SquareTwo Financial Corp - FORM 10-Q

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EX-31.1 - EXHIBIT 31.1 - SquareTwo Financial Corp	q22015ex311ceocertification.htm
EX-31.2 - EXHIBIT 31.2 - SquareTwo Financial Corp	q22015ex312cfocertification.htm
EX-32.1 - EXHIBIT 32.1 - SquareTwo Financial Corp	q22015ex321soxcertification.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

________________________________________________________________

FORM 10-Q

________________________________________________________________

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

For the quarterly period ended June 30, 2015

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

For the transition period from to

Commission File Number: 333-170734

_____________________________________________

SquareTwo Financial Corporation

(Exact name of Registrant as Specified in Its Charter)

_____________________________________________



Delaware		84-1261849
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
4340 South Monaco Street, Second Floor
Denver, Colorado		80237
(Address of Principal Executive Offices)		(Zip Code)

303-296-3345

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 o No o

(Note: The registrant is a voluntary filer of reports under Section 13 or 15(d) of the Securities Exchange Act of 1934; the registrant has filed during the preceding 12 months all reports that it would have been required to file by Section 13 or 15(d) of the Securities Exchange Act of 1934 if the registrant had been subject to one of such Sections.)

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 o

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



Large accelerated filer o		Accelerated filer o
Non-accelerated filer x (Do not check if a smaller reporting company)		Smaller reporting company o

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

As of August 13, 2015, 1,000 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

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TABLE OF CONTENTS



		Page
Part I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited).	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	54
Item 4.	Controls and Procedures.	54

Part II	OTHER INFORMATION
Item 1.	Legal Proceedings.	55
Item 1A.	Risk Factors.	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	55
Item 3.	Defaults Upon Senior Securities.	55
Item 4.	Mine Safety Disclosures.	55
Item 5.	Other Information.	55
Item 6.	Exhibits.	56

	Signatures	57

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PART I

Item 1. Condensed Consolidated Financial Statements.

SquareTwo Financial Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited, in thousands except share data)



	June 30, 2015			December 31, 2014
Assets
Cash and cash equivalents	$	23,482		$	15,677
Restricted cash	5,073			4,137
Trade receivables, net of allowance for doubtful accounts of $15 and $15, respectively	1,816			1,851
Notes receivable	180			194
Purchased debt, net	189,393			222,700
Property and equipment, net	23,072			23,189
Goodwill and intangible assets	171,292			171,348
Other assets	8,187			8,991
Total assets	$	422,495		$	448,087
Liabilities and stockholder's deficiency
Liabilities:
Accounts payable, trade	$	3,392		$	3,225
Payable from trust accounts	1,559			1,404
Taxes payable	352			475
Accrued interest and other liabilities	21,458			24,499
Deferred tax liability, net	11,619			11,408
Line of credit	148,272			138,702
Notes payable, net of discount	289,333			289,370
Obligations under capital lease agreements	1,899			2,310
Total liabilities	477,884			471,393
Commitments and contingencies (Note 9)
Stockholder's deficiency:
Common stock, par value $0.001 per share; 1,000 shares authorized, issued and outstanding	—			—
Additional paid-in capital	190,211			190,191
Accumulated deficit	(246,476		)	(215,823		)
Accumulated other comprehensive loss	(5,892		)	(3,636		)
Total SquareTwo deficiency	(62,157		)	(29,268		)
Noncontrolling interest	6,768			5,962
Total stockholder's deficiency	(55,389		)	(23,306		)
Total liabilities and stockholder's deficiency	$	422,495		$	448,087

See Notes to the Condensed Consolidated Financial Statements

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SquareTwo Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited, in thousands)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Revenues
Purchased debt revenue, net	$	48,820		$	66,838		$	101,223		$	138,328
Other revenue	19			9			25			28
Total revenues	48,839			66,847			101,248			138,356
Expenses
Purchased debt expense	30,011			38,399			64,490			77,477
Court costs, net	7,078			9,958			14,339			19,141
Salaries and payroll taxes	9,064			7,530			17,726			15,087
General and administrative	2,988			3,538			6,295			7,581
Depreciation and amortization	1,630			1,706			3,386			3,348
Total operating expenses	50,771			61,131			106,236			122,634
Operating (loss) income	(1,932		)	5,716			(4,988		)	15,722
Other expenses
Interest expense	11,207			11,075			22,295			22,084
Other expense	77			87			161			193
Total other expenses	11,284			11,162			22,456			22,277
Loss before income taxes	(13,216		)	(5,446		)	(27,444		)	(6,555		)
Income tax expense	(1,243		)	(2,071		)	(2,403		)	(3,108		)
Net loss	(14,459		)	(7,517		)	(29,847		)	(9,663		)
Less: Net income attributable to the noncontrolling interest	419			399			806			740
Net loss attributable to SquareTwo	$	(14,878	)	$	(7,916	)	$	(30,653	)	$	(10,403	)

See Notes to the Condensed Consolidated Financial Statements

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SquareTwo Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

(unaudited, in thousands)



	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014
Net loss	$	(14,459	)	$	(7,517	)	$	(29,847	)	$	(9,663	)
Other comprehensive income (loss), net of tax:
Currency translation adjustment	431			898			(2,256		)	64
Comprehensive loss	(14,028		)	(6,619		)	(32,103		)	(9,599		)
Less: Comprehensive income attributable to the noncontrolling interest	419			399			806			740
Comprehensive loss attributable to SquareTwo	$	(14,447	)	$	(7,018	)	$	(32,909	)	$	(10,339	)

See Notes to the Condensed Consolidated Financial Statements

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SquareTwo Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholder's Deficiency

(unaudited, in thousands)



	Common Stock		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Total SquareTwo Deficiency			Noncontrolling Interest		Total Stockholder's Deficiency
Balances, December 31, 2014	$	—	$	190,191	$	(215,823	)	$	(3,636	)	$	(29,268	)	$	5,962	$	(23,306	)
Net (loss) income	—		—		(30,653		)	—			(30,653		)	806		(29,847		)
Currency translation adjustment	—		—		—			(2,256		)	(2,256		)	—		(2,256		)
Stock option expense	—		20		—			—			20			—		20
Balances, June 30, 2015	$	—	$	190,211	$	(246,476	)	$	(5,892	)	$	(62,157	)	$	6,768	$	(55,389	)

See Notes to the Condensed Consolidated Financial Statements

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SquareTwo Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)



	Six Months Ended
	June 30,
	2015			2014
Operating activities
Net loss	$	(29,847	)	$	(9,663	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,386			3,348
Amortization of loan origination fees and debt discount	1,652			1,466
Purchased debt valuation allowance reversals	(2,648		)	(523		)
Stock option expense	20			49
Amortization of prepaid and other non-cash expenses	3,045			2,084
Deferred tax provision, net of valuation allowance	211			1,092
Changes in operating assets and liabilities:
Income tax payable/receivable	(120		)	(396		)
Restricted cash	(936		)	(822		)
Other assets	(3,314		)	(2,798		)
Accounts payable and accrued liabilities	(2,535		)	(3,840		)
Net cash used in operating activities	(31,086		)	(10,003		)
Investing activities
Investment in purchased debt	(53,713		)	(67,816		)
Proceeds applied to purchased debt principal	88,534			88,900
Payments to branch offices related to asset purchase program	(259		)	—
Net investment in notes receivable	—			(193		)
Investment in property and equipment, including internally developed software	(2,548		)	(2,063		)
Net cash provided by investing activities	32,014			18,828
Financing activities
Repayments of investment by Parent	—			(150		)
Payments on notes payable	(396		)	(377		)
Proceeds from line of credit	190,314			229,236
Payments on line of credit	(180,744		)	(229,720		)
Origination fees on line of credit	(200		)	(244		)
Payments on capital lease obligations	(843		)	(742		)
Net cash provided by (used in) financing activities	8,131			(1,997		)
Increase in cash and cash equivalents	9,059			6,828
Impact of foreign currency translation on cash	(1,254		)	321
Cash and cash equivalents at beginning of period	15,677			9,379
Cash and cash equivalents at end of period	$	23,482		$	16,528
Supplemental cash flow information
Cash paid for interest	$	20,642		$	20,673
Cash paid for income taxes	2,296			2,431
Property and equipment financed with capital leases and notes payable	715			1,282

See Notes to the Condensed Consolidated Financial Statements

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SquareTwo Financial Corporation and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(unaudited, in thousands except share amounts or otherwise indicated)

1. Organization and Basis of Presentation

SquareTwo Financial Corporation (together with its subsidiaries referred to herein as “SquareTwo,” "we," "our," "us," or the “Company”) is a Delaware corporation that was organized in February 1994 and is headquartered in Denver, Colorado. On August 5, 2005, CA Holding Inc. (“Parent”) acquired 100% of the outstanding stock of SquareTwo and its subsidiaries (the “Acquisition”). The accompanying condensed consolidated financial statements reflect Parent’s basis in SquareTwo. SquareTwo’s subsidiaries purchase domestic and Canadian charged-off receivables (referred to herein as “purchased debt”).

The Company is a leading purchaser of charged-off consumer and commercial receivables in the accounts receivable management industry. Our primary business is the acquisition, management and collection of charged-off consumer and commercial accounts receivable that we purchase from financial institutions, finance and leasing companies, and other issuers in the United States (U.S.) and Canada. In the U.S, we pursue recovery of accounts through our Closed Loop Network, a unique combination of company-owned call centers along with a network of regional law offices, also referred to as "branch offices", exclusively dedicated to SquareTwo. Branch offices pursue proceeds on purchased debt owned by the Company for a fee. Each of our branch offices is independently owned and has executed agreements that provide the legal structure for the exclusive relationship with SquareTwo. SquareTwo places certain of its accounts for collection with its call centers operating under the subsidiary SquareTwo Financial Services Corporation d/b/a Fresh View Solutions ("Fresh View").

Our Canadian subsidiaries exclusively purchase and service charged-off Canadian accounts. We utilize a combination of a company-owned call center and third-party non-legal and legal collection firms to pursue recovery of our Canadian accounts.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by GAAP for complete financial statements. In the opinion of the Company, however, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s condensed consolidated balance sheet as of June 30, 2015, its condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2015 and 2014, its condensed consolidated statements of changes in stockholder's deficiency for the six months ended June 30, 2015, and its condensed consolidated statements of cash flows for the six months ended June 30, 2015 and 2014. The condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss of the Company for the three and six months ended June 30, 2015 may not be indicative of future results. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2014 included in the Company’s most recent Annual Report on Form 10-K.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements of the Company are prepared in accordance with GAAP and include the accounts of SquareTwo and its subsidiaries. SquareTwo owns the following subsidiaries: ReFinance America, Ltd.; CACV of Colorado, LLC; CACH, LLC; Collect Air, LLC; Healthcare Funding Solutions, LLC; SquareTwo Financial Services Corporation (d/b/a Fresh View Solutions); Collect America of Canada, LLC, and certain other inactive entities not listed. Collect America of Canada, LLC has a wholly-owned subsidiary, SquareTwo Financial Canada Corporation, which has an 86% ownership interest in CCL Financial Inc. ("CCL"). CCL is a consolidated subsidiary of the Company. As previously disclosed, Parent owns 100% of the outstanding equity of SquareTwo and all other Parent investments are dormant. Expenses incurred by Parent on SquareTwo’s behalf have been allocated to SquareTwo and are reflected in the condensed consolidated financial statements of SquareTwo. Intercompany transactions and balances have been eliminated in consolidation.

SquareTwo has two reportable operating segments, as defined by the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 280, Segment Reporting: Domestic and Canada.

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Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The Company's condensed consolidated financial statements are based on a number of significant estimates, including the collectability of purchased debt and the timing of such proceeds, impairment testing of goodwill and the branch office network indefinite-lived intangible asset, and accounting for income taxes. Due to the uncertainties inherent in the estimation process, it is at least reasonably possible that the Company's estimates in connection with these items could be materially revised within the near term.

Revenue Recognition from Purchased Debt

Purchased debt represents receivables that have been charged-off as uncollectible by the originating organization and that may or may not have been subject to previous collection efforts. Through its subsidiaries, the Company purchases the rights to the unrecovered balances owed by individual customers from various financial institutions at a substantial discount from face value and records the purchase at the Company's cost to acquire the portfolio.

We account for our purchased debt under the guidance of ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Under ASC 310-30, static pools of purchased debt may be established and accounted for under either the interest method of accounting (referred to by us as "level yield") or the cost recovery method of accounting. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, reduction of carrying value and any valuation allowance. Once a static pool is established, individual accounts are not added to or removed from the pool. Purchased debt accounted for under our level yield method of accounting is pooled each quarter, whereas purchased debt accounted for under cost recovery is pooled by each individual purchase. The cost recovery method prescribed by ASC 310-30 is required when cash proceeds on a particular purchase cannot be reasonably predicted in timing or amount. Purchased debt accounted for under the cost recovery method is comprised of Canadian portfolios acquired prior to January 1, 2012, commercial, student loan, medical, and any other purchases in the U.S. or Canada for which we do not have the necessary experience to forecast the timing and amount of cash flows. For purchased debt that we believe we can reasonably forecast the timing and amount of our cash proceeds we utilize the level yield method.

Level Yield Method

Most of our purchased debt is accounted for under the level yield method of accounting. Under the level yield method of accounting, cash proceeds on each static pool are allocated to both revenue and to reduce the carrying value (the purchased debt, net line item on the condensed consolidated balance sheets) based on an estimated gross internal rate of return ("IRR") for that pool. We determine the applicable IRR for each static pool based on our estimate of the expected cash proceeds of that pool which is based on our estimated remaining proceeds ("ERP") for the static pool, and the rate of return required to reduce the carrying value of that pool to zero over its estimated life. Each pool's IRR is typically determined using an expected life up to twelve years. As described below, if cash proceeds for a pool deviate from the forecast in timing or amount, we adjust the carrying value of the pool or its IRR (which determines our future revenue recognition), as applicable.

Purchased debt portfolios with similar economic characteristics accounted for under the level yield method are accumulated into static pools on a quarterly basis. Cash proceeds on a pool that are greater than the revenue recognized in accordance with the established IRR will reduce the carrying value of the static pool (also referred to as "amortization" of the pool). Cash proceeds on a pool that are lower than the revenue recognized in accordance with the established IRR will increase the carrying value of the static pool as required by ASC 310-30.

The expected trends of each pool are analyzed at least quarterly. If these trends are different than the original estimates, certain adjustments may be required. Each quarter, we use our ERP to determine our estimate of future cash proceeds for each pool. We then use all factors available, such as the types of assets within the pool, our experience with those assets, the age of the pool, any recent fluctuations in our recovery rates from the various channels we collect from, and where that pool is in its own collection life cycle. We use these factors for each static pool to determine a range of future proceeds, which becomes smaller as we gain more experience with each static pool. We determine our best estimate of future proceeds within that range, which may be used for adjustments to our revenue recognition, or for our determination of allowance charges.

Using our best estimate of future proceeds, if we estimate a reduction or delay in the receipt of the aggregate future cash proceeds on a pool, a valuation allowance may be recognized and the original IRR remains unchanged. The valuation

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allowance is determined to the extent that the present value (using the established IRR) of the revised future cash proceeds is less than the current carrying value of the pool. If we estimate an increase in the aggregate future cash proceeds or an acceleration of the timing of future cash proceeds on a pool, the IRR may be increased prospectively to reflect revised best estimates of those future cash proceeds over the remaining life of the pool. If there was a previous valuation allowance taken, reversal of the previously recognized valuation allowance occurs prior to any increases to the IRR. ASC 310-30 requires that each pool be evaluated independently and does not allow netting across pools. Thus, even in periods of increasing cash proceeds for our entire purchased debt portfolio, we may be required to record a valuation allowance. Allowance charges for purchased debt are included as adjustments to the purchased debt revenue, net line item in the condensed consolidated statements of operations.

Canadian purchases made on or after January 1, 2012 are being accounted for under the level yield method unless we are unable to reasonably forecast the timing and amount of cash proceeds. Purchases eligible for the level yield method are being accumulated into static pools on a quarterly basis separately from U.S. purchases.

Cost Recovery Method

Treatment of cash proceeds under the cost recovery method differs from treatment under the level yield method. Under the cost recovery method, as cash proceeds, excluding court cost recoveries, less collection fees paid are received, they directly reduce the carrying value of the purchased debt. For every dollar recorded as a fee paid to the branch offices or third party collection firms, there is a corresponding dollar recorded as revenue in the purchased debt revenue, net line item in the condensed consolidated statements of operations (i.e. the expense and revenue amounts are equal). Once the purchase's carrying value has been reduced to zero, all cash proceeds, excluding court cost recoveries, are recorded as revenues. Court cost recoveries received for purchased debt accounted for under the cost recovery method of accounting are netted against court cost expenditures in the court costs, net line item in the condensed consolidated statements of operations. As compared to the level yield method of accounting, the cost recovery method of accounting generally results in a more rapid reduction in the carrying value of purchased debt and slower recognition of revenue with respect thereto.

We assess our purchased debt accounted for under the cost recovery method at least annually, or more frequently if necessary, to determine if a valuation allowance is necessary. If the carrying value of a purchase is greater than our best estimate of future cash proceeds, excluding court cost recoveries, net of the fees expected to be paid for collections on that purchase, we record a valuation allowance for the difference. In the instance that our best estimate of future cash proceeds, excluding court cost recoveries, increases for a cost recovery purchase that had a valuation allowance previously recorded, we may reverse a portion or the entire valuation allowance, as estimates indicate. Similar to our process to determine our revenue recognition, or allowance charges for our level yield pools as described above, we use all factors available, and our ERP to determine our best estimate of future cash proceeds for our purchased debt accounted for under the cost recovery method.

Reclassifications

Certain reclassifications have been made to prior year amounts in order to conform to the current year presentation. The Company has revised the presentation of its condensed consolidated statements of operations for all the periods presented to provide improved visibility and comparability with the current year presentation. Other direct operating expense, previously a separate line item on the condensed consolidated statements of operations, of $3,904 and $7,810 for the three and six months ended June 30, 2014, respectively, has been reclassified to purchased debt expense.

Recently Issued Accounting Pronouncements

In May 2014, the FASB and the IASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 is a comprehensive new revenue recognition standard that supersedes virtually all existing revenue guidance under GAAP and IFRS. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current guidance. The effective date of the new standard was deferred by one year by ASU No. 2015-14. The standard, which does not apply to financial instruments, is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period and early adoption is permitted for periods beginning after December 15, 2016. The Company is in the process of determining the impact this standard may have on its financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU No. 2014-15 provides

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guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern at each annual and interim reporting period, and to provide related footnote disclosures. This update will be effective for the Company for the annual period ending after December 15, 2016.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. ASU No. 2015-02 amends current consolidation guidance, affecting the evaluation of whether certain legal entities should be consolidated. All legal entities are subject to reevaluation under the revised consolidation model. The Company is evaluating this ASU to determine whether any of our current conclusions with respect to consolidation of legal entities will change under the new guidance; however, we do not anticipate any material impact to our financial statements and related disclosures. The requirements of this update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods, and early adoption is permitted.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying value of that debt liability and will therefore impact our presentation of debt issuance costs when implemented. The recognition and measurement guidance for debt issuance costs is not impacted by ASU No. 2015-03. This update is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods, and early adoption is permitted.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. ASU 2015-05 provides guidance for customers to determine whether a cloud computing arrangement includes a software license to be accounted for consistent with the acquisition of other software licenses. Cloud computing arrangements that do not include a software license shall be accounted for as service contracts. This update is effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods, and early adoption is permitted. The Company will adopt this update prospectively for any cloud computing arrangements entered into or materially modified after the effective date.

3. Purchased Debt

The following table shows the changes in purchased debt, net for the periods presented:



	Three Months Ended
	Level Yield						Cost Recovery						Totals
	June 30,						June 30,						June 30,
	2015			2014			2015			2014			2015			2014
Balance at beginning of period	$	182,586		$	240,314		$	17,920		$	17,272		$	200,506		$	257,586
Purchases	17,825			39,617			13,886			2,435			31,711			42,052
Valuation allowance reversals (charges)	963			318			(734		)	—			229			318
Proceeds applied to purchased debt principal	(37,998		)	(43,775		)	(5,282		)	(2,858		)	(43,280		)	(46,633		)
Other(1)	227			386			—			11			227			397
Balance at end of period	$	163,603		$	236,860		$	25,790		$	16,860		$	189,393		$	253,720



	Six Months Ended
	Level Yield						Cost Recovery						Totals
	June 30,						June 30,						June 30,
	2015			2014			2015			2014			2015			2014
Balance at beginning of period	$	206,642		$	254,419		$	16,058		$	19,938		$	222,700		$	274,357
Purchases	34,174			64,362			19,539			3,454			53,713			67,816
Valuation allowance reversals (charges)	3,305			523			(657		)	—			2,648			523
Proceeds applied to purchased debt principal	(79,384		)	(82,376		)	(9,150		)	(6,524		)	(88,534		)	(88,900		)
Other(1)	(1,134		)	(68		)	—			(8		)	(1,134		)	(76		)
Balance at end of period	$	163,603		$	236,860		$	25,790		$	16,860		$	189,393		$	253,720

(1) Other includes impacts of the Company’s currency translation.

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The following table shows the relationship of purchased debt proceeds to gross revenue recognized and proceeds applied to principal for the periods presented:



	Three Months Ended
	Level Yield				Cost Recovery				Totals
	June 30,				June 30,				June 30,
	2015		2014		2015		2014		2015		2014
Proceeds	$	77,678	$	99,171	$	13,929	$	12,733	$	91,607	$	111,904
Less:
Gross revenue recognized	39,680		55,396		8,342		9,561		48,022		64,957
Cost recovery court cost recoveries(1)	—		—		305		314		305		314
Proceeds applied to purchased debt principal	37,998		43,775		5,282		2,858		43,280		46,633
	$	—	$	—	$	—	$	—	$	—	$	—



	Six Months Ended
	Level Yield				Cost Recovery				Totals
	June 30,				June 30,				June 30,
	2015		2014		2015		2014		2015		2014
Proceeds	$	160,016	$	198,652	$	26,064	$	25,492	$	186,080	$	224,144
Less:
Gross revenue recognized	80,632		116,276		16,342		18,332		96,974		134,608
Cost recovery court costs recoveries(1)	—		—		572		636		572		636
Proceeds applied to purchased debt principal	79,384		82,376		9,150		6,524		88,534		88,900
	$	—	$	—	$	—	$	—	$	—	$	—

(1) Cost recovery court cost recoveries are recorded as a contra expense in the court costs, net line item in the condensed consolidated statements of operations.

The following table reconciles gross revenue recognized to purchased debt revenue, net for the periods presented:



	Three Months Ended
	Level Yield				Cost Recovery						Totals
	June 30,				June 30,						June 30,
	2015		2014		2015			2014			2015			2014
Gross revenue recognized	$	39,680	$	55,396	$	8,342		$	9,561		$	48,022		$	64,957
Purchased debt royalties	531		1,348		85			258			616			1,606
Valuation allowance reversals (charges)	963		318		(734		)	—			229			318
Other(1)	—		—		(47		)	(43		)	(47		)	(43		)
Purchased debt revenue, net	$	41,174	$	57,062	$	7,646		$	9,776		$	48,820		$	66,838



	Six Months Ended
	Level Yield				Cost Recovery						Totals
	June 30,				June 30,						June 30,
	2015		2014		2015			2014			2015			2014
Gross revenue recognized	$	80,632	$	116,276	$	16,342		$	18,332		$	96,974		$	134,608
Purchased debt royalties	1,477		2,804		204			482			1,681			3,286
Valuation allowance reversals (charges)	3,305		523		(657		)	—			2,648			523
Other(1)	—		—		(80		)	(89		)	(80		)	(89		)
Purchased debt revenue, net	$	85,414	$	119,603	$	15,809		$	18,725		$	101,223		$	138,328

(1) Other items relate to certain profit sharing items that reduce the Company’s revenue recorded on purchased debt and the branch office asset purchase program (discontinued).

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The following table shows the detail of the Company’s purchases for the periods presented:



	Three Months Ended
	Level Yield						Cost Recovery						Totals
	June 30,						June 30,						June 30,
	2015			2014			2015			2014			2015			2014
Purchase price	$	17,825		$	39,617		$	13,886		$	2,435		$	31,711		$	42,052
Face value	207,775			286,787			69,371			54,020			277,146			340,807
% of face	8.6		%	13.8		%	20.0		%	4.5		%	11.4		%	12.3		%



	Six Months Ended
	Level Yield						Cost Recovery						Totals
	June 30,						June 30,						June 30,
	2015			2014			2015			2014			2015			2014
Purchase price	$	34,174		$	64,362		$	19,539		$	3,454		$	53,713		$	67,816
Face value	373,722			471,204			140,274			90,400			513,996			561,604
% of face	9.1		%	13.7		%	13.9		%	3.8		%	10.5		%	12.1		%

Accretable yield represents the difference between the ERP of our purchased debt accounted for under the level yield method and the carrying value of those assets. The ERP is used in determining our revenue recognition, and adjustments to our revenue recognition, for our purchased debt accounted for under the level yield method, which is described in further detail in Note 2.

During the three months ended June 30, 2015, the Company purchased $207.8 million in face value debt that qualified for the level yield method of accounting for a purchase price of $17.8 million. The ERP expected at acquisition for these level yield portfolios amounted to $31.4 million. The accretable yield for these purchases was $13.6 million, or the ERP of $31.4 million less the purchase price of $17.8 million.

During the six months ended June 30, 2015, the Company purchased $373.7 million in face value debt that qualified for the level yield method of accounting for a purchase price of $34.2 million. The ERP expected at acquisition for these level yield portfolios amounted to $60.3 million. The accretable yield for these purchases was $26.1 million, or the ERP of $60.3 million less the purchase price of $34.2 million.

The following table represents the change in accretable yield for the periods presented:



	2015			2014
Balance at December 31, prior year	$	389,803		$	523,006
Impact from revenue recognized on purchased debt, net	(43,294		)	(61,085		)
Additions from current purchases	12,592			13,150
Reclassifications to accretable yield, including foreign currency translation	2,409			13,555
Balance at March 31,	$	361,510		$	488,626
Impact from revenue recognized on purchased debt, net	(40,643		)	(55,714		)
Additions from current purchases	13,557			16,241
Reclassifications to (from) accretable yield, including foreign currency translation	20,283			(10,751		)
Balance at June 30,	$	354,707		$	438,402

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The following table shows the changes in the valuation allowance for the Company’s purchased debt for the periods presented:



	Three Months Ended
	Level Yield						Cost Recovery				Totals
	June 30,						June 30,				June 30,
	2015			2014			2015		2014		2015			2014
Balance at beginning of period	$	123,416		$	125,879		$	19,617	$	17,584	$	143,033		$	143,463
Valuation allowance (reversals) charges	(963		)	(318		)	734		—		(229		)	(318		)
Balance at end of period	$	122,453		$	125,561		$	20,351	$	17,584	$	142,804		$	143,145



	Six Months Ended
	Level Yield						Cost Recovery				Totals
	June 30,						June 30,				June 30,
	2015			2014			2015		2014		2015			2014
Balance at beginning of period	$	125,758		$	126,084		$	19,694	$	17,584	$	145,452		$	143,668
Valuation allowance (reversals) charges	(3,305		)	(523		)	657		—		(2,648		)	(523		)
Balance at end of period	$	122,453		$	125,561		$	20,351	$	17,584	$	142,804		$	143,145

4. Goodwill and Intangible Assets

Indefinite lived intangible assets consist of goodwill and the value of the Company’s branch offices and were identified as part of purchase accounting at the date of the Acquisition. The Company tests its indefinite lived intangible assets annually for impairment unless there is a triggering event during an interim period that would necessitate testing.

We have two operating segments: Domestic and Canada. In accordance with FASB ASC Topic 350, Intangibles-Goodwill and Other, we have deemed our operating segments to be reporting units for the purpose of testing goodwill for impairment.

The following is a summary of intangible assets as of the dates presented:



	June 30, 2015		December 31, 2014
Goodwill	$	146,402	$	146,458
Branch office intangible	24,890		24,890
Total intangible assets	$	171,292	$	171,348

The change in goodwill represents the effect of foreign currency translation on the goodwill of our Canada segment.

5. Notes Payable and Other Borrowings

Line of Credit

The following is a listing of the Company’s outstanding line of credit borrowings, balances, and interest rates under the revolving credit facility as of the dates presented:



	June 30, 2015					December 31, 2014
Type of Debt	Weighted Average Interest Rate(1)		Balance		Maturity	Weighted Average Interest Rate(1)		Balance		Maturity
Line of Credit US	4.8	%	$	148,272	April 2016	4.8	%	$	138,702	April 2016
Line of Credit Canada	5.8	%	—		April 2016	5.8	%	—		April 2016
Total Line of Credit			$	148,272				$	138,702

(1) Weighted average interest rates exclude the impact of the amortization of fees associated with the origination of these instruments.

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The remaining unamortized costs of the facility were $991 and $1,443 at June 30, 2015 and December 31, 2014, respectively, and are included in the other assets line item on the condensed consolidated balance sheets. These costs are amortized on a straight-line basis over the remaining term of the facility.

The Company had accrued interest on its line of credit of $103 and $81 at June 30, 2015 and December 31, 2014, respectively, which are included in the accrued interest and other liabilities line item on the condensed consolidated balance sheets.

At June 30, 2015, our availability under the line of credit facility was $26.6 million based on our borrowing base calculation.

Notes Payable

The following is a listing of the Company’s outstanding notes payable borrowings, balances, and interest rates as of the dates presented:



	June 30, 2015					December 31, 2014
Type of Debt	Weighted Average Interest Rate(1)		Balance		Maturity	Weighted Average Interest Rate(1)		Balance		Maturity
Senior Second Lien Notes, net of $1,272 and $1,631 unamortized discount	11.625	%	$	288,728	April 2017	11.625	%	$	288,369	April 2017
Other Notes Payable	6.3	%	605		2015 - 2021	5.8	%	1,001		2015 - 2021
Total Notes Payable			$	289,333				$	289,370

(1) Weighted average interest rates exclude the impact of the amortization of fees associated with the origination of these instruments.

The remaining unamortized costs of the Senior Second Lien Notes were $2,263 and $2,904 at June 30, 2015 and December 31, 2014, respectively, and are included in the other assets line item on the condensed consolidated balance sheets. These costs are amortized on a straight-line basis over the remaining term of the notes.

The Company had accrued interest on its Senior Second Lien Notes payable of $8,428 at June 30, 2015 and December 31, 2014 which is included in the accrued interest and other liabilities line item on the condensed consolidated balance sheets.

Covenants

The senior revolving credit facility, as amended, and the Senior Second Lien Notes have certain covenants and restrictions, as is customary for such facilities, with which the Company must comply. As of June 30, 2015, the Company was in compliance with all covenants and restrictions of the revolving credit facility and Senior Second Lien Notes.

Letters of Credit

The Company had outstanding letters of credit totaling $492 at June 30, 2015 and December 31, 2014 which had not been drawn on and remained outstanding. The letters of credit have been issued to provide support in connection with our licensing applications.

6. Stockholder's Deficiency

Common Stock

As of June 30, 2015 and December 31, 2014, the Company was authorized to issue 1,000 shares, all of which are reserved as common stock, with 1,000 shares outstanding with a par value of $0.001 per share. There are no other equity shares outstanding that would take preference over the common stock in the instance that the Company pays dividends or liquidates. The outstanding shares are voting common stock and are owned 100% by Parent.

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Noncontrolling Interest

The Company holds a controlling interest of approximately 86% in its Canadian subsidiary, CCL. The portions of net income and comprehensive income attributable to the noncontrolling interest in CCL are shown on our condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss.

Accumulated Other Comprehensive Loss

During the six months ended June 30, 2015 and 2014, comprehensive (loss) income included currency translation adjustments resulting from converting transactions and balances related to our Canada segment's operations from Canadian dollars to U.S. dollars. The following is a summary of the changes in accumulated other comprehensive loss for the periods presented:



Accumulated Other Comprehensive Loss	Currency Translation Adjustment			Accumulated Other Comprehensive Loss
Balance, December 31, 2014	$	(3,636	)	$	(3,636	)
Other comprehensive loss, net of tax of $0	(2,256		)	(2,256		)
Balance, June 30, 2015	$	(5,892	)	$	(5,892	)



Accumulated Other Comprehensive Loss	Currency Translation Adjustment			Accumulated Other Comprehensive Loss
Balance, December 31, 2013	$	(1,347	)	$	(1,347	)
Other comprehensive income, net of tax of $0	64			64
Balance, June 30, 2014	$	(1,283	)	$	(1,283	)

7. Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"), defines fair value based on the price 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. ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value. The fair value hierarchy consists of three broad levels, which are described below:

· Level 1-Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

· Level 2-Inputs other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, such as 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; or other inputs that are observable or can be corroborated by observable market data.

· Level 3-Unobservable inputs that are supported by little, if any, market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

Purchased Debt

The Company initially records purchased debt at cost. Purchased debt for which a valuation allowance has not been recorded are subsequently recorded net of amortization under the interest method or the cost recovery method as discussed previously in Note 2. If a valuation allowance is required for a level yield pool, the Company records that portion of the total purchased debt balance by discounting the future cash flows generated by its proprietary forecasting model using the IRR as a discount rate. Valuation allowances for cost recovery pools are determined using the Company's proprietary forecasting model cash flows, which are undiscounted.

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Estimated Fair Value

The following tables display the carrying value and estimated fair value of the Company's financial instruments held in accordance with ASC 820 as of the dates presented:



	June 30, 2015
	Carrying amounts		Estimated fair value		Level 1		Level 2		Level 3
Purchased debt(1)	$	189,393	$	514,349	$	—	$	—	$	514,349
Line of credit(2)	148,272		148,272		—		148,272		—
Senior Second Lien Notes, net of $1,272 unamortized discount(3)	288,728		217,195		217,195		—		—
Other Notes Payable(4)	605		605		—		605		—



	December 31, 2014
	Carrying amounts		Estimated fair value		Level 1		Level 2		Level 3
Purchased debt(1)	$	222,700	$	563,674	$	—	$	—	$	563,674
Line of credit(2)	138,702		138,702		—		138,702		—
Senior Second Lien Notes, net of $1,631 unamortized discount(3)	288,369		288,157		288,157		—		—
Other Notes Payable(4)	1,001		1,001		—		1,001		—

(1) The Company's estimated fair value of purchased debt has been determined using our consolidated ERP discounted using a rate that approximates our weighted average cost of capital. Our ERP expectations are based on historical data as well as assumptions about future collection rates and customer behavior. The estimated fair value of purchased debt should not be construed to represent the underlying value of the Company.

(2) The Company has both a domestic and Canadian revolving credit facility. These instruments contain variable borrowing rates that are based in part on observed available market interest rates. As a result, the Company believes the carrying values of these instruments approximate fair value.

(3) The fair value of our Senior Second Lien Notes is based on observed available market trading metrics as of the dates presented.

(4) We estimated the fair value of these notes to approximate carrying value, as the applicable interest rates of the notes approximate those of our other current borrowings, which are based in part on observable market rates.

The carrying values of cash and cash equivalents, accounts receivable and payable, accrued expenses, and notes receivable are considered to approximate fair value due to the short-term nature of these instruments.

8. Income Taxes

For financial statement reporting purposes, the Company is treated as a stand-alone entity, and therefore all components of the provision for, or benefit from income taxes as well as the deferred tax assets and liabilities recognized herein reflect only the financial results and position of SquareTwo. For income tax purposes, the Company is included in the consolidated return of Parent. Parent files income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Parent's U.S. federal income tax returns were last examined for the tax year ended December 31, 2004, and Parent potentially remains subject to examination for all tax years ended on or after December 31, 2010.

For the three and six months ended June 30, 2015 the combined state, federal and Canadian tax expense from operations was $1.2 million and $2.4 million, respectively. These amounts were comprised of foreign taxes on Canadian operations based on an effective tax rate of approximately 26.5% as well as deferred expense related to Canadian withholding tax recognized in connection with Internal Revenue Code (“IRC”) Section 956 income from Canadian operations of $0.1 million and $0.2 million for the three and six months ended June 30, 2015, respectively. Any tax benefits related to pretax losses generated by the Company’s ongoing U.S. operations during 2015 have been fully offset by a corresponding increase in the valuation allowance as the Company remains in full valuation allowance position at June 30, 2015.

While virtually all IRC Section 956 income generated in the U.S. during 2015 can be offset by the Company’s net operating losses in the U.S., the expense of $0.1 million and $0.2 million relates specifically to withholding taxes on the amount of the deemed distribution under IRC Section 956, which would be payable in Canada upon an actual distribution in the future. Therefore, to the extent the amount of Canadian earnings and profits deemed distributed is not actually repatriated to the U.S., the withholding tax will not be paid.

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9. Commitments and Contingencies

Litigation

From time to time the Company is a defendant in ordinary routine litigation alleging violations of applicable state and federal laws by the Company or the branch offices acting on its behalf that is incidental to our business. These suits may include actions which may purport to be on behalf of a class of consumers. While the litigation and regulatory environment is challenging and continually changing, for the Company, our branch offices and our industry, in our opinion, such matters will not individually, or in the aggregate, result in a materially adverse effect on the Company's financial position, results of operations or cash flows. Management believes the range of reasonably possible loss for outstanding claims beyond those previously accrued is between zero and $1.5 million. The Company accrues for loss contingencies as they become probable and estimable.

10. Segment Information

In its operation of the business, the chief operating decision maker ("CODM"), our Chief Executive Officer, reviews certain financial information, including segment statements of profitability prepared on a basis not consistent with GAAP. The segment information within this note is reported on that basis. The CODM evaluates this information in deciding how to allocate resources and in assessing performance. The Company has two reportable operating segments: Canada operations and Domestic operations, which have been determined based on the way our Board of Directors, the CODM, and our Senior Leadership Team review the Company's strategy and performance.

The accounting policies of our two segments are the same as those described in the summary of significant accounting policies in Note 2. Canadian purchases made on or after January 1, 2012 are being accounted for under the level yield method unless we are unable to reasonably forecast the timing and amount of cash proceeds. Purchases eligible for the level yield method are accumulated into static pools on a quarterly basis separately from U.S. purchases.

The following tables present the Company's operating segment results for the periods presented:

Cash Proceeds on Purchased Debt:



	Three Months Ended June 30,				Six Months Ended June 30,
Cash Proceeds on Purchased Debt	2015		2014		2015		2014
Domestic	$	80,003	$	100,352	$	163,265	$	202,338
Canada	11,604		11,552		22,815		21,806
Consolidated	$	91,607	$	111,904	$	186,080	$	224,144

Total Revenues:



	Three Months Ended June 30,				Six Months Ended June 30,
Total Revenues	2015		2014		2015		2014
Domestic	$	41,846	$	59,845	$	87,683	$	125,204
Canada	6,993		7,002		13,565		13,152
Consolidated	$	48,839	$	66,847	$	101,248	$	138,356

Adjusted EBITDA:



	Three Months Ended June 30,				Six Months Ended June 30,
Adjusted EBITDA(1)	2015		2014		2015		2014
Domestic	$	34,230	$	45,432	$	67,521	$	92,203
Canada	8,672		8,378		17,065		15,799
Consolidated	$	42,902	$	53,810	$	84,586	$	108,002

(1) Segment Adjusted EBITDA is calculated consistently with the methodology used to report the Company's consolidated Adjusted EBITDA, except with regard to the costs of certain overhead items that may benefit both operating segments. The costs of these overhead items are included in the calculation of Domestic Adjusted EBITDA, but have not been allocated to Canada. This treatment of certain overhead costs is consistent with CODM review.

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Segment net income or loss is not presented herein, which is consistent with the CODM's review of segment information. The table below reconciles consolidated net loss to consolidated Adjusted EBITDA for the periods presented:



Reconciliation of Net loss to Adjusted EBITDA ($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net loss	$	(14,459	)	$	(7,517	)	$	(29,847	)	$	(9,663	)
Interest expense	11,207			11,075			22,295			22,084
Interest income	(43		)	(38		)	(84		)	(57		)
Income tax expense	1,243			2,071			2,403			3,108
Depreciation and amortization	1,630			1,706			3,386			3,348
EBITDA	(422		)	7,297			(1,847		)	18,820
Adjustments related to purchased debt accounting
Proceeds applied to purchased debt principal(1)	43,280			46,633			88,534			88,900
Purchased debt valuation allowance reversals(2)	(229		)	(318		)	(2,648		)	(523		)
Certain other or non-cash expenses
Stock option expense(3)	9			25			20			49
Other(4)	264			173			527			756
Adjusted EBITDA	$	42,902		$	53,810		$	84,586		$	108,002

(1) Cash proceeds applied to purchased debt principal rather than recorded as revenue.

(2) Represents non-cash valuation allowance reversals on purchased debt.

(3) Represents the non-cash expense related to option grants of Parent’s equity granted to certain employees, directors and branch office owners.

(4) Consistent with the covenant calculations within our revolving credit facility, other includes, as applicable, branch office note reserves, lease breakup costs, certain consulting fees, management fees paid to KRG Capital Management, L.P., certain transaction expenses, recruiting expense, severance expense, and certain non-recurring items.

The table below reconciles net cash used in operating activities to Adjusted EBITDA for the periods presented:



Reconciliation of Net Cash Used in Operating Activities to Adjusted EBITDA ($ in thousands)	Six Months Ended June 30,
	2015			2014
Net cash used in operating activities	$	(31,086	)	$	(10,003	)
Proceeds applied to purchased debt principal(1)	88,534			88,900
Interest expense to be paid in cash(2)	20,643			20,618
Interest income	(84		)	(57		)
Amortization of prepaid and other non-cash expenses	(3,045		)	(2,084		)
Changes in operating assets and liabilities and deferred taxes:
Restricted cash(3)	936			822
Other operating assets and liabilities and deferred taxes(4)	5,758			5,942
Income tax expense	2,403			3,108
Other(5)	527			756
Adjusted EBITDA	$	84,586		$	108,002

(1) Cash proceeds applied to purchased debt principal are shown in the investing activities section of the condensed consolidated statements of cash flows.

(2) Represents interest expense, excluding non-cash amortization of loan origination fees and debt discount.

(3) Represents the change in restricted cash balances for the period due to the timing of payments on our line of credit and semi-annual interest payments on our Senior Second Lien Notes.

(4) The amount represents timing differences due to the recognition of certain expenses and revenue items on a cash versus accrual basis.

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(5) Consistent with the covenant calculations within our revolving credit facility, other includes, as applicable, branch office note reserves, lease breakup costs, certain consulting fees, management fees paid to KRG Capital Management, L.P., certain transaction expenses, recruiting expense, severance expense, and certain non-recurring items.

Segment assets were as follows as of the dates presented:



Total Assets	June 30, 2015		December 31, 2014
Domestic	$	385,391	$	414,711
Canada	37,104		33,376
Consolidated	$	422,495	$	448,087

Long-lived assets, excluding financial instruments and deferred taxes, of our Canada segment were not material at June 30, 2015 or December 31, 2014.

11. Supplemental Guarantor Information

The payment obligations under the Senior Second Lien Notes (see Note 5) are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by substantially all of SquareTwo Financial Corporation’s (the “Borrower”) 100% owned existing and future domestic subsidiaries (“Guarantor Subsidiaries”). The Senior Second Lien Notes are not guaranteed by Parent.

The consolidating financial information presented below reflects information regarding the Borrower, the issuer of the Senior Second Lien Notes, the Guarantor Subsidiaries, and all other subsidiaries of the Borrower (“Non-Guarantor Subsidiaries”). This basis of presentation is not intended to present the financial condition, results of operations or cash flows of the Company, the Borrower, the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting. The consolidating information is prepared in accordance with the same accounting policies as are applied to the Company’s condensed consolidated financial statements except for accounting for income taxes of the Guarantor Subsidiaries, which is reflected entirely in the Borrower’s financial statements as all material Guarantor Subsidiaries are disregarded entities for tax purposes and are combined with the Borrower in the consolidated income tax return of Parent.

The presentation of the Borrower’s financial statements represents the equity method of accounting for the Guarantor and Non-Guarantor Subsidiaries. The results of operations of the Guarantor and Non-Guarantor Subsidiaries reflect certain expense allocations from the Borrower, which are made in relation to the intercompany balances and the intercompany usage of the Borrower’s assets.

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Condensed Consolidating Balance Sheets



	June 30, 2015
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Assets
Cash and cash equivalents	$	105		$	672		$	22,705		$	—		$	23,482
Restricted cash	(111		)	5,184			—			—			5,073
Trade receivables, net of allowance for doubtful accounts	789			30			997			—			1,816
Notes receivable	—			—			180			—			180
Purchased debt, net	—			176,821			12,572			—			189,393
Property and equipment, net	22,711			238			123			—			23,072
Goodwill and intangible assets	170,780			—			512			—			171,292
Other assets	6,097			1,312			778			—			8,187
Investment in subsidiaries	218,684			—			—			(218,684		)	—
Total assets	$	419,055		$	184,257		$	37,867		$	(218,684	)	$	422,495
Liabilities and equity (deficiency)
Liabilities:
Accounts payable, trade	$	3,108		$	270		$	14		$	—		$	3,392
Payable from trust accounts	1,405			55			99			—			1,559
Payable to Borrower	—			334,429			3,662			(338,091		)	—
Taxes payable	26			—			326			—			352
Accrued interest and other liabilities	19,650			855			953			—			21,458
Deferred tax liability (asset), net	11,627			—			(8		)	—			11,619
Line of credit	148,272			—			—			—			148,272
Notes payable, net of discount	289,333			—			—			—			289,333
Obligations under capital lease agreements	1,899			—			—			—			1,899
Total liabilities	475,320			335,609			5,046			(338,091		)	477,884
Equity (deficiency):
Common stock	—			—			—			—			—
Additional paid-in capital	190,211			5,551			1			(5,552		)	190,211
(Accumulated deficit) retained earnings	(246,476		)	(156,903		)	31,944			124,959			(246,476		)
Accumulated other comprehensive loss	—			—			(5,892		)	—			(5,892		)
Total (deficiency) equity before noncontrolling interest	(56,265		)	(151,352		)	26,053			119,407			(62,157		)
Noncontrolling interest	—			—			6,768			—			6,768
Total (deficiency) equity	(56,265		)	(151,352		)	32,821			119,407			(55,389		)
Total liabilities and (deficiency) equity	$	419,055		$	184,257		$	37,867		$	(218,684	)	$	422,495

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	December 31, 2014
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Assets
Cash and cash equivalents	$	—		$	—		$	15,677		$	—		$	15,677
Restricted cash	(360		)	4,497			—			—			4,137
Trade receivables, net of allowance for doubtful accounts	1,221			22			608			—			1,851
Notes receivable	—			—			194			—			194
Purchased debt, net	—			206,542			16,158			—			222,700
Property and equipment, net	22,783			254			152			—			23,189
Goodwill and intangible assets	170,779			—			569			—			171,348
Other assets	6,614			1,571			806			—			8,991
Investment in subsidiaries	243,404			—			—			(243,404		)	—
Total assets	$	444,441		$	212,886		$	34,164		$	(243,404	)	$	448,087
Liabilities and equity (deficiency)
Liabilities:
Accounts payable, trade	$	3,549		$	(227	)	$	(97	)	$	—		$	3,225
Payable from trust accounts	1,252			58			94			—			1,404
Payable to Borrower	—			342,772			2,842			(345,614		)	—
Taxes payable	138			—			337			—			475
Accrued interest and other liabilities	23,336			385			778			—			24,499
Deferred tax liability (asset), net	11,416			—			(8		)	—			11,408
Line of credit	138,702			—			—			—			138,702
Notes payable, net of discount	289,370			—			—			—			289,370
Obligations under capital lease agreements	2,310			—			—			—			2,310
Total liabilities	470,073			342,988			3,946			(345,614		)	471,393
Equity (deficiency):
Common stock	—			—			—			—			—
Additional paid-in capital	190,191			2,922			1			(2,923		)	190,191
(Accumulated deficit) retained earnings	(215,823		)	(133,024		)	27,891			105,133			(215,823		)
Accumulated other comprehensive loss	—			—			(3,636		)	—			(3,636		)
Total (deficiency) equity before noncontrolling interest	(25,632		)	(130,102		)	24,256			102,210			(29,268		)
Noncontrolling interest	—			—			5,962			—			5,962
Total (deficiency) equity	(25,632		)	(130,102		)	30,218			102,210			(23,306		)
Total liabilities and (deficiency) equity	$	444,441		$	212,886		$	34,164		$	(243,404	)	$	448,087

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Condensed Consolidating Statements of Operations



	Three Months Ended June 30, 2015
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
Revenues
Purchased debt revenue, net	$	616		$	41,225		$	6,979		$	—	$	48,820
Other revenue	4			1			14			—		19
Total revenues	620			41,226			6,993			—		48,839
Expenses
Purchased debt expense	—			27,486			2,525			—		30,011
Court costs, net	—			6,963			115			—		7,078
Salaries and payroll taxes	1,572			7,330			162			—		9,064
General and administrative	869			1,592			527			—		2,988
Depreciation and amortization	656			965			9			—		1,630
Total operating expenses	3,097			44,336			3,338			—		50,771
Operating (loss) income	(2,477		)	(3,110		)	3,655			—		(1,932		)
Other expenses
Interest expense	3,192			8,015			—			—		11,207
Other expense (income)	118			—			(41		)	—		77
Total other expenses	3,310			8,015			(41		)	—		11,284
(Loss) income before income taxes	(5,787		)	(11,125		)	3,696			—		(13,216		)
Income tax expense	(151		)	—			(1,092		)	—		(1,243		)
Loss from subsidiaries	(8,940		)	—			—			8,940		—
Net (loss) income	(14,878		)	(11,125		)	2,604			8,940		(14,459		)
Less: Net income attributable to the noncontrolling interest	—			—			419			—		419
Net (loss) income attributable to SquareTwo	$	(14,878	)	$	(11,125	)	$	2,185		$	8,940	$	(14,878	)

Table of Contents



	Three Months Ended June 30, 2014
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
Revenues
Purchased debt revenue, net	$	1,689		$	58,153		$	6,996		$	—	$	66,838
Other revenue	1			2			6			—		9
Total revenues	1,690			58,155			7,002			—		66,847
Expenses
Purchased debt expense	2			35,664			2,733			—		38,399
Court costs, net	—			9,854			104			—		9,958
Salaries and payroll taxes	1,275			6,092			163			—		7,530
General and administrative	445			2,393			700			—		3,538
Depreciation and amortization	546			1,149			11			—		1,706
Total operating expenses	2,268			55,152			3,711			—		61,131
Operating (loss) income	(578		)	3,003			3,291			—		5,716
Other expenses
Interest expense	1,560			9,515			—			—		11,075
Other expense (income)	121			—			(34		)	—		87
Total other expenses	1,681			9,515			(34		)	—		11,162
(Loss) income before income taxes	(2,259		)	(6,512		)	3,325			—		(5,446		)
Income tax expense	(1,062		)	—			(1,009		)	—		(2,071		)
Loss from subsidiaries	(4,595		)	—			—			4,595		—
Net (loss) income	(7,916		)	(6,512		)	2,316			4,595		(7,517		)
Less: Net income attributable to the noncontrolling interest	—			—			399			—		399
Net (loss) income attributable to SquareTwo	$	(7,916	)	$	(6,512	)	$	1,917		$	4,595	$	(7,916	)

Table of Contents



	Six Months Ended June 30, 2015
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
Revenues
Purchased debt revenue, net	$	1,685		$	85,990		$	13,548		$	—	$	101,223
Other revenue	7			1			17			—		25
Total revenues	1,692			85,991			13,565			—		101,248
Expenses
Purchased debt expense	1			59,578			4,911			—		64,490
Court costs, net	—			14,142			197			—		14,339
Salaries and payroll taxes	3,152			14,214			360			—		17,726
General and administrative	1,671			3,444			1,180			—		6,295
Depreciation and amortization	1,316			2,052			18			—		3,386
Total operating expenses	6,140			93,430			6,666			—		106,236
Operating (loss) income	(4,448		)	(7,439		)	6,899			—		(4,988		)
Other expenses
Interest expense	5,855			16,440			—			—		22,295
Other expense (income)	241			—			(80		)	—		161
Total other expenses	6,096			16,440			(80		)	—		22,456
(Loss) income before income taxes	(10,544		)	(23,879		)	6,979			—		(27,444		)
Income tax expense	(283		)	—			(2,120		)	—		(2,403		)
Loss from subsidiaries	(19,826		)	—			—			19,826		—
Net (loss) income	(30,653		)	(23,879		)	4,859			19,826		(29,847		)
Less: Net income attributable to the noncontrolling interest	—			—			806			—		806
Net (loss) income attributable to SquareTwo	$	(30,653	)	$	(23,879	)	$	4,053		$	19,826	$	(30,653	)

Table of Contents



	Six Months Ended June 30, 2014
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
Revenues
Purchased debt revenue, net	$	3,455		$	121,736		$	13,137		$	—	$	138,328
Other revenue	7			6			15			—		28
Total revenues	3,462			121,742			13,152			—		138,356
Expenses
Purchased debt expense	4			72,293			5,180			—		77,477
Court costs, net	—			18,969			172			—		19,141
Salaries and payroll taxes	2,596			12,137			354			—		15,087
General and administrative	986			5,049			1,546			—		7,581
Depreciation and amortization	1,102			2,224			22			—		3,348
Total operating expenses	4,688			110,672			7,274			—		122,634
Operating (loss) income	(1,226		)	11,070			5,878			—		15,722
Other expenses
Interest expense	2,865			19,219			—			—		22,084
Other expense	249			—			(56		)	—		193
Total other expenses	3,114			19,219			(56		)	—		22,277
(Loss) income before income taxes	(4,340		)	(8,149		)	5,934			—		(6,555		)
Income tax expense	(1,205		)	—			(1,903		)	—		(3,108		)
Loss from subsidiaries	(4,858		)	—			—			4,858		—
Net (loss) income	(10,403		)	(8,149		)	4,031			4,858		(9,663		)
Less: Net income attributable to the noncontrolling interest	—			—			740			—		740
Net (loss) income attributable to SquareTwo	$	(10,403	)	$	(8,149	)	$	3,291		$	4,858	$	(10,403	)

Table of Contents

Condensed Consolidating Statements of Comprehensive (Loss) Income



	Three Months Ended June 30, 2015
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations		Total
Net (loss) income	$	(14,878	)	$	(11,125	)	$	2,604	$	8,940	$	(14,459	)
Other comprehensive loss, net of tax:
Currency translation adjustment	—			—			431		—		431
Comprehensive (loss) income	(14,878		)	(11,125		)	3,035		8,940		(14,028		)
Less: Comprehensive income attributable to the noncontrolling interest	—			—			419		—		419
Comprehensive (loss) income attributable to SquareTwo	$	(14,878	)	$	(11,125	)	$	2,616	$	8,940	$	(14,447	)

Table of Contents



	Three Months Ended June 30, 2014
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations		Total
Net (loss) income	$	(7,916	)	$	(6,512	)	$	2,316	$	4,595	$	(7,517	)
Other comprehensive income, net of tax:
Currency translation adjustment	—			—			898		—		898
Comprehensive (loss) income	(7,916		)	(6,512		)	3,214		4,595		(6,619		)
Less: Comprehensive income attributable to the noncontrolling interest	—			—			399		—		399
Comprehensive (loss) income attributable to SquareTwo	$	(7,916	)	$	(6,512	)	$	2,815	$	4,595	$	(7,018	)

Table of Contents



	Six Months Ended June 30, 2015
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Total
Net (loss) income	$	(30,653	)	$	(23,879	)	$	4,859		$	19,826	$	(29,847	)
Other comprehensive loss, net of tax:
Currency translation adjustment	—			—			(2,256		)	—		(2,256		)
Comprehensive (loss) income	(30,653		)	(23,879		)	2,603			19,826		(32,103		)
Less: Comprehensive income attributable to the noncontrolling interest	—			—			806			—		806
Comprehensive (loss) income attributable to SquareTwo	$	(30,653	)	$	(23,879	)	$	1,797		$	19,826	$	(32,909	)

Table of Contents



	Six Months Ended June 30, 2014
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations		Total
Net (loss) income	$	(10,403	)	$	(8,149	)	$	4,031	$	4,858	$	(9,663	)
Other comprehensive loss, net of tax:
Currency translation adjustment	—			—			64		—		64
Comprehensive (loss) income	(10,403		)	(8,149		)	4,095		4,858		(9,599		)
Less: Comprehensive income attributable to the noncontrolling interest	—			—			740		—		740
Comprehensive (loss) income attributable to SquareTwo	$	(10,403	)	$	(8,149	)	$	3,355	$	4,858	$	(10,339	)

Table of Contents

Condensed Consolidating Statements of Cash Flows



	Six Months Ended June 30, 2015
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Operating activities
Net (loss) income	$	(30,653	)	$	(23,879	)	$	4,859		$	19,826		$	(29,847	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	1,316			2,052			18			—			3,386
Amortization of loan origination fees and debt discount	1,652			—			—			—			1,652
Purchased debt valuation allowance reversals	—			(2,648		)	—			—			(2,648		)
Stock option expense	20			—			—			—			20
Amortization of prepaid and other non-cash expenses	2,414			605			26			—			3,045
Deferred tax provision, net of valuation allowance	211			—			—			—			211
Loss from subsidiaries	19,826			—			—			(19,826		)	—
Changes in operating assets and liabilities:
Income tax payable/receivable	(112		)	—			(8		)	—			(120		)
Restricted cash	(249		)	(687		)	—			—			(936		)
Other assets	(2,540		)	(1,175		)	401			—			(3,314		)
Accounts payable and accrued liabilities	(4,292		)	1,223			534			—			(2,535		)
Net cash (used in) provided by operating activities	(12,407		)	(24,509		)	5,830			—			(31,086		)
Investing activities
Investment in purchased debt	—			(46,970		)	(6,743		)	—			(53,713		)
Proceeds applied to purchased debt principal	—			79,339			9,195			—			88,534
Payments to branch offices related to asset purchase program	—			(259		)	—			—			(259		)
Investment in subsidiaries	6,900			—			—			(6,900		)	—
Investment in property and equipment, including internally developed software	(2,519		)	(29		)	—			—			(2,548		)
Net cash provided by investing activities	4,381			32,081			2,452			(6,900		)	32,014
Financing activities
Repayments of investment by Parent, net	—			(6,900		)	—			6,900			—
Payments on notes payable	(396		)	—			—			—			(396		)
Proceeds from line of credit	190,314			—			—			—			190,314
Payments on line of credit	(180,744		)	—			—			—			(180,744		)
Origination fees on line of credit	(200		)	—			—			—			(200		)
Payments on capital lease obligations	(843		)	—			—			—			(843		)
Net cash provided by (used in) financing activities	8,131			(6,900		)	—			6,900			8,131
Increase in cash and cash equivalents	105			672			8,282			—			9,059
Impact of foreign currency translation on cash	—			—			(1,254		)	—			(1,254		)
Cash and cash equivalents at beginning of period	—			—			15,677			—			15,677
Cash and cash equivalents at end of period	$	105		$	672		$	22,705		$	—		$	23,482
Supplemental cash flow information
Cash paid for interest	$	20,642		$	—		$	—		$	—		$	20,642
Cash paid for income taxes	184			—			2,112			—			2,296
Property and equipment financed with capital leases and notes payable	715			—			—			—			715

Table of Contents



	Six Months Ended June 30, 2014
	Borrower			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Total
Operating activities
Net (loss) income	$	(10,403	)	$	(8,149	)	$	4,031		$	4,858		$	(9,663	)
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	1,102			2,224			22			—			3,348
Amortization of loan origination fees and debt discount	1,466			—			—			—			1,466
Purchased debt valuation allowance reversals	—			(523		)	—			—			(523		)
Stock option expense	32			17			—			—			49
Amortization of prepaid and other non-cash expenses	1,734			311			39			—			2,084
Deferred tax provision, net of valuation allowance	1,092			—			—			—			1,092
Loss from subsidiaries	4,858			—			—			(4,858		)	—
Changes in operating assets and liabilities:
Income tax payable/receivable	(748		)	—			352			—			(396		)
Restricted cash	482			(1,304		)	—			—			(822		)
Other assets	(2,253		)	(1,657		)	1,112			—			(2,798		)
Accounts payable and accrued liabilities	(4,025		)	105			80			—			(3,840		)
Net cash (used in) provided by operating activities	(6,663		)	(8,976		)	5,636			—			(10,003		)
Investing activities
Investment in purchased debt	—			(60,268		)	(7,548		)	—			(67,816		)
Proceeds applied to purchased debt principal	—			80,306			8,594			—			88,900
Net investments in notes receivable	(193		)	—			—			—			(193		)
Investment in subsidiaries	10,943			—			—			(10,943		)	—
Investment in property and equipment including internally developed software	(2,048		)	(15		)	—			—			(2,063		)
Net cash provided by investing activities	8,702			20,023			1,046			(10,943		)	18,828
Financing activities
Repayments of investment by Parent, net	(150		)	(10,943		)	—			10,943			(150		)
Payments on notes payable	(377		)	—			—			—			(377		)
Proceeds from line of credit	229,236			—			—			—			229,236
Payments on line of credit	(229,720		)	—			—			—			(229,720		)
Origination fees on line of credit	(244		)	—			—			—			(244		)
Payments on capital lease obligations	(742		)	—			—			—			(742		)
Net cash used in financing activities	(1,997		)	(10,943		)	—			10,943			(1,997		)
Increase in cash and cash equivalents	42			104			6,682			—			6,828
Impact of foreign currency translation on cash	—			—			321			—			321
Cash and cash equivalents at beginning of period	—			—			9,379			—			9,379
Cash and cash equivalents at end of period	$	42		$	104		$	16,382		$	—		$	16,528
Supplemental cash flow information
Cash paid for interest	$	20,673		$	—		$	—		$	—		$	20,673
Cash paid for income tax	861			—			1,570			—			2,431
Property and equipment financed with capital leases and notes payable	1,282			—			—			—			1,282

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” "will," “should,” “expect,” “intend,” “estimate,” “anticipate,” "plan," "foresee," “predict,” “believe,” “potential” or “continue” or, in each case, the negative or other variations or similar expressions. All forward-looking statements reflect our current beliefs and assumptions with respect to our future results, business plans and prospects, and are based on information currently available to us. Accordingly, these statements are subject to significant risks and uncertainties and our actual results, business plans and prospects could differ significantly from those expressed in, or implied by, these statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under “Risk Factors” in our most recent Annual Report on Form 10-K (File No. 333- 170734). We undertake no obligation to update publicly or publicly revise any forward-looking statement, whether as a result of new information or otherwise.

Unless otherwise indicated, the terms (i) “SquareTwo,” “we,” “our,” “us” and the “Company” refer to SquareTwo Financial Corporation and all of its restricted subsidiaries on a consolidated basis, (ii) “SquareTwo Financial Corporation” refers to SquareTwo Financial Corporation and not to its parent company or any of its subsidiaries, and (iii) “Parent” refers to CA Holding, Inc. and not to any of its subsidiaries. You should read this discussion and analysis in conjunction with the condensed consolidated financial statements and notes that appear elsewhere in this Quarterly Report on Form 10-Q. Our financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as an independent, stand-alone entity during all periods presented.

Our Company

We are a leading purchaser of charged-off consumer and commercial receivables in the accounts receivable management industry. Our primary business is the acquisition, management and collection of charged-off consumer and commercial accounts receivable that we purchase from financial institutions, finance and leasing companies, and other issuers in the United States (U.S.) and Canada. We believe that we are one of the largest purchasers of "fresh" charged-off credit card and consumer loan receivables in the U.S. Fresh charged-off credit card and consumer loan receivables are generally 180-210 days past due at the time of sale and typically have not been subject to previous collection attempts by a third-party collection agency. The act of charging off an account is an action required by banking regulations and is an accounting action that does not release the obligor on the account from his/her responsibility to pay amounts due on the account. Because the credit issuer was unable to collect the charged-off receivables that we purchase, we are able to acquire these portfolios at a substantial discount to their face value.

Our focus throughout the recovery process is on the customer, and helping the customer resolve their outstanding financial commitments, while ensuring that those customers who demonstrate a significant ability to pay their contractual obligations actually satisfy their obligations. In accordance with our commitment to customer service, respect, and operational excellence, which we have internally labeled the “Fair Square Promise”, we are dedicated to treating customers fairly and ethically and maintaining stringent compliance standards, which we believe allows us to liquidate more effectively.

Our business model leverages our analytic expertise, technology platform, and in the U.S., a unique combination of company-owned call centers operating under the d/b/a name Fresh View Solutions (“Fresh View”) along with a network of regional law offices, also referred to as "branch offices", exclusively dedicated to SquareTwo. We refer to this network of branch offices and company-owned call centers as the “Closed Loop Network” because all newly acquired customer accounts are managed within this network through our centralized, proprietary technology platform called eAGLE, regardless of where an account is in its lifecycle. This Closed Loop Network along with its integrated account management system allows us to achieve the highest level of information security and data accuracy, as well as provide a uniform customer experience during every stage of collections regardless of location. We also utilize non-exclusive law firms to liquidate legacy customer commitments, for collections on accounts where legal judgments and payment plans had been established prior to the formation of our Closed Loop Network. Lastly, in Canada, where we exclusively service our Canadian customers, we utilize a company-owned call center as well as third-party non-legal and legal collection firms.

From 1999, our first full year of purchasing debt, to June 30, 2015, we have invested approximately $2.6 billion in the acquisition of charged-off receivables, representing over $38.4 billion in face value of accounts.

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The combination of our historical and future recovery efforts is expected to result in cumulative gross cash proceeds of approximately 2.1x our invested capital since our first purchase in 1998. Based on our proprietary analytical models, which utilize historical and current account level data, as well as economic, pricing and collection trends, we expect that our U.S. owned charged-off receivables as of June 30, 2015 of $7.2 billion (active face value) will generate approximately $544.3 million in gross cash proceeds. We refer to this as estimated remaining proceeds ("ERP"). In addition, we expect our Canadian owned charged-off receivables of $1.2 billion (active face value) to generate approximately $55.3 million in additional ERP. Therefore, the total ERP for both our U.S. and Canadian owned charged-off receivables was $599.6 million as of June 30, 2015. These expectations are based on historical data as well as assumptions about future collection rates and consumer behavior. We cannot guarantee that we will achieve such proceeds.

Our U.S. Closed Loop Network

Recovery efforts on all newly acquired U.S. purchased debt are managed by the Closed Loop Network discussed in the preceding section. Historically, our branch offices were the primary channel for recovery work on our behalf, but at the end of 2014, we expanded our asset recovery options in the U.S by opening a company-owned call center dedicated to consumer collections. Most newly acquired accounts are being placed for collection with our Fresh View call centers, where our call center employees are compensated based on their ability to meet our stringent compliance and operating standards. Legal recovery operations, if necessary, continue to progress through our dedicated branch office legal channel.

The expansion of our collection capabilities through Fresh View has enabled us to satisfy a wide array of our bank clients’ needs while helping SquareTwo remain a leader in compliance. Regardless of where in our Closed Loop Network we place an account, either with Fresh View or with one of our branch offices, all customer account information and collection activity is managed within eAGLE, our proprietary integrated account management system, and in accordance with a standardized set of comprehensive policies and operational procedures, which we refer to as our “Compliance Management System.” This ensures that regardless of the chosen recovery option, we strive to provide a uniform customer experience. In addition, our Closed Loop Network business model creates valuable operating efficiencies and synergies, which we believe will translate to improved financial performance in the future.

Once accounts are designated for legal recovery efforts, they are placed into the network of legal branch offices. The branch offices perform recovery work exclusively on our behalf and utilize our account management system in accordance with specified contractual arrangements. Effective June 1, 2015, the Company entered into new business agreements with its branch offices replacing the previous contractual arrangements that were subject to franchise law. The new legal framework removed the legal requirements of franchise law in multiple jurisdictions and enables the Company more control and flexibility in how we manage the branch offices. These contractual agreements have a term of three years. The contractual agreements provide the branch office with a license to use our proprietary collection and account management software; however, SquareTwo no longer charges royalty fees as a percentage of each dollar collected.

We are under no obligation to provide accounts to any branch office. We pay these offices a service fee, which varies based upon the amount collected as well as their performance against certain of our operational incentives. We have historically allocated accounts to our branch offices based on capacity, geographic coverage, and their performance against our return expectations and adherence to operational and compliance requirements. In addition, branches are required to meet our stringent compliance standards to continue to be a part of our Closed Loop Network.

Underwriting and Purchasing

The success of our business depends heavily on our ability to find charged-off receivables for purchase, evaluate these assets accurately and acquire them at the appropriate pricing. We have a dedicated Business Development team that generates portfolio acquisition opportunities in the markets in which we operate. Historically, we have purchased charged-off receivables from seven of the ten largest U.S. credit card issuers, as well as from super-regional and regional banks and other issuers of credit. Potential purchasing opportunities are reviewed in detail by our Decision Science department, which is responsible for preparing forecasted cash flows for each purchase based on our proprietary statistical models and our experience with similar purchases. These models and related assumptions are reviewed by our investment committee, which includes members of our senior leadership team and representatives from each key business function, to determine the appropriate purchase price for the available portfolios. We target purchases that meet return thresholds determined by our investment committee. In times of increased pricing in the market, we may accept a lower return, while still maintaining our yield-based purchasing strategy. In addition to the credit card and consumer loan business, we are actively engaged in the development of business opportunities in purchasing other forms of charged-off domestic and Canadian financial obligations.

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Sources of Revenue and Expense

Sources of Revenue

Our primary sources of revenue are revenues recognized on our portfolio base of purchased debt assets which are driven by cash proceeds from non-legal collections, legal collections, court cost recoveries, recourse and bankruptcy. Historically, we resold certain purchased debt accounts at various stages of their collection cycle. However, account sales are no longer a part of our core liquidation strategy. In addition, prior to June 1, 2015, we earned royalties from our branch offices ranging from 2% to 4% of each dollar collected in the non-legal channels for the use of our proprietary collection platform, eAGLE. In conjunction with the new contractual arrangements with our branch offices, effective June 1, 2015, the Company no longer charges royalty fees as a percentage of each dollar collected.

Expense

Purchased Debt Expense

Purchased debt expense represents direct and indirect costs of collections related to our purchased debt. In the U.S., the majority of our direct expenses represent the fees that we pay to our branch offices based on their collections on our U.S. purchased debt. The fee we pay to our branch offices varies depending on the age and type of purchased debt and certain network performance targets and other operational factors. Purchased debt expense in the U.S. also includes all costs related to our call centers, as well as legal compliance costs and certain other indirect operating and branch office costs. In Canada, purchased debt expense includes the cost of our collectors as well as fees paid to outside agencies with whom we place certain accounts.

Court Costs, Net

Court costs represent court costs and related fees on accounts placed for legal action. Court costs are expensed as incurred and are reduced by court cost recoveries for purchased debt accounted for under the cost recovery method. Court cost recoveries for purchased debt accounted for under the level yield method are included in level yield proceeds which drive purchased debt revenue, net. We estimate that we recover in excess of one-third of all court costs expended.

Costs to Collect

We refer to the costs related to the collection of purchased debt as our "costs to collect" which includes purchased debt expense and gross court costs. We evaluate our costs to collect, both including and excluding court costs, in relation to total collections rather than revenue due to the timing differences between revenue and expense recognition under U.S. generally accepted accounting principles ("GAAP").

Salaries and Payroll Taxes

Salaries and payroll taxes include all employment-related expenses, including salaries, wages, bonuses, insurance, payroll taxes and benefits, except those associated with our call centers which are included in Purchased Debt Expense.

General and Administrative

General and administrative expenses consist of rent, utilities, marketing, information technology, property and other miscellaneous taxes, office, travel and entertainment, accounting and payroll services, consulting fees, licenses, and general insurance.

Depreciation and Amortization

We incur depreciation related to our property and equipment. We incur amortization on the value of our internally developed proprietary collection platform, eAGLE, which is used by our call centers and branch offices.

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Results of Operations

We have two reportable operating segments, as defined by the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 280, Segment Reporting: Domestic and Canada.

A reporting segment's operating results are regularly reviewed by the Company's Chief Operating Decision Maker ("CODM"), our Chief Executive Officer, to make decisions about resources to be allocated to the segment and assess its performance. Consistent with how the Board of Directors, the CODM, and the leadership team review the Company's results, the following discussion and analysis is primarily around consolidated results. Segment specific information reviewed by the CODM and Company directors is discussed later in this section under the heading "Segment Performance Summary".

Three and Six Months Ended June 30, 2015 Compared to Three and Six Months Ended June 30, 2014

Purchasing Activity

The following table summarizes the purchasing activity for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014:



	Three Months Ended											Six Months Ended
Purchasing Activity ($ in thousands)	June 30,											June 30,
Purchasing Activity ($ in thousands)	2015			2014			$ Variance			% Variance		2015			2014			$ Variance			% Variance
Credit Card/Consumer Loan - Fresh(1)
Face Value	$	110,949		$	246,781		$	(135,832	)	(55.0	)%	$	208,254		$	421,592		$	(213,338	)	(50.6	)%
Price	12,427			36,882			(24,455		)	(66.3	)%	24,006			61,054			(37,048		)	(60.7	)%
Price (%)	11.2		%	14.9		%						11.5		%	14.5		%
Credit Card/Consumer Loan - Non-Fresh(1)
Face Value	96,826			40,006			56,820			142.0	%	165,468			49,612			115,856			233.5	%
Price	5,398			2,735			2,663			97.4	%	10,168			3,308			6,860			207.4	%
Price (%)	5.6		%	6.8		%						6.1		%	6.7		%
Other(2)
Face Value	69,371			54,020			15,351			28.4	%	140,274			90,400			49,874			55.2	%
Price	13,886			2,435			11,451			(3)		19,539			3,454			16,085			(3)
Price (%)	20.0		%	4.5		%						13.9		%	3.8		%
Purchased Debt - Total
Face Value	$	277,146		$	340,807		$	(63,661	)	(18.7	)%	$	513,996		$	561,604		$	(47,608	)	(8.5	)%
Price	31,711			42,052			(10,341		)	(24.6	)%	53,713			67,816			(14,103		)	(20.8	)%
Price (%)	11.4		%	12.3		%						10.5		%	12.1		%

(1) Includes both Domestic and Canadian purchases.

(2) Other includes commercial, student loan, and other purchased debt assets.

(3) Not meaningful

Credit Card/Consumer Loan - Fresh

Credit card and consumer loan - fresh purchases were $110.9 million of face value receivables at a price of $12.4 million during the three months ended June 30, 2015, compared to $246.8 million of face value receivables at a price of $36.9 million during the three months ended June 30, 2014, a decrease of $135.8 million in face value and $24.5 million in capital deployed. During the six months ended June 30, 2015 credit card and consumer loan - fresh purchases were $208.3 million of face value at a price of $24.0 million compared to $421.6 million of face value at a price of $61.1 million during the six months ended June 30, 2014, a decrease of $213.3 million in face value and $37.0 million in capital deployed. The decrease in overall fresh purchasing continues to be attributed to reduced supply and elevated pricing in the market. The decrease in average price from 14.9% to 11.2% for the three months ended June 30, 2015 and from 14.5% to 11.5% for the six months ended June 30, 2015 was primarily attributed to change in seller and portfolio mix.

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Credit Card/Consumer Loan - Non-Fresh

Credit card and consumer loan - non-fresh purchases consist of purchases of charged-off receivables that have been worked by an external agency or other party external to the originating financial institution. Credit card and consumer loan - non-fresh purchases were $96.8 million of face value receivables at a price of $5.4 million during the three months ended June 30, 2015, compared to $40.0 million of face value receivables at a price of $2.7 million during the three months ended June 30, 2014, an increase of $56.8 million in face value and $2.7 million in capital deployed. During the six months ended June 30, 2015 credit card and consumer loan - non-fresh purchases were $165.5 million of face value at a price of $10.2 million compared to $49.6 million of face value at a price of $3.3 million during the six months ended June 30, 2014, an increase of $115.9 million in face value and $6.9 million in capital deployed. The increases in 2015 were due to more favorable opportunities for capital deployment in the non-fresh category compared to fresh in the domestic market.

Other

Other purchases consist of commercial, student loan, and other various asset classes. Other purchases were $69.4 million in face value at a price of $13.9 million during the three months ended June 30, 2015, compared to $54.0 million in face value at a price of $2.4 million during the three months ended June 30, 2014, an increase of $15.4 million in face value and $11.5 million in capital deployed. During the six months ended June 30, 2015 other purchases were $140.3 million of face value at a price of $19.5 million compared to $90.4 million of face value at a price of $3.5 million during the six months ended June 30, 2014, an increase of $49.9 million in face value and $16.1 million in capital deployed. These increases were due to increases in commercial and student loan purchasing consistent with our diversification strategy. Our average price for other purchases increased from 4.5% to 20.0% during the three months ended June 30, 2015 and from 3.8% to 13.9% during the six months ended June 30, 2015 primarily due to the product and portfolio mix purchased with certain portfolios containing a significantly higher proportion of high quality accounts. In addition, there have been more commercial fresh purchases in 2015 compared to 2014. We continue to deploy capital into the other category only if the anticipated return exceeds our targeted return thresholds.

Cash Proceeds on Purchased Debt

A key driver to our performance, and one of the primary metrics monitored by our management team, is cash proceeds received from our purchased debt. This measurement, and our focus on cash proceeds, is important because proceeds drive our business operations. Included in cash proceeds are non-legal collections, legal collections, the reimbursement of court costs, bankruptcy proceeds, returns of non-conforming accounts (which we refer to as "recourse"), and sales.

The following table summarizes the cash proceeds activity for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014:



	Three Months Ended									Six Months Ended
	June 30,									June 30,
Cash Proceeds ($ in thousands)	2015		2014		$ Variance			% Variance		2015		2014		$ Variance			% Variance
Credit card/consumer loan collections
Non-legal collections	$	33,908	$	50,658	$	(16,750	)	(33.1	)%	$	72,234	$	102,911	$	(30,677	)	(29.8	)%
Legal collections	47,370		54,388		(7,018		)	(12.9	)%	95,658		107,263		(11,605		)	(10.8	)%
Other collections(1)	8,195		4,965		3,230			65.1	%	14,712		10,247		4,465			43.6	%
Total collections	89,473		110,011		(20,538		)	(18.7	)%	182,604		220,421		(37,817		)	(17.2	)%
Sales, recourse & bankruptcy proceeds	2,134		1,893		241			12.7	%	3,476		3,723		(247		)	(6.6	)%
Total cash proceeds on purchased debt	$	91,607	$	111,904	$	(20,297	)	(18.1	)%	$	186,080	$	224,144	$	(38,064	)	(17.0	)%

(1) Other includes non-legal collections, legal collections, and court cost recoveries on commercial, student loan, medical, and other accounts.

Credit Card/Consumer Loan Collections

Non-legal Collections

Credit card and consumer loan non-legal collections were $33.9 million during the three months ended June 30, 2015 compared to $50.7 million during the three months ended June 30, 2014, a decrease of $16.8 million or 33.1%. During the six

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months ended June 30, 2015 credit card and consumer loan non-legal collections were $72.2 million compared to $102.9 million during the six months ended June 30, 2014, a decrease of $30.7 million or 29.8%. This decrease continues to be driven primarily by lower face value of purchases in the past 21 months and therefore less inventory in the non-legal channel. Credit card/consumer loan non-legal collections represented 37.9% and 46.0% of total collections during the three months ended June 30, 2015 and 2014, respectively and 39.6% and 46.7% of total collections during the six months ended June 30, 2015 and 2014, respectively.

Legal Collections

Credit card and consumer loan legal collections were $47.4 million during the three months ended June 30, 2015 compared to $54.4 million during the three months ended June 30, 2014, a decrease of $7.0 million or 12.9%. During the six months ended June 30, 2015 credit card and consumer loan legal collections were $95.7 million compared to $107.3 million during the six months ended June 30, 2014, a decrease of $11.6 million or 10.8%. Legal collections continue to be impacted less by the lower volume of purchases than non-legal collections due to the time lag between when portfolios are acquired versus when legal action, our strategy of last resort, is commenced. Credit card/consumer loan legal collections represented 52.9% and 49.4% of total collections during the three months ended June 30, 2015 and 2014, respectively and 52.4% and 48.7% of total collections during the six months ended June 30, 2015 and 2014, respectively.

Other Collections

Other collections were $8.2 million during the three months ended June 30, 2015 compared to $5.0 million during the three months ended June 30, 2014, an increase of $3.2 million or 65.1%. During the six months ended June 30, 2015 other collections were $14.7 million compared to $10.2 million during the six months ended June 30, 2014, an increase of $4.5 million or 43.6%. The increase in other collections in 2015 was primarily due to an increase in commercial collections of $4.0 million or 48.4% resulting from increased commercial purchasing consistent with our diversification strategy.

Sales, Recourse, and Bankruptcy Proceeds

Sales, recourse, and bankruptcy proceeds were $2.1 million during the three months ended June 30, 2015 compared to $1.9 million during the three months ended June 30, 2014. During the six months ended June 30, 2015 sales, recourse, and bankruptcy proceeds were $3.5 million compared to $3.7 million during the six months ended June 30, 2014. While the net changes are slight, bankruptcy proceeds have increased in 2015 by $1.6 million offset by a continued decrease in sales and recourse. With very few exceptions, such as discontinued medical portfolios, we no longer sell accounts.

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Consolidated Results

The following table summarizes the results of our operations for the three months ended June 30, 2015 compared to the three months ended June 30, 2014:



	Three Months Ended
	June 30,
Consolidated Results ($ in thousands)	2015			2014			$ Variance			% Variance
Revenues
Purchased debt revenue, net	$	48,820		$	66,838		$	(18,018	)	(27.0	)%
Other revenue	19			9			10			111.1	%
Total revenues	48,839			66,847			(18,008		)	(26.9	)%
Expenses
Purchased debt expense	30,011			38,399			(8,388		)	(21.8	)%
Court costs, net	7,078			9,958			(2,880		)	(28.9	)%
Salaries and payroll taxes	9,064			7,530			1,534			20.4	%
General and administrative	2,988			3,538			(550		)	(15.5	)%
Depreciation and amortization	1,630			1,706			(76		)	(4.5	)%
Total operating expenses	50,771			61,131			(10,360		)	(16.9	)%
Operating (loss) income	(1,932		)	5,716			(7,648		)	(1)
Other expenses
Interest expense	11,207			11,075			132			1.2	%
Other expense	77			87			(10		)	(11.5	)%
Total other expenses	11,284			11,162			122			1.1	%
Loss before income taxes	(13,216		)	(5,446		)	(7,770		)	(142.7	)%
Income tax expense	(1,243		)	(2,071		)	828			40.0	%
Net loss	$	(14,459	)	$	(7,517	)	$	(6,942	)	(92.4	)%

(1) Not meaningful.

Purchased Debt Revenue, Net

Purchased debt revenue, net was $48.8 million during the three months ended June 30, 2015 compared to $66.8 million during the three months ended June 30, 2014, a decrease of $18.0 million or 27.0%. The change was predominantly due to a $15.7 million decrease in gross revenue on level yield assets as a result of a decrease in the carrying value of purchased debt driven by lower purchasing. The average carrying value of level yield purchased debt assets decreased from $238.6 million for the three months ended June 30, 2014 to $173.1 million for the three months ended June 30, 2015.

In addition, there was a decrease in purchased debt royalties of $1.0 million primarily due to lower non-legal collections on which the royalty was calculated prior to June 1, 2015 as well as the discontinuance of royalty fees effective June 1, 2015.

Purchased Debt Expense

Purchased debt expense was $30.0 million during the three months ended June 30, 2015 compared to $38.4 million during the three months ended June 30, 2014. Purchased debt expense decreased 21.8%, which was primarily attributable to a decrease of 18.7% in total collections on purchased debt. Also, effective May 1, 2015, the Company fundamentally restructured the legal compensation plan by lowering fees paid to our branch offices on all collections, including those on accounts placed prior to May 2015. The Company has invested in operational and technology improvements over the last 24 months and the fee reduction reflects the benefits gained by the branch offices due to these improvements.

Court Costs, Net

Court costs, net were $7.1 million during the three months ended June 30, 2015 compared to $10.0 million during the three months ended June 30, 2014, a decrease of $2.9 million or 28.9% primarily due to lower volumes purchased over the past 21 months. Court costs are expensed as incurred; however, partial recovery of these costs occurs over several years. We estimate that we recover in excess of one-third of all court costs expended.

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Costs to Collect

Costs to collect include purchased debt expense and gross court costs. We evaluate our costs to collect, both including and excluding court costs, in relation to total collections rather than revenue due to the timing differences between revenue and expense recognition for GAAP purposes. For the purpose of this metric, we use gross court costs in the numerator because court cost recoveries are included in total collections.

The following table summarizes our costs to collect and our costs to collect excluding court costs as a percentage of total collections for the three months ended June 30, 2015 compared to the three months ended June 30, 2014:



	Three Months Ended
	June 30,
Costs to Collect ($ in thousands)	2015		2014		$ Variance			% Variance
Total collections	89,473		110,011		$	(20,538	)	(18.7	)%

Costs to collect(1)	37,394		48,671		(11,277		)	(23.2	)%
Costs to collect as a % of collections	41.8	%	44.2	%

Costs to collect excluding court costs	30,011		38,399		(8,388		)	(21.8	)%
Costs to collect excluding court costs as a % of collections	33.5	%	34.9	%

(1) Excludes court cost recoveries of $0.3 million and $0.3 million, respectively, to arrive at gross court costs.

The decrease in costs to collect as a percentage of collections was primarily due to the lower fees paid to our branch offices with the new legal compensation structure effective May 1, 2015. In addition, court costs as a percentage of collections decreased primarily due to the timing of legal proceedings. These decreases were partially offset by an increase in other collection expenses as a percentage of collections.

Salaries and Payroll Taxes

Salaries and payroll taxes were $9.1 million during the three months ended June 30, 2015, compared to $7.5 million during the three months ended June 30, 2014, an increase of $1.5 million or 20.4%. The increase was driven by an increase in headcount and related compensation expenses primarily related to increased compliance staffing.

Income Tax Expense

For the three months ended June 30, 2015 the combined state, federal and Canadian tax expense from operations was $1.2 million compared to $2.1 million for the same period in 2014. Tax expense in 2015 was comprised of foreign taxes on Canadian operations based on an effective tax rate of approximately 26.5% and deferred expense of $0.1 million related to Canadian withholding tax recognized in connection with Internal Revenue Code (“IRC”) Section 956 income from Canadian operations. Tax expense in 2014 included a $1.1 million expense recognized in the U.S. under IRC Section 956 as a result of the Company's pledge of its Canadian assets as collateral on U.S. borrowings. Any tax benefits related to pretax losses generated by the Company’s ongoing U.S. operations during 2015 have been fully offset by a corresponding increase in the valuation allowance as the Company remains in full valuation allowance position at June 30, 2015.

While virtually all IRC Section 956 income generated in the U.S. during 2015 can be offset by the Company’s net operating losses in the U.S., the $0.1 million expense relates specifically to withholding taxes on the amount of the deemed distribution under IRC Section 956, which would be payable in Canada upon an actual distribution in the future. Therefore, to the extent the amount of Canadian earnings and profits deemed distributed is not actually repatriated to the U.S., the withholding tax will not be paid.

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The following table summarizes the results of our operations for the six months ended June 30, 2015 compared to the six months ended June 30, 2014:



	Six Months Ended
	June 30,
Consolidated Results ($ in thousands)	2015			2014			$ Variance			% Variance
Revenues
Purchased debt revenue, net	$	101,223		$	138,328		$	(37,105	)	(26.8	)%
Other revenue	25			28			(3		)	(10.7	)%
Total revenues	101,248			138,356			(37,108		)	(26.8	)%
Expenses
Purchased debt expense	64,490			77,477			(12,987		)	(16.8	)%
Court costs, net	14,339			19,141			(4,802		)	(25.1	)%
Salaries and payroll taxes	17,726			15,087			2,639			17.5	%
General and administrative	6,295			7,581			(1,286		)	(17.0	)%
Depreciation and amortization	3,386			3,348			38			1.1	%
Total operating expenses	106,236			122,634			(16,398		)	(13.4	)%
Operating income	(4,988		)	15,722			(20,710		)	(1)
Other expenses
Interest expense	22,295			22,084			211			1.0	%
Other expense (income)	161			193			(32		)	(16.6	)%
Total other expenses	22,456			22,277			179			0.8	%
Income before income taxes	(27,444		)	(6,555		)	(20,889		)	(1)
Income tax expense	(2,403		)	(3,108		)	705			22.7	%
Net income	$	(29,847	)	$	(9,663	)	$	(20,184	)	(208.9	)%

(1) Not meaningful.

Purchased Debt Revenue, Net

Purchased debt revenue, net was $101.2 million during the six months ended June 30, 2015 compared to $138.3 million during the six months ended June 30, 2014, a decrease of $37.1 million or 26.8%. The change was predominantly due to a $35.6 million decrease in gross revenue on level yield assets as a result of a decrease in the carrying value of purchased debt driven by lower purchasing. The average carrying value of level yield purchased debt assets decreased from $245.6 million for the six months ended June 30, 2014 to $185.1 million for the six months ended June 30, 2015.

In addition, purchased debt royalties decreased $1.6 million primarily due to lower non-legal collections on which the royalty was calculated prior to June 1, 2015 as well as the discontinuance of royalty fees effective June 1, 2015.

Purchased Debt Expense

Purchased debt expense was $64.5 million during the six months ended June 30, 2015 compared to $77.5 million during the six months ended June 30, 2014. Purchased debt expense decreased 16.8%, which was primarily attributable to a decrease of 17.2% in total collections on purchased debt.

Court Costs, Net

Court costs, net were $14.3 million during the six months ended June 30, 2015, compared to $19.1 million during the six months ended June 30, 2014, a decrease of $4.8 million or 25.1% primarily due to lower volumes purchased over the past 21 months. Court costs are expensed as incurred; however, partial recovery of these costs occurs over several years. We estimate that we recover in excess of one-third of all court costs expended.

Costs to Collect

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expense recognition for GAAP purposes. For the purpose of this metric, we use gross court costs in the numerator because court cost recoveries are included in total collections.

The following table summarizes our costs to collect and our costs to collect excluding court costs as a percentage of total collections for the six months ended June 30, 2015 compared to the six months ended June 30, 2014:



	Six Months Ended
	June 30,
Costs to Collect ($ in thousands)	2015		2014		$ Variance			% Variance
Total collections	182,604		220,421		$	(37,817	)	(17.2	)%

Costs to collect(1)	79,401		97,254		(17,853		)	(18.4	)%
Costs to collect as a % of collections	43.5	%	44.1	%

Costs to collect excluding court costs	64,490		77,477		(12,987		)	(16.8	)%
Costs to collect excluding court costs as a % of collections	35.3	%	35.1	%

(1) Excludes court cost recoveries of $0.6 million and $0.6 million, respectively, to arrive at gross court costs.

The decrease in costs to collect as a percentage of collections was partially due to the lower fees paid to our branch offices with the new legal compensation structure effective May 1, 2015. In addition, court costs as a percentage of collections decreased primarily due to the timing of legal proceedings. These decreases were partially offset by an increase in other collection expenses as a percentage of collections. The increase in costs to collect excluding court costs as a percentage of collections was driven by the increase in other collection expenses as a percentage of collections partially offset by the decrease in service fees.

Salaries and Payroll Taxes

Salaries and payroll taxes were $17.7 million during the six months ended June 30, 2015, compared to $15.1 million during the six months ended June 30, 2014, an increase of $2.6 million or 17.5%. The increase was driven by an increase in headcount and related compensation expenses primarily related to increased compliance staffing.

General and Administrative Expenses

General and administrative expenses were $6.3 million during the six months ended June 30, 2015, compared to $7.6 million during the six months ended June 30, 2014, a decrease of $1.3 million or 17.0%. This decrease was primarily due to decreases in professional fees, marketing, and travel and entertainment expenses.

Income Tax Expense

For the six months ended June 30, 2015 the combined state, federal and Canadian tax expense from operations was $2.4 million compared to $3.1 million for the same period in 2014. Tax expense in 2015 was comprised of foreign taxes on Canadian operations based on an effective tax rate of approximately 26.5% and deferred expense of $0.2 million related to Canadian withholding tax recognized in connection with Internal Revenue Code (“IRC”) Section 956 income from Canadian operations. Tax expense in 2014 included a $1.1 million expense recognized in the U.S. under IRC Section 956 as a result of the Company's pledge of its Canadian assets as collateral on U.S. borrowings. Any tax benefits related to pretax losses generated by the Company’s ongoing U.S. operations during 2015 have been fully offset by a corresponding increase in the valuation allowance as the Company remains in full valuation allowance position at June 30, 2015.

While virtually all IRC Section 956 income generated in the U.S. during 2015 can be offset by the Company’s net operating losses in the U.S., the $0.2 million expense relates specifically to withholding taxes on the amount of the deemed distribution under IRC Section 956, which would be payable in Canada upon an actual distribution in the future. Therefore, to the extent the amount of Canadian earnings and profits deemed distributed is not actually repatriated to the U.S., the withholding tax will not be paid.

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Adjusted EBITDA

Adjusted EBITDA is calculated as income before interest, taxes, depreciation and amortization (including amortization of the carrying value on our purchased debt), as adjusted by several items. Adjusted EBITDA generally represents cash proceeds on our owned charged-off receivables plus the contributions of our other business activities less operating expenses (other than non-cash expenses, such as depreciation and amortization) as adjusted. Adjusted EBITDA, which is a non-GAAP financial measure, should not be considered an alternative to, or more meaningful than, net income prepared on a GAAP basis. We present Adjusted EBITDA because we consider it to be an important supplemental measure of our performance. We believe Adjusted EBITDA is representative of our cash flow generation that can be used to purchase charged-off receivables, pay down or service debt, pay income taxes, and for other uses. We believe that Adjusted EBITDA is frequently used by investors and other interested parties in the evaluation of companies in our industry. In addition, the instruments governing our indebtedness use Adjusted EBITDA to measure our compliance with certain covenants and, in certain circumstances, our ability to make certain borrowings.

The following table summarizes our Adjusted EBITDA for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014:



	Three Months Ended									Six Months Ended
	June 30,									June 30,
Adjusted EBITDA ($ in thousands)	2015		2014		$ Variance			% Variance		2015		2014		$ Variance			% Variance
Non-legal collections	$	33,908	$	50,658	$	(16,750	)	(33.1	)%	$	72,234	$	102,911	$	(30,677	)	(29.8	)%
Legal collections	47,370		54,388		(7,018		)	(12.9	)%	95,658		107,263		(11,605		)	(10.8	)%
Other collections(1)	8,195		4,965		3,230			65.1	%	14,712		10,247		4,465			43.6	%
Sales, recourse & bankruptcy proceeds	2,134		1,893		241			12.7	%	3,476		3,723		(247		)	(6.6	)%
Contribution of other business activities(2)	635		1,615		(980		)	(60.7	)%	1,706		3,314		(1,608		)	(48.5	)%
Total inflows	92,242		113,519		(21,277		)	(18.7	)%	187,786		227,458		(39,672		)	(17.4	)%

Purchased debt expense	30,011		38,399		(8,388		)	(21.8	)%	64,490		77,477		(12,987		)	(16.8	)%
Court costs, net	7,078		9,958		(2,880		)	(28.9	)%	14,339		19,141		(4,802		)	(25.1	)%
Salaries, general and administrative expenses	12,052		11,068		984			8.9	%	24,021		22,668		1,353			6.0	%
Other(3)	472		482		(10		)	(2.1	)%	897		975		(78		)	(8.0	)%
Total outflows	49,613		59,907		(10,294		)	(17.2	)%	103,747		120,261		(16,514		)	(13.7	)%
Adjustments(4)	273		198		75			37.9	%	547		805		(258		)	(32.0	)%
Adjusted EBITDA	$	42,902	$	53,810	$	(10,908	)	(20.3	)%	$	84,586	$	108,002	$	(23,416	)	(21.7	)%

(1) Other includes non-legal collections, legal collections, and court cost recoveries on commercial, student loan, medical, and other accounts.

(2) Includes royalties on purchased debt and other revenue.

(3) Represents certain other items consistent with our debt covenant calculation.

(4) Consistent with the covenant calculations within our revolving credit facility, adjustments include, as applicable, the non-cash expense related to option grants of Parent’s equity granted to our employees, directors and branch office owners, branch office note reserve, lease breakup costs, certain consulting fees, management fees paid to KRG Capital Management, L.P., certain transaction expenses, recruiting expense, severance expense, and certain non-recurring items.

The table above represents cash generated by collecting debt, selling debt and other business activities, less operating and other cash expenses, resulting in Adjusted EBITDA. The table below reconciles net loss to EBITDA and adjusts for certain purchasing items and other non-cash items to reconcile to Adjusted EBITDA for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014:

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	Three Months Ended											Six Months Ended
Reconciliation of Net Loss to Adjusted EBITDA ($ in thousands)	June 30,											June 30,
	2015			2014			$ Variance			% Variance		2015			2014			$ Variance			% Variance
Net loss	$	(14,459	)	$	(7,517	)	$	(6,942	)	(92.4	)%	$	(29,847	)	$	(9,663	)	$	(20,184	)	(208.9	)%
Interest expense	11,207			11,075			132			1.2	%	22,295			22,084			211			1.0	%
Interest income	(43		)	(38		)	(5		)	(13.2	)%	(84		)	(57		)	(27		)	(47.4	)%
Income tax expense	1,243			2,071			(828		)	(40.0	)%	2,403			3,108			(705		)	(22.7	)%
Depreciation and amortization	1,630			1,706			(76		)	(4.5	)%	3,386			3,348			38			1.1	%
EBITDA	(422		)	7,297			(7,719		)	(5)		(1,847		)	18,820			(20,667		)	(5)
Adjustments related to purchased debt accounting
Proceeds applied to purchased debt principal(1)	43,280			46,633			(3,353		)	(7.2	)%	88,534			88,900			(366		)	(0.4	)%
Purchased debt valuation allowance reversals(2)	(229		)	(318		)	89			28.0	%	(2,648		)	(523		)	(2,125		)	(5)
Certain other or non-cash expenses
Stock option expense(3)	9			25			(16		)	(64.0	)%	20			49			(29		)	(59.2	)%
Other(4)	264			173			91			52.6	%	527			756			(229		)	(30.3	)%
Adjusted EBITDA	$	42,902		$	53,810		$	(10,908	)	(20.3	)%	$	84,586		$	108,002		$	(23,416	)	(21.7	)%

(1) Cash proceeds applied to purchased debt principal rather than recorded as revenue.

(2) Represents non-cash valuation allowance reversals on purchased debt.

(3) Represents the non-cash expense related to option grants of Parent’s equity granted to certain employees, directors and branch office owners.

(5) Not meaningful.

The table below reconciles net cash used in operating activities to Adjusted EBITDA for the six months ended June 30, 2015 compared to the six months ended June 30, 2014:



	Six Months Ended
Reconciliation of Net Cash Used in Operating Activities to Adjusted EBITDA ($ in thousands)	June 30,
	2015			2014			$ Variance			% Variance
Net cash used in operating activities	$	(31,086	)	$	(10,003	)	$	(21,083	)	(210.8	)%
Proceeds applied to purchased debt principal(1)	88,534			88,900			(366		)	(0.4	)%
Interest expense to be paid in cash(2)	20,643			20,618			25			0.1	%
Interest income	(84		)	(57		)	(27		)	(47.4	)%
Amortization of prepaid and other non-cash expenses	(3,045		)	(2,084		)	(961		)	(46.1	)%
Changes in operating assets and liabilities and deferred taxes:
Restricted cash(3)	936			822			114			13.9	%
Other operating assets and liabilities and deferred taxes(4)	5,758			5,942			(184		)	(3.1	)%
Income tax expense	2,403			3,108			(705		)	(22.7	)%
Other(5)	527			756			(229		)	(30.3	)%
Adjusted EBITDA	$	84,586		$	108,002		$	(23,416	)	(21.7	)%

(1) Cash proceeds applied to purchased debt principal are shown in the investing activities section of the condensed consolidated statements of cash flows.

(2) Represents interest expense, excluding non-cash amortization of loan origination fees and debt discount.

(3) Represents the change in restricted cash balances for the period due to the timing of payments on our line of credit and semi-annual interest payments on our Senior Second Lien Notes.

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(4) The amount represents timing differences due to the recognition of certain expenses and revenue items on a cash versus accrual basis.

Segment Performance Summary

We have two reportable segments in accordance with the GAAP criteria for segment reporting: Domestic and Canada. A reporting segment's operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the segment and assess its performance. The segment operating results discussed in this section are presented on a basis consistent with our current management reporting being reviewed by our Board of Directors and the CODM.

Domestic Performance Summary

The following table presents selected financial data for our Domestic operating segment for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014:



Domestic Segment Performance Summary	Three Months Ended											Six Months Ended
Domestic Segment Performance Summary	June 30,											June 30,
($ in thousands)	2015			2014			$ Variance			% Variance		2015			2014			$ Variance			% Variance
Purchases - face value	$	247,619		$	288,215		$	(40,596	)	(14.1	)%	$	445,542		$	480,747		$	(35,205	)	(7.3	)%
Purchases - price	28,711			37,479			(8,768		)	(23.4	)%	46,970			60,269			(13,299		)	(22.1	)%
Purchases - price (%)	11.6		%	13.0		%						10.5		%	12.5		%
Cash proceeds on purchased debt	80,003			100,352			(20,349		)	(20.3	)%	163,265			202,338			(39,073		)	(19.3	)%
Total revenues	41,846			59,845			(17,999		)	(30.1	)%	87,683			125,204			(37,521		)	(30.0	)%
Adjusted EBITDA(1)	34,230			45,432			(11,202		)	(24.7	)%	67,521			92,203			(24,682		)	(26.8	)%

Purchases

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Total domestic purchases decreased $40.6 million or 14.1% in face value and decreased $8.8 million or 23.4% in capital deployed. Credit card/consumer loan - fresh debt purchases decreased $137.8 million in face value and $24.6 million in capital deployed. This decrease continues to be attributed to reduced supply and elevated supply in the market. Credit card/consumer loan - non-fresh debt purchases increased $81.9 million in face value and $4.3 million in capital deployed due to more favorable opportunities in the non-fresh category compared to fresh. Purchases of other accounts increased $15.4 million in face value and $11.5 million in capital deployed primarily due to increases in commercial and student loan purchasing consistent with our diversification strategy.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Total domestic purchases decreased $35.2 million or 7.3% in face value and decreased $13.3 million or 22.1% in capital deployed. Credit card/consumer loan - fresh debt purchases decreased $221.7 million in face value and $37.7 million in capital deployed. This decrease continues to be attributed to reduced supply and elevated pricing in the market. Credit card/consumer loan - non-fresh purchases increased $136.6 million in face value and $8.4 million in capital deployed due to more favorable opportunities in the non-fresh category compared to fresh. Purchases of other accounts increased $49.9 million in face value and $16.1 million in capital deployed primarily due to increases in commercial and student loan purchasing consistent with our diversification strategy.

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Cash Proceeds

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Domestic cash proceeds on purchased debt decreased $20.3 million or 20.3%. The largest driver was a $16.6 million or 40.6% decrease in credit card/consumer loan non-legal collections, due to lower face value of purchases in the past 21 months and therefore less inventory in the non-legal channel. In addition, credit card/consumer loan legal collections decreased $7.0 million or 13.3%. Legal collections were impacted less by the lower purchases volume than non-legal collections due to the time lag between when portfolios are acquired versus when legal action, our strategy of last resort, is commenced.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Domestic cash proceeds on purchased debt decreased $39.1 million or 19.3%. The largest driver was a $31.1 million or 37.0% decrease in credit card/consumer loan non-legal collections, due to lower face value of purchases in 2013, 2014, and 2015 and therefore less inventory in the non-legal channel. In addition, credit card/consumer loan legal collections decreased $11.8 million or 11.3% due to the lower face value of purchases. Legal collections were impacted less by the lower purchases volume than non-legal collections due to the time lag between when portfolios are acquired versus when legal action, our strategy of last resort, is commenced.

Total Revenues

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Total domestic revenues decreased $18.0 million or 30.1%. Gross revenue on level yield assets decreased by $16.5 million, which was driven by a decrease in the carrying value of purchased debt. In addition, purchased debt royalties decreased $1.0 million primarily due to lower non-legal collections on which the royalty was calculated prior to June 1, 2015 as well as the discontinuance of royalty fees effective June 1, 2015.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Total domestic revenues decreased $37.5 million or 30.0%. Gross revenue on level yield assets decreased by $37.2 million, which was driven by a decrease in the carrying value of purchased debt.

Also contributing to the overall decrease in purchased debt revenue, net was a decrease of $2.1 million in net valuation allowance reversals which directly impact purchased debt revenue. During the six months ended June 30, 2015, we recorded $3.3 million in net reversals of non-cash valuation allowances on our level yield assets which were partially offset by non-cash valuation allowance charges of $0.7 million on our cost recovery assets. During the six months ended June 30, 2014, we recorded $0.5 million in net reversals of non-cash valuation allowances on our level yield assets.

Adjusted EBITDA

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Domestic Adjusted EBITDA decreased $11.2 million or 24.7%, primarily driven by the decrease in cash proceeds on purchased debt of $20.3 million, which resulted in a partially offsetting $11.1 million decrease in costs to collect.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Domestic Adjusted EBITDA decreased $24.7 million or 26.8%, primarily driven by the decrease in cash proceeds on purchased debt of $39.1 million, which resulted in a partially offsetting $17.6 million decrease in costs to collect.

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Canada Performance Summary

The following table presents selected financial data for our Canada operating segment for the three and six months ended June 30, 2015 compared to the three and six months ended June 30, 2014:



Canada Segment Performance Summary	Three Months Ended											Six Months Ended
Canada Segment Performance Summary	June 30,											June 30,
($ in thousands)	2015			2014			$ Variance			% Variance		2015			2014			$ Variance			% Variance
Purchases - face value	$	29,527		$	52,592		$	(23,065	)	(43.9	)%	$	68,454		$	80,857		$	(12,403	)	(15.3	)%
Purchases - price	3,000			4,573			(1,573		)	(34.4	)%	6,743			7,547			(804		)	(10.7	)%
Purchases - price (%)	10.2		%	8.7		%						9.9		%	9.3		%
Cash proceeds on purchased debt	11,604			11,552			52			0.5	%	22,815			21,806			1,009			4.6	%
Total revenues	6,993			7,002			(9		)	(0.1	)%	13,565			13,152			413			3.1	%
Adjusted EBITDA(1)	8,672			8,378			294			3.5	%	17,065			15,799			1,266			8.0	%

Purchases

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Purchases by our Canada segment decreased $23.1 million or 43.9% in face value, which includes foreign currency translation impact of $2.6 million, and decreased $1.6 million or 34.4% in capital deployed, which includes foreign currency translation impact of $0.3 million. Purchases decreased primarily due to fewer acquisition opportunities that met our return criteria. Our average price for purchases by our Canada segment increased from 8.7% to 10.2% due to a decrease in credit card/consumer loan - non-fresh purchasing.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Purchases by our Canada segment decreased $12.4 million or 15.3% in face value and $0.8 million or 10.7% in capital deployed primarily due to foreign currency translation impact of $9.8 million in face value and $1.0 million in capital deployed.

Cash Proceeds

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Canada's cash proceeds on purchased debt remained consistent net of negative foreign currency translation impact of $1.7 million. The increase in proceeds prior to foreign currency translation was primarily due to an increase in purchasing and higher collections on those purchases for the trailing four quarters as of June 30, 2015 compared to the trailing four quarters as of June 30, 2014.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Canada's cash proceeds on purchased debt increased 1.0 million or 4.6% net of negative foreign currency translation impact of $3.6 million. The increase in proceeds prior to foreign currency translation was primarily due to an increase in purchasing and higher collections on those purchases for the trailing four quarters as of June 30, 2015 compared to the trailing four quarters as of June 30, 2014.

Total Revenues

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Total revenues from our Canada segment remained consistent net of negative foreign currency translation impact of $1.1 million. The increase in revenue prior to foreign currency translation was primarily due to an increase in gross revenue on level yield assets. This increase was due to better than expected collections on a number of level yield pools that resulted in full

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amortization of those pools and thus an increase in level yield revenue. In addition, higher level yield revenue resulted from a 20.8% increase in the average carrying value of level yield purchased debt assets.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Total revenues from our Canada segment increased $0.4 million or 3.1%, net of negative foreign currency translation impact of $2.1 million. The increase in revenue prior to foreign currency translation was primarily due to an increase in gross revenue on level yield assets. This increase was due to better than expected collections on a number of level yield pools that resulted in full amortization of those pools and thus an increase in level yield revenue. In addition, higher level yield revenue resulted from a 23.2%% increase in the average carrying value of level yield purchased debt assets.

Adjusted EBITDA

Three months ended June 30, 2015 compared with three months ended June 30, 2014

Canada Adjusted EBITDA increased $0.3 million or 3.5%, net of negative foreign currency translation impact of $1.4 million. This increase was primarily driven by the increase in cash proceeds on purchased debt.

Six months ended June 30, 2015 compared with six months ended June 30, 2014

Canada Adjusted EBITDA increased $1.3 million or 8.0%, net of negative foreign currency translation impact of $2.8 million. This increase was primarily driven by the increase in cash proceeds on purchased debt.

Supplemental Performance Data

Our Owned Portfolios

As of June 30, 2015, our active owned charged-off receivables in the U.S. and Canada totaled $8.4 billion in face value and consisted of approximately 2.1 million accounts. We believe that these accounts will represent a significant base of cash flows for us. The following table sets forth summary information on our active owned charged-off receivables as of June 30, 2015.



Account Type	# of Active Accts (in thousands)	Avg. Bal. per Acct.		Active Face Value(3) ($ in millions)		Active Face Value (% of Total)		Capital Deployed(1) ($ in millions)		Capital Deployed(1) (% of Total)
Credit Card/Consumer Loan - Fresh	1,329	$	4,032	$	5,359	63.7	%	$	2,121	80.4	%
Credit Card/Consumer Loan - Non-Fresh	724	2,967		2,148		25.5	%	357		13.5	%
Other(2)	55	16,527		909		10.8	%	159		6.0	%
Total/Average	2,108	$	3,992	$	8,416	100.0	%	$	2,637	100.0	%

(1) Capital Deployed is an aggregate life-to-date total by account type. It is a representation of resource allocation and includes active and inactive accounts.

(2) Other includes commercial, student loan, medical and other purchased debt assets.

(3) Canadian amounts converted to U.S. dollars using the exchange rate as of June 30, 2015.

Owned Portfolio Performance

The following tables show certain data related to our purchased debt portfolios. These tables describe purchase price, cash proceeds received to date, estimated remaining cash proceeds, and related gross return on investment.

The gross ROIs for 2007 and 2008 shown below are lower in comparison to most of our historical multiples. These lower ROIs were generally caused by increased market pricing and an overall deterioration in the macroeconomic environment. The gross ROIs for 2013 - 2015 purchases are also lower in comparison to most of our historical returns, primarily due to lower supply that has resulted in increased market competition and higher prices.

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U.S. Purchased Debt Portfolio as of June 30, 2015 ($ in thousands)



Purchase Period	Purchase Price(1)		Valuation Allowance (2)			Purchased Debt, net Carrying Value(3)		% of Carrying Value Unamortized(4)		Actual Proceeds Life to Date		Estimated Remaining Proceeds		Total Estimated Proceeds(5)		Gross ROI(6)
2006 and prior	$	896,340	$	(5,280	)	$	455	—	%	$	2,111,255	$	8,873	$	2,120,128	2.37x
2007	236,005		(56,311		)	2,016		1	%	354,234		3,881		358,115		1.52x
2008	226,030		(65,921		)	3,970		2	%	343,871		8,253		352,124		1.56x
2009	105,157		(459		)	1,620		2	%	215,359		10,055		225,414		2.14x
2010	164,117		(2,172		)	219		—	%	406,481		35,660		442,141		2.69x
2011	244,959		(2,868		)	2,481		1	%	561,388		69,692		631,080		2.58x
2012	246,011		(4,078		)	14,634		6	%	461,019		95,145		556,164		2.26x
2013	240,595		(4,909		)	64,144		27	%	289,070		147,784		436,854		1.82x
2014	105,532		(806		)	46,758		44	%	70,433		90,180		160,613		1.52x
2015	46,970		—			41,400		88	%	6,846		74,774		81,620		1.74x
Total	$	2,511,716	$	(142,804	)	$	177,697			$	4,819,956	$	544,297	$	5,364,253	2.14x

(1) Purchase price represents cost of each purchase.

(2) Valuation allowance represents the total valuation allowance on our purchased debt, net of reversals.

(3) Portfolio carrying value represents the net book value of our purchased debt portfolios excluding the impact of the branch office asset purchase program (discontinued).

(4) Percentage of carrying value unamortized represents the carrying value divided by the purchase price.

(5) Total estimated proceeds represent actual proceeds life to date plus the estimated remaining proceeds.

(6) Gross ROI represents the total estimated proceeds divided by purchase price.

Canada Purchased Debt Portfolio as of June 30, 2015 (U.S. dollars in thousands)



Purchase Period	Purchase Price(1)		Valuation Allowance		Purchased Debt, net Carrying Value(2)		% of Carrying Value Unamortized		Actual Proceeds Life to Date(1)		Estimated Remaining Proceeds(2)		Total Estimated Proceeds		Gross ROI
2006 and prior	$	5,885	$	—	$	—	—	%	$	9,554	$	6	$	9,560	1.62x
2007	7,889		—		—		—	%	15,159		72		15,231		1.93x
2008	6,282		—		—		—	%	9,876		126		10,002		1.59x
2009	3,350		—		—		—	%	9,645		420		10,065		3.00x
2010	7,706		—		—		—	%	30,278		2,176		32,454		4.21x
2011	22,745		—		—		—	%	62,063		4,679		66,742		2.93x
2012	26,746		—		—		—	%	51,981		5,819		57,800		2.16x
2013	17,515		—		1,922		11	%	25,370		10,792		36,162		2.06x
2014	21,215		—		7,565		36	%	18,030		21,216		39,246		1.85x
2015	6,743		—		3,085		46	%	4,642		9,975		14,617		2.17x
Total	$	126,076	$	—	$	12,572			$	236,598	$	55,281	$	291,879	2.32x

(1) Converted to U.S. dollars using average historical exchange rates effective in the month of activity.

(2) Converted to U.S. dollars using the exchange rate as of June 30, 2015.

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Consolidated Purchased Debt Portfolio as of June 30, 2015 (U.S. dollars in thousands)



Purchase Period	Purchase Price		Valuation Allowance			Purchased Debt, net Carrying Value		% of Carrying Value Unamortized		Actual Proceeds Life to Date		Estimated Remaining Proceeds		Total Estimated Proceeds		Gross ROI
2006 and prior	$	902,225	$	(5,280	)	$	455	—	%	$	2,120,809	$	8,879	$	2,129,688	2.36x
2007	243,894		(56,311		)	2,016		1	%	369,393		3,953		373,346		1.53x
2008	232,312		(65,921		)	3,970		2	%	353,747		8,379		362,126		1.56x
2009	108,507		(459		)	1,620		1	%	225,004		10,475		235,479		2.17x
2010	171,823		(2,172		)	219		—	%	436,759		37,836		474,595		2.76x
2011	267,704		(2,868		)	2,481		1	%	623,451		74,371		697,822		2.61x
2012	272,757		(4,078		)	14,634		5	%	513,000		100,964		613,964		2.25x
2013	258,110		(4,909		)	66,066		26	%	314,440		158,576		473,016		1.83x
2014	126,747		(806		)	54,323		43	%	88,463		111,396		199,859		1.58x
2015	53,713		—			44,485		83	%	11,488		84,749		96,237		1.79x
Total	$	2,637,792	$	(142,804	)	$	190,269			$	5,056,554	$	599,578	$	5,656,132	2.14x

Estimated Remaining Proceeds

Based on our proprietary models and analytics, we have developed detailed cash flow forecasts for our charged-off receivables. As outlined in the tables below, we anticipate that our U.S. owned charged-off receivables as of June 30, 2015 will generate a total of approximately $544.3 million of gross cash proceeds. Our ERP expectations are based on historical data as well as assumptions about future collection rates and consumer behavior and are subject to a variety of factors that are beyond our control, and we cannot guarantee that we will achieve these results.

U.S. Purchased Debt Calendar Year Estimated Remaining Proceeds by Year of Purchase ($ in thousands)



Purchase Year	2015		2016		2017		2018		2019		2020		2021		2022		2023 and thereafter(2)		Total
2006 and prior(1)	$3,624		$3,818		$1,173		$258		$—		$—		$—		$—		$—		$8,873
2007	1,290		1,103		1,008		387		93		—		—		—		—		3,881
2008	3,338		2,445		919		1,031		418		102		—		—		—		8,253
2009	2,679		3,943		2,007		559		537		264		66		—		—		10,055
2010	7,842		12,543		8,366		4,174		1,158		1,006		457		114		—		35,660
2011	13,616		21,423		15,730		10,349		4,891		1,512		1,445		583		143		69,692
2012	20,811		27,317		17,806		13,179		8,670		4,052		1,335		1,289		686		95,145
2013	31,940		47,076		26,059		17,873		12,590		8,115		3,629		388		114		147,784
2014	23,085		29,862		14,691		8,018		4,771		3,501		2,773		2,216		1,263		90,180
2015	17,345		21,161		12,053		7,616		5,083		3,750		2,953		2,390		2,423		74,774
Total	$125,570		$170,691		$99,812		$63,444		$38,211		$22,302		$12,658		$6,980		$4,629		$544,297
Cumulative Percent	23.1	%	54.4	%	72.8	%	84.4	%	91.4	%	95.5	%	97.9	%	99.1	%	100.0	%

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U.S. Purchased Debt Rolling Twelve Months Estimated Remaining Proceeds by Year of Purchase ($ in thousands)



Purchase Year	0 - 12 Months		13 - 24 Months		25 - 36 Months		37 - 48 Months		49 - 60 Months		61 - 72 Months		73 - 84 Months		85 - 96 Months		97 - 120 Months(2)		Total
2006 and prior(1)	$6,065		$2,089		$674		$45		$—		$—		$—		$—		$—		$8,873
2007	1,881		1,053		734		191		22		—		—		—		—		3,881
2008	4,997		1,225		1,035		770		200		26		—		—		—		8,253
2009	4,892		2,975		1,109		504		441		113		21		—		—		10,055
2010	14,684		10,408		6,270		2,278		986		791		208		35		—		35,660
2011	25,148		18,415		13,062		7,620		2,579		1,473		1,076		282		37		69,692
2012	36,196		21,451		15,508		10,871		6,360		2,127		1,343		956		333		95,145
2013	58,755		34,802		21,283		14,900		10,423		5,859		1,597		85		80		147,784
2014	41,087		20,292		10,909		5,964		4,040		3,105		2,472		1,876		435		90,180
2015	29,239		16,118		9,378		6,189		4,328		3,314		2,650		2,162		1,396		74,774
Total	$222,944		$128,828		$79,962		$49,332		$29,379		$16,808		$9,367		$5,396		$2,281		$544,297
Cumulative Percent	41.0	%	64.6	%	79.3	%	88.4	%	93.8	%	96.9	%	98.6	%	99.6	%	100.0	%

(1) Represents estimated remaining proceeds for purchased debt acquired during the years 2004-2006.

(2) Although the maximum forecast period for charged-off receivables is 144 months, at June 30, 2015 no portfolio was expected to generate remaining cash proceeds in excess of the next 120 months.

Historical Proceeds

The following table demonstrates our ability to realize continuing cash flow streams on our purchased debt, showing our cash proceeds by year, and year of purchase.

U.S. Period of Proceeds ($ in thousands)



Purchase Year	2006 & Prior(2)		2007		2008		2009		2010		2011		2012		2013		2014		2015		Total
2006 & Prior(1)	$	1,329,748	$	338,808	$	180,830	$	96,778	$	61,165	$	40,410	$	26,238	$	18,207	$	13,516	$	5,555	$	2,111,255
2007	—		98,929		111,049		54,363		34,500		21,178		14,424		9,919		6,889		2,983		354,234
2008	—		—		98,025		88,017		65,471		38,416		24,983		15,024		9,699		4,236		343,871
2009	—		—		—		49,074		71,698		41,300		27,948		13,681		8,407		3,251		215,359
2010	—		—		—		—		90,429		130,132		94,374		53,213		27,698		10,635		406,481
2011	—		—		—		—		—		163,304		196,236		120,068		60,322		21,458		561,388
2012	—		—		—		—		—		—		176,605		163,096		88,015		33,303		461,019
2013	—		—		—		—		—		—		—		122,488		119,738		46,844		289,070
2014	—		—		—		—		—		—		—		—		42,279		28,154		70,433
2015	—		—		—		—		—		—		—		—		—		6,846		6,846
Total	$	1,329,748	$	437,737	$	389,904	$	288,232	$	323,263	$	434,740	$	560,808	$	515,696	$	376,563	$	163,265	$	4,819,956

(1) Represents purchase vintage years 1998-2006.

(2) Represents proceeds from purchased debt during the years 1998-2006.

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The following chart represents our historical proceeds on owned debt by quarter, with collections shown in black and sales, recourse & bankruptcy proceeds in gray.

Quarterly Cash Proceeds ($ in millions)

Liquidity and Capital Resources

Working Capital

Our primary sources of working capital are cash flows from operations, excess cash balances and bank borrowings. Our working capital levels fluctuate throughout the year based on purchasing volumes and are generally positively affected by first and second quarter collections each year when we historically tend to have higher collections. Generally, these higher first and second quarter collections are driven by tax refunds, patterns of seasonal employment, and the impact of reductions in consumer spending following the holiday season. We use our working capital to purchase charged-off receivables, service our indebtedness, and fund our operations to generate long-term growth.

Under our current borrowing structure, our domestic and Canadian line of credit borrowings are managed separately. Our domestic operation sweeps all cash proceeds obtained to pay down our domestic line of credit daily. As a result, we maintain minimal domestic cash balances on hand, excluding our restricted cash. Domestically and in Canada, we borrow from our line of credit only as needed to reduce overall interest costs on our outstanding borrowings. Our line of credit, in total for both domestic and Canadian operations, is subject to a borrowing base and is described further in our condensed consolidated financial statements. To the extent our Canadian cash flow exceeds the cash flow needs of our Canadian operation including purchasing new assets, the excess Canadian cash flow, after paying down the Canadian line of credit to zero, is held in our Canadian bank accounts or used to pay down our domestic line of credit.

The Company from time to time enters into forward flow purchase agreements with various debt sellers to purchase specified amounts of debt for designated prices. These contracts typically cover a year or less and can generally be canceled by the Company at its discretion with 30-60 days’ notice. At June 30, 2015, the Company did not have any non-cancelable forward flow purchase agreements.

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Our purchasing volumes and proceeds in any period fluctuate based on pricing and other macro-economic factors. We view our liquidity as our availability to borrow on our domestic and Canadian line of credit, plus our domestic and Canadian non-restricted cash balances, which primarily includes excess Canadian cash on hand. As of June 30, 2015, our total availability under our line of credit was $26.6 million based on our borrowing base calculation, and our non-restricted cash balances were $23.5 million, resulting in liquidity as of June 30, 2015 of $50.1 million. Based on our expected level of operations and returns, we consider our liquidity to be sufficient to fund our operations through the maturity of our existing revolving credit facility.

The Company's revolving line of credit facility, which had a balance of $148.3 million at June 30, 2015, matures in April 2016. The Company is currently evaluating various options to extend or refinance its obligations under the existing revolving credit facility.

Cash Flows

Our primary sources of liquidity are cash proceeds from purchased debt, cash from operations, excess cash balances, and borrowings on our senior revolving credit facility. Our primary uses of liquidity are to purchase additional charged-off receivables, fund operating expenses, and service our indebtedness. Our total indebtedness, net of discount, at June 30, 2015 and December 31, 2014 was $439.5 million and $430.4 million, respectively, including obligations under capital leases. Our ability to service our debt and to fund planned purchases of charged-off receivables will depend on our ability to generate cash proceeds in the future, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond our control.

The following table provides a summary of the components of cash flow for the periods presented:



	Six Months Ended
	June 30,
$ in thousands	2015			2014
Net cash used in operating activities	$	(31,086	)	$	(10,003	)
Net cash provided by investing activities	32,014			18,828
Net cash provided by (used in) financing activities	8,131			(1,997		)
Increase in cash and cash equivalents (1)	$	9,059		$	6,828

(1) Before the impact of foreign currency translation on cash of $(1,254) and $321, respectively.

Operating Activities

Cash generated from operations is dependent upon our ability to generate proceeds on our purchased debt. Many factors, including the economy and our Closed Loop Network's ability to maintain low collector turnover and adequate liquidation rates, are essential to our ability to generate cash proceeds. Fluctuations in these factors that cause volatility in our business could have a material impact on our expected future cash flows. Proceeds on purchased debt recorded as revenue are included in the operating activities, while proceeds recorded as amortization of purchased debt principal are included in the investing activities. See the reconciliation of net cash used in operating activities to Adjusted EBITDA in the Results of Operations section herein.

Our operating activities used net cash of $31.1 million and $10.0 million during the six months ended June 30, 2015 and 2014, respectively, resulting in a net increase in cash used in operating activities of $21.1 million. The increase in cash used by operating activities was primarily due to a decrease of $37.6 million in proceeds on purchased debt recorded as revenue, excluding non-cash valuation allowance charges and reversals. This was partially offset by a corresponding decrease in costs to collect including court costs of $17.9 million. The remaining change in net cash used in operating activities was due to normal changes in operating assets and liabilities.

Investing Activities

Our investing activities provided net cash of $32.0 million and $18.8 million during the six months ended June 30, 2015 and 2014, respectively. Cash provided by investing activities was primarily driven by cash proceeds applied to the carrying value of our purchased debt offset by investments in charged-off receivables. The increase in cash provided by investing activities of $13.2 million was primarily due to a $14.1 million decrease in investments in purchased debt offset by a $0.4 million decrease in cash proceeds recorded as a reduction of our purchased debt carrying value.

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Financing Activities

Our financing activities provided net cash of $8.1 million during the six months ended June 30, 2015 and used net cash of $2.0 million during the six months ended June 30, 2014. Financing activities are primarily driven by purchasing volume (which drives our incremental borrowing), payments on our revolving credit facility, capital lease obligations, and payments of origination fees on our revolving line of credit. Cash is provided by draws on our revolving credit facility and proceeds are used to pay down the revolving credit facility. The increase in cash provided by financing activities of $10.1 million was primarily due to a decrease of $49.0 million in payments on our revolving line of credit resulting from reduced proceeds on purchased debt during 2015 compared to 2014 offset by a decrease of $38.9 million in draws on our revolving credit facility.

Long-term Financing

Senior Revolving Credit Facility and Senior Second Lien Notes

As of June 30, 2015, there were no material changes to the Company's revolving credit facility or its Senior Second Lien Notes from the information previously disclosed except for additional draws and repayments on the revolving credit facility. The balance of the outstanding line of credit under the revolving credit facility was $148.3 million and $138.7 million at June 30, 2015 and December 31, 2014, respectively; an increase of $9.6 million. At June 30, 2015, our availability under the line of credit was $26.6 million based on our borrowing base calculation.

Company Debt Outstanding as a Multiple of TTM Adjusted EBITDA

We believe the metric of debt outstanding as a multiple of TTM Adjusted EBITDA is representative of the Company's business model operating leverage. The ratio increased from 1.7x at June 30, 2014 to 2.5x at June 30, 2015 as a result of a 32.6% decrease in our TTM Adjusted EBITDA and a 0.5% increase in our total debt. Adjusted EBITDA declined primarily due to lower cash proceeds on purchased debt as a result of lower purchasing volumes.

Covenants

The senior revolving credit facility and the Senior Second Lien Notes have certain covenants and restrictions, as is customary for such facilities, with which the Company must comply. Some of the financial covenants under the revolving credit facility include: minimum Adjusted EBITDA, capital expenditures limits, and maximum operating lease obligations. The minimum Adjusted EBITDA covenant, as defined in detail in the revolving credit facility agreement is $165 million for each of the trailing twelve month periods beginning with the fiscal quarter ending December 31, 2014. The maximum capital expenditures covenant for any fiscal year, as further described in the revolving credit facility agreement, is $8 million and is

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subject to provisions set forth in the agreement. Maximum aggregate rent expense and certain other operating lease obligations, excluding a certain operating lease, are $3 million in any fiscal year.

As of June 30, 2015, the Company was in compliance with all covenants and restrictions of the revolving credit facility and Senior Second Lien Notes.

Capital Leases

We had outstanding capital lease obligations relating to computer and office equipment of $1.2 million and software agreements of $0.7 million as of June 30, 2015.

Related Party Loans

During 2001, we entered into two promissory notes with two individuals related to a co-founder and member of our Board of Directors, P. Scott Lowery. The notes were issued to repurchase common stock of SquareTwo held by these related parties. These notes bear interest at a fixed rate of 8.0% and require us to make monthly principal and interest payments of less than $0.1 million. As of June 30, 2015, these notes had outstanding balances of $0.2 million and $0.3 million, respectively. The notes mature on January 15, 2016, and August 15, 2021, respectively.

Off-Balance Sheet Arrangements

As of June 30, 2015, we did not have any off balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and results of operations require our management to make judgments, assumptions and estimates that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.

Management believes our critical accounting policies and estimates are those related to revenue recognition, accounting estimates, valuation of acquired goodwill and intangible assets, and income taxes. Management believes these policies to be critical because they are both important to the portrayal of our financial condition and results, and they require management to make judgments and estimates about matters that are inherently uncertain.

Revenue Recognition from Purchased Debt

We account for our purchased debt under the guidance of ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). Under ASC 310-30, static pools of purchased debt, aggregated based on certain common risk criteria, can be accounted for under either the interest method of accounting or the cost recovery method of accounting. Revenue recognition under ASC 310-30 is based in part on life-to-date performance of our static pools as well as our forecasts of future proceeds on those pools, which reflect our judgments and various assumptions and estimates made quarterly. See accounting for income recognized on purchased debt discussed in detail in Note 2 to the condensed consolidated financial statements.

Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. Our condensed consolidated financial statements are based on a number of significant estimates, including the collectability of purchased debt and the timing of such proceeds. Due to the uncertainties inherent in the estimation process, it is at least reasonably possible that our estimates in connection with these items could be materially revised within the near term.

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Goodwill and Intangible Assets

Goodwill represents the cost of acquired businesses in excess of the fair value assigned to the net tangible and identifiable intangible assets acquired. As prescribed by ASC Topic 350, Intangibles-Goodwill and Other, goodwill is not amortized. We review goodwill for impairment annually, or more frequently, if indicators of possible impairment arise. Potential impairment is indicated when the book value of a reporting unit, including goodwill, exceeds its fair value. Significant judgments are required to estimate the fair value of reporting units and intangible assets including estimating future cash flows, and determining appropriate discount rates, growth rates, and other assumptions. If potential impairment exists, the fair value of the reporting unit is compared to the fair value of its assets and liabilities, excluding goodwill, to estimate the implied value of the reporting unit's goodwill. An impairment loss is recognized for any excess of the book value of the reporting unit's goodwill over the implied fair value.

In connection with the Acquisition, certain intangible assets were identified. The branch office intangible, with a value of $24.9 million, was deemed to have an indefinite life and, therefore, is not being amortized. We perform an impairment test annually, or more frequently, if events or changes in circumstances indicate impairment of intangible assets. We also annually evaluate the remaining useful life of the branch office intangible to determine whether events and circumstances continue to support the indefinite life assertion. Our judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of our businesses, market conditions and other factors.

Income Taxes

The Company uses the liability method of accounting for income taxes in accordance with the authoritative guidance for income taxes. When the Company prepares its condensed consolidated financial statements, it estimates income taxes based on the various jurisdictions where it conducts business. This requires the Company to estimate current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. Deferred income taxes are recognized based on the difference between the financial statements and income tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to reverse. The Company then assesses the likelihood that deferred tax assets will be realized. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. When the Company establishes a valuation allowance or increases this allowance in an accounting period, it records a corresponding tax expense in the condensed consolidated statements of operations. The Company includes interest and penalties related to the income taxes within its provision for income taxes. See Note 8 for additional discussion of income taxes.

Management must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance to be recorded against the deferred tax assets.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Market Risk

We are exposed to various types of market risk in the normal course of business, including the impact of interest rate changes, foreign currency exchange rate fluctuations, changes in corporate tax rates, and inflation. From time to time, we employ risk management strategies that may include the use of derivatives, such as interest rate swap agreements. We do not enter into derivatives for trading purposes.

For additional discussion of market risks affecting SquareTwo Financial, see "Quantitative and Qualitative Disclosure About Market Risk" in our Annual Report on Form 10-K. Our exposure to market risk has not changed materially since the filing of our most recent Annual Report on Form 10-K.

Item 4. Controls and Procedures.

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in our internal control over financial reporting during the three months ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled "Risk Factors" in our most recent Annual Report on Form 10-K.

There have been no material changes to risk factors previously disclosed in our most recent Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.



Exhibit No.	Description

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002

32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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.



	SQUARETWO FINANCIAL CORPORATION

August 13, 2015	By:	/s/ Paul A. Larkins
	Name:	Paul A. Larkins
	Title:	Chief Executive Officer
		(Principal Executive Officer)

August 13, 2015	By:	/s/ John D. Lowe
	Name:	John D. Lowe
	Title:	Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

SquareTwo Financial Corp - FORM 10-Q - August 13, 2015

Attached files

SquareTwo Financial Corp Reports