NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2017
(
1
)
Description of Business
Founded in December 2006 as a Florida limited liability company, Imperial Holdings, LLC, converted into Imperial Holdings, Inc. on February 3, 2011, in connection with its initial public offering. Effective September 1, 2015, the Company changed its name to Emergent Capital, Inc. (with its subsidiary companies, the "Company" or "Emergent Capital").
Incorporated in Florida, Emergent Capital, through its subsidiary companies, owns a portfolio of
614
life insurance policies, also referred to as life settlements, with a fair value of
$526.3 million
and an aggregate death benefit of approximately
$2.9 billion
at
June 30, 2017
. The Company primarily earns income on these policies from changes in their fair value and through death benefits.
612
of these policies, with an aggregate death benefit of approximately
$2.9 billion
and a fair value of approximately
$525.5 million
at
June 30, 2017
are pledged under a
$370.0 million
, revolving credit agreement (the "White Eagle Revolving Credit Facility") entered into by the Company’s indirect subsidiary, White Eagle Asset Portfolio, LP ("White Eagle"). At
June 30, 2017
,
two
policies owned by the Company, with an aggregate death benefit of approximately
$12.0 million
and a fair value of
$736,000
were not pledged as collateral under the White Eagle Revolving Credit Facility.
(
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 Imperial Settlements Financing 2010, LLC ("ISF 2010"), an unconsolidated special purpose entity which is accounted for using the cost method of accounting. The special purpose entity has been created to fulfill specific objectives. All significant intercompany balances and transactions have been eliminated in consolidation, including income from services performed by subsidiary companies in connection with the Revolving Credit Facilities, as detailed herein. Notwithstanding consolidation, as referenced above, White Eagle is the owner of
612
policies, with an aggregate death benefit of approximately
$2.9 billion
and an estimated fair value of approximately
$525.5 million
at
June 30, 2017
.
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 disclosures 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 June 30, 2017
are not necessarily indicative of the results that may be expected for future periods or for the year ended
December 31, 2017
. These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Emergent Capital's Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
.
Going Concern and Management's Plan
The Company has incurred substantial losses and reported negative cash flows from operating activities of
$17.0 million
for the
six month period ended June 30, 2017
and
$45.6 million
for the year ended December 31, 2016. As of
June 30, 2017
, we had approximately
$22.7 million
of cash and cash equivalents and certificates of deposit of
$1.0 million
; of this amount, approximately
$623,000
is available to pay premiums on the
two
unencumbered policies and other overhead expenses, with approximately
$22.0 million
being restricted by the White Eagle Revolving Credit Facility.
The Company’s ability to continue as a going concern is dependent on its ability to meet its liquidity needs through a combination of the receipt of death benefits from life insurance policy maturities, borrowings under the White Eagle Revolving Credit Facility, strategic capital market raises, policy sales (subject to certain asset sale restrictions) and cash on hand. During the six months ended
June 30, 2017
, the Company entered into certain agreements for the purpose of recapitalizing the Company, and subsequent to the quarter end, on July 28, 2017 and August 11, 2017, the Company consummated a series of recapitalization transactions, as described below. In considering the cash received from the recapitalization and management's projections for receipts of death benefits from policy maturities, we estimate that our liquidity and capital resources are sufficient for our current and projected financial needs in excess of twelve months. Additionally, if we do not receive the projected death benefits as forecasted, the Company projects that it will have available sufficient cash to continue its operations for at least the next twelve months from the date of filing this Form 10-Q.
On March 15, 2017 and May 12, 2017, the Company entered into a series of separate Master Transaction Agreements (together, the "Master Transaction Agreements") by and between the Company, PJC Investments, LLC, a Texas limited liability company ("PJC"), and each Consenting Convertible Note Holder that is a party to one or more Master Transaction Agreements ("Consenting Holders") regarding a series of integrated transactions with the intent to effect a recapitalization of the Company (the "Transaction"), which included an Amendment to the Company’s Articles of Incorporation (the "Articles Amendment") to increase the number of authorized shares of the Company's common stock,
$0.01
par value (the "Common Stock"), a Common Stock Purchase Agreement, a Convertible Note Exchange Offer, a New Convertible Note Indenture providing for the issuance of New Convertible Notes, a Senior Note Exchange Offer, a New Senior Note Indenture providing for the issuance of New Senior Notes, a Senior Note Purchase Agreement, Warrants and certain other agreements and documents to be delivered in connection with the Transaction (each as defined in the Master Transaction Agreements, and together with the Master Transaction Agreements, the "Transaction Documents"). The Master Transaction Agreements and the transactions contemplated under the Master Transaction Agreements were unanimously approved by the Board of Directors of the Company on March 13, 2017.
On April 7, 2017, the Company entered into a series of amendments to the Master Transaction Agreements (the "MTA Amendments"), which amended each Master Transaction Agreement made as of March 15, 2017, as amended to date and from time to time, by and between the Company, PJC and the Consenting Convertible Note Holders party to each Agreement. The modifications as a result of the MTA Amendments are specified below.
On June 19, 2017, the Company entered into a series of amendments to the Master Transaction Agreements, as amended (the "Additional MTA Amendments"), which amended each Master Transaction Agreement made as of March 15, 2017 and May 12, 2017. The purpose of the Additional MTA Amendments was to modify the definition of "Investor" and amend the form of warrant attached as Exhibit E to the Master Transaction Agreements (the "Warrant") to, among other things, contemplate vesting of the Warrant to holders on a pro rata basis. The Additional MTA Amendments also extended the period by which Consenting Convertible Note Holders must tender into the Convertible Note Exchange Offer.
Under the Master Transaction Agreements, PJC and other parties agreed to certain undertakings, including: (i) PJC or its designees (the "Investors") purchasing up to
100%
of the Company’s Senior Secured Notes from the Consenting Senior Note Holders (as defined herein) pursuant to a Senior Note Purchase Agreement, (ii) PJC or the Investors purchasing
$15.0 million
in shares of Common Stock, pursuant to a Common Stock Purchase Agreement, and (iii) issuance to PJC or the Investors of warrants to purchase up to
42,500,000
shares of Common Stock at an exercise price of
$0.20
per share for an aggregate purchase price of up to
$8.5 million
. Upon the closing of the proposed transactions, the Company’s Board of Directors will include
four
members representing PJC or the Investors and
one
member representing the Consenting Convertible Note Holders.
On or about April 7, 2017, the Company entered into an Exchange Participation Agreement (the "Participation Agreement") with holders (the "Consenting Senior Note Holders") representing
100%
of the aggregate outstanding principal amount of the Company's
15.0%
Senior Secured Notes due 2018 (the "
15.0%
Senior Secured Notes").
On April 18, 2017, the Company launched an exchange offer to the existing holders of its outstanding
8.50%
Senior Unsecured Convertible Notes due 2019 (the "Convertible Notes") for
5%
Senior Unsecured Convertible Notes due 2023 (the "New Convertible Notes").
On May 15, 2017, the Company entered into a
$1.5 million
Promissory Note with PJC (the "Bridge Note"), to provide financing to fund the Company's continued operations with a maturity date of July 3, 2017. The Bridge Note was amended on June 28, 2017 (the "Amended and Restated Bridge Note"), to (i) increase the principal amount under the Bridge Note to
$3.3 million
and (ii) extend the maturity date from July 3, 2017 to the earlier of (a) July 28, 2017 or (b) the date on which the Master Transaction Agreements are consummated. Approximately
$1.9 million
was drawn on the Amended and Restated Bridge Note during the
three months and six months
ended
June 30, 2017
. All outstanding principal and interest amounts due under the Amended and Restated Bridge Note were repaid on July 28, 2017 in connection with the consummation of the recapitalization transactions, as described below.
As of
June 30, 2017
, the Company has incurred approximately
$3.3 million
in costs related to the recapitalization transactions. These costs have been deferred and included in prepaid and other assets on the consolidated balance sheet.
Subsequent Events
Master Transaction Agreements
On July 28, 2017, the Company consummated a series of integrated transactions to effect a recapitalization of the Company (the "Transaction Closing") pursuant to the Master Transaction Agreements.
Common Stock Purchase Agreement
In connection with the Transaction Closing, the Company entered into a Common Stock Purchase Agreement (the "Stock Purchase Agreement") by and among the Company, PJC, certain investors jointly designated by PJC and Triax Capital Advisors LLC, a New York limited liability company ("Triax"), to be party to the Stock Purchase Agreement (collectively, the "Common Stock Investors"), and certain Convertible Note Holders that were a party to the Stock Purchase Agreement (collectively, the "Convertible Note Holder Purchasers," and together with PJC and the Common Stock Investors, the "Purchasers"). Pursuant to the Stock Purchase Agreement, the Company issued and sold to the Purchasers
115,000,000
shares (the "Stock Purchase Agreement Shares") of the Company’s common stock,
$0.01
par value (the "Common Stock"), at a price of
$0.20
per share for an aggregate purchase price of
$23.0 million
, of which PJC and the Common Stock Investors purchased
75,000,000
Stock Purchase Agreement Shares for an aggregate purchase price of
$15.0 million
and the Convertible Note Holder Purchasers, pursuant to the previously announced rights offering which expired on July 26, 2017, purchased
40,000,000
Stock Purchase Agreement Shares for an aggregate purchase price of
$8.0 million
, of which PJC purchased
19,320,038
shares in connection with the exercise of rights assigned to it by certain Convertible Note Holder Purchasers. The Stock Purchase Agreement contained customary representations, warranties, and covenants.
Common Stock Purchase Warrants
In connection with the Transaction Closing, the Company issued Common Stock Purchase Warrants (the "Warrants") to certain investors jointly designated by PJC and Triax (collectively, the "Warrant Investors") to purchase up to an aggregate of
42,500,000
shares of the Common Stock at an exercise price of
$0.20
per share (the "Warrant Shares").
The Warrants shall vest and become exercisable as follows: (i) with respect to
17,500,000
Warrant Shares, immediately upon the issuance of the Warrants, and (ii) with respect to the remaining
25,000,000
Warrant Shares, at later times tied to the conversion of Convertible Notes (as defined below) and New Convertible Notes (as defined below) outstanding upon the Transaction Closing into shares of Common Stock or, if earlier, upon the date that all Convertible Notes or New Convertible Notes are no longer outstanding. The Warrants have an
eight
year term. The number of Warrant Shares is subject to anti-dilution adjustment provisions.
Convertible Note Exchange Offer
On July 26, 2017, the Company’s offer to exchange its outstanding
$74.2 million
aggregate principal amount of
8.50%
Senior Unsecured Convertible Notes due 2019 (the "Convertible Notes") for its
5%
Senior Unsecured Convertible Notes due 2023 (the "New Convertible Notes") expired (the "Convertible Note Exchange Offer"). At least
98%
of the holders of the Convertible Notes tendered in the Convertible Note Exchange Offer.
Second Supplemental Indenture for Convertible Notes
In connection with the Transaction Closing, the Company entered into a supplemental indenture (the "Supplemental Indenture") to that certain Indenture dated February 21, 2014 between the Company and U.S. Bank National Association, as indenture trustee (as amended and supplemented or otherwise modified from time to time, the " Convertible Notes Indenture") governing the Convertible Notes. The purpose of the Supplemental Indenture was to eliminate substantially all of the restrictive covenants, eliminate certain events of default, eliminate the covenant restricting mergers and consolidations and modify certain provisions relating to defeasance contained in the Convertible Notes Indenture and the Convertible Notes (collectively, the "Proposed Amendments") promptly after the receipt of the requisite consents for the Proposed Amendments.
New Convertible Note Indenture and New Convertible Notes
In connection with the Transaction Closing, the Company caused to be issued the New Convertible Notes in an aggregate amount of approximately
$75.8 million
pursuant to an Indenture (the "New Convertible Note Indenture") between the Company and U.S. Bank National Association, as indenture trustee. The terms of the New Convertible Notes are governed by the New Convertible Note Indenture, which provides, among other things, that the New Convertible Notes are unsecured,
senior obligations of the Company and will mature on February 15, 2023. The New Convertible Notes bear interest at a rate of
5%
per annum from the issue date, payable semi-annually on August 15 and February 15 of each year, beginning on August 15, 2017.
Senior Secured Note Purchase Agreement
In connection with the Transaction Closing, PJC, certain investors jointly designated by PJC and Triax (the "Note Purchase Investors") and holders (the "Senior Secured Note Holders") representing
100%
of the aggregate outstanding principal amount of the Company’s
15.0%
Senior Secured Notes entered into a Note Purchase Agreement (the "Note Purchase Agreement"). Pursuant to the Note Purchase Agreement, the Note Purchase Investors purchased
100%
of the
15.0%
Senior Secured Notes held by each Senior Secured Note Holder for an aggregate purchase price equal to the face amount of such purchased
15.0%
Senior Secured Notes. The Note Purchase Agreement contained customary representations, warranties, and covenants.
In connection with the Transaction Closing, the Company paid each Senior Secured Note Holder
5%
of the face amount of the
15.0%
Senior Secured Notes held by such Senior Secured Note Holder as of immediately prior to the Transaction Closing, plus all accrued but unpaid interest of such 15.0% Senior Secured Notes through the date of the Transaction Closing, pursuant to that certain Exchange Participation Agreement dated April 7, 2017 among the Company and Senior Secured Note Holders representing
100%
of the aggregate outstanding principal amount of the
15.0%
Senior Secured Notes.
New Senior Secured Note Indenture and New Senior Secured Notes
In connection with the Transaction Closing, the Company and Wilmington Trust, National Association, as indenture trustee (the "Senior Secured Note Trustee") entered into an Amended and Restated Senior Secured Note Indenture (the "New Senior Secured Indenture") to amend and restate the Indenture dated as of March 11, 2016 (as amended and supplemented or otherwise modified from time to time, the "Senior Secured Indenture") between the Company and the Senior Secured Note Trustee following the Company’s receipt of requisite consents of the holders of the
15.0%
Senior Secured Notes. Pursuant to the terms of the New Senior Secured Indenture, the Company caused the cancellation of all outstanding
15.0%
Senior Secured Notes and the issuance of
8.5%
Senior Secured Notes due 2021 (the "New Senior Secured Notes") in an aggregate amount of
$30.0 million
. The New Senior Secured Indenture provides, among other things, that the New Senior Secured Notes will be secured senior obligations of the Company and will mature on July 15, 2021. The New Senior Secured Notes will bear interest at a rate of
8.5%
per annum, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2017.
Special Dividend Note
In connection with the Transaction Closing, Lamington Road Designated Activity Company, an Irish section 110 company and an indirect subsidiary of the Company ("Lamington"), issued a promissory note to Markley Asset Portfolio, LLC, a Delaware limited liability company and an indirect subsidiary of the Company ("Markley"), in a principal amount of
$57.0 million
. The amount represents distributions of earnings from Lamington's share of profits of White Eagle to satisfy the Profit Participation Note issued by Markley to Lamington (the "Special Dividend Note"). Management is currently evaluating the extent to which U.S. cash taxes will result from the transaction. The Special Dividend Note matures on July 28, 2027. Advances under the Special Dividend Note bear interest at an annual rate of
5.0%
. The transaction will be eliminated in consolidation.
Securities Purchase Agreement
On August 11, 2017, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") by and between the Company and Brennan Opportunities Fund I LP ("Brennan"). Pursuant to the Securities Purchase Agreement, Brennan purchased from the Company (i)
12,500,000
shares (the "Brennan Shares") of Common Stock at a price of
$0.40
per share for an aggregate purchase price of
$5.0 million
and (ii)
$5.0 million
principal amount of the Company’s New Senior Secured Notes (the "Brennan Notes," and together with the Brennan Shares, the "Brennan Securities"). The Securities Purchase Agreement contained customary representations, warranties, and covenants.
The sale of the Brennan Securities was consummated on August 11, 2017, as to
8,750,000
shares of Common Stock and
$3.5 million
principal amount of New Senior Secured Notes, and on August 14, 2017, as to
3,750,000
shares of Common Stock and
$1.5 million
principal amount of New Senior Secured Notes.
See Note 19 "Subsequent Events," of the accompanying financial statements for additional information.
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.
Discontinued Operations
On October 25, 2013, the Company sold substantially all of the assets comprising its structured settlement business for
$12.0 million
. 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 balance sheets of the Company as of
June 30, 2017
and
December 31, 2016
, and the related consolidated statements of operations for the
three months and six months
ended
June 30, 2017
and
2016
, 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
7
, "
Discontinued Operations
," for further information. Unless otherwise noted, the following notes refer to the Company’s continuing operations.
Derivative Instrument
In February 2014, the Company issued and sold
$70.7 million
in aggregate principal amount of
8.50%
senior unsecured convertible notes due 2019 (the "Convertible Notes"). Prior to shareholder approval on June 5, 2014 to issue shares of common stock upon conversion of the Convertible Notes in excess of New York Stock Exchange limits for share issuances without shareholder approval, the Convertible Notes contained an embedded derivative feature. In accordance with Accounting Standards Codification ("ASC") 815,
Derivatives and Hedging
, derivative instruments are recognized as either assets or liabilities on the Company’s balance sheet and are measured at fair value with gains or losses recognized in earnings. Embedded derivatives that are not clearly and closely related to the host contract, such as the Convertible Notes, are bifurcated and recognized at fair value with changes in fair value recognized as either a gain or loss in earnings if they can be reliably measured. The Company determined the fair value of its embedded derivative based upon available market data and unobservable inputs using a Black Scholes pricing model. In accordance with ASC 815, upon receipt of shareholder approval on June 5, 2014, the Company reclassified the embedded derivative to equity along with unamortized transaction costs proportionate to the allocation of the initial debt discount and the principal amount of the Convertible Notes. The Convertible Notes are recorded at accreted value and will continue to be accreted up to the par value of the Convertible Notes at maturity. See Note
11
, "
8.50% Senior Unsecured Convertible Notes
."
Foreign Currency
The Company owns certain foreign subsidiary companies formed under the laws of Ireland, 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 Revolving Credit Facilities, the valuation of equity awards and the valuation of the conversion derivative liability formerly embedded within the Convertible Notes.
(
3
)
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers," which converges the FASB and the International Accounting Standards Board ("IASB") standard on revenue recognition. Areas of revenue recognition that will be affected include, but are not limited to, transfer of control, variable consideration, allocation of transfer pricing, licenses, time value of money, contract costs and disclosures. In April 2015, the FASB voted to defer the effective date of the new revenue recognition standard by one year. As a result, the provisions of this ASU are effective for interim and annual periods beginning after December 15, 2017. Following the deferral, in March 2016 the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" which aims to clarify the implementation guidance on principal versus agent considerations. The amendments in this Update do not change the core principle of the guidance in No. 2014-09. The effective date and transition requirements of ASU No. 2016-08 are the same as the effective date and transitions requirements of Update 2014-09. The Company does not expect that this guidance will have a material impact on its financial position, results of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, "Disclosures of Uncertainties About an Entity’s Ability to Continue as a Going Concern." The standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted this guidance during the
six months ended June 30, 2017
. Management has performed a going concern analysis of the Company's liquidity needs and the appropriate disclosures have been incorporated in the accompanying consolidated financial statements for the
six months ended June 30, 2017
.
In March 2016, the FASB issued ASU No. 2016-06, "Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments." Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met. One of those criteria is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of the host contract (the "clearly and closely related" criterion). The guidance in this ASU intends to resolve the diversity in practice resulting from the application of the existing four-step decision sequence defined in ASC 815-15-25-42 to call (put) options that can accelerate the repayment of principal on a debt instrument if they meet the clearly and closely related criterion by clarifying that an entity is required to perform only the four-step decision sequence. The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. This ASU is effective for annual periods beginning after December 15, 2017, and interim periods beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period, as long as any adjustment is reflected as of the beginning of the fiscal year that includes the interim period. We are currently evaluating the impact that the adoption of ASU 2016-06 will have on our consolidated financial statements or related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, "Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" as part of its Simplification Initiative. The guidance simplifies several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, these amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted including adoption in an interim period, as long as any adjustment is reflected as of the beginning of the fiscal year that includes the interim period. The Company adopted this guidance during the quarter ended March 31, 2017. The adoption of this ASU did not impact the consolidated financial statements or related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This ASU provides specific guidance on eight cash flow classification issues that are either unclear or not included in current GAAP. These cash flow classification issues include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. We are currently evaluating the impact that the adoption of ASU 2016-15 will have on our consolidated financial statements.
(
4
)
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
June 30, 2017
, as well as non-consolidated VIEs for which the Company has determined it is not the primary beneficiary (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Beneficiary
|
|
Not Primary
Beneficiary
|
|
|
Consolidated VIEs
|
|
Non-consolidated VIEs
|
|
|
Assets
|
|
Liabilities
|
|
Total
Assets
|
|
Maximum
Exposure
To Loss
|
|
June 30, 2017
|
$
|
569,499
|
|
|
$
|
305,592
|
|
|
$
|
2,384
|
|
|
$
|
2,384
|
|
|
December 31, 2016
|
511,792
|
|
|
257,678
|
|
|
2,384
|
|
|
$
|
2,384
|
|
As of
June 30, 2017
,
612
life insurance policies owned by White Eagle with an aggregate death benefit of approximately
$2.9 billion
and an estimated fair value of approximately
$525.5 million
were pledged as collateral under the White Eagle Revolving Credit Facility. In accordance with ASC 810,
Consolidation
, the Company consolidated White Eagle in its financial statements for the
six months ended June 30, 2017
and
2016
, and the year ended
December 31, 2016
.
(
5
)
Earnings Per Share
As of
June 30, 2017
and
2016
, there were
29,021,844
and
28,393,535
shares of common stock issued, respectively, and
28,413,844
and
27,785,535
shares of common stock outstanding, respectively. Outstanding shares as of
June 30, 2017
and
2016
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, as applicable.
The following table reconciles actual basic and diluted earnings per share for the
three months and six months
ended
June 30, 2017
and
2016
(in thousands except share and per share data).
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|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2017(1)
|
|
2016(2)
|
|
2017(1)
|
|
2016(2)
|
|
Income (loss) per share:
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
$
|
(6,474
|
)
|
|
$
|
(9,775
|
)
|
|
$
|
(4,588
|
)
|
|
$
|
(17,221
|
)
|
|
Net income (loss) from discontinued operations
|
(35
|
)
|
|
(127
|
)
|
|
(225
|
)
|
|
(194
|
)
|
|
Net income (loss)
|
$
|
(6,509
|
)
|
|
$
|
(9,902
|
)
|
|
$
|
(4,813
|
)
|
|
$
|
(17,415
|
)
|
|
Basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) from continuing operations
|
$
|
(0.23
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.63
|
)
|
|
Basic and diluted income (loss) from discontinued operations
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
Basic and diluted income (loss) per share available to common shareholders
|
$
|
(0.23
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.64
|
)
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
28,169,414
|
|
|
27,491,768
|
|
|
28,159,080
|
|
|
27,486,508
|
|
|
|
|
|
(1)
|
The computation of diluted EPS does not include
200,000
shares of restricted stock,
605,227
options,
6,240,521
warrants, and up to
11,266,011
shares of underlying common stock issuable upon conversion of the Convertible Notes, as the effect of their inclusion would have been anti-dilutive.
|
|
|
|
|
(2)
|
The computation of diluted EPS did not include
265,212
shares of restricted stock,
763,594
options,
6,240,521
warrants, and up to
10,738,165
shares of underlying common stock issuable upon conversion of the Convertible Notes, as the effect of their inclusion would have been anti-dilutive.
|
(
6
)
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"). Awards under the Omnibus Plan may consist of incentive awards, stock options, stock appreciation rights, performance shares, performance units, and shares of common stock, restricted stock, restricted stock units or other stock-based awards as determined by the compensation committee of the Company's board of directors. The Omnibus Plan provides for an aggregate of
12,600,000
shares of common stock to be reserved for issuance under the Omnibus Plan, subject to adjustment as provided in the Omnibus Plan.
Options
As of
December 31, 2016
, all options to purchase shares of common stock issued by the Company were fully vested. There was
no
stock-based compensation expense relating to stock options it granted under the Omnibus Plan during the
three months and six months
ended
June 30, 2017
and
2016
, respectively.
As of
June 30, 2017
, options to purchase
605,227
shares of common stock were outstanding under the Omnibus Plan at a weighted average exercise price of
$8.66
per share. The following table presents the activity of the Company’s outstanding stock options of common stock for the
six months ended June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Options
|
|
Number of
Shares
|
|
Weighted
Average Exercise Price
per Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding, January 1, 2017
|
|
763,594
|
|
|
$
|
8.52
|
|
|
2.47
|
|
|
$
|
—
|
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Options exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Options forfeited
|
|
(158,367
|
)
|
|
$
|
8.00
|
|
|
—
|
|
|
|
|
|
Options expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Options outstanding, June 30, 2017
|
|
605,227
|
|
|
$
|
8.66
|
|
|
1.89
|
|
|
$
|
—
|
|
|
Exercisable at June 30, 2017
|
|
605,227
|
|
|
$
|
8.66
|
|
|
1.89
|
|
|
|
|
|
Unvested at June 30, 2017
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
As of
June 30, 2017
, 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 additional stock-based compensation expense of approximately
$125,000
and
$68,000
relating to restricted stock granted to its board of directors and certain employees during the
three months ended June 30, 2017
and
2016
, respectively, and approximately
$264,000
and
$128,000
during the
six months ended June 30, 2017
and
2016
, respectively.
Under the Omnibus Plan,
41,259
shares of restricted stock granted to the Company’s directors during 2015 vested during the year ended
December 31, 2016
. The fair value of the restricted stock was valued at approximately
$255,000
based on the closing price of the Company’s shares on the day prior to the grant date. The Company incurred stock-based compensation expense of approximately
$0
and
$43,000
related to these
41,259
shares of restricted stock during the
three months ended June 30, 2017
and
2016
, respectively, and
$0
and
$103,000
during the
six months ended June 30, 2017
and
2016
, respectively.
During the year ended
December 31, 2016
, the Company granted
65,212
shares of restricted stock to its directors under the Omnibus Plan, which are 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
$255,000
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 of approximately
$47,000
and
$19,000
related to these
65,212
shares of restricted stock during the
three months and six months
ended
June 30, 2017
and
2016
, respectively and
$106,000
and
$19,000
during the
six months ended June 30, 2017
and
2016
, 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 are 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. The Company incurred stock-based compensation expense of approximately
$79,000
and
$6,000
, related to these
200,000
shares of restricted stock during the
three months and six months
ended
June 30, 2017
and
2016
, respectively and
$158,000
and
$6,000
during the
six months ended June 30, 2017
and
2016
, respectively.
The following table presents the activity of the Company’s unvested shares of restricted stock for the
six months ended June 30, 2017
:
|
|
|
|
|
|
|
Common Unvested Shares
|
Number of
Shares
|
|
Outstanding January 1, 2017
|
265,212
|
|
|
Granted
|
—
|
|
|
Vested
|
(65,212
|
)
|
|
Forfeited
|
—
|
|
|
Outstanding June 30, 2017
|
200,000
|
|
The aggregate intrinsic value of the awards of
200,000
shares is
$60,000
and the remaining weighted average life of these awards is
one
year as of
June 30, 2017
.
Performance Shares
During 2014, the Company awarded
323,500
target performance shares for restricted common stock to its directors and certain employees, of which
150,000
shares were subject to shareholder approval of the Omnibus Plan, which was obtained at the Company’s 2015 annual meeting on May 28, 2015. The issuance of the performance shares was contingent on the Company’s financial performance, as well as the performance of the Company’s common stock through June 30, 2016, with the actual shares to be issued ranging between
0
–
150%
of the target performance shares. Given that the Company's financial performance goal was not achieved the remaining performance shares have been forfeited during the year ended
December 31, 2016
. At
June 30, 2016
, the Company determined that it was not probable that the performance conditions would be achieved and
no
related expense was recognized for the
three months and six months
ended
June 30, 2016
.
Warrants
On February 11, 2011,
three
shareholders received warrants that may be exercised for up to a total of
4,240,521
shares of the Company’s common stock at a weighted average exercise price of
$14.51
per share. The warrants will expire
seven
years after the date of issuance and are exercisable as they are fully vested. At
June 30, 2017
, all
4,240,521
warrants remained outstanding.
In connection with a settlement of class action litigation arising in connection with the investigation by the U.S. Attorney's Office for District of New Hampshire ("USAO") into the Company's now legacy premium finance business (the "USAO Investigation"), the Company issued warrants to purchase
2,000,000
shares of the Company’s stock into an escrow account in April of 2014. The estimated fair value as of the measurement date of such warrants was
$5.4 million
, which is included in stockholders’ equity. The warrants were distributed in October 2014 and have a
five
-year term from the date they were distributed to the class participants with an exercise price of
$10.75
. The Company is obligated to file a registration statement to register the shares underlying the warrants with the SEC if shares of the Company’s common stock have an average daily trading closing price of at least
$8.50
per share for a
45
day period. The warrants will be exercisable upon effectiveness of the registration statement.
(
7
)
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 for
$920,000
to the buyer of its operating assets.
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
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Total income
|
$
|
30
|
|
|
$
|
3
|
|
|
$
|
33
|
|
|
$
|
6
|
|
|
Total expenses
|
65
|
|
|
130
|
|
|
258
|
|
|
200
|
|
|
Income (loss) before income taxes
|
(35
|
)
|
|
(127
|
)
|
|
(225
|
)
|
|
(194
|
)
|
|
Income tax benefit
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
Net income (loss) from discontinued operations, net of income taxes
|
$
|
(35
|
)
|
|
$
|
(127
|
)
|
|
$
|
(225
|
)
|
|
$
|
(194
|
)
|
(
8
)
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 Statements of Operations in the periods in which the changes occur.
As of
June 30, 2017
and
December 31, 2016
, the Company owned
614
and
621
policies, respectively, with an aggregate estimated fair value of life settlements of
$526.3 million
and
$498.4 million
, respectively.
The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the Company at
June 30, 2017
was
8.7
years. The following table describes the Company’s life settlements as of
June 30, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Life Expectancy (In Years)*
|
Number of
Life Settlement
Contracts
|
|
Estimated Fair
Value
|
|
Face
Value
|
|
0 - 1
|
4
|
|
|
$
|
16,471
|
|
|
$
|
19,945
|
|
|
1 - 2
|
16
|
|
|
40,216
|
|
|
57,093
|
|
|
2 - 3
|
18
|
|
|
33,859
|
|
|
65,124
|
|
|
3 - 4
|
34
|
|
|
57,812
|
|
|
146,711
|
|
|
4 - 5
|
44
|
|
|
54,809
|
|
|
177,795
|
|
|
Thereafter
|
498
|
|
|
323,115
|
|
|
2,437,232
|
|
|
Total
|
614
|
|
|
$
|
526,282
|
|
|
$
|
2,903,900
|
|
*Based on remaining life expectancy at
June 30, 2017
, 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 14, "Fair Value Measurements" of the accompanying consolidated financial statements.
The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the Company at
December 31, 2016
was
9.0
years. The following table describes the Company’s life settlements as of
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Life Expectancy (In Years)*
|
Number of
Life Settlement
Contracts
|
|
Estimated Fair
Value
|
|
Face
Value
|
|
0-1
|
4
|
|
|
$
|
16,280
|
|
|
$
|
19,497
|
|
|
1-2
|
14
|
|
|
35,019
|
|
|
52,093
|
|
|
2-3
|
14
|
|
|
31,300
|
|
|
57,274
|
|
|
3-4
|
31
|
|
|
44,096
|
|
|
114,449
|
|
|
4-5
|
40
|
|
|
57,792
|
|
|
172,157
|
|
|
Thereafter
|
518
|
|
|
313,913
|
|
|
2,531,041
|
|
|
Total
|
621
|
|
|
$
|
498,400
|
|
|
$
|
2,946,511
|
|
*Based on remaining life expectancy at
December 31, 2016
, 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 14, "Fair Value Measurements" of the accompanying consolidated financial statements.
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
June 30, 2017
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2017
|
$
|
42,298
|
|
|
2018
|
86,546
|
|
|
2019
|
93,774
|
|
|
2020
|
97,355
|
|
|
2021
|
97,578
|
|
|
Thereafter
|
875,726
|
|
|
|
$
|
1,293,277
|
|
The amount of
$1.29 billion
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.
(
9
)
White Eagle Revolving Credit Facility
Effective
April 29, 2013
, White Eagle entered into a
15
-year revolving credit agreement with LNV Corporation, as initial lender, Imperial Finance & Trading, LLC, as servicer and portfolio manager and CLMG Corp., as administrative agent. Proceeds from the initial advance under the facility were used, in part, to retire a bridge facility and to fund a payment to the lender protection insurance provider to release subrogation rights in certain of the policies pledged as collateral for the White Eagle Revolving Credit Facility. On May 16, 2014, White Eagle Asset Portfolio, LLC converted from a Delaware limited liability company to White Eagle Asset Portfolio, LP, a Delaware limited partnership (the "Conversion") and all of its ownership interests were transferred to an indirect, wholly-owned Irish subsidiary of the Company. In connection with the Conversion, the White Eagle Revolving Credit Facility was amended and restated among White Eagle, as borrower, Imperial Finance and Trading, LLC, as the initial servicer, the initial portfolio manager and guarantor, Lamington Road Bermuda Ltd., as portfolio manager, LNV Corporation, as initial lender, the other financial institutions party thereto as lenders, and CLMG Corp., as administrative agent for the lenders. The White Eagle Revolving Credit Facility was amended on November 9, 2015. As amended, the White Eagle Revolving Credit Facility may provide earlier participation in the portfolio cash flows if certain loan to value ("LTV") ratios are achieved. Additionally, the maximum facility limit was reduced from
$300.0 million
to
$250.0 million
, and the interest rate under the facility was increased by
50 basis point
s.
On December 29, 2016, White Eagle entered into a Second Amendment to the Amended and Restated Loan and Security Agreement ("White Eagle Second Amendment") and on
January 31, 2017, as required by the terms of the White Eagle Amendment, White Eagle executed the Second Amended and Restated Loan and Security Agreement, dated January 31, 2017, which consolidated into a single document the amendments evidenced by the White Eagle Second Amendment and all previous amendments.
As amended, the White Eagle Revolving Credit Facility adjusted the LTV ratios which directed cash flow participation and became subjected to achieving certain financial metrics, as more fully described below under "Amortization & Distributions." Pursuant to the White Eagle Second Amendment,
190
life settlement policies purchased from wholly owned subsidiaries of the Company were pledged as additional collateral under the facility for an additional policy advance of approximately
$71.1 million
. The maximum facility limit was increased to
$370.0 million
and the term of the facility was extended to
December 31, 2031
. Additional loan terms and amendment changes are more fully described in the sections that follow.
General & Security
. The White Eagle Revolving Credit Facility provides for an asset-based revolving credit facility backed by White Eagle’s portfolio of life insurance policies with an aggregate lender commitment of up to
$370.0 million
, subject to borrowing base availability.
612
life insurance policies with an aggregate death benefit of approximately
$2.9 billion
and an estimated fair value of approximately
$525.5 million
are pledged as collateral under the White Eagle Revolving Credit
Facility at
June 30, 2017
. In addition, the equity interests in White Eagle have been pledged under the White Eagle Revolving Credit Facility.
Borrowing Base.
Borrowing availability under the White Eagle Revolving Credit Facility is subject to a borrowing base, which at any time is equal to the lesser of (A) the sum of all of the following amounts that have been funded or are to be funded through the next distribution date (i) the initial advance and all additional advances to acquire additional pledged policies that are not for ongoing maintenance advances, plus (ii)
100%
of the sum of the ongoing maintenance costs, plus (iii)
100%
of accrued and unpaid interest on borrowings (excluding the rate floor portion described below), plus (iv)
100%
of any other fees and expenses funded and to be funded as approved by the required lenders, less (v) any required payments of principal and interest previously distributed and to be distributed through the next distribution date; (B)
75%
of the valuation of the policies pledged as collateral as determined by the lenders; (C)
50%
of the aggregate face amount of the policies pledged as collateral (excluding certain specified life insurance policies); and (D) the then applicable facility limit. At
June 30, 2017
,
$70.9 million
was undrawn and
$5.0 million
was available to borrow under the White Eagle Revolving Credit Facility. The amount available to borrow is calculated based on and limited to the premium payments and expenses if any, that are due as of the calculation date. In essence, what is available, is what is required to pay expenses and keep the policies in force as of the calculation date.
Amortization & Distributions.
Proceeds from the maturity of the policies pledged as collateral under the White Eagle Revolving Credit Facility are distributed pursuant to a waterfall. After distributions for premium payments, fees to service providers and payments of interest, a percentage of the collections from policy proceeds are to be paid to the Company, which will vary depending on the then LTV ratio as illustrated below where the valuation is determined by the lenders:
|
|
|
|
|
|
|
|
|
|
|
|
|
LTV
|
|
Premiums, Interest & Other Fees
|
|
Principal
|
|
Distribution to White Eagle - 55%
|
|
Lender Participation - 45%
|
|
N/A
|
|
100%
|
|
—%
|
|
—%
|
|
—%
|
|
>65%
|
|
N/A
|
|
100%
|
|
—%
|
|
—%
|
|
50-65%
|
|
N/A
|
|
70%
|
|
16.5%
|
|
13.5%
|
|
35-50%
|
|
N/A
|
|
55%
|
|
24.8%
|
|
20.3%
|
|
0-35%
|
|
N/A
|
|
45%
|
|
30.3%
|
|
24.8%
|
Provided that (i) if (a) the Company failed to maintain a cash interest coverage ratio of at least
2.0
:1 at any time during the immediately preceding calendar quarter or (b) the Company fails to take steps to improve its solvency in a manner acceptable to the required lenders (as determined in their sole and absolute discretion), then the cash flow sweep percentage to the lenders shall equal one-hundred percent (
100%
) and (ii) if such distribution date occurs on or after December 29, 2025, then the cash flow sweep percentage shall equal one-hundred percent (
100%
). As of
June 30, 2017
, the cash interest coverage ratio was
2.17
:1 and the loan to value ratio was
59%
, as calculated using the lenders' valuation. It should be noted that although the Company met the required threshold at quarter end, the threshold was not met for all days during the quarter. As a result, the Company will not participate in the waterfall distribution scheduled during July 2017.
The cash interest coverage ratio is the ratio of (i) consolidated cash and cash equivalents maintained by the Company to (ii) the aggregate interest amounts that will be due and payable in cash on (x) the
$30.0 million
Senior Secured Notes due September 14, 2018 (and any notes issued by the Company or any of its Affiliates in connection with refinancing, replacing, substituting or any similar action with respect to any such notes) and the
$74.2 million
Convertible Notes due February 15, 2019 (and any notes issued by the Company or any of its Affiliates in connection with refinancing, replacing, substituting or any similar action with respect to any such notes) and (y) any additional indebtedness issued by the Company after December 29, 2016, in each case, during the twelve month period following such date of determination. See Note 11, "
8.50%
Senior Unsecured Convertible Notes", Note 12, "
15.0%
Senior Secured Notes", and Note 13, "15.0% Promissory Note" to the accompanying consolidated financial statements.
With respect to approximately
25%
of the face amount of policies pledged as collateral under the White Eagle Revolving Credit Facility, White Eagle has agreed that if policy proceeds that are otherwise due are not paid by an insurance carrier, the foregoing distributions will be altered such that the lenders will receive any "catch-up" payments with respect to amounts that they would have received in the waterfall prior to distributions being made to White Eagle. During the continuance of events of default or unmatured events of default, the amounts from collections of policy proceeds that might otherwise be paid to White Eagle will instead be held in a designated account controlled by the lenders and may be applied to fund operating and third party expenses, interest and principal, "catch-up" payments or percentage payments that would go to the lenders as described above.
Assuming no event of default, funds on account from policy proceeds shall be distributed in specified stages of priority. For the
three months and six months
ended
June 30, 2017
, approximately
$10.0 million
and
$12.5 million
, respectively, of proceeds received from the maturity of policies pledged under the White Eagle Revolving Credit Facility, were distributed through the waterfall in the following stages of priority (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2017
|
|
|
|
Clause
|
Amount
|
|
Use of Proceeds
|
|
First:
|
$
|
85
|
|
|
144
|
|
|
Custodian and Securities Intermediary
|
|
Second:
|
—
|
|
|
—
|
|
|
White Eagle - Ongoing Maintenance Cost Reimbursable
|
|
Third:
|
—
|
|
|
—
|
|
|
Administrative Agent - Protective Advances
|
|
Fourth:
|
13
|
|
|
23
|
|
|
Administrative Agent - Administrative Agent Fee and Legal Expense Reimbursement
|
|
Fifth:
|
4,282
|
|
|
6,694
|
|
|
Administrative Agent - Accrued and Unpaid Interest
|
|
Sixth:
|
5,656
|
|
|
5,656
|
|
|
Administrative Agent - Required Amortization
|
|
Seventh:
|
—
|
|
|
—
|
|
|
Administrative Agent - Amortization Shortfall
|
|
Eighth:
|
—
|
|
|
—
|
|
|
Administrative Agent - Participation Interest
|
|
Ninth:
|
—
|
|
|
—
|
|
|
Reserved - $0
|
|
Tenth:
|
—
|
|
|
—
|
|
|
Administrative Agent Aggregate Unpaid Participation Interest
|
|
Eleventh:
|
—
|
|
|
—
|
|
|
Administrative Agent - Remaining Available Amount After Clause First to Tenth
|
|
Twelfth:
|
—
|
|
|
—
|
|
|
Wilmington Trust - Custodian and Securities Intermediary - Unpaid Fees
|
|
Thirteenth:
|
—
|
|
|
—
|
|
|
Borrower - Any Remaining Available Amount After Clause First to Twelfth
|
|
Total Distributions
|
$
|
10,036
|
|
|
$
|
12,517
|
|
|
|
Approximately
$2.5 million
of the amount distributed during the
six months ended June 30, 2017
was from maturity proceeds collected during the year ended
December 31, 2016
.
The below is a reconciliation of proceeds collected by the White Eagle Revolving Credit Facility and distributed through the waterfall as shown above (in thousands):
|
|
|
|
|
|
|
|
Face value collected in 2016 and distributed during the six months ended June 30, 2017
|
2,480
|
|
|
Face value collected in prior quarter and distributed in current quarter
|
$
|
10,000
|
|
|
Face value collected in current quarter
|
16,180
|
|
|
Other collections*
|
106
|
|
|
Total waterfall collection
|
$
|
28,766
|
|
|
Less: Total waterfall distribution during the six months ended June 30, 2017
|
(12,517
|
)
|
|
Total to be distributed subsequent to the quarter ended June 30, 2017
|
$
|
16,249
|
|
*Includes refund of premiums and interest earned on maturity proceeds
Use of Proceeds.
Generally, ongoing advances may be made for paying premiums on the life insurance policies pledged as collateral and to pay the fees of service providers. Effective with the White Eagle Amendment on November 9, 2015, ongoing advances may no longer be used to pay interest, which will now be paid by White Eagle if there is not otherwise sufficient amounts available from policy proceeds to be distributed to pay interest expense pursuant to the waterfall described above in "Amortization and Distributions." Subsequent advances and the use of proceeds from those advances are at the discretion of the lenders. During the
three months and six months
ended
June 30, 2017
and
2016
, advances for premium payments and fees to service providers amounted to (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Amount drawn for premium payments
|
$
|
21,490
|
|
|
$
|
12,573
|
|
|
$
|
42,249
|
|
|
$
|
24,754
|
|
|
Amount drawn in fees to service providers
|
626
|
|
|
420
|
|
|
1,150
|
|
|
833
|
|
|
Total amount drawn
|
$
|
22,116
|
|
|
$
|
12,993
|
|
|
$
|
43,399
|
|
|
$
|
25,587
|
|
Interest.
Borrowings under the White Eagle Revolving Credit Facility bear interest at a rate equal to LIBOR or, if LIBOR is unavailable, the base rate, in each case plus an applicable margin of
4.50%
, which was increased from
4.00%
pursuant to the November 9, 2015 amendment, and subject to a rate floor component equal to the greater of LIBOR (or the applicable rate) and
1.5%
. The base rate under the White Eagle Revolving Credit Facility equals the sum of (i) the weighted average of the interest rates on overnight federal funds transactions or, if unavailable, the average of three federal funds quotations received by the Agent plus
0.75%
and (ii)
0.5%
. Based on the loan agreement, the LIBOR portion of the interest rate will re-adjust annually, once the floor has exceeded
1.5%
. The applicable rate will be dependent on the rate at the last business day of the preceding calendar year. On December 30, 2016, the LIBOR floor increased from
1.5%
to
1.69%
. The effective rate at
June 30, 2017
and
2016
was
6.19%
and
6.00%
, respectively.
Interest paid during the period is recorded in the Company’s consolidated financial statements. Accrued interest is reflected as a component of the estimated fair value of the White Eagle Revolving Credit Facility debt. Effective with the White Eagle Amendment on November 9, 2015, interest for the applicable margin of
4.50%
is no longer withheld from borrowings by the lender. Total interest expense on the facility during the
three months and six months
ended
June 30, 2017
and
2016
paid through the waterfall distribution from maturity proceeds or paid directly by White Eagle was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Interest paid through waterfall
|
$
|
4,282
|
|
|
$
|
2,794
|
|
|
$
|
6,694
|
|
|
$
|
5,216
|
|
|
Interest paid by White Eagle
|
—
|
|
|
—
|
|
|
782
|
|
|
—
|
|
|
Total interest expense
|
$
|
4,282
|
|
|
$
|
2,794
|
|
|
$
|
7,476
|
|
|
$
|
5,216
|
|
Maturity.
Effective with the White Eagle Second Amendment, the term of the White Eagle Revolving Credit Facility expires
December 31, 2031
, which is also the scheduled commitment termination date (though the lenders’ commitments to fund borrowings may terminate earlier in an event of default). The lenders’ interests in and rights to a portion of the proceeds of the policies does not terminate with the repayment of the principal borrowed and interest accrued thereon, the termination of the White Eagle Revolving Credit Facility or expiration of the lenders’ commitments.
Covenants/Events of Defaults
. The White Eagle Revolving Credit Facility contains covenants and events of default that are customary for asset-based credit agreements of this type, but also include cross defaults under the servicing, account control, contribution and pledge agreements entered into in connection with the White Eagle Revolving Credit Facility (including in relation to breaches by third parties thereunder), certain changes in law, changes in control of or insolvency or bankruptcy of the Company and relevant subsidiary companies and performance of certain obligations by certain relevant subsidiary companies, White Eagle and third parties. Effective with the White Eagle Second Amendment, and as described above in "Amortization and Distributions", the White Eagle Revolving Credit Facility contains a financial covenant requiring White Eagle to maintain a cash interest coverage ratio of at least
1.75
:1 commencing after June 30, 2019. Failure to maintain this ratio for
60
consecutive days after June 30, 2019 constitutes an event of default. There is no interest coverage ratio requirement that would result in an event of default prior to this date; however, any failure to maintain a cash interest coverage ratio of at least
2.0
:1 on any day during the quarter does impact the cash flow sweep percentage for proceeds distributed through the waterfall. As of
June 30, 2017
, the cash interest coverage ratio was
2.17
:1. The White Eagle Revolving Credit Facility also contains certain tests relating to asset maintenance, performance and valuation, the satisfaction of which will be determined by the lenders with a high degree of discretion.
Remedies.
The White Eagle Revolving Credit Facility and ancillary transaction documents afford the lenders a high degree of discretion in their selection and implementation of remedies, including strict foreclosure, in relation to any event of default, including a high degree of discretion in determining whether to foreclose upon and liquidate all or any pledged policies, the interests in White Eagle, and the manner of any such liquidation. White Eagle has limited ability to cure events of default through the sale of policies or the procurement of replacement financing.
The Company elected to account for the debt under the White Eagle Revolving Credit Facility in accordance with ASC 820, which includes the
45%
interest in policy proceeds to the lender, using the fair value method. The fair value of the debt is the amount the Company would have to pay to transfer the debt to a market participant in an orderly transaction. The Company calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the credit facility and probabilistic cash flows from the pledged policies. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, 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 insured and the discount rate. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
At
June 30, 2017
, the fair value of the outstanding debt was
$304.9 million
and the borrowing base was approximately
$304.2 million
, which includes
$299.1 million
of outstanding principal. Approximately
$5.0 million
was available to borrow under the White Eagle Revolving Credit Facility.
There are no scheduled repayments of principal prior to maturity although payments are due upon the next distribution date following the receipt of death benefits and distributed pursuant to the waterfall as described above. At
June 30, 2017
, approximately
$16.2 million
included in restricted cash was on account with White Eagle awaiting distribution through the waterfall.
(
10
)
Red Falcon Revolving Credit Facility
Effective
July 16, 2015
, Red Falcon Trust ("Red Falcon"), a Delaware statutory trust formed by Blue Heron Designated Activity Company ("Blue Heron"), a wholly-owned Irish subsidiary of the Company, entered into a revolving loan and security agreement (together with its ancillary documents, the "Red Falcon Revolving Credit Facility," and together with the White Eagle Revolving Credit Facility, the "Revolving Credit Facilities") with LNV Corporation, as initial lender, the other lenders party thereto from time to time, Imperial Finance & Trading, LLC, as guarantor, Blue Heron as portfolio administrator and CLMG Corp., as administrative agent. On July 15, 2016, the Company amended its Red Falcon Revolving Credit Facility (the "Red Falcon Amendment"). Pursuant to the amendment,
six
additional policies and additional portions of
20
policies that were previously pledged in part as collateral under the initial credit agreement were pledged for an additional policy advance. Amounts advanced to Red Falcon following effectiveness of the amendment to the credit agreement were approximately
$3.0 million
.
On
December 29, 2016
, the Red Falcon Revolving Credit Facility was terminated (the "Facility Termination"). The policies pledged under the Red Falcon Revolving Credit Facility were sold to White Eagle, a subsidiary of the Company, in exchange for a distribution of cash totaling
$65.1 million
, which was used to repay all outstanding principal and interest due under the Red Falcon Revolving Credit Facility. The significant terms in effect through the termination date are included below.
General & Security
. The Red Falcon Revolving Credit Facility provided for a revolving credit facility backed by Red Falcon’s portfolio of life insurance policies with an initial aggregate lender commitment of up to
$110.0 million
, subject to borrowing base availability. As of
June 30, 2017
, all life insurance policies previously owned by Red Falcon and pledged as collateral under the Red Falcon Revolving Credit Facility were sold to White Eagle, an affiliate of the Company. See Note 9, "White Eagle Revolving Credit Facility," to the accompanying consolidated financial statements for further information regarding the Company's portfolio subsequent to the Red Falcon Revolving Credit Facility termination.
Borrowing Base & Availability
. Revolving credit borrowings were permitted for a
five
-year period with the loans under the Red Falcon Revolving Credit Facility maturing on July 15, 2022. Borrowing availability under the Red Falcon Revolving Credit Facility was subject to a borrowing base, which at any time was equal to the lesser of (A) the sum of all of the following amounts that were funded or were to be funded through the next distribution date (i) the initial advance and all additional advances in respect of newly pledged policies that were not for ongoing maintenance advances, plus (ii)
100%
of the sum of the ongoing maintenance costs, less (iii) any required amortization payments previously distributed and which were to be distributed through the next distribution date; (B)
60%
of the valuation of the policies pledged as collateral as determined by the lenders; (C)
45%
of the aggregate face amount of the policies pledged as collateral; and (D)
$110.0 million
. All outstanding principal and interest was repaid in connection with the Facility Termination as of
June 30, 2017
.
Amortization & Distributions.
Proceeds from the policies pledged as collateral under the Red Falcon Revolving Credit Facility were distributed pursuant to a waterfall with, subject to yield maintenance provisions,
5%
of policy proceeds directed to the lenders. Thereafter proceeds were directed to pay fees to service providers and premiums with any remaining proceeds directed to pay outstanding interest and required amortization of
8%
per annum on the greater of the then outstanding balance of the loan or the initial advance. Generally, after payment of interest and required amortization, a percentage of the collections from policy proceeds were to be paid to the lenders, which will varied depending on the then loan to value ratio ("LTV") as follows: (1) if the LTV was equal to or greater than
50%
, all remaining proceeds were to be directed to the lenders to repay the then outstanding principal balance; (2) if the LTV was less than
50%
but greater than or equal to
25%
,
65%
of the remaining proceeds were to be directed to the lenders to repay the then outstanding principal balance; or (3) if the LTV was less than
25%
,
35%
of the remaining proceeds were to be directed to the lenders to repay the then outstanding principal balance, in each case, with remaining proceeds directed to Red Falcon. To the extent there were not sufficient remaining proceeds in the waterfall to satisfy the amount of required interest and amortization then due, Red Falcon would have had to pay any such shortfall amount.
Initial Advance and Use of Proceeds.
Amounts advanced to Red Falcon following effectiveness of the Red Falcon Revolving Credit Facility were approximately
$54.0 million
with certain of the proceeds used to pay transaction expenses and to purchase the policies pledged as collateral under the Red Falcon Revolving Credit Facility from certain affiliates of the Company, who then made a distribution to the Company which was used to redeem the Company's
12.875%
Secured Notes. Generally, ongoing advances may have been made for paying premiums on the life insurance policies pledged as collateral, and to pay the fees of service providers. Subsequent advances in respect of newly pledged policies are at the discretion of the lenders.
Interest.
Borrowings under the Red Falcon Revolving Credit Facility bore interest at a rate equal to LIBOR or, if LIBOR was unavailable, the base rate, in each case plus an applicable margin of
4.50%
and subject to a rate floor of
1.0%
. The base rate under the Red Falcon Revolving Credit Facility equaled the sum of (i) the weighted average of the interest rates on overnight federal funds transactions or, if unavailable, the average of three federal funds quotations received by the Agent plus
0.75%
and (ii)
0.5%
. Based on the loan agreement, the LIBOR portion of the interest rate readjusted monthly, once the floor had exceeded
1.0%
. The applicable rate was dependent on the rate at the last business day of the immediately preceding calendar month.
Interest expense paid during the period is recorded in the Company’s consolidated financial statements.
Interest expense on the facility was
$939,000
and
$1.9 million
for the three and six months ended
June 30, 2016
, respectively.
Maturity and Early Extinguishment.
The original term of the Red Falcon Revolving Credit Facility expired
July 15, 2022
. On
December 29, 2016
Red Falcon terminated the facility and repaid all outstanding principal and interest in the amount of
$65.1 million
.
Covenants/Events of Defaults
. The Red Falcon Revolving Credit Facility contained covenants and events of default, including those that are customary for asset-based credit facilities of this type and including cross defaults under the servicing, portfolio management and sales agreements entered into in connection with the Red Falcon Revolving Credit Facility, changes in control of or insolvency or bankruptcy of the Company and relevant subsidiary companies and performance of certain obligations by certain relevant subsidiary companies, Red Falcon and third parties. The Red Falcon Revolving Credit Facility did not contain any financial covenants, but did contain certain tests relating to asset maintenance, performance and valuation with determinations as to the satisfaction of such tests involving determinations made by the lenders with a high degree of discretion.
The Company elected to account for the debt under the Red Falcon Revolving Credit Facility using the fair value method in accordance with ASC 820. The fair value of the debt is the amount the Company would have to pay to transfer the debt to a market participant in an orderly transaction. The Company calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the credit facility and probabilistic cash flows from the pledged policies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, 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 insured and the discount rate. The use of different assumptions and/or estimation methodologies could have had a material effect on the estimated fair values.
At
June 30, 2017
, there was
no
outstanding principal and interest as the Red Falcon Facility had been fully repaid on
December 29, 2016
.
(
11
)
8.50% Senior Unsecured Convertible Notes
In February 2014, the Company issued
$70.7 million
in an aggregate principal amount of
8.50%
senior unsecured convertible notes due
2019
(the "Convertible Notes"). The Convertible Notes were issued pursuant to an indenture dated
February 21, 2014
, between the Company and U.S. Bank National Association, as trustee (the "Convertible Notes Indenture").
Two
members of the Company's Board of Directors, Messrs. Dakos and Goldstein, are affiliated with Bulldog Investors, LLC, who purchased
$9.2 million
of the Convertible Notes.
The Convertible Notes are general senior unsecured obligations and rank equally in right of payment with all of the Company's other existing and future senior unsecured indebtedness. The Convertible Notes are effectively subordinate to all of the Company's secured indebtedness to the extent of the value of the assets collateralizing such indebtedness. The Convertible Notes are not guaranteed by the Company's subsidiaries.
The maturity date of the Convertible Notes is
February 15, 2019
. The Convertible Notes accrue interest at the rate of
8.50%
per annum on the principal amount of the Convertible Notes, payable
semi-annually in arrears on August 15 and February 15 of each year
.
The Convertible Notes are convertible into shares of common stock at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date. Initially, the Convertible Notes were convertible into shares of common stock at a conversion rate of
147.9290
shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of
$6.76
per share of common stock). In the second quarter of 2015, the conversion rate was adjusted to
151.7912
shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to a conversion price of
$6.59
per share of common stock) in connection with an anti-dilution adjustment triggered by a rights offering that resulted in the issuance of
6,688,433
shares of the Company’s common stock.
The Convertible Notes were not redeemable prior to
February 15, 2017
. On and after such date, and prior to the maturity date, the Company may redeem for cash all, but not less than all, of the Convertible Notes if the last reported sale price of the Company’s common stock equals or exceeds
130%
of the applicable conversion price for at least
20
trading days during the
30
consecutive trading day period ending on the trading day immediately prior to the date the Company delivers notice of the redemption. The redemption price will be equal to
100%
of the principal amount of the Convertible Notes, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, if the Company calls the Convertible Notes for redemption, a make-whole fundamental charge will be deemed to occur. As a result, the Company will, in certain circumstances, increase the conversion rate by a number of additional shares of common stock for holders who convert their notes prior to the redemption date.
The Company determined that an embedded conversion option existed in the Convertible Notes that was required to be separately accounted for as a derivative under ASC 815 which required the Company to bifurcate the embedded conversion option, record it as a liability at fair value and record a debt discount by an equal amount. Upon receipt of shareholder approval to issue shares of common stock upon conversion of the Convertible Notes in an amount that exceeded applicable New York Stock Exchange limits for issuances without shareholder approval, the Company reclassified the embedded conversion derivative liability to equity. The Convertible Notes are recorded at accreted value and will continue to be accreted up to the par value of the Convertible Notes at maturity.
On February 14, 2017, the Company solicited consents (the "Consent Solicitation") to issue additional
8.50%
Senior Unsecured Convertible Notes (the "Additional Convertible Notes") in lieu of a cash payment of interest on February 15, 2017 (the "2017 Interest Payment Date") to holders of the Convertible Notes.
On March 14, 2017, the Company issued an additional
$3.5 million
in Additional Convertible Notes following the Company’s receipt of the requisite consents of the holders of the Convertible Notes of approximately
98%
of the aggregate principal amount of Convertible Notes (the "Consenting Holders"), pursuant to the Consent Solicitation, whereby each Consenting Holder agreed to accept Additional Convertible Notes in lieu of a cash payment of interest on the Convertible Notes due on the 2017 Interest Payment Date. All Additional Convertible Notes issued by the Company to Consenting Holders were issued under the Convertible Note Indenture and such Additional Convertible Notes have identical terms to the existing Convertible Notes. Interest on the Additional Convertible Notes will accrue from February 15, 2017. The issue of the Additional Convertible Notes increased the outstanding principal amount of the Convertible Notes to
$74.2 million
at
June 30, 2017
.
On March 15, 2017 and May 12, 2017, the Company entered into a series of separate Master Transaction Agreements (the "Master Transaction Agreements") by and between the Company, PJC Investments, LLC, a Texas limited liability company ("PJC") and each such Consenting Convertible Note Holder that is a party to such Master Transaction Agreement ("Consenting Holders") regarding a series of integrated transactions with the intent to effect a recapitalization of the Company (the "Transaction") which includes, among other transactions, a Convertible Note Exchange Offer and a New Convertible Note Indenture providing for the issuance of New Convertible Notes to be delivered in connection with the Transaction (each as defined in the Master Transaction Agreements).
As part of the Transaction, on April 18, 2017, the Company launched an exchange offer to the existing holders of its outstanding Convertible Notes for
5%
Senior Unsecured Convertible Notes due 2023 (the "New Convertible Notes"). At least
98%
of the holders of the Convertible Notes must tender in the exchange offer as a condition to closing the Transaction.
As of
June 30, 2017
, the carrying value of the Convertible Notes was
$66.1 million
, net of unamortized debt discounts and origination costs of
$7.1 million
and
$1.1 million
, respectively. These are being amortized over the remaining life of the Convertible Notes using the effective interest method.
During the
three months ended June 30, 2017
, the Company recorded
$2.6 million
of interest expense on the Convertible Notes, including
$1.6 million
,
$922,000
and
$137,000
from interest, amortizing debt discounts and origination costs, respectively, compared to interest expense of
$2.4 million
during the
three months ended June 30, 2016
, which included
$1.5 million
,
$782,000
and
$116,000
from interest, amortizing debt discounts and origination costs, respectively.
During the
six months ended June 30, 2017
, the Company recorded
$5.8 million
of interest expense on the Convertible Notes, including
$3.7 million
,
$1.8 million
and
$264,000
from interest, amortizing debt discounts and origination costs, respectively, compared to interest expense of
$4.8 million
during the
six months ended June 30, 2016
, which included
$3.0 million
,
$1.5 million
and
$227,000
from interest, amortizing debt discounts and origination costs, respectively. Interest for the
six months ended June 30, 2017
was higher due to approximately
$522,000
of additional interest paid in kind to note holders.
Subsequent Events
Master Transaction Agreements
On July 28, 2017, the Company consummated a series of integrated transactions to effect a recapitalization of the Company (the "Transaction Closing") pursuant to the Master Transaction Agreements.
Convertible Note Exchange Offer
On July 26, 2017, the Company’s offer to exchange its Convertible Notes for its New Convertible Notes expired (the "Convertible Note Exchange Offer"). At least
98%
of the holders of the Convertible Notes tendered in the Convertible Note Exchange Offer.
Supplemental Indenture for Convertible Notes
In connection with the Transaction Closing, the Company entered into a supplemental indenture (the "Supplemental Indenture") to that certain Indenture dated February 21, 2014 between the Company and U.S. Bank, National Association, as indenture trustee (as amended and supplemented or otherwise modified from time to time, the "Convertible Notes Indenture") governing the Convertible Notes. The purpose of the Supplemental Indenture was to eliminate substantially all of the restrictive covenants, eliminate certain events of default, eliminate the covenant restricting mergers and consolidations and modify certain provisions relating to defeasance contained in the Convertible Notes Indenture and the Convertible Notes (collectively, the "Proposed Amendments") promptly after the receipt of the requisite consents for the Proposed Amendments.
New Convertible Note Indenture and New Convertible Notes
In connection with the Transaction Closing, the Company caused to be issued the New Convertible Notes in an aggregate amount of approximately
$75.8 million
pursuant to an Indenture (the "New Convertible Note Indenture") between the Company and U.S. Bank, National Association, as indenture trustee. The terms of the New Convertible Notes are governed by the New Convertible Note Indenture, which provides, among other things, that the New Convertible Notes are unsecured senior
obligations of the Company and will mature on February 15, 2023. The New Convertible Notes bear interest at a rate of
5%
per annum from the issue date, payable semi-annually on August 15 and February 15 of each year, beginning on August 15, 2017.
Holders of New Convertible Notes may convert their New Convertible Notes at their option on any day prior to the close of business on the second scheduled trading day immediately preceding February 15, 2023. Upon conversion, the Company will deliver shares of Common Stock, together with any cash payment for any fractional share of Common Stock. The initial conversion rate for the New Convertible Notes will be (x) 500 shares of Common Stock per $1,000 principal amount of New Convertible Notes (for New Convertible Notes denominated in $1,000 increments) and (y)
0.5
shares of Common Stock per $1.00 principal amount of New Convertible Notes (for New Convertible Notes denominated in $1.00 increments). The conversion rate will be subject to adjustment in certain circumstances.
The Company may redeem, in whole but not in part, the New Convertible Notes at a redemption price of
100%
of the principal amount of the New Convertible Notes to be redeemed, plus accrued and unpaid interest and additional interest, if any, if and only if the last reported sale price of the Common Stock equals or exceeds
120%
of the conversion price for at least
15
trading days in any period of
30
consecutive trading days. The Company may, at its election, pay or deliver as the case may be, to all Holders of the New Convertible Notes, either (a) solely cash, (b) solely shares of Common Stock, or (c) a combination of cash and shares of Common Stock.
The New Convertible Note Indenture provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the New Convertible Note Indenture; defaults or failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the New Convertible Note Indenture, the trustee or the holders of at least
25%
in aggregate principal amount of the New Convertible Notes then outstanding may declare all unpaid principal plus accrued interest on the New Convertible Notes immediately due and payable, subject to certain conditions set forth in the New Convertible Note Indenture. In addition, holders of the New Convertible Notes may require the Company to repurchase the New Convertible Notes upon the occurrence of certain designated events at a repurchase price of
100%
of the principal amount of the New Convertible Notes, plus accrued and unpaid interest.
See Note 19 "Subsequent Events," of the accompanying financial statements for additional information.
(
12
)
15.0%
Senior Secured Notes
On March 11, 2016, the Company, as issuer, entered into an indenture (the "Senior Secured Indenture") with Wilmington Trust, National Association as indenture trustee (the "Senior Secured Note Trustee"). The Senior Secured Indenture provides for the issuance of up to
$30.0 million
in senior secured notes (the "
15.0%
Senior Secured Notes"), of which approximately
$21.2 million
were issued on the Initial Closing Date with an additional
$8.8 million
issued on March 24, 2016. The
15.0%
Senior Secured Notes were purchased in private transactions exempt from the registration requirements of the Securities Act of 1933, as amended, under the note purchase agreements with certain accredited investors and/or non U.S. persons, including certain members of the Company's board of directors, management and their affiliates, who purchased approximately
$3.3 million
of the
15.0%
Senior Secured Notes issued on the Initial Closing Date.
During the
six months ended June 30, 2017
, the Company entered into three supplemental indentures with the Senior Secured Note Trustee as follows:
On February 21, 2017, the first supplemental indenture amended and restated the Senior Secured Indenture to: (i) amend the definition of "Permitted Indebtedness" to include all Additional Convertible Notes issued by the Company after February 14, 2017, in lieu of a cash payment of interest due to the holders of the Convertible Notes, and (ii) add Section 4.07(e) to restrict the Company from increasing the interest rate payable on the Convertible Notes.
On May 15, 2017, the second supplemental indenture amended and restated the Senior Secured Indenture to amend the definition of "Permitted Indebtedness" to include the Bridge Note in the original principal amount of
$1.5 million
, made by the Company in favor of PJC Investments, LLC.
On June 28, 2017, the third supplemental indenture amended and restated the Senior Secured Indenture to: (i) modify the definition of "Permitted Indebtedness" to include the increased principal amount of
$3.3 million
pursuant to the Amended and Restated Bridge Note and (ii) amend the definition of "Payment Date," so that beginning with and including July 14, 2017, the interest payment date occurs monthly, as opposed to quarterly.
Interest on the
15.0%
Senior Secured Notes accrues at
15.0%
per annum payable monthly and all
15.0%
Senior Secured Notes will mature on September 14, 2018 (the "Maturity Date"). The
15.0%
Senior Secured Notes may be optionally redeemed in full at any time and must be redeemed in full upon additional issuances of debt by Emergent Capital, Inc., in each case, at a price equal to
100%
of the principal amount redeemed plus (i) accrued and unpaid interest on the
15.0%
Senior Secured Notes redeemed up to the date of redemption, and (ii) the present value, as of the date of redemption of all remaining interest payments to the Maturity Date using a discount rate equal to the yield to maturity at the time of computation on the US treasury security with a constant maturity most nearly equal to the period from the redemption date to the Maturity Date plus
50
basis points. Upon a change of control, the Company will be required to make an offer to holders of the Senior Secured Notes to repurchase the Senior Secured Notes at a price equal to
107.5%
of their principal amount.
The
15.0%
Senior Secured Notes contain negative covenants restricting additional debt incurred by the Company, creation of liens on the collateral securing the
15.0%
Senior Secured Notes, and restrictions on dividends and stock repurchases. The
15.0%
Senior Secured Notes are secured by settlement proceeds, if any, received from certain litigation involving the Company, certain notes issued to the Company and a pledge of
65%
of the equity interests in Blue Heron Designated Activity Company, OLIPP IV, LLC and Red Reef Alternative Investments, LLC.
On or about April 7, 2017, the Company entered into an Exchange Participation Agreement (the "Participation Agreement") with holders (the "Consenting Senior Note Holders") representing
100%
of the aggregate outstanding principal amount of the Company's
15.0%
Senior Secured Notes. Pursuant to the Participation Agreement, each Consenting Senior Note Holder agreed to enter into a Senior Note purchase agreement with PJC or its designee to sell
100%
of the aggregate principal amount of the New Senior Notes that are to be issued to such Consenting Senior Note Holder at a price equal to
100%
of the face amount of each New Senior Note purchased. In connection with the closing of all the transactions contemplated by the Master Transaction Agreements, including the closing of the Senior Note purchase agreement (the "Closing Date"), the Company agreed to pay each Consenting Senior Note Holder
5.0%
of the face amount of the
15.0%
Senior Secured Notes held by such Consenting Senior Note Holder, plus all accrued but unpaid interest under such
15.0%
Senior Secured Notes through the Closing Date (the "Sale Participation Fee").
On June 15, 2017, the Company did not make an interest payment of
$1.2 million
(the "Interest Payment") due June 15, 2017 (the "Interest Payment Date") on the Company’s
15.0%
Senior Secured Notes, of which
$30.0 million
principal amount was outstanding on that date. On June 21, 2017, the Company, the Consenting Senior Note Holders and the Senior Secured Note Trustee, entered into a Consent and Forbearance Agreement (the "Forbearance Agreement") relating to Senior Secured Indenture between the Company and the Senior Secured Note Trustee. Pursuant to the Forbearance Agreement, the Consenting Senior Note Holders agreed to: (i) extend the Interest Payment that would otherwise be due and payable on the Interest Payment Date to June 30, 2017 and (ii) forbear from exercising their rights and remedies against the Company solely with respect to a certain event of default under the Senior Secured Indenture (the "Specified Default") during the period commencing on June 15, 2017 and ending on the date that is the earlier of (a) July 1, 2017 and (b) the date on which any other breach of any Transaction Documents (as defined in the Senior Secured Indenture) by the Company occurs (the "Termination Date"); provided that if the Company made the Interest Payment in full in accordance with the Senior Secured Indenture prior to the Termination Date, the Specified Default shall be waived. On June 29, 2017, the Company made the Interest Payment in full and the Specified Default was deemed waived.
As of
June 30, 2017
, the carrying value of the
15.0%
Senior Secured Notes was
$29.5 million
, net of unamortized debt origination costs of
$518,000
, which is being amortized over the remaining life of the
15.0%
Senior Secured Notes using the effective interest method.
During the
three months ended June 30, 2017
, the Company recorded approximately
$1.2 million
of interest expense on the
15.0%
Senior Secured Notes, which includes
$1.1 million
of interest and
$95,000
of amortizing debt issuance costs, compared to interest expense of
$1.2 million
during the
three months ended June 30, 2016
, which included
$1.1 million
of interest and
$111,000
of amortizing debt issuance costs, respectively.
During the
six months ended June 30, 2017
, the Company recorded approximately
$2.4 million
of interest expense on the
15.0%
Senior Secured Notes, which includes
$2.3 million
of interest and
$184,000
of amortizing debt issuance costs, compared to interest expense of
$1.5 million
during the
six months ended June 30, 2016
, which included
$1.4 million
, of interest and
$176,000
of amortizing debt issuance costs, respectively.
Subsequent Events
Master Transaction Agreements
On July 28, 2017, the Company consummated a series of integrated transactions to effect a recapitalization of the Company (the "Transaction Closing") pursuant to the Master Transaction Agreements.
Senior Secured Note Purchase Agreement
In connection with the Transaction Closing, PJC, certain investors jointly designated by PJC and Triax (the "Note Purchase Investors") and holders (the "Senior Secured Note Holders") representing
100%
of the aggregate outstanding principal amount of the Company’s
15.0%
Senior Secured Notes entered into a Note Purchase Agreement (the "Note Purchase Agreement"). Pursuant to the Note Purchase Agreement, the Note Purchase Investors purchased
100%
of the
15.0%
Senior Secured Notes held by each Senior Secured Note Holder for an aggregate purchase price equal to the face amount of such purchased
15.0%
Senior Secured Notes. The Note Purchase Agreement contained customary representations, warranties, and covenants.
In connection with the Transaction Closing, the Company paid each Senior Secured Note Holder
5%
of the face amount of the
15.0%
Senior Secured Notes held by such Senior Secured Note Holder as of immediately prior to the Transaction Closing, plus all accrued but unpaid interest of such 15.0% Senior Secured Notes through the date of the Transaction Closing, pursuant to that certain Exchange Participation Agreement dated April 7, 2017 among the Company and Senior Secured Note Holders representing
100%
of the aggregate outstanding principal amount of the
15.0%
Senior Secured Notes.
New Senior Secured Note Indenture and New Senior Secured Notes
In connection with the Transaction Closing, the Company and Wilmington Trust, National Association, as indenture trustee (the "Senior Secured Note Trustee") entered into an Amended and Restated Senior Secured Note Indenture (the "New Senior Secured Indenture") to amend and restate the Indenture dated as of March 11, 2016 (as amended and supplemented or otherwise modified from time to time, the "Senior Secured Indenture") between the Company and the Senior Secured Note Trustee following the Company’s receipt of requisite consents of the holders of the
15.0%
Senior Secured Notes. Pursuant to the terms of the New Senior Secured Indenture, the Company caused the cancellation of all outstanding
15.0%
Senior Secured Notes and the issuance of
8.5%
Senior Secured Notes due 2021 (the "New Senior Secured Notes") in an aggregate amount of
$30.0 million
. The New Senior Secured Indenture provides, among other things, that the New Senior Secured Notes will be secured senior obligations of the Company and will mature on July 15, 2021. The New Senior Secured Notes will bear interest at a rate of
8.5%
per annum, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2017.
The New Senior Secured Indenture provides that the New Senior Secured Notes may be optionally redeemed in full by the Company at any time and must be redeemed in full upon additional issuances of debt by the Company in each case, at a price equal to
100%
of the principal amount redeemed plus (i) accrued and unpaid interest on the New Senior Secured Notes redeemed up to the date of redemption, and (ii) the Applicable Premium, if any, as defined in the New Senior Secured Indenture. Upon a change of control, the Company will be required to make an offer to holders of the New Senior Secured Notes to repurchase the New Senior Secured Notes at a price equal to
107.5%
of their principal amount, plus accrued and unpaid interest up to the date of redemption.
The New Senior Secured Indenture contains negative covenants restricting additional debt incurred by the Company, creation of liens on the collateral securing the New Senior Secured Notes, and restrictions on dividends and stock repurchases, among other things. The New Senior Secured Notes are secured by settlement proceeds, if any, received from certain litigation involving the Company, certain notes issued to the Company, and pledges of
65%
of the equity interests in Blue Heron Designated Activity Company, OLIPP IV, LLC and Red Reef Alternative Investments, LLC.
The New Senior Secured Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the New Senior Secured Indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the New Senior Secured Indenture, the trustee or the holders of at least
25%
in aggregate principal amount of the New Senior Secured Notes then outstanding may declare the principal of and accrued but unpaid interest, plus a premium, if any, on all the New Senior Secured Notes immediately due and payable, subject to certain conditions set forth in the New Senior Secured Indenture.
Securities Purchase Agreement
On August 11, 2017, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") by and between the Company and Brennan Opportunities Fund I LP ("Brennan"). Pursuant to the Securities Purchase Agreement, Brennan purchased from the Company (i)
12,500,000
shares (the "Brennan Shares") of Common Stock at a price of
$0.40
per share for an aggregate purchase price of
$5.0 million
and (ii)
$5.0 million
principal amount of the Company’s New Senior Secured Notes (the "Brennan Notes," and together with the Brennan Shares, the "Brennan Securities"). The Securities Purchase Agreement contained customary representations, warranties, and covenants.
The sale of the Brennan Securities was consummated on August 11, 2017, as to
8,750,000
shares of Common Stock and
$3.5 million
principal amount of New Senior Secured Notes, and on August 14, 2017, as to
3,750,000
shares of Common Stock and
$1.5 million
principal amount of New Senior Secured Notes.
See Note 19 "Subsequent Events," of the accompanying financial statements for additional information.
(
13
) 15.0% Promissory Note
On May 15, 2017, the Company entered into a
$1.5 million
Promissory Note with PJC Investments, LLC (the "Bridge Note"), to provide financing to fund the Company's continued operations with a maturity date of July 3, 2017.
The Bridge Note was amended on June 28, 2017 (the "Amended and Restated Bridge Note") to (i) increase the principal amount under the Bridge Note to
$3.3 million
and (ii) extend the maturity date from July 3, 2017 to the earlier of (a) July 28, 2017 or (b) the date on which the Master Transaction Agreements are consummated.
Under the Amended and Restated Bridge Note, the Company may request an advance of funds, and PJC shall make an advance to the Company, provided that (i) the aggregate amount of outstanding advances shall not exceed
$3.3 million
and (ii) the Company’s proposed budgeted use of proceeds for such advance is reasonably acceptable to PJC.
Advances under the Amended and Restated Bridge Note bear interest at an annual rate of
15.0%
.
The Amended and Restated Bridge Note includes certain default provisions customary to bridge financing facilities of this type which are subject to customary grace periods, including, among others, (i) defaults related to payment failures; (ii) failure to comply with covenants; (iii) any material misrepresentation of fact made or deemed made by or on behalf of the Company; (iv) failure by the Company to comply with any of its obligations under any Master Transaction Agreement; (v) defaults in payment of any indebtedness of the Company that continues after the applicable grace or cure period; (vi) bankruptcy and related events and; (vii) change of control without the prior written consent of PJC. Default interest accrues at an annual rate of
17.0%
.
The Amended and Restated Bridge Note contains certain affirmative and negative covenants customary for bridge financing facilities of this type.
In consideration for the Amended and Restated Bridge Note and pursuant to a fee letter agreement by and between the Company and PJC dated May 15, 2017 (the "Fee Agreement"), the Company agreed to pay an additional termination fee equal to
$1.5 million
in the event that the Company becomes obligated to pay certain termination fees pursuant to certain termination provisions under the Master Transaction Agreements.
The Company drew approximately
$1.9 million
on the Amended and Restated Bridge Note and recorded interest expense of approximately
$11,000
during the
three months and six months
ended
June 30, 2017
.
Subsequent Event
All outstanding principal and interest amounts due under the Amended and Restated Bridge Note were repaid on July 28, 2017 in connection with the consummation of the Transaction Closing.
(
14
)
Fair Value Measurements
The Company carries life settlements and debt under the Revolving Credit Facilities at fair value as shown in the consolidated balance sheets. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. Fair value measurements are classified based on the following fair value hierarchy:
Level 1
-Valuation is based on unadjusted quoted prices in active markets for identical assets and liabilities that are accessible at the reporting date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
Level 2
-Valuation is determined from pricing inputs that are other than quoted prices in active markets that are either directly or indirectly observable as of the reporting date. Observable inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and interest rates and yield curves that are observable at commonly quoted intervals.
Level 3
-Valuation is based on inputs that are both significant to the fair value measurement and unobservable. Level 3 inputs include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value generally require significant management judgment or estimation.
Assets and liabilities measured at fair value on a recurring basis
The balances of the Company’s assets measured at fair value on a recurring basis as of
June 30, 2017
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in life settlements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
526,282
|
|
|
$
|
526,282
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
526,282
|
|
|
$
|
526,282
|
|
The balances of the Company’s liabilities measured at fair value on a recurring basis as of
June 30, 2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
Fair Value
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
White Eagle Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
304,874
|
|
|
$
|
304,874
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
304,874
|
|
|
$
|
304,874
|
|
The balances of the Company’s assets measured at fair value on a recurring basis as of
December 31, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in life settlements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
498,400
|
|
|
$
|
498,400
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
498,400
|
|
|
$
|
498,400
|
|
The balances of the Company’s liabilities measured at fair value on a recurring basis as of
December 31, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Fair
Value
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
White Eagle Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257,085
|
|
|
$
|
257,085
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
257,085
|
|
|
$
|
257,085
|
|
The Company categorizes its investment in life settlement portfolio in two classes, non-premium financed and premium financed. In considering the categories, historically, it has generally believed that market participants would require a lower risk premium for policies that were non-premium financed, while a higher risk premium would be required for policies that were premium financed; the Company believes that this risk premium has been declining.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
Fair Value
at 6/30/17
|
|
Aggregate
death benefit
at 6/30/17
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
(Weighted Average)
|
|
Non-premium financed
|
$
|
99,003
|
|
|
$307,758
|
|
Discounted cash flow
|
|
Discount rate
|
|
15.00%
|
-
|
18.00%
|
|
|
|
|
|
|
|
|
Life expectancy evaluation
|
|
(5.5 years)
|
|
Premium financed
|
$
|
427,279
|
|
|
$2,596,141
|
|
Discounted cash flow
|
|
Discount rate
|
|
16.00%
|
-
|
21.50%
|
|
|
|
|
|
|
|
|
Life expectancy evaluation
|
|
(9.0 years)
|
|
Life settlements
|
$
|
526,282
|
|
|
$2,903,899
|
|
Discounted cash flow
|
|
Discount rate
|
|
16.39%
|
|
|
|
|
|
|
|
|
Life expectancy evaluation
|
|
(8.7 years)
|
|
White Eagle Revolving Credit Facility
|
$
|
304,874
|
|
|
$2,891,899
|
|
Discounted cash flow
|
|
Discount rate
|
|
18.31%
|
|
|
|
|
|
|
|
|
Life expectancy evaluation
|
|
(8.7 years)
|
Following is a description of the methodologies used to estimate the fair values of assets and liabilities measured at fair value on a recurring basis and within the fair value hierarchy.
Life settlements
—The Company has elected to account for the life settlement policies it acquires using the fair value method. The Company uses a present value technique to estimate the fair value of its life settlements, which is a Level 3 fair value measurement as the significant inputs are unobservable and require significant management judgment or estimation. 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 provides medical records for each insured to LE providers. Each LE provider reviews and analyzes the medical records and identifies all medical conditions it feels are relevant to the life expectancy determination of the insured. Debits and credits are assigned by each LE provider to the individual’s health based on identified medical conditions which are derived from the experience of mortality attributed to relevant conditions in the portfolio of lives that the LE provider monitors. The health of the insured is summarized by the LE provider into a life assessment of the individual’s life expectancy expressed both in terms of months and in mortality factor. The mortality factor represents the degree to which the given life can be considered more or less impaired than a life having similar characteristics (e.g. gender, age, smoking, etc.). For example, a standard insured (the average life for the given mortality table) would carry a mortality rating of
100%
. A similar but impaired life bearing a mortality rating of
200%
would be considered to have twice the chance of dying earlier than the standard life relative to the LE provider’s population. Since each provider’s mortality factor is based on its own mortality table, the Company calculates its own factors to apply to the table selected by the Company.
The Company calculates mortality factors so that when applied to the mortality table selected by the Company, the resulting LE equals the LE provided by each LE provider. The resulting mortality factors are then blended to determine a factor for each insured.
A mortality curve is then generated based on the calculated mortality factors and the rates from the Company selected mortality table to generate the best estimated probabilistic cash flow stream. The net present value of the cash flows is then calculated to determine the policy value.
If the insured dies earlier than expected, the return will be higher than if the insured dies when expected or later than expected. The calculation allows for the possibility that if the insured dies earlier than expected, the premiums needed to keep the policy in force will not have to be paid. Conversely, the calculation also considers the possibility that if the insured lives longer than expected, more premium payments will be necessary.
Since the quarter ended September 30, 2012, and prior to June 30, 2016, the Company used the 2008 Valuation Basic tables, smoker distinct ("2008 VBT"), mortality tables developed by the U.S. Society of Actuaries (the "SOA"). The mortality tables are created based on the expected rates of death among different groups categorized by factors such as age and gender.
During 2015, the SOA released new versions of the Valuation Basic Tables, the ("2015 VBT"). The 2015 VBT has a significant increase in exposure and number of claims compared to the 2008 VBT and is believed to be a better fit for the life settlement industry and is becoming more widely accepted. During the year ended
December 31, 2016
, the Company changed its valuation technique and decided to adopt the 2015 VBT, smoker and gender distinct tables, to determine the value of the policies. The table shows lower mortality rates in the earlier select periods at most ages, so while the Company continues to fit the life expectancies from the LE providers to the 2015 VBT, the change in the mortality curve changes the timing of the Company’s expected cash flow streams.
Future changes in the life expectancies could have a material adverse effect on the fair value of the Company’s life settlements, which could have a material adverse effect on its business, financial condition and results of operations
Life expectancy sensitivity analysis
If all of the insured lives in the Company’s life settlement portfolio lived six months shorter or longer than the life expectancies provided by these third parties, the change in estimated fair value would be as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Life Expectancy Months Adjustment
|
Value
|
|
Change in Value
|
|
+6
|
$
|
441,232
|
|
|
$
|
(85,050
|
)
|
|
-
|
$
|
526,282
|
|
|
$
|
—
|
|
|
-6
|
$
|
615,255
|
|
|
$
|
88,973
|
|
Discount rate
The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require.
The Company re-evaluates its discount rates at the end of every reporting period in order to reflect the estimated discount rates that could reasonably be used in a market transaction involving the Company’s portfolio of life insurance policies. In doing so, the Company relies on management insight, engages third party consultants to corroborate its assessment, engages in discussions with other market participants and extrapolates the discount rate underlying actual sales of policies.
At one time, due to the Company’s association with the USAO Investigation and certain civil litigation involving the Company, the Company believed that, when given the choice to invest in a policy that was associated with the Company’s premium finance business and a similar policy without such an association, all else being equal, an investor would have generally opted to invest in the policy that was not associated with the Company’s premium finance business. However, since the Company entered into a Non-prosecution Agreement, investors have required less of a risk premium to transact in policies associated with the Company’s legacy premium finance business. With passage of time, and resolution of litigations, the Company now believes investors no longer require a greater risk premium for policies associated with the Company's premium finance business than the risk premium otherwise required for policies that were premium financed. In general, the Company believes that the risk premium an investor would require to transact in a policy that has been premium financed versus a policy without premium financing is lessening in the current market environment and further expects that, with the passage of time, investors will continue to require less of a risk premium to transact in policies that had been premium financed.
Credit exposure of insurance company
The Company considers the financial standing of the issuer of each life insurance policy. Typically, we seek to hold policies issued by insurance companies that are rated investment grade by the top three credit rating agencies. At
June 30, 2017
, the Company had
19
life insurance policies issued by
three
carriers that were rated non-investment grade as of that date. In order to compensate a market participant for the perceived credit and challenge risks associated with these policies, the Company applied an additional 300 basis point risk premium.
The following table provides information about the life insurance issuer concentrations that exceed 10% of total death benefit and 10% of total fair value of the Company’s life settlements as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
|
Percentage of
Total
Fair Value
|
|
Percentage of
Total Death
Benefit
|
|
Moody's
Rating
|
|
S&P
Rating
|
|
Transamerica Life Insurance Company
|
18.4
|
%
|
|
20.9
|
%
|
|
A1
|
|
AA-
|
|
Lincoln National Life Insurance Company
|
21.9
|
%
|
|
19.3
|
%
|
|
A1
|
|
AA-
|
Estimated risk premium
As of
June 30, 2017
, the Company owned
614
policies with an estimated fair value of
$526.3 million
. Of these
614
policies,
535
were previously premium financed and are valued using discount rates that range from
16.00%
to
21.50%
. The remaining
79
policies, which are non-premium financed, are valued using discount rates that range from
15.00%
to
18.00%
. As of
June 30, 2017
, the weighted average discount rate calculated based on death benefit used in valuing the policies in the Company’s life settlement portfolio was
16.39%
.
The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. The extent to which the fair value could vary in the near term has been quantified by evaluating the effect of changes in the weighted average discount rate on the death benefit used to estimate the fair value. If the weighted average discount rate was increased or decreased by 1/2 of 1% and the other assumptions used to estimate fair value remained the same, the change in estimated fair value would be as follows (dollars in thousands):
Market interest rate sensitivity analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Rate Calculated Based on
|
|
|
|
|
|
|
Death Benefit
|
Rate Adjustment
|
|
Value
|
|
Change in Value
|
|
15.89%
|
-0.50%
|
|
|
$
|
539,740
|
|
|
$
|
13,458
|
|
|
16.39%
|
—
|
|
|
$
|
526,282
|
|
|
$
|
—
|
|
|
16.89%
|
+0.50%
|
|
|
$
|
513,366
|
|
|
$
|
(12,916
|
)
|
Future changes in the discount rates we use to value life insurance policies could have a material effect on the Company's yield on life settlement transactions, which could have a material adverse effect on our business, financial condition and results of our operations.
At the end of each reporting period we re-value the life insurance policies using our valuation model in order to update our estimate of fair value for investments in policies held on our balance sheet. This includes reviewing our assumptions for discount rates and life expectancies as well as incorporating current information for premium payments and the passage of time.
White Eagle Revolving Credit Facility
— As of
June 30, 2017
,
612
policies are pledged by White Eagle to serve as collateral for its obligations under the White Eagle Revolving Credit Facility. Absent an event of default under the White Eagle Revolving Credit Facility, ongoing borrowings will be used to pay the premiums on these policies and certain approved third party expenses. As more fully described in Note 9, "White Eagle Revolving Credit Facility," proceeds from the maturity of the policies pledged as collateral under the White Eagle Revolving Credit Facility are distributed pursuant to a waterfall. After premium payments, fees to service providers and payments of interest, a percentage of the collections from policy proceeds are to be paid to the Company, which will vary depending on the then LTV ratio.
The Company elected to account for the debt under the White Eagle Revolving Credit Facility in accordance with ASC 820, which includes the
45%
interest in policy proceeds payable to the lender, using the fair value method. The fair value of the debt is the amount the Company would have to pay to transfer the debt to a market participant in an orderly transaction. We calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the White Eagle Revolving Credit Facility and probabilistic cash flows from the pledged policies. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
During the year ended
December 31, 2016
, the Company changed its valuation technique by adopting the 2015 VBT, smoker and gender distinct tables, to determine the value of the life insurance policies pledged as collateral in the facility. The table shows lower mortality rates in the earlier select periods at most ages, so while the Company continues to fit the life expectancies from the LE providers to the 2015 VBT, the change in the mortality curve changes the timing of the Company’s expected cash flow streams, which resulted in an increase in projected borrowings.
Life expectancy sensitivity analysis of the White Eagle Revolving Credit Facility
A considerable portion of the fair value of the White Eagle Revolving Credit Facility is determined by the timing of receipt of future policy proceeds. Should life expectancies lengthen such that policy proceeds are collected further into the future, the fair value of this debt will decline. Conversely, should life expectancies shorten, the fair value of this debt will increase. Considerable judgment is required in interpreting market data to develop the estimates of fair value.
If all of the insured lives in the life settlement portfolio pledged under the White Eagle Revolving Credit Facility live six months shorter or longer than the life expectancies used to calculate the estimated fair value of the White Eagle Revolving Credit Facility debt, the change in estimated fair value would be as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Life Expectancy Months Adjustment
|
Fair Value of White Eagle
Revolving Credit
Facility
|
|
Change in Value
|
|
+6
|
$
|
262,635
|
|
|
$
|
(42,239
|
)
|
|
|
$
|
304,874
|
|
|
$
|
—
|
|
|
-6
|
$
|
354,520
|
|
|
$
|
49,646
|
|
Future changes in the life expectancies could have a material effect on the fair value of the White Eagle Revolving Credit Facility, which could have a material adverse effect on its business, financial condition and results of operations.
Discount rate of the White Eagle
Revolving Credit Facility
The discount rate incorporates current information about market interest rates, credit exposure to insurance companies and the Company’s estimate of the return a lender lending against the policies would require.
Market interest rate sensitivity analysis of the White Eagle Revolving Credit Facility
The extent to which the fair value of the White Eagle Revolving Credit Facility could vary in the near term has been quantified by evaluating the effect of changes in the weighted average discount. If the weighted average discount rate were increased or decreased by
1/2 of 1% and the other assumptions used to estimate fair value remained the same, the change in estimated fair value of the White Eagle Revolving Credit Facility as of
June 30, 2017
would be as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount Rate
|
Rate Adjustment
|
|
Fair Value of White Eagle
Revolving Credit
Facility
|
|
Change in Value
|
|
17.81%
|
-0.50
|
%
|
|
$
|
312,239
|
|
|
$
|
7,365
|
|
|
18.31%
|
—
|
|
|
$
|
304,874
|
|
|
$
|
—
|
|
|
18.81%
|
+0.50
|
%
|
|
$
|
297,794
|
|
|
$
|
(7,080
|
)
|
Future changes in the discount rates could have a material effect on the fair value of the White Eagle Revolving Credit Facility, which could have a material adverse effect on its business, financial condition and results of its operations.
At
June 30, 2017
, the fair value of the debt was
$304.9 million
and the outstanding principal was approximately
$299.1 million
.
Red Falcon Revolving Credit Facility
— During the year ended
December 31, 2016
, the Company terminated the Red Falcon Revolving Credit Facility and repaid all outstanding principal and interest. At December 31, 2016, all policies that were
pledged by Red Falcon to serve as collateral for its obligations under the Red Falcon Revolving Credit Facility were sold to White Eagle.
Prior to the Facility Termination, proceeds from the policies pledged as collateral under the Red Falcon Credit Facility were distributed pursuant to a waterfall with, subject to yield maintenance provisions,
5%
of policy proceeds directed to the lenders. Thereafter proceeds were directed to pay fees to service providers and premiums with any remaining proceeds directed to pay outstanding interest and required amortization of
8%
per annum on the loan. Generally, after payment of interest and required amortization, a percentage of the collections from policy proceeds were to be paid to the lenders to repay the then outstanding principal balance, which varied depending on the then loan to value ratio as more fully described in Note 10,"Red Falcon Revolving Credit Facility."
The Company had elected to account for this long-term debt using the fair value method. The fair value of the debt is the amount the Company would have to pay to transfer the debt to a market participant in an orderly transaction. The Company calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the Red Falcon Revolving Credit Facility and probabilistic cash flows from the pledged policies. Accordingly, the Company’s estimates were 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 were the estimates of life expectancy of the insured and the discount rate. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
During the year ended
December 31, 2016
, the Company changed its valuation technique by adopting the 2015 VBT, smoker and gender distinct tables, to determine the value of the life insurance policies pledged as collateral in the facility. The table shows lower mortality rates in the earlier select periods at most ages, so while the Company continues to fit the life expectancies from the LE providers to the 2015 VBT, the change in the mortality curve changes the timing of the Company’s expected cash flow streams, which resulted in an increase in projected borrowings.
Convertible Notes
—The Company determined that an embedded conversion option in the Convertible Notes was required to be separately accounted for as a derivative under Accounting Standards Codification 815,
Derivatives and Hedging
("ASC 815")
.
ASC 815 required the Company to bifurcate the embedded conversion option and record it as a liability at fair value and reduce the debt liability by a corresponding discount of an equivalent amount. The Company used a Black Scholes pricing model that incorporates present valuation techniques and reflect both the time value and the intrinsic value of the embedded conversion option to approximate the fair value of the conversion derivative liability at the end of each reporting period. This model required assumptions as to expected volatility, dividends, terms, and risk free rates.
In accordance with ASC 815, upon receipt of shareholder approval the Company reclassified the embedded derivative to stockholders’ equity along with unamortized transaction costs proportionate to the allocation of the initial debt discount and the principal amount of the Convertible Notes. The Convertible Notes continue to be recorded at accreted value up to the par value of the Convertible Notes at maturity. See Note
11
, "
8.50% Senior Unsecured Convertible Notes
," of the accompanying consolidated financial statements. Although the Company believes its valuation method is appropriate, the use of different methodologies or assumptions to determine the fair value could result in different fair values.
Changes in Fair Value
The following table provides a roll-forward in the changes in fair value for the
six months ended June 30, 2017
, for all life settlement assets for which the Company determines fair value using a material level of unobservable (Level 3) inputs, which consists solely of life settlements (in thousands):
|
|
|
|
|
|
|
|
Life Settlements:
|
|
|
Balance, January 1, 2017
|
$
|
498,400
|
|
|
Purchase of policies
|
—
|
|
|
Change in fair value
|
28,922
|
|
|
Matured/lapsed/sold policies
|
(43,073
|
)
|
|
Premiums paid
|
42,033
|
|
|
Transfers into level 3
|
—
|
|
|
Transfer out of level 3
|
—
|
|
|
Balance, June 30, 2017
|
$
|
526,282
|
|
|
Changes in fair value included in earnings for the period relating to assets held at June 30, 2017
|
$
|
9,730
|
|
The following table provides a roll-forward in the changes in fair value for the
six months ended June 30, 2017
, for the White Eagle Revolving Credit Facility for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):
|
|
|
|
|
|
|
|
White Eagle Revolving Credit Facility:
|
|
|
Balance, January 1, 2017
|
$
|
257,085
|
|
|
Draws under the White Eagle Revolving Credit Facility
|
43,399
|
|
|
Payments on White Eagle Revolving Credit Facility
|
(5,656
|
)
|
|
Unrealized change in fair value
|
10,046
|
|
|
Transfers into level 3
|
—
|
|
|
Transfer out of level 3
|
—
|
|
|
Balance, June 30, 2017
|
$
|
304,874
|
|
|
Changes in fair value included in earnings for period relating to liabilities held at June 30, 2017
|
$
|
10,046
|
|
The following table provides a roll-forward in the changes in fair value for the
six months ended June 30, 2016
, for all assets for which the Company determines fair value using a material level of unobservable (Level 3) inputs, which consists solely of life settlements (in thousands):
|
|
|
|
|
|
|
|
Life Settlements:
|
|
|
Balance, January 1, 2016
|
$
|
461,925
|
|
|
Purchase of policies
|
16
|
|
|
Retained death benefits acquisitions
|
1,374
|
|
|
Change in fair value
|
(7,425
|
)
|
|
Matured/sold policies
|
(17,180
|
)
|
|
Premiums paid
|
34,336
|
|
|
Transfers into level 3
|
—
|
|
|
Transfers out of level 3
|
—
|
|
|
Balance, June 30, 2016
|
$
|
473,046
|
|
|
Changes in fair value included in earnings for the period relating to assets held at June 30, 2016
|
$
|
(18,182
|
)
|
The following table provides a roll-forward in the changes in fair value for the
six months ended June 30, 2016
, for the White Eagle Revolving Credit Facility for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):
|
|
|
|
|
|
|
|
White Eagle Revolving Credit Facility:
|
|
|
Balance, January 1, 2016
|
$
|
169,131
|
|
|
Draws under the White Eagle Revolving Credit Facility
|
25,587
|
|
|
Payments on White Eagle Revolving Credit Facility
|
(7,952
|
)
|
|
Unrealized change in fair value
|
(14,405
|
)
|
|
Transfers into level 3
|
—
|
|
|
Transfer out of level 3
|
—
|
|
|
Balance, June 30, 2016
|
$
|
172,361
|
|
|
Changes in fair value included in earnings for the period relating to liabilities at June 30, 2016
|
$
|
(14,405
|
)
|
The following table provides a roll-forward in the changes in fair value for the
six months ended June 30, 2016
, for the Red Falcon Revolving Credit Facility for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):
|
|
|
|
|
|
|
|
Red Falcon Revolving Credit Facility
|
|
|
Balance, January 1, 2016
|
$
|
55,658
|
|
|
Draws under the Red Falcon Revolving Credit Facility
|
8,603
|
|
|
Payments on Red Falcon Revolving Credit Facility
|
(8,014
|
)
|
|
Unrealized change in fair value
|
(1,165
|
)
|
|
Transfers into level 3
|
—
|
|
|
Transfer out of level 3
|
—
|
|
|
Balance, June 30, 2016
|
$
|
55,082
|
|
|
Changes in fair value included in earnings for the period relating to liabilities held at June 30, 2016
|
$
|
(1,165
|
)
|
There were no transfers of financial assets or liabilities between levels of the fair value hierarchy during the
six months ended June 30, 2017
and
2016
.
Other Fair Value Considerations -
Carrying value of certificate of deposits, prepaid expenses and other assets, receivable for maturity of life settlements, investment in affiliates, Senior Secured Notes, accounts payable and accrued expenses approximate fair value due to their short-term maturities and/or low credit risk.
(
15
)
Segment Information
On October 25, 2013, the Company sold its structured settlement business, which was previously reported as an operating segment. The operating results related to the Company’s structured settlement business have been included in discontinued operations in the Company’s Consolidated Statements of Operations for all periods presented and the Company has discontinued segment reporting. See Note 7 "Discontinued Operations" to the accompanying consolidated financial statements.
(
16
)
Commitments and Contingencies
Lease Agreements
The Company leases office space under a lease that commenced on October 1, 2014. The lease expires on
September 30, 2020
. The annual base rent is
$239,000
, with a provision for a
3%
increase on each anniversary of the rent commencement date. Rent expense was approximately
$106,000
and
$103,000
for the
three months ended June 30, 2017
and
2016
, respectively. Future minimum lease payments for the remainder of
2017
are approximately
$121,000
.
Employment Agreements
The Company has entered into employment agreements with certain of its officers, including with its chief executive officer, whose agreement provides for substantial payments in the event that the executive terminates his employment with the Company due to a material change in the geographic location where the chief executive officer performs his duties or upon a material diminution of his base salary or responsibilities, with or without cause. These payments are equal to
three
times the sum of the chief executive officer’s base salary and the average of the preceding
three
years’ annual cash bonus.
The Company does not have any general policies regarding the use of employment agreements, but has and may, from time to time, enter into such a written agreement to reflect the terms and conditions of employment of a particular named executive officer, whether at the time of hire or thereafter.
Separation Agreement
On April 26, 2012, the Company entered into a Separation Agreement and General Release of Claims (the "Separation Agreement") with its former chief operating officer, Jonathan Neuman. The Separation Agreement obligates the Company to indemnify Mr. Neuman for his legal expenses. The Company recognized indemnification expenses of
$0
and
$251,000
during the
three months ended June 30, 2017
and
2016
, respectively.
Litigation
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may
be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. When a loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Company will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. The Company will then continue to monitor the matter for further developments that could affect the amount of any such accrued liability.
Sun Life
On April 18, 2013, Sun Life Assurance Company of Canada ("Sun Life") filed a complaint against the Company and several of its affiliates in the United States District Court for the Southern District of Florida, entitled
Sun Life Assurance Company of Canada v. Imperial Holdings, Inc., et al
. ("
Sun Life Case
"), asserting, among other things, that at least
28
life insurance policies issued by Sun Life and owned by the Company through certain of its subsidiary companies were invalid. The Sun Life complaint, as amended, asserted the following claims: (1) violations of the federal Racketeer Influenced and Corrupt Organizations ("RICO") Act, (2) conspiracy to violate the RICO Act, (3) common law fraud, (4) aiding and abetting fraud, (5) civil conspiracy to commit fraud, (6) tortious interference with contractual obligations, and (7) a declaration that the policies issued were void. Following the filing of a motion by the Company to dismiss the Sun Life Case, on December 9, 2014, counts (2), (4), (5), (6) and (7) of the Sun Life Case were dismissed with prejudice. The Company then filed a motion for summary judgment on the remaining counts. On February 4, 2015, the Court issued an order (the "Order") granting the Company’s motion for summary judgment on counts (1) and (3), resulting in the Company prevailing on all counts in the Sun Life Case.
On July 29, 2013, the Company filed a separate complaint against Sun Life in United States District Court for the Southern District of Florida, entitled
Imperial Premium Finance, LLC v. Sun Life Assurance Company of Canada
("
Imperial Case
"), which was subsequently consolidated with the Sun Life Case. The Imperial complaint asserts claims against Sun Life for breach of contract, breach of the covenant of good faith and fair dealing, and fraud, and seeks a judgment declaring that Sun Life is obligated to comply with the promises made by it in certain insurance policies. The complaint also seeks compensatory damages of no less than
$30.0 million
in addition to an award of punitive damages. On August 23, 2013, Sun Life moved to dismiss the complaint, which was denied by the Court as part of the Order. On February 26, 2015, Sun Life filed a Notice of Appeal from the Order to the United States Court of Appeals for the Eleventh Circuit, which had denied Sun Life’s motion to dismiss. On December 17, 2015, after the matter was fully briefed, the Circuit Court issued an order granting the Company’s motion to dismiss and sent the case back to the District Court. The District Court lifted the stay and ordered Sun Life to file its Answer to the Imperial Case by January 22, 2016. On February 3, 2016, the District Court set a trial date of the Imperial Case for October 31, 2016.
On September 22, 2016, the Court granted summary judgment in favor of Sun Life on the entirety of the Imperial complaint and subsequently entered final judgment to end the case. After denial of its motion to alter or amend the judgment, the Company filed a notice of appeal on January 12, 2017. Sun Life filed its notice of appeal on January 24, 2017. The Company and Sun Life have requested oral argument after their respective briefs have been filed with the Eleventh Circuit Court of Appeals.
Other Litigation
The Company is party to various other legal proceedings that arise in the ordinary course of business. Due to the inherent difficulty of predicting the outcome of litigation and other legal proceedings, the Company cannot predict the eventual outcome of these matters, and it is reasonably possible that some of them could be resolved unfavorably to the Company. As a result, it is possible that the Company’s results of operations or cash flows in a particular fiscal period could be materially affected by an unfavorable resolution of pending litigation or contingencies. However, the Company believes that the resolution of these other proceedings will not, based on information currently available, have a material adverse effect on the Company’s financial position or results of operations.
(
17
)
Stockholders’ Equity
During the second quarter of 2015, the Company issued
6,688,433
shares of common stock pursuant to a rights offering at a price of
$5.75
per share.
In connection with the settlement of class litigation, the Company issued warrants to purchase
two million
shares of the Company’s stock into an escrow account in April 2014 and were distributed in October 2014. The estimated fair value at the measurement date of such warrants was
$5.4 million
, which is included in stockholder’s equity. The warrants have a
five
-year term from the date of their distribution with an exercise price of
$10.75
. The Company is obligated to file a registration statement to register the shares underlying the warrants with the SEC if shares of the Company’s common stock have an average daily trading closing price of at least
$8.50
per share for a
45
day period. The warrants will be exercisable upon effectiveness of the registration statement.
The Company has reserved an aggregate of
12,600,000
shares of common stock under its Omnibus Plan, of which
605,227
options to purchase shares of common stock granted to existing employees were outstanding as of
June 30, 2017
, and
116,871
shares of restricted stock had been granted to directors under the plan with
265,212
shares subject to vesting. There were
11,612,690
securities remaining for future issuance under the Omnibus Plan as of
June 30, 2017
.
On September 1, 2015, the Company announced that its Board of Directors authorized a
$10.0 million
share and note repurchase program. The program has a
two
-year expiration date, and authorizes the Company to repurchase up to
$10.0 million
of its common stock and/or its Convertible Notes due 2019. During 2015, the Company purchased
608,000
shares for a total cost of approximately
$2.5 million
, which is an average cost of
$4.17
per share, including transaction fees. There were
no
purchases during
three months ended June 30, 2017
. As of
June 30, 2017
, the Company may purchase up to approximately
$7.5 million
of additional common stock or Convertible Notes under its board authorized plan. However, the Company's
15.0%
Senior Secured Notes restrict the Company from repurchasing its common stock if the Company has less than
$20 million
in cash and cash equivalents.
On March 14, 2016, the Company filed a prospectus supplement with the SEC related to the offer and sale from time to time of the Company's common stock at an aggregate offering price of up to
$50.0 million
through FBR Capital Markets & Co. and MLV & Co. LLC, as distribution agents. Sales of shares of the Company's common stock under the prospectus supplement and the equity distribution agreement entered into with the distribution agents, if any, may be made in negotiated transactions or transactions that are deemed to be "at the market" offerings as defined in Rule 415 under the Securities Act of 1933. The Company has agreed to pay the distribution agents a commission rate of up to
3%
of the gross proceeds from the sale of any shares of common stock sold through the equity distribution agreement. During the year ended
December 31, 2016
, the Company sold
628,309
shares of common stock under this prospectus supplement at a weighted average price per share of
$3.00
, receiving proceeds net of commissions totaling approximately
$1.8 million
. Approximately
$56,600
in commissions were paid in connection with the sales of shares.
On March 15, 2017 and May 12, 2017, the Company entered into a series of separate Master Transaction Agreements (together, the "Master Transaction Agreements") by and between the Company, PJC Investments, LLC, a Texas limited liability company ("
PJC
"), and each Consenting Convertible Note Holder that is a party to one or more Master Transaction Agreements ("Consenting
Holders") regarding a series of integrated transactions with the intent to effect a recapitalization of the Company (the "Transaction"), which included an Amendment to the Company’s Articles of Incorporation (the "Articles Amendment") to increase the number of authorized shares of the Company's common stock,
$0.01
par value (the "Common Stock"), a Common Stock Purchase Agreement, a Convertible Note Exchange Offer, a New Convertible Note Indenture providing for the issuance of New Convertible Notes, a Senior Note Exchange Offer, a New Senior Note Indenture providing for the issuance of New Senior Notes, a Senior Note Purchase Agreement, Warrants and certain other agreements and documents to be delivered in connection with the Transaction (each as defined in the Master Transaction Agreements, and together with the Master Transaction Agreements, the "Transaction Documents"). The Master Transaction Agreements and the transactions contemplated under the Master Transaction Agreements were unanimously approved by the Board of Directors of the Company on March 13, 2017.
Subsequent Events
Master Transaction Agreements
On July 28, 2017, the Company consummated a series of integrated transactions to effect a recapitalization of the Company (the "Transaction Closing") pursuant to the Master Transaction Agreements.
Common Stock Purchase Agreement
In connection with the Transaction Closing, the Company entered into a Common Stock Purchase Agreement (the "Stock Purchase Agreement") by and among the Company, PJC, certain investors jointly designated by PJC and Triax Capital Advisors LLC, a New York limited liability company ("Triax"), to be party to the Stock Purchase Agreement (collectively, the "Common
Stock Investors"), and certain Convertible Note Holders that were a party to the Stock Purchase Agreement (collectively, the "Convertible Note Holder Purchasers," and together with PJC and the Common Stock Investors, the "Purchasers"). Pursuant to the Stock Purchase Agreement, the Company issued and sold to the Purchasers
115,000,000
shares (the "Stock Purchase Agreement Shares") of the Company’s common stock,
$0.01
par value (the "Common Stock"), at a price of
$0.20
per share for an aggregate purchase price of
$23.0 million
, of which PJC and the Common Stock Investors purchased
75,000,000
Stock Purchase Agreement Shares for an aggregate purchase price of
$15.0 million
and the Convertible Note Holder Purchasers, pursuant to the previously announced rights offering which expired on July 26, 2017, purchased
40,000,000
Stock Purchase Agreement Shares for an aggregate purchase price of
$8.0 million
, of which PJC purchased
19,320,038
shares in connection with the exercise of rights assigned to it by certain Convertible Note Holder Purchasers. The Stock Purchase Agreement contained customary representations, warranties, and covenants.
Common Stock Purchase Warrants
In connection with the Transaction Closing, the Company issued Common Stock Purchase Warrants (the "Warrants") to certain investors jointly designated by PJC and Triax (collectively, the "Warrant Investors") to purchase up to an aggregate of
42,500,000
shares of the Common Stock at an exercise price of
$0.20
per share (the "Warrant Shares").
The Warrants shall vest and become exercisable as follows: (i) with respect to
17,500,000
Warrant Shares, immediately upon the issuance of the Warrants, and (ii) with respect to the remaining
25,000,000
Warrant Shares, at later times tied to the conversion of Convertible Notes (as defined below) and New Convertible Notes (as defined below) outstanding upon the Transaction Closing into shares of Common Stock or, if earlier, upon the date that all Convertible Notes or New Convertible Notes are no longer outstanding. The Warrants have an
eight
year term. The number of Warrant Shares is subject to anti-dilution adjustment provisions.
Articles Amendment
Effective on July 17, 2017, the Company filed an Articles of Amendment to Articles of Incorporation (the "Articles Amendment") to increase the authorized Common Stock from
80,000,000
shares to
415,000,000
shares. As previously disclosed, the Articles Amendment was approved by the Company’s shareholders at the Company’s 2017 Annual Meeting. The adoption of the Articles Amendment results in a greater number of shares of Common Stock available for issuance.
Changes in Control of Registrant
As a result of the consummation of the Master Transaction Agreements, on the date of the Transaction Closing, a change in control of the Company occurred. PJC and Triax, together with certain of their affiliates, acquired beneficial ownership of approximately
38.9%
of the outstanding Common Stock, based on their aggregate acquisition of
39,320,038
shares of Common Stock and warrants to purchase
27,150,000
shares of Common Stock. Other investors designated by PJC and Triax acquired beneficial ownership of approximately
43.6%
of the outstanding Common Stock, based on their aggregate acquisition of
55,000,000
shares of Common Stock and warrants to purchase
13,350,000
shares of Common Stock. Additionally, PJC and Triax designated two of
seven
directors to the Company’s Board, two other investors designated a third new director and a fourth new director, and a fifth new director was designated by a holder of New Convertible Notes, collectively resulting in a change in the majority of the Company’s Board.
Securities Purchase Agreement
On August 11, 2017, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") by and between the Company and Brennan Opportunities Fund I LP ("Brennan"). Pursuant to the Securities Purchase Agreement, Brennan purchased from the Company (i)
12,500,000
shares (the "Brennan Shares") of Common Stock at a price of
$0.40
per share for an aggregate purchase price of
$5.0 million
and (ii)
$5.0 million
principal amount of the Company’s New Senior Secured Notes (the "Brennan Notes," and together with the Brennan Shares, the "Brennan Securities"). The Securities Purchase Agreement contained customary representations, warranties, and covenants.
The sale of the Brennan Securities was consummated on August 11, 2017, as to
8,750,000
shares of Common Stock and
$3.5 million
principal amount of New Senior Secured Notes, and on August 14, 2017, as to
3,750,000
shares of Common Stock and
$1.5 million
principal amount of New Senior Secured Notes.
See Note 19 "Subsequent Events," of the accompanying financial statements for additional information.
(
18
)
Income Taxes
The Company’s provision for income taxes from continuing operations is estimated to result in an annual effective tax rate of approximately
0.0%
for the
six month period ended June 30, 2017
and in
2016
, respectively. The Company’s quarterly effective income tax rates are based upon the Company’s current estimated annual rate. The Company’s annual effective income tax rate varies based upon the Company’s taxable earnings, as well as on a mix of taxable earnings in the various state and foreign jurisdictions.
Based on the Company's evaluation, a deferred tax valuation allowance was established against its net deferred tax assets. In its evaluation, management considers taxable loss carryback availability, expectations of sufficient future taxable income, trends in earnings, existence of taxable income in recent years, the future reversal of temporary differences, and available tax planning strategies that could be implemented, if required. Valuation allowances are established based on the consideration of all available evidence using a more likely than not standard. This valuation allowance was determined to be necessary as an offset to the full amount of the federal and state deferred tax asset. During the
six month period ended June 30, 2017
, the Company does not expect that position to change and therefore is not recording any benefit.
The Company and its subsidiary companies are subject to U.S. federal income tax, as well as to income tax in Florida and other states and foreign jurisdictions in which it operates.
Subsequent Event
Special Dividend Note
Effective July 28, 2017, Lamington Road Limited, an Irish section 110 limited company and an indirect subsidiary of the Company ("Lamington"), issued a promissory note to Markley Asset Portfolio, LLC, a Delaware limited liability company and an indirect subsidiary of the Company ("Markley"), in a principal amount of
$57.0 million
. The amount represents distributions of earnings from Lamington's share of profits of White Eagle, to satisfy the Profit Participation Note issued by Markley to Lamington Road (the "Special Dividend Note"). Management is currently evaluating the extent to which U.S. cash taxes will result from the transaction. The Special Dividend Note matures on July 28, 2027. Advances under the Special Dividend Note bear interest at an annual rate of
5.0%
. The transaction will be eliminated in consolidation.
(19)
Subsequent Events
Master Transaction Agreements
On July 28, 2017, the Company consummated a series of integrated transactions to effect a recapitalization of the Company (the "Transaction Closing") pursuant to the Master Transaction Agreements.
Common Stock Purchase Agreement
In connection with the Transaction Closing, the Company entered into a Common Stock Purchase Agreement (the "Stock Purchase Agreement") by and among the Company, PJC, certain investors jointly designated by PJC and Triax Capital Advisors LLC, a New York limited liability company ("Triax"), to be party to the Stock Purchase Agreement (collectively, the "Common Stock Investors"), and certain Convertible Note Holders that were a party to the Stock Purchase Agreement (collectively, the "Convertible Note Holder Purchasers," and together with PJC and the Common Stock Investors, the "Purchasers"). Pursuant to the Stock Purchase Agreement, the Company issued and sold to the Purchasers
115,000,000
shares (the "Stock Purchase Agreement Shares") of the Company’s common stock,
$0.01
par value (the "Common Stock"), at a price of
$0.20
per share for an aggregate purchase price of
$23.0 million
, of which PJC and the Common Stock Investors purchased
75,000,000
Stock Purchase Agreement Shares for an aggregate purchase price of
$15.0 million
and the Convertible Note Holder Purchasers, pursuant to the previously announced rights offering which expired on July 26, 2017, purchased
40,000,000
Stock Purchase Agreement Shares for an aggregate purchase price of
$8.0 million
, of which PJC purchased
19,320,038
shares in connection with the exercise of rights assigned to it by certain Convertible Note Holder Purchasers. The Stock Purchase Agreement contained customary representations, warranties, and covenants.
Common Stock Purchase Warrants
In connection with the Transaction Closing, the Company issued Common Stock Purchase Warrants (the "Warrants") to certain investors jointly designated by PJC and Triax (collectively, the "Warrant Investors") to purchase up to an aggregate of
42,500,000
shares of the Common Stock at an exercise price of
$0.20
per share (the "Warrant Shares").
The Warrants shall vest and become exercisable as follows: (i) with respect to
17,500,000
Warrant Shares, immediately upon the issuance of the Warrants, and (ii) with respect to the remaining
25,000,000
Warrant Shares, at later times tied to the conversion of Convertible Notes (as defined below) and New Convertible Notes (as defined below) outstanding upon the Transaction Closing into shares of Common Stock or, if earlier, upon the date that all Convertible Notes or New Convertible Notes are no longer outstanding. The Warrants have an
eight
year term. The number of Warrant Shares is subject to anti-dilution adjustment provisions.
Convertible Note Exchange Offer
On July 26, 2017, the Company’s offer to exchange its outstanding
$74.2 million
aggregate principal amount of 8.5% Senior Unsecured Convertible Notes due 2019 (the "Convertible Notes") for its
5%
Senior Unsecured Convertible Notes due 2023 (the "New Convertible Notes") expired (the "Convertible Note Exchange Offer"). At least
98%
of the holders of the Convertible Notes tendered in the Convertible Note Exchange Offer.
Second Supplemental Indenture for Convertible Notes
In connection with the Transaction Closing, the Company entered into a supplemental indenture (the "Supplemental Indenture") to that certain Indenture dated February 21, 2014 between the Company and U.S. Bank, National Association, as indenture trustee (as amended and supplemented or otherwise modified from time to time, the "Convertible Notes Indenture") governing the Convertible Notes. The purpose of the Supplemental Indenture was to eliminate substantially all of the restrictive covenants, eliminate certain events of default, eliminate the covenant restricting mergers and consolidations and modify certain provisions relating to defeasance contained in the Convertible Notes Indenture and the Convertible Notes (collectively, the "Proposed Amendments") promptly after the receipt of the requisite consents for the Proposed Amendments.
New Convertible Note Indenture and New Convertible Notes
In connection with the Transaction Closing, the Company caused to be issued the New Convertible Notes in an aggregate amount of approximately
$75.8 million
pursuant to an Indenture (the "New Convertible Note Indenture") between the Company and U.S. Bank, National Association, as indenture trustee. The terms of the New Convertible Notes are governed by the New Convertible Note Indenture, which provides, among other things, that the New Convertible Notes are unsecured senior obligations of the Company and will mature on February 15, 2023. The New Convertible Notes bear interest at a rate of
5%
per annum from the issue date, payable semi-annually on August 15 and February 15 of each year, beginning on August 15, 2017.
Holders of New Convertible Notes may convert their New Convertible Notes at their option on any day prior to the close of business on the second scheduled trading day immediately preceding February 15, 2023. Upon conversion, the Company will deliver shares of Common Stock, together with any cash payment for any fractional share of Common Stock. The initial conversion rate for the New Convertible Notes will be (x) 500 shares of Common Stock per $1,000 principal amount of New Convertible Notes (for New Convertible Notes denominated in $1,000 increments) and (y)
0.5
shares of Common Stock per $1.00 principal amount of New Convertible Notes (for New Convertible Notes denominated in $1.00 increments). The conversion rate will be subject to adjustment in certain circumstances.
The Company may redeem, in whole but not in part, the New Convertible Notes at a redemption price of
100%
of the principal amount of the New Convertible Notes to be redeemed, plus accrued and unpaid interest and additional interest, if any, if and only if the last reported sale price of the Common Stock equals or exceeds
120%
of the conversion price for at least
15
trading days in any period of
30
consecutive trading days. The Company may, at its election, pay or deliver as the case may be, to all Holders of the New Convertible Notes, either (a) solely cash, (b) solely shares of Common Stock, or (c) a combination of cash and shares of Common Stock.
The New Convertible Note Indenture provides for customary events of default, which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the New Convertible Note Indenture; defaults or failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the New Convertible Note Indenture, the trustee
or the holders of at least
25%
in aggregate principal amount of the New Convertible Notes then outstanding may declare all unpaid principal plus accrued interest on the New Convertible Notes immediately due and payable, subject to certain conditions set forth in the New Convertible Note Indenture. In addition, holders of the New Convertible Notes may require the Company to repurchase the New Convertible Notes upon the occurrence of certain designated events at a repurchase price of
100%
of the principal amount of the New Convertible Notes, plus accrued and unpaid interest.
Senior Secured Note Purchase Agreement
In connection with the Transaction Closing, PJC, certain investors jointly designated by PJC and Triax (the “Note Purchase Investors”) and holders (the "Senior Secured Note Holders") representing
100%
of the aggregate outstanding principal amount of the Company’s
15.0%
Senior Secured Notes entered into a Note Purchase Agreement (the "Note Purchase Agreement"). Pursuant to the Note Purchase Agreement, the Note Purchase Investors purchased
100%
of the
15.0%
Senior Secured Notes held by each Senior Secured Note Holder for an aggregate purchase price equal to the face amount of such purchased
15.0%
Senior Secured Notes. The Note Purchase Agreement contained customary representations, warranties, and covenants.
In connection with the Transaction Closing, the Company paid each Senior Secured Note Holder
5%
of the face amount of the
15.0%
Senior Secured Notes held by such Senior Secured Note Holder as of immediately prior to the Transaction Closing, plus all accrued but unpaid interest of such 15.0% Senior Secured Notes through the date of the Transaction Closing, pursuant to that certain Exchange Participation Agreement dated April 7, 2017 among the Company and Senior Secured Note Holders representing
100%
of the aggregate outstanding principal amount of the
15.0%
Senior Secured Notes.
New Senior Secured Note Indenture and New Senior Secured Notes
In connection with the Transaction Closing, the Company and Wilmington Trust, National Association, as indenture trustee (the "Senior Secured Note Trustee") entered into an Amended and Restated Senior Secured Note Indenture (the "New Senior Secured Indenture") to amend and restate the Indenture dated as of March 11, 2016 (as amended and supplemented or otherwise modified from time to time, the "Senior Secured Indenture") between the Company and the Senior Secured Note Trustee following the Company’s receipt of requisite consents of the holders of the
15.0%
Senior Secured Notes. Pursuant to the terms of the New Senior Secured Indenture, the Company caused the cancellation of all outstanding
15.0%
Senior Secured Notes and the issuance of
8.5%
Senior Secured Notes due 2021 (the "New Senior Secured Notes") in an aggregate amount of
$30.0 million
. The New Senior Secured Indenture provides, among other things, that the New Senior Secured Notes will be secured senior obligations of the Company and will mature on July 15, 2021. The New Senior Secured Notes will bear interest at a rate of
8.5%
per annum, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning on September 15, 2017.
The New Senior Secured Indenture provides that the New Senior Secured Notes may be optionally redeemed in full by the Company at any time and must be redeemed in full upon additional issuances of debt by the Company in each case, at a price equal to
100%
of the principal amount redeemed plus (i) accrued and unpaid interest on the New Senior Secured Notes redeemed up to the date of redemption, and (ii) the Applicable Premium, if any, as defined in the New Senior Secured Indenture. Upon a change of control, the Company will be required to make an offer to holders of the New Senior Secured Notes to repurchase the New Senior Secured Notes at a price equal to
107.5%
of their principal amount, plus accrued and unpaid interest up to the date of redemption.
The New Senior Secured Indenture contains negative covenants restricting additional debt incurred by the Company, creation of liens on the collateral securing the New Senior Secured Notes, and restrictions on dividends and stock repurchases, among other things. The New Senior Secured Notes are secured by settlement proceeds, if any, received from certain litigation involving the Company, certain notes issued to the Company, and pledges of
65%
of the equity interests in Blue Heron Designated Activity Company, OLIPP IV, LLC and Red Reef Alternative Investments, LLC.
The New Senior Secured Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others: nonpayment of principal or interest; breach of covenants or other agreements in the New Senior Secured Indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the New Senior Secured Indenture, the trustee or the holders of at least
25%
in aggregate principal amount of the New Senior Secured Notes then outstanding may declare the principal of and accrued but unpaid interest, plus a premium, if any, on all the New Senior Secured Notes immediately due and payable, subject to certain conditions set forth in the New Senior Secured Indenture.
Special Dividend Note
In connection with the Transaction Closing, Lamington Road Designated Activity Company, an Irish section 110 company and an indirect subsidiary of the Company ("Lamington"), issued a promissory note to Markley Asset Portfolio, LLC, a Delaware limited liability company and an indirect subsidiary of the Company ("Markley), in a principal amount of
$57.0 million
. The amount represents distributions of earnings from Lamington's share of profits of White Eagle, to satisfy the Profit Participation Note issued by Markley to Lamington (the "Special Dividend Note"). Management is currently evaluating the extent to which U.S. cash taxes will result from the transaction. The Special Dividend Note matures on July 28, 2027. Advances under the Special Dividend Note bear interest at an annual rate of
5.0%
. The transaction will be eliminated in consolidation.
Registration Rights Agreement
In connection with the Transaction Closing, the Company entered into a Registration Rights Agreement (the "Registration Rights Agreement") with the Common Stock Investors, the Warrant Investors, the Convertible Note Holder Purchasers and each such holder of the Company’s New Convertible Notes that is a party to the Registration Rights Agreement (the "New Convertible Note Holders"). Pursuant to the Registration Rights Agreement, the Company is required to register the resale of the Stock Purchase Agreement Shares , Warrant Shares, the New Convertible Notes and the shares of Common Stock issued or issuable upon conversion of the New Convertible Notes in accordance with the terms of the New Convertible Notes Indenture (collectively, the "Registrable Securities"). Under the Registration Rights Agreement, the Company will be required to prepare and file a shelf registration statement with the Securities and Exchange Commission (the "SEC") within 60 days of the Transaction Closing, and to use its best efforts to have the registration statement declared effective upon the earliest to occur of (i) the date that is 120 days after the Transaction Closing, (ii) the date that is two (2) business days after the date that the SEC communicates to the Company that it has no comments to the registration statement, and (iii) the date that is two (2) business days after the date that the SEC communicates to the Company that all comments with respect to the registration statement have been resolved. Pursuant to the Registration Rights Agreement, the Company must use all commercially reasonable efforts to keep the registration statement continuously effective until the date when all of the Registrable Securities covered by such registration statement have been sold. The Registration Rights Agreement also contains piggyback registration rights in favor of the Common Stock Investors, Convertible Note Holder Purchasers and the New Convertibles Note Holders and customary indemnification provisions.
Board Designation Agreements
In connection with the Transaction Closing, the Company entered into a series of separate Board Designation Agreements (collectively, the "Board Designation Agreements") with each of (i) Evermore Global Advisors, LLC ("Evermore"), (ii) PJC and JSARCo, LLC (the "Board Rights Investors"), (iii) Opal Sheppard Opportunities Fund I LP ("Opal Sheppard"), (iv) Ironsides P Fund L.P. and Ironsides Partners Special Situations Master Fund II L.P. (together with Ironsides P Fund L.P., the "Ironsides Funds") and (v) Nantahala Capital Management, LLC ("Nantahala").
Pursuant to the Board Designation Agreement with Evermore (the "Evermore Designation Agreement"), subject to the terms and conditions set forth therein, Evermore shall have the right to designate
one
director to the Company’s Board of Directors (the "Board") whom the Board must add as a director of the Company contemporaneously with the Transaction Closing. At each meeting of the Company’s shareholders at which the election of directors is to be considered and Evermore holds the requisite Minimum Percentage (as defined in the Evermore Designation Agreement), Evermore shall have the right to designate
one
nominee whom the Board must nominate for election at such meeting.
Pursuant to the Board Designation Agreement with the Board Rights Investors (the "Investor Designation Agreement"), subject to the terms and conditions set forth therein, the Board Rights Investors shall have the right to designate
three
directors to the Board whom the Board must add as directors of the Company contemporaneously with the Transaction Closing,
one
of which shall be designated pursuant to the Opal Sheppard Agreement. At each meeting of the Company’s shareholders at which the election of directors is to be considered and the Board Rights Investors hold the requisite Minimum Percentage (as defined in the Investor Designation Agreement), the Board Rights Investors shall have the right to designate
three
nominees whom the Board must nominate for election at such meeting,
one
of which shall be designated pursuant to the Opal Sheppard Agreement so long as the Opal Sheppard Agreement is in effect.
Pursuant to the Board Designation Agreement with Opal Sheppard (the "Opal Sheppard Designation Agreement"), subject to the terms and conditions set forth therein, Opal Sheppard shall have the right to designate
one
director to the Company’s Board of Directors (the "Board") whom the Board must add as a director of the Company contemporaneously with the Transaction Closing. At each meeting of the Company’s shareholders at which the election of directors is to be considered, so long as the Board Rights Investors have the right to
three
designees and Opal Sheppard holds the requisite Minimum
Percentage (as defined in the Opal Sheppard Designation Agreement), Opal Sheppard shall have the right to designate
one
nominee whom the Board must nominate for election at such meeting.
Pursuant to the Board Designation Agreement with the Ironsides Funds (the "Ironsides Designation Agreement"), subject to the terms and conditions set forth therein, the Ironsides Funds shall have the right to designate
one
director to the Board whom the Board must add as a director of the Company contemporaneously with the Transaction Closing. At each meeting of the Company’s shareholders at which the election of directors is to be considered and the Ironsides Funds hold the requisite Specified Percentage (as defined in the Ironsides Designation Agreement), the Ironsides Funds shall have the right to designate
one
nominee whom the Board must nominate for election at such meeting.
Pursuant to the Board Designation Agreement with Nantahala (the "Nantahala Designation Agreement"), subject to the terms and conditions set forth therein, upon the termination of the Ironsides Designation Agreement in accordance with the terms thereof, Nantahala shall have the right to designate
one
director to the Board and, at each meeting of the Company’s shareholders at which the election of directors is to be considered and Nantahala holds the requisite Specified Percentage (as defined in the Nantahala Designation Agreement), Nantahala shall have the right to designate
one
nominee whom the Board must nominate for election at such meeting.
Articles Amendment
Effective on July 17, 2017, the Company filed an Articles of Amendment to Articles of Incorporation (the "Articles Amendment") to increase the authorized Common Stock from
80,000,000
shares to
415,000,000
shares. As previously disclosed, the Articles Amendment was approved by the Company’s shareholders at the Company’s 2017 Annual Meeting. The adoption of the Articles Amendment results in a greater number of shares of Common Stock available for issuance.
Changes in Control of Registrant
As a result of the consummation of the Master Transaction Agreements, on the date of the Transaction Closing, a change in control of the Company occurred. PJC and Triax, together with certain of their affiliates, acquired beneficial ownership of approximately
38.9%
of the outstanding Common Stock, based on their aggregate acquisition of
39,320,038
shares of Common Stock and warrants to purchase
27,150,000
shares of Common Stock. Other investors designated by PJC and Triax acquired beneficial ownership of approximately
43.6%
of the outstanding Common Stock, based on their aggregate acquisition of
55,000,000
shares of Common Stock and warrants to purchase
13,350,000
shares of Common Stock. Additionally, PJC and Triax designated two of
seven
directors to the Company’s Board, two other investors designated a third new director and a fourth new director, and a fifth new director was designated by a holder of New Convertible Notes, collectively resulting in a change in the majority of the Company’s Board.
Departure of Directors or Certain Officers
Effective July 28, 2017, the Company accepted resignations of the following members of the Company’s Board of Directors: James Chadwick, Michael Crow, Phillip Goldstein, Gerald Hellerman and Gilbert Nathan. There were no disagreements between each of Messrs. Chadwick, Crow, Goldstein, Hellerman, and Nathan and the Company or any officer or director of the Company.
In connection with the Transaction Closing, the Company appointed Mr. Patrick J. Curry, Mr. Joseph E. Sarachek, Mr. Matthew T. Epstein, Mr. James Hua and Mr. Robert Knapp to join the Company’s Board of Directors. Each of Messrs. Curry, Sarachek, Epstein, Hua and Knapp are affiliates of PJC, Triax, a Common Stock Investor or a Consenting Convertible Note Holder. All such persons were appointed pursuant to the Board Designation Agreements described above. Prior to the Transaction Closing, none of Messrs. Curry, Sarachek, Epstein, Hua and Knapp were officers and/or directors of the Company, had any family relationship with any director, executive officer or other director designee of the Company, or held any previous position with the Company nor have they been involved in any transactions with the Company or any of our directors, executive officers, affiliates or associates that are required to be disclosed pursuant to the rules and regulations of the SEC.
Reduction in Force
On August 3, 2017 and August 11, 2017, as a reduction in force, the Company reduced its headcount from
20
employees to
12
employees, included in this reduction in force, were
two
of the Company’s executive officers - David Sasso, Vice President of Investor Relations and Business Development and Christopher O’Reilly, General Counsel and Secretary. The Company will incur a onetime severance cost of approximately
$1.2 million
related to this reduction, for the quarter ended September 30, 2017, the amounts are being paid over a period of
twelve
months.
Termination of Employment Agreement
On August 10, 2017, Antony Mitchell, the Chief Executive Officer of the Company, notified the Company of his intention to terminate his employment agreement with the company, effective as of a date to be determined in accordance with the terms of such agreement.
Securities Purchase Agreement
On August 11, 2017, the Company entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") by and between the Company and Brennan Opportunities Fund I LP ("Brennan"). Pursuant to the Securities Purchase Agreement, Brennan purchased from the Company (i)
12,500,000
shares (the "Brennan Shares") of Common Stock at a price of
$0.40
per share for an aggregate purchase price of
$5.0 million
and (ii)
$5.0 million
principal amount of the Company’s New Senior Secured Notes (the "Brennan Notes," and together with the Brennan Shares, the "Brennan Securities"). The Securities Purchase Agreement contained customary representations, warranties, and covenants.
The sale of the Brennan Securities was consummated on August 11, 2017, as to
8,750,000
shares of Common Stock and
$3.5 million
principal amount of New Senior Secured Notes, and on August 14, 2017, as to
3,750,000
shares of Common Stock and
$1.5 million
principal amount of New Senior Secured Notes.
Brennan Registration Rights Agreement
On August 11, 2017, the Company entered into a Registration Rights Agreement with Brennan (the "Brennan Registration Rights Agreement"), pursuant to which the Company is required to register the resale of the Brennan Shares. The Brennan Registration Rights Agreement is substantially similar to the Registration Rights Agreement entered into in connection with the Transaction Closing.