Company Quick10K Filing
Quick10K
Emergent Capital
10-Q 2019-08-31 Quarter: 2019-08-31
10-Q 2019-05-31 Quarter: 2019-05-31
10-Q 2019-02-28 Quarter: 2019-02-28
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-09 Earnings, Exhibits
8-K 2019-08-28 Enter Agreement
8-K 2019-08-21 Enter Agreement, Leave Agreement, Exhibits
8-K 2019-07-24 Enter Agreement, Exhibits
8-K 2019-07-10 Earnings, Exhibits
8-K 2019-06-24 Bankruptcy, Exhibits
8-K 2019-06-14 Other Events, Exhibits
8-K 2019-05-16 Shareholder Vote
8-K 2019-05-08 Other Events, Exhibits
8-K 2019-04-10 Earnings, Exhibits
8-K 2019-03-15 Earnings, Exhibits
8-K 2019-02-25 Off-BS Arrangement
8-K 2019-02-25 Officers
8-K 2019-02-15 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-02-04 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-01-29 Other Events, Exhibits
8-K 2019-01-03 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-12-13 Bankruptcy
8-K 2018-12-11 Other Events
8-K 2018-12-10 Enter Agreement, Officers, Exhibits
8-K 2018-12-07 Other Events
8-K 2018-12-04 Other Events
8-K 2018-11-30 Other Events, Exhibits
8-K 2018-11-28 Other Events
8-K 2018-11-16 Earnings, Exhibits
8-K 2018-09-12 Amend Bylaw
8-K 2018-08-20 Earnings, Exhibits
8-K 2018-07-10 Leave Agreement, Exhibits
8-K 2018-06-05 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-29 Other Events, Exhibits
8-K 2018-03-12 Amend Bylaw, Exhibits
8-K 2018-01-25 Enter Agreement, Exhibits
WPZ Williams Partners 38,808
FMI Foundation Medicine 5,089
NYLD NRG Yield 3,452
EDR Education Realty Trust 3,375
AMPY Amplify Energy 130
SFEG Santa Fe Gold 29
EXPL Endurance Exploration Group 13
VLTC Voltari 8
EMYB Embassy Bancorp 0
SSOK Sunstock 0
EMG 2019-08-31
Item 1 Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Litigation
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Default Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 a3q19ex311.htm
EX-31.2 a3q19ex312.htm
EX-32.1 a3q19ex321.htm
EX-32.2 a3q19ex322.htm

Emergent Capital Earnings 2019-08-31

EMG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 emergent3q19form10-q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 
(Mark One)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2019

or

¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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
 
 

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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨

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," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
 
Accelerated filer
 
¨

Non-accelerated filer
 
ý



 
Smaller reporting company
 
ý

 
 
 
 
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. ¨    






Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý


Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
 


As of October 8, 2019, the Registrant had 158,051,803 shares of common stock outstanding.




EMERGENT CAPITAL, INC.
FORM 10-Q REPORT FOR THE QUARTER ENDED August 31, 2019
TABLE OF CONTENTS

 
Page No.
PART I — FINANCIAL INFORMATION
 
 
 
 
 
PART II — OTHER INFORMATION
 
 
 


2



"Forward Looking" Statements

As used in this Form 10-Q, "Emergent Capital," "Company, "we," "us," "its," or "our" refer to Emergent Capital, Inc. and its consolidated subsidiary companies, unless the context suggests otherwise.

This Quarterly Report on Form 10-Q contains forward looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q 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 cash flows, 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 our industry and Company, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our 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 we believe 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, we disclaim any obligation to update our 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 and our financial condition to differ materially from those indicated in our forward looking statements include, but are not limited to, the following:

our ability to obtain future financings on favorable terms, or at all;
our ability to meet our debt service obligations;
delays in the receipt of death benefits may impact distribution from our investment in the limited partnership that constitutes our primary asset;
increases in premiums on, or the cost of insurance of, life insurance policies that we own or owned by the limited partnership;
our lack of control over the policies that are within the limited partnership under its current ownership and control;
changes in general economic conditions, including inflation, changes in interest or tax rates;
our actual 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 litigation and judicial actions;
changes to actuarial life expectancy tables including inaccurate estimates regarding the likelihood and magnitude of death benefits related to life insurance policies that we own or owned by the limited partnership;
lack of mortalities of insureds of the life insurance policies that we own or owned by the limited partnership;
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 two 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;

3



challenges to the ownership of the policies in the portfolio held by the limited partnership;
changes in laws and regulations;
deterioration in the credit worthiness of the life insurance companies that issued the policies included in the portfolio held by the limited partnership;
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;
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 resulting in disruption of our information technology systems; and
loss of the services of any of our executive officers;
our ability to mitigate the effects of global intangible low-taxed income ("GILTI") tax;
We do not control our significant asset and rely on third parties to manage it.

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. See "Risk Factors" included in our Transition Report on Form 10-KT for the eleven months ended November 30, 2018. You should evaluate all forward looking statements made in this Form 10-Q 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.




4



Item 1        Financial Statements

Emergent Capital, Inc.
CONSOLIDATED BALANCE SHEETS

 
August 31,
2019

November 30,
2018*
 
(Unaudited)
 
 
 
(In thousands except share data)
ASSETS
 
 
 
Assets
 
 
 
Cash and cash equivalents
$
8,780


$
1,209

Certificates of deposit
508


500

Prepaid expenses and other assets
844


657

Deposits - other
1,377


1,377

Life settlements, at estimated fair value
1,254


1,172

Receivable for maturity of life settlements
17,768



Fixed assets, net
28


78

Investment in limited partnership, at estimated fair value (Note 11)
132,334



Investment in deconsolidated subsidiaries, at estimated fair value (Note 4)


128,795

Investment in affiliate
2,384


2,384

Deferred tax asset


576

Total assets
$
165,277

 
$
136,748

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Accounts payable and accrued expenses
$
2,093


$
2,446

Other liabilities
100


194

Interest payable - 8.5% Convertible Notes (Note 13)


37

8.5% Convertible Notes, net of discount and deferred debt costs (Note 13)


1,173

Interest payable - 5.0% Convertible Notes (Note 14)
169


1,116

5.0% Convertible Notes, net of discount and deferred debt costs (Note 14)
70,697


69,742

Interest payable - 8.5% Senior Secured Notes (Note 15)
1,091


628

8.5% Senior Secured Notes, net of deferred debt costs (Note 15)
44,042


34,170

Current tax liability
2,642



Total liabilities
120,834

 
109,506

Commitments and Contingencies (Note 18)

 

Stockholders’ Equity
 
 
 
Common stock (par value $0.01 per share, 415,000,000 authorized at August 31, 2019 and November 30, 2018; 158,659,803 issued and 158,051,803 outstanding as of August 31, 2019; 158,733,928 issued and 158,125,928 outstanding as of November 30, 2018)
1,587


1,587

Preferred stock (par value $0.01 per share, 40,000,000 authorized; 0 issued and outstanding as of August 31, 2019 and November 30, 2018)



Treasury Stock, net of issuance cost (608,000 shares as of August 31, 2019 and November 30, 2018)
(2,534
)

(2,534
)
Additional paid-in-capital
334,488


334,198

Accumulated deficit
(289,098
)

(306,009
)
Total stockholders’ equity
44,443

 
27,242

Total liabilities and stockholders’ equity
$
165,277

 
$
136,748


 *    Derived from audited consolidated financial statements.
The accompanying notes are an integral part of these financial statements.

5



Emergent Capital, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

 
For the Three Months Ended
August 31,
 
For the Nine Months Ended
August 31,
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except share and per share data)
Income
 
 
 
 
Change in fair value of life settlements (Notes 10 & 16)
$
(42
)

$
5,404


$
(37
)

$
19,299

Change in fair value of investment in limited partnership
(5,821
)



(5,821
)


Change in fair value of investment in deconsolidated subsidiaries (Notes 4 & 16)
90,710

 

 
37,941

 

Other income
2,011


153


2,028


396

Total income
86,858

 
5,557

 
34,111

 
19,695

Expenses
 
 
 
 
 
 
 
Interest expense
2,832


7,979


8,370


23,398

Change in fair value of White Eagle Revolving Credit Facility (Notes 12 & 16)


(7,037
)



(11,663
)
Personnel costs
694


800


1,001


2,460

Legal fees
1,448


552


2,117


3,478

Professional fees
1,142


1,875


1,470


4,497

Insurance
270


193


666


592

Other selling, general and administrative expenses
276


394


399


1,407

Total expenses

6,662

 
4,756

 
14,023

 
24,169

Income (loss) from continuing operations before income taxes
80,196


801


20,088


(4,474
)
(Benefit) provision for income taxes
(5
)

3,094


3,213


(136
)
Net income (loss) from continuing operations
$
80,201


$
(2,293
)

$
16,875


$
(4,338
)
Discontinued Operations:







Income (loss) from discontinued operations before income taxes
70


(17
)

36


(14
)
(Benefit) provision for income taxes







Net income (loss) from discontinued operations
70


(17
)

36


(14
)
Net income (loss)
$
80,271


$
(2,310
)

$
16,911


$
(4,352
)
Basic income (loss) per common share:







Continuing operations
$
0.51


$
(0.01
)

$
0.11


$
(0.03
)
Discontinued operations
$


$


$


$

Net income (loss) - basic
$
0.51


$
(0.01
)

$
0.11


$
(0.03
)
Diluted income (loss) per share:







Continuing operations
$
0.41


$
(0.01
)

$
0.10


$
(0.03
)
Discontinued operations
$


$


$


$

Net income (loss) - diluted
$
0.41


$
(0.01
)

$
0.10


$
(0.03
)
Weighted average shares outstanding:







Basic
156,968,470


158,305,635


156,949,425


157,919,215

Diluted
195,979,957


158,305,635


194,867,908


157,919,215

The accompanying notes are an integral part of these financial statements.

6



Emergent Capital, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT/EQUITY (UNAUDITED)

Nine Months Ended August 31, 2019
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
(in thousands, except share data)
Balance, December 1, 2018
158,733,928

 
$
1,587

 
(608,000
)
 
$
(2,534
)
 
$
334,198

 
$
(306,009
)
 
$
27,242

Net income/(loss)

 

 

 

 

 
(37,476
)
 
(37,476
)
Stock-based compensation

 

 

 

 
98

 

 
98

Balance, February 28, 2019
158,733,928

 
$
1,587

 
(608,000
)
 
$
(2,534
)
 
$
334,296

 
$
(343,485
)
 
$
(10,136
)
Net income/(loss)

 

 

 

 

 
(25,884
)
 
(25,884
)
Stock-based compensation

 

 

 

 
97

 

 
97

Retirement of common stock
(74,125
)
 

 

 

 

 

 

Balance, May 31, 2019
158,659,803

 
$
1,587

 
(608,000
)
 
$
(2,534
)
 
$
334,393

 
$
(369,369
)
 
$
(35,923
)
Net income/(loss)

 

 

 

 

 
80,271

 
80,271

Stock-based compensation

 

 

 

 
95

 

 
95

Balance, August 31, 2019
158,659,803

 
$
1,587

 
(608,000
)
 
$
(2,534
)
 
$
334,488

 
$
(289,098
)
 
$
44,443



Nine Months Ended August 31, 2018
 
Common Stock
 
Treasury Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
(in thousands, except share data)
Balance, December 1, 2017
156,515,399

 
$
1,565

 
(608,000
)
 
$
(2,534
)
 
$
333,631

 
$
(143,718
)
 
$
188,944

Net income/(loss)

 

 

 

 

 
4,851

 
4,851

Stock-based compensation
2,000,000

 
20

 

 

 
121

 

 
141

Retirement of common stock
(40,000
)
 


 

 

 
(91
)
 

 
(91
)
Balance, February 28, 2018
158,475,399

 
$
1,585

 
(608,000
)
 
$
(2,534
)
 
$
333,661

 
$
(138,867
)
 
$
193,845

Net income/(loss)

 

 

 

 

 
(6,893
)
 
(6,893
)
Stock-based compensation
150,000

 
1

 

 

 
122

 

 
123

Issue of common stock, net
25,000

 

 

 

 
9

 

 
9

Balance, May 31, 2018
158,650,399

 
$
1,586

 
(608,000
)
 
$
(2,534
)
 
$
333,792

 
$
(145,760
)
 
$
187,084

Net income/(loss)

 

 

 

 

 
(2,310
)
 
(2,310
)
Stock-based compensation
400,000

 
4

 

 

 
207

 

 
211

Retirement of common stock
(21,941
)
 

 

 

 
(4
)
 

 
(4
)
Balance, August 31, 2018
159,028,458

 
$
1,590

 
(608,000
)
 
$
(2,534
)
 
$
333,995

 
$
(148,070
)
 
$
184,981


7


Emergent Capital, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
For the Nine Months Ended
August 31,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities
 
 
 
Net income (loss)
$
16,911

 
$
(4,352
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Depreciation and amortization
63

 
55

Amortization of discount and deferred costs for 8.5% Convertible Notes
21

 
62

Amortization of discount and deferred costs for 5.0% Convertible Notes
955

 
889

Amortization of deferred costs for 8.5% Senior Secured Notes
554

 
197

Change in fair value of investment in deconsolidated subsidiaries
(37,941
)
 

Stock-based compensation expense
290

 
380

Finance cost and fees withheld by borrower

 
1,910

Interest paid in kind on 8.5% Senior Secured Notes
2,842

 

Change in fair value of life settlements
37

 
(19,299
)
Change in fair value of investment in limited partnership
5,821

 

Change in fair value of White Eagle Revolving Credit Facility

 
(11,663
)
Interest income
(311
)
 
(114
)
Deferred tax asset
576

 

Deferred tax liability

 
(2,378
)
Change in assets and liabilities:
 
 
 
Prepaid expenses and other assets
118

 
145

Accounts payable and accrued expenses
(394
)
 
306

Other liabilities
(155
)
 
14

Current tax liability
2,642

 
2,242

Interest payable - 8.5% Convertible Notes
(37
)
 
(25
)
Interest payable - 5.0% Convertible Notes
(948
)
 
(948
)
Interest payable - 8.5% Senior Secured Notes
463

 
8

Net cash used in operating activities
(8,493
)
 
(32,571
)
Cash flows from investing activities
 
 
 
Purchase of fixed assets, net of disposals
(5
)
 

Premiums paid on life settlements
(118
)
 
(67,916
)
Proceeds from maturity of life settlements

 
52,304

Consolidation of subsidiaries (cash)
10,905

 

Net cash provided by (used) in investing activities
10,782

 
(15,612
)
Cash flows from financing activities
 
 
 
Borrowings from White Eagle Revolving Credit Facility

 
67,580

Repayment of borrowings under White Eagle Revolving Credit Facility

 
(34,597
)
Proceeds from issue of 8.5% Senior Secured Notes
6,476

 

Repayment of 8.5% Convertible Notes
(1,194
)
 

Net cash provided by financing activities
5,282

 
32,983

Net increase (decrease) in cash and cash equivalents
7,571

 
(15,200
)
Cash and cash equivalents, at beginning of the period
1,209

 
31,208

Cash and cash equivalents, at end of the period
$
8,780

 
$
16,008

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest during the period
$
4,430

 
$
22,865

The accompanying notes are an integral part of these financial statements.

8



Emergent Capital, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2019

(1) Description of Business

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 our 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 subsidiaries, owns 2 life insurance policies, also referred to as life settlements, with a fair value of $1.3 million and an aggregate death benefit of approximately $12.0 million at August 31, 2019. Additionally, through a subsidiary, the Company owns a 27.5% equity investment, having an estimated fair value of approximately $132.3 million at August 31, 2019, in White Eagle Asset Portfolio, LP ("White Eagle"), which was previously a wholly-owned subsidiary of the Company that holds a portfolio of life settlements. The Company primarily earns income through change in fair value and death benefits from these two polices and change in fair value and distributions from its equity investment in White Eagle.

Change in Financial Year End

On September 7, 2018, the Board of Directors of the Company (the "Board") adopted resolutions to change the Company’s fiscal year end, and therefore the Company and its direct and indirect subsidiaries changed their fiscal year ends, from December 31 to November 30, effective immediately. The Company filed a Transition Report on Form 10-KT in accordance with SEC rules and regulations for the fiscal period ended November 30, 2018, which covered transactions from January 1, 2018 to November 30, 2018. This Form 10-Q covers the period beginning June 1, 2019 and ending August 31, 2019 compared to June 1, 2018 to August 31, 2018. As a result, the Form 10-Q will not be comparable to the results filed for the third quarter of 2018 covering July 1, 2018 to September 30, 2018.

Voluntary Petitions for Relief Under Chapter 11 and De-consolidation of Subsidiaries

On November 14, 2018 (the "Petition Date"), Lamington Road Designated Activity Company (formerly known as Lamington Road Limited), the Company’s wholly-owned indirect Irish subsidiary ("Lamington" or "Lamington Road DAC"), and White Eagle General Partner, LLC, the Company’s wholly-owned indirect Delaware subsidiary ("WEGP"), filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Lamington is the limited partner and owns 99.99%, and WEGP is the general partner and owns 0.01%, of White Eagle. In its capacity as general partner, WEGP manages the affairs of White Eagle. The Lamington and WEGP filings are referred to as the "November Chapter 11 Cases."

The commencement of the November Chapter 11 Cases would constitute defaults and events of default under the terms of the Company’s Amended and Restated Senior Secured Indenture and the New Convertible Note Indenture (each as defined below). However, such defaults and events of default and their consequences were waived in advance of the November Chapter 11 Cases by holders of a majority of the outstanding principal amounts of each of the 8.5% Senior Secured Notes and the New Convertible Notes, and consequently, the Company believes that no defaults, events of default or acceleration of the payment obligations thereunder, including principal or accrued interest, occurred under either the Amended and Restated Senior Secured Indenture or the New Convertible Note Indenture. The commencement of the November Chapter 11 Cases constituted an event of default under the Second Amended and Restated Loan and Security Agreement, dated as of January 31, 2017, by and among White Eagle, as borrower, Imperial Finance and Trading, LLC, Lamington Road Bermuda, LTD, as Portfolio Manager ("Lamington Bermuda"), CLMG Corp., as Administrative Agent ("CLMG"), and LNV Corporation, as Lender ("LNV"), as amended (the "White Eagle Revolving Credit Facility"), resulting in the principal and accrued interest due from White Eagle thereunder becoming immediately due and payable. Lamington and WEGP have pledged their respective interests in White Eagle to secure its obligations under the White Eagle Revolving Credit Facility. Any efforts by LNV, or CLMG to enforce such pledges by Lamington and WEGP of their respective interests in White Eagle in connection with the White Eagle Revolving Credit Facility are automatically stayed as a result of the commencement of the November Chapter 11 Cases and LNV’s and CLMG’s rights of enforcement in respect of the White Eagle Revolving Credit Facility are subject to the applicable provisions of the Bankruptcy Code. In addition, on November 15, 2018, White Eagle, LNV and CLMG entered into an Agreement Regarding Rights and Remedies (the "Standstill Agreement"), pursuant to which LNV and CLMG agreed to refrain from exercising their rights and remedies in connection with the White Eagle Revolving Credit Facility, subject to the terms and provisions of the Standstill Agreement, until 12:00 p.m. noon Pacific time on November 26, 2018, to facilitate negotiations. The effective period under the Standstill Agreement was extended several times, finally to December 13, 2018.

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On December 13, 2018, White Eagle filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "White Eagle Chapter 11 Case" and, together with the November Chapter 11 Cases, the "Chapter 11 Cases"). The Company obtained waivers from the requisite holders of each of the 8.5% Senior Secured Notes and the New Convertible Notes with respect to the White Eagle Chapter 11 Case, similar to the waivers for the November Chapter 11 Cases, and believes that no defaults, events of default or acceleration of the payment obligations thereunder, including principal or accrued interest, occurred with respect to both the 8.5% Senior Secured Notes and the New Convertible Notes.

Subsequent Event

On September 16, 2019, the Bankruptcy Court entered an order and final decree closing the White Eagle Chapter 11 Case.

Beal Litigation

On January 25, 2019, the Company, White Eagle, Lamington, and WEGP, collectively the "Plaintiffs", filed suit (the "Suit") against LNV , Silver Point Capital L.P. ("Silver Point") and GWG Holdings, Inc. ("GWG" and, with LNV and Silver Point, the "Defendants") in the Bankruptcy Court, where the Suit will be administered together with the Chapter 11 Cases. LNV, a subsidiary of Beal Bank ("Beal"), is the lender under the White Eagle Revolving Credit Facility.

In the Suit, the Plaintiffs allege that the Defendants engaged in a scheme to coerce the Plaintiffs into selling their valuable portfolio of life insurance policies to defendants for well below its true value. Pursuant to the White Eagle Revolving Credit Facility, LNV agreed to lend $370 million to White Eagle, and in connection therewith received a 45% equity stake in White Eagle. That equity stake, and LNV’s significant control over White Eagle under the Credit Facility, creates a joint venture, and gives rise to fiduciary duties to White Eagle and Emergent, on the part of LNV. The Plaintiffs further allege that LNV has been engaged in a concerted campaign to "squeeze" White Eagle and Emergent by improperly restricting their cash flow, in the hopes that White Eagle and Emergent will have no choice but to sell the valuable policy portfolio to LNV or one of its proxies, including Silver Point and/or GWG, at below its true value.

In connection with the White Eagle Chapter 11 Case, on January 15, 2019, the Court authorized the Debtors to use the proceeds of pre-petition cash collateral for a period of twenty (20) weeks (the "Cash Collateral"), which allowance was extended in May 2019 for another nine (9) weeks. The Cash Collateral may be used solely for the purposes permitted under the budget approved by the Court, including (i) to provide working capital needs of the Debtors and general corporate purposes of the Debtors, (ii) to make the payments or fund amounts otherwise permitted in the final order that authorized such uses and such budget, (iii) to fund amounts necessary to pay certain fees; and (iv) to fund amounts necessary to pay certain professional fees in accordance with such Budget.

Global Settlement Agreement in Principle in Bankruptcies

On May 7, 2019, a global settlement in principle of the Chapter 11 Cases and the Suit was announced on the record to, and filed with, the Bankruptcy Court jointly by the Debtors and Defendants (the "Proposed Settlement"). The Proposed Settlement would be effected together with the plan of reorganization, in accordance with the following schedule: (x) the Proposed Settlement and plan of reorganization, and other relevant documents, would be filed with the Bankruptcy Court by May 24, 2019, (y) the parties would use their best efforts to have the Proposed Settlement approved by the Bankruptcy Court by June 7, 2019, and (z) the parties would use their best efforts to have a confirmation hearing for approval of the plan of reorganization by the Bankruptcy Court held on or before June 21, 2019.

Pursuant to the Proposed Settlement, among other things:

White Eagle shall have up to and including September 17, 2019 to satisfy any and all obligations to LNV under the Credit Facility by paying LNV 102% of its outstanding principal plus accrued interest at the relevant default rate, accrued fees and costs, which aggregate amount would include the resolution of the 45% participation interest element of the Credit Facility which was part of the subject matter of the Suit;

If White Eagle satisfies such obligations after September 17, 2019 and by December 30, 2019, the amount due on the outstanding principal would increase to 104%;

In the event LNV has not received the payoff described above by September 17, 2019, the court-appointed liquidation trustee, together with investment banking assistance from Maple Life Financial, LLC, shall have full authority to sell

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White Eagle’s life insurance policy portfolio (which constitutes collateral under the Credit Facility) for the maximum amount achievable through an orderly sale process, taking into account that the transaction must be closed no later than December 30, 2019; in connection with this authority, the liquidation trustee and the investment banker may work prior to September 17, 2019 to prepare the portfolio for sale, but may not take actions to actually commence a sale including, but not limited to, marketing the portfolio or contacting potential buyers about the portfolio, prior to such date.

If the portfolio is sold in whole or in part, LNV shall only have the right to step in to bid for such sale if, and to the extent, the total amounts generated through the sale thereof do not fully satisfy the payoff amount.

If the sale of any portion of the policies that serve as collateral under the White Eagle Revolving Credit Facility (the "Collateral") has not closed or the proceeds of such sale(s) have not been received by CLMG by December 30, 2019, and if the obligations due to LNV (the "Payoff Amount") has not then been paid in cash in full, such Collateral shall be transferred on or before Noon Eastern on December 31, 2019 to CLMG (or its designee) in full satisfaction of the remaining unpaid portion of the amounts due to LNV.

In addition, in order to provide sufficient cash flow to the Company during this period, and subject to negotiation of mutually-agreed upon terms and conditions, the Debtors shall have the right to use proceeds from the maturity of any portfolio policy and resolution of certain claims, and LNV will provide the Debtors a revolving $15.0 million of debtor-in-possession financing (which amount may be increased if found to be insufficient) through December 30, 2019 (the "DIP Financing").

On June 5, 2019, the Bankruptcy Court approved an agreement memorializing the Proposed Settlement (the "Settlement Agreement") and the DIP Financing. The plan of reorganization for the Chapter 11 Cases, which implements the Settlement Agreement and the DIP Financing (the "Plan of Reorganization") was confirmed by the Bankruptcy Court on June 19, 2019.

On July 18, 2019, the Company entered into a commitment letter (the "Commitment Letter") with Lamington, White Eagle and Jade Mountain Partners ("Jade Mountain") in connection with the Plan of Reorganization. The Commitment Letter provided for a transaction in which Jade Mountain and/or certain of its affiliates and/or certain investors would acquire 72.5% of the equity interests of White Eagle in exchange for $384.3 million as may be adjusted in accordance with the final documentation. The Commitment Letter and its terms and the transactions contemplated thereby were approved by the Bankruptcy Court on July 22, 2019.

Repayment and Termination of the White Eagle Revolving Credit Facility

On August 16, 2019, the Company entered into a subscription agreement (the "Subscription Agreement") with Lamington Road ("Class B Limited Partner"), White Eagle, WEGP ("Withdrawing General Partner"), and Palomino JV, L.P. ("Palomino" or "Class A Limited Partner"), in connection with the commitment letter signed on June 22, 2019 with Jade Mountain Partners, LLC ("Jade Mountain"), pursuant to which White Eagle sold to Palomino 72.5% of its limited partnership interests, consisting of all of the newly issued and outstanding Class A and Class D interests, and WEGP sold to an affiliate of Jade Mountain (the "Manager") all of its general partnership interests (collectively, the "WE Investment") for a purchase price of approximately $366.2 million and $8.0 million for the Class A and Class D interests, respectively. Pursuant to the Subscription Agreement, Lamington received 27.5% of the limited partnership interests of White Eagle, consisting of all of the newly issued and outstanding Class B interests in exchange for all of its previously owned White Eagle limited partnership interests with a value of approximately $138.9 million on the closing date.

The proceeds of the WE Investment were used to satisfy in full (i) the White Eagle Revolving Credit Facility , and (ii) DIP Financing extended by CLMG, as Administrative Agent ("CLMG"), as agent, and LNV, as Lender, to White Eagle, each in connection with the termination of the White Eagle Revolving Credit Facility and the release of the related liens on the collateral thereunder pursuant to a Master Termination Agreement dated as of August 16, 2019 among WEGP, Lamington, White Eagle, Markley Asset Portfolio, LLC, CLMG, as administrative agent, LNV, as initial lender, Wilmington Trust, National Association, in its capacities as securities intermediary, custodian and agent, and Palomino (the "Master Termination Agreement"). The repayment and termination of the White Eagle Revolving Credit Facility and the termination of the DIP Financing, which had not been drawn against, were in accordance with the Plan of Reorganization for Lamington, WEGP and White Eagle approved by the Bankruptcy Court with respect to the previously announced voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code of Lamington, WEGP and White Eagle (the "Chapter 11 Cases").

The WE Investment was consummated, and the White Eagle Revolving Credit Facility was paid off in full and terminated, on August 16, 2019. The payoff totaled $402.5 million, which included payment directly to CLMG by Palomino of

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$374.2 million and payment to CLMG by White Eagle of $28.3 million, collectively sufficient to repay, under the White Eagle Revolving Credit Facility, the outstanding principal of $368.0 million, accrued and unpaid interest of $21.3 million plus, under the Plan of Reorganization, an early payment amount due to LNV of $7.4 million and lender-allowed claims of $5.8 million. Of the $374.2 million purchase price of the limited partnership, $8.0 million was allocated to the Class D interests which amount is to be repaid in accordance with the distribution terms of the amended and restated Limited Partnership Agreement of White Eagle.

In connection with the WE Investment, the Limited Partnership Agreement of White Eagle was amended and restated (the "A&R LPA") to provide for the issuance of the Class A, B and D limited partnership interests, and for funding of an "Advance Facility" to maintain reserves sufficient to fund premiums, certain operating expenses of White Eagle and certain minimum payments to Lamington as the holder of the Class B interests. Pursuant to the A&R LPA, holders of Class A interests are entitled to receive distributions on the amounts paid or contributed by them in relation to the WE Investment and funding of the Advance Facility after payment of premiums on the portfolio policies and other fees and expenses. The A&R LPA provides generally that holders of the Class A and Class B Interests receive distributions of proceeds of the assets of White Eagle based on their 72.5% and 27.5% ownership, respectively, after certain expenses and reserves are funded (including such minimum payments to Lamington totaling approximately $8.0 million per year for the first three (3) years and $4.0 million for the subsequent seven (7) years), provided that commencing after year three (3), such minimum payments will be utilized to repay the Class D Return of $8.0 million, which was advanced at closing, plus the greater of $2.0 million or 11% per annum on such $8.0 million to the extent necessary to fully repay such Class D Return. The minimum payments to the Company will occur regardless of maturities with payments through the premium/expense reserve account when there are no maturity proceeds available for distributions as described below). However, the A&R LPA also provides that all payments to holders of the Class B interests (other than such minimum payments to Lamington during the first eight (8) years following the Closing Date) are fully subordinated to payments in respect of the minimum returns to holders of the Class A and Class D interests (including repayment of all amounts advanced in respect of the Advance Facility) and to any indemnification payments, if any, due to such holders and related indemnified persons pursuant to the indemnities afforded them in and in relation to the A&R LPA, Subscription Agreement, Master Termination Agreement and related documents. As of the closing of the Investment, Lamington Bermuda resigned as manager of the portfolio and was replaced by Jade Mountain or an affiliate thereof.

On August 16, 2019, Lamington also entered into (i) a pledge agreement (the "Pledge Agreement") pursuant to which it pledged the 27.5% limited partnership interests of White Eagle owned by it to Palomino and certain other secured parties in support of the payment and indemnification obligations described above, and (ii) an assumption agreement among White Eagle, Lamington, the Company and WEGP (the "Assumption Agreement") pursuant to which Lamington assumed all liabilities and obligations of White Eagle and WEGP as of the closing date of the Transactions, and Lamington, the Company and WEGP agreed to terminate, waive and release any intercompany debt, obligations and liabilities of White Eagle to Lamington, the Company and WEGP. On August 16, 2019, Emergent entered into an indemnification agreement (the "Indemnification Agreement") pursuant to which it indemnified Wilmington Trust, National Association against claims and liabilities that may arise in relation to policies that have matured prior to the Closing Date but as to which Wilmington Trust, National Association has historically held title as securities intermediary.

See Note 11, "Investment in Limited Partnership", to the accompanying consolidated financial statements for further information.

Deconsolidation and Subsequent Measurement of the Deconsolidated Entities

Lamington and its subsidiaries' (White Eagle, WEGP and Lamington Bermuda), financial results were excluded from the Company’s consolidated results for the period from November 14, 2018, the Petition Date to August 16, 2019 the day the date the White Eagle Revolving Facility was terminated. ASC 810, Consolidation require that an entity whose financial statements were previously consolidated with those of its parent that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, generally must be prospectively deconsolidated from the parent and presented as an equity investment (deconsolidation applies to Lamington and all subsidiaries owned, directly or indirectly, by Lamington, including WEGP, White Eagle and Lamington Bermuda which collectively are referred to herein as the ("Deconsolidated Entities" or the "Debtors"). Therefore, our 2019 results are not comparable with our 2018 results. Under ASC 810, this loss of control would likely trigger a gain or loss for the parent as the parent would remeasure its retained noncontrolling investment at fair value each reporting period. We assessed the inherent uncertainties associated with the outcome of the Chapter 11 reorganization process and the anticipated duration thereof, and concluded that it was appropriate to deconsolidate Lamington and its subsidiaries effective on the Petition Date.


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Lamington and WEGP had pledged their respective interests in White Eagle to secure its obligations under the White Eagle Revolving Credit Facility, with the termination of the facility, this pledge was also terminated. There was no outstanding third party liabilities for either Lamington or WEGP at August 16, 2019 besides intercompany obligations to Emergent.

On September 16, 2019, subsequent to the quarter end, the Bankruptcy Court entered an order and a final decree closing the White Eagle Chapter 11 Case, the Lamington and WEGP case were not yet dismissed as of the filing date of this Form 10Q.
However pursuant to ASC 810, Consolidation, management took the position that given that all third party claims had been satisfied in the case, consolidation of Lamington and WEGP as of August 17, 2019 was appropriate.

As part of the WE Investment, the Company sold 72.5% of its ownership in White Eagle, which is the most substantial asset of the Company, resulting in a reduction in its ownership from 100% to 27.5%. Given the new percentage ownership, this is considered an equity investment. Based on the A&R LPA, the Company will receive funds from White Eagle through a monthly distribution which is highly driven by maturities of the portfolio. Although the Company is guaranteed certain monthly payments, the Class A Partner must be made whole based on their established IRR of 11% which exposes the Company as to the amount and timing of funds that will be received. Although White Eagle continues to be a VIE under ASC 810, Consolidation, the Company has not met the criteria for consolidation as they do not have a controlling interest in While Eagle, financially or otherwise. Based on the A&R LPA, the Company's management responsibilities are very limited. The Company's remaining ownership of White Eagle does not give the Company any control over decisions of White Eagle and the Company is the minority owner. As a result, the Company is precluded from consolidating White Eagle Asset Portfolio at August 31, 2019.

White Eagle previously valued its life settlement policies at fair value whose valuation were based on inputs that are both significant to the fair value measurement and unobservable. The Company now holds an equity investment of 27.5% in White Eagle whose only assets are these life settlements. Additionally, the investment includes a mezzanine financing which the Company assumed at closing which repayment by, and ultimate distributions to, the Company are based on a prescribed waterfall with a guaranteed 11% return to the majority owner partner. Given the nature of this ownership, fair value is not readily redeemable and inputs are not observable. The Company will utilize a fair value approach to account for its 27.5% investment in White Eagle Asset Portfolio, and the calculation will be performed consistent with ASC 820, Fair Value Measurement with changes in fair value recorded in current earnings.

2) Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company, all of its wholly-owned subsidiary companies and its special purpose entities, with the exception of the Deconsolidated Entities, White Eagle Asset Portfolio, an unconsolidated equity investment effective August 17, 2019, which is accounted for using fair value and Imperial Settlements Financing 2010, LLC ("ISF 2010"), an unconsolidated special purpose entity which is accounted for using the measurement alternative, which is measured at cost less impairment. The special purpose entity was to fulfill specific objectives. All significant intercompany balances and transactions except those related to Lamington after November 13, 2018 to August 16, 2019 (see Note 4) have been eliminated in consolidation, including income from services performed by subsidiary companies in connection with the White Eagle Revolving Credit Facility, as detailed herein.

The unaudited consolidated financial statements have been prepared in conformity with the rules and regulations of the SEC for Form 10-Q and therefore do not include certain information, accounting policies, and footnote disclosure information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, all adjustments (consisting of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the financial statements, have been included. Operating results for the three months ended August 31, 2019 and nine months ended August 31, 2019 are not necessarily indicative of the results that may be expected for future periods or for the year ending November 30, 2019. These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Emergent Capital's Transition Report on Form 10-KT for the fiscal year ended November 30, 2018.

Liquidity

Historically, the Company has incurred substantial losses, which has resulted in an accumulated deficit of approximately $289.1 million as of August 31, 2019. Cash flows used in operating activities were $8.5 million for the nine months ended August 31, 2019 and $32.6 million for the nine months ended August 31, 2018. As of August 31, 2019, the Company had approximately $8.8 million of cash and cash equivalents and certificates of deposit of $508,000; of this amount, approximately $8.8 million is available to pay premiums on the two unencumbered policies for which such expenses will approximate $45,000 in 2019 and other overhead expenses.

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The Company’s ability to continue as a going concern is dependent on its ability to meet its liquidity needs through a combination of factors including but not limited to, the receipt of distributions from its investment in its equity investment in White Eagle Asset Portfolio, strategic capital market raises and cash on hand.

As of the filing date of this Form 10-Q, we had approximately $26.8 million of cash and cash equivalents inclusive of certificates of deposit of $511,000. In considering our forecast for the next twelve months with the current cash balance as of the filing of this Form 10-Q, the Company has sufficient resources to meet its liquidity needs for the foreseeable future.

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

Reorganization and Consolidation

Lamington and its subsidiaries' (White Eagle and WEGP) filing of the Chapter 11 Cases was a reconsideration event for Emergent Capital to reevaluate whether consolidation of Lamington and its subsidiaries (White Eagle, WEGP and Lamington Road Bermuda Limited) (collectively, and with Lamington, the "Deconsolidated Entities") continued to be appropriate. Under ASC 810, Consolidation, specifically ASC 810-10-15, consolidation of a majority-owned subsidiary is precluded where control does not rest with the majority owners, for instance, where the subsidiary is in legal reorganization or bankruptcy. Accordingly, when a subsidiary files for bankruptcy, it is appropriate for the parent to deconsolidate the subsidiary. Under ASC 810, this loss of control would likely trigger a gain or loss for the parent as the parent would remeasure its retained noncontrolling investment at fair value. We assessed the inherent uncertainties associated with the outcome of the Chapter 11 reorganization process and the anticipated duration thereof, and concluded that it was appropriate to deconsolidate Lamington and its subsidiaries effective on the Petition Date.

On June 19, 2019, the Bankruptcy Court entered an order confirming the Plan of Reorganization for the Chapter 11 Cases. The Plan of Reorganization implemented the Settlement Agreement and the DIP Financing. In addition, the Plan of Reorganization provided for the payment of all other allowed third party creditor claims in full, including allowed professional fees and taxes. The effective date of the Plan of Reorganization was June 19, 2019.

On August 16, 2019, the White Eagle Revolving Credit Facility was paid in full and terminated, additionally, payment was made to all White Eagle vendors and intercompany liabilities were contributed by Emergent. Lamington and WEGP had pledged their respective interests in White Eagle to secure its obligations under the White Eagle Revolving Credit Facility. With the termination of the facility, this pledge was released. There were no outstanding third party liabilities for either Lamington or WEGP at August 16, 2019 besides intercompany obligations to Emergent. Pursuant to ASC 810, Consolidation, management took the position that given that all third party claims had been satisfied in the case, consolidation of Lamington and WEGP as of August 17, 2019 was appropriate. However, the consummation of the transaction under the Subscription Agreement resulted in the Company being a minority owner in White Eagle, the entity was not reconsolidated but rather treated as an equity investment.

On September 16, 2019, subsequent to the quarter end, the Bankruptcy Court entered an order and final decree closing the White Eagle Chapter 11 Case. The Lamington and WEGP Chapter 11 Cases were not yet dismissed as of the filing date of this Form 10-Q.


Related Party Relationship

Upon filing for Chapter 11 and the subsequent deconsolidation, transactions with Lamington are no longer eliminated in consolidation and are treated as related party transactions for Emergent Capital. See Note 5 "Condensed and Consolidated Financial Statements For Entities in Bankruptcy" for all transactions between Emergent Capital and Lamington.



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Discontinued Operations

On October 25, 2013, the Company sold substantially all of the assets comprising its structured settlement business. As a result, the Company has discontinued segment reporting and classified its operating results of the structured settlement business, net of income taxes, as discontinued operations. The accompanying consolidated statements of operations for the three months and nine months ended August 31, 2019 and 2018, and the related notes to the consolidated financial statements, reflect the classification of its structured settlement business operating results, net of tax, as discontinued operations. See Note 9, "Discontinued Operations," of the accompanying consolidated financial statements for further information. Unless otherwise noted, the following notes refer to the Company’s continuing operations.

Foreign Currency

The Company owns certain foreign subsidiary companies formed under the laws of Ireland, the Bahamas and Bermuda. These foreign subsidiary companies utilize the U.S. dollar as their functional currency. The foreign subsidiary companies' financial statements are denominated in U.S. dollars and therefore, there are no translation gains and losses resulting from translating 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 subsidiary companies' functional currency) are included in income. These gains and losses are immaterial to the Company’s financial statements.

Use of Estimates

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America ("GAAP"), requires management to make 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. Actual results could differ from these estimates and such differences could be material. Significant estimates made by management include income taxes, the valuation of life settlements, the valuation of the debt owing under the White Eagle Revolving Credit Facility, the valuation of equity awards, the valuation of our investment in deconsolidated entities and the valuation of our investment in limited partnership.

(3) Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee in accordance with FASB Concepts Statement No. 6, Elements of Financial Statements, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. In December 2018, the Board released the amendments related to 1) sales taxes and other similar taxes collected from lessees that affect all lessors electing the accounting policy election; 2) lessor costs affecting all lessor entities that have lease contracts that either require lessees to pay lessor costs directly to a third party or require lessees to reimburse lessors for costs paid by lessors directly to third parties; and 3) recognition of variable payments for contracts with lease and nonlease components affecting all lessor entities with variable payments related to both lease and nonlease components. During the first quarter of 2019, the FASB issued targeted amendments to ASC 842 that affect how (1) financial institution lessors present lessee payments in their statements of cash flows and (2) lessors that are not manufacturers or dealers determine the fair value of the underlying asset. The FASB also clarified that companies transitioning to ASC 842 do not need to provide the interim transition disclosures required by ASC 250 (accounting changes and error corrections). All entities, including early adopters, must apply the amendments in this Update to all new and existing leases. This ASU is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements. We do not expect that it will have a material impact.

In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" to address stakeholder concerns about the guidance in current generally accepted accounting principles (GAAP) that requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

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In July 2018, the FASB issued ASU 2018-11, "Targeted Improvements to Leases" (Topic 842) primarily to provide another transition method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption date (such as January 1, 2019, for calendar year-end public business entities) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. The amendments in this Update address stakeholders’ concerns about the requirement for lessors to separate components of a contract by providing lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component, similar to the expedient provided for lessees. The amendments in this Update also clarify which Topic (Topic 842 or Topic 606) applies for the combined component. For entities that have not adopted Topic 842 before the issuance of this Update, the effective date and transition requirements for the amendments in this Update related to separating components of a contract are the same as the effective date and transition requirements in Update 2016-02.
 
In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement" which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The following disclosure requirements were removed from Topic 820 among others: 1) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy 2) The policy for timing of transfers between levels. The following disclosure requirements were part of the modifications in Topic 820:1) For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. The amendments also clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Lastly, the following disclosure requirements were added to Topic 820: 1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities ("ASU 2018-17"). ASU 2018-17 provides that indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. ASU 2018-17 is effective for public companies for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In May 2019, the FASB issued ASU No. 2019- 05 which amends ASU 2016-13 to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-203 if the instruments are eligible for the fair value option under ASC 825-10.4 The fair value option election does not apply to held-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05’s amendments should be applied "on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings balance in the statement of financial position as of the date that an entity adopted the amendments in ASU 2016-13." Certain disclosures are required. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-05 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. An entity may early adopt the ASU in any interim period after its issuance if the entity has adopted ASU 2016-13. For all other entities, the effective date will be the same as the effective date in ASU 2016-13.We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In May 2019, the FASB issued ASU No 2019-04 which clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. The ASU’s amendments apply to all entities within the scope of the affected guidance. Accrued interest - Amortized cost basis is defined in ASU 2016-13 as "the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, writeoffs, foreign exchange, and fair value hedge accounting

16



adjustments" (emphasis added). To address stakeholders’ concerns that the inclusion of accrued interest in the definition of amortized cost basis could make application of the credit loss guidance operationally burdensome, ASU 2019-04 provides certain alternatives for the measurement of the allowance for credit losses (ALL) on accrued interest receivable (AIR). These measurement alternatives include (1) measuring an ALL on AIR separately, (2) electing to provide separate disclosure of the AIR component of amortized cost as a practical expedient, and (3) making accounting policy elections to simplify certain aspects of the presentation and measurement of such AIR. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-04 related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and interim periods therein. ASU 2019-04’s amendments should be applied "on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date an entity adopted the amendments in ASU 2016-13." Certain disclosures are also required. For all other entities, the effective date will be the same as the effective date in ASU 2016-13.We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In July 2019, the FASB issued ASU No 2019-07, Codification Updates to SEC Sections—Amendments to SEC paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. The FASB has updated the SEC portion of its codification literature to reflect changes the regulator made to simplify disclosures, modernize the reporting and disclosure of information by registered investment companies, and other items. ASU. 2019-07 updates the codification to reflect the amendments of various SEC disclosure requirements that the agency determined were redundant, duplicative, overlapping, outdated or superseded. The SEC amended its disclosure rules in 2018 with the aim of providing investors with useful disclosure information and to simplify compliance without significantly altering the mix of the information being provided. The amendments were part of an initiative by the SEC’s Division of Corporation Finance to review disclosure requirements applicable to issuers to consider ways to improve the requirements for the benefit of investors and issuers. The amendments are effective upon issuance of this update on July 2019.

Adopted Accounting Pronouncements
 
On August 17, 2018, the SEC issued a final rule that amends certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, or changes in the information environment. The financial reporting implications of the final rule’s amendments are generally expected to reduce or eliminate some of an SEC registrant’s disclosure requirements. In limited circumstances, however, the amendments may expand those requirements, including those related to interim disclosures about changes in stockholders’ equity and noncontrolling interests (hereinafter referred to as changes in stockholders’ equity). The changes in stockholders’ equity extends to interim periods the annual disclosure requirement in SEC Regulation S-X, Rule 3-04,5,6 of presenting (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares. An analysis of changes in stockholders’ equity will now be required for the current and comparative year-to-date interim periods with subtotals for each interim period. Note that both rules refer to Rule 3-04 for presentation requirements, which, among other items, include a reconciliation that describes all significant reconciling items in each caption of stockholders’ equity and noncontrolling interests (if applicable). Rule 3-04 permits the disclosure of changes in stockholders’ equity (including dividend-per-share amounts) to be made either in a separate financial statement or in the notes to the financial statements. The final rule was effective for all filings submitted on or after November 5, 2018. This standard was adopted during the nine months ended August 31, 2019.

(4) Deconsolidation of Subsidiaries

On the Petition Date, Lamington and WEGP filed the November Chapter 11 Cases in the Bankruptcy Court. As of such date, Lamington was the limited partner and owned 99.99%, and WEGP was the general partner and owned 0.01%, of White Eagle. In its capacity as general partner, WEGP managed the affairs of White Eagle. Lamington and WEGP will continue to operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. Emergent Capital (exclusive of its subsidiaries) is a separate entity, and has not filed for bankruptcy relief and is continuing to operate in the ordinary course.

The Deconsolidated Entities' financial results are included in the Company’s consolidated results through November 13, 2018, the day prior the Petition Date. However, under ASC 810, Consolidation, specifically ASC 810-10-15, consolidation of a majority-owned subsidiary is precluded where control does not rest with the majority owners, for instance, where the subsidiary is in legal reorganization or bankruptcy. Accordingly, when a subsidiary files for bankruptcy, it is appropriate for the parent to deconsolidate the subsidiary. Under ASC 810, this loss of control would likely trigger a gain or loss for the parent as the parent would remeasure its retained noncontrolling investment at fair value. We assessed the inherent uncertainties associated with the outcome of the Chapter 11 reorganization process and the anticipated duration thereof, and concluded that it was appropriate to deconsolidate Lamington and its subsidiaries effective on the Petition Date.

17




At November 13, 2018, the pre-petition date, the Company valued its investment in Lamington to be $278.4 million, of which $127.3 million represents equity, $145.9 million represents promissory notes and interest receivable and $5.2 million represents other liabilities, which is equivalent to the Company's carrying value. This valuation was determined by performing a fair value calculation of the assets and liabilities of Lamington under ASC 820, Fair Value Measurement. 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. The Company calculated the fair value of the White Eagle Revolving Credit Facility 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, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. The most significant assumptions are the estimates of life expectancy of the insureds, the estimate of the amount that will be necessary to settle the debt under the White Eagle Revolving Credit Facility, and the discount rate. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. All other assets and liabilities were deemed equivalent to their carrying value as at the pre-petition date. See Note 16, "Fair Value Measurements," of the accompanying consolidated financial statements.

ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities was effective for calendar year-end public business entities in 2018. Under the new guidance, a reporting entity should account for its equity investments that are not consolidated or accounted for under the equity method at fair value, with changes to fair value recorded in current earnings. Lamington's main subsidiary, White Eagle, carries its life settlements policies and debt under the White Eagle Revolving Credit Facility at fair value, these valuations are based on inputs that are both significant to the fair value measurement and unobservable. As a result, the Company adopted ASU 2016-01 to value its investment in Lamington. The calculation was performed consistent with ASC 820 with changes in fair value recorded in current earnings.

As a result of the Chapter 11 Cases, consistent with ASC 321, Investments - Equity Securities, the Company subsequently, measured its investment in Lamington at fair value as of November 30, 2018. Further, the Company engaged a third party to perform a quantitative assessment to determine the value of its investment in Lamington. The valuation report showed the fair value of the Company's investment in Lamington to be $128.8 million, which was $149.6 million lower than its pre-petition value. As a result, the Company recognized a reduction in its investment in Lamington at November 30, 2018.

On August 16, 2019, the White Eagle Revolving Credit Facility was paid in full and terminated. In addition, payment was made to all White Eagle vendors and intercompany liabilities were contributed by Emergent. Lamington and WEGP had pledged their respective interests in White Eagle to secure its obligations under the White Eagle Revolving Credit Facility. With the termination of the facility, this pledge was released. There were no outstanding third party liabilities for either Lamington or WEGP at August 16, 2019 besides intercompany obligations.

On September 16, 2019, subsequent to the quarter end, the Bankruptcy Court entered an order and a final decree closing the White Eagle Chapter 11 Case. The Lamington and WEGP case were not yet dismissed as of the filing date of this Form 10-Q. However pursuant to ASC 810, Consolidation, management took the position that given that all third party claims had been satisfied in the case, consolidation of Lamington and WEGP as of August 17, 2019 was appropriate.

The Company further evaluated its investment at August 16, 2019 and recognized a gain of approximately $37.9 million, which amount is reflected in current earnings as change in fair value of investment in deconsolidated subsidiaries. The amount is associated with gains incurred by Lamington for the period up to August 16, 2019 in considering the proceeds received through the transactions for the Subscription Agreement, the actual payoff of the White Eagle Revolving Credit Facility and all other third party claims.

Effective August 17, 2019, the entities are no longer deconsolidated.

The fair value of the investment in Lamington is calculated as follows:
Investment in Lamington at December 1, 2018
$
128,795

Less: Change in fair value
37,941

Investment in Lamington at August 16, 2019
$
166,736


The table below summarizes the composition of the Company's investment in the deconsolidated entities at August 16, 2019:

18



 
 
 
Change in Fair Value
 
 
 
November 30, 2018
 
December 1, 2018 to August 16, 2019
 
August 16, 2019
Equity investment
$
66,251

 
$
(45,847
)
 
$
20,404

Promissory notes
56,596

 
89,736

 
146,332

Other liabilities
5,948

 
(5,948
)
 

Total investment
$
128,795

 
$
37,941

 
$
166,736


19



(5) Condensed and Consolidated Financial Statements for Entities in Bankruptcy

Condensed consolidated financial information for Lamington Road DAC is set forth below, presented at historical cost basis from the Petition Date to August 16, 2019.

Lamington Road DAC
(Debtor-in-Possession)
Condensed and Consolidated Balance Sheet

 
August 31,
2019
 
November 30,
2018
 
(Unaudited)
 
 
 
(In thousands except share data)
ASSETS
 
 
 
Assets
 
 
 
     Cash and cash equivalents
$

 
$
33,719

     Prepaid expenses and other assets

 
68

     Investment in life settlements, at estimated fair value

 
505,235

     Receivable for maturity of life settlements

 
27,700

          Total assets
$

 
$
566,722

 
 
 
 
LIABILITIES AND STOCKHOLDERS' DEFICIT/EQUITY
 
 
 
Liabilities
 
 
 
     Accounts payable and accrued expenses

 
1,410

     Other liabilities (subject to compromise)*

 
5,997

     Revolving Credit Facility debt, at estimated fair value

 
346,671

     Promissory notes payable (subject to compromise)*

 
137,813

     Promissory notes interest payable (subject to compromise)*

 
8,580

          Total liabilities

 
500,471

 
 
 
 
Share Capital (1 share of $1 authorized and issued)

 

Additional paid in capital

 
60,602

     Accumulated deficit/retained earnings

 
5,649

          Total stockholders' deficit/equity

 
66,251

          Total liabilities and stockholders' equity
$

 
$
566,722


*Liabilities subject to compromise include pre-petition unsecured claims, which may be settled at amounts different from those recorded in the condensed consolidated balance sheet.


20



Lamington Road DAC
(Debtor-in-Possession)
Condensed and Consolidated Statements of Operations

 
For the Three Months Ended
August 31,
 
For the Nine Months Ended
August 31,
 
2019
 
2018
 
2019
 
2018
Change in Fair Value of Life Settlements (Notes 10 & 16)
$
12,985

 
$
5,245

 
$
(16,841
)
 
$
19,144

Change in fair value of investment in limited partnership (Note 11&16)
15,352

 

 
15,352

 

Realized Gain on Life Settlements, Net
21,336

 

 
21,336

 

Other income
345

 
134

 
709

 
304

      Total income
50,018

 
5,379

 
20,556

 
19,448

 
 
 
 
 
 
 
 
Interest expense
23,331

 
5,844

 
28,331

 
16,716

Interest expense - affiliate

 
2,478

 

 
7,330

Change in fair value of White Eagle Revolving Credit Facility (Notes 12 & 16)
(26,586
)
 
(7,037
)
 
17,094

 
(11,663
)
Loss on extinguishment of debt
7,360

 

 
7,360

 

Participation Interest - Revolving Credit Facility

 

 

 
340

Reorganization cost
4,769

 

 
13,954

 

Legal fees
158

 
836

 
890

 
1,987

Professional fees
659

 
478

 
1,549

 
1,510

Administrative service fees - affiliate

 

 
2,765

 
2,371

Other general and administrative expenses
(71
)
 
96

 
469

 
292

Total expenses
9,620

 
2,695

 
72,412

 
18,883

Income taxes

 

 

 

(Loss) income
$
40,398

 
$
2,684

 
$
(51,856
)
 
$
565




21



Lamington Road DAC
(Debtor-in-Possession)
Condensed and Consolidated Statements of Cash Flows


 
For the Nine Months Ended
August 31,
 
2019
 
2018
 
 
 
 
Net cash used in operating activities
$
(58,793
)
 
$
(18,283
)
Cash flows from investing activities
 
 
 
Premiums paid on life settlements
(69,827
)
 
(67,815
)
Proceeds from maturity of life settlements
92,505

 
52,304

Net cash used in investing activities
$
22,678

 
$
(15,511
)
Cash flows from financing activities
 
 
 
Repayment of borrowings under White Eagle Revolving Credit Facility
(1,804
)
 
(34,597
)
Borrowings from White Eagle Revolving Credit Facility
4,221

 
67,580

Cash distributed to Parent Company
(21
)
 
700

Net cash provided by financing activities
$
2,396

 
$
33,683

Net increase (decrease) in cash and cash equivalents
(33,719
)
 
(111
)
Cash and cash equivalents, at beginning of the period
33,719

 
12,129

Cash and cash equivalents, at end of the period
$

 
$
12,018

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest during the period
$
28,331

 
$
16,716

Supplemental disclosures of non-cash financing activities:
 
 
 
Repayment of White Eagle Revolving Credit Facility by third party from proceeds of sale of life settlement
$
366,821

 
$

White Eagle early extinguishment fees paid by third party from proceeds of Class D Shares
$
7,360

 
$


Related Party Transactions

Certain related party transactions had been eliminated in consolidation. Due to the deconsolidation of Lamington, transactions after November 13, 2018 are no longer eliminated. With deemed discharge of the Chapter 11 Cases, effective August 17, 2019 related party transactions are now eliminated in consolidation. The below is a description of related party transactions for the period.

Administrative Services Fees

In 2014, White Eagle entered into an Administrative Service Agreement with Imperial Finance and Trading ("IFT"). Under the agreement, IFT will perform certain non-discretionary, administrative or ministerial services to assist with certain reporting, compliance and document retention duties and obligations arising under or in connection with the Amended and Restated Loan and Securities Agreement. IFT shall recover all cost incurred in performing these services, with billings quarterly or annually. Bills will be based on actual cost or an appropriate allocation methodology. White Eagle incurred administrative service expenses of approximately $0 during the three months ended August 31, 2019 and 2018, respectively, with $2.8 million and $2.4 million during the nine months ended August 31, 2019 and 2018, respectively, amounts for 2018 were eliminated in consolidation. Amounts due from White Eagle resulting from the administrative services during the nine months ended August 31, 2019 were contributed on August 16, 2019 consisted with the Master Termination Agreement.

Promissory Notes Receivable

Effective May 16, 2014, Lamington entered into a 10 year, $59.3 million unsecured Promissory Note ("the 8.5% Promissory Note") with its parent company, Markley Asset Portfolio, LLC ("Markley"). The amount was used by Lamington as

22



the partial purchase price of Markley’s interest in White Eagle. The annual interest rate on the Promissory Note is 8.5% and is due to be paid at the end of each calendar year; provided that any interest accrued at the end of a calendar year which is not paid within seven business days thereafter shall be capitalized and increased to the outstanding principal balance. As of August 31, 2019 the outstanding principal balance was $86.5 million, which includes $27.2 million in capitalized interest. Total interest expense related to the 8.5% Promissory Note was $0 and $1.7 million for the three months ended August 31, 2019 and 2018, respectively, with $0 and $5.1 million during the nine months ended August 31, 2019 and 2018, respectively. The entire remaining principal balance of the 8.5% Promissory Note shall be due and payable, together with all accrued but unpaid interest, on May 16, 2024. No principal payments are due prior to the maturity date.

Effective July 28, 2017, Lamington issued an unsecured Promissory Note to 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 Profit Participating Notes 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% provided that any interest accrued at the end of a calendar year which is not paid within seven business days thereafter shall be capitalized and increased to the outstanding principal balance. As of August 31, 2019 the outstanding principal balance was $59.9 million, which includes $2.9 million in capitalized interest. Total interest expense related to the Special Dividend Note was $0 and $737,000 for the three months ended August 31, 2019 and 2018, respectively, with $0 and $1.5 million during the nine months ended August 31, 2019 and 2018, respectively. The entire remaining principal balance of the Special Dividend Note shall be due and payable, together with all accrued but unpaid interest, on July 28, 2027. No principal payments are due prior to the maturity date. Approximately $570,000 was paid as interest for the nine months ended August 31, 2018. There was no payment for the nine months ended August 31, 2019 up to the deconsolidated period. Approximately $10.9 million was paid after the deemed discharge of the Chapter 11 Case and have been eliminated in consolidation at August 31, 2019.

At August 16, 2019, the notes were fair valued in accordance with ASC 820, with a fair value of approximately $146.3 million, resulting in a change in fair value of approximately $89.7 million for the period up to August 16, 2019, which is included in change in fair value of investment in deconsolidated subsidiaries. The notes are now being eliminated in consolidation effective August 17, 2019. At August 31, 2019 and 2018, the combined face value of the notes was $146.4 million and $137.8 million, respectively.

23




(6) Consolidation of Variable Interest Entities

The Company evaluates its interests in variable interest entities ("VIEs") on an ongoing basis and consolidates those VIEs in which it has a controlling financial interest and is thus deemed to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact its economic performance; and (ii) the obligation to absorb losses of the VIE that could potentially be significant to it or the right to receive benefits from the VIE that could be potentially significant to the VIE.

The following table presents the consolidated assets and consolidated liabilities of VIEs for which the Company has concluded that it is the primary beneficiary and which are consolidated in the Company’s financial statements as of August 31, 2019 and November 30, 2018, as well as non-consolidated VIEs for which the Company has determined it is not the primary beneficiary (in thousands):
 
 
Not Primary
Beneficiary
 
Not Primary
Beneficiary
 
 
Non-consolidated VIE
 
Non-consolidated VIE- White Eagle
 
 
Total
Assets
 
Maximum
Exposure
To Loss
 
Total
Assets
 
Maximum
Exposure
To Loss
August 31, 2019
 
$
2,384

 
$
2,384

 
$
132,334

 
$
132,334

November 30, 2018
 
$
2,384

 
$
2,384

 
$

 
$


Imperial Settlements Financing 2010, LLC ("ISF 2010"), which was formed as an affiliate of the Company to serve as a special purpose financing entity to allow the Company to sell structured settlements and assignable annuities, is a non-consolidated special purpose financing entity, as well as a non-consolidated VIE for which the Company has determined it is not the primary beneficiary. Approximately $2.4 million is included in investment in affiliates in the accompanying balance sheet as of each of August 31, 2019 and November 30, 2018.

In connection with the WE Investment, the Limited Partnership Agreement of White Eagle was amended and restated (the "A&R LPA") to provide for the issuance of the Class A, B and D limited partnership interests, and for funding of an "Advance Facility" evidenced by the Class D limited partnership interests, to maintain reserves sufficient to fund premiums, certain operating expenses of White Eagle and certain minimum payments to Lamington as the holder of the Class B interests. The A&R LPA provides generally that the Class A and Class B Interests receive distributions of proceeds of the assets of White Eagle based on their 72.5% and 27.5% ownership. The limited partnership is a non-consolidated VIE for which the Company has determined it is not the primary beneficiary. The Company accounts for its equity investment at fair value with changes in fair included in current earnings.

(7) Earnings Per Share

As of August 31, 2019 and 2018, there were 158,659,803 and 159,028,458 shares of common stock issued, respectively, and 158,051,803 and 158,420,458 shares of common stock outstanding, respectively. Outstanding shares as of August 31, 2019 and 2018 have been adjusted to reflect 608,000 treasury shares.

Basic net income per share is computed by dividing the net earnings attributable to common shareholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares outstanding, increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Conversion or exercise of the potential common shares is not reflected in diluted earnings per share unless the effect is dilutive. The dilutive effect, if any, of outstanding common share equivalents is reflected in diluted earnings per share by application of the treasury stock method, and if-converted method as applicable.


24



The following table reconciles actual basic and diluted earnings per share for the three months and nine months ended August 31, 2019 and 2018 (in thousands except per share data).
 
For the Three Months Ended
August 31,
 
For the Nine Months Ended August 31,
 
2019(1)
 
2018(2)
 
2019(3)
 
2018(4)
Income (loss) per share:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
80,201

 
$
(2,293
)
 
$
16,875

 
$
(4,338
)
Net income (loss) from discontinued operations
70

 
(17
)
 
36

 
(14
)
Numerator for basic EPS - net income (loss) attributable to common stockholders
$
80,271

 
$
(2,310
)
 
$
16,911

 
$
(4,352
)
       Add back convertible notes interest
1,095

 

 
3,270

 

Numerator for diluted earnings per share - net income (loss) attributable to common stockholders
$
81,296

 
$
(2,293
)
 
$
20,145

 
$
(4,338
)
Basic income (loss) per common share:
 
 
 
 
 
 
 
Basic income (loss) from continuing operations
$
0.51

 
$
(0.01
)
 
$
0.11

 
$
(0.03
)
Basic income (loss) from discontinued operations

 

 

 

Basic income (loss) per share available to common shareholders
$
0.51

 
$
(0.01
)
 
$
0.11

 
$
(0.03
)
Diluted income (loss) per common share:
 
 
 
 
 
 
 
Diluted income (loss) from continuing operations
$
0.41

 
$
(0.01
)
 
$
0.10

 
$
(0.03
)
Diluted income (loss) from discontinued operations

 

 

 

Diluted income (loss) per share available to common shareholders
$
0.41

 
$
(0.01
)
 
$
0.10

 
$
(0.03
)
Denominator:
 
 
 
 
 
 
 
Basic
156,968,470

 
158,305,635

 
156,949,425

 
157,919,215

Diluted
195,979,957

 
158,305,635

 
194,867,908

 
157,919,215



(1)
The computation of diluted EPS does not include 85,000 shares of common stock underlying options, 100,000 shares of stock appreciation rights and 2,000,000 shares of common stock underlying warrants, as the effect of their inclusion would have been anti-dilutive.

(2)
The computation of diluted EPS does not include 2,550,000 shares of restricted stock, 85,000 shares of common stock underlying options,100,000 shares of stock appreciation rights, 44,500,000 shares of common stock underlying warrants, and up to 37,918,483 shares of common stock issuable upon conversion of the 5% Convertible Notes (as defined below) and up to 181,249 shares of common stock issuable upon the conversion of the 8.5% Convertible Notes (as defined below), as the effect of their inclusion would have been anti-dilutive.

(3)
The computation of diluted EPS does not include 85,000 shares of common stock underlying options, 100,000 shares of stock appreciation rights, 1,083,333 shares of restricted stock and 44,500,000shares of common stock underlying warrants, as the effect of their inclusion would have been anti-dilutive.

(4)
The computation of diluted EPS does not include 2,550,000 shares of restricted stock, 85,000 shares of common stock underlying options, 100,000 shares of stock appreciation rights, 44,500,000 shares of common stock underlying warrants, up to 37,918,483 shares of common stock issuable upon conversion of the 5% Convertible Notes (as defined below) and up to 181,249 shares of common stock issuable upon the conversion of the 8.5% Convertible Notes (as defined below), as the effect of their inclusion would have been anti-dilutive.

(8) Stock-based Compensation

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

25



Plan has an aggregate of 12,600,000 shares of common stock authorized for issuance thereunder, subject to adjustment as provided therein.


Options

As of November 30, 2018, all options to purchase shares of common stock issued by the Company were fully vested with 85,000 exercisable. There was no stock-based compensation expense relating to stock options granted under the Omnibus Plan during the three months and nine months ended August 31, 2019 and 2018, respectively.

As of August 31, 2019, options to purchase 85,000 shares of common stock were outstanding under the Omnibus Plan at a weighted average exercise price of $6.94 per share. The options were issued on June 6, 2013 and expire seven years after the date of grant which will be June 6, 2020. The following table presents the activity of the Company’s outstanding stock options to purchase common stock for the nine months ended August 31, 2019:
Common Stock Options
 
Number of
Shares
 
Weighted
Average Exercise Price
per Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding Balance, December 1, 2018
 
85,000

 
$
6.94

 
1.50

 
$

Options granted
 

 

 

 


Options exercised
 

 

 

 


Options forfeited
 

 
$

 

 


Options expired
 

 

 

 


Options outstanding, August 31, 2019
 
85,000

 
$
6.94

 
0.75

 
$

Exercisable at August 31, 2019
 
85,000

 
$
6.94

 
0.75

 


Unvested at August 31, 2019
 

 

 

 
$


As of August 31, 2019, all outstanding stock options had an exercise price above the fair market value of the common stock on that date. There are no remaining unamortized amounts to be recognized on these options.

Restricted Stock

The Company incurred stock-based compensation expense of approximately $95,000 and $207,000 relating to restricted stock granted to the board and certain employees during the three months ended August 31, 2019 and 2018, respectively, and $290,000 and $380,000 during the nine months ended August 31, 2019 and 2018, respectively.

During the year ended December 31, 2016, the Company granted 200,000 shares of restricted stock units to certain employees under the Omnibus Plan, which were subject to a two year vesting period that commenced on the date of grant. The fair value of the unvested restricted stock was valued at approximately $674,000 based on the closing price of the Company’s shares on the day prior to the grant date. Approximately 46,000 and 60,000 shares of restricted stock were vested and forfeited, respectively, since issuance and 74,000 and 20,000 were vested and forfeited, respectively, during the eleven months ended November 30, 2018 with 0 unvested at August 31, 2019. The Company incurred stock-based compensation expense of approximately $0 and $10,000 related to these 200,000 shares of restricted stock during the three months ended August 31, 2019 and 2018 respectively, and income of $0 and $25,000 during the nine months ended August 31, 2019 and 2018, respectively.

During the year ended December 31, 2017, the Company granted 51,132 shares of restricted stock to its directors under the Omnibus Plan, which were subject to a one year vesting period that commenced on the date of grant. The fair value of the unvested restricted stock was valued at approximately $17,000 based on the closing price of the Company’s shares on the date prior to the grant date. The Company incurred stock-based compensation expense related to these 51,132 shares of restricted stock of approximately $0 during the three months and nine months ended August 31, 2019 and 2018. Approximately 42,610 shares of restricted stock vested during the year ended December 31, 2017, with 8,522 vested during the eleven months November 30, 2018.
During the year ended December 31, 2017, the Company granted 2,000,000 shares of restricted stock units to certain employees under the Omnibus Plan, which are subject to a two year vesting period that commenced on the date of grant. The

26



fair value of the unvested restricted stock was valued at approximately $745,000 based on the closing price of the Company's shares on the day prior to the grant date. Approximately 750,000 shares of restricted stock vested during the eleven months ended November 30, 2018 and 250,000 during the nine months ended August 31, 2019 with 1,000,000 unvested at August 31, 2019. The Company incurred stock-based compensation expense of approximately $89,000 and $101,000 during the three months ended August 31, 2019 and 2018, respectively, with $271,000 and $305,000 during the nine months ended August 31, 2019 and 2018, respectively, related to these 2,000,000 shares of restricted stock.
During the eleven months ended November 30, 2018, the Company granted 150,000 shares of restricted stock units to certain employees under the Omnibus Plan, with 100,000 shares and 50,000 subject to a two and three year vesting period, respectively, that commenced on the date of grant. The fair value of the unvested restricted stock was valued at approximately $58,000 based on the closing price of the Company's shares on the day prior to the grant date. Approximately 66,667 shares of restricted stock vested during the three months and nine months ended August 31, 2019 with 83,333 unvested at August 31, 2019. The Company incurred stock-based compensation expense of approximately $6,000 and $6,000 during the three months ended August 31, 2019 and 2018, respectively, with $19,000 and $11,000 during the nine months ended August 31, 2019 and 2018, respectively, related to these 150,000 shares of restricted stock.

During the three months and nine months ended August 31, 2018, the Company established an ad hoc Capital Structure Committee (the "Committee") consisting of members of the board of directors, to undertake a review of the Company's capital structure. As compensation to the sole non-employee member of the Committee, the Company granted 400,000 restricted stock units under the Omnibus Plan, which will vest on the later of (i) September 30, 2018 and (ii) termination of the director's service on the Committee. The fair value of the restricted stock was valued at approximately $128,000 based on the closing price of the Company’s shares on the date prior to the grant date. The Company incurred stock-based compensation expense related to these 400,000 restricted stock units of approximately $81,000 and $81,000 during the three months and nine months ended August 31, 2018 and 2018. The 400,000 restricted stock units vested during the eleven months November 30, 2018.

The following table presents the activity of the Company’s unvested shares of restricted stock for the nine months ended August 31, 2019:
Common Unvested Shares
Number of
Shares
Outstanding Balance, December 1, 2018
1,400,000

Granted

Vested
(316,667
)
Forfeited

Outstanding August 31, 2019
1,083,333


The aggregate intrinsic value of the awards of 83,333 and 1,000,000 shares is $20,000 and $240,000, respectively, and the remaining weighted average life of these awards is 0.87 years and 0.21 years respectively as of August 31, 2019. As of August 31, 2019, a total of $110,000 in stock based compensation remained unrecognized.

Stock Appreciation Rights (SARs)

During the eleven months November 30, 2018, the Company issued 100,000 SARs to the sole non-employee member of the ad hoc Capital Structure Committee of the Board, which will expire 10 years after the date the SARs were granted. The SARs will vest on the later of (i) September 30, 2018 and (ii) termination of the director's service on the Committee and had a fair value of $9,000 on the grant date. Each SAR entitles the holder to receive, upon exercise, an amount equal to the excess of (a) the fair market value per share of stock on the exercise date, over (b) the exercise price, which is $1.00, being not less than the fair market value per share of stock on the grant date. Upon exercise of the SARs, the stock appreciation amount shall be paid, as determined solely at the discretion of the Company, in (a) whole shares, (b) cash, or (c) a combination of both cash and shares. The 100,000 SARs vested during the eleven months November 30, 2018 and remain unexercised at August 31, 2019.

(9) Discontinued Operations

On October 25, 2013, the Company sold substantially all of the operating assets comprising its structured settlement business to Majestic Opco LLC pursuant to an Asset Purchase Agreement. No structured settlement receivables were sold and no on-balance sheet liabilities were transferred in connection with the sale. On August 18, 2015, the Company sold its remaining structured settlement receivables asset to the buyer of its operating assets.


27



As a result of the sale of its structured settlements business, the Company reclassified its structured settlement business operating results as discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented.

Operating results related to the Company’s discontinued structured settlement business are as follows:
 
Three Months Ended
August 31,
 
Nine Months Ended
August 31,
 
2019
 
2018
 
2019
 
2018
Total income
$

 
$

 
$

 
$
17

Total expenses
(70
)
 
18

 
(36
)
 
32

Income (loss) before income taxes
70

 
(18
)
 
36

 
(15
)
(Benefit) provision for income taxes


 

 

 

Net income (loss) from discontinued operations, net of income taxes
$
70

 
$
(18
)
 
$
36

 
$
(15
)

(10) Life Settlements (Life Insurance Policies)

The Company accounts for policies it acquires using the fair value method in accordance with ASC 325-30-50 Investments-Other-Investment in Insurance Contracts. Under the fair value method, the Company recognizes the initial investment at the purchase price. For policies that were relinquished in satisfaction of premium finance loans at maturity, the initial investment is the loan carrying value. For policies purchased in the secondary or tertiary markets, the initial investment is the amount of cash outlay at the time of purchase. At each reporting period, the Company re-measures the investment at fair value in its entirety and recognizes changes in the consolidated statements of operations in the periods in which the changes occur.
Emergent Capital, through its subsidiaries, owns two life insurance policies, also referred to as life settlements, with a fair value of $1.3 million and an aggregate death benefit of approximately $12.0 million at August 31, 2019. Additionally, through a subsidiary, the Company owns a 27.5% equity investment, having an estimated fair value of approximately $132.3 million at August 31, 2019, in White Eagle Asset Portfolio, LP ("White Eagle"), which was previously a wholly-owned subsidiary of the Company that holds a portfolio of life settlements. The Company primarily earns income through change in fair value and death benefits from these two polices and change in fair value and distributions from its equity investment in White Eagle.
As of November 30, 2018, the Company through its consolidated and deconsolidated subsidiary companies owned 588 policies, with an aggregate estimated fair value of life settlements of $506.4 million. See Note 4, "Deconsolidation of Subsidiaries" and Note 5, "Condensed and Consolidated Financial Statements for Entities in Bankruptcy," to the accompanying consolidated financial statements for further information.
The following describes the Company’s life settlements as of August 31, 2019 (dollars in thousands):
Policies Pledged Under White Eagle Revolving Credit Facility and Deconsolidated

On August 16, 2019 the Company and its subsidiaries entered into a Subscription Agreement where White Eagle sold 72.5% of its limited partnership interests for a purchase price of approximately $366.2 million and recognized a gain on disposal of approximately $21.3 million. The proceeds were used to satisfy all outstanding indebtedness held by the White Eagle’s Revolving Credit Facility thus terminating the credit facility and releasing the related pledge to the lender of the life settlements owned by White Eagle. The Company now owns a 27.5% equity investment in White Eagle.
As of August 31, 2019, there were no policies pledged under the White Eagle Credit Facility due to its termination.
The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the White Eagle at November 30, 2018 was 8.9 years.



28



Remaining Life Expectancy (In Years)*
Number of Life Settlement Contracts
 
Fair Value
 
Face Value
0-1
6

 
$
24,221

 
$
28,796

1-2
12

 
30,828

 
46,390

2-3
31

 
72,343

 
126,402

3-4
37

 
57,874

 
139,447

4-5
46

 
77,719

 
217,450

Thereafter
454

 
242,251

 
2,217,430

Total
586

 
$
505,236

 
$
2,775,915


*Based on remaining life expectancy at November 30, 2018, as derived from reports of third party life expectancy providers, and does not indicate the timing of expected death benefits. See "Life Settlements," in Note 16, "Fair Value Measurements," of the accompanying consolidated financial statements.

During the three months ended August 31, 2019 and 2018, the Company experienced maturities of 6 and 3 life insurance policies, respectively, with face amounts totaling $31.8 million and $14.3 million, respectively, resulting in a net gain of approximately $20.0 million and $7.1 million, respectively.

During the nine months ended August 31, 2019 and 2018, the Company experienced maturities of 18 and 15 life insurance policies, respectively, with face amounts totaling $100.4 million and $68.2 million, respectively, resulting in a net gain of approximately $70.3 million and $35.1 million, respectively.


The below is an analysis of policy maturities for the three months and nine months ended August 31, 2019 and 2018.

 
Three Months Ended August 31,
 
Nine Months Ended August 31,
 
2019
 
2018
 
2019
 
2018
Face value
$
31,768

 
$
14,250

 
$
100,374

 
$
68,185

 
 
 
 
 
 
 
 
Cost*
8,911

 
7,664

 
27,723

 
22,755

Accumulated Change in Fair Value*
2,858

 
(528
)
 
2,351

 
10,316

Carrying Value
11,769

 
7,136

 
30,074

 
33,071

 
 
 
 
 
 
 
 
Gain on Maturities
$
19,999

 
$
7,114

 
$
70,300

 
$
35,114

 
 
 
 
 
 
 
 
Number of Policies
6

 
3

 
18

 
15


* Cost includes purchase price and premiums paid into the policy to date of maturity. Accumulated change in fair value is impacted by changes in discount rate, updated life expectancy estimates on the life insurance policy and cost of insurance increase.

Policies Not Pledged
The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the Company at August 31, 2019 was 11.6 years.


29



Remaining Life Expectancy (In Years)
Number of Life Settlement Contracts
 
Fair Value
 
Face Value
0-1

 
$

 
$

1-2

 

 

2-3

 

 

3-4

 

 

4-5

 

 

Thereafter
2

 
1,254

 
12,000

Total
2

 
$
1,254

 
$
12,000

The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the Company at November 30, 2018 was 12.2 years.

Remaining Life Expectancy (In Years)*
Number of Life Settlement Contracts
 
Fair Value
 
Face Value
0-1
$

 
$

 
$

1-2

 

 

2-3

 

 

3-4

 

 

4-5

 

 

Thereafter
2

 
1,172

 
12,000

Total
$
2

 
$
1,172

 
$
12,000

Estimated premiums to be paid for each of the five succeeding fiscal years and thereafter to keep the life insurance policies in force as of August 31, 2019, are as follows (in thousands):
Remainder of 2019
$
45

2020
191

2021
222

2022
254

2023
286

Thereafter
4,989

 
$
5,987

The amount of $6.0 million noted above represents the estimated total future premium payments required to keep the life insurance policies in force during the life expectancies of all the underlying insured lives and does not give effect to projected receipt of death benefits. The estimated total future premium payments could increase or decrease significantly to the extent that insurance carriers increase the cost of insurance on their issued policies or that actual mortalities of insureds differs from the estimated life expectancies.


30



(11) Investment in Limited Partnership

Subscription Agreement

On August 16, 2019 (the "Effective Date"), the Company entered into a subscription agreement (the "Subscription Agreement") with Lamington ("Class B Limited Partner"), White Eagle, WEGP ("Withdrawing General Partner"), and Palomino JV, L.P. ("Palomino" or "Class A Limited Partner"), in connection with the commitment letter signed on June 22, 2019 with Jade Mountain Partners, LLC ("Jade Mountain" ), pursuant to which White Eagle sold to Palomino 72.5% of its limited partnership interests, consisting of all of the newly issued and outstanding Class A and Class D interests, and WEGP sold to an affiliate of Jade Mountain (the "Manager") all of its general partnership interests (collectively, the "WE Investment"). Pursuant to the Subscription Agreement, Lamington received 27.5% of the limited partnership interests of White Eagle, consisting of all of the newly issued and outstanding Class B interests in exchange for all of its previously owned White Eagle limited partnership interests.

The proceeds of the WE Investment and certain funds then held in accounts of White Eagle were used to satisfy in full (i) the White Eagle Revolving Credit Facility and (ii) the DIP Financing, each in connection with the termination of the White Eagle Revolving Credit Facility and the release of the related liens on the collateral thereunder pursuant to the Master Termination Agreement. The repayment and termination of the White Eagle Revolving Credit Facility and the termination of the DIP Financing, which had not been drawn against, were in accordance with the Plan of Reorganization.

The WE Investment was consummated, and the White Eagle Revolving Credit Facility was paid off in full and terminated, on August 16, 2019. The payoff totaled $402.5 million, which included payment directly to CLMG by Palomino of $374.2 million and payment to CLMG by White Eagle of $28.3 million, collectively sufficient to repay, under the White Eagle Revolving Credit Facility, the outstanding principal of $368.0 million, accrued and unpaid interest of $21.3 million plus, under the Plan of Reorganization, an early payment amount due to LNV of $7.4 million and lender allowed claims of $5.8 million. Of the $374.2 million purchase price, $8.0 million was allocated to the Class D interests which amount is to be repaid in accordance with the distribution terms of the A&R LPA.

On August 16, 2019, Lamington also entered into (i) the Pledge Agreement pursuant to which it pledged the 27.5% limited partnership interests of White Eagle owned by it to Palomino and certain other secured parties in support of the payment and indemnification obligations described above, and (ii) the Assumption Agreement pursuant to which Lamington assumed all liabilities and obligations of White Eagle and WEGP as of the closing date of the Transactions, and Lamington, the Company and WEGP agreed to terminate, waive and release any intercompany debt, obligations and liabilities of White Eagle to Lamington, the Company and WEGP. On August 16, 2019, Emergent entered into the Indemnification Agreement pursuant to which it indemnified Wilmington Trust, National Association against claims and liabilities that may arise in relation to policies that have matured prior to the Closing Date but as to which Wilmington Trust, National Association has historically held title as securities intermediary.

Amended and Restated Limited Partnership Agreement of White Eagle

In connection with the WE Investment, the Limited Partnership Agreement of White Eagle was amended and restated (the "A&R LPA") to provide for the issuance of the Class A, B and D limited partnership interests, and for funding of an "Advance Facility" evidenced by the Class D limited partnership interests, to maintain reserves sufficient to fund premiums, certain operating expenses of White Eagle and certain minimum payments to Lamington as the holder of the Class B interests. The A&R LPA provides generally that holders of the Class A and Class B Interests receive distributions of proceeds of the assets of White Eagle based on their 72.5% and 27.5% ownership, respectively, after certain expenses and reserves are funded (including such minimum payments to Lamington totaling approximately $8.0 million per year for the first three (3) years and $4.0 million for the subsequent seven (7) years, provided that commencing after year three (3), such minimum payments will be utilized to repay the Class D Return of $8.0 million, which was advanced at closing, plus the greater of $2.0 million or 11% per annum on such $8.0 million to the extent necessary to fully repay such Class D Return. The minimum payments to the Company will occur regardless of maturities with payments through the premium/expense reserve account when there are no maturity proceeds available for distribution as described below). However, the A&R LPA also provides that all payments to holders of the Class B interests (other than such minimum payments to Lamington during the first eight (8) years following the Closing Date) are fully subordinated to payments in respect of the minimum returns to holders of the Class A and Class D interests (including repayment of all amounts advanced in respect of the Advance Facility) and to any indemnification payments, if any, due to such holders and related indemnified persons pursuant to the indemnities afforded them in and in relation to the A&R LPA, Subscription Agreement, Master Termination Agreement and related documents. As of the closing of

31



the WE Investment, Lamington Road Bermuda, LTD resigned as manager of the portfolio and was replaced by an affiliate of Jade Mountain.

On August 16, 2019, White Eagle , Palomino JV GP Limited, ("the General Partner") and the Manager entered into the Management Agreement, setting forth the terms and conditions pursuant to which the General Partner has delegated certain of its management rights and obligations under the A&R LPA to the Manager.

Advance Facility. The facility under which the Class A Limited Partner or its Affiliates from time to time advance to the Class B Limited Partner (or, as a matter of convenience only, provides the proceeds of any such advance directly to the Partnership on behalf of the Class B Limited Partner, provided that, for the avoidance of doubt, any such advance distributed directly to the Partnership shall not be deemed to be an incurrence of an obligation of the Partnership for the repayment thereof) the portion of the premium/expense reserve account owed by the Class B Limited Partner under the Agreement. Essentially, this is the aggregate amount owed by the Class B Limited Partner to the Class A Limited Partner thereunder as a result of such advances.

Class A Minimum Return Cumulative Amount. An amount equal to 11% per annum, compounded quarterly and accruing from the Effective Date, on the sum of (i) 100% of the initial contribution by the Class A Limited Partner on its own behalf to the premium/expense reserve account, accruing from the Effective Date until repaid (as reduced by any repayment thereof) (but for the avoidance of doubt excluding any advances made by the Class A Limited Partner under the Advance Facility), (ii) 100% of the amounts funded into the premium/expense reserve account by the Class A Limited Partner on its own behalf after the Effective Date (as reduced by any repayment thereof), accruing from the date of funding until repaid (but for the avoidance of doubt excluding any advances made by the Class A Limited Partner under the Advance Facility), and (iii) the Purchase Price of $374.2 million (as reduced by any portion thereof repaid by the Class B Interest Monthly Distribution, as defined below, (v) that reflects amortization of principal, all sale proceeds received by the Class A Limited Partner and any reductions thereof as contemplated by the permitted disposition of policies, (plus (x) the amount necessary to reduce the principal balance to the targeted principal balance hereto for such Distribution Date, plus (y) later contributions by the Class A Limited Partner (excluding any advances made by the Class A Limited Partner under the Advance Facility but, for the avoidance of doubt, including amounts funded into the premium/expense reserve account by the Class A Limited Partner on its own behalf), plus (z) the Class D Return.

Class A True Up Payment. As of the applicable Distribution Date, (i) the excess (if positive) of (x) 72.5% of the total return distributions over (y) the sum of cumulative amounts actually received by the Class A Limited Partner prior to such Distribution Date on account of clauses (w), (x) and (y) of the Class A Minimum Return Cumulative Amount, any Class A true up payments and amounts paid to the Class A Limited Partner pursuant plus (ii) the amount necessary such that the Class A Limited Partner shall have received 72.5% of total return distributions after giving effect to the amounts to be paid to the Class A Limited Partner on such Distribution Date.

Class B True Up Payment. As of the applicable Distribution Date, (i) the excess (if positive) of (x) 27.5% of the Total Return Distributions over (y) the sum of cumulative amounts actually received by the Class B Limited Partners prior to such Distribution Date on account of the Minimum Class B Interest Monthly Distributions, the Class B True Up Payments and amounts paid to the Class B Limited Partners pursuant to Section 3.2(b)(v) (plus the cumulative amounts that were paid to the Class A Limited Partner in repayment of the Advance Facility, to the Class D Limited Partner on account of the Class D Return, or to the Purchaser Indemnified Parties to satisfy (in whole or in part) the indemnity obligations of Parent, Lamington Road or the Class B Limited Partner) plus (ii) the amount necessary such that the Class B Limited Partners shall have received 27.5% of Total Return Distributions after giving effect to the amounts to be paid to the Class B Limited Partner on account of the Minimum Class B Interest Monthly Distributions and amounts paid to the Class B Limited Partners on such Distribution Date in the priority of payments after payment of any Class A True Up Payments and Class B True Up Payments (plus the cumulative amounts that would have been distributed to the Class B Limited Partners but that were paid to the Class A Limited Partner in repayment of the Advance Facility, to the Class D Limited Partner on account of the Class D Return, or to the Purchaser Indemnified Parties to satisfy (in whole or in part) the indemnity obligations of Parent, Lamington Road or the Class B Limited Partner).

Class D Return. The aggregate repayment amount of approximately $8.0 million ( as described above) owed by the Class B Limited Partner to the Class D Limited Partner, payable in accordance with the terms herein, which shall equal the greater of (x) 125% of the Class D Payment Amount, and (y) the Class D Payment Amount plus the total amount of unpaid interest accruing on the Class D Payment Amount at a rate equal to 11% per annum compounded quarterly from the Effective Date through the date on which the Class D payment amount and all accrued and unpaid interest is repaid in full.


32



Distribution Date. The 5th Business Day of each month.

Minimum Class B Interest Monthly Distribution. The monthly amount equal to (i) for each month commencing prior to the third anniversary of the Effective Date, the greater of $667,000 and 1/12th of 1.50% of the Net Asset Value as determined by the most recent valuation report obtained on or prior to such Distribution Date and (ii) for each month commencing on or after the third anniversary of the Effective Date and prior to the tenth anniversary of the Effective Date, the greater of $333,000 and 1/12th of 0.75% of the net asset value as determined by the most recent valuation report obtained on or prior to such Distribution Date.

Expense. On August 16, 2019, the Class A Limited Partner contributed $21.8 million to the premium/expense reserve account in satisfaction of its obligations to fund the premium/expense reserve account as of the Effective Date, and (ii) advanced under the Advance Facility $8.3 million by deposit into the premium/expense reserve account on behalf of the Class B Limited Partner, in satisfaction of the Class B Limited Partner’s obligations to fund the premium/reserve fund as of the Effective Date. This $8.3 million is to be repaid through the waterfall distribution from amounts to be distributed to the Company. Total initial premium/expense reserve was approximately $30.0 million on August 16, 2019.

If at any time prior to a Distribution Date, the amount in the premium/expense reserve account is less than an amount sufficient to cover the next month of premiums and expenses, as set forth in the budget or as otherwise determined by the General Partner based upon advice of the Manager, the Class A Limited Partner will (i) contribute its percentage interest of 72.5%, and (ii) make advances under the Advance Facility of the Class B Limited Partner’s percentage interest of 27.5% , the aggregate amount of additional capital needed to increase the balance of the premium/expense reserve account to an amount sufficient to cover the next three months of premiums and expenses, as set forth in the budget.

All advances made by the Class A Limited Partner under the Advance Facility, whether prior to, on or after the Effective Date, shall accrue interest at the rate of 11% per annum, compounded quarterly, until repaid, and all such amounts (including any accrued but unpaid interest) shall be secured by the Class B Partnership Units pursuant to the Pledge Agreement. After the Effective Date, the General Partner will use commercially reasonable efforts to obtain financing proposals for premiums and expenses on terms more favorable to the Class B Limited Partner than the Advance Facility, if and to the extent available, and in the event such financing is obtained, the Class A Limited Partner shall no longer have any obligation to fund advances under the Advance Facility.

Funds in the premium/expense reserve account shall be used or otherwise distributed in the following order of priority:

Premium/Expense Reserve Account
 
Three Months Ended August 31, 2019
 
Nine Months Ended August 31, 2019
 
 
 
 
Amount
 
Use of Proceeds
First
 
$
8,210

 
$
8,210

 
Premiums, Expenses and Manager Fees
Second
 

 

 
Minimum Class B Interest Monthly Distribution - after three years, Class D Returns takes priority until paid in full
Third
 

 

 
Minimum Class B Interest Monthly Distribution
Fourth