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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
(Mark One)
ý    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2020

or

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

Commission file number: 001-35064
EMERGENT CAPITAL, INC.

(Exact name of registrant as specified in its charter)
 
Florida 30-0663473
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)

1200 N. Federal Highway—Suite 200
     Boca Raton, Florida, 33432
(Address of principal executive offices, including zip code)
(561) 995-4200



5355 Town Center Road, Suite 701
Boca Raton, Florida, 33486
(Former name or former address, if changed since last report)
 

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




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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," “accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨Accelerated filer¨
Non-accelerated filerýSmaller reporting companyý
Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨    

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

As of October 14, 2020, the Registrant had 158,655,140 shares of common stock outstanding.




EMERGENT CAPITAL, INC.
FORM 10-Q REPORT FOR THE QUARTER ENDED August 31, 2020
TABLE OF CONTENTS
Page No.
PART I — FINANCIAL INFORMATION
PART II — OTHER INFORMATION




"Forward Looking" Statements

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

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

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

our ability to obtain future financings on favorable terms, or at all;
our ability to meet our debt service obligations;
delays in the receipt of death benefits may impact distribution from our investment in the limited partnership that constitutes our primary asset;
increases in premiums on, or the cost of insurance of, life insurance policies owned by the limited partnership;
our lack of control over the policies that are within the limited partnership under its current ownership and control;
changes in general economic conditions, including inflation, changes in interest or tax rates;
our actual results of operations;
adverse developments, including financial ones, associated with litigation and judicial actions;
changes to actuarial life expectancy tables including inaccurate estimates regarding the likelihood and magnitude of death benefits related to life insurance policies owned by the limited partnership;
lack of mortalities of insureds of the life insurance policies owned by the limited partnership;
increases to the discount rates used to value our investment in the limited partnership;
changes in mortality rates and inaccurate assumptions about life expectancies for policies owned by the limited partnership;
changes in life expectancy calculation methodologies by third party medical underwriters;
the effect on our financial condition as a result of any lapse of life insurance policies owned by the limited partnership;
adverse developments in capital markets;
deterioration of the market for life insurance policies and life settlements;
increased carrier challenges to the validity of life insurance policies owned by the limited partnership;
adverse court decisions regarding insurable interest and the obligation of a life insurance carrier to pay death benefits or return premiums upon a successful rescission or contest;
challenges to the ownership of the policies in the portfolio held by the limited partnership;
changes in laws and regulations;
3


deterioration in the credit worthiness of the life insurance companies that issued the policies included in the portfolio held by the limited partnership;
regulation of life settlement transactions as securities;
liabilities associated with our legacy structured settlement business;
our failure to maintain the security of personally identifiable information pertaining to insureds and counterparties;
our ability to maintain a listing or quotation on a national securities exchange or other trading platform for our common stock;
cyber security risks and the threat of data breaches resulting in disruption of our information technology systems;
loss of the services of any of our executive officers;
our ability to mitigate the effects of global intangible low-taxed income ("GILTI") tax;
disruptions to our business due to the COVID-19 pandemic, including workforce inability to perform in the ordinary
course due to illness or access restrictions, and our ability to consummate the restructuring of the Company; and
We do not control our significant asset and rely on third parties to manage it.

All written and oral forward looking statements attributable to the Company, or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. See "Risk Factors" included in our Annual Report on Form 10-K for the twelve months ended November 30, 2019. You should evaluate all forward looking statements made in this Form 10-Q in the context of these risks and uncertainties. The Company cautions you that the important factors referenced above may not contain all of the factors that are important to you.



4


Item 1        Financial Statements

Emergent Capital, Inc.
CONSOLIDATED BALANCE SHEETS
August 31,
2020
November 30,
2019*
 (Unaudited) 
 (In thousands except share data)
ASSETS
Assets
Cash and cash equivalents$19,054 $24,283 
Certificates of deposit517 511 
Prepaid expenses and other assets1,152 377 
Operating lease asset (Note 18)22 — 
Deposits - other1,212 1,377 
Life settlements, at estimated fair value  1,297 
Fixed assets, net 18 
Investment in limited partnership, at estimated fair value (Note 11)152,450 137,849 
Total assets$174,407 $165,712 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Accounts payable and accrued expenses$1,337 $1,651 
Other liabilities 86 
Interest payable - 5.0% Convertible Notes (Note 14)
159 1,116 
5.0% Convertible Notes, net of discount and deferred debt costs (Note 14)
64,420 71,022 
Interest payable - 8.5% Senior Secured Notes (Note 15)
1,118 854 
8.5% Senior Secured Notes, net of deferred debt costs (Note 15)
46,491 45,675 
Current tax liability2,623 3,195 
Total liabilities116,148 123,599 
Commitments and Contingencies (Note 18)
Stockholders’ Equity
Common stock (par value $0.01 per share, 415,000,000 authorized at August 31 ,2020 and November 30, 2019; 159,263,140 issued and 158,655,140 outstanding as of August 31, 2020; 158,365,275 issued and 157,757,275 outstanding as of November 30, 2019)

1,593 1,584 
Preferred stock (par value $0.01 per share, 40,000,000 authorized; 0 issued and outstanding as of August 31, 2020 and November 30, 2019)
  
Treasury Stock, net of issuance cost 608,000 shares as of August 31, 2020 and November 30, 2019)
(2,534)(2,534)
Additional paid-in-capital334,641 334,576 
Accumulated deficit(275,441)(291,513)
Total stockholders’ equity58,259 42,113 
Total liabilities and stockholders’ equity$174,407 $165,712 

 *    Derived from audited consolidated financial statements.
The accompanying notes are an integral part of these financial statements.
5


Emergent Capital, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
August 31,
Nine Months Ended August 31,
 2020201920202019
 (in thousands, except share and per share data)
Income
Change in fair value of life settlements (Notes 10 & 16)$ $(42)$ $(37)
Change in fair value of investment in limited partnership, net of distributions (Notes 11 and 16)4,250 (5,821)20,601 (5,821)
Change in fair value of investment in deconsolidated subsidiaries (Notes 4 & 16) 90,710  37,941 
Gain on life settlements, net (Note 10)  743  
Other income57 2,052 10,875 2,145 
Total income 4,307 86,899 32,219 34,228 
Expenses
Interest expense2,743 2,832 7,610 8,370 
Extinguishment of debt  (2,815) 
Personnel costs444 694 2,833 1,001 
Legal fees738 1,448 1,850 2,117 
Professional fees619 1,142 2,034 1,470 
Insurance519 270 1,360 666 
Other selling, general and administrative expenses272 317 792 516 
Total expenses
5,335 6,703 13,664 14,140 
Income (loss) from continuing operations before income taxes(1,028)80,196 18,555 20,088 
Provision (benefit) provision for income taxes (5)2,428 3,213 
Net income (loss) from continuing operations$(1,028)$80,201 $16,127 $16,875 
Discontinued Operations:
Income (loss) from discontinued operations before income taxes 70 (53)36 
Provision (benefit) provision for income taxes    
Net income (loss) from discontinued operations 70 (53)36 
Net income (loss)$(1,028)$80,271 $16,074 $16,911 
Basic income (loss) per common share:
Continuing operations$(0.01)$0.51 $0.10 $0.11 
Discontinued operations$ $ $ $ 
Net income (loss) - basic $(0.01)$0.51 $0.10 $0.11 
Diluted income (loss) per share:
Continuing operations$(0.01)$0.41 $0.09 $0.10 
Discontinued operations$ $ $ $ 
Net income (loss) - diluted$(0.01)$0.41 $0.09 $0.10 
Weighted average shares outstanding:
Basic
157,655,140 156,968,470 157,624,241 156,949,425 
Diluted157,655,140 195,979,957 206,696,703 194,867,908 
The accompanying notes are an integral part of these financial statements.
6


Emergent Capital, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT/EQUITY (UNAUDITED)
Nine Months Ended August 31, 2020
 Common StockTreasury StockAdditional
Paid-in Capital
Accumulated DeficitTotal
 SharesAmountSharesAmount
 (in thousands, except share data)
Balance, December 1, 2019158,365,275 $1,584 (608,000)$(2,534)$334,576 $(291,513)$42,113 
Net income/(loss)— — — — — 12,438 12,438 
Stock-based compensation1,000,000 10 — — 22 — 32 
Retirement of common stock(87,309)(1)— — — — (1)
Balance, February 29, 2020159,277,966 $1,593 (608,000)$(2,534)$334,598 $(279,075)$54,582 
Net income/(loss)— — — — — 4,662 4,662 
Stock-based compensation— — — — 22 — 22 
Retirement of common stock(14,826)— — — — —  
Balance, May 31, 2020159,263,140 $1,593 (608,000)$(2,534)$334,620 $(274,413)$59,266 
Net income/(loss)— — — — — (1,028)(1,028)
Stock-based compensation— — — — 21 — 21 
Balance, August 31, 2020159,263,140 $1,593 (608,000)$(2,534)$334,641 $(275,441)$58,259 

Nine Months Ended August 31, 2019
 Common StockTreasury StockAdditional
Paid-in Capital
Accumulated DeficitTotal
 SharesAmountSharesAmount
 (in thousands, except share data)
Balance, December 1, 2018158,733,928 $1,587 (608,000)$(2,534)$334,198 $(306,009)27,242 
Net income/(loss)— — — — — (37,476)(37,476)
Stock-based compensation— — — — 98 — 98 
Balance, February 28, 2019158,733,928 $1,587 (608,000)$(2,534)$334,296 $(343,485)$(10,136)
Net income/(loss)— — — — — (25,884)(25,884)
Stock-based compensation— — — — 97 — 97 
Retirement of common stock(74,125)— — — — —  
Balance, May 31, 2019158,659,803 $1,587 (608,000)$(2,534)$334,393 $(369,369)$(35,923)
Net income/(loss)— — — — — 80,271 80,271 
Stock-based compensation— — — — 95 — 95 
Balance, August 31, 2019158,659,803 $1,587 (608,000)$(2,534)$334,488 $(289,098)$44,443 
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Emergent Capital, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended August 31,
 20202019
 (In thousands)
Cash flows from operating activities
Net income (loss)$16,074 $16,911 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization18 63 
Amortization of discount and deferred costs for 8.5% Convertible Notes
 21 
Amortization of discount and deferred costs for 5.0% Convertible Notes
891 955 
Amortization of deferred costs for 8.5% Senior Secured Notes
817 554 
Change in fair value of investment in deconsolidated subsidiaries (37,941)
Extinguishment of debt(2,815) 
Stock-based compensation expense74 290 
Interest paid in kind on 8.5% Senior Secured Notes
 2,842 
Change in fair value of life settlements 37 
Change in fair value of investment in limited partnership, net of distributions(20,601)5,821 
Gain on sale of life settlement(743) 
Interest income(311)(311)
Deferred tax asset 576 
Change in assets and liabilities:
Deposits - other164  
Prepaid expenses and other assets(471)118 
Accounts payable and accrued expenses(316)(394)
Operating lease assets, net of liabilities(22)— 
Other liabilities(87)(155)
Current tax liability(572)2,642 
Interest payable - 8.5% Convertible Notes
 (37)
Interest payable - 5.0% Convertible Notes
(957)(948)
Interest payable - 8.5% Senior Secured Notes
264 463 
Net cash (used in) provided by operating activities(8,593)(8,493)
Cash flows from investing activities
Purchase of fixed assets, net of disposals (5)
Premiums paid on life settlements (118)
Proceeds from sale of life settlements, net2,041  
Distributions from investment in limited partnership6,000  
Consolidation of subsidiaries (cash) 10,905 
Net cash (used in) provided by investing activities8,041 10,782 
Cash flows from financing activities
Proceeds from issue of 8.5% Senior Secured Notes
 6,476 
Repayment of 5.0% Convertible Notes
(4,677)(1,194)
Net cash (used in) provided by financing activities(4,677)5,282 
Net increase (decrease) in cash and cash equivalents(5,229)7,571 
Cash and cash equivalents, at beginning of the period24,283 1,209 
Cash and cash equivalents, at end of the period$19,054 $8,780 
Supplemental disclosures of cash flow information:
Cash paid for interest during the period$6,594 $4,430 
The accompanying notes are an integral part of these financial statements.
8


Emergent Capital, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
August 31, 2020

(1) Description of Business

Emergent Capital, Inc. was founded in December 2006 as a Florida limited liability company, Imperial Holdings, LLC, and converted into Imperial Holdings, Inc. on February 3, 2011, in connection with our initial public offering. Effective September 1, 2015, the name was changed to Emergent Capital, Inc. (with its subsidiary companies, the "Company" or "Emergent Capital").

Risks and Uncertainties

The outbreak of COVID-19, which is a rapidly evolving situation, has adversely impacted global commercial activities. The Company does not believe that there is any significant impact to the Financial Statements as of August 31, 2020 as a result of the COVID-19 pandemic. The Company is monitoring the developments relating to COVID-19 and is coordinating its operational response based on existing business continuity plans and ongoing guidance from global health organizations, relevant governments, and general pandemic response best practices.

Equity Investment in White Eagle Asset Portfolio

Emergent Capital indirectly owns a 27.5% equity investment, having an estimated fair value of approximately $152.5 million at August 31, 2020, in White Eagle Asset Portfolio, LP ("White Eagle"), which was previously a wholly-owned subsidiary of the Company that holds a portfolio of life settlements. The Company primarily earns income through change in fair value and distributions from its equity investment in White Eagle.

On August 16, 2019, the Company entered into a subscription agreement (the "Subscription Agreement") with Lamington Road Designated Activity Company (formerly known as Lamington Road Limited) ("Lamington" or "Class B Limited Partner"), White Eagle, White Eagle General Partner, LLP ( "WEGP" or "Withdrawing General Partner"), and Palomino JV, L.P. ("Palomino" or "Class A Limited Partner"), pursuant to which White Eagle sold to Palomino 72.5% of its limited partnership interests, consisting of all of the newly issued and outstanding Class A and Class D interests, and WEGP sold to an affiliate (the "Manager") of Jade Mountain Partners, LLC ("Jade Mountain"), all of its general partnership interests (collectively, the "WE Investment") for a purchase price of approximately $366.2 million and $8.0 million for the Class A and Class D interests, respectively. Pursuant to the Subscription Agreement, Lamington retained 27.5% of the limited partnership interests of White Eagle, consisting of all of the newly issued and outstanding Class B interests in exchange for all of its previously owned White Eagle limited partnership interests with a value of approximately $138.9 million on the closing date. The consummation of the transaction under the Subscription Agreement resulted in the Company being a minority owner in White Eagle, as a result the entity is treated as an equity investment. Activities for our investment in White Eagle are included in Note 11 "Investment in Limited Partnership" of the accompanying consolidated financial statements for further information.

Litigation Settlement and Disposal of Life Settlement

On December 4, 2019, the Company and certain of its subsidiaries entered into a Settlement Agreement and Mutual Release (the "Settlement Agreement") with Sun Life Assurance Company of Canada ("Sun Life") and Wilmington Trust, N.A. as securities intermediary ("Wilmington Trust").

Pursuant to the Settlement Agreement, 31 life insurance policies with face value totaling $163.5 million issued by Sun Life were canceled in exchange for a lump sum payment of $36.1 million. The settlement included two policies held by the Company outside of White Eagle with an aggregate face value of $12.0 million, 28 policies held by White Eagle with an aggregate face value of $141.5 million and one policy with a face value of $10.0 million in receivable for maturity for White Eagle. Of this amount, approximately $12.7 million was received by the Company, $13.4 million was paid to White Eagle and $10.0 million was paid to Wilmington Trust for the maturity receivable. With this settlement, the Company no longer directly owns any life insurance policies.






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Subsequent Event

Sale of Imperial Life Settlements, LLC

On September 15, 2020, the Company sold its wholly-owned subsidiary, Imperial Life Settlements, LLC ("ILS"), to an unrelated third party. Included in the sale were viatical and/or life settlement provider licenses, permits and authorizations issued to ILS by 12 states. In connection with the sale of ILS and such licenses, the Company voluntarily surrendered licenses issued to ILS by 17 other states. Such licenses are required in connection with the purchase of existing life settlements, but are not required for ownership of life settlements. The Company no longer acquires life settlements, and therefore does not need to
maintain the licenses and their related deposits and expenses.

Voluntary Petitions for Reorganization

On October 15, 2020 (the "2020 Petition Date"), Emergent Capital and its wholly-owned subsidiary Red Reef Alternative Investment, LLC ("Red Reef") filed voluntary petitions for relief (the "2020 Chapter 11 Cases") under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").

Emergent Capital and Red Reef will continue to operate their business as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

On October 14, 2020, Emergent Capital entered into two substantially identical Restructuring Support Agreements (together with all exhibits and schedules thereto, the "RSAs") with certain holders of the 8.5% Senior Secured Notes and with certain holders of the 5.0% Convertible Notes (such holders collectively, the "Supporting Holders"). In the aggregate, the Supporting Holders hold at least a majority of each of the 8.5% Senior Secured Notes and the 5.0% Convertible Notes.

See Note 21, "Subsequent Events", to the accompanying consolidated financial statements for further information.

2) Principles of Consolidation and Basis of Presentation

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

The unaudited consolidated financial statements have been prepared in conformity with the rules and regulations of the SEC for Form 10-Q and therefore do not include certain information, accounting policies, and footnote disclosure information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. However, all adjustments (consisting of normal recurring accruals), which, in the opinion of management, are necessary for a fair presentation of the financial statements, have been included. Operating results for the three months ended August 31, 2020 and nine months ended August 31, 2020 are not necessarily indicative of the results that may be expected for future periods or for the year ending November 30, 2020. These interim financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Emergent Capital's Report on Form 10-K for the fiscal year ended November 30, 2019.

Going Concern

Historically, the Company has incurred substantial losses, which has resulted in an accumulated deficit of approximately $275.4 million as of August 31, 2020. Cash flows used in operating activities were $8.6 million for the nine months ended August 31, 2020 and $8.5 million for the nine months ended August 31, 2019. As of August 31, 2020, the Company had approximately $19.1 million of cash and cash equivalents and certificates of deposit of $517,000.

The Company’s ability to continue as a going concern is dependent on its ability to meet its liquidity needs through a combination of factors including but not limited to, the receipt of distributions from its investment in its equity investment in White Eagle, cash on hand and pending approval of its prenegotiated Chapter 11 reorganization plan by the Bankruptcy Court.
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As of the filing date of this Form 10-Q, we had approximately $19.0 million of cash and cash equivalents inclusive of certificates of deposit of $519,000. The Company's 8.5% Senior Secured Notes, which have outstanding principal of approximately $47.6 million, currently mature on July 15, 2021. In considering our forecast for the next twelve months, including the scheduled repayment of this debt, the Company does not have sufficient liquidity to meet it's obligations. Subsequent to the quarter end, the Company filed a Chapter 11 petition, including a prenegotiated reorganization plan with the support of the holders of a majority of the 8.5% Senior Secured Notes holders which plan would convert the 8.5% Senior Secured Notes into a security with a later maturity date. The plan is pending approval by the Bankruptcy Court. These facts create a substantial doubt of the Company’s ability to meet its financial needs and continue as a going concern. During the bankruptcy process, management plans to continue to operate our business in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

See Note 21, "Subsequent Events", to the accompanying consolidated financial statements for further information.

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

Reorganization and Consolidation

On November 14, 2018 (the "Petition Date"), Lamington and WEGP filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Lamington was the limited partner and owned 99.99%, and WEGP was the general partner and owned 0.01%, of White Eagle. In its capacity as general partner, WEGP managed the affairs of White Eagle.

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

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

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

On September 16, 2019, the Bankruptcy Court entered an order and a final decree closing the White Eagle Chapter 11 Case and the Lamington WEGP cases were closed on November 25, 2019.

Related Party Relationship

Upon filing for Chapter 11 and the subsequent deconsolidation, transactions with Lamington were no longer eliminated in consolidation and are treated as related party transactions for Emergent Capital. On August 17, 2019 Lamington was reconsolidated and its transactions are eliminated in consolidation. See Note 5 "Condensed and Consolidated Financial
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Statements For Entities in Bankruptcy" for all transactions between Emergent Capital and Lamington while Lamington was deconsolidated.

Discontinued Operations

On October 25, 2013, the Company sold substantially all of the assets comprising its structured settlement business. As a result, the Company has discontinued segment reporting and classified its operating results of the structured settlement business, net of income taxes, as discontinued operations. The accompanying consolidated statements of operations for the three months and nine months ended August 31, 2020 and August 31, 2019, and the related notes to the consolidated financial statements, reflect the classification of its structured settlement business operating results, net of tax, as discontinued operations. See Note 9, "Discontinued Operations," of the accompanying consolidated financial statements for further information. Unless otherwise noted, the following notes refer to the Company’s continuing operations.

Foreign Currency

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

Use of Estimates

The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America ("GAAP"), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material. Significant estimates made by management include income taxes, the valuation of life settlements, the valuation of equity awards and the valuation of our investment in limited partnership.

Reclassifications

Certain reclassifications of the prior period amounts and presentation have been made to conform to the presentation for the current period. These reclassifications relate primarily to change in fair value of investment in deconsolidated subsidiaries and sublease income.

(3) Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement" which modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The following disclosure requirements were removed from Topic 820 among others: 1) The amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy 2) The policy for timing of transfers between levels. The following disclosure requirements were part of the modifications in Topic 820:1) For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly. The amendments also clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. Lastly, the following disclosure requirements were added to Topic 820:1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; 2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all
12


periods presented upon their effective date. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

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

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

In May 2019, the FASB issued ASU No 2019-04 which clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. The ASU’s amendments apply to all entities within the scope of the affected guidance. Accrued interest - Amortized cost basis is defined in ASU 2016-13 as "the amount at which a financing receivable or investment is originated or acquired, adjusted for applicable accrued interest, accretion or amortization of premium, discount, and net deferred fees or costs, collection of cash, write offs, foreign exchange, and fair value hedge accounting adjustments". To address stakeholders’ concerns that the inclusion of accrued interest in the definition of amortized cost basis could make application of the credit loss guidance operationally burdensome, ASU 2019-04 provides certain alternatives for the measurement of the allowance for credit losses (ALL) on accrued interest receivable (AIR). These measurement alternatives include (1) measuring an ALL on AIR separately, (2) electing to provide separate disclosure of the AIR component of amortized cost as a practical expedient, and (3) making accounting policy elections to simplify certain aspects of the presentation and measurement of such AIR. For entities that have adopted ASU 2016-13, the amendments in ASU 2019-04 related to ASU 2016-13 are effective for fiscal years beginning after December 15, 2019, and interim periods therein. ASU 2019-04’s amendments should be applied "on a modified-retrospective basis by means of a cumulative-effect adjustment to the opening retained earnings balance in the statement of financial position as of the date an entity adopted the amendments in ASU 2016-13." Certain disclosures are also required. For all other entities, the effective date will be the same as the effective date in ASU 2016-13. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes.  The ASU enhances and simplifies various aspects of the income tax accounting guidance in ASC 740, including requirements related to the following: (1) hybrid tax regimes; (2) tax basis step-up in goodwill obtained in a transaction that is not a business combination; (3) separate financial statements of entities not subject to tax; (4) intra-period tax allocation exception to the incremental approach; (5) ownership changes in investments; (6) interim-period accounting for enacted changes in tax law; (7) year-to-date loss limitation in interim-period tax accounting. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The amendments in this Update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. For public business entities, the amendments in this Update are effective
13


for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period, (1) for public business entities for periods for which financial statements have not yet been issued and (2) for all other entities for periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied prospectively. Under a prospective transition, an entity should apply the amendments at the beginning of the interim period that includes the adoption date. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In June 2020, the FASB issued ASU 2020-06 which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 also amends certain guidance in ASC 260 on the computation of EPS for convertible instruments and contracts on an entity’s own equity. Under ASU 2020-06, entities must apply the if-converted method to all convertible instruments because the treasury stock method will no longer be available. In instances where the principal amount must be paid in cash and only the conversion spread is settled in shares, the if-converted method is modified so that interest expense is not added back to the numerator, and the denominator only includes the net number of incremental shares that would be issued upon conversion. ASU 2020-06 clarifies that the "average market price should be used to calculate the diluted EPS denominator" when the exercise price or the number of shares that may be issued is variable, except for certain contingently issuable shares. For public business entities that are not smaller reporting companies, the amendments in this update are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. For all other entities, the guidance will be effective for the fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The guidance may be early adopted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

Adopted Accounting Pronouncements

Change in Accounting Principle and Accounting for Lease

The Company adopted ASU No. 2016-02, Leases (Topic 842) which now requires recognition of right-of-use (ROU) asset and lease liability on the balance sheet. As part of the transition to the new standard, the Company measured its operating lease commitment at December 1, 2019 and recognized a right-of-use asset and operating lease liability on its balance sheet. The adoption of this ASU did not result in any significant changes to the consolidated statements of operations, stockholders' equity, or statement of cash flows. In transitioning the application of this guidance, retrospective application to all periods presented in the consolidated financial statements has been performed as follows (in thousands):
As reported under previous accounting guidanceAs reported under ASU 2016-02Effect of change
Balance Sheet - November 30, 2019
Assets
Prepaid and other assets$377 $353 $24 
Operating lease assets— 132