EMERGENT CAPITAL, INC. - FORM 10-Q

EMERGENT CAPITAL, INC. - FORM 10-Q - November 10, 2014

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2014

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

Commission file number: 001-35064

IMPERIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Florida

30-0663473

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5355 Town Center Road—Suite 701

Boca Raton, Florida 33486

(Address of principal executive offices, including zip code)

(561) 995-4200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

As of November 3, 2014, the Registrant had 21,402,990 shares of common stock outstanding.

IMPERIAL HOLDINGS, INC.

FORM 10-Q REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS


	Page No.
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)		5
Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013		5
Consolidated Statements of Operations for the three months and nine months ended September 30, 2014 and 2013		6
Consolidated Statements of Comprehensive Income (Loss) for the three months and nine months ended September 30, 2014 and 2013		7
Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2014		8
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013		9
Notes to Consolidated Financial Statements		10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3. Quantitative and Qualitative Disclosures About Market Risk		42
Item 4. Controls and Procedures		43

PART II — OTHER INFORMATION

Item 1. Litigation		44
Item 1A. Risk Factors		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 3. Defaults Upon Senior Securities		45
Item 4. Mine Safety Disclosures		45
Item 5. Other Information		45
Item 6. Exhibits		45

“Forward Looking” Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that are subject to risks and uncertainties. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “will,” “should,” “can have,” “likely” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable as of the date made, results may prove to be materially different. Unless otherwise required by law, the Company disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this report.

Factors that could cause our actual results to differ materially from those indicated in our forward-looking statements include, but are not limited to, the following:

•

our results of operations;

•

continuing costs associated with indemnification and continuing cooperation obligations related to the investigation into our legacy premium finance business by the United States Attorneys’ Office for the District of New Hampshire (“USAO”) (the “USAO Investigation”), an investigation by the U.S. Securities and Exchange Commission (“SEC”) (the “SEC Investigation”) and an investigation by the Internal Revenue Services (“IRS”) (the “IRS Investigation”);

•

adverse developments, including financial ones, associated with the USAO Investigation, the SEC Investigation and the IRS Investigation, other litigation and judicial actions or similar matters;

•

our ability to continue to comply with the covenants and other obligations, including the conditions precedent for additional fundings, under our revolving credit facility;

•

our ability to receive distributions from policy proceeds from life insurance policies pledged as collateral under our revolving credit facility;

•

our ability to meet our debt service obligations;

•

our ability to continue to make premium payments on the life insurance policies that we own;

•

loss of business due to negative press from the non-prosecution agreement executed in connection with the USAO Investigation, the SEC Investigation, the IRS Investigation, litigation or otherwise;

•

increases to the discount rates used to value the life insurance policies that we own;

•

inaccurate estimates regarding the likelihood and magnitude of death benefits related to life insurance policies that we own;

•

changes in mortality rates and inaccurate assumptions about life expectancies;

•

changes in life expectancy calculation methodologies by third party medical underwriters;

•

changes to actuarial life expectancy tables;

•

lack of mortalities of insureds of the life insurance policies that we own;

•

increased carrier challenges to the validity of our owned life insurance policies;

•

delays in the receipt of death benefits from our portfolio of life insurance policies;

•

challenges to the ownership of the policies in our portfolio;

•

costs related to obtaining death benefits from our portfolio of life insurance policies;

•

the effect on our financial condition as a result of any lapse of life insurance policies;

•

deterioration of the market for life insurance policies and life settlements;

•

our ability to sell the life insurance policies we own at favorable prices, if at all;

•

adverse developments associated with uncooperative co-trustees;

•

loss of the services of any of our executive officers;

•

adverse court decisions regarding insurable interest and the obligation of a life insurance carrier to pay death benefits or return premiums upon a successful rescission or contest;

•

our inability to grow our businesses;

•

liabilities associated with our legacy structured settlement business;

•

changes in laws and regulations;

•

adverse developments in capital markets;

•

disruption of our information technology systems;

•

our failure to maintain the security of personally identifiable information pertaining to insureds, customers and counterparties;

•

regulation of life settlement transactions as securities;

•

our limited operating experience and our ability to successfully implement our acquisition and lending strategies;

•

deterioration in the credit worthiness of the life insurance companies that issue the policies included in our portfolio;

•

increases in premiums on life insurance policies that we own;

•

the effects of United States involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and

•

changes in general economic conditions, including inflation, changes in interest or tax rates and other factors.

All written and oral forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements. See “Risk Factors” below and in our Annual Report on Form 10-K for the year ended December 31, 2013. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks and uncertainties. The Company cautions you that the important factors referenced above may not contain all of the factors that are important to you.

All statements in this Form 10-Q to “Imperial,” “Company,” “we,” “us,” or “our” refer to Imperial Holdings, Inc. and its consolidated subsidiaries unless the context suggests otherwise.

Item 1

Financial Statements.

Imperial Holdings, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS


	September 30, 2014			December 31, 2013*
	(Unaudited)
	(In thousands except share data)
ASSETS
Assets
Cash and cash equivalents	$	53,745		$	14,722
Cash and cash equivalents (VIE Note 4)		4,647			7,977
Restricted cash		—			13,506
Prepaid expenses and other assets		1,717			1,331
Deposits - other		1,353			1,597
Deposits on purchase of life settlements		50			—
Structured settlement receivables, at estimated fair value		383			660
Structured settlement receivables at cost, net		599			797
Investment in life settlements, at estimated fair value		54,914			48,442
Investment in life settlements, at estimated fair value (VIE Note 4)		295,469			254,519
Receivable for maturity of life settlements (VIE Note 4)		—			2,100
Fixed assets, net		202			74
Investment in affiliates		2,385			2,378
Deferred debt costs, net		2,295			—

Total assets	$	417,759		$	348,103


LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses	$	5,209		$	2,977
Accounts payable and accrued expenses (VIE Note 4)		337			341
Other liabilities		1,039			21,221
Interest payable - senior unsecured convertible notes (Note 10)		768			—
Revolving Credit Facility debt, at estimated fair value (VIE Note 4)		142,661			123,847
Senior unsecured convertible notes, net of discount (Note 10)		55,250			—
Income taxes payable		—			6,295
Deferred tax liability		6,383			—

Total liabilities		211,647			154,681
Commitments and Contingencies (Note 13)
Stockholders’ Equity
Common stock (par value $0.01 per share, 80,000,000 authorized; 21,402,990 and 21,237,166 issued and outstanding as of September 30, 2014 and December 31, 2013, respectively)		214			212
Additional paid-in-capital		266,511			239,506
Accumulated deficit		(60,613	)		(46,296	)

Total stockholders’ equity		206,112			193,422

Total liabilities and stockholders’ equity	$	417,759		$	348,103

*	Derived from audited consolidated financial statements.

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

Imperial Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2014			2013			2014			2013
	(in thousands, except share and per share data)
Income
Interest income	$	9		$	—		$	22		$	28
Interest and dividends on investment securities available for sale		—			—			—			14
Loss on life settlements, net		—			(461	)		(426	)		(1,708	)
Change in fair value of life settlements (Notes 8 & 11)		(3,643	)		15,262			19,313			81,948
Servicing fee income		—			—			—			310
Other income		17			8			72			2,015

Total (loss) income		(3,617	)		14,809			18,981			82,607

Expenses
Interest expense		4,303			1,158			11,165			12,020
Loss on extinguishment of Bridge Facility		—			—			—			3,991
Change in fair value of Revolving Credit Facility debt (Notes 9 & 11)		(8,375	)		66			(4,556	)		(5,295	)
Change in fair value of conversion derivative liability (Notes 10 & 11)		—			—			6,759			—
Gain on loan payoffs and settlements, net		—			—			—			(65	)
Amortization of deferred costs		—			—			—			7
Personnel costs		1,910			1,924			6,627			6,216
Legal fees		2,943			3,271			9,121			11,254
Professional fees		1,143			1,503			3,562			3,564
Insurance		414			478			1,253			1,475
Other selling, general and administrative expenses		544			303			1,365			1,476

Total expenses		2,882			8,703			35,296			34,643

(Loss) income from continuing operations before income taxes		(6,499	)		6,106			(16,315	)		47,964
Benefit (provision) for income taxes		2,235			—			2,452			(40	)

Net (loss) income from continuing operations	$	(4,264	)	$	6,106		$	(13,863	)	$	47,924

Discontinued Operations:
(Loss) income from discontinued operations, net of income taxes	$	(249	)	$	55		$	(454	)	$	1,627

Net (loss) income	$	(4,513	)	$	6,161		$	(14,317	)	$	49,551

Earnings per share:
Basic and diluted earnings per common share
Continuing operations	$	(0.20	)	$	0.29		$	(0.65	)	$	2.26
Discontinued operations	$	(0.01	)		—		$	(0.02	)	$	0.08

Net (loss) income	$	(0.21	)	$	0.29		$	(0.67	)	$	2.34

Weighted average shares outstanding:

Basic weighted average common shares outstanding		21,361,930			21,219,880			21,352,086			21,215,344


Diluted weighted average common shares outstanding		21,361,930			21,223,027			21,352,086			21,215,392

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

Imperial Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2014			2013		2014			2013
	(In thousands)					(In thousands)

Net (loss) income	$	(4,513	)	$	6,161	$	(14,317	)	$	49,551
Other comprehensive income (loss), net of tax		—			—		—			3

Comprehensive (loss) income	$	(4,513	)	$	6,161	$	(14,317	)	$	49,554

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

Imperial Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

For the Nine Months Ended September 30, 2014


	Common Stock					Additional Paid-in Capital		Accumulated Deficit			Total
	Shares			Amount
	(in thousands, except share data)
Balance, January 1, 2014		21,237,166		$	212	$	239,506	$	(46,296	)	$	193,422
Comprehensive loss		—			—		—		(14,317	)		(14,317	)
Stock-based compensation		41,060			1		761		—			762
Issuance of common stock		125,628			1		499		—			500
Issuance of warrants		—			—		5,381		—			5,381
Pre-conversion tax adjustment		—			—		6,295		—			6,295
Retirement of common stock		(864	)		—		—		—			—
Reclassification of conversion derivative liability, net of tax		—			—		14,069		—			14,069

Balance, September 30, 2014		21,402,990		$	214	$	266,511	$	(60,613	)	$	206,112

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

Imperial Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine Months Ended September 30,
	2014			2013
	(In thousands)
Cash flows from operating activities
Net (loss) income	$	(14,317	)	$	49,551
Adjustments to reconcile net (loss) income to net cash used in operating activates:
Depreciation and amortization		59			142
Revolving Credit Facility origination cost		—			10,340
Revolving Credit Facility financing cost		4,238			995
Amortization of discount and deferred costs for senior unsecured convertible notes		1,648			—
Amortization of premiums and accretion of discounts on available for sale securities		—			21
Stock-based compensation expense		762			1,203
Gain on loan payoffs and settlements, net		—			(65	)
Change in fair value of life settlements		(19,313	)		(81,948	)
Unrealized change in fair value of structured settlements		(24	)		(1,211	)
Change in fair value of Revolving Credit Facility debt		(4,556	)		(5,295	)
Loss on life settlements, net		426			1,708
Interest income		(102	)		(220	)
Amortization of deferred costs		—			7
Loss on extinguishment of Bridge Facility		—			3,991
Gain on sale and prepayment of investment securities available for sale		—			(22	)
Change in fair value of warrants to be issued		—			2,478
Change in fair value of conversion derivative liability		6,759			—
Change in assets and liabilities:
Restricted cash		13,506			(13,502	)
Deposits - other		243			1,258
Investment in affiliates		(7	)		(148	)
Structured settlement receivables		578			1,687
Prepaid expenses and other assets		(413	)		12,461
Accounts payable and accrued expenses		2,512			2,453
Other liabilities		(14,301	)		(664	)
Interest receivable		—			95
Interest payable		768			—
Deferred income tax		(2,452	)		40

Net cash used in operating activities		(23,986	)		(14,645	)

Cash flows from investing activities
Purchase of fixed assets, net of disposals		(178	)		(4	)
Purchase of investments in life settlements		(3,488	)		(7,000	)
Proceeds from sale and prepayments of investment securities available for sale		—			12,111
Proceeds from maturity of investment in life settlements		13,641			6,039
Premiums paid on investments in life settlements		(40,578	)		(50,984	)
Proceeds from surrender of investments in life settlements		—			1,049
Proceeds from sale of investments in life settlements, net		4,031			1,764
Deposit on purchase of investment in life settlement		(50	)		—
Proceeds from loan payoffs and lender protection insurance claims received in advance		—			691

Net cash used in investing activities		(26,622	)		(36,334	)

Cash flows from financing activities
Revolving Credit and Bridge Facility origination cost		—			(6,731	)
Borrowings from Revolving Credit Facility		36,004			66,584
Repayment of borrowings under Revolving Credit Facility		(17,595	)		—
Restricted cash		—			1,162
Borrowings from Bridge Facility		—			41,400
Repayment of borrowings under Bridge Facility		—			(45,000	)
Proceeds from senior unsecured convertible notes, net		67,892			—

Net cash provided by financing activities		86,301			57,415


Net increase in cash and cash equivalents		35,693			6,436
Cash and cash equivalents, at beginning of the period		22,699			7,001

Cash and cash equivalents, at end of the period	$	58,392		$	13,437


Supplemental disclosures of cash flow information:
Cash paid for interest during the period	$	4,496		$	825

Supplemental disclosures of non-cash investing activities:
Investment in life settlements acquired in foreclosure	$	—		$	3,168

Supplemental disclosures of non-cash financing activities:
Interest payment and fees withheld from borrowings by lender	$	4,962		$	995

Credit facility origination costs paid to lender	$	—		$	4,000

Purchase of policies through release of subrogation claim paid by lender	$	—		$	48,500

Reclassification of derivative liability	$	14,069		$	—

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

Imperial Holdings, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2014

(1) Description of Business

Founded in December 2006 as a Florida limited liability company, Imperial Holdings, LLC, converted into Imperial Holdings, Inc. (with its subsidiaries, the “Company” or “Imperial”) on February 3, 2011, in connection with the Company’s initial public offering.

Incorporated in Florida, Imperial owns a portfolio of 595 life insurance policies, also referred to as life settlements, with a fair value of $350.4 million and an aggregate death benefit of approximately $2.9 billion at September 30, 2014. The Company primarily earns income on these policies from changes in their fair value and through death benefits. 452 of these policies, with an aggregate death benefit of approximately $2.3 billion, are pledged under a 15-year revolving credit agreement (the “Revolving Credit Facility”) entered into by the Company’s indirect subsidiary, White Eagle Asset Portfolio, LP (“White Eagle”).

(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. 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 subsidiaries in connection with the Revolving Credit Facility. Notwithstanding consolidation, White Eagle is the owner of 452 policies, with an aggregate death benefit of approximately $2.3 billion and an estimated fair value of approximately $295.5 million at September 30, 2014.

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 and nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for future periods or for the year ended December 31, 2014. These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Imperial’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Derivative Instruments

The Company issued and sold $70.7 million in aggregate principal amount of 8.50% senior unsecured convertible notes due 2019 (the “Notes”). Prior to shareholder approval on June 5, 2014 to issue shares of common stock upon conversion of the Notes in excess of New York Stock Exchange limits for share issuances without shareholder approval, the 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 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 Notes. The Notes are recorded at accreted value and will continue to be accreted up to the par value of the Notes at maturity. See Note 10, 8.50% Senior Unsecured Convertible Notes.

Foreign Currency

The Company’s foreign subsidiaries are considered to be extensions of the U.S. Company and the U.S. dollar is utilized as the functional currency. The foreign subsidiaries’ financial statements are denominated in U.S. dollars and therefore, there are no translation gains and losses resulting from converting the financial statements at exchange rates other than the functional currency. Any gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries’ functional currency) are included in income. At this time, these gains and losses are immaterial to the Company’s financial statements.

Use of Estimates

The preparation of these consolidated financial statements, in conformity with generally accepted accounting principles 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 investments in life settlements, the valuation of the debt owing under the Revolving Credit Facility, the valuation of equity awards and the valuation of the conversion derivative liability formerly embedded within the Company’s Notes.

(3) Recent Accounting Pronouncements

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires, unless certain conditions exist, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013. Retrospective application is permitted. The Company adopted ASU 2013-11 effective on January 1, 2014, which required the Company to reclassify a $6.3 million current liability for unrecognized tax benefits to deferred taxes. Adoption of this guidance resulted in the recognition of a $3.7 million tax expense in the Company’s consolidated financial statement of operations for the nine months ended September 30, 2014, a $2.6 million reduction in the valuation allowance and an increase to additional paid-in-capital of $6.3 million on the Company’s consolidated balance sheet and consolidated statement of stockholders’ equity as of September 30, 2014.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective in the first quarter of 2015 for public business entities with calendar year ends. Early adoption is permitted. The Company is currently in the process of evaluating the impact, if any, of the adoption on its consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which converges the FASB and the International Accounting Standards Board 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. This is effective for the fiscal years and interim reporting periods beginning after December 15, 2016. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our consolidated financial statements or related disclosures.

(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 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 consolidated financial statements as of September 30, 2014 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
September 30, 2014	$	300,116	$	142,998	$	2,385		$2,385
December 31, 2013	$	264,596	$	124,188	$	2,378		$2,378

As of September 30, 2014, 452 life insurance policies owned by White Eagle with an aggregate death benefit of approximately $2.3 billion and an estimated fair value of approximately $295.5 million were pledged as collateral under the Revolving Credit Facility. Effective May 16, 2014, a foreign subsidiary acts as portfolio manager for life insurance policies owned by White Eagle and it was determined that the Company will continue to be the primary beneficiary of White Eagle as it has a controlling financial interest and the Company’s subsidiaries have the power to direct the activities that most significantly impacted White Eagle’s economic performance and the obligation to absorb economic gains and losses. In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, the Company consolidated White Eagle in its financial statements for the three months and nine months ended September 30, 2014 and the year ended December 31, 2013.

(5) Earnings Per Share

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. In determining whether outstanding stock options, restricted stock, warrants and Notes should be considered for their dilutive effect, the average market price of the common stock for the period has to exceed the exercise price of the outstanding common share equivalent.

The following tables reconcile actual basic and diluted earnings per share for the three months and nine months ended September 30, 2014 and 2013 (in thousands except share and per share data).


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2014(1)			2013(2)		2014(1)			2013(2)
Earnings per share:
Numerator:
Net (loss) income from continuing operations	$	(4,264	)	$	6,106	$	(13,863	)	$	47,924
Net (loss) income income from discontinued operations	$	(249	)	$	55	$	(454	)	$	1,627

Net (loss) income	$	(4,513	)	$	6,161	$	(14,317	)	$	49,551

Basic earnings per common share:
Basic (loss) income from continuing operations	$	(0.20	)	$	0.29	$	(0.65	)	$	2.26
Basic (loss )income from discontinued operations	$	(0.01	)		—	$	(0.02	)	$	0.08

Basic (loss) income per share available to common shareholders	$	(0.21	)	$	0.29	$	(0.67	)	$	2.34
Denominator:

Basic weighted average common shares outstanding		21,361,930			21,219,880		21,352,086			21,215,344

Diluted earnings per per common share:
Diluted (loss) income from continuing operations.	$	(0.20	)	$	0.29	$	(0.65	)	$	2.26
Diluted (loss) income from discontinued operations	$	(0.01	)	$	—	$	(0.02	)	$	0.08

Diluted (loss) income per share available to common shareholders	$	(0.21	)	$	0.29	$	(0.67	)	$	2.34
Denominator:
Weighted average common shares outstanding		21,361,930			21,219,880		21,352,086			21,215,344
Add: Restricted Stock		—			3,147		—			48

Diluted weighted average shares outstanding		21,361,930			21,223,027		21,352,086			21,215,392

(1)

The computation of diluted EPS does not include 815,448 options, 6,240,521 warrants, 41,060 shares of restricted stock, up to 10,464,941 shares of underlying common stock issuable upon conversion of the Notes and 299,500 performance shares for the three months and nine months ended September 30, 2014, as the effect of their inclusion would have been anti-dilutive.

(2)	The computation of diluted EPS did not include 899,472 options, and 4,240,521 warrants for the three months and nine months ended September 30, 2013, as the effect of their inclusion would have been anti-dilutive.

(6) Stock-based Compensation

In 2011, the Company established the Imperial Holdings 2011 Omnibus Incentive Plan (the “Omnibus Plan”) to attract, retain and motivate participating employees and to attract and retain well-qualified individuals to serve as members of the board of directors, consultants and advisors through the use of incentives based upon the value of our common stock. 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. The Omnibus Plan provides that an aggregate of 1,200,000 shares of common stock are reserved for issuance under the Omnibus Plan, subject to adjustment as provided in the Omnibus Plan. The outstanding options issued in 2011 expire seven years after the date of grant and were granted with a strike price of $10.75, which was the offering price of our initial public offering or fair market value (closing price) of the stock on the date of grant and vest over three years.

On April 1, 2013, the Company granted 13,759 shares of unrestricted common stock to its outside directors with an aggregate grant date fair value of approximately $57,000 computed in accordance with ASC 718, Compensation-Stock Compensation. During the year ended December 31, 2013, the Company issued 545,000 options to employees at a strike price of $6.94. The Company recognized approximately $140,000 and $118,000 in stock-based compensation expense relating to stock options it granted under the Omnibus Plan during the three months ended September 30, 2014 and 2013, respectively and $632,000 and $1.1 million during the nine months ended September 30, 2014 and 2013, respectively. The Company incurred additional stock-based compensation expense of approximately $61,000 and $30,000 relating to restricted stock granted to its board of directors during the three months ended September 30, 2014 and 2013, respectively and $130,000 and $39,000 during the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, the Company awarded 299,500 target performance shares for restricted common stock to its directors and certain employees, of which 150,000 shares are subject to shareholder approval of an amendment to the Omnibus Plan at the Company’s 2015 annual meeting. The issuance of the performance shares is 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. The Company will evaluate on a quarterly basis whether it is probable that the Company’s financial performance conditions will be achieved. At September 30, 2014, the Company determined that it was not probable that the performance conditions would be achieved and as a result, no related expense was recognized for the three and nine months ended September 30, 2014. Once issued, the performance shares will be subject to a one year vesting period from the date of issuance.

Options

As of September 30, 2014, options to purchase 815,448 shares of common stock were outstanding and unexercised under the Omnibus Plan at a weighted average exercise price of $8.49 per share.

The following table presents the activity of the Company’s outstanding stock options of common stock for the nine months ended September 30, 2014:


Common Stock Options	Number of Shares			Weighted Average Price per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Options outstanding, January 1, 2014		831,282		$	8.46		5.51		—
Options granted		—			—		—		—
Options exercised		—			—		—		—
Options forfeited		(15,834	)	$	6.94		5.68		—
Options expired		—			—		—		—

Options outstanding, September 30, 2014		815,448		$	8.49		4.74		—

Exercisable at September 30, 2014		654,740		$	8.87		4.51		—

Unvested at September 30, 2014		160,708		$	6.94		5.68		—

As of September 30, 2014, all outstanding stock options had an exercise price above the average fair market value of the common stock during the nine months ended September 30, 2014.

During the three months and nine months ended September 30, 2014, the Company recognized expense of $140,000 and $632,000, respectively related to these options. The remaining unamortized amounts in respect of the June 5, 2013 option grants of approximately $140,000 and $239,000 will be expensed during the remainder of 2014 and 2015, respectively.

Restricted Stock

17,286 shares of restricted stock granted to our directors under the Omnibus Plan vested during the nine months ended September 30, 2014. The fair value of the vested restricted stock was valued at $120,138 based on the closing price of the Company’s shares on the grant date. The Company expensed approximately $0 and $52,000 in stock based compensation related to the 17,286 shares of restricted stock during the three months and nine months ended September 30, 2014, respectively.

During the nine months ended September 30, 2014, the Company granted 41,060 shares of restricted stock to its directors under the Omnibus Plan subject to a one year vesting schedule that commenced on the date of grant. The fair value of the unvested restricted stock was valued at $254,983 based on the closing price of the Company’s shares on the day prior to the grant date. The Company incurred additional stock-based compensation expense of approximately $61,000 and $78,000 related to these 41,060 shares of restricted stock during the three months and nine months ended September 30, 2014, respectively.

The following table presents the activity of the Company’s restricted stock for the nine months ended September 30, 2014:


Common Unvested Shares	Number of Shares
Outstanding January 1, 2014		17,286
Granted		41,060
Vested		(17,286	)
Forfeited		—

Outstanding September 30, 2014		41,060

The aggregate intrinsic value of unvested restricted stock awards is approximately $265,000 and the stock will vest in June 2015.

Performance Shares

During the nine months ended September 30, 2014, the Company awarded 299,500 target performance shares for restricted common stock to its directors and certain employees, of which 150,000 shares are subject to shareholder approval of an amendment to the Omnibus Plan at the Company’s 2015 annual meeting. The issuance of the performance shares is 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. At September 30, 2014, the Company determined that it was not probable that the performance conditions would be achieved and no related expense was recognized for the quarter or nine months ended September 30, 2014. Once issued, the performance shares will be subject to a one year vesting period from the date of issuance.

The following table presents the activity of the Company’s performance share awards for the nine months ended September 30, 2014:


Performance Shares	Number of Shares
Outstanding January 1, 2014		—
Awarded		299,500
Vested		—
Forfeited		—

Outstanding September 30, 2014		299,500

Warrants

On February 11, 2011, three shareholders received ownership of 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 the exercisability of the warrant will vest ratably over four years. At September 30, 2014, 3,180,391 warrants were exercisable with a weighted average exercise price of $14.51.

In connection with the class action settlement described in Note 13, Commitments and Contingencies, the Company issued warrants to purchase two million 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 are 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 for gross proceeds of $12.0 million. The Company’s decision to sell the division was to focus on the life settlements business. No structured settlement receivables were sold and no on-balance sheet liabilities were transferred in connection with the sale. This sale resulted in the recognition of a gain of $11.3 million in the fourth quarter of 2013.

As a result of the sale, the Company retrospectively reclassified its structured settlement business operating results as discontinued operations, net of income taxes, in the accompanying Consolidated Statements of Operations for all periods presented and the Company has discontinued segment reporting. All other footnotes in these financial statements that were affected by this reclassification of discontinued operations have been updated accordingly.

Operating results related to the Company’s discontinued structured settlement business are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Total income	$	38		$	2,698		$	150		$	10,366
Total expenses		(287	)		(2,643	)		(604	)		(8,739	)

(Loss) income before income taxes		(249	)		55			(454	)		1,627
Income tax expense		—			—			—			—

Net (loss) income from discontinued operations	$	(249	)	$	55		$	(454	)	$	1,627

(8) Investment in 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 fair value in earnings in the period in which the changes occur.

As of September 30, 2014 and December 31, 2013, the Company owned 595 and 612 policies, respectively, with an aggregate estimated fair value of investments in life settlements of $350.4 million and $303.0 million, respectively.

The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the Company at September 30, 2014 was 11.0 years. The following table describes the Company’s investments in life settlements as of September 30, 2014 (dollars in thousands):


Remaining Life Expectancy (In Years)	Number of Life Settlement Contracts		Fair Value		Face Value
0 - 1		—	$	—	$	—
1 - 2		2		3,727		5,377
2 - 3		11		26,135		46,957
3 - 4		9		11,642		29,800
4 - 5		15		21,145		63,854
Thereafter		558		287,734		2,742,301

Total		595	$	350,383	$	2,888,289

The weighted average life expectancy calculated based on death benefit of insureds in the policies owned by the Company at December 31, 2013 was 11.6 years. The following table describes the Company’s investments in life settlements as of December 31, 2013 (dollars in thousands):


Remaining Life Expectancy (In Years)	Number of Life Settlement Contracts		Fair Value		Face Value
0 - 1		—	$	—	$	—
1 - 2		—		—		—
2 - 3		6		8,489		16,875
3 - 4		10		14,171		38,100
4 - 5		8		13,529		40,250
Thereafter		588		266,772		2,859,665

Total		612	$	302,961	$	2,954,890

This table is not intended to reflect the cash flow pattern expected over the life of the policies; the Company projects its cash flows using a probabilistic approach. The life expectancies represent the average number of years of life remaining on individuals with similar characteristics including age and gender.

Estimated premiums to be paid for the remainder of fiscal year 2014, the four succeeding fiscal years, and thereafter to keep the life insurance policies in force as of September 30, 2014, are as follows (in thousands):


Remainder of 2014	$	13,436
2015		53,625
2016		57,116
2017		63,683
2018		67,945
Thereafter		1,145,526

	$	1,401,331

The amount of $1.4 billion noted above represents the estimated total future premium payments required to keep the life insurance policies in force utilizing the Company’s probabilistic approach 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 actual mortalities of insureds differs from the estimated life expectancies.

(9) 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, White Eagle entered into an Amended and Restated Loan and Security Agreement (the “Revolving Credit Facility”) 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 Revolving Credit Facility amended and restated the revolving credit facility previously entered into by White Eagle on April 29, 2013.

In connection with the entry into the amended and restated Revolving Credit Facility, a new servicing agreement with respect to the policies pledged under the facility has been entered into with a third party. Prior to the amendment and restatement, a corporate subsidiary acted as servicer.

General & Security. The Revolving Credit Facility provides for an asset-based revolving credit facility backed by White Eagle’s portfolio of life insurance policies with an initial aggregate lender commitment of up to $300.0 million, subject to borrowing base availability. 452 life insurance policies with an aggregate death benefit of approximately $2.3 billion and an estimated fair value of approximately $295.5 million are pledged as collateral under the Revolving Credit Facility at September 30, 2014. In addition, the equity interests in White Eagle have been pledged under the Revolving Credit Facility.

Borrowing Base. Borrowing availability under the 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 or 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 September 30, 2014, $143.4 million was undrawn and $2.6 million was available to borrow under the Revolving Credit Facility.

Amortization & Distributions. Proceeds from the policies pledged as collateral under the Revolving Credit Facility will be distributed pursuant to a waterfall. Absent an event of default, after premium payments and fees to service providers, 100% of the remaining proceeds will be directed to pay outstanding interest and principal on the loan, unless the lenders determine otherwise. Generally, after payment of interest and principal, collections from policy proceeds are to be paid to White Eagle up to $76.1 million, then 50% of the remaining proceeds are to be directed to the lenders with the remainder paid to White Eagle and for any unpaid fees to service providers. With respect to approximately 25% of the face amount of policies pledged as collateral under the 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 in respect of 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.

Use of Proceeds. Generally, ongoing advances may be made for paying premiums on the life insurance policies pledged as collateral, to pay debt service (other than a “rate floor” component equal to the greater of LIBOR (or the applicable base rate) and 1.5%), and to pay the fees of service providers. Subsequent advances in respect of newly pledged policies are at the discretion of the lenders and the use of proceeds from those advances are at the discretion of the lenders.

Interest. Borrowings under the 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 4.00% and subject to the rate floor described above. The base rate under the 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%. The effective rate at September 30, 2014 is 5.5%.

Interest expense for the cash portion of 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 Revolving Credit Facility debt. Total interest expense on the facility was $2.1 million, which includes $1.5 million withheld from borrowings by the lender and $573,000 paid by White Eagle, for the three months ended September 30, 2014 and $5.8 million, which includes $4.2 million withheld from borrowings by the lender and $1.6 million paid by White Eagle, for the nine months ended September 30, 2014.

Maturity. The term of the Revolving Credit Facility expires April 28, 2028, 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 Revolving Credit Facility or expiration of the lenders’ commitments.

Covenants/Events of Defaults. The 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 Revolving Credit Facility (including in relation to breached by third parties thereunder), certain changes in law, changes in control of or insolvency or bankruptcy of the Company and relevant subsidiaries and performance of certain obligations by certain relevant subsidiaries, White Eagle and third parties. The Revolving Credit Facility does not contain any financial covenants, but does contain 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 Revolving Credit Facility and ancillary transaction documents afford the lenders a high degree of discretion in their selection of and implementation of remedies 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.

We have elected to account for the debt under the Revolving Credit Facility, which includes the 50% 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. 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 different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.

At September 30, 2014, the fair value of the outstanding debt was $142.7 million and the borrowing base was approximately $159.1 million, including $156.6 million in outstanding principal.

There are no scheduled repayments of principal prior to maturity. Payments are due upon receipt of death benefits and distributed pursuant to the waterfall as described above.

(10) 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 Notes were sold, in part, to certain accredited investors pursuant to Regulation D under the Securities Act of 1933 and, in part, to an initial purchaser who then resold such Notes to qualified institutional buyers pursuant to Rule 144A of the Securities Act of 1933. The Notes were issued pursuant to an indenture dated February 21, 2014, between the Company and U.S. Bank National Association, as trustee (the “Indenture”). Two members of our Board of Directors, Messrs. Dakos and Goldstein, are affiliated with Bulldog Investors, LLC, who purchased Notes in the aggregate principal amount of $9.2 million in the offering.

The Notes are general senior unsecured obligations and rank equally in right of payment with all of our other existing and future senior unsecured indebtedness. The Notes are effectively subordinate to all of our secured indebtedness to the extent of the value of the assets collateralizing such indebtedness. The Notes are not guaranteed by our subsidiaries.

The maturity date of the Notes is February 15, 2019. The Notes accrue interest at the rate of 8.50% per annum on the principal amount of the Notes, payable semi-annually in arrears on August 15 and February 15 of each year with the first interest payment on August 15, 2014.

The 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. The Notes may be converted into shares of common stock initially at a conversion rate of 147.9290 shares of common stock per $1,000 principal amount of Notes (equivalent to a conversion price of $6.76 per share of common stock), subject to adjustment.

The Company may not redeem the Notes prior to February 15, 2017. On and after February 15, 2017, and prior to the maturity date, the Company may redeem for cash all, but not less than all, of the 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 Notes, plus any accrued and unpaid interest to, but excluding, the redemption date. In addition, if we call the Notes for redemption, a make-whole fundamental charge will be deemed to occur. As a result, we 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 Notes, prior to June 5, 2014, that was required to be separately accounted for as a derivative under ASC 815 which required the Company to bifurcate the embedded conversion option and record it as a liability at fair value and record a debt discount by an equal amount with changes in the fair value of the conversion derivative liability recorded in earnings and the discount on the debt liability, together with the stated interest on the instrument, amortized to interest expense over the life of the debt using the effective interest method.

On June 5, 2014, the Company obtained shareholder approval to issue shares of common stock upon conversion of the Notes in an amount that exceeded applicable New York Stock Exchange limits for issuances without shareholder approval. In accordance with ASC 815, the Company reclassified the embedded conversion derivative liability to equity along with unamortized transaction costs proportionate to the allocation of the initial debt discount and the principal amount of the Notes. The Notes are recorded at accreted value and will continue to be accreted up to the par value of the Notes at maturity.

The fair value of the conversion derivative liability was estimated at June 5, 2014 using a Black Scholes pricing model with the following assumptions:


	As of June 5, 2014
Expected Volatility		40.0	%
Expected Term in Years		4.7
Risk Free Rate		1.5	%

At June 5, 2014, the fair value of the conversion derivative liability was $23.7 million. In accordance with ASC 815, the Company reclassified this amount along with $756,000 of unamortized transaction costs offset by deferred taxes of $8.8 million to stockholders’ equity. As of September 30, 2014, the carrying value of the Notes was $55.3 million. The unamortized debt discount and origination cost of $15.5 million and $2.3 million, respectively, will be amortized over the remaining life of the Notes, using the effective interest method.

The Company recorded $2.2 million of interest expense, including $1.5 million, $605,000 and $90,000 from interest, amortizing debt discounts and issuance costs, during the three months ended September 30, 2014 and $5.3 million of interest expense, including $3.7 million, $1.4 million and $239,000 from interest, amortizing debt discounts and issuance costs, during the nine months ended September 30, 2014.

During the nine months ended September 30, 2014, the Company recorded a loss on the change in fair value of the conversion derivative liability of $6.8 million.

(11) Fair Value Measurements

We carry investments in life settlements, certain structured settlements, and our Revolving Credit Facility debt at fair value 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 and liabilities measured at fair value on a recurring basis as of September 30, 2014, are as follows (in thousands):


	Level 1		Level 2		Level 3		Total Fair Value
Assets:
Investment in life settlements	$	—	$	—	$	350,383	$	350,383
Structured settlement receivables		—		—		383		383

	$	—	$	—	$	350,766	$	350,766


	Level 1		Level 2		Level 3		Total Fair Value
Liabilities:
Revolving Credit Facility debt	$	—	$	—	$	142,661	$	142,661

	$	—	$	—	$	142,661	$	142,661

The balances of the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2013, are as follows (in thousands):


	Level 1		Level 2		Level 3		Total Fair Value
Assets:
Investment in life settlements	$	—	$	—	$	302,961	$	302,961
Structured settlement receivables		—		—		660		660

	$	—	$	—	$	303,621	$	303,621


	Level 1		Level 2		Level 3		Total Fair Value
Liabilities:
Revolving Credit Facility debt	$	—	$	—	$	123,847	$	123,847

	$	—	$	—	$	123,847	$	123,847

The Company values its investment in life settlement portfolio in two classes, non-premium financed and premium financed. In considering the categories, it is 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.

($ in thousands)

Quantitative Information about Level 3 Fair Value Measurements

Fair Value
at 9/30/14

Aggregate
death benefit
at 9/30/14

Valuation Technique (s)

Unobservable Input

Range
(Weighted Average)

Non-premium financed

52,909

220,802

Discounted cash flow

Discount rate
Life expectancy evaluation

14.80% - 20.80%

(8.1 years)

Premium financed

297,474

2,667,487

Discounted cash flow

Discount rate Life
expectancy evaluation

16.55% - 26.55%
(11.2 years)

Investment in life settlements

350,383

2,888,289

Discounted cash flow

Discount rate Life
expectancy evaluation

(18.56)%

(11.0 years)

Structured settlements receivables

383

N/A

Discounted cash flow

Facility sales discount rates

8.66%

Revolving Credit Facility debt

142,661

N/A

Discounted cash flow

Discount rate Life
expectancy evaluation

24.01% *

(10.5 years)

Actual

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.

Investment in 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 our investments in 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 we believe 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 independent secondary market life expectancy providers (each, an “LE provider”). 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. The debit or credit that an LE provider assigns to a medical condition is derived from the experience of mortality attributed to this condition 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.

Beginning in the quarter ended September 30, 2012, the Company began using the 2008 Valuation Basic Table (“2008 VBT”), a mortality table developed by the U.S. Society of Actuaries. The mortality table is created based on the expected rates of death among groups categorized by gender, age, and smoking status. Since the Company uses the 2008 VBT, the Company calculates its own mortality factor that, when applied to the 2008 VBT, produces the same life expectancy provided by each LE providers. The resulting mortality factors are then blended to determine a factor for each insured.

To generate best estimate probabilistic cash flow stream, a mortality curve is generated by calculating the probability of mortality for each period based on the calculated mortality factors and the death rates from the 2008 VBT. The company modifies the table by incorporating future mortality improvements to better reflect the curves used by the LE providers.

A discounted present value calculation is then used to determine the value of the policy. 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. Based on these considerations, each possible outcome is assigned a probability and the range of possible outcomes is then used to create a value for the policy.

The Company currently obtains its life expectancy reports from two life expectancy report providers, AVS Underwriting LLC (“AVS”) and 21st Services, LLC (“21st Services”).

In the first quarter of 2013, 21st Services announced revisions to its underwriting methodology. According to 21st Services, these revisions have generally been understood to lengthen the average reported life expectancy furnished by this life expectancy provider by 19%. As of September 30, 2014, the Company received 370 updated life expectancy reports from 21st Services, of which 332 were used to calculate life expectancy extension. These life expectancies reported an average lengthening of life expectancies of 15.80% and, based on this sample, for the nine months ended September 30, 2014, the Company increased the life expectancies furnished by 21st Services by 15.80% on the rest of its portfolio of life settlements prior to blending them with the life expectancy reports furnished by AVS. The Company expects to continue to lengthen life expectancies furnished by 21st Services that have not been re-underwritten using their updated methodology. Since the Revolving Credit Facility necessitates that the Company procure updated life expectancies on a periodic basis, the number of policies that are lengthened by the Company in this manner will decrease over time and the fair value calculations in future periods will, accordingly, reflect the actual impact of the revised 21st Services methodology on a policy by policy basis as updated life expectancy reports are procured.

Life expectancy sensitivity analysis

If all of the insured lives in the Company’s life settlement portfolio live 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	$	294,789	$	(55,594	)
-		350,383	$	—
-6	$	411,117	$	60,734

Future changes in life expectancies could have a material effect on the fair value of our investment in life settlements, which could have a material adverse effect on our business, financial condition and results of operations.

Discount rate

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 potential financing sources and extrapolates the discount rate underlying actual sales of policies.

Due to the Company’s association with the USAO Investigation and certain civil litigation involving the Company, the Company believes 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. 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 associated with its legacy premium finance business.

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 September 30, 2014, the Company had nineteen life insurance policies issued by two 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 our investments in life settlements as of September 30, 2014:


Carrier	Percentage of Total Fair Value			Percentage of Total Death Benefit			Moody’s Rating			S&P Rating
Transamerica Occidental Life Insurance Company		24.1	%		20.6	%		A1			AA-
Lincoln National Life Insurance Company		22.5	%		20.3	%		A1			AA-
Lincoln Benefit Life Company		10.7	%		10.0	%		NR	*		BBB+

Not Rated

Estimated risk premium

As of September 30, 2014, the Company owned 595 policies with an aggregate investment in life settlements of $350.4 million. Of these 595 policies, 550 were premium financed and are valued using discount rates that range from 16.55% to 26.55%. The remaining 45 policies, which are non-premium financed, are valued using discount rates that range from 14.80% to 20.80%. As of September 30, 2014, the weighted average discount rate calculated based on death benefit used in valuing the policies in our life settlement portfolio was 18.56%.

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 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 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
18.06%		-0.50	%	$	360,030	$	9,647
18.56%		—		$	350,383	$	—
19.06%		+0.50	%	$	341,171	$	(9,212	)

Future changes in the discount rates we use to value life insurance policies could have a material effect on our 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.

Structured settlement receivables—All structured settlements that were acquired subsequent to July 1, 2010 were marked to fair value. We made this election because it was our intention to sell these assets within twelve months of acquisition. Structured settlements are purchased at effective yields that are fixed. Purchase discounts are accreted into interest income using the effective-interest method for those structured settlements marked to fair value. As of September 30, 2014, the Company had 17 structured settlements with an estimated fair value of $383,000 and an average sales discount rate of 8.66%.

Revolving Credit Facility debt—In connection with the Revolving Credit Facility, 452 policies are pledged by White Eagle to serve as collateral for its obligations under the facility. Absent an event of default under the Revolving Credit Facility, ongoing borrowings will be used to pay the premiums on these policies and certain approved third party expenses. Proceeds from the policies pledged as collateral will be distributed pursuant to a waterfall. After premium payments and fees to service providers, 100% of the remaining proceeds will be directed to pay outstanding principal and interest on the loan. Generally, after payment of principal and interest, collections from policy proceeds are to be paid to White Eagle up to $76.1 million, then 50% of the remaining proceeds are to

be directed to the lenders with the remainder paid to White Eagle. We have elected to account for this long-term debt, which includes the lender’s interest in policy proceeds, 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 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.

Life expectancy sensitivity analysis of Revolving Credit Facility debt

A considerable portion of the fair value of the Revolving Credit Facility debt 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 Revolving Credit Facility live six months shorter or longer than the life expectancies used to calculate the estimated fair value of the Revolving Credit Facility debt, the change in estimated fair value would be as follows (dollars in thousands):


Life Expectancy Months Adjustment	Fair Value of Revolving Credit Facility Debt		Change in Value
+6	$	121,547	$	(21,114	)
-	$	142,661	$	—
-6	$	165,172	$	22,511

Future changes in the life expectancies could have a material effect on the fair value of our Revolving Credit Facility debt, which could have a material adverse effect on our business, financial condition and results of operations.

Discount rate of Revolving Credit Facility debt

The discount rate incorporates current information about market interest rates, credit exposure to insurance companies and our estimate of the return a lender lending against the policies would require.

Market interest rate sensitivity analysis of Revolving Credit Facility debt

The extent to which the fair value of the Revolving Credit Facility debt 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 Revolving Credit Facility debt as of September 30, 2014 would be as follows (dollars in thousands):


Discount Rate	Rate Adjustment			Fair Value of Revolving Credit Facility Debt		Change in Value
23.51%		-0.50	%	$	145,394	$	2,733
24.01%		—		$	142,661	$	—
24.51%		+0.50	%	$	140,020	$	(2,641	)

Future changes in the discount rates could have a material effect on the fair value of our Revolving Credit Facility debt, which could have a material adverse effect on our business, financial condition and results of our operations.

At September 30, 2014, the fair value of the debt was $142.7 million and the outstanding principal was approximately $156.6 million.

Senior Unsecured Convertible Notes- The Company determined that an embedded conversion option in the 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 on June 5, 2014, 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 Notes. The Notes continue to be recorded at accreted value up to the par value of the Notes at maturity. See Note 10, “8.50% Senior Unsecured Convertible Notes.” Although we believe our 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 nine months ended September 30, 2014, for assets for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):


Life Settlements:
Balance, January 1, 2014	$	302,961
Purchase of policies	$	3,488
Change in fair value		19,313
Matured/lapsed/sold policies		(15,957	)
Premiums paid		40,578
Transfers into level 3
Transfer out of level 3		—

Balance, September 30, 2014	$	350,383

Changes in fair value included in earnings for the period relating to assets held at September 30, 2014	$	8,627

The following tables provide a roll-forward in the changes in fair value for nine months ended September 30, 2014, for all liabilities for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):


Revolving Credit Facility debt:
Balance, January 1, 2014	$	123,847
Subsequent Draws under the revolving credit facility		40,965
Payments on credit facility		(17,595	)
Unrealized change in fair value		(4,556	)
Transfers into level 3		—
Transfer out of level 3		—

Balance, September 30, 2014	$	142,661

Changes in fair value included in earnings for the period relating to liabilities held at September 30, 2014	$	(4,556	)


Conversion derivative liability:
Balance, at inception		16,901
Change in fair value		6,759
Reclassified to equity		(23,660	)
Transfers into level 3		—
Transfer out of level 3		—

Balance, September 30, 2014	$	—

Changes in fair value included in earnings for the period relating to liabilities held at September 30, 2014	$	—

The following table provides a roll-forward in the changes in fair value for nine months ended September 30, 2013, for all assets for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):


Life Settlements:
Balance, January 1, 2013	$	113,441
Purchase of policies	$	55,500
Acquired in foreclosure		3,168
Change in fair value		81,948
Matured/lapsed/sold policies		(12,658	)
Premiums paid		50,984
Transfers into level 3		—
Transfer out of level 3		—

Balance, September 30, 2013		292,383

Changes in fair value included in earnings for the period relating to assets held at September 30, 2013	$	74,655

The following table provides a roll-forward in the changes in fair value for nine months ended September 30, 2013, for all liabilities for which the Company determines fair value using a material level of unobservable (Level 3) inputs (in thousands):


Revolving Credit Facility debt:
Balance, January 1, 2013	$	—
Initial advance under the revolving credit facility	$	83,020
Subsequent Draws under the revolving credit facility		37,059
Unrealized change in fair value		(5,295	)
Transfers into level 3		—
Transfer out of level 3		—

Balance, September 30, 2013	$	114,784

Changes in fair value included in earnings for the period relating to liabilities held at September 30, 2013	$	(5,295	)

There were no transfers of financial assets or liabilities between levels of the fair value hierarchy during the nine months ended September 30, 2014 or 2013.

(12) 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.

(13) Commitments and Contingencies

Lease Agreements

The Company leases office space under a new lease that commenced on October 1, 2014. The lease expires on September 30, 2020. The annual base rent is $225,100, with a provision for a 3% increase on each anniversary of the rent commencement date. Rent expense under the prior lease was approximately $126,000 for the three months ended September 30, 2014 and 2013 and $377,000 for the nine months ended September 30, 2014 and 2013.

Future minimum lease payments for the remainder of 2014 are approximately $49,000.

Employment Agreements

We have entered into employment agreements with certain of our officers, including with our chief executive officer, whose agreement provides for substantial payments in the event that the executive terminates his employment with us 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 our chief executive officer’s base salary and the average of the three years’ annual cash bonus.

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 $500,000 and $880,000 during the three months ended September 30, 2014 and 2013, respectively and $1.5 million and $2.3 million during the nine months ended September 30, 2014 and 2013, respectively.

We do not have any general policies regarding the use of employment agreements, but 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.

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.

Non-Prosecution Agreement

On September 27, 2011, the Company was informed that it was being investigated by the U.S. Attorney’s Office for the District of New Hampshire (the “USAO Investigation”). At that time, the Company was informed that, among other individuals, its former president and chief operating officer and, three former life finance sales executives were considered “targets” of the USAO Investigation. The USAO Investigation focused on the Company’s premium finance loan business.

On April 30, 2012, the Company entered into a Non-Prosecution Agreement (the “Non-Prosecution Agreement”) with the USAO, which agreed not to prosecute the Company for its involvement in the making of misrepresentations on life insurance applications in connection with its premium finance business or any potential securities fraud claims related to its premium finance business. In the Non-Prosecution Agreement, the USAO and the Company agreed among other things, that the following facts are true and correct: (i) at all relevant times (x) certain insurance companies required that the prospective insured applying for a life insurance policy, and sometimes the agent, disclose information relating to premium financing on applications for life insurance policies, and (y) the questions typically required the prospective insured to disclose if he or she intended to seek premium financing in connection with the policy and sometimes required the agent to disclose if he or she was aware of any such intent on the part of the applicant; (ii) in connection with a portion of the Company’s retail operation known as “retail non-seminar” that began in December 2006 and was discontinued in January 2009, Imperial had a practice of disclosing on applications that the prospective insured was seeking premium financing when the life insurance company allowed premium financing from Imperial; however, in certain circumstances, Imperial internal life agents facilitated and/or made misrepresentations on applications that the prospective insured was not seeking premium financing when the insurance carrier was likely to deny the policy on the basis of premium financing; and (iii) to the extent that external agents, brokers and insureds caused other misrepresentations to be made in life insurance applications in connection with the retail non-seminar business, Imperial failed to appropriately tailor controls to prevent potential fraudulent practices in that business. As of September 30, 2014, the Company had 39 policies in its portfolio that once served as collateral for premium finance loans derived through the retail non-seminar business.

In connection with the Non-Prosecution Agreement, Imperial voluntarily agreed to terminate its premium finance business, which historically accounted for the majority of the Company’s income and terminated certain senior sales staff associated with the premium finance business. Additionally, the Company paid the United States Government $8.0 million, and agreed to cooperate fully with the USAO’s ongoing investigation and to refrain from and self-report any criminal conduct. The Non-Prosecution Agreement has a term of three years until April 30, 2015, but the Company may petition the USAO to forego the remaining term of the Non-Prosecution Agreement, if the Company otherwise complies with all of its obligations under the Non-Prosecution Agreement. Should the USAO conclude that Imperial has not abided by its obligations under the Non-Prosecution Agreement, the USAO could choose to terminate the Non-Prosecution Agreement, resume its investigation of the Company, or bring charges against Imperial. While the Non-Prosecution Agreement effectively resolved the USAO Investigation as it pertains to the Company (subject to the Company’s continuing compliance with its terms), the USAO is continuing to investigate certain individuals formerly employed by the Company and the Company is continuing to incur expenses regarding its indemnification obligations with respect to such individuals.

In addition, settlements of certain civil litigation with the Company’s director and officer liability insurance carriers related to the USAO Investigation require Imperial to advance legal fees to and indemnify certain individuals. The obligation to advance and indemnify on behalf of these individuals, while currently unquantifiable, may be substantial and could have a material adverse effect on the Company’s financial position and results of operations. Excluding expenses of general external legal service providers, USAO litigation-related fees (inclusive of indemnification and advancement expenses) of $1.2 million and $1.6 million were recognized for the three months ended September 30, 2014 and 2013, respectively and $3.2 million and $4.6 million were recognized for the nine months ended September 30, 2014 and 2013, respectively.

Class Action Litigation

On December 16, 2013, final approval of the settlement to the class action designated Fuller v. Imperial Holdings et al. was granted by the United States District Court for the Southern District of Florida. The terms of the class action settlement included a cash payment of $12.0 million, with $11.0 million contributed by the Company’s primary and excess director and officer liability insurance carriers, with such amounts paid during the nine months ended September 30, 2014. The terms of the settlement also include the issuance of warrants to purchase two million shares of the Company’s stock. The warrants, which were issued into an escrow account in April 2014 and distributed in October 2014 have a five-year term from the date of their distribution and have an exercise price of $10.75.

SEC Investigation

On February 17, 2012, the Company first received a subpoena issued by the staff of the SEC seeking documents from 2007 through the date of the subpoena, generally related to the Company’s premium finance business and corresponding financial reporting. The SEC is investigating whether any violations of federal securities laws have occurred and the Company has been cooperating with the SEC regarding this matter. The Company is unable to predict what action, if any, might be taken in the future by the SEC or its staff as a result of the investigation or what impact, if any, the cost of responding to the SEC might have on the Company’s financial position, results of operations, or cash flows. The Company has not established any provision for losses in respect of this matter.

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”). The complaint seeks to contest the validity of at least twenty-nine policies issued by Sun Life. The complaint also asserts the following claims: (1) violations of the federal Racketeer Influenced and Corrupt Organizations Act, (2) common law fraud, (3) civil conspiracy, (4) tortious interference with contractual obligations, and (5) an equitable accounting. In response to a motion to dismiss filed by the Company, Sun Life filed an amended complaint on June 13, 2013. The Company believes that the amended complaint is without merit and filed another motion to dismiss on July 8, 2013. Sun Life responded to the second motion to dismiss on August 1, 2013 and the Company filed its reply on August 19, 2013. On June 26, 2014, the District Court entered an order granting the Company’s motion to dismiss and dismissed Sun Life’s amended complaint, without prejudice. On July 28, 2014, Sun Life filed its second amended complaint. The Company believes the second amended complaint suffers from similar deficiencies as the previous complaints and filed another motion to dismiss on September 5, 2014. Sun Life filed its response on October 10, 2014 and the Company filed its reply on November 3, 2014. No reserve has been established for this litigation.

On July 29, 2013, the Company filed a complaint against Sun Life in United States District Court for the Southern District of Florida, entitled Imperial Premium Finance, LLC (“IPF”) v. Sun Life Assurance Company of Canada (“IPF Case”). The 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 million in addition to an award of punitive damages. On August 23, 2013, Sun Life moved to dismiss the complaint. IPF filed its response on September 9, 2013, and Sun Life filed its reply on September 19, 2013. The IPF Case has been consolidated with the Sun Life Case for all purposes, including trial.

Sanctions Order

On April 27, 2012, after the conclusion of a jury trial in the matter styled Steven A. Sciaretta, as Trustee of the Barton Cotton Irrevocable Trust a/k/a the Amended and Restated Barton Cotton Irrevocable Trust v. The Lincoln National Life Insurance Company (“Lincoln”), the defendant, Lincoln, filed a motion seeking sanctions against the Company’s subsidiary, Imperial Premium Finance (“IPF”), a non-party to the litigation, relating to its corporate representative deposition and trial testimony. On May 6, 2013, the Court issued an order sanctioning IPF and ordering it to pay $850,000. On June 4, 2013, IPF filed a Notice of Appeal and oral argument was held before the Eleventh Circuit Court of Appeals on October 7, 2014. The Company recorded a reserve of $850,000 that is included in other liabilities as of September 30, 2014.

IRS Investigation

As previously disclosed, the Internal Revenue Service (“IRS”) Criminal Investigation Division is conducting an investigation related to the Company and its legacy structured settlements business. The Company believes that it has been cooperating with the investigation and is unable, at this time, to predict what action, if any, might be taken in the future by the IRS or what impact, if any, the cost of providing information and documents might have on the Company’s financial condition, results of operations, or cash flows. If the investigation results in a determination by the IRS that the Company has failed to comply with any of its obligations under the Internal Revenue Code or regulations thereunder, the Company could incur additional tax liability, restitution payment obligations, penalties, fines or other liabilities, including criminal penalties and fines and a reduction in the Company’s net operating losses, that could have a material adverse effect on the Company, its personnel, its financial condition, its results of operations, or its cash flows. The Company has not established any provision for losses in respect to this matter.

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.

(14) Stockholders’ Equity

The Company has reserved an aggregate of 1,200,000 shares of common stock under its Omnibus Plan, of which 815,448 options to purchase shares of common stock granted to existing employees were outstanding as of September 30, 2014, and an additional 61,853 shares of restricted stock, and 13,759 shares of unrestricted stock had been granted to directors under the plan subject to vesting.

On June 5, 2014, upon receipt of shareholder approval, the Company reclassified the embedded derivative contained in its Notes to stockholders’ equity along with unamortized transaction costs proportionate to the allocation of the initial debt discount and the principal amount of the Notes. This resulted in an increase to additional paid-in-capital of $14.1 million, net of taxes on the Company’s consolidated balance sheet and consolidated statement of stockholders’ equity as of September 30, 2014. See Note 10, 8.50% Senior Unsecured Convertible Notes.

In connection with the settlement of derivative litigation, the Company issued 125,628 shares of the Company’s stock, which were issued in the first quarter of 2014 and are included in stockholders’ equity.

In connection with the class action settlement described in Note 13, Contingencies and Commitments, 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.

During the nine months ended September 30, 2014, the Company awarded 299,500 target performance shares for restricted common stock to its directors and certain employees, of which 150,000 shares are subject to shareholder approval of an amendment to the Omnibus Plan at the Company’s 2015 annual meeting. The issuance of the performance shares is 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. As a result, the Company determined that it is not probable that the performance conditions will be achieved and no related expense was recognized for the three and nine months ended September 30, 2014. The performance shares will be subject to a one year vesting period from the date of issuance.

Exclusive of those performance shares awarded to our named executive officers that are not subject to shareholder approval of an amendment to the Plan at the Company’s 2015 annual meeting, there were 308,940 securities remaining for future issuance under the Omnibus Plan as of September 30, 2014.

During the nine months ended September 30, 2014, the Company adopted ASU No. 2013-11, resulting in an increase to additional paid-in-capital of $6.3 million on the Company’s consolidated balance sheet and consolidated statement of stockholders’ equity as of September 30, 2014. See Note 3, Recent Accounting Pronouncements

(15) Income Taxes

Our provision for income taxes, excluding the income tax expense of $3.7 million recorded as a result of the adoption of the new accounting pronouncement as discussed below, is estimated to result in an annual effective tax rate of 36.9% in 2014. For periods prior to 2014 our provision for income taxes was an annual effective tax rate of 0.0%. The 0.0% effective tax rate was the result of our recording of a valuation allowance for those deferred tax assets that were not expected to be recovered in the future.

Included in our provision for income taxes for the nine months ended September 30, 2014, is a $3.7 million provision attributed to the adoption of guidance provided in ASU No. 2013-11, that was effective on January 1, 2014. In addition, as a result of the adoption of this standard, the Company recorded a $6.3 million increase to additional paid-in-capital.

In March of 2014, the Company was notified by the IRS of its intention to examine the Company’s tax returns for the years ended December 31, 2011 and 2012. See also “IRS Investigation” in Note 13 regarding the IRS Criminal Investigation Division’s investigation related to the Company’s former structured settlement business.

The Company and its subsidiaries 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.

At the time the Company recorded a liability for the conversion derivative liability attributed to the issuance of the Notes, the Company recorded a deferred tax asset of $6.5 million for the conversion derivative liability and a deferred tax liability of $6.5 million for the corresponding debt discount. As the changes in the fair value of the conversion derivative liability are included in earnings, the Company recorded additions to the deferred tax asset. At June 5, 2014 when the Company received shareholder approval to issue shares of common stock upon conversion of the Notes, the deferred tax attributed to the conversion derivative liability (net of allocated unamortized transaction costs) was $8.8 million. In accordance with ASC 815, the Company reclassified the deferred tax asset attributed to the conversion derivative liability (net of allocated unamortized transaction costs) to equity. See Note 10, 8.50% Senior Unsecured Convertible Notes. As of September 30, 2014, the Company has a deferred tax liability of $6.2 million related to unamortized debt discount.

(16) Subsequent Events

On November 10, 2014 (the “Initial Closing Date”), Imperial, as issuer, entered into an indenture with certain of its subsidiaries, Harbordale, LLC, Imperial Finance & Trading, LLC, Imperial Life and Annuity Services, LLC, Imperial Litigation Funding, LLC, Imperial Premium Finance, LLC, Red Reef Alternative Investments, LLC and Washington Square Financial, LLC, as guarantors (the “Guarantors”), and Wilmington Trust Company, as indenture trustee. The indenture provides for the issuance of up to $100 million in senior secured notes (the “Secured Notes”), of which $25 million was issued by Imperial on the Initial Closing Date. The Secured Notes issued on the Initial Closing Date were issued at 96% of their face amount and were purchased under a note purchase agreement (the “Note Purchase Agreement”) with Imperial and the Guarantors by an affiliate of Indaba Capital Management, L.P. (the “Purchaser”) in a private transaction pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended. The Note Purchase Agreement gives the Purchaser the right, subject to applicable law, to appoint one director to Imperial’s board of directors so long as it maintains a voting percentage of at least 5% of Imperial’s common stock and holds at least $25 million in principal amount or market value of Imperial’s debt.

Interest on issued Secured Notes accrues at 12.875% per annum and all Secured Notes issued under the indenture will mature 36 months from the Initial Closing Date (the “Initial Maturity”) although Imperial may elect to extend the maturity date by an additional 12 months (the “Extended Term”) and, if elected, interest on the Secured Notes will accrue at 14.5% during the Extended Term. The Secured Notes may not be optionally redeemed by Imperial for one year from the Initial Closing Date. Between the first and second anniversary of the Initial Closing Date, Imperial may optionally redeem the Secured Notes at 106% of the principal amount redeemed and thereafter at 104%, in each case, plus accrued and unpaid interest on the Secured Notes to the date of redemption. If Imperial does not elect the Extended Term, Secured Notes may be optionally redeemed within 60 days of the Initial Maturity at par plus accrued and unpaid interest up to the Initial Maturity. The Senior Notes are subject to mandatory prepayment provisions upon the issuance of additional debt and asset sales. In addition to usual and customary affirmative and negative covenants restricting additional debt, creation of liens, transactions with affiliates, and restrictions on certain payments and investments, the indenture governing the Secured Notes requires the Company to maintain a net worth of no less than $100 million and cash and cash equivalents of at least $20 million.

The Secured Notes may be used for general corporate purposes, are guaranteed by the Guarantors and are secured by substantially all of the Company’s and Guarantors’ assets, other than those securing the Revolving Credit Facility, including cash on account as well as the Company’s life insurance policies that are not pledged as collateral under the Revolving Credit Facility. The Secured Notes are also secured by pledges of the equity interests of the Guarantors and by pledges of 65% of their first tier foreign subsidiaries.

The Company may issue, and the Purchaser will be obligated to purchase, up to an additional $75 million in aggregate principal amount of Secured Notes in $25 million increments during the period ending on the 12-month anniversary of the Initial Closing Date provided certain performance conditions are met (in addition to usual and customary conditions precedent). The Company must deploy $25 million in investments following the Initial Closing Date to be eligible to issue the next $25 million of Secured Notes. Thereafter, the remaining $50 million in aggregate principal amount of Secured Notes may only be issued if the Company satisfies certain book and market value targets. Estimated fees and expenses payable by the Company at closing were approximately $1.9 million. Additionally, the Company will pay a draw-down fee of 1% of the amount of any subsequent issuance of Secured Notes and will pay a monthly unused fee on the unissued Secured Notes at a per annum rate of 1%.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.”

Overview

We were founded in December 2006 as a Florida limited liability company and in connection with our initial public offering, in February 2011, Imperial Holdings, Inc. succeeded to the business of Imperial Holdings, LLC and its assets and liabilities. Through our subsidiaries, we own a portfolio of 595 life insurance policies, also referred to as life settlements, with a fair value of $350.4 million and an aggregate death benefit of approximately $2.9 billion at September 30, 2014. The Company primarily earns income on these policies from changes in their fair value and through death benefits.

During the third quarter of 2014, we began to deploy a portion of the proceeds from our issuance of 8.50% senior unsecured convertible notes due 2019 (the “Notes”). We purchased two policies during the quarter, which contributed $2.4 million in income from changes in the fair value of life settlements. We believe that there are accretive opportunities to grow our existing portfolio of life settlements and intend to continue to deploy capital in both the secondary and tertiary life settlement markets into 2015. We also continue to seek opportunities to lend against portfolios of life settlements owned by institutional investors that satisfy our underwriting and return criteria.

Portfolio Update

At September 30, 2014, we owned 595 life insurance policies with a fair value of $350.4 million and an aggregate death benefit of approximately $2.9 billion. Our indirect subsidiary, White Eagle Asset Portfolio, LP, (“White Eagle”), is the owner of 452 of these life insurance policies with an aggregate death benefit of approximately $2.3 billion and an estimated fair value of approximately $295.5 million at September 30, 2014. White Eagle pledged its policies as collateral to secure borrowings made under a 15-year revolving credit agreement (the “Revolving Credit Facility”), which will be used, among other things, to pay premiums on the life insurance policies owned by White Eagle. In addition, on November 10, 2014, we issued $25 million in aggregate principal amount of 12.875% senior secured notes, which are secured, in part, by the Company’s policies that are not pledged as collateral under the Revolving Credit Facility. For a description of the secured notes, see Note 16, “Subsequent Events,” of the notes to Consolidated Financial Statements.

No policies matured during the three months ended September 30, 2014 and five with an aggregate death benefit of $11.5 million matured during the nine months ended September 30, 2014. The Company did not sell any policies in the three months ended September 30, 2014 and sold 14 policies during the nine months ended September 30, 2014 that were not pledged as collateral under the Revolving Credit Facility for gross proceeds of $4.3 million.

In August 2014, the U.S. Society of Actuaries released draft tables for the 2014 Valuation Basic Table (“2014 VBT”), which show a lengthening of average life expectancies. We currently use a modified version of the 2008 Valuation Basic Table (“2008 VBT”), the predecessor to the 2014 VBT, as an input to the estimation of fair value of our life settlements. The 2014 VBT is expected to be released some time in 2015 and we will continue to monitor the market reaction to the draft tables and to the 2014 VBT once it is released. Future changes in life expectancies could have a material adverse effect on the fair value of our investment in life settlements, which could have a material adverse effect on our business, financial condition and results of operations.

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 investments in life settlements, the valuation of the debt owing under the Revolving Credit Facility and the valuation of our conversion derivative liability formerly embedded within the Notes have the greatest potential impact on our financial statements and accordingly believe these to be our critical accounting estimates.

Fair Value Option

We have elected to account for the debt under the Revolving Credit Facility, which includes its 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 different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.

The Company determined that an embedded conversion option existed in the Notes, prior to June 5, 2014, that was required to be separately accounted for as a derivative under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. On June 5, 2014, the Company obtained shareholder approval to issue shares of common stock upon conversion of the Notes in an amount that exceeded the New York Stock Exchange limits for issuances without shareholder approval. In accordance with ASC 815, the Company reclassified the conversion derivative liability to stockholders’ equity along with unamortized transaction costs proportionate to the allocation of the initial debt discount and the principal amount of the Notes. In subsequent reporting periods, the Notes will continue to be recorded at accreted value up to the par value of the Notes at maturity. The debt discount will be amortized into interest expense using the interest method, in an aggregate amount equal to the amount of the conversion derivative liability reclassified into equity along with any unamortized transaction costs. See Note 10, “8.50% Senior Unsecured Convertible Notes.”

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, structured settlements and 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 11, “Fair Value Measurements” of the notes to Consolidated Financial Statements for a discussion of our fair value measurement.

Income Recognition from Continuing Operations

Our primary source of income from continuing operations are in the form of changes in fair value of life settlements and gains on life settlements, net. Our income recognition policies for this source of income is as follows:

•

Changes in Fair Value of Life Settlements—When the Company acquires certain life insurance policies we initially record these investments at the transaction price, which is the fair value of the policy for those acquired upon relinquishment or the amount paid for 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 upon receipt of death notice or verified obituary of insured. This income is the difference between the death benefits and fair values of the policy at the time of maturity.

•

Gains on Life Settlements, Net—The Company recognizes gains from life settlement contracts that the Company owns upon the signed sale agreement and/or filing of ownership forms and funds transferred to escrow.

Deferred Costs

Deferred costs include costs incurred in connection with acquiring and maintaining credit facilities. These costs are amortized over the life of the related loan 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 Notes. The Company did not recognize any deferred cost on its Revolving Credit Facility given all costs were expensed due to electing the fair value option in valuing the Revolving Credit Facility.

Income Taxes

Prior to our initial public offering in 2011, we converted from a Florida limited liability company to a Florida corporation (the “Conversion”). Prior to the Conversion we were treated as a partnership for federal and state income tax purposes. As a partnership our taxable income and losses were attributed to our members, and accordingly, no provision or liability for income taxes was reflected in the accompanying consolidated financial statements for periods prior to the Conversion.

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

Our provision for income taxes is estimated to result in an annual effective tax rate of 36.9% in 2014, except as noted below. For periods prior to 2014 our provision for income taxes is estimated to result in an annual effective tax rate of 0.0%. At September 30, 2013, due to the large losses and the uncertainties that resulted from the USAO Investigation, SEC investigation, Non-Prosecution Agreement and class action lawsuits, we recorded a full valuation allowance against our net deferred tax asset as it was more likely than not that the net deferred tax asset is not realizable. As a result of these increases in the valuation allowance, we recorded no income tax benefit for 2013.

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.

In March of 2014, the Company was notified by the IRS of its intention to examine the Company’s tax returns for the years ended December 31, 2011 and 2012. See also “IRS Investigation” in Note 13, Contingencies and Commitments regarding the IRS Criminal Investigation Division’s investigation related to the Company’s former structured settlement business.

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

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 awarded upon or after the closing of our initial public offering 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.

Held-for-sale and discontinued operations

The Company reports a business as held-for-sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the ensuing year and certain other specified criteria are met. A business classified as held-for-sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value, a loss is recognized. Depreciation is not recorded on assets of a business classified as held-for-sale. Assets and liabilities related to a business classified as held-for-sale are segregated in the Consolidated Balance Sheet and major classes are separately disclosed in the notes to the Consolidated Financial Statements commencing in the period in which the business is classified as held-for-sale. The Company reports the results of operations of a business as discontinued operations if the business is classified as held-for-sale, the operations and cash flows of the business have been or will be eliminated from the ongoing operations

of the Company as a result of a disposal transaction and the Company will not have any significant continuing involvement in the operations of the business after the disposal transaction. The results of discontinued operations are reported in Discontinued Operations in the Consolidated Statement of Operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell.

Foreign Currency

The Company’s foreign subsidiaries are considered to be extensions of the U.S. Company and the U.S. dollar is utilized as the functional currency. The foreign subsidiaries’ financial statements are denominated in U.S. dollars and therefore, there are no translation gains and losses resulting from converting the financial statements at exchange rates other than the functional currency. Any gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the subsidiaries’ functional currency) are included in income. These gains and losses are immaterial to the Company’s financial statements.

Recent Accounting Pronouncements

Note 2, Principles of Consolidation and Basis of Presentation of the Notes to Consolidated Financial Statements discusses accounting standards adopted during the nine months ended September 30, 2014.

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. Our results of operations are discussed below in two parts: (i) our consolidated results of continuing operations and (ii) our results of discontinued operations.

Results of Continuing Operations

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net loss from continuing operations for the quarter ended September 30, 2014 was $4.3 million as compared to net income of $6.1 million for the quarter ended September 30, 2013, a decrease of $10.4 million. Total loss from continuing operations was $3.6 million for the quarter ended September 30, 2014, a decrease of $18.4 million over total income from continuing operations of $14.8 million during the same period in 2013. This reduction is primarily driven by the change in fair value of investment in life settlements loss that resulted from the lengthening of life expectancies for certain insureds that were updated during the three months ended September 30, 2014. Total expenses from continuing operations were $2.9 million for the quarter ended September 30, 2014 compared to total expenses from continuing operations of $8.7 million incurred during the same period in 2013, a decrease of $5.8 million, or 67%.

Change in Fair Value of Life Settlements. Change in fair value of life settlements was a loss of $3.6 million for the quarter ended September 30, 2014 compared to a gain of $15.3 million for the quarter ended September 30, 2013, a decrease of $18.9 million. The loss for 2014 is primarily driven by the fair value loss associated with the lengthening of life expectancies for certain insureds that were updated during the three months ended September 30, 2014.

As of September 30, 2014, the Company owned 595 policies with an estimated fair value of $350.4 million compared to 622 policies with a fair value of $292.4 million at September 30, 2013, an increase of $58.0 million or 20%. Of the 595 policies, 452 policies were pledged to the Revolving Credit Facility and 143 policies were not pledged. During the three months ended September 30, 2014, the Company acquired two life insurance policies compared to two policies during the same period in 2013. The two policies acquired during 2013 were as a result of certain of the Company’s borrowers defaulting on premium finance loans and relinquishing the underlying policies to the Company. As of September 30, 2014, the aggregate death benefit of the Company’s investment in life settlements is $2.9 billion.

Of the 595 policies owned as of September 30, 2014, 550 were premium financed and are valued using discount rates that range from 16.55% – 26.55%. The remaining 45 policies are valued using discount rates that range from 14.80% – 20.80%. See Note 11, “Fair Value Measurements,” to the accompanying consolidated financial statements.

Gain/(Loss) on life settlements, net. Loss on life settlements, net was zero for the quarter ended September 30, 2014 compared to $461,000 as of September 30, 2013. During the quarter ended September 30, 2013, two policies were sold resulting in a loss of $461,000 with net proceeds received of $1.8 million and lapsed four policies resulting in no loss as they were carried with no value. There were no policies sales, surrendered or lapsed for the three months ended September 30, 2014.

Expenses

Interest expense. Interest expense increased to $4.3 million during the quarter ended September 30, 2014, compared to $1.2 million during the same period in 2013, an increase of $3.1 million as the principal on the Company’s outstanding debt increased to $227.3 million as of September 30, 2014. Outstanding debt includes $156.6 million of outstanding principal on the Revolving Credit Facility and $70.7 million of Notes. Of the interest expense of $4.3 million, approximately $2.1 million represents interest paid on the Revolving Credit Facility compared to $1.2 million for 2013. Interest expense also includes $1.5 million, $605,000 and $90,000 representing interest, amortization of debt discount and issuance costs, respectively, on the Notes. We expect interest expense on the Revolving Credit Facility to continue to increase in 2014 as we continue to borrow funds under this facility. See Notes 9, Revolving Credit Facility and 10, 8.50% Senior Unsecured Convertible Notes to the accompanying consolidated financial statements.

Change in fair value of Revolving Credit Facility. Change in fair value of Revolving Credit Facility was a gain of $8.4 million for the quarter ended September 30, 2014 compared to a loss of $66,000 for the quarter ended September 30, 2013. This change is associated with the lengthening of life expectancies of certain insureds underlying policies pledged as collateral in the Revolving Credit Facility and an increase in the discount rate. The Revolving Credit Facility is valued at September 30, 2014 using a discount rate of 24.01%. See Note 11, “Fair Value Measurements,” to the accompanying consolidated financial statements.

Selling, General and Administrative Expenses. SG&A expenses were $7.0 million for the quarter ended September 30, 2014 compared to $7.5 million for the same period in 2013. This was primarily a result of a $328,000 reduction in legal fees and $360,000 reduction in professional fees, offset by a $241,000 increase in other SG&A expenses during the period.

Legal expenses for the quarter ended September 30, 2014 were $2.9 million compared to $3.3 million for the same period in 2013. Approximately $1.2 million are expenses related to indemnification and continuing cooperation obligations with the USAO Investigation for 2014, compared to $1.6 million for the quarter ended September 30, 2013. Legal expense was reduced by approximately $848,000 associated with change in fair value of the warrants for the class action litigation for the quarter ended September 30, 2013. See Note 13, “Commitments and Contingencies,” to the accompanying consolidated financial statements.

Results of Discontinued Operations

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Net loss from our discontinued structured settlement operations for the quarter ended September 30, 2014 was $249,000 as compared to income of $55,000 for the quarter ended September 30, 2013. Total income from our discontinued structured settlement operations was $38,000 for the quarter ended September 30, 2014 compared to $2.7 million in 2013. This reduction is mainly associated with the sale of the structured settlement operations in October 2013. During the quarter ended September 30, 2014, there were no sales for our discontinued structured settlement operations, compared to the sale of 127 structured settlements for a gain of $2.1 million for the quarter ended September 30, 2013. Unrealized change in fair value of structured settlements receivable was $8,000 for the quarter ended September 30, 2014 compared to $430,000 for the quarter ended September 30, 2013.

Total expenses from our discontinued structured settlement operations were $287,000 for the quarter ended September 30, 2014 compared to $2.6 million incurred during the same period in 2013. This reduction is mainly associated with the sale of the structured settlement operations in October 2013, including a $1.3 million decrease in personnel cost, $461,000 decrease in marketing cost, $301,000 decrease in professional fees and $357,000 decrease in other SG&A expenses.

Results of Continuing Operations

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Net loss from continuing operations for the nine months ended September 30, 2014 was $13.9 million as compared to net income of $47.9 million for the nine months ended September 30, 2013, a reduction of $61.8 million. Total income from continuing operations was $19.0 million for the nine months ended September 30, 2014, a reduction of $63.6 million over total income from continuing operations of $82.6 million during the same period in 2013, which was primarily driven by the change in fair value of the additional 430 life insurance policies acquired during that period. Total expenses from continuing operations were $35.3 million for the nine months ended September 30, 2014 compared to total expenses from continuing operations of $34.6 million incurred during the same period in 2013, an increase of $654,000, or 2%.

Our net loss for the nine months ended September 30, 2014 includes an income tax provision of approximately $4.0 million which resulted from the adoption of ASU No. 2013-11. See Note 15 “Income Taxes,” to the accompanying consolidated financial statements. This expense was then offset by an income tax benefit of $6.5 million related to the Company’s pretax loss of $16.3 million for the nine months ended September 30, 2014.

Change in Fair Value of Life Settlements. Change in fair value of life settlements was a gain of approximately $19.3 million for the nine months ended September 30, 2014 compared to a gain of $81.9 million for the nine months ended September 30, 2013, a reduction of $62.6 million. The gain for 2013 was primarily driven by the fair value associated with the acquisition of 432 life insurance policies during the nine months ended September 30, 2013. Two life settlements were acquired during the nine months ended September 30, 2014 which resulted in a gain of $2.4 million.

During the nine months ended September 30, 2014, five life insurance policies with face amounts totaling $11.5 million matured compared to three policies with face amount of $8.1 million for the same period in 2013. The net gain on these maturities was $10.6 million and $5.3 million for 2014 and 2013, respectively, and is recorded as a change in fair value of life settlements in the consolidated statements of operations for the nine months ended September 30, 2014 and 2013, respectively. All five maturities for 2014 occurred with respect to policies that served as collateral under the Revolving Credit Facility. Amounts totaling $13.6 million were received during the nine months ended September 30, 2014 including $2.1 million collected during the quarter ended September 30, 2014 for maturity related to 2013.

As of September 30, 2014, the Company owned 595 policies with an estimated fair value of $350.4 million compared to 622 policies with a fair value of $292.4 million at September 30, 2013, an increase of $58.0 million or 20%. Of the 595 policies, 452 policies were pledged to the Revolving Credit Facility and 143 policies were not pledged. During the nine months ended September 30, 2013, the Company acquired 432 life insurance policies, 16 of which were a result of certain of the Company’s borrowers defaulting on premium finance loans and relinquishing the underlying policies to the Company. Of the remaining 416 policies, 323 policies were previously kept off-balance sheet as contingent assets and known as life settlements with subrogation rights, net with the remaining 93 acquired through the Company’s acquisition of CTL Holdings, LLC. As of September 30, 2014, the aggregate death benefit of the Company’s investment in life settlements is $2.9 billion.

Of these 595 policies owned as of September 30, 2014, 550 were premium financed and are valued using discount rates that range from 16.55% – 26.55%. The remaining 45 policies are valued using discount rates that range from 14.80% – 20.80%. See Note 11, “Fair Value Measurements,” to the accompanying consolidated financial statements.

Gain/(Loss) on life settlements, net. Loss on life settlements, net was approximately $426,000 for the nine months ended September 30, 2014 compared to $1.7 million as of September 30, 2013 a reduction of $1.3 million. During the nine months ended September 30, 2014, 14 policies were sold resulting in a loss of approximately $426,000 on net proceeds received of $4.0 million. During the nine months ended September 30, 2013, the Company sold two policies resulting in a loss of approximately 461,000 and received proceeds of $1.8 million.

During the nine months ended September 30, 2013, the Company surrendered two policies resulting in a gain of approximately $255,000 and received proceeds of $1.1 million and lapsed 17 policies resulting in a loss of $1.5 million. The net effect of these surrenders and lapses was a loss of $1.2 million. There were no policies surrendered or lapsed for the nine months ended September 30, 2014.

Servicing Fee Income. Servicing income was zero for the nine months ended September 30, 2014 compared to $310,000 in 2013. Servicing fee income was earned in providing asset servicing for third parties, which we began providing during 2010. This decrease was due to the Company ceasing servicing assets for unaffiliated third parties on April 30, 2013.

Other Income. Other income was $72,000 for the nine months ended September 30, 2014 compared to $2.0 million in 2013, a decrease of $1.9 million. The amount for 2013 is attributable to a write off of liabilities which were payable to a third party.

Expenses

Interest expense. Interest expense decreased to $11.2 million during the nine months ended September 30, 2014, compared to $12.0 during the same period in 2013, a decrease of $855,000, as the principal on the Company’s outstanding debt increased to $227.3 million as of September 30, 2014. Outstanding debt includes $156.6 million of outstanding principal on the Revolving Credit Facility and $70.7 million of Notes.

Of the interest expense of $11.2 million, approximately $5.8 million represents interest paid on the Revolving Credit Facility. We expect interest expense on the Revolving Credit Facility to continue to increase in 2014 as we continue to borrow funds under this facility. Interest expense also includes $3.7 million, $1.4 million and $239,000 representing interest and amortization of

debt discount and issuance costs, respectively, on the Notes. Of the interest expense of $12.0 million for 2013, approximately $10.3 million represents loan origination cost incurred under the Revolving Credit Facility, which was not capitalized as a result of electing the fair value option for valuing this Revolving Credit Facility and interest paid of $1.2 million. The Company borrowed $45.0 million under a Bridge Facility in March 2013 and fully prepaid this facility in the subsequent quarter ended September 30, 2013. Interest expense of $550,000 is associated with this facility for the nine months ended September 30, 2013. See Notes 9, Revolving Credit Facility and 10, 8.50% Senior Unsecured Convertible Notes to the accompanying consolidated financial statements.

Change in fair value of Revolving Credit Facility. Change in fair value of Revolving Credit Facility was a gain of approximately $4.6 million for the nine months ended September 30, 2014 compared to a gain of approximately $5.3 million for the nine months ended September 30, 2013. This change is associated with the lengthening of life expectancy estimates of certain insureds underlying policies pledged as collateral in the policies in the Revolving Credit Facility and an increase in the discount rate during the quarter ended September 30, 2014. The Revolving Credit Facility is valued at September 30, 2014 using a discount rate of 24.01%. See Note 11, “Fair Value Measurements,” to the accompanying consolidated financial statements.

Loss on extinguishment of Bridge Facility. Loss on extinguishment of Bridge Facility was approximately $4.0 million for the nine months ended September 30, 2013. This amount is related to the Bridge Facility issued during the quarter ended March 31, 2013 and was fully repaid during the quarter ended September 30, 2013. The Bridge Facility had a face value of $45.0 million, with a funding discount of $3.6 million and deferred financing cost of approximately $400,000. All amounts were expensed during the nine months ended September 30, 2013 as a result of repayment of the facility.

Change in fair value of conversion derivative liability. Change in fair value of conversion derivative liability embedded in the Notes was approximately $6.8 million for the nine months ended September 30, 2014 compared to zero for the nine months ended September 30, 2013. ASC 815, Derivatives and Hedging, required the Company to bifurcate the embedded conversion option that was valued on February 21, 2014 and June 5, 2014 which resulted in a fair value loss of approximately $6.8 million for the nine months ended September 30, 2014. In the nine months September 30, 2014, the conversion derivative liability was reclassified to additional-paid-in-capital, so there will be no further adjustment to the fair value of this derivative liability reflected in the Company’s financial statements. See Note 10, 8.50% Senior Unsecured Convertible Notes to the accompanying consolidated financial statements.

Selling, General and Administrative Expenses. SG&A expenses were $21.9 million for the nine months ended September 30, 2014 compared to $24.0 million in 2013, a reduction of approximately $2.0 million. This reduction was primarily a result of a $2.1 million reduction in legal fees, $222,000 reduction in insurance and $110,000 reduction in other SG&A expenses. These reductions were offset by an increase in personnel cost of $411,000 which is mainly attributable to bonus payment of $800,000 during the nine months ended September 30, 2014.

Legal expenses for the nine months ended September 30, 2014 were $9.1 million compared to $11.3 million for 2013. Of the legal expense, approximately $3.2 million is mainly associated with the USAO Investigation for 2014, compared to $4.6 million for the nine months ended September 30, 2013. Legal expense also includes approximately $2.5 million associated with the warrants for the class action litigation for the nine months ended September 30, 2013. See Note 13, “Commitments and Contingencies,” to the accompanying consolidated financial statements.

Results of Discontinued Operations

Nine months Ended September 30, 2014 Compared to Nine months Ended September 30, 2013

Net loss from our discontinued structured settlement operations for the nine months ended September 30, 2014 was $454,000 as compared to income of $1.6 million for the nine months ended September 30, 2013. Total income from our discontinued structured settlement operations was $150,000 for the nine months ended September 30, 2014 compared to $10.4 million in 2013. This reduction is mainly associated with the sale of the structured settlement operations in October 2013. During the nine months ended September 30, 2014, our discontinued structured settlement operations sold 8 structured settlements for a gain of $18,000, compared to the sale of 440 structured settlements for a gain of $8.8 million. Unrealized change in fair value of structured settlements receivable was $24,000 for the nine months ended September 30, 2014 compared to $1.2 million for the nine months ended September 30, 2013.

Total expenses from our discontinued structured settlement operations were $604,000 for the nine months ended September 30, 2014 compared to $8.7 million incurred during the same period in 2013. This reduction is mainly associated with the sale of the structured settlement operations in October 2013; including a $4.0 million decrease in personnel cost, $1.9 million decrease in marketing cost, $947,000 decrease in professional fees, $882,000 decrease in other SG&A expenses and $465,000 decrease in legal fees.

Continuing Operations—Selected Operating Data (dollars in thousands):

Life Finance


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2014		2013		2014		2013

Period Acquisitions — Policies Owned
Number of policies acquired		2		2		2		432
Average age of insured at acquisition		84.5		72.7		84.5		77.7
Average life expectancy - Calculated LE (Years)		5.6		15.9		5.6		12.7
Average death benefit	$	7,176	$	6,000	$	7,176	$	4,749
Aggregate purchase price	$	3,488	$	245	$	3,488	$	58,645

End of Period — Policies Owned
Number of policies owned		595		622		595		622
Average Life Expectancy - Calculated LE (Years)		11.0		11.9		11.0		11.9
Aggregate Death Benefit	$	2,888,289	$	2,999,040	$	2,888,289	$	2,999,040
Aggregate fair value	$	350,383	$	292,383	$	350,383	$	292,383
Monthly premium — average per policy	$	7.6	$	7.5	$	7.6	$	7.5

Liquidity and Capital Resources

Our consolidated financial statements have been prepared assuming the realization of assets and the satisfaction of liabilities in the normal course, as well as continued compliance with the covenants contained in the Revolving Credit Facility, the indenture governing the Notes and other financing arrangements. In addition, on November 10, 2014, we issued $25 million in aggregate principal amount of 12.875% senior secured notes. For a description of the secured notes, see Note 16, “Subsequent Events,” of the notes to Consolidated Financial Statements.

As of September 30, 2014, the Company’s cumulative legal and related fees in respect of the USAO Investigation (including indemnification obligations), the SEC Investigation, the IRS Investigation and related matters were $38.6 million, including $1.4 million and $1.6 million incurred during the three months ended September 30, 2014 and 2013, respectively and $3.9 million and $4.6 million incurred during the nine months ended September 30, 2014 and 2013, respectively. We believe we may continue to spend significant amounts on these matters as well as for general litigation and judicial proceedings over the next year, and possibly beyond. In addition, as part of the framework for the class action settlement described in Note 13, “Contingency and Commitments” to our consolidated financial statements, the Company has undertaken to advance legal fees and indemnify certain individuals covered under the director and officer liability insurance policies. The remaining obligation to advance and indemnify on behalf of these individuals, while currently unquantifiable, may be substantial and could have an adverse effect on the Company’s financial position and results of operations.

We expect to meet our liquidity needs for the next year primarily through the receipt of death benefits from life insurance policy maturities and cash on hand.

While the liquidity risk associated with the policies that have been pledged as collateral under the Revolving Credit Facility has been mitigated, any available proceeds under the facility’s waterfall provisions will generally be directed to pay outstanding interest and principal on the loan unless the lenders determine otherwise. Accordingly, there can be no assurance as to when the proceeds from maturities of the policies pledged as collateral under the Revolving Credit Facility will be distributed to the Company. The Company must proactively manage its cash in order to effectively run its businesses, Service its debt and opportunistically grow its assets. Accordingly, the Company may in the future determine to sell or, under certain circumstances, lapse certain of its policies as its portfolio management strategy and liquidity needs dictate. The lapsing of policies, if any, would create losses as such assets would be written down to zero.

Financing Arrangements Summary

Revolving Credit Facility

Effective April 29, 2013, White Eagle, as borrower, entered into a 15-year Revolving Credit Facility, which was amended and restated on May 16, 2014 in connection with the conversion of White Eagle from a Delaware limited liability company to a Delaware limited partnership, with 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.

For a description of the facility see Note 9, “Revolving Credit Facility,” of the notes to Consolidated Financial Statements.

At September 30, 2014, the fair value of the debt was $142.7 million. As of September 30, 2014, the borrowing base was approximately $159.1 million including $156.6 million in outstanding principal. See Note 11, “Fair Value Measurements,” of the notes to Consolidated Financial Statements. There are no scheduled repayments of principal. Payments are due upon receipt of death benefits and distributed pursuant to the waterfall as described above.

8.50% Senior Unsecured Convertible Notes

In February 2014, we issued $70.7 million in aggregate principal amount of 8.50% senior unsecured convertible notes due 2019. For a description of the Notes see Note 10, “8.50% Senior Unsecured Convertible Notes,” of the notes to Consolidated Financial Statements.

12.875% Senior Secured Notes

On November 10, 2014, we issued $25 million in aggregate principal amount of 12.875% senior secured notes due 2017. For a description of the secured notes, see Note 16, “Subsequent Events,” of the notes to Consolidated Financial Statements.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended September 30, 2014 and 2013 (in thousands):


	For the Nine Months Ended
	September 30,
	2014			2013
Statement of Cash Flows Data:
Total cash provided by (used in) :
Operating activities	$	(23,986	)	$	(14,645	)
Investing activities		(26,622	)		(36,334	)
Financing activities		86,301			57,415

Increase in cash and cash equivalents	$	35,693		$	6,436

Operating Activities

During the nine months ended September 30, 2014, operating activities used cash of $24.0 million. Our net loss of $14.3 million was adjusted for non-cash Revolving Credit Facility financing costs of $4.2 million, which represent interest expense associated with the Revolving Credit Facility, the amount is a non-cash item and was withheld by the lender and added to the outstanding loan balance; change in fair value of life settlement gains of $19.3 million that is mainly attributable to the maturities of five policies; change in fair value of Revolving Credit Facility gain of $4.6 million that resulted from increased borrowings and increase in the discount rate used to value the facility; change in fair value of conversion derivative liability loss of $6.8 million resulted from an increase in the fair value of the embedded derivative included in the Notes issued during the period and, a net positive change in the components of operating assets and liabilities of $434,000. This $434,000 change in operating assets and liabilities is partially attributable to a $14.3 million decrease in other liabilities and a $13.5 million decrease in restricted cash, both associated with the settlement of the class action and derivative litigation. These reductions were offset by a $2.5 million increase in deferred income tax and $2.5 million increase in accounts payable and accrued expenses.

During the nine months ended September 30, 2013, operating activities used cash of $14.6 million. Our net income of $49.6 million was adjusted for Revolving Credit Facility origination cost of $10.3 million which was not capitalized as a result of electing the fair value option for valuing the facility; change in fair value of life settlement gains of $81.9 million that is mainly attributable to the acquisition of 432 policies; change in fair value of Revolving Credit Facility gain of $5.3 million that resulted from electing the fair value option to value the new Revolving Credit Facility; extinguishment of Bridge Facility of $4.0 million that is mainly attributable to early repayment of the bridge facility which was received during the first quarter of 2013; change in value of warrants

to be issued of $2.5 million that is mainly attributable to an increase in its fair value; and a net positive change in the components of operating assets and liabilities of $3.7 million. This positive change in operating assets and liabilities is partially attributable to a $12.5 million decrease in prepaid and other assets and a $13.5 million increase in restricted cash, both associated with the settlement of the class action and derivative litigation; a $1.7 million decrease in structured settlements receivables; $1.3 million decrease in deposits and a $664,000 million decrease in other liabilities. These reductions were offset by a $2.5 million increase in accounts payable.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2014 was $26.6 million and includes $4.0 million from sale of investments in life settlements that were associated with the sale of 14 policies during the period and proceeds of $13.6 million from maturity of six life settlements. This was offset by $40.6 million for premiums paid on investments in life settlements and $3.5 million for purchase of investment in life settlement.

During the nine months ended September 30, 2013, cash flows used in investing activities was $36.3 million and includes $12.1 million in proceeds received from sale of investment securities available for sale; $6.0 million proceeds from maturity of two life settlements, $1.0 million proceeds from surrender of two investment in life settlements, $1.8 million from sale of investments in life settlements that were associated with the sale of two policies during the period and $691,000 from loan payoffs. These were offset by $51.0 million for premiums paid on investments in life settlements and $7.0 million for purchase of investment in life settlement.

Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2014 was $86.3 million and includes $67.9 million in net proceeds from the Notes and $36.0 million of borrowings from our Revolving Credit Facility. These were offset by $17.6 million in repayment of borrowings under the Revolving Credit Facility.

During the nine months ended September 30, 2013, cash provided by financing activities was $57.4 million and included $41.4 million in proceeds from the Bridge Facility; $1.2 million in restricted cash for indemnification deposits received and $66.6 million from the Revolving Credit Facility. These were offset by repayment of the Bridge Facility of $45.0 million and revolving credit facility origination cost of $6.7 million.

Off-Balance Sheet Arrangements

At September 30, 2014, there are no off-balance sheet arrangements between us and any other entity that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk are credit risk, interest rate risk and foreign currency risk. As of September 30, 2014 we did not hold material amount of financial instruments for trading purposes.

Credit Risk

Credit risk consists primarily of the potential loss arising from adverse changes in the financial condition of the issuers of the life insurance policies that we own. Historically, we managed our credit risk related to these life insurance policy issuers by generally only funding premium finance loans for policies issued by companies that had a credit rating of at least “A” by Standard & Poor’s, at least “A2” by Moody’s, at least “A” by A.M. Best Company or at least “A-” by Fitch. At September 30, 2014, we had no outstanding loans. To limit our credit risk, when purchasing life settlements, we generally only purchase life settlements from companies that are investment grade.

The following table provides information about the life insurance issuer concentration that exceed 10% of total death benefit and 10% of total fair value of our investment in life settlements as of September 30, 2014:

Percentage of

Total

Total Death

Moody’s

S&P

Carrier

Fair Value

Benefit

Rating

Transamerica Occidental Life Insurance Company

24.1

20.6

AA-

Lincoln National Life Insurance Company

22.5

20.3

AA-

Lincoln Benefit Life Company

10.7

10.0

BBB+

Not Rated

Interest Rate Risk

At September 30, 2014, fluctuations in interest rates did not impact interest expense in the life finance business. As discussed above in Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Revolving Credit Facility accrues interest at LIBOR plus an applicable margin. LIBOR under the facility is subject to a floor of 1.5% and the Company does not expect a fluctuation in interest rates to have a meaningful impact on the Company’s interest expense in the short term. Increases in LIBOR above the 1.5% floor provided in the Revolving Credit Facility, however, would likely affect the calculation of the fair value of the debt under the Revolving Credit Facility. Additional increases in interest rates may impact the rates at which we are able to obtain financing in the future. Holding other variables constant, a hypothetical 1% increase in LIBOR would not be expected to have a material impact for fiscal year 2014.

We earn income on the changes in fair value of the life insurance policies we own. However, if the fair value of the life insurance policies we own decreases, we record this reduction as a loss.

As of September 30, 2014, we owned investments in life settlements with a fair value of $350.4 million. A rise in interest rates could potentially have an adverse impact on the sale price if we were to sell some or all of these assets. There are several factors that affect the market value of life settlements, including the age and health of the insured, investors’ demand, available liquidity in the marketplace, duration and longevity of the policy, and interest rates. We currently do not view the risk of a decline in the sale price of life settlements due to normal changes in interest rates as a material risk.

Foreign Currency Exchange Rate Risk

Changes in the exchange rate between transactions denominated in a currency other than our foreign subsidiaries’ functional currency are immaterial to our operating results. Exposure to foreign currency exchange rate risk may increase over time as our business evolves.

Item 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q.

Limitations on Controls

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal controls over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based on certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1.

Litigation

For a description of legal proceedings, see “Litigation” under Note 13, “Commitments and Contingencies” to our consolidated financial statements.

Item 1A.

Risk Factors

Updates to our risk factors are discussed below. Other than the risk factors set forth below, our risk factors have not changed materially from those disclosed in our Annual Report on Form 10-K filed for the year ended December 31, 2013.

Our substantial leverage and significant debt service obligations could adversely affect our ability to fulfill our obligations and make it more difficult for us to fund our operations.

As of September 30, 2014, we had $227.3 million in outstanding long-term debt (without giving effect to the fair value of such indebtedness) and on November 10, 2014, we borrowed an additional $25 million through the issuance of 12.875% senior secured notes. Our substantial level of indebtedness could have important negative consequences to you and us, including:

•

we may have difficulty satisfying our debt obligations;

•

we may have difficulty refinancing our existing indebtedness or obtaining financing in the future for working capital, portfolio lending, acquisitions or other purposes;

•

we will need to use a substantial portion of our available cash flow to pay interest and principal on our debt, which will reduce the amount of money available to finance our operations and other business activities;

•

our debt level increases our vulnerability to general economic downturns and adverse industry conditions;

•

our debt level could limit our flexibility in planning for, or reacting to, changes in our business and in our industry in general; and

•

our leverage could place us at a competitive disadvantage compared to our competitors that have less debt.

While the terms of the financing arrangements governing our debt contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. Accordingly, we could incur significant additional indebtedness in the future; the more we become leveraged, the more we become exposed to the risks described above.

We are subject to a number of restrictive covenants which, if breached, may restrict our business and financing activities.

The indenture governing the 12.875% senior secured notes contains a number of restrictive covenants that impose significant operating and other restrictions on us. Such restrictions affect, and in many respects limit or prohibit, among other things, our ability to:

•

incur additional debt;

•

pay dividends and make distributions;

•

issue stock of subsidiaries;

•

make certain investments;

•

repurchase stock;

•

create liens;

•

enter into affiliate transactions;

•

merge or consolidate; and

•

transfer and sell assets.

Such restrictions could have a material adverse effect on our business and operations. In addition, the indenture governing the 12.875% senior secured notes also requires us to maintain a minimum cash balance of $20 million and meet a net worth requirement of at least $100 million. Our ability to comply with these requirements may be affected by events beyond our control.

A failure to comply with these and other covenants contained in the financing arrangements governing our indebtedness could result in an event of default, which, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations.

We may have exposure to greater than anticipated tax liabilities.

Our income tax obligations are based in part on our corporate operating structure and intercompany arrangements, including the manner in which we own our life settlements and the valuations of our intercompany transactions. The tax laws applicable to our business, including the laws of the United States, Ireland and other jurisdictions, are subject to interpretation and certain jurisdictions are aggressively interpreting their laws in new ways in an effort to raise additional tax proceeds from companies. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for intercompany arrangements and ownership of life settlements, which could increase our effective tax rate and harm our financial position and results of operations. We are subject to regular review and audit by U.S. federal and state authorities and beginning in 2014, foreign tax authorities. Tax authorities may disagree with certain positions we have taken and any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made. In addition, our future income taxes could be adversely affected by changes in tax laws, regulations, or accounting principles.

Changes in tax laws or tax rulings could materially affect our financial position and results of operations.

Changes in tax laws or tax rulings could materially affect our financial position and results of operations. The U.S. and many countries in the European Union, are actively considering changes to existing tax laws. Certain proposals, including proposals with retroactive effect, could include recommendations that would significantly increase our tax obligations where we do business. Any changes in the taxation of either international business activities or ownership of life settlements may increase our effective tax rate and harm our financial position and results of operations and, under certain circumstances, may constitute an event of default under the Revolving Credit Facility.

If we are unable to maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common stock may be negatively affected.

We are subject to Section 404 of the Sarbanes-Oxley Act (SOX), which requires us to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. We have consumed and will continue to consume management resources and incur expenses for SOX compliance on an ongoing basis. In addition, as we have reduced the number of our employees and moved certain of our operations to foreign subsidiaries, we have increased our reliance on third parties for various aspects of our internal controls. If we identify material weaknesses in our internal control over financial reporting, or if we are unable to comply with the requirements of Section 404 in a timely manner or are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the trading price of our common stock could be negatively affected, and we could become subject to investigations by the SEC, or other regulatory authorities, which could require additional financial and management resources.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

There are no recent sales of unregistered securities that have not been previously included in an Annual Report on Form 10-K, a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K.

Item 3.

Default Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

Entry into a Material Definitive Agreement.

On November 10, 2014, we issued $25 million in aggregate principal amount of 12.875% senior secured notes due 2017. Please see Note 16, “Subsequent Events,” of the notes to Consolidated Financial Statements, which is incorporated herein by reference. The forgoing summary does not purport to be complete and is qualified in its entirety by the note purchase agreement and the indenture for the notes, which are filed as an Exhibits to this Quarterly Report on Form 10-Q and incorporated herein by reference.

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

The information set forth above under “Entry into a Material Definitive Agreement” is incorporated herein by reference.

Item 6.

Exhibits

See the Exhibit Index following the Signatures page of this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


				IMPERIAL HOLDINGS, INC.

/s/ Richard S. O’Connell, Jr.
Richard S. O’Connell, Jr. Date November 10, 2014				Chief Financial Officer and Chief Credit Officer
				(Principal Financial Officer)

EXHIBIT INDEX

In reviewing the agreements included as exhibits to this report, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company, its subsidiaries or other parties to the agreements. The Agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:

•

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

•

have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

•

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

•

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading. Additional information about the Company may be found elsewhere in this report and the Company’s other public files, which are available without charge through the SEC’s website at http://www.sec.gov.


Exhibit No.		Description

Exhibit 4.1		Indenture, dated as of November 10, 2014, by and among the Registrant, as issuer, the subsidiary guarantors named therein and Wilmington Trust, National Association, as trustee.

Exhibit 10.1		Note Purchase Agreement, dated as of November 10, 2014, by and among the Registrant, as issuer, the subsidiary guarantors named therein and Indaba Capital Fund, L.P., as purchaser.

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.		Interactive Data Files

Exhibit 101.INS +		XBRL Instance Document

Exhibit 101.SCH +		XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL +		XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.DEF +		XBRL Taxonomy Definition Linkbase Document

Exhibit 101.LAB +		XBRL Taxonomy Extension Label Linkbase Document 10.1 & 10.2

Exhibit 101.PRE +		XBRL Taxonomy Extension Presentation Linkbase Document

+	Submitted electronically with this Quarterly Report

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company