The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of our Company as of and for the periods presented below and should be read in conjunction with the financial statements and accompanying notes included with this Quarterly Report on Form 10-Q. This discussion contains forward looking statements that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Actual results could differ materially from those discussed in or implied by forward looking statements as a result of various factors. See "Forward Looking Statements."
Business Overview
Incorporated in
On
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Investment") for a purchase price of approximately
During the three month period ended
During the three month period ended
Litigation Settlement and Disposal of Life Settlement
On
Pursuant to the Settlement Agreement, 31 life insurance policies with face
totaling
Liquidity
The Company has incurred substantial losses and reported negative cash flows
from operating activities of
The Company's ability to continue as a going concern is dependent on its ability to meet its liquidity needs through a combination of factors including but not limited to, the receipt of distributions from its investment in its equity investment in White Eagle and cash on hand.
As of the filing date of this Form 10-Q, we had approximately
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.
Critical Accounting Policies
Critical Accounting Estimates
The preparation of the financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. We base our judgments, estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions and conditions. We evaluate our judgments, estimates and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates and assumptions involved in the accounting for income taxes, the valuation of life settlements and the valuation of investment in limited partnership have the greatest potential impact on our financial statements and accordingly believe these to be our critical accounting estimates.
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Fair Value Measurement Guidance
We follow ASC 820, Fair Value Measurements and Disclosures, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Our investments in life insurance policies, investment in limited partnership and White Eagle Revolving Credit Facility debt are considered Level 3 as there is currently no active market where we are able to observe quoted prices for identical assets/liabilities and our valuation model incorporates significant inputs that are not observable. See Note 16, "Fair Value Measurements" of the notes to Consolidated Financial Statements for a discussion of our fair value measurement.
Fair Value Option
We have elected to account for life settlements using the fair value method. The fair value of the asset is the estimated amount that would be received to sell an asset in an orderly transaction between market participants at the measurement date. We calculate the fair value of the asset using a present value technique to estimate the fair value of its life settlements. The Company currently uses a probabilistic method of valuing life insurance policies, which the Company believes to be the preferred valuation method in the industry. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. See Note 10, "Life Settlements (Life Insurance Policies)" and Note 16, "Fair Value Measurements" of the notes to consolidated financial statements for further information.
We have elected to account for the investment in limited partnership using the fair value method. We calculate the fair value of the investment using a present value technique to estimate the fair value the limited partnership investment. The most significant assumptions are the estimates of life expectancy of the insured for the life insurance policies that are held by the partnership, the stipulated rate of return by the Class A Holder of the partnership, repayment of advances made by the Class A holder on the Company's behalf, distributions to the Company and the discount rate. See Note 11, "Investment in Limited Partnership" and Note 16, "Fair Value Measurements" of the notes to consolidated financial statements for further information.
We have elected to account for the debt under the White Eagle Revolving Credit Facility, which includes the interest in policy proceeds to the lender, using the fair value method. The fair value of the debt is the estimated amount that would have to be paid to transfer the debt to a market participant in an orderly transaction. We calculated the fair value of the debt using a discounted cash flow model taking into account the stated interest rate of the credit facility and probabilistic cash flows from the pledged policies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The most significant assumptions are the estimates of life expectancy of the insured and the discount rate. The use of assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
Income Recognition
Our primary sources of income are in the form of changes in fair value of life settlements, gains on life settlements, net, change in fair value of investment in limited partnership and distributions from limited partnership. Our income recognition policies for this source of income is as follows:
• Changes in Fair Value of Life Settlements-When we acquire certain life insurance policies, we initially record these investments at the transaction price, which is the fair value of the policy for those acquired upon relinquishment or the amount paid for policies acquired for cash. The fair value of the investment in insurance policies is evaluated at the end of each reporting period. Changes in the fair value of the investment based on evaluations are recorded as changes in fair value of life settlements in our consolidated statement of operations. The fair value is determined on a discounted cash flow basis that incorporates current life expectancy assumptions. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. The Company recognizes income from life settlement maturities on the date we are in receipt of death notice or verified obituary of 51
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the insured. This income is the difference between the death benefits and fair values of the policy at the time of maturity.
• Change in Fair Value of Investment in Limited Partnership - ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities requires that a reporting entity should account for its equity investments that are not consolidated or accounted for under the equity method at fair value, with changes to fair value recorded in current earnings. White Eagle previously valued its life settlement policies at fair value whose valuation are based on inputs that are both significant to the fair value measurement and unobservable. The Company now holds an equity investment of 27.5% in White Eagle whose only assets are these life settlement. Additionally, the investment includes a mezzanine financing which the Company assumed at closing which repayment by, and ultimate distributions to, the Company are based on a prescribed waterfall with a guaranteed 11% return to the majority owner partner. The Company recognizes income from monthly distribution from the limited partnership as prescribed by the Subscription Agreement.
Deferred Debt Costs
Deferred debt costs include costs incurred in connection with acquiring and maintaining debt arrangements. These costs are directly deducted from the carrying amount of the liability in the consolidated balance sheets, are amortized over the life of the related debt using the effective interest method and are classified as interest expense in the accompanying consolidated statement of operations. These deferred costs are related to the Company's 5% Convertible Notes and 8.5% Senior Secured Notes.
Income Taxes
We account for income taxes in accordance with ASC 740, Income Taxes. Under ASC 740, deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies varies, adjustments to the carrying value of the deferred tax assets and liabilities may be required. Valuation allowances are based on the "more likely than not" criteria of ASC 740.
The accounting for uncertain tax positions guidance under ASC 740 requires that we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize interest and penalties (if any) on uncertain tax positions as a component of income tax expense.
On
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Stock-Based Compensation
We have adopted ASC 718, Compensation-Stock Compensation. ASC 718 addresses accounting for share-based awards, including stock options, restricted stock, performance shares and warrants, with compensation expense measured using fair value and recorded over the requisite service or performance period of the award. The fair value of equity instruments will be determined based on a valuation using an option pricing model that takes into account various assumptions that are subjective. Key assumptions used in the valuation will include the expected term of the equity award taking into account both the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award. Compensation expense associated with performance shares is only recognized to the extent that it is probable the performance measurement will be met.
Held-for-sale and discontinued operations
We report a business as held-for-sale when management has approved or received
approval to sell the business and is committed to a formal plan, the business is
available for immediate sale, the business is being actively marketed, the sale
is anticipated to occur during the ensuing year and certain other specified
criteria are met. A business classified as held-for-sale is recorded at the
lower of its carrying amount or estimated fair value less cost to sell. If the
carrying amount of the business exceeds its estimated fair value, a loss is
recognized. Depreciation is not recorded on assets of a business classified as
held-for-sale. Assets and liabilities related to a business classified as
held-for-sale are segregated in the Consolidated Balance Sheet and major classes
are separately disclosed in the notes to the Consolidated Financial Statements
commencing in the period in which the business is classified as held-for-sale.
We report the results of operations of a business as discontinued operations if
the business is classified as held-for-sale, the operations and cash flows of
the business have been or will be eliminated from the ongoing operations of the
Company as a result of a disposal transaction and we will not have any
significant continuing involvement in the operations of the business after the
disposal transaction. The results of discontinued operations are reported in
Discontinued Operations in the Consolidated Statement of Operations for current
and prior periods commencing in the period in which the business meets the
criteria of a discontinued operation, and include any gain or loss recognized on
closing or adjustment of the carrying amount to fair value less cost to sell.
During the fourth quarter of 2013, we sold substantially all of our structured
settlements business. The remaining balance of
Foreign Currency
The Company owns certain foreign subsidiaries formed under the laws of
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Reorganization and Consolidation
On
Lamington and its subsidiaries' (White Eagle and WEGP) filing of the Chapter 11
Cases was a reconsideration event for
On
On
On
Related Party Relationship
Upon filing for Chapter 11 and the subsequent deconsolidation, transactions with
Lamington are no longer eliminated in consolidation and are treated as related
party transactions for
Accounting Changes
Note 3, "Recent Accounting Pronouncements," of the Notes to Consolidated Financial Statements discusses accounting standards adopted in 2020, as well as accounting standards recently issued but not yet required to be adopted and the expected impact of these changes in accounting standards. Any material impact of adoption is discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Notes to the Consolidated Financial Statements.
Leases
At lease inception, the Company determines whether an arrangement is or contains a lease. Operating leases are included in operating lease right-of-use ("ROU") assets and operating lease liabilities in the consolidated financial statements. ROU assets represent the Company's right to use leased assets over the term of the lease. Lease liabilities represent the Company's contractual obligation to make lease payments over the lease term. For operating leases, ROU assets and lease liabilities are
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recognized at the commencement date. The lease liability is measured as the present value of the lease payments over the lease term. The Company uses the rate implicit in the lease if it is determinable. When the rate implicit in the lease is not determinable, the Company uses its incremental borrowing rate at the commencement date of the lease to determine the present value of the lease payments. Operating ROU assets are calculated as the present value of the remaining lease payments plus unamortized initial direct costs plus any prepayments less any unamortized lease incentives received. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised. The assessment of whether renewal or extension options are reasonably certain to be exercised is made at lease commencement.
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Selected Operating Data (dollars in thousands):
Three Months Three Months Ended February Ended February 29, 28, 2020 2019 End of Period - Policies Owned - Consolidated Number of policies owned - 2 Average age of insured - 77.9 Average death benefit per policy $ -$ 6,000 Average Life Expectancy - Calculated LE (Years) - 12.0 Aggregate Death Benefit $ -$ 12,000 Aggregate fair value $ -$ 1,213 Monthly premium - average per policy $ - $ 7.0 White Eagle Portfolio - Deconsolidated End of Period - Policies Owned Number of policies owned - 582 Average age of insured - 85 Average death benefit per policy $ -$ 4,731 Average Life Expectancy - Calculated LE (Years) - 8.8 Aggregate Death Benefit $ -$ 2,753,250 Aggregate fair value $ -$ 494,732 Monthly premium - average per policy $ - $ 15.0 Period Maturities Number of policies matured - 4 Average age of insured at maturity - 84.9 Average Life Expectancy - Calculated LE (Years) - 5.9 Aggregate death benefit $ -$ 23,000 Gains on maturity $ -$ 22,338 Proceeds collected $ -$ 14,000 Investment in Limited Partnership End of Period - Policies Owned Number of policies owned 524 - Average age of insured 85.5 - Average death benefit per policy$ 4,682 $ - Average Life Expectancy - Calculated LE (Years) 6.8 - Aggregate death benefit$ 2,453,152 $ - Monthly premium - average per policy $ 16.2 $ - Period Maturities* Number of policies matured 9 - Average age of insured at maturity 88.4 - Average Life Expectancy - Calculated LE (Years) 3.7 - Aggregate death benefit$ 46,900 $ - Gains on maturity$ 23,775 $ - Proceeds collected$ 33,126 $ -
*Subject to waterfall distribution as described in Note 11, Investment in Limited Partnership
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Results of Operations
The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our financial statements, including the related notes to the financial statements.
As a result of our subsidiaries' Chapter 11 Cases, Lamington's and its
subsidiaries' (White Eagle,
Our results of operations are discussed below in three parts: (i) our consolidated results of continuing operations for 2020 compared to 2019, (ii) our results of deconsolidated subsidiaries for 2019, and (iii) our results of discontinued operations 2020 compared to 2019.
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