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(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard IndustrialClassification Code Number) |
(I.R.S. Employer Identification No.) |
| Brian T. Casey, Esq. Locke Lord LLP Terminus 200, Suite 2000 3333 Piedmont Road, NE Atlanta, GA 30305 (404) 870-4600 |
Michael J. Kessler, Esq. David E. Brown, Esq. Alston & Bird LLP 90 Park Avenue New York, NY 10016 (202) 239-3300 | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
☒ |
Smaller reporting company | |||||
| Emerging growth company | ||||||
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This preliminary prospectus relates to a registration statement under the Securities Act of 1933 but is not complete and may be changed. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, Dated February 9, 2024.
PRELIMINARY PROSPECTUS
$15,000,000
9.875% Fixed Rate Senior Notes due 2028
Abacus Life, Inc., a Delaware corporation (“Abacus” or the “Company”), is offering an additional $15,000,000 aggregate principal amount (the “notes”) of its 9.875% Fixed Rate Senior Notes due 2028 that are listed on the Nasdaq Global Market® (“NASDAQ”) under the symbol “ABLLL” (the “existing notes” and, together with the notes, the “9.875% senior notes”). The notes will bear interest at the rate of 9.875% per annum, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, beginning on February 15, 2024 and ending on the date the notes mature, November 15, 2028 (the “maturity date”). The notes will be fully fungible for U.S. federal income tax purposes with the existing notes, will be treated as a single series of debt securities with the existing notes for all purposes under the indenture and will be issued under same CUSIP and ISIN numbers as the existing notes. Upon completion of this offering, the aggregate principal amount of 9.875% senior notes outstanding will be $50,650,000 ($52,900,000 if the underwriters’ over-allotment option to purchase additional notes referred to herein is exercised in full).
The Company may, at its option, redeem the notes in whole or in part at any time or from time to time on or after February 15, 2027 at a redemption price of 100% of the outstanding principal amount of the notes to be redeemed plus accrued and unpaid interest payments otherwise payable thereon for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption as further described under “Description of the Notes—Optional Redemption.” In addition, each holder of the notes may require the Company to repurchase all or a portion of such holder’s notes at a purchase price equal to 100% of their principal amount, plus accrued and unpaid interest thereon, if any, to, but excluding, the date of repurchase as further described under “Description of the Notes-Offer to Repurchase Upon a Change of Control Repurchase Event.” The notes will not be entitled to any sinking fund.
The notes will be senior unsecured obligations of the Company and will rank equal in right of payment to all of the Company’s other senior unsecured indebtedness from time to time outstanding (including the Company’s $10.5 million Amended and Restated Unsecured Senior Promissory Note, dated as of July 5, 2023, and the existing notes). Because the notes will not be secured by any of the Company’s assets, they are effectively subordinated to any future secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness. The notes will be structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries because the notes will be obligations exclusively of the Company and will not be guaranteed by any of the Company’s subsidiaries.
The notes will be issued only in registered book-entry form, in minimum denominations of $25 and integral multiples of $25 in excess thereof. The Company’s existing notes are listed on NASDAQ under the trading symbol “ABLLL” and we intend to apply to list the notes on NASDAQ under the same symbol. We expect trading of the notes to commence promptly following completion of this offering. The notes trade “flat.” This means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the notes that is not included in the trading price. The last reported sales price of the existing notes on February 1,2024 was $25.46.
Investing in the notes involves risks. See “Risk Factors” beginning on page 12 of this prospectus for a discussion of risks that you should consider in connection with an investment in the notes.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the notes nor have any of the foregoing authorities determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| Per Note |
Total | |||||||
| Price to Public(1) |
25.00 | $ | 15,000,000 | |||||
| Underwriting discount |
3.15 | % | 472,500 | |||||
| Proceeds, before expenses, to the Company |
$ | 24.21 | $ | 14,527,500 | ||||
| (1) | Plus accrued interest, if any, from February 15, 2024. |
We have granted the underwriters an option to purchase up to an additional $2,250,000 aggregate principal amount of the notes, solely to cover overallotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total public offering price will be $17,250,000, the total underwriting discounts and commissions paid by us will be $543,375, and total proceeds, before expenses, to us will be $16,706,625.
The underwriters expect to deliver the notes in book-entry only form through the facilities of The Depository Trust Company on or about February 15, 2024, which is the fourth business day following the date of this Prospectus.
Joint Book-Running Managers
| Piper Sandler | A.G.P. |
Ladenburg Thalmann |
The date of this prospectus is February 9, 2024
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Neither we nor the underwriters have authorized any other person to provide you with any information other than that contained or incorporated by reference in this prospectus. Neither we nor the underwriters take any responsibility for, or provide any assurance as to the reliability of, any other information that others may give you.
We are not, and the underwriters are not, making an offer to sell the notes in any jurisdiction where the offer or sale is not permitted. This prospectus does not constitute an offer of, or an invitation on our behalf or on behalf of the underwriters to subscribe for and purchase, any securities, and may not be used for or in connection with an offer or solicitation by anyone, in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. You should assume that the information contained in this prospectus is accurate only as of the date on the front of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
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TABLE OF CONTENTS
Prospectus
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| 12 | ||||
| 31 | ||||
| CAPITALIZATION OF ABACUS LIFE AND ITS CONSOLIDATED SUBSIDIARIES |
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| 33 | ||||
| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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| 107 | ||||
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| 134 | ||||
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INFORMATION ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-1 (File No. 333-276795). As permitted by SEC rules, this prospectus does not contain all of the information included in the registration statement. For further information, we refer you to the registration statement, including its exhibits. Statements contained in this prospectus about the provisions or contents of any agreement or other document are not necessarily complete. If the SEC’s rules and regulations require that an agreement or document be filed as an exhibit to the registration statement, please see that agreement or document for a complete description of these matters.
You should read this prospectus together with any additional information you may need to make your investment decision. You should also read and carefully consider the information in the documents we have referred you to in “Where You Can Find Additional Information” below. Neither we nor the underwriters have authorized any other person to provide you with any information other than that contained in this prospectus. Neither we nor the underwriters take any responsibility for, or provide any assurance as to the reliability of, any other information that others may give you.
References in this prospectus to “Abacus,” “the Company,” “we,” “us,” and “our” refer to Abacus Life, Inc. (formerly known as East Resources Acquisition Company), and not to any of its consolidated subsidiaries, unless otherwise specified or as the context otherwise requires.
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FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements regarding, among other things, the plans, strategies and prospects, both business and financial, of the Company. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on the beliefs and assumptions of the management of the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, the Company cannot assure you that it will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, and any statements that refer to projections, forecasts or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “predicts,” “projects,” “forecasts,” “may,” “might,” “will,” “could,” “should,” “would,” “seeks,” “plans,” “scheduled,” “possible,” “continue,” “potential,” “anticipates” or “intends” or similar expressions; provided that the absence of these does not means that a statement is not forward-looking. Forward-looking statements contained in this prospectus include, but are not limited to, statements about the ability of the Company to:
| • | realize the benefits expected from the previously disclosed business combination (the “Business Combination”) and related transactions consummated by the Company on June 30, 2023; |
| • | maintain the listing of the Company on a securities exchange; |
| • | achieve projections and anticipate uncertainties relating to the business, operations and financial performance of the Company, including: |
| • | expectations with respect to financial and business performance, including financial projections and business metrics and any underlying assumptions thereunder; |
| • | expectations regarding product development and pipeline; |
| • | expectations regarding market size; |
| • | expectations regarding the competitive landscape; |
| • | expectations regarding future acquisitions, partnerships or other relationships with third parties; and |
| • | future capital requirements and sources and uses of cash, including the ability to obtain additional capital in the future. |
| • | develop, design and sell services that are differentiated from those of competitors; |
| • | retain and hire necessary employees; |
| • | attract, train and retain effective officers, key employees or directors; |
| • | enhance future operating and financial results; |
| • | comply with laws and regulations applicable to its business; |
| • | stay abreast of modified or new laws and regulations applying to its business, including privacy regulation; |
| • | anticipate the impact of, and response to, new accounting standards; |
| • | anticipate the significance and timing of contractual obligations; and |
| • | maintain key strategic relationships with partners and customers. |
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SUMMARY
This summary highlights selected information included in this prospectus and does not contain all of the information that may be important to you. You should read the entire prospectus and the other documents to which we refer before you decide to invest.
Overview of the Company
Abacus Life, Inc. is composed of two principal operating subsidiaries, Abacus Settlements, LLC (“Abacus Settlements”) and Longevity Market Assets, LLC (“LMA”). These principal operating subsidiaries comprise a leading vertically integrated alternative asset manager specializing in investing in in-force life insurance products throughout the lifecycle of a life insurance policy. As an alternative asset manager, the Company focuses on originating, holding and servicing life insurance policies. The Company purchases life insurance policies from consumers seeking liquidity and actively manages those policies over time (via trading, holding and/or servicing). To date, the Company has purchased over $2.9 billion in policy value and has helped thousands of clients maximize the value of their life insurance policies.
The mailing address of the Company’s principal executive office is 2101 Park Center Drive, Suite 170, Orlando, Florida 32835 and the telephone number of the Company’s principal executive office is 800-561-4148.
Recent Financial Information
On December 11, 2023, our Board of Directors authorized a stock repurchase program of up to $15 million of the Company’s outstanding common stock over a period of up to 18 months. During the pendency of the stock repurchase program, the Company may repurchase shares from time to time through various methods, including in open market transactions, block trades, accelerated share repurchases, privately negotiated transactions, derivative transactions or otherwise, certain of which may be made pursuant to a trading plan meeting the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, in compliance with applicable state and federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will be determined by the Company at its discretion and will depend on a variety of factors, including our assessment of the intrinsic value of the Company’s common stock, the market price of the Company’s common stock, general market and economic conditions, available liquidity, compliance with the Company’s debt and other agreements, applicable legal requirements, the nature of other investment opportunities available to the Company, and other considerations. The Company is not obligated to purchase any shares under the repurchase program, and the program may be suspended, modified, or discontinued at any time without prior notice. The Company expects to fund the repurchases by using cash on hand and expected free cash flow to be generated in the future.
The Company expects its financial results for the year ended December 31, 2023 to be consistent with the Company’s expectations with a forecasted range of Adjusted EBITDA of $35 million to $41 million. The Company’s actual financial results for the year ended December 31, 2023 are subject to our detailed period-end closing procedures. Our consolidated financial statements as of, and for the year ended December 31, 2023 are not yet available. Accordingly, the forecasted range reflects our preliminary estimate subject to the completion of our financial closing procedures and any adjustments that may result from the completion of the annual review of our consolidated financial statements. As a result, this preliminary estimate may differ from the actual result that will be reflected in our consolidated financial statements for the period when they are completed and publicly disclosed. This preliminary estimate may change, and such change may be material. Our independent registered public accounting firm has not audited, reviewed or performed any procedures with respect to this preliminary estimate and, accordingly, does not express an opinion or any other form of assurance about it. Adjusted EBITDA is a non-GAAP financial measure. Non-GAAP financial measures are financial measures that are
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derived from the consolidated financial statements, but that are not presented in accordance with generally accepted accounting principles in the United States (GAAP). The Company uses this non-GAAP financial measure and other key metrics internally to facilitate analysis of financial and business trends and for internal planning and forecasting purposes. The Company believes this non-GAAP financial measure, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance by excluding certain items that may not be indicative of the business, results of operations, or outlook. However, this non-GAAP financial measure has limitations as an analytical tool and is presented for supplemental informational purposes only. It should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. In particular, other companies, including companies in the Company’s industry, may report Adjusted EBITDA or similarly titled measures but calculate them differently, which reduces its usefulness as comparative measures. We believe that there is a degree of variability with respect to the GAAP measures and certain adjustments made to arrive at the non-GAAP measure that precludes us from providing an accurate preliminary estimate of a GAAP to non-GAAP reconciliation without unreasonable effort or expense. As a result, we believe that providing estimates of the amounts that would be required to reconcile the ranges of our adjusted EBITDA would imply a degree of precision that would be confusing or misleading to investors for the reasons identified above.
Summary of Historical Financial Data for Abacus Life, Inc.
The summary of historical statements of income data of Abacus for the years ended December 31, 2022 and 2021 and the historical balance sheet data as of December 31, 2022 and December 31, 2021 are derived from Abacus’s audited financial statements included elsewhere in this prospectus. The summary historical statements of income data of Abacus for the nine months ended September 30, 2023 and 2022 and the balance sheet data as of September 30, 2023 and 2022 are derived from Abacus’s unaudited interim condensed financial statements included elsewhere in this prospectus.
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Abacus’s historical results are not necessarily indicative of the results that may be expected in the future. The information below is only a summary and should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, and the notes and schedules related thereto, which are included elsewhere in this prospectus.
| As of and for the nine months ended September 30, 2023 |
As of and for the nine months ended September 30, 2022 |
As of and for the year ended December 31, 2022 |
As of and for the year-ended December 31, 2021 |
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| Statement of Income Data: |
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| Total revenues |
$ | 42,705,904 | $ | 29,784,048 | $ | 44,713,553 | $ | 1,199,986 | ||||||||
| Total cost of revenues |
4,827,907 | 3,840,969 | 6,245,131 | 735,893 | ||||||||||||
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| Gross profit |
37,877,997 | 25,943,079 | 38,468,422 | 464,093 | ||||||||||||
| Sales, general, administrative, and depreciation |
15,927,375 | 2,374,134 | 3,666,826 | 597,702 | ||||||||||||
| Change in fair value of debt |
309,865 | (859,519 | ) | 90,719 | — | |||||||||||
| Unrealized loss on investments |
(491,356 | ) | 1,301,821 | 1,045,623 | — | |||||||||||
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| Income (loss) from operations |
22,132,113 | 23,126,640 | 33,665,255 | (133,609 | ) | |||||||||||
| Other (expense) income Other (expense) |
(1,565 | ) | (199,958 | ) | (347,013 | ) | — | |||||||||
| Interest (expense) |
(3,620,695 | ) | — | (42,798 | ) | — | ||||||||||
| Interest income |
71,283 | — | 1,474 | — | ||||||||||||
| Loss on change in fair value of warrant liability |
(943,400 | ) | — | — | — | |||||||||||
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| Total other (expense) |
(4,494,377 | ) | (199,958 | ) | (388,337 | ) | — | |||||||||
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| Income (loss) before income taxes |
17,637,736 | 22,926,682 | 33,276,917 | (133,609 | ) | |||||||||||
| Provision for Income taxes (benefit) |
2,238,419 | 648,887 | 889,943 | — | ||||||||||||
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| Less: Net Income (Loss) attributable to Noncontrolling Interest |
(339,692 | ) | 770,093 | 704,699 | (148,155 | ) | ||||||||||
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| Net and Comprehensive Income (loss) |
$ | 15,399,317 | $ | 21,507,701 | $ | 31,682,275 | $ | 14,546 | ||||||||
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| Balance Sheet Data: |
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| Total assets |
$ | 304,301,937 | $ | 81,400,312 | $ | 59,094,847 | $ | 1,840,218 | ||||||||
| Total liabilities |
138,212,190 | 59,261,147 | 30,945,150 | 1,073,325 | ||||||||||||
| Total members’ equity |
166,089,747 | 22,139,164 | 28,149,697 | 766,893 | ||||||||||||
Summary of Historical Financial Data for Abacus Settlements
The summary historical statements of income data of Abacus Settlements for the years ended December 31, 2022 and 2021 and the historical balance sheet data as of December 31, 2022 and December 31, 2021 are derived from Abacus Settlement’s audited financial statements included elsewhere in this prospectus. The summary historical statements of income data of Abacus Settlements for the six months ended June 30, 2023 and 2022 and the balance sheet data as of June 30, 2023 and 2022 are derived from our unaudited interim financial statements included elsewhere in this prospectus.
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Abacus Settlement’s historical results are not necessarily indicative of the results that may be expected in the future. The information below is only a summary and should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements, and the notes and schedules related thereto, which are included elsewhere in this prospectus.
| As of and for the six months ended June 30, 2023 |
As of and for the nine months ended September 30, 2022 |
As of and for the year ended December 31, 2022 |
As of and for the year- ended December 31, 2021 |
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| Statement of Income Data: |
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| Total revenue |
$ | 13,184,676 | $ | 19,046,144 | $ | 25,203,463 | $ | 22,592,144 | ||||||||
| Total cost of revenue |
9,293,303 | 12,651,704 | 16,561,005 | 14,205,341 | ||||||||||||
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| Gross profit |
3,891,373 | 6,394,440 | 8,642,458 | 8,386,803 | ||||||||||||
| Operating Expenses |
4,854,177 | 6,241,568 | 8,686,590 | 7,449,688 | ||||||||||||
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| Income (loss) from operations |
(962,804 | ) | 152,872 | (44,132 | ) | 937,115 | ||||||||||
| Other (expense) income |
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| Interest income |
1,917 | 1,505 | 2,199 | 10,870 | ||||||||||||
| Interest (expense) |
(11,725 | ) | (2,954 | ) | (8,817 | ) | — | |||||||||
| Consulting income |
— | — | 273 | 50,000 | ||||||||||||
| Other income |
— | 273 | — | 630 | ||||||||||||
| Total other (expense) income |
(9,808 | ) | (1,176 | ) | (6,345 | ) | 61,500 | |||||||||
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| Income (loss) before income taxes |
(972,612 | ) | 151,696 | (50,477 | ) | 998,615 | ||||||||||
| Provision for Income taxes. |
2,289 | 1,907 | 2,018 | 1,200 | ||||||||||||
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| Net income (loss) |
$ | (974,901) | $ | 149,789 | $ | (52,495 | ) | $ | 997,415 | |||||||
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| Balance Sheet Data: |
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| Total assets |
— | $ | 3,704,464 | $ | 3,215,812 | $ | 5,291,997 | |||||||||
| Total liabilities |
— | 1,492,988 | 1,204,675 | 2,569,002 | ||||||||||||
| Total members’ equity |
— | 2,211,476 | 2,011,137 | 2,722,995 | ||||||||||||
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RISK FACTORS SUMMARY
| • | The notes will be unsecured and therefore will be effectively subordinated to any secured indebtedness we have incurred or may incur in the future. |
| • | The notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries. |
| • | The indenture under which the notes will be issued contains limited protection for holders of the notes. |
| • | There may not be an active and liquid trading market for the notes. |
| • | We may choose to redeem the notes when prevailing interest rates are relatively low. |
| • | An increase in interest rates could result in a decrease in the fair value of the notes. |
| • | A downgrade, suspension or withdrawal of any credit rating assigned by a rating agency to us or the notes or change in the debt markets could cause the liquidity or market value of the notes to decline significantly. |
| • | If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes. |
| • | We may not be able to repurchase the notes upon a Change of Control Repurchase Event. |
| • | The Company has entered into certain credit agreements. Each of these agreements limit the Company’s ability to enter into further credit facilities or take on additional debt which could result in additional financial strain on the Company. |
| • | The Company’s valuation of certain life insurance policies is tied to their actual maturity date and any erroneous valuations could have a material adverse impact on the Company’s business. |
| • | The Company could fail to accurately forecast life expectancies. There may also be changes to life expectancies generally, which could result in a lower return on the Company’s life settlement policies. |
| • | The Company’s policy acquisitions are limited by the market availability of life insurance policies that meet the Company’s eligibility criteria and purchase parameters; failure to secure a sufficient number of quality life insurance policies could have a material adverse effect on the Company’s business. |
| • | The Company may experience increased competition from originating life insurance companies, life insurance brokers, and investment funds which could adversely affect the Company’s business. |
| • | Historically, there has been a negative public perception of the life settlement industry that could affect the value and/or liquidity of the Company’s investments and the life settlement industry faces political opposition from life insurance companies which could adversely affect the Company’s business. |
| • | The Company or third parties the Company relies upon could fail to accurately evaluate, acquire, maintain, track, or collect on life settlement policies, which could adversely affect the Company. |
| • | There is a risk of fraud in the origination of the original life insurance policy or in subsequent sales of the life insurance policy that could adversely affect the Company’s returns. |
| • | The Company may become subject to claims by life insurance companies, individuals and their families, or regulatory authorities. |
| • | If the life settlements in which the Company invests were to become regulated as securities, further compliance with federal and state securities laws would be required, which could result in significant additional regulatory burdens on the Company and limit the Company’s investments. |
| • | The Company faces privacy and cyber security risks related to its maintenance of proprietary information, including information regarding life settlement policies and the related insureds, and any adverse impact related to such risks could have a material adverse impact on the Company’s business. |
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| • | The Company is subject to U.S. privacy laws and regulations. Failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of operations; reputational harm; loss of revenue or profits; and other adverse business consequences. |
| • | The Company’s business may be subject to additional or different government regulation in the future, which could have a material adverse impact on the Company’s business. |
| • | There is currently no direct legal authority regarding the proper federal tax treatment of life settlements and potential future rulings from the Internal Revenue Service (“IRS”) may have significant tax consequences on the Company. |
| • | There have been lawsuits in various states questioning whether a purchaser of a life insurance policy has the requisite “insurable interest” in the policy which would permit the purchaser to collect the insurance benefits and an adverse finding in any of these lawsuits could have a material adverse effect on the Company’s business. |
| • | The failure of the Company to accurately and timely track and pay premium payments on the life insurance policies it holds could result in the lapse of such policies which would have a material adverse impact on the Company’s business. |
| • | The originating life insurance company may increase the cost of insurance premiums, which would adversely affect the Company’s returns. |
| • | The Company may not be able to liquidate its life insurance policies which could have a material adverse effect on the Company’s business. |
| • | The Company assumes the credit risk associated with life insurance companies and may not be able to realize the full value of insurance company payouts. |
| • | The Company’s success is dependent upon the services of its management and employees. If the Company is unable to such individuals, its ability to compete could be harmed. |
| • | The Company’s intellectual property rights may not adequately protect the Company’s business. |
| • | The Company may become subject to costly intellectual property disputes. |
| • | The ongoing COVID-19 pandemic, along with rising interest rates and inflation, may disrupt the ability of the Company and its providers to originate life settlement policies which could have a material adverse impact on the Company’s financial position. |
| • | We have identified material weaknesses in our internal control over financial reporting. If our remediation of these issues is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations. |
| • | If we do not develop and implement all required accounting practices and policies, we may be unable to provide the financial information required of a public company in a timely and reliable manner. |
| • | Our ability to raise capital in the future may be limited, or may be unavailable on acceptable terms, if at all. Debt issued to raise additional capital could affect our ability to execute our investment strategy or impact the value of our investments. |
| • | Our management has limited experience in operating a public company. |
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THE OFFERING
The following is a brief summary of certain terms of this offering. For a more complete description of the terms of the notes, see “Description of the Notes”in this prospectus.
| Issuer |
Abacus Life, Inc., a Delaware corporation. |
| Title of the securities |
9.875% Fixed Rate Senior Notes due 2028 (the “notes”). |
| Initial aggregate principal amount being offered |
$15,000,000 |
| Overallotment option |
The underwriters may also purchase from us up to an additional $2,250,000 aggregate principal amount of notes solely to cover overallotments, if any, within 30 days of the date of this prospectus. |
| Principal payable at maturity |
100% of the aggregate principal amount. The outstanding principal amount of the notes will be payable on the stated maturity date at the office of the trustee, paying agent and security registrar for the notes or at such other office as we may designate. |
| Maturity date |
The notes will mature on November 15, 2028. |
| Interest rate |
9.875% per annum. |
| Interest periods |
The initial interest period will be the period from and including the issue date, to, but excluding, the initial interest payment date, and the subsequent interest periods will be the periods from and including an interest payment date to, but excluding, the next interest payment date or the stated maturity date, as the case may be. |
| Interest payment dates |
Each February 15, May 15, August 15 and November 15 of each year beginning on May 15, 2024 and ending on the maturity date. If an interest payment date falls on a non-business day, the applicable interest payment will be made on the next business day and no additional interest will accrue as a result of such delayed payment. |
| Interest day count convention |
Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months. |
| Record dates |
Interest will be paid to the person in whose name a note is registered at the close of business on the 15th calendar day (whether or not a Business Day) preceding the related date an interest payment is due with respect to such note; provided that if the notes are global notes held by DTC, the record date for such notes will be the close of business on the Business Day preceding the applicable interest payment date. |
| No guarantees |
The notes will not be guaranteed by any of the Company’s subsidiaries. As a result, the notes will be structurally subordinated to the liabilities of the Company’s subsidiaries as discussed below under “Ranking.” |
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| Ranking |
The notes will be the Company’s senior unsecured obligations and will rank: (i) equal in right of payment to the Company’s other outstanding and future senior unsecured indebtedness (including the Company’s $10.5 million Amended and Restated Unsecured Senior Promissory Note, dated as of July 5, 2023); (ii) senior to any of the Company’s existing and future indebtedness that expressly provides it is subordinated to the notes (including the Company’s indebtedness under its SPV Investment Facility, dated as of July 5, 2023); (iii) effectively subordinated to all of the Company’s existing and future secured indebtedness (including indebtedness that is initially unsecured to which the Company subsequently grants security), to the extent of the value of the assets securing such indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries. |
| As of September 30, 2024, the Company had approximately $118 million in long-term debt outstanding. |
| Optional redemption |
The notes may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after February 15, 2027 upon not less than 15 days nor more than 60 days written notice to holders prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the notes to be redeemed plus accrued and unpaid interest payments otherwise payable for the then-current quarterly interest period accrued to, but not including, the date fixed for redemption. |
| You may be prevented from exchanging or transferring the notes when they are subject to redemption. Any exercise of our option to redeem the notes will be done in compliance with the indenture. |
| If the Company redeems only some of the notes by partial redemption, the global notes shall be selected in accordance with applicable rules and procedures of the Depository Trust Company (“DTC”), or in the case of certificated notes, any other method in accordance with the policies and procedures of the trustee. Unless we default in payment of the redemption price, on and after the date of redemption, interest will cease to accrue on the notes called for redemption. |
| Change of control offer to repurchase |
If the Company is subject to a Change of Control Repurchase Event, each holder of the Notes may require the Company to purchase all or a portion of such holder’s notes at a price equal to 100% of their principal amount, plus accrued and unpaid interest thereon, if any, to, but excluding, the date of purchase. |
| Repayment at holder’s option |
The notes will be subject to repayment at the option of the holder at any time prior to the maturity date, except as set forth under “Description of the Notes-Offer to Repurchase Upon a Change of Control Repurchase Event” and will not be entitled to any sinking fund. |
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| Use of proceeds |
The net proceeds from the offering will be approximately $14,250,000 million, after deducting the discounts and commissions payable to the underwriters and estimated offering expenses payable by us. The Company intends to use these proceeds to refinance other outstanding indebtedness and for general corporate purposes. For further information, see “Use of Proceeds” in this prospectus. |
| Form and denomination |
The notes will be issued as fully registered global notes which will be deposited with, or on behalf of, the DTC and registered, at the request of DTC, in the name of Cede & Co. Beneficial interests in the global notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as participants in DTC. Beneficial interests in the global notes must be held in minimum denominations of $25 or any amount in excess thereof which is an integral multiple of $25. |
| Further issuances |
The amount of debt securities the Company can issue under the indenture is unlimited. The Company has $35,650,000 in aggregate principal of existing notes outstanding and will issue notes in the initial aggregate principal amount of $15,000,000 ($17,250,000 if the underwriters’ overallotment option is exercised in full). The notes will be additional notes under the indenture governing the existing notes. The Company may, without your consent and without notifying you, create and issue further notes, which notes may be consolidated and form a single series with the series of notes offered by this prospectus and the existing notes and may have the same terms as to interest rate, maturity, covenants or otherwise; provided that if any such additional notes are not fungible with the notes for U.S. federal income tax purposes, such additional notes will have a separate CUSIP or other identifying number. |
| Events of default |
For a discussion of events that will permit acceleration of the payment of the principal of the notes, see “Description of the Notes—Events of Default; Waivers” in this prospectus. |
| Indenture and trustee |
The notes will be issued under the indenture, dated as of November 10, 2023, between the Company and U.S. Bank Trust Company, National Association, as trustee, as supplemented by a supplemental indenture relating to the issuance of the notes. |
| Governing law |
The notes will be governed by and construed in accordance with the laws of the State of New York. |
| Listing |
The existing notes are listed on NASDAQ under the trading symbol ”ABLLL,” and we intend to apply to list the notes on NASDAQ under the same symbol. We expect trading of the notes to commence promptly following the completion of this offering. |
| Risk factors |
An investment in the notes involves risks. You should carefully consider the information set forth in the section entitled “—Risk Factors” below, as well as other information included in this prospectus before deciding whether to invest in the notes. |
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RISK FACTORS
You should carefully consider the risks and uncertainties described below and the other information in this prospectus before making an investment in our notes. Our business, financial condition, results of operations, or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our notes could decline and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties. See the section titled “Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below.
Risks Related to our Notes
The notes will be unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future.
The notes will not be secured by any of our assets or any of the assets of our subsidiaries, including our wholly owned subsidiaries. As a result, the notes will be effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. As of September 30, 2023, the Company and its subsidiaries had long-term debt with a fair market value of $62,926,907. Because the notes will not be secured by any of our assets, they will be effectively subordinated to any secured indebtedness we may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security), to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our future secured indebtedness may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the notes.
The notes will be structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The notes will be obligations exclusively of the Company, and not of any of our subsidiaries. None of our subsidiaries will be a guarantor of the notes and the notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries will not be directly available to satisfy the claims of our creditors, including holders of the notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the notes will be structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and portfolio companies with respect to which we hold equity investments. As of September 30, 2023, the Company and its subsidiaries had long-term debt with a fair market value of $62,926,907. In addition, the Company and its subsidiaries may incur substantial indebtedness in the future, all of which would be structurally senior to the notes.
The indenture under which the notes will be issued contains limited protection for holders of the notes.
The indenture under which the notes will be issued offers limited protection to holders of the notes. The terms of the indenture and the notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the notes. In particular, the terms of the indenture and the notes do not place any restrictions on our or our subsidiaries’ ability to:
| • | issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the notes, (2) any |
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| indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the notes to the extent of the values of the assets securing such debt and (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the notes; |
| • | sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); |
| • | enter into transactions with affiliates; |
| • | create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; |
| • | make investments; or |
| • | create restrictions on the payment of dividends or other amounts to us from our subsidiaries. |
Furthermore, the terms of the indenture and the notes do not protect holders of the notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the notes may have important consequences for you as a holder of the notes, including making it more difficult for us to satisfy our obligations with respect to the notes or negatively affecting the trading value of the notes.
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the notes.
We cannot assure you that there will be an active and liquid trading market for the notes.
The notes will have the same CUSIP and ISIN numbers as, be fungible for U.S. federal income tax purposes with, and form a single series of debt securities with, the $35.7 million aggregate principal amount of existing notes we issued on November 10, 2023. The existing notes are listed and trade on NASDAQ under the symbol “ABLLL,” and we intend to apply to list the notes on NASDAQ under the same symbol. We expect trading of the notes to commence promptly following the completion of this offering. The notes trade “flat,” which means that purchasers will not pay, and sellers will not receive, any accrued and unpaid interest on the notes that is not reflected in the trading price.
We have been informed by the underwriters that they may make a market in the notes. However, the underwriters may cease their market making at any time without notice. In addition, the liquidity of the trading market in the notes, and the market prices quoted for the notes, may be materially and adversely affected by changes in the overall market for this type of security and by changes in our financial condition, liquidity, operating results and prospects or in the prospects for companies in our industry generally. Further, such market making activities will be subject to limits imposed by federal securities laws. As a result, we cannot assure you that there will be an active and liquid trading market for the notes. The notes may trade at a discount from their initial offering price, and you may be unable to resell your notes or may be able to sell them only at a substantial discount. Future trading prices of the notes will depend on many factors, including prevailing interest rates, the market for similar securities, general economic conditions and our financial condition, liquidity, operating results and prospects.
We may choose to redeem the notes when prevailing interest rates are relatively low.
On or after February 15, 2027, we may choose to redeem the notes from time to time, especially when prevailing interest rates are lower than the rate borne by the notes. If prevailing rates are lower at the time of
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redemption, you would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the notes being redeemed. Our redemption right also may adversely impact your ability to sell the notes as the optional redemption date or period approaches.
An increase in interest rates could result in a decrease in the fair value of the notes.
In general, as market interest rates rise, notes bearing interest at a fixed rate generally decrease in value. Consequently, if you purchase these notes and market interest rates increase, the fair value of your notes will likely decrease. We cannot predict the future level of market interest rates.
A downgrade, suspension or withdrawal of any credit rating assigned by a rating agency to us or the notes or change in the debt markets could cause the liquidity or market value of the notes to decline significantly.
Any credit rating is an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in any credit ratings will generally affect the market value of the notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the notes. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor any underwriter undertakes any obligation to obtain or maintain any credit ratings or to advise holders of notes of any changes in any credit ratings. There can be no assurance that any credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agencies if in their judgment future circumstances relating to the basis of the credit ratings, such as adverse changes in our company, so warrant. The conditions of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future, which could have an adverse effect on the market price of the notes.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the notes.
Any default under the agreements governing our indebtedness that is not waived by the required lenders and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the notes and substantially decrease the market value of the notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness, including the notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the other debt we may incur in the future could elect to terminate its commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. In addition, any such default may constitute a default under the notes, which could further limit our ability to repay our debt, including the notes. If our operating performance declines, we may in the future need to seek to obtain waivers from the lender under the other debt that we may incur in the future to avoid being in default. If we breach our covenants under the other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the other debt, the lender could exercise its rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt.
We may not be able to repurchase the notes upon a Change of Control Repurchase Event.
Upon the occurrence of a Change of Control Repurchase Event, unless we have exercised our right to redeem the notes, each holder of the notes will have the right to require us to repurchase all or any part of such holder’s notes at a price equal to 100% of their principal amount of the notes to be repurchased, plus accrued and
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unpaid interest to, but excluding, the date of repurchase. If we experience a Change of Control Repurchase Event, there can be no assurance that we would have sufficient financial resources available to satisfy our obligations to repurchase the notes and any other indebtedness that may be required to be repaid or repurchased as a result of such event. A failure to repurchase the notes as required under the indenture would result in a default under the indenture, which could have material adverse consequences for us and the holders of the notes. See “Description of the Notes—Offer to Repurchase Upon a Change of Control Repurchase Event” herein.
On or about June 30, 2023, the Company entered into each of the SPV Purchase and Sale, the Policy APA and the SPV Investment Facility. Each of these agreements limits the Company’s ability to enter into further credit facilities or take on additional debt which could result in additional financial strain on the Company.
SPV Purchase and Sale
On or about June 30, 2023 the Company entered into the Abacus Investment SPV, LLC (“SPV”) Purchase and Sale, including the Asset Purchase Agreement (“Policy APA”). The Company and the SPV are parties to the Policy APA. The payable obligation owing by the Company to the SPV in connection with the SPV Purchase and Sale is evidenced by a note issued by the Company under the SPV Investment Facility in an original principal amount equal to the aggregate fair market value of the acquired insurance policies. The aforementioned note has the same material terms and conditions as the other credit extensions under the SPV Investment Facility (as defined below).
Relationships
The Sponsor, members of the Company’s founding team, directors or officers of Abacus Settlements and Abacus or its or their affiliates are members of the SPV and thereby indirectly receive economic or other benefits from the Policy APA.
SPV Investment Facility
On or about July 5, 2023, the Company entered into a SPV Investment Facility (the “SPV Investment Facility”), between the Company, as borrower, and the SPV, as lender.
The SPV Investment Facility, among other things:
| • | was unsecured without collateral security expected to be provided in favor of the SPV; |
| • | evidenced or provided for certain credit extensions to include: (i) an initial credit extension in an original principal amount of $15.0 million that is expected to be funded upon the closing of the SPV Investment Facility, (ii) a note in favor of the SPV in an original principal amount of $10.0 million to finance the purchase of the insurance policies under the Policy APA and (iii) a delayed draw credit extension in an original principal amount of $25.0 million, with the delayed draw credit extension drawn in a period between 90 and 120 days after the closing of the SPV Investment Facility upon satisfaction of certain conditions precedent; |
| • | provided proceeds from the SPV Investment Facility for payment of certain transaction expenses, general corporate purposes and any other purposes not prohibited by law (it being expected that a significant portion of the proceeds from the SPV Investment Facility will be used by the Company for purchasing insurance policies, among other purposes); |
| • | was subordinated in right of payment to the Company’s obligations under the Owl Rock Credit Facility, subject to limited specified exceptions and circumstances for permitting early payment; |
| • | required Abacus Settlements and Abacus and certain subsidiaries of Abacus Settlements and Abacus to guarantee the credit extensions to be provided under the SPV Investment Facility pursuant to separate documentation; |
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| • | contained a maturity date that is at least three years after the closing of the SPV Investment Facility, subject to two automatic extensions of one year each without any amendment of the relevant documentation; |
| • | provided for interest to accrue on the SPV Investment Facility at a rate of 12.00% per annum, payable quarterly, all of which is expected be paid in-kind by the Company by increasing the principal amount of the SPV Investment Facility owing to the SPV on each interest payment date; |
| • | provided a default rate that will accrue at 2.00% per annum (subject to applicable subordination restrictions) over the rate otherwise applicable. If cash payment is not permitted due to applicable subordination restrictions or otherwise, such default interest shall be paid in-kind; |
| • | provided that no amortization payments shall be required prior to maturity; |
| • | provided for financial and other covenants no worse than those contained in the Owl Rock Credit Facility from the perspective of the Company; and |
| • | provided for certain specified events of default (including certain events of default which are expected to be subject to grace or cure periods), with the occurrence and continuance of such events of default enabling the lender under the SPV Investment Facility to accelerate the obligations under the SPV Investment Facility, among other potential rights or remedies; and contain certain specified closing conditions. The SPV’s investment resulting from credit extensions under the SPV Investment Facility is expected to be treated by the Company as debt for U.S. Generally Accepted Accounting Principles (“GAAP”) accounting purposes. To the extent that multiple notes are issued under the SPV Investment Facility, it is expected that the documentation will provide flexibility for the SPV to request such notes be reissued as a single note under such facility. |
Relationships
Directors and officers of the Company and significant shareholders of the Company are members of the SPV and thereby indirectly receive economic or other benefits from the SPV Investment Facility.
Risks Related to the Business of the Company
The Company’s valuation of life insurance policies is uncertain as many life insurance policies’ values are tied to their actual maturity date and any erroneous valuations could have a material adverse impact on the Company’s business.
The valuation of life insurance policies involves inherent uncertainty (including, without limitation, the life expectancies of insureds and future increases in premium costs to keep the policies in force). There is no guarantee that the value determined with respect to a particular life settlement policy by the Company will represent the value that will be realized by the Company on the eventual disposition of the related investment or that would, in fact, be realized upon an immediate disposition of the investment. In addition, there can be no guarantee that such valuation accurately reflects the current present value of such life insurance policy at its actual maturity. Uncertainties as to the valuation of life insurance policies held by the Company could require adjustments to reported net asset values and could have a material adverse impact on the Company’s business. Uncertainties as to the valuation may also result in the Company being less competitive in the market for originating new life settlement policies and could adversely affect the profits the Company realizes on life settlements purchased and sold.
The Company could fail to accurately forecast life expectancies. There may also be changes to life expectancies generally, resulting in people living longer in the future, which could result in a lower return on the Company’s life settlement policies.
Prices for life insurance policies and annuities that may be obtained by the Company depend, in large measure, upon the life expectancy of the underlying insureds. The returns of the Company’s hold portfolio is
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almost entirely dependent upon how accurate the actual longevity of an insured is as compared to the Company’s expectation for that insured. Life expectancies are estimates of the expected longevity or mortality of an insured. In determining the life expectancy of an insured, the Company relies on medical underwriting conducted by various medical underwriting firms. The medical underwriting process underlying life expectancy estimates is highly subjective, and mortality and longevity estimates are inherently uncertain. In addition, there can be no assurance that the applicable medical underwriting firm received accurate or complete information regarding the health of an insured under a life insurance policy, or that such insured’s health has not changed since the information was received. Different medical underwriting firms use different methods and may arrive at materially different mortality estimates for the same individual based on the same information, thus causing a life insurance policy’s value to vary. Moreover, as methods of calculating mortality estimates change over time, a mortality estimate prepared by any medical underwriting firm in connection with the acquisition of a life insurance policy may be different from a mortality estimate prepared by the same person at a later time. The valuation of the life insurance policies will vary depending on the dates of the related mortality estimates and the medical underwriting firms that provide the supporting information.
Other factors, including, but not limited to, better access to health care, better adherence to treatment plans, improved nutritional habits, improved lifestyle, an improved economic environment and a higher standard of living could also lead to increases in the longevity of the insureds under the life insurance policies. In addition to other factors affecting the accuracy of life expectancy estimates, improvements in medicine, disease treatment, pharmaceuticals and other medical and health services may enable insureds to live longer.
The actual longevity of an insured may be materially different than the predicted mortality estimate. If the actual maturity date of life insurance policies are longer than projected, it would delay when the Company could expect to receive a return on its investment and the Company may be unable to meet its investment objectives and goals. For example, a term life insurance policy in which the Company may invest have a stated expiration date on the date at which the underlying insured reaches a certain attained age and, beyond such date, the issuing insurance company may not be obligated to pay the face value, but rather only the cash surrender value which is usually maintained at a low value by investors, if any, in accordance with the terms of such life insurance policy. Therefore, if the underlying insured survives to the stated maturity date set forth in the terms of the life insurance policy, the issuing insurance company may only be obligated to pay an amount substantially less than the face value, which could have an adverse effect on the performance of the Company.
The medical underwriting and other firms that provide information for the Company’s forecasts of life expectancies are generally not regulated by the U.S. federal or state governments, with the exception of the states of Florida and Texas, which require life expectancy providers to register with their respective offices of insurance regulation. There can be no assurance that this business will not become more broadly regulated and, if so, that any such regulation would not have a material adverse effect on the ability of the Company to establish appropriate life expectancies in connection with the purchase or sale of policies.
The Company’s policy acquisitions are limited by the market availability of life insurance policies that meet the Company’s eligibility criteria and purchase parameters, and failure to secure a sufficient number of quality life insurance policies could have a material adverse effect on the Company’s business.
The life insurance policy secondary market has grown substantially in the past several years, however, as to whether and how it will continue to develop is uncertain. There are only a limited number of life insurance policies available in the market from time to time. There can be no assurance that the Company will be able to source life insurance policies on terms acceptable to the Company. As more investment funds flow into the market for life insurance policies, margins may be squeezed, and the value of the collateral may become comparatively more expensive to purchase or subject to greater competition on the purchase side. There can be no assurance that secondary market life insurance policies will be available to the Company on satisfactory or competitive terms.
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The supply of life insurance policies available in the market may be reduced by, among other things: (i) improvement in the economy, resulting in higher investment returns to insureds and other owners of life insurance policies from their investment portfolios; (ii) improvements in health insurance coverage, limiting the need of insureds to obtain funds to pay the cost of their medical treatment by selling their life insurance policies; (iii) the entry into the market of less reputable third-party brokers who submit inaccurate or false life insurance policy information to the Company; (iv) the establishment of new licensing requirements for market participants and a delay in complying or an inability to comply with such new requirements; or (v) refusal of the carrier that issued a life insurance policy to consent to its transfer. A change in the availability of life insurance policies could adversely affect the Company’s ability to execute its strategy and meet its objectives.
The Company may experience increased competition from originating life insurance companies, life insurance brokers, and investment funds which could have a material adverse effect on the Company’s business.
Life insurance companies have begun offering to repurchase their own in-force life insurance policies from their current policyholders by offering “enhanced cash surrender value payments” above the amount of the net cash surrender value provided under the life insurance contracts’ terms and thus compete directly with the Company and other life settlement providers. The life settlements industry has challenged the legal validity of the life insurance companies’ actions, and some state insurance regulators have declared that these repurchase offers are unlawful while other state insurance regulators have approved them. To the extent that life insurance companies can seek to repurchase their own in-force life insurance policies, they present competition to the Company in acquiring policies.
In addition, the Company is subject to significant competition from other life settlement brokers and investment funds for the purchase of life settlement policies. Increased competition for life settlement policies may result in the Company being unable to access the number of life settlement policies that it desires for its business at prices that it deems acceptable.
Historically, there has been a negative public perception of the life settlement industry that could affect the value and/or liquidity of the Company’s investments and the life settlement industry faces political opposition from life insurance companies which could have a material adverse effect on the Company’s business.
Many regulators, lawmakers and other governmental authorities, as well as many insurance companies and insurance industry organizations, are hostile to or otherwise concerned about certain aspects of the longevity-contingent asset markets. The life settlement industry and some of its participants have also been, and may continue to be, portrayed negatively in a number of widely read publications and other forms of media. These opponents regularly contend that life settlement transactions are contrary to public policy by promoting financial speculation on human life and often involve elements of fraud and other wrongdoing. Continued public opposition to the life settlement industry, as well as actual or alleged wrongdoing by participants in the industry, could have a material adverse effect on the Company and its investors, including on the value and/or liquidity of the Company’s investments.
In March 2010, the American Council of Life Insurers, an insurance carrier trade association, issued a press release calling for a complete ban on life settlement securitization. While that effort was not successful, any such federal or state legislation, if passed, could have the effect of severely limiting or potentially prohibiting the continued operation of the Company’s life settlement purchasing operations. All of the foregoing could adversely affect the Company’s ability to execute its investment strategy and meet its investment objective.
The Company or third parties the Company relies upon could fail to accurately evaluate, acquire, maintain, track, or collect on life settlement policies, which could have a material adverse impact on the Company’s revenues.
The Company relies on third party data for tracking and servicing its life settlement policies. This includes the origination and servicing of life settlement policies by the servicing and tracking agent, market counterparties
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and other service providers, and the Company may not be in a position to verify the risks or reliability of such third-party data and systems. Failures in the systems employed by the Company and other service providers, counterparties, and other parties could result in mistakes made in the evaluation, acquisition, maintenance, tracking and collection of life settlement policies and other longevity-linked investments. This could result in the Company overpaying for life settlement policies it acquires or underpricing life settlement policies it sells. In addition, disruptions in the Company’s operations as a result of a failure in a third party system may cause the Company to suffer, among other things, financial loss, the disruption of its business, liability to third-parties, regulatory intervention or reputational damage. Any of the foregoing failures or disruptions could have a material adverse effect on the Company.
There is a risk of fraud in the origination of the original life insurance policy or in subsequent sales of the life insurance policy that could adversely affect the Company’s returns which could have a material adverse impact on the Company’s business.
The Company faces the risk that an original owner of a life insurance policy, the related insured, the insurance agent involved in the issuance of such life insurance policy, or other party may have committed fraud, or misstated or failed to provide material information in connection with the origination or subsequent sale of that life insurance policy. While most life insurance policies may not be challenged for fraud after the end of the two-year contestability period, there may be situations where such fraud in connection with the issuance of a life insurance policy may survive the contestability period. If an issuing insurance company successfully challenges a life insurance policy acquired by the Company on the grounds of fraud, the Company may lose its entire investment in that life insurance policy. Furthermore, if the age of an insured was misstated, the Company may receive lower death benefits than expected. In addition, there may be information directly relevant to the value of a life insurance policy, including, but not limited to, information relating to the insured’s medical or financial condition, to which the Company will not have access. It is not possible to verify the accuracy or completeness of each piece of information or the completeness of the overall information supplied by such parties. Any such misstatement or omission could cause the Company to rely on assumptions which turn out to be inaccurate. Additionally, there can be no assurance that the seller of a life insurance policy in the tertiary market properly acquired that policy from the former owner, or that a former beneficiary or other interested party will not attempt to challenge the validity of the transfer. The occurrence of any one or more of these factors could adversely affect the Company’s performance and returns.
The Company may become subject to claims by life insurance companies, individuals and their families, or regulatory authorities which could have a material adverse impact on the Company’s business.
The secondary market for life insurance policies has been subjected to allegations of fraud and misconduct as reflected in certain litigated cases. Some of these cases, some of which have been brought by regulatory authorities, involve allegations of fraud, breaches of fiduciary duty, bid rigging, non-disclosure of material facts and associated misconduct in life settlement transactions. Cases have also been brought by the life insurance companies that challenge the legality of the original issuance of the life insurance policies based on lack of insurable interest, fraud and misrepresentation grounds.
Further, both federal and U.S. state statutes safeguard an insured’s private health information. In addition, insureds frequently have an expectation of confidentiality even if they are not legally entitled to it. Even if the Company properly obtains and uses otherwise private health information, but fails to maintain the confidentiality of such information, the Company may be the subject of complaints from the affected individuals, their families and relatives and, potentially, interested regulatory authorities. Because of the uncertainty of applicable laws, it is not possible to predict the outcome of those disputes. It is also possible that, due to a misunderstanding regarding the scope of consents that a transaction party possesses, the Company may request and receive from health care providers, information that it in fact did not have a right to request or receive. If the Company finds itself to be the recipient of complaints for these acts, it is not possible to predict what the results will be. This uncertainty also increases the likelihood that a transaction party may sell, or cause to be sold, life insurance policies in
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violation of applicable law, which could potentially result in additional costs related to defending claims or enduring regulatory inquiries, rescinding such transactions, possible legal damages and penalties and probable reduced market value of the affected life insurance policies. Each of the foregoing factors may delay or reduce the return on the policies and adversely affect the Company’s business and results of operations.
Life settlements in which we invest are not currently regulated under the federal securities laws, but if deemed to be securities would require further compliance with federal and state securities laws, which could result in significant additional regulatory burdens on the Company, and limit the Company’s investments, which could have an adverse impact on the Company’s business and results of operations.
The origination and trading in whole, non-variable life insurance policies has historically been understood to not involve transactions in securities. However, on February 22, 2019, the United States Court of Appeals for the Fifth Circuit in a case captioned In the Matter of Living Benefits Asset Management, LLC, vs. Kestrel Aircraft Company, Incorporated, case No. 18-10510, concluded that whole, non-variable life insurance policies, when offered for sale to an investor, were securities for purposes of the Investment Company Act. If this same conclusion were to be reached in other circuits or at the Supreme Court and extended to the Securities Act, there would be significant changes to our industry, and it would materially impact the Company’s ability to conduct its business.
In 2002, the Eleventh Circuit Court of Appeals reached a similar conclusion with respect to fractionalized death benefits payable under non-variable policies in SEC v. Mutual Benefits Corp., but, the District of Columbia Circuit Court of Appeals reached a contrary result with respect to fractionalized death benefits in SEC v. Life Partners which was decided in 1996. The Company does not presently transact in fractionalized death benefits, i.e., buying or selling a part of, but not all of, a life settlement policy, nor does it currently plan to transact in fractionalized death benefits.
On July 22, 2010, the SEC released a staff report that recommended that Congress clearly define life settlements to be securities, so that the investors in life settlements transactions would be protected under the U.S. federal securities laws. To date, the SEC has not made another such recommendation to Congress nor has Congress acted on the SEC staff’s report. If the statutory definitions of “security” were to be amended to encompass life settlements involving non-variable life insurance policies, or if the Supreme Court or other Circuit Courts were to conclude that non-variable life insurance policies are securities for purposes of the Securities Act, the Company could become subject to additional extensive regulatory requirements under the federal securities laws. Those regulatory requirements would include the obligation to register the Company’s sales and offerings of life settlements with the SEC as public offerings under the Securities Act. Also, if the resale of non-variable life insurance policies were to be considered securities, the Company’s ownership of those policies as a percentage of its assets or source of income could be limited as it would likely manage its business to avoid being required to register as an “investment company” pursuant to the Investment Company Act. Those limitations could have an adverse effect on the Company’s business and results of operations. Any legislation or court or regulatory interpretations leading to that regulatory change or a change in the transactions that are characterized as life settlement transactions could lead to significantly increased compliance costs and increased liability risk to the Company, and could adversely affect the Company’s ability to acquire or sell life insurance policies in the future. This could materially and adversely affect the Company’s business, financial condition and results of operations, which in turn could materially and adversely affect the performance of the Company.
The Company cannot assure you as to the ultimate content, timing, or effect of changes, nor is it possible at this time to estimate the impact of any such potential change in administration or new legislation on the Company’s business, financial condition, or results of operations and consequently, any potential material and adverse effect on the performance of the Company.
The Company may be subject to certain U.S. state securities laws, and failure to comply with applicable requirements may result in fines, sanctions and rescission of purchase or sale transactions.
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Certain U.S. state laws specifically characterize life settlements as securities transactions. Thus, in some U.S. states, purchases and sales of life insurance policies by the Company may be subject to applicable U.S. state blue sky laws or other U.S. state securities laws. The Company intends to comply with all applicable federal and state securities laws. However, this will not necessarily exempt the Company from compliance with U.S. federal or state broker-dealer laws. The failure to comply with applicable securities laws in connection with the purchase or sale of life settlement policies could result in the Company being subject to fines, administrative and civil sanctions and rescission of life settlement policy purchase or sales transactions. Each of the foregoing factors could materially and adversely affect the performance of the Company.
The Company could in the future be required to register as an investment company under the Investment Company Act or could have to substantively change its business model in order to fit within an applicable exemption from such registration requirement.
The Company’s sales of life insurance policies and investment and financing programs of which the purchase or sale of a life insurance policy is a part are subject to an evolving regulatory landscape. Depending on the facts and circumstances attending such sales or programs, U.S. state and federal securities laws, including the Investment Company Act could be implicated, and it is possible that the Company could in the future be required to register as an investment company under the Investment Company Act. The Company would not be able to continue to operate its business as it does today if required to register as an investment company. In such event, the Company would have to substantively change its business model to avoid registration as an investment company under the Investment Company Act. If the Company were re quired to change its business model in order to fit within an exemption from registration, it would have a material adverse effect on the performance of the Company.
The Company faces privacy and cyber security risks related to its maintenance of proprietary information, including information regarding life settlement policies and the related insureds, and any adverse impact related to such risks could have a material adverse impact on the Company’s business.
The Company relies on data processing systems to price and close transactions, to evaluate investments, to monitor its portfolio and capital, and to generate risk management and other reports that are critical to oversight of the Company’s activities. Further, the Company relies on information systems to store sensitive information about the Company, its affiliates, and its investments, including life settlement policies and information about the related insured individuals and others. While the Company is not aware of security breaches or proceedings related to the processing of information, the loss or improper access, use or disclosure of the Company’s proprietary information can adversely impact the Company. For example, the Company could suffer, among other things, financial loss, the disruption of its business, liability to third parties, regulatory intervention or reputational damage. Any of the foregoing events could have a material adverse effect on the Company.
Additionally, the Company collects information related to life insurance, including nonpublic personal information (“NPI”) and protected health information (“PHI”), and information from its website, such as contact information and high-level policy information. The Company also collects information from its employees, such as standard HR information, and business contact information from third party employees. The Company shares information with its service providers, and has entered into non-disclosure and business association agreements, where appropriate. Although the Company has, and believes that each service provider has, procedures and systems in place that it believes are reasonably designed to protect such information and prevent data loss and security breaches, such measures cannot guarantee absolute security.
Furthermore, the techniques used to obtain unauthorized access to data, disable or degrade service, or sabotage systems change frequently with increasing sophistication and may be difficult to detect for long periods of time. For example, hardware or software acquired from third parties may contain defects in design or other problems that could unexpectedly compromise information security. Network connected services provided by third parties to the Company may be susceptible to compromise, leading to a breach of the Company’s network
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and/or business interruptions. The Company’s systems or facilities may be susceptible to employee error or malfeasance, government surveillance, or other security threats.
The Company is subject to U.S. privacy laws and regulations. Failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of operations; reputational harm; loss of revenue or profits; and other adverse business consequences.
Due to the type of information the Company collects, including personal, medical, and financial information on the underlying insureds, and the nature of its services, the Company is subject to privacy laws. In the United States, federal, state and local governments have enacted numerous data privacy and security laws to address privacy, data protection and collection, and the processing and disclosure of certain types of information. Obligations related to these laws are quickly changing, becoming increasingly stringent and creating regulatory uncertainty. In addition, these obligations may be subject to differing applications and interpretations, which can result in inconsistency or conflict among jurisdictions. Among these laws, the Company is likely subject to the Telephone Consumer Protection Act (“TCPA”), Controlling Assault of Non-Solicited Pornography and Marketing Act of 2003, the Gramm-Leach Bliley Act (“GLBA”) and the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”).
The Company may be considered a financial institution under the GLBA, and is subject to the GLBA through the NPI it collects. The GLBA regulates, among other things, the use of certain information about individuals (NPI) in the context of the provision of financial services. The GLBA includes both a “Privacy Rule,” which imposes obligations on financial institutions relating to the use or disclosure of NPI, and a “Safeguards Rule,” which imposes obligations on financial institutions, and indirectly, their service providers, to implement and maintain physical, administrative and technological measures to protect the security of NPI.
The Company has certain business components that are subject to HIPAA. HIPAA imposes privacy, security and breach notification obligations on “covered entities” and “business associates.” Furthermore, HIPAA requires “covered entities” and “business associates” to develop and maintain policies with respect to the protection of PHI. If in violation of HIPAA, the Company may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations. HIPAA also authorizes state Attorneys Generals to file suit on behalf of their residents. Courts may award damages, costs and attorneys’ fees related to violations of HIPAA in such cases. While HIPAA does not create a private right of action allowing individuals to sue the Company in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of PHI.
Because of the complexity of the various data privacy laws the Company may be subject to, compliance can be costly. The Company has taken general steps to comply with data privacy and security laws. For example, the Company has implemented a number of policies, including policies regarding access controls, customer data privacy, secure data disposal, and incident response and risk assessments. Despite these efforts, the Company may at times fail in its efforts due to the complexity and evolving nature of these laws. Failure to comply with relevant data privacy laws could negatively impact the Company’s operations, including subject the Company to possible government enforcement actions which could result in investigations, fines, penalties, audits, inspection, litigation, additional reporting requirements and/or oversight.
The Company’s business may be subject to additional or different government regulation in the future, which could have a material adverse impact on the Company’s business.
The Company is currently licensed and operating in 49 states. Increased regulation (whether promulgated under insurance laws or any other applicable law) and regulatory oversight of and changes in law applicable to life settlements may restrict the ability of the Company to carry on its business as currently conducted. This could also impose additional administrative burdens on the Company, including responding to examinations and
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other regulatory inquiries and implementing policies and procedures. Regulatory inquiries often are confidential in nature, may involve a review of an individual’s or a firm’s activities or may involve studies of the industry or industry practices, as well as the practices of a particular institution.
There is currently no direct legal authority regarding the proper federal tax treatment of life settlements and potential future rulings from the IRS may have significant tax consequences on the Company.
There is no direct legal authority regarding the proper U.S. federal income tax treatment of life settlements, and the Company does not plan to request a ruling from the IRS. Consequently, significant aspects of the tax treatment of the Company’s assets are uncertain, and the IRS or a court might not agree with the Company’s treatment of life settlements as prepaid financial contracts that are not debt. If the IRS were successful in asserting an alternative treatment, the tax consequences of ownership and disposition of life settlements could be materially and adversely affected. In addition, in 2007, the U.S. Treasury Department and the IRS released a notice requesting public comments on various issues regarding the U.S. federal income tax treatment of “prepaid forward contracts” and similar instruments. Any Treasury regulations or other guidance promulgated after consideration of these issues could materially and adversely affect the tax consequences of an investment in life settlements, possibly with retroactive effect.
There have been lawsuits in various states questioning whether a purchaser of a life insurance policy has the requisite “insurable interest” in the policy which would permit the purchaser to collect the insurance benefits and an adverse finding in any of these lawsuits could have a material adverse effect on the Company’s business.
All states require that the initial purchaser of a new life insurance policy insuring the life of another individual have an insurable interest in that individual’s life at the time of the original issuance of the policy. An “insurable interest” is an economic stake in an event for which a person or entity purchases an insurance policy. An insurance policy may only be initially purchased by a person or entity who has an insurable interest in the insured. For example, if a spouse purchases an insurance policy on his or her spouse or a company purchases an insurance policy on an employee. In addition, some states may require that the Company have an insurable interest in the insured. Whether an insurable interest exists in the context of the purchase of a life insurance policy is critical because in the absence of a valid insurable interest, life insurance policies are unenforceable under the laws of most states. Where a life insurance policy has been issued to a policy holder without an insurable interest in the life of the insured, the life insurance company may not be required to pay the face value under the policy and may also be entitled to retain the premiums paid. Generally, there are two forms of insurable interest in the life of an individual, familial and financial. Additionally, an individual is deemed to have an insurable interest in his or her own life. Insurable interest is determined at the inception of the policy. The definition of exactly what constitutes “insurable interest” tends to vary by state. Some cases have also been initiated by life insurance companies, challenging the legality of the original issuance of policies on insurable interest grounds and asserting that such policies constitute “Stranger-Originated Life Insurance” or “STOLI,” which is defined as a practice or plan to initiate a life insurance policy for a third-party investor who, at the time of policy origination, has no insurable interest in the insured. Some states (such as Utah and New York) permit the heirs and beneficiaries of an insured to recover the face value under such STOLI policies rather than the policy owner which lacked insurable interest.
While the Company does not believe it has invested in any STOLI polices, and has policies and procedures in place to identify potential STOLI policies, there can be no guarantee that the Company will identify all STOLI policies. As such, the Company may acquire certain life insurance policies that may be deemed by an issuing insurance company to be STOLI policies, whether purposefully, if the Company deems such life insurance policy to be an attractive investment even after taking into account the insurable interest risk, or inadvertently, where the true nature of such life insurance policy is not discovered prior to its acquisition by the Company. Should an issuing insurance company successfully challenge the validity of a life insurance policy acquired by the Company, the Company will lose its investment in such life insurance policy. Furthermore, the Company will
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also suffer losses if a family member of an insured is successful in asserting a claim that he or she, and not the Company, is entitled to the face value payable under a life insurance policy.
The failure of the Company to accurately and timely track and pay premium payments on the life insurance policies it holds could result in the lapse of such policies which would have a material adverse impact on the Company’s business.
In order to realize on its investment in life insurance policies, the Company must ensure that the life insurance policies remain in force until they mature or are sold by the Company. Failure by the Company to pay premiums on the life insurance policies when due will result in termination or “lapse” of the life insurance policies and will result in the loss of the Company’s investment in such life insurance policies.
The originating life insurance company may increase the cost of insurance premiums, which would adversely affect the Company’s returns.
For any life insurance policies that may be obtained by the Company, the Company will be responsible for maintaining the policies, including paying insurance premiums. If a life insurance company increases the cost of insurance charged for any of the life insurance policies held by the Company, the amounts required to be paid for insurance premiums due for these life insurance policies may increase, requiring the Company to incur additional costs for the life insurance policies which may reduce the value of such life insurance policies and consequently affect the returns available on such policies.
Life insurance companies have in the past materially increased the cost of insurance charges. There can be no assurance that life insurance policies acquired by the Company will not be subject to cost of insurance increases. If any such life insurance policies are affected by a cost of insurance increase, the value of such life insurance policy may be materially reduced and the Company may decide or may be forced to allow such life insurance policy to lapse, resulting in a loss to the Company.
In the event an insurance company experiences significantly higher than anticipated expenses associated with operation and/or policy administration, or, in some instances, lower investment returns, the insurance company may have the right to increase the charges to each of its policy owners, but not beyond guaranteed maximums. While the insurance companies did not specify the reason for the increases, it is generally believed that the low interest rate environment was a significant contributing factor in the decision to raise the cost of insurance.
The Company may not be able to liquidate its life insurance policies which could have a material adverse effect on the Company’s business.
In the ordinary course of its business, the Company engages in the purchase and sale of life insurance policies. The liquidation value of these life insurance policies is important where, for example, it becomes necessary to sell life insurance policies from the Company’s hold portfolio in order to meet the Company’s cash flow needs, including the payment of future premiums.
In many cases liquidations may not be a viable option to meet the Company’s liquidity because of, among other things: (1) the lack of a market for such life insurance policies at the time; (2) the uncertainties surrounding the liquidation value of an individual life insurance policy; (3) the extensive amount of time and effort it might take to sell a life insurance policy; (4) the effect excessive sales of life insurance policies may have on transactions and future cash flows; and (5) the tax consequences.
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The Company assumes the credit risk associated with life insurance companies and may not be able to realize the full value of insurance company payouts which could have a material adverse effect on the Company’s profits.
The Company will assume the credit risk associated with life insurance policies issued by various life insurance companies. The failure or bankruptcy of any such life insurance company could have a material adverse impact on the Company’s ability to achieve its investment objectives. A life insurance company’s business tends to track general economic and market conditions that are beyond its control, including extended economic recessions, interest rate changes, the subprime lending market crisis or changes in investor perceptions regarding the strength of insurers generally and the life insurance policies or annuities they offer. Adverse economic factors and volatility in the financial markets may have a material adverse effect on a life insurance company’s business obligation to pay the face value of policies.
The insolvency of any insurance company or a downgrade in the ratings of an insurance company could have a material adverse impact on the value of the related life insurance policies, the collectability of the related face value, cash surrender value or other amounts agreed to be paid by such insurance company. In the event that a life insurance carrier becomes insolvent or is placed into receivership, most state guaranty associations place a $300,000 or lower cap on face value for policies per insured. In addition to the limitations on the amount of coverage, which vary by state, there are limitations on who may make claims under such coverage and the Company may not be eligible to make claims under U.S. state guarantee funds as most U.S. state guarantee fund laws were enacted with the stated goal of assisting policyholders residing in such states. Even if available to the Company, guarantee fund coverage limits are typically smaller than the face values of some of the life insurance policies that the Company will acquire. There can be no assurance that as more life settlement transactions are undertaken, legislators will not adopt additional restrictions on the availability of U.S. state guaranty funds.
The Company’s success is dependent upon the services of its experienced management and talented employees. If the Company is unable to retain management and/or key employees, its ability to compete could be harmed.
The success of the Company is dependent upon the talents and efforts of highly skilled individuals employed by the Company and the Company’s ability to identify and willingness to provide acceptable compensation to attract, retain and motivate experienced management, talented investment professionals and other employees. Most of the shares registered for sale by the Registration Statement of which this Prospectus is a part are owned by our founders who are also key members of management of the Company.
There can be no assurance that the Company’s management and professionals will continue to be associated with the Company, and the failure to attract or retain such professionals could have a material adverse effect on the Company’s ability to execute on its business plan. Competition in the financial services industry for qualified management and employees is intense and there is no guarantee that, if lost, the talents of the Company’s professionals could be replaced.
The Company’s intellectual property rights may not adequately protect the Company’s business.
To be successful, the Company must protect its technology, know-how and brand through means, such as trademarks, trade secrets, patents, copyrights, service marks, contractual restrictions, and other intellectual property rights and confidentiality procedures. Despite the Company’s efforts to implement these protections, they may not adequately protect its business for a variety of reasons, including:
| • | inability to successfully register or obtain patents and other intellectual property rights for important innovations that sufficiently protect the full scope of such innovations; |
| • | inability to maintain appropriate confidentiality and other protective measures to establish and maintain the Company’s trade secrets; |
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| • | uncertainty in, and evolution of, legal standards relating to the validity, enforceability and scope of protection of intellectual property rights; |
| • | potential invalidation of the Company’s intellectual property rights through administrative processes or litigation; and |
| • | other practical, resource, or business limitations on the Company’s ability to detect and prevent infringement or misappropriation of our rights and to enforce our rights. |
Litigation may be necessary to enforce the Company’s intellectual property or proprietary rights, protect the Company’s trade secrets, or determine the validity and scope of proprietary rights claimed by others. Any litigation, whether or not resolved in the Company’s favor, could result in significant expense to the Company, and divert the time and efforts of the Company’s technical and management personnel. If the Company is unable to prevent third parties from infringing upon, violating or misappropriating the Company’s intellectual property or is required to incur substantial expenses defending the Company’s intellectual property rights, the Company’s business, financial condition and results of operations may be materially adversely affected.
The Company may become subject to intellectual property disputes, which are costly and may subject the Company to significant liability and increased costs of doing business.
The Company may in the future become subject to intellectual property disputes. The Company’s success depends, in part, on the Company’s ability to operate without infringing, misappropriating or otherwise violating the intellectual property rights of third parties. However, the Company may not be aware that its practices are infringing, misappropriating or otherwise violating third-party intellectual property rights, and such third parties may bring claims against the Company or its business partners alleging such infringement, misappropriation or violation.
Any claims of intellectual property infringement, even those without merit, may be time-consuming and expensive to resolve, divert management’s time and attention, cause the Company to cease using or incorporating the asserted challenged intellectual property rights expose it to other legal liabilities, or require it to enter into licensing agreements to obtain the right to use a third party’s intellectual property. Although the Company carries general liability insurance, it may not cover potential claims of this type or may not be adequate to indemnify the Company for all liability that may be imposed. The Company cannot predict the outcome of lawsuits and cannot ensure that the results of any such actions will not have an adverse effect on the Company’s business, financial condition, or results of operations.
Even if the claims do not result in litigation or are resolved in the Company’s favor, these claims, and the time and resources necessary to resolve them, could divert the resources of the Company’s management and harm the Company’s business and results of operations.
The ongoing COVID-19 pandemic, along with rising interest rates and inflation, may disrupt the ability of the Company and its providers to originate life settlement policies which could have a material adverse impact on the Company’s financial position.
The COVID-19 pandemic disrupted the global economy in several ways, some of which are still unfolding. COVID-19, or any outbreak of contagious diseases and other adverse public health developments, particularly in the United States, could have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to source life settlement policies, as well as temporary closures of our facilities and the facilities of our third-party service providers. Any disruption or delay of our third-party service providers would likely impact our operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of the United States and throughout the world, resulting in an economic downturn that could affect demand for the life insurance policies and significantly impact the Company’s operating results.
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We have identified material weaknesses in our internal control over financial reporting. And, prior to the Business Combination, we were not timely in filing our Form 10-K for the year ended December 31, 2022 and our Form 10-Q for the quarter ended March 31, 2023. If our remediation of the material weaknesses is not effective, or if we experience additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls in the future, we may not be able to accurately or timely report our financial condition or results of operations.
In connection with the audit of our financial statements for Abacus for the years ended December 31, 2022 and 2021, we identified the same material weakness in our internal control over financial reporting for both Abacus. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses for both entities related to members of executive management having access to post to the general ledger; members of finance having inappropriate information technology access to the general ledger; and journal entry users having the ability to post to the general ledger without formal review or approval. The material weaknesses did not result in a misstatement to our financial statements.
We are taking steps to remediate the material weaknesses and, as it related to executive management and information technology access to the general ledger, Abacus revoked the inappropriate privileges before 2022 year-end. We have also hired a new qualified accounting resource and are in the process of enhancing and formalizing our accounting, business operations and information technology policies, procedures and controls. We have engaged outside resources to enhance our business documentation process, provide company-wide training and to help with management’s self-assessment and testing of internal controls. We are implementing a new accounting system in 2023 that will require the appropriate approval of journal entries in our accounting system and are currently working with outside advisors to ensure proper segregation of duties and put mitigating controls in place. However, we are still in the process of implementing these steps and cannot assure investors that these measures will significantly improve or remediate the material weaknesses described above.
In addition, prior to the Business Combination, the Company (then known as East Resources Acquisition Company), was not timely in filing its Form 10-K for the year ended December 31, 2022 and its Form 10-Q for the quarter ended March 31, 2023.
We may in the future discover additional material weaknesses in our system of internal financial and accounting controls and procedures that could result in a material misstatement of our financial statements. Our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
Risks Related to Being a Public Company
The market price of our notes may be volatile or may decline regardless of our operating performance. You may lose some or all of your investment.
The trading price of our notes may be volatile. The securities markets have recently experienced extreme volatility. This volatility often has been unrelated or disproportionate to the operating performance of particular companies. You may not be able to resell your notes at an attractive price due to a number of factors such as the following:
| • | the impact of the COVID-19 pandemic on our financial condition and the results of operations; |
| • | our operating and financial performance and prospects; |
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| • | our quarterly or annual earnings or those of other companies in our industry compared to market expectations; |
| • | conditions that impact demand for our products and/or services; |
| • | future announcements concerning our business, our clients’ businesses or our competitors’ businesses; |
| • | the public’s reaction to our press releases, other public announcements and filings with the SEC; |
| • | the market’s reaction to our reduced disclosure and other requirements as a result of being an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”); |
| • | the size of our public float; |
| • | coverage by or changes in financial estimates by securities analysts or failure to meet their expectations; |
| • | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; |
| • | strategic actions by us or our competitors, such as acquisitions or restructurings; |
| • | changes in laws or regulations which adversely affect our industry or us; |
| • | privacy and data protection laws, privacy or data breaches, or the loss of data; |
| • | changes in accounting standards, policies, guidance, interpretations or principles; |
| • | changes in senior management or key personnel; |
| • | issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock; |
| • | changes in our dividend policy; |
| • | adverse resolution of new or pending litigation against us; and |
| • | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from inflation, natural disasters, terrorist attacks, acts of war and responses to such events. |
These broad market and industry factors may materially reduce the market price of the notes, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our notes is low. As a result, you may suffer a loss on your investment.
In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in securities litigation, it could have a substantial cost and divert resources and the attention of management from our business regardless of the outcome of such litigation.
If we do not develop and implement all required accounting practices and policies, we may be unable to provide the financial information required of a U.S. publicly traded company in a timely and reliable manner.
The implementation of all required accounting practices and policies and the hiring of additional financial staff has increased and may continue to increase our operating costs and requires our management to devote significant time and resources to such implementation. If we fail to develop and maintain effective internal controls and procedures and disclosure procedures and controls, we may be unable to provide financial information and required SEC reports that are timely and reliable. Any such delays or deficiencies could harm us, including by limiting our ability to obtain financing, either in the public capital markets or from private sources and damaging our reputation, which in either cause could impede our ability to implement our growth strategy. In addition, any such delays or deficiencies could result in our failure to meet the requirements for continued listing of our notes on NASDAQ.
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Our ability to timely raise capital in the future may be limited, or may be unavailable on acceptable terms, if at all. Our failure to raise capital when needed could harm our business, operating results and financial condition. Debt issued to raise additional capital may reduce the cash flow available to make required payments with respect to the notes and affect our ability to execute our investment strategy or impact the value of our investments.
We have funded our operations since inception primarily through our origination, active management and holding of life settlement policies. We cannot be certain when or if our operations will generate sufficient cash to fund our ongoing operations or the growth of our business.
We intend to continue to make investments to support our business and may require additional funds. Additional financing may not be available on favorable terms, if at all. If adequate funds are not available on acceptable terms, we may be unable to invest in future growth opportunities, which could harm our business, operating results and financial condition. If we incur debt, the debt holders could have rights senior to holders of the notes to make claims on our assets.
The Company has a series of warrants outstanding (collectively the “Warrants”), which include: (i) warrants (the “Private Placement Warrants”) originally issued in connection the Company’s initial public offering (the “Company IPO”) to purchase up to 7,120,000 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”), issuable upon the exercise, at an exercise price of $11.50 per share; (ii) warrants issued in connection with the Closing of the Business Combination to purchase up to 1,780,000 shares of our Common Stock issuable upon the exercise, at an exercise price of $11.50 per share; (iii) warrants (the “Public Warrants”) issued in connection with the Company IPO to purchase up to 17,250,000 shares of Common Stock, at an exercise price of $11.50 per share, of the public warrants. We receive no capital until the Warrants are exercised, which do not expire until 2028. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
We are an “emerging growth company.” The reduced public company reporting requirements applicable to emerging growth companies may make our notes less attractive to investors.
We qualify as an “emerging growth company,” as defined in the JOBS Act. While we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These provisions include: (1) an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (2) not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, (3) reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, registration statements and proxy statements and (4) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide will be different than the information that is available with respect to other public companies that are not emerging growth companies. In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the exemption from complying with new or revised accounting standards provided in Section 7(a)(2)(B) of the Securities Act as long as we are an emerging growth company. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies, but any such election to opt out is irrevocable. We have elected to irrevocably opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we will adopt the new or revised standard at the time public companies adopt the new or revised standard. This may make comparison of our financial statements with another emerging growth company that has not opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
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We cannot predict whether investors will find our notes less attractive if we rely on these exemptions. If some investors find our notes less attractive as a result, there may be a less active trading market for our notes. The market price of our notes may be more volatile.
We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year following the fifth anniversary of the date of the completion of the Company IPO, (2) in which we have total annual gross revenue of at least $1.235 billion, (3) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities, or (4) the end of any fiscal year in which the market value of our Common Stock held by non-affiliates is at least $700 million as of the end of the second quarter of that fiscal year.
Our management has limited experience in operating a public company.
Our executive officers have limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage its transition to a public company that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a disadvantage in that it is likely that an increasing amount of their time may be devoted to these activities which will result in less time being devoted to the management and growth of the Company. We may not have adequate personnel with the appropriate level of knowledge, experience and training in the accounting policies, practices or internal controls over financial reporting required of public companies in the United States. The development and implementation of the standards and controls necessary for the Company to achieve the level of accounting standards required of a public company in the United States may require costs greater than expected. It is possible that the Company will be required to expand its employee base and hire additional employees to support its operations as a public company which will increase its operating costs in future periods.
In addition, prior to the Business Combination, the Company (then known as East Resources Acquisition Company), was not timely in filing its Form 10-K for the year ended December 31, 2022 and its Form 10-Q for the quarter ended March 31, 2023.
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USE OF PROCEEDS
The net proceeds received from the sale of the notes are estimated to be approximately $14,250,000, after deducting the discounts and commissions payable to the underwriters and $250,000 of estimated offering expenses payable by us. The net proceeds received will be used to refinance other outstanding indebtedness and for general corporate purposes.
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CAPITALIZATION OF ABACUS AND ITS CONSOLIDATED SUBSIDIARIES
The following table sets forth the unaudited capitalization of Abacus and its consolidated subsidiaries as of September 30, 2023 on an actual basis and on an as adjusted basis to give effect to the sale of the notes in this offering and with respect to the existing notes. This table should be read in conjunction with the financial statements of Abacus and its subsidiaries in the prospectus.
| As of September 30, 2023 | ||||||||||||
| Actual | As adjusted for Existing Notes |
As further adjusted for current offering |
||||||||||
| (Dollars in thousands-unaudited) | ||||||||||||
| LONG-TERM DEBT(1) |
$ | 93,814 | $ | 93,814 | $ | 93,814 | ||||||
| 9.875% Fixed Rate Senior Notes due 2028 |
— | 35,650 | 50,650 | |||||||||
| Owl Rock Credit Facility(2) |
25,000 | — | — | |||||||||
| Other Long-Term Debt |
— | — | — | |||||||||
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|
|
|
|
|
|
|||||||
| TOTAL LONG-TERM DEBT |
$ | 118,814 | $ | 129,464 | $ | 144,464 | ||||||
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|
|
|
|
|
|||||||
| STOCKHOLDERS’ EQUITY |
$ | |||||||||||
| Common stock, par value $0.0001 per share; 200,000,000 authorized shares; 63,349,823 and 50,369,350 issued and outstanding, respectively |
$ | 6 | $ | 6 | $ | 6 | ||||||
| Additional paid-in capital |
194,198 | 194,198 | 194,198 | |||||||||
| Retained earnings |
(28,503 | ) | (28,503 | ) | (28,503 | ) | ||||||
| Accumulated other comprehensive income |
100 | 100 | 100 | |||||||||
| Non-Controlling interest |
289 | 289 | 289 | |||||||||
| TOTAL SHAREHOLDERS’ EQUITY |
$ | 166,090 | $ | 166,090 | $ | 166,090 | ||||||
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|
|
|
|
|
|
|||||||
| TOTAL CAPITALIZATION |
$ | 284,904 | $ | 295,554 | $ | 310,554 | ||||||
|
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|
|
|
|
|
|||||||
| (1) | Long-term debt consists of debt with a maturity of one year or more at the time it is incurred. These amounts are presented at the gross principal amounts outstanding and exclude unamortized debt issuance costs and purchase accounting adjustments. |
| (2) | This amount does not include a $1 million prepayment fee in connection with paying off the Owl Rock Credit Facility. |
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UNAUDITED PRO FORMA FINANCIAL INFORMATION
Introduction
Abacus Life, Inc., a Delaware corporation (“Abacus” or the “Company”), and its subsidiaries, Abacus Settlements, LLC (“Abacus Settlements”) and Longevity Market Assets, LLC (“LMA”) are providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial aspects of the Company. The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X and should be read in conjunction with the accompanying notes.
The unaudited pro forma condensed combined balance sheet as of September 30, 2023 presents the unaudited balance sheet of Abacus of September 30, 2023, giving effect to the issuance of $35.65 million of the existing notes as if it had been consummated on November 10, 2023.
The unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2023 combines the unaudited condensed statement of operations of East Resources Acquisition Company for the period from January 1 to July 3, 2023, the unaudited condensed statement of operations of Abacus Life Inc. for the nine months ended September 30, 2023, and the unaudited condensed statement of operations of Abacus Settlements for the period from January 1 to July 3, 2023. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022 combines the audited statement of operations of East Resources Acquisition Company for the year ended December 31, 2022, the audited statement of operations of LMA for the year ended December 31, 2022, and the audited statement of operations of Abacus Settlements for the year ended December 31, 2022, giving effect to the Business Combination as if it had been consummated on January 1, 2022, the beginning of the earliest period presented.
The unaudited pro forma condensed combined financial information was derived from, and should be read in conjunction with, the following historical financial statements and the accompanying notes:
| • | The historical unaudited condensed financial statements of Abacus as of and for the nine months ended September 30, 2023, and the historical audited financial statements of Abacus Settlements and the re-issued audited financial statements of Abacus Life Inc (formerly LMA) that show the effects of the reverse recapitalization of East Resource Acquisition Company as part of the share exchange as of and for the year ended December 31, 2022; and |
| • | The historical unaudited condensed financial statements of Abacus Settlements for the period from January 1 to July 3, 2023, and the historical audited financial statements of Abacus Settlements as of and for the year ended December 31, 2022. |
The foregoing historical financial statements have been prepared in accordance with GAAP. The pro forma adjustments reflect transaction accounting adjustments related to the Business Combination, which is discussed in further detail below. The unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not purport to represent the Company’s consolidated results of operations or consolidated financial position that would actually have occurred had the Business Combination been consummated on the dates assumed or to project the Company’s consolidated results of operations or consolidated financial position for any future date or period.
The unaudited pro forma condensed combined financial information should also be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information included elsewhere in this prospectus.
Description of the Business Combination
On August 30, 2022, East Resource Acquisition Company entered into an Agreement and Plan of Merger, as amended on October 14, 2022 (the “Merger Agreement”), with Abacus Settlements, LMA, Abacus Merger
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Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Abacus Merger Sub”) and LMA Merger Sub, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“LMA Merger Sub” and, together with Abacus Settlements, LMA and Abacus Merger Sub, the “Merger Subs”), pursuant to which, among other things and subject to the terms and conditions contained in the Merger Agreement, Abacus Merger Sub merged with and into Abacus Settlements, with Abacus Settlements surviving the merger as a wholly owned subsidiary of East Resource Acquisition Company (the “Abacus Merger”), and LMA Merger Sub merged with and into LMA, with LMA surviving the merger as a wholly owned subsidiary of East Resource Acquisition Company (the “LMA Merger” and, together with the Abacus Merger, the “Merger” and, along with the other transactions contemplated by the Merger Agreement, the “Business Combination”). In connection with the closing of the Merger (the “Closing”), East Resource Acquisition Company was renamed Abacus Life, Inc.
On October 14, 2022, East Resource Acquisition Company entered into the First Amendment to the Merger Agreement with Abacus Settlements, LMA and the Merger Subs, which modified certain terms and conditions contained within the Merger Agreement.
On April 20, 2023, East Resource Acquisition Company entered into the Second Amendment to the Merger Agreement with Abacus Settlements, LMA and the Merger Subs, which modified certain terms and conditions contained within the Merger Agreement.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, on June 30, 2023, the Business Combination was consummated.
Recent Note Offering
On November 10, 2023, the Company issued $31 million aggregate principal amount of existing notes. The net proceeds after related debt issue costs, were used by the Company to repay the Owl Rock Credit Facility, with the remaining to be used for general corporate purposes. This loan is based on a fixed interest rate of 9.875%, provides for quarterly interest payments beginning on February 15, 2024, and has a term of five years with a maturity date of November 15, 2028. The Company has the option to redeem the existing notes in whole or in part at a price of 100% of the outstanding principal balance on or after November 15, 2027. The existing notes are senior unsecured obligations of the Company and rank equal in right of payment to all of the Company’s other senior unsecured indebtedness from time to time outstanding.
Accounting for the Business Combination
The Business Combination has been accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, East Resource Acquisition Company has been treated as the “acquired” company for financial reporting purposes. This determination was primarily based on the LMA shareholders having a relative majority of the voting power of the Post-Combination Company, the LMA shareholders having the authority to appoint a majority of directors on the Board of Directors, and senior management of LMA comprising the majority of the senior management of the Post-Combination Company. LMA was then determined to be the “acquirer” for financial reporting purposes based on the relative size of LMA as compared to Abacus Settlements, represented by their revenue, equity, gross profit and net income. Accordingly, for accounting purposes, the financial statements of the combined entity represent a continuation of the financial statements of LMA with the LMA Merger being treated as the equivalent of LMA issuing stock for the net assets of East Resource Acquisition Company, accompanied by a recapitalization. The net assets of East Resource Acquisition Company have been stated at historical cost, with no goodwill or other intangible assets recorded.
The Abacus Settlements Merger has been accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of Abacus Settlements have been recorded at estimated fair value as of the acquisition date. The excess of the purchase price over the estimated fair values of the net assets acquired, if applicable, has been recognized as goodwill.
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The Business Combination was accounted for as a reverse recapitalization and the historical financial statements for the year-ended December 31, 2022 and 2021 of the accounting acquirer, Longevity Market Assets, LLC, were retrospectively revised to show the impact of the share exchange and were re-isused under Abacus Life, Inc. Abacus Settlements, LLC was determined to be a predecessor in addition to Longevity Market Assets, LLC and have been separately presented for the periods prior to the Business Combination, as they were not determined to be under common control.
Basis of Pro Forma Presentation
The historical financial information has been adjusted to give pro forma effect to the transaction accounting required for the Business Combination. The adjustments in the unaudited pro forma condensed combined financial information have been identified and presented to provide relevant information necessary for an accurate understanding of the Company upon Closing.
The unaudited pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different had Abacus Settlements always been combined with Abacus Life, Inc. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have been achieved had Abacus Settlements always been combined or the future results that the Company will experience.
Abacus Settlements and Abacus Life Inc. were related parties, although they were determined not to be under common control. As such, an adjustment was applied to the statement of operations for the year ended December 31, 2022 to remove activity that would be considered intercompany activity and eliminated upon consolidation. This activity represented revenue for Abacus Settlements and cost of sales for Abacus Life Inc. in the amount of $2.3 million for the year ended December 31, 2022, respectively.
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Unaudited Pro Forma Condensed Combined Statement of Operations
Nine Months Ended September 30, 2023
(In thousands)
| (1) Abacus Life, Inc. Historical |
(2) Abacus Settlements January 1, 2023- July 3, 2023 Historical |
(3) Transaction Adjustments |
(4) Pro Forma Combined Abacus Settlements and Abacus Life (1) + (2) + (3) |
(5) Transaction Adjustments - Acquisition |
Pro Forma Combined with Acquisition (4) + (5) |
(8) Financing Adjustments |
Pro Forma Combined (7) + (8) |
|||||||||||||||||||||||||
| Revenue |
42,706 | 13,184 | 55,890 | 55,890 | — | 55,890 | ||||||||||||||||||||||||||
| Cost of sales |
4,828 | 9,293 | 14,121 | 14,121 | — | 14,121 | ||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Gross profit |
37,878 | 3,891 | — | 41,769 | — | 41,769 | — | 41,769 | ||||||||||||||||||||||||
| Formation and operating costs |
— | — | — | — | — | |||||||||||||||||||||||||||
| Sales and marketing |
3,117 | — | 3,117 | 3,117 | 3,117 | |||||||||||||||||||||||||||
| General and administrative expenses |
11,113 | 4,849 | 10,084 | (BB) | 26,046 | 26,046 | 26,046 | |||||||||||||||||||||||||
| Unrealized loss on investments |
(491 | ) | — | (491 | ) | (491 | ) | (491 | ) | |||||||||||||||||||||||
| Loss on change in fair value of debt |
310 | — | 310 | 310 | 310 | |||||||||||||||||||||||||||
| Amortization |
1,682 | — | 1,682 | 3,237 | (GG) | 4,919 | 4,919 | |||||||||||||||||||||||||
| Depreciation |
15 | 5 | 20 | 20 | 20 | |||||||||||||||||||||||||||
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|
|||||||||||||||||
| Total operating expenses |
15,746 | 4,854 | 10,084 | 30,684 | 3,237 | 33,921 | — | 33,921 | ||||||||||||||||||||||||
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|
|||||||||||||||||
| Loss from Operations |
22,132 | (963 | ) | (10,084 | ) | 11,085 | (3,237 | ) | 7,848 | — | 7,848 | |||||||||||||||||||||
| Other income (expense): |
||||||||||||||||||||||||||||||||
| Change in fair value of warrant liability |
(943 | ) | — | (6,408 | ) (CC) | (7,351 | ) | (7,351 | ) | (7,351 | ) | |||||||||||||||||||||
| Interest income |
71 | 2 | 73 | 73 | 73 | |||||||||||||||||||||||||||
| Interest expense |
(3,621 | ) | (12 | ) | (1,860 | ) (EE) | (6,121 | ) | (6,121 | ) | 1,874 | (HH) | (6,543 | ) | ||||||||||||||||||
| (628 | ) (FF) | (2,296 | ) (II) | |||||||||||||||||||||||||||||
| Interest earned on marketable securities held in Trust Account |
— | — | — | (AA) | — | — | — | |||||||||||||||||||||||||
| Other income (expense) |
(2 | ) | — | (2 | ) | (2 | ) | (2 | ) | |||||||||||||||||||||||
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|
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|
|
|
|||||||||||||||||
| Total other income (expense) |
(4,495 | ) | (10 | ) | (8,896 | ) | (13,401 | ) | — | (13,401 | ) | (422 | ) | (13,823 | ) | |||||||||||||||||
| Net income before provision for income taxes |
17,637 | (973 | ) | (18,980 | ) | (2,316 | ) | (3,237 | ) | (5,553 | ) | (422 | ) | (5,975 | ) | |||||||||||||||||
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|
|||||||||||||||||
| (Provision for)/Benefit from income taxes |
(2,238 | ) | (2 | ) | 2,255 | (DD) | 15 | 820 | (DD) | 835 | 107 | (DD) | 942 | |||||||||||||||||||
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|
|||||||||||||||||
| Net income |
15,399 | (975 | ) | (16,725 | ) | (2,301 | ) | (2,417 | ) | (4,718 | ) | (315 | ) | (5,033 | ) | |||||||||||||||||
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|
|||||||||||||||||
| Net income attributable to noncontrolling interest |
(340 | ) | — | (340 | ) | (340 | ) | (340 | ) | |||||||||||||||||||||||
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| Net income / (loss) attributable to members / shareholders |
15,739 | (975 | ) | (16,725 | ) | (1,961 | ) | (2,417 | ) | (4,378 | ) | (315 | ) | (4,693 | ) | |||||||||||||||||
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| Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption |
||||||||||||||||||||||||||||||||
| Basic and diluted net income per share, Class A common stock subject to possible redemption |
||||||||||||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding, Non-redeemable common stock |
||||||||||||||||||||||||||||||||
| Basic and diluted net income per share, Non-redeemable common stock |
||||||||||||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding, Class A common stock |
54,632,826 | 54,632,826 | ||||||||||||||||||||||||||||||
| Basic and diluted net loss per share, Class A common stock |
0.29 | (0.09 | ) | |||||||||||||||||||||||||||||
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Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 2022
(in thousands)
| (1) LMA Historical |
(2) Transaction Adjustments |
(3) Pro Forma Combined (1) + (2) |
(4) Abacus Settlements Historical |
(5) Transaction Adjustments - Acquisition |
(6) Pro Forma Combined with Acquisition (3) + (4) + (5) |
(7) Financing Acquisition |
Pro Forma Combined (6) + (7) |
|||||||||||||||||||||||||
| Revenue |
44,713 | (2,268 | ) (JJ) | 42,445 | 25,203 | 67,648 | 67,648 | |||||||||||||||||||||||||
| Cost of Sales |
6,245 | (2,268 | ) (JJ) | 3,977 | 16,561 | 20,538 | 20,538 | |||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|||||||||||||||||
| Gross profit |
38,468 | — | 38,468 | 8,642 | — | 47,110 | — | 47,110 | ||||||||||||||||||||||||
| Formation and operating costs |
— | — | — | — | — | |||||||||||||||||||||||||||
| Sales and marketing |
2,596 | 2,596 | — | 2,596 | 2,596 | |||||||||||||||||||||||||||
| General and administrative expenses |
1,066 | 20,168 | (MM) | 21,234 | 8,674 | 29,908 | 29,908 | |||||||||||||||||||||||||
| Loss (gain) on change in fair value of debt |
91 | 91 | — | 91 | 91 | |||||||||||||||||||||||||||
| Unrealized loss (gain) on investments |
1,046 | 1,046 | — | 1,046 | 1,046 | |||||||||||||||||||||||||||
| Amortization |
— | — | — | 6,474 | (RR) | 6,474 | 6,474 | |||||||||||||||||||||||||
| Depreciation |
4 | 4 | 12 | 16 | 16 | |||||||||||||||||||||||||||
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|
|||||||||||||||||
| Total operating expenses |
4,803 | 20,168 | 24,971 | 8,686 | 6,474 | 40,131 | — | 40,131 | ||||||||||||||||||||||||
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|
|||||||||||||||||
| Loss from operations |
33,665 | (20,168 | ) | 13,497 | (44 | ) | (6,474 | ) | 6,979 | — | 6,979 | |||||||||||||||||||||
| Other income (expense): |
||||||||||||||||||||||||||||||||
| Change in fair value of warrant liability |
— | (6,794 | ) (LL) | (6,794 | ) | — | (6,794 | ) | (6,794 | ) | ||||||||||||||||||||||
| Change in fair value of forward purchase agreement liability |
— | — | — | — | — | |||||||||||||||||||||||||||
| Interest income |
2 | 2 | 3 | 5 | 5 | |||||||||||||||||||||||||||
| Interest (expense) |
(43 | ) | (3,720 | ) (PP) | (5,020 | ) | (9 | ) | (5,029 | ) | (2,121 | ) (SS) | (10,211 | ) | ||||||||||||||||||
| (1,257 | ) (QQ) | — | (3,061 | ) (TT) | 5 | |||||||||||||||||||||||||||
| — | (KK) | — | — | — | (10,211 | ) | ||||||||||||||||||||||||||
| Interest earned on marketable securities held in Trust Account |
— | — | — | — | ||||||||||||||||||||||||||||
| Consulting income |
— | — | — | — | ||||||||||||||||||||||||||||
| Other income/(expense) |
(347 | ) | (347 | ) | — | (347 | ) | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(347) |
| ||||||||||||||||
| Total other income |
(388 | ) | (11,771 | ) | (12,159 | ) | (6 | ) | — | (12,165 | ) | (5,182 | ) | (17,347 | ) | |||||||||||||||||
| Net income before provision for income taxes |
33,277 | (31,939 | ) | 1,338 | (50 | ) | (6,474 | ) | (5,186 | ) | (5,182 | ) | (10,368 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (Provision for)/Benefit from income taxes |
890 | 1,183 | (NN) | (7,730 | ) | (2 | ) | 1539 | (NN) | (6,193 | ) | 1,232 | (NN) | (4,961 | ) | |||||||||||||||||
| (8,023 | ) (OO) | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income / (loss) |
32,387 | (38,779 | ) | (6,392 | ) | (52 | ) | (4,935 | ) | (11,379 | ) | (3,951 | ) | (15,330 | ) | |||||||||||||||||
| Net income / (loss) attributable to noncontrolling interest |
705 | 705 | 705 | 705 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income / (loss) attributable to members / shareholders |
31,682 | (38,779 | ) | (7,097 | ) | (52 | ) | (4,935 | ) | (12,084 | ) | (3,951 | ) | (16,035 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Basic and diluted weighted average shares outstanding, Class A common stock subject to possible redemption |
23,637,084 | |||||||||||||||||||||||||||||||
| Basic and diluted net income per share, Class A common stock subject to possible redemption |
(0.02 | ) | ||||||||||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding, Non-redeemable common stock |
8,625,000 | |||||||||||||||||||||||||||||||
| Basic and diluted net income per share, Non-redeemable common stock |
(0.02 | ) | ||||||||||||||||||||||||||||||
| Basic and diluted weighted average shares outstanding, Class A common stock |
50,369,350 | 50,369,350 | ||||||||||||||||||||||||||||||
| Basic and diluted net loss per share, Class A common stock |
0.63 | (0.32 | ) | |||||||||||||||||||||||||||||
37
Table of Contents
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
The pro forma adjustments have been prepared as if the Business Combination had been consummated on January 1, 2022, the beginning of the earliest period presented in the unaudited pro forma condensed combined statement of operations.
The LMA Merger was accounted for under the reverse recapitalization method of accounting, with no goodwill or other intangible assets recorded in accordance with GAAP. Accordingly, for accounting purposes, the financial statements of the Company represent a continuation of the financial statements of LMA with the acquisition being treated as the equivalent of LMA issuing stock for the net assets of ERES, accompanied by a recapitalization.
The Abacus Settlements Merger was accounted for using the acquisition method of accounting in accordance with GAAP. Accordingly, for accounting purposes, the identified assets and liabilities of Abacus Settlements have been recorded at their estimated fair values as of the acquisition date. The excess of the purchase price over the estimated fair values of the net assets acquired, if applicable, has been recognized as goodwill.
The pro forma adjustments represent management’s estimates based on information available as of the date of this prospectus and incorporated by reference into the prospectus to which this Unaudited Pro Forma Condensed Combined Financial Information is attached and are subject to change as additional information becomes available and additional analyses are performed. Management considers this basis of presentation to be reasonable under the circumstances.
2. Adjustments and Assumptions to the Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 2023
The adjustments included in the unaudited pro forma condensed combined balance sheet as of September 30, 2023 are as follows:
| (A) | Represents the extinguishment of $25.0 million in Blue Owl debt, inclusive of unamortized debt issuance costs of $2.1 million. |
| (B) | Represents the issuance of Fixed Rate Senior Notes in the amount of $35.65 million at an interest rate of 9.9% on November 10, 2023. This debt will mature on November 5, 2028. |
3. Adjustments and Assumptions to the Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended September 30, 2023
The adjustments included in the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2023 are as follows:
| (AA) | Reflects the elimination of interest earned on marketable securities held in the Trust Account. |
| (BB) | Reflects recurring compensation expense due to a non-pro-rata distribution to one of the existing owners of the Companies, which vests in two equal tranches over the period of 25 months and 30 months, respectively, following Closing and which is subject to forfeiture prior to vesting. The negotiations related to the draft Restriction Agreement governing these shares, attached to this prospectus as Annex I, were considered to be concluded as of January 12, 2023, and this was determined to be the grant date of these incentive shares. The compensation expense amount was calculated using East Resource Acquisition Company’s closing stock price on the grant date. This adjustment is expected to result in a permanent difference between book and taxable income, and as such, no income tax benefit has been reflected herein related to this adjustment. |
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Table of Contents
| (CC) | Represents the elimination of the change in fair value of the ERES’s public warrants for the period beginning from January 1, 2023 through the transaction close date i.e., July 3, 2023 as a result of the reclassification of these warrants and the forfeiture of 20% of ERES’s Private Placement Warrants. This adjustment is expected to result in a permanent difference between book and taxable income, and as such, no income tax benefit has been reflected herein related to this adjustment. |
| (DD) | Represents the pro forma adjustment to taxes as a result of adjustments to the income statement for the period beginning from January 1, 2023 through the transaction close date i.e., July 3, 2023, which was calculated using the statutory income tax rate of 26.5%. Adjustments that were expected to result in permanent differences between book and taxable income, as noted herein, were not included in the calculation of the tax impact of pro forma adjustments. |
| (EE) | Reflects the interest expense related to the issuance of new debt, calculated based on an interest rate of 12%. |
| (FF) | Reflects the interest expense related to the incremental issuance under the promissory note with the Sponsor, which is subject to a fixed interest rate of 12%, for the period beginning from January 1, 2023 through the transaction close date i.e., July 3, 2023. |
| (GG) | Reflects the incremental amortization expense related to intangibles. These intangibles include customer relationships, internally developed and used technology, and non-compete agreements, which were previously not present within Abacus Settlements’ historical financial statements and were adjusted to fair value based on the purchase price allocation. The amortization expense for intangibles was calculated on a straight-line basis using the estimated remaining useful lives of the assets, which varied among the different intangibles. |
| (HH) | Reflects the elimination of interest expense related to the Blue Owl debt, which was extinguished as presented at adjustment (A). As this debt was issued during 2023, no adjustment was applied to eliminate interest expense related to this debt for the year ended December 31, 2022. |
| (II) | Reflects interest expense related to the issuance of the Fixed Rate Senior Notes, as presented at adjustment (B), which was calculated using a fixed interest rate of 9.9%. |
4. Adjustments and Assumptions to the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2022
The adjustments included in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2022 are as follows:
| (JJ) | Reflects the elimination of activity between LMA and Abacus Settlements for the year ended December 31, 2022 that, following the Business Combination, would be considered intercompany activity and eliminated upon consolidation. This activity was historically recorded as revenue for Abacus Settlements and as cost of sales for LMA. |
| (KK) | Reflects the elimination of interest earned on marketable securities held in the Trust Account. |
| (LL) | Represents the elimination of the change in fair value of the ERES’s public warrants for the year ended December 31, 2022 as a result of the reclassification of these warrants and the forfeiture of 20% of ERES’s Private Placement Warrants. This adjustment is expected to result in a permanent difference between book and taxable income, and as such, no income tax benefit has been reflected herein related to this adjustment. |
| (MM) | Reflects recurring compensation expense due to a non-pro-rata distribution to one of the existing owners of the Companies, which vests in two equal tranches over the period of 25 months and 30 months, respectively, following Closing and which is subject to forfeiture prior to vesting. The negotiations related to the draft Restriction Agreement governing these shares, attached to this |
39
Table of Contents
| prospectus as Annex I, were considered to be concluded as of January 12, 2023, and this was determined to be the grant date of these incentive shares. The compensation expense amount was calculated using East Resource Acquisition Company’s closing stock price on the grant date. This adjustment is expected to result in a permanent difference between book and taxable income, and as such, no income tax benefit has been reflected herein related to this adjustment. |
| (NN) | Represents the pro forma adjustment to taxes as a result of adjustments to the income statement for the year ended December 31, 2022, which was calculated using the statutory income tax rate of 26.5%. Adjustments that were expected to result in permanent differences between book and taxable income, as noted herein, were not included in the calculation of the tax impact of pro forma adjustments. |
| (OO) | Reflects the tax impact of transitioning the Companies from pass-through entities for tax purposes to taxable entities for the year ended December 31, 2022. |
| (PP) | Reflects the interest expense related to the debt issued as part of a capital contribution, calculated based on an interest rate of 12%. |
| (QQ) | Reflects the interest expense related to the incremental issuance under the promissory note with the Sponsor, which is subject to a fixed interest rate of 12%, for the year ended December 31, 2022. |
| (RR) | Reflects the incremental amortization expense related to intangibles. These intangibles include customer relationships, internally developed and used technology, and non-compete agreements, which were previously not present within Abacus Settlements’ historical financial statements and were adjusted to fair value based on the purchase price allocation. The amortization expense for intangibles was calculated on a straight-line basis using the estimated remaining useful lives of the assets, which varied among the different intangibles. |
| (SS) | Reflects the nonrecurring expense recorded for the unamortized debt issuance costs related to the Blue Owl debt, which was extinguished as presented at adjustment (A). |
| (TT) | Reflects interest expense related to the issuance of the Fixed Rate Senior Notes, as presented at adjustment (B), which was calculated using a fixed interest rate of 9.9%. |
5. Earnings per Share Information
The pro forma weighted average shares calculations have been performed for the nine months ended September 30, 2023 and the year ended December 31, 2022 using the historical weighted average shares outstanding, and the issuance of additional shares in connection with the Business Combination, assuming the transaction occurred on January 1, 2022. As the Business Combination is being reflected as if it had occurred at the beginning of the periods presented, the calculation of weighted average share outstanding for both basic and diluted earnings per share assumes that the shares issued relating to the Business Combination have been outstanding for the entire periods presented. As such, historical weighted average common shares outstanding—basic and diluted for the nine months ended September 30, 2023 were determined to appropriately approximate the pro forma weighted average common shares outstanding — basic and diluted for the pro forma periods presented.
| Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||
| Pro forma net income |
$ | (4,693 | ) | $ | (16,035 | ) | ||
| Pro forma weighted average Class A Common Stock outstanding—basic and diluted |
54,632,826 | 50,369,350 | ||||||
| Pro forma Class A Common Stock income per share |
$ | (0.09 | ) | $ | (0.32 | ) | ||
40
Table of Contents
The above calculation excludes the effects of potentially dilutive shares from the computation of diluted net income per share as the effect would have an antidilutive impact under the treasury stock method. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net profit per share attributable to common shareholders of the Company is the same.
41
Table of Contents
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company is composed of two principal operating subsidiaries, LMA and Abacus Settlements. The following sets forth management’s discussion and analysis of financial condition and results of operations of the Company and its operating subsidiaries.
Business Combination
The Company was formed under the laws of the State of Delaware on May 22, 2020 as a blank check company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or other similar business combination with one or more businesses. The Business Combination was effectuated using cash from the proceeds of the Company IPO and the sale of the Private Placement Warrants, our capital stock, debt or a combination of cash, stock and debt. On August 30, 2022, the Company entered into the Merger Agreement, and the Business Combination was consummated on June 30, 2023.
Prior to the Business Combination, the Company neither engaged in any operations (other than searching for a business combination after the Company IPO) nor generated any revenues to date. Our only activities from May 22, 2020 (inception) through June 30, 2023 were organizational activities, those necessary to prepare for the Initial Public Offering, described below, and, subsequent to the Initial Public Offering, identifying a target company for a Business Combination and completing such Business Combination.
Longevity Market Assets
Overview
LMA directly acquires life insurance policies in a mutually beneficial transaction for both us and the underlying insured. With meaningful support from our proprietary risk rating heat map, we consistently evaluate policies (at origination and throughout the lifecycle) to generate essentially uncorrelated risk adjusted returns. Additionally, we provide a range of services for owners of life settlement assets.
Upon acquiring a policy, we have the option to either (i) trade that policy to a third-party institutional investor (i.e., generating a spread on each trade) or (ii) hold that policy on our balance sheet until maturity (i.e., paying the premiums over time and receiving the final claim / payout). This process is predicated on driving the best economics for LMA and we categorize this revenue as “Trading” or “Active management revenue.”
Additionally, LMA provides a wide range of services to owners and purchasers of life settlements assets (i.e., acquired policies). More specifically, LMA provides consulting, valuation, actuarial services, and performs administrative work involved in keeping a policy in force and at the premium level most advantageous to the owner. We have experience servicing a large number of policies for highly sophisticated institutions, including policies for large institutional life settlement funds. We generate revenue on these services by charging a base servicing fee of approximately 0.5% of total asset value of the portfolio. We categorize this revenue as “Servicing” or “Portfolio servicing revenue.”
In 2021, we shifted our focus from a service based only business model and began directly acquiring life insurance policies. Our first purchase under the expanded model was in June 2021, and the revenue related to that purchase is included in the Active management revenue line item in the accompanying financial statements for the period ended December 31, 2022. We have seen rapid growth in this segment as we have continued to dedicate capital and resources towards our marketing and diversified origination channels. Such items are appropriately reflected in the operating expenses section of the accompanying financial statements for the period ended September 30, 2023.
42
Table of Contents
LMA was formed as Abacus Life Services, LLC in the state of Florida in February 2017. Subsequently, in February 2022, we changed our name to Longevity Market Assets, LLC. We are headquartered in Orlando, Florida.
Our Business Model
As mentioned in the above Overview section, LMA generates revenue in two main ways. The first is through our active portfolio management strategy (“Active management revenue”), whereby we can (i) generate a spread on traded policies, (ii) hold policies on our balance sheet (paying premiums over time and receiving the payout/claim), or (iii) generate unrealized gains or losses on policies purchased by our structured note offerings: LMATT Series 2024, Inc., LMATT Growth Series 2.2024, Inc., LMATT Growth and Income Series 1.2026, Inc., and LMA Income Series, LP using the proceeds from the debt offerings with the intention to hold to maturity. The second is through our portfolio and policy servicing activities, whereby we provide a range of services to life settlement asset owners.
Active management revenue derives from buying and selling policies; and the receipt of death benefits proceeds on policies we hold where the insured dies. Of the purchased policies, some are purchased with the intent to hold to maturity, while others are held for trading to be sold for a gain. We elect to account for each investment in life settlement contracts using either the investment method or the fair value method. Once the accounting method is elected for each policy, it cannot be changed. LMA accounts for life settlement policies purchased through the structured note and fund offerings on a fair value basis, and life settlement policies that we intend to trade in the near term at cost plus premiums paid. At the time that this election was made, this was the result of a cost-benefit analysis: because of our intention to hold the instruments for a relatively short period, we believed that the investment method provided a more cost-effective method of accounting for the instruments and did not believe that, in the course of the short period, the fair value would differ materially from the accumulated cost. For the life settlement policies accounted for under the fair value method, these policies are part of the collateral consideration for the market linked structured notes issued under LMX Series, LLC and LMA Series, LLC subsidiaries where quarterly valuations are a condition of the private placement memorandum. Given that there is a valuation requirement stipulated in the notes, management has elected to use the fair value method for these policies as the information is readily available and also captures the change in fair value within the income statement when those changes occur as opposed to when the policies mature given management’s intention to hold them to maturity. For policies held at fair value, changes in fair value are reflected in operations in the period the change is calculated. Under the investment method, investments in contracts are recorded at investment price plus all initial direct costs. Continuing costs (e.g., policy premiums, statutory interest and direct external costs, if any) to keep the policy in force are capitalized. Gains/losses on sales of such are recorded at the time of sale or maturity. Under the fair value method, we record the initial investment of the transaction price and remeasure the investment at fair value at each subsequent reporting period. Changes in fair value are reported in revenue when they occur including those related to life insurance proceeds (policy maturities) and premium payments. Upon sale of a life settlement contract, we record revenue (gain/loss) for the difference between the agreed-upon purchase price with the buyer, and the carrying value of the contract.
Generating Portfolio servicing revenue involves the provision of services to one affiliate by common ownership, and third parties, which own life insurance policies. Portfolio servicing revenue is derived from services related to maintaining these settled policies pursuant to agreement with investors in settled policies (“Service Agreement(s)”). Additionally, also included in servicing revenue are fees for limited consulting services related to the evaluation of policies that we perform for third parties. Portfolio servicing revenue is recognized ratably over the life of the Service Agreements, which range from one month to ten years. The duties performed by the Company under these arrangements are considered a single performance obligation that is satisfied ratably as the customer simultaneously receives and consumes the benefit provided by us. As such, revenue is recognized for services provided for the corresponding month.
Portfolio servicing revenue also consists of revenue related to consulting engagements. We provide services for the owners of life settlement contracts who are often customers of the servicing business line, or customers of
43
Table of Contents
Abacus Settlements. These consulting engagements are comprised of valuation, actuarial services, and overall policy assessments related to life settlement contracts and are short-term in nature. The performance obligations are typically identified as separate services with a specific deliverable or a group of deliverables to be provided in tandem, as agreed to in the engagement letter or contract. Each service provided under a contract is considered as a performance obligation and revenue is recognized at a point in time when the deliverable or group of deliverables is transferred to the customer.
Key Factors Affecting Our Performance
The markets for our consulting and portfolio servicing are affected by economic, regulatory, and legislative changes, technological developments, and increased competition from established and new competitors. We believe that the primary factors in selecting LMA include reputation, the ability to provide measurable increases to shareholder value and return on investment, global scale, quality of service and the ability to tailor services to each client’s specific needs. In that regard, with our ability to leverage the technology we develop, we are focused on developing and implementing data and analytic solutions for both internal operations and for maintaining industry standards and meeting client needs.
Results of Operations
The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not indicative of future results:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
Twelve Months Ended December 31, |
||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2022 | 2021 | |||||||||||||||||||
| Portfolio Servicing Revenue |
||||||||||||||||||||||||
| Related party servicing revenue |
$ | 168,899 | $ | 419,253 | $ | 543,076 | $ | 620,159 | $ | 818,300 | $ | 699,884 | ||||||||||||
| Portfolio servicing revenue |
55,670 | 169 | 46,981 | 370,169 | 652,672 | 380,102 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Portfolio servicing revenue |
224,569 | 419,422 | 590,057 | 990,328 | 1,470,972 | 1,079,986 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Active management revenue |
||||||||||||||||||||||||
| Investment income from life insurance policies held using investment method |
1,817,764 | 5,965,466 | 16,655,833 | 13,980,466 | 37,828,829 | 120,000 | ||||||||||||||||||
| Change in fair value of life insurance policies (policies held using fair value method) |
17,108,380 | 2,014,013 | 4,339,084 | 3,305,505 | 5,413,751 | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total active management revenue |
18,926,144 | 7,979,479 | 20,994,917 | 17,285,971 | 43,242,580 | 120,000 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Revenue |
11,378,765 | 8,398,901 | 21,584,974 | 18,276,299 | 44,713,552 | 1,199,986 | ||||||||||||||||||
| Cost of revenues (excluding depreciation stated below) |
973,400 | 666,119 | 1,462,950 | 2,086,075 | 6,245,131 | 735,893 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Gross Profit |
10,405,365 | 7,732,782 | 20,122,024 | 16,190,224 | 38,468,421 | 464,093 | ||||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||
| Sales and marketing |
683,841 | 1,019,498 | 1,412,845 | 1,649,498 | 2,596,140 | — | ||||||||||||||||||
| General, administrative and other |
577,539 | 5,499 | 1,274,431 | 646,705 | 1,066,403 | 101,406 | ||||||||||||||||||
| Unrealized loss (gain) on investments |
(672,936 | ) | 1,039,022 | (798,156 | ) | 1,054,975 | 90,719 | — | ||||||||||||||||
| Loss on change in fair value of debt |
1,445,229 | 333,879 | 2,398,662 | 375,513 | 1,045,623 | — | ||||||||||||||||||
| Other operating expenses |
— | 493,849 | ||||||||||||||||||||||
| Depreciation expense |
1,098 | 1,098 | 2,141 | 2,141 | 4,282 | 2,447 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total operating expenses |
2,034,771 | 2,398,996 | 4,289,923 | 3,728,832 | 4,803,167 | 597,702 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income |
8,370,594 | 5,333,786 | 15,832,101 | 12,461,392 | 33,665,254 | (133,609 | ) | |||||||||||||||||
44
Table of Contents
| Three Months Ended September 30, |
Nine Months Ended September 30, |
Twelve Months Ended December 31, |
||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2022 | 2021 | |||||||||||||||||||
| Other (expense) income |
||||||||||||||||||||||||
| Other income (expense) |
121,601 | (127,455 | ) | (21,651 | ) | (242,247 | ) | (347,013 | ) | — | ||||||||||||||
| Interest (expense) |
(584,075 | ) | — | (941,458 | ) | — | (41,324 | ) | — | |||||||||||||||
| Interest income |
— | — | 7,457 | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income before provision for income taxes |
7,908,120 | 5,206,331 | 14,876,449 | 12,219,145 | 33,276,918 | (133,609 | ) | |||||||||||||||||
| Provision for income taxes |
(1,184,571 | ) | (120,132 | ) | (528,104 | ) | (296,806 | ) | (889,943 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income |
6,723,549 | 5,086,199 | 14,348,345 | 11,922,339 | 32,386,975 | (133,609 | ) | |||||||||||||||||
| Less: Net income (loss) attributable to noncontrolling interest |
(26,596 | ) | 406,641 | (487,303 | ) | 406,641 | 704,699 | (148,155 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income attributable to Abacus Life, Inc. |
$ | 6,750,145 | $ | 4,679,558 | $ | 14,835,648 | $ | 11,515,698 | $ | 31,682,275 | $ | 14,546 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Revenue
Related Party Services
We have a related-party relationship with Nova Trading (US), LLC (“Nova Trading”), a Delaware limited liability company and Nova Holding (US) LP, a Delaware limited partnership (“Nova Holding” and collectively with Nova Trading, the “Nova Funds”) as some of the owners of Abacus Life, Inc. and certain members of management jointly own 11% of the Nova Funds. We enter into service agreements with the owners of life settlement contracts and are responsible for maintaining the policies, managing processing of claims in the event of death of the insured and ensuring timely payment of optimized premiums computed to derive maximum return on maturity of the policy. We neither assume the ownership of the contracts nor undertake the responsibility to make the associated premium payments. The duties that we perform under these arrangements are considered a single performance obligation that is satisfied over time and revenue is recognized for services provided for the corresponding time period. We earn servicing revenue related to policy and administrative services on behalf of Nova Funds portfolio (the “Nova Portfolio”). The servicing fee is equal to 50 basis points (0.50%) times the monthly invested amount in policies held by Nova Funds divided by 12.
| Three Months Ended September 30, | $ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Related party servicing revenue |
$ | 168,899 | $ | 132,220 | $ | 36,679 | 27.7 | % | ||||||||
Related party servicing revenue increased by $36,679, or 27.7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in related party servicing revenue is primarily due to servicing more policies owned by the joint venture for the three months at September 30, 2023.
| Nine Months Ended September 30, |
|
|
||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Related party servicing revenue |
$ | 711,975 | $ | 752,379 | $ | (40,404 | ) | (5.4 | )% | |||||||
Related party servicing revenue decreased by $40,404, or 5.4%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in related party servicing revenue is primarily due to servicing less policies for the Nova Portfolio for the nine months ended September 30, 2023. Total policy count for the Nova Portfolio was 320 and 400 for the periods ended September 30, 2023 and September 30, 2022, respectively. This translated to total invested dollars of $144,635,789 and $153,272,988 as of September 30, 2023 and September 30, 2022, respectively.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Portfolio servicing revenue |
$ | 55,670 | $ | 250,025 | $ | (194,355) | (77.7 | )% | ||||||||
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Portfolio servicing revenue decreased by $194,355 or 77.7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in portfolio servicing revenue is primarily attributable to a reduction in the non-recurring consulting projects during the three months ended September 30, 2023 compared to the three months ended September 30, 2022. There were no new non-recurring consulting projects initiated during the third quarter 2023 to servicing more external funds.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Portfolio servicing revenue |
$ | 102,651 | $ | 620,194 | $ | (517,543) | (83.4 | )% | ||||||||
Portfolio servicing revenue decreased by $517,543, or 83.4%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in portfolio servicing revenue is primarily attributable to a reduction in the non-recurring consulting projects in 2023.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Related party servicing revenue |
$ | 818,300 | $ | 699,884 | $ | 118,416 | 17 | % | ||||||||
Related party servicing revenue increased by $118,416, or 17%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in related party servicing revenue is primarily attributable to the increase in size of the Nova Portfolio, both in policy count and invested dollars. Total policy count for the Nova Portfolio was 392 and 231 for the periods ended December 31, 2022 and December 31, 2021, respectively. This translated to total invested dollars of $155,451,161 and $76,016,669 as of December 31, 2022 and December 31, 2021, respectively.
Active management revenue
Active management revenue is generated by buying, selling, and trading policies and maintaining policies through to receipt of maturity or death benefits. Policies are accounted for under both the investment method and fair value method. We have elected on an instrument-by-instrument basis to account for these policies under the investment method, pursuant to Accounting Standards Codification (“ASC”) 323-30-25-2. Abacus Life, Inc. engages in direct buying and selling of life settlement policies whereby each potential policy is independently researched to determine if it would be a profitable investment. Policies purchased under Abacus Life, Inc. are typically purchased with the intention to sell within twelve months and are measured for under the investment method given that the purchase dates are recent, and policies turn fairly quickly. Policies purchased under LMATT Series 2024, Inc. or LMATT Growth Series 2.2024, Inc. are measured under the fair value method and will either be sold or held until the policies mature. Upon sale of a life settlement contract, the company will record revenue (gain/loss) for the difference between the agreed-upon purchase price with the buyer, and the carrying value of the contract.
| Three Months Ended September 30, |
$ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Active management revenue |
||||||||||||||||
| Policies accounted for under the investment method |
$ | 1,817,764 | $ | 10,629,978 | $ | (8,812,214 | ) | (82.9 | )% | |||||||
| Policies accounted for under the fair value method |
17,108,380 | 495,525 | 16,612,855 | 3,352.6 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total active management revenue |
$ | 18,926,144 | $ | 11,125,503 | $ | 7,800,641 | 70.1 | % | ||||||||
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Total active management revenue increased by $7,800,641, or 70.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in active management revenue was primarily attributable to an increase in active management services. As of September 30, 2023, Abacus Life, Inc. holds 240 policies, of which 228 are accounted for under the fair value method and 12 are accounted for using the investment method (cost, plus premiums paid). Policies recorded under the investment method resulted in a revenue decrease of $8,812,214, or 82.9%, which is due to the Company electing to use the fair value method for all policies purchased subsequent to June 30, 2023. The aggregate face value of policies accounted for using the investment method was $37,300,000 as of September 30, 2023, with a corresponding carrying value of $4,116,499. Additional information regarding policies accounted for under the investment method is as follows:
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Investment method: |
||||||||
| Policies bought |
0 | 10 | ||||||
| Policies sold |
34 | 4 | ||||||
| Policies matured |
0 | 1 | ||||||
| Average realized gain (loss) on policies sold |
29.2 | % | 13.5 | % | ||||
| Number of external counter parties that purchased policies |
5 | 4 | ||||||
Policies accounted for under the fair value method, resulted in a revenue increase of $16,612,855, driven primarily by a realized gain on the sale of 78 policies of $7,789,464 for the three months ended September 30, 2023. In the three months period ended September 30, 2023, an unrealized gain of $10,940,077 was recorded on 149 policies purchased. For the policies held at fair value, the unrealized gain on policies of $10,940,077 represents a change in fair value of the aforementioned policies. The Company realized a gain of $7,789,464 for the three months ended September 30, 2023 for 78 policies that sold that were included in the change in fair value of life insurance policies held using the fair value method and made premium payments of $1,621,161, which were also included in the same line item. Additional information regarding policies accounted for under the fair value method is as follows:
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Fair value method: |
||||||||
| Policies bought |
149 | 0 | ||||||
| Policies sold |
78 | 0 | ||||||
| Policies matured |
0 | 1 | ||||||
| Average realized gain (loss) on policies sold |
12.7 | % | 0 | % | ||||
| Number of external counter parties that purchased policies |
10 | 0 | ||||||
| Nine Months Ended September 30, | $ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Active management revenue |
||||||||||||||||
| Policies accounted for under the investment method |
$ | 18,473,597 | $ | 24,610,444 | $ | (6,136,847 | ) | (24.9 | )% | |||||||
| Policies accounted for under the fair value method |
21,447,464 | 3,801,031 | 17,646,433 | 464.3 | % | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Total active management revenue |
$ | 39,921,061 | $ | 28,411,475 | $ | 11,509,586 | 40.5 | % | ||||||||
Total active management revenue increased by $11,509,586, or 40.5%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in active management
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revenue was primarily attributable to an increase in policy purchase and sale activity. Policies recorded under the fair value method resulted in an increase of $17,646,433, or 464.3%. Aggregate face value of policies accounted for using the investment method is $14,575,000 as of September 30, 2023, with a corresponding carrying value of $9,889,610. Additional information regarding policies accounted for under the investment method is as follows:
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Investment method: |
||||||||
| Policies bought |
165 | 90 | ||||||
| Policies sold |
161 | 52 | ||||||
| Policies matured |
2 | 1 | ||||||
| Average realized gain (loss) on policies sold |
19.0 | % | 13.5 | % | ||||
| Number of external counter parties that purchased policies |
15 | 8 | ||||||
Policies accounted for under the fair value method resulted in an increase in revenue of $17,646,433 driven primarily by a realized gain on life settlement policies of $9,688,422 for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Aggregate face value of policies held at fair value was $303,605,030 as of September 30, 2023, with a corresponding fair value of $83,585,374. For the policies held at fair value, the unrealized gain recorded on 218 purchased policies as of $14,259,665 represents a change in fair value of the aforementioned policies. The Company realized a gain of $9,688,422 for the nine months ended September 30, 2023 for 89 sold policies that were included in the change in fair value of life insurance policies held using the fair value method and made premium payments of $2,500,623, which were also included in the same line item. Additional information regarding policies accounted for under the fair value method is as follows:
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Fair value method: |
||||||||
| Policies bought |
218 | 32 | ||||||
| Policies sold |
89 | 0 | ||||||
| Policies matured |
1 | 1 | ||||||
| Average realized gain (loss) on policies sold |
12.5 | % | — | |||||
| Number of external counter parties that purchased policies |
10 | 0 | ||||||
| Years Ended December 31, | $ Change | % Change | ||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Active management revenue |
||||||||||||||||
| Policies accounted for under the investment method |
$ | 37,828,829 | $ | 120,000 | $ | 37,708,829 | 31,424 | % | ||||||||
| Policies accounted for under the fair value method |
5,413,751 | — | 5,413,751 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total active management revenue |
$ | 43,242,581 | $ | 120,000 | $ | 43,122,581 | 35,935 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Active management revenue increased by $43,122,581, or 35,935%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in Active management revenue was primarily attributable to LMA making a strategic shift and re-organizing the business to include an active management segment. This shift in business model occurred in 2021. As of December 31, 2022, LMA holds 53 policies, of which 35 are accounted for under the fair value method and 18 are accounted for using the investment method
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(cost, plus premiums paid). Policies recorded under the investment method represent those policies purchased by LMA with the intent to sell within the next 12 months. Policies recorded under the investment method resulted in an increase of $37,708,829. Aggregate face value of policies accounted for using the investment method is $42,330,000 as of December 31, 2022, with a corresponding carrying value of approximately $8,716,111. Additional information regarding policies accounted for under the investment method is as follows:
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Investment method |
||||||||
| Policies bought |
145 | 1 | ||||||
| Policies sold |
127 | 1 | ||||||
| Policies matured |
2 | — | ||||||
| Average realized gain (loss) on policies sold |
17 | % | 40 | % | ||||
| Number of external counter parties that purchased policies |
25 | 1 | ||||||
| Life insurance proceeds received |
2 | — | ||||||
Policies accounted for under the fair value method, with the intention to hold to maturity, resulted in an increase in revenue of $5,413,751 driven primarily by an unrealized gain on policies of $5,742,377 for the year ended December 31, 2022 compared to the year ended December 31, 2021. Aggregate face value of policies held at fair value is $40,092,154 as of December 31, 2022, with a corresponding fair value of $13,809,352. For the policies held at fair value, the unrealized gain on policies of $5,742,377 represents a change in fair value of the aforementioned policies. LMA realized a gain of $105,000 for the year-ended December 31, 2022 for two policies that had matured that were included in the change in fair value of life insurance policies held using the fair value method and made premium payments of $433,626, which were also included in the same line item. Additional information regarding policies accounted for under the fair value method is as follows:
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Fair value method |
||||||||
| Policies bought |
32 | — | ||||||
| Policies sold |
— | — | ||||||
| Policies matured |
2 | — | ||||||
| Average realized gain (loss) on policies sold |
— | — | ||||||
| Number of external counter parties that purchased policies |
||||||||
| Life insurance proceeds received |
2 | — | ||||||
Origination Revenue
Through the origination segment, the Company originates life insurance policy settlement contracts as a licensed life settlement provider on behalf of third-party institutional investors interested in investing in the life settlement asset class. Specifically, Company originates policies through three primary origination channels (agents/financial advisors, direct-to-consumers, life settlement brokers and third-party intermediaries), screens them for eligibility by verifying that the policy is in force, obtaining consents and disclosures, and submitting cases for life expectancy estimates. The Company has a related party relationship with Nova Trading (US), LLC (“Nova Trading”), a Delaware limited liability company and Nova Holding (US) LP, a Delaware limited partnership (“Nova Holding” and collectively with Nova Trading, the “Nova Funds”) as the owners of the Company jointly own 11% of the Nova Funds. The pricing for origination fees is governed by origination contracts that have been negotiated by both parties and are considered to be arms-length and consistent with
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Table of Contents
origination fees charged to third party customers. For its origination services to the Nova Funds, the Company earns origination fees equal to the lesser of (i) 2% of the net death benefit for the policy or (ii) $20,000.
| Three Months Ended September 30, |
$ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Related Party origination revenue |
$ | 254,517 | $ | — | $ | 254,517 | 100 | % | ||||||||
Related party origination revenue increased to $254,517 from $0, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Revenue from originations arose due to Business Combination of LMA and Abacus Settlements on June 30, 2023 as this stream of revenue comes from Abacus Settlements LLC business.
| Three Months Ended September 30, | $ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Origination Revenue |
$ | 1,715,700 | $ | — | $ | 1,715,700 | 100 | % | ||||||||
Origination Revenue increased to $1,715,700 from $0, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Origination Revenue occurred due to Business Combination of LMA and Abacus Settlements on June 30, 2023 as this stream of revenue comes from the Abacus Settlements business.
Cost of Revenues (Excluding Depreciation) and Gross Profit
Cost of revenues (excluding depreciation) primarily consists of payroll costs for employees who service policies and consulting expenses for discretionary commissions directly related to active management trading revenue. Cost of revenues excludes depreciation expense as Abacus Life, Inc. does not hold any material property and equipment that is directly used to support the servicing or trading of life settlement policies. The payroll costs related to policy servicing are for recurring and non-recurring projects where the time incurred for servicing policies is measurable and directly correlates to revenue earned. Similarly, consulting expenses are for discretionary commissions earned directly related to revenue generated as part of the Active management revenue stream.
| Three Months Ended September 30, | $ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Cost of revenue (excluding depreciation) |
$ | 3,364,957 | $ | 1,754,894 | $ | 1,610,063 | 91.791 | % | ||||||||
Cost of revenues (excluding depreciation and amortization) increased by $1,610,063, or 91.7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in cost of revenues is primarily due to an increased cost of revenue for Abacus Settlement primarily for third party commissions for origination activity, increase of payroll expenses related to increased headcount, changes to various benefit packages, and the expansion of active management services in 2023.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Cost of revenue (excluding depreciation) |
$ | 4,827,907 | $ | 3,840,969 | $ | 986,938 | 25.7 | % | ||||||||
Cost of revenues (excluding depreciation and amortization) increased by $986,938, or 25.7%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in cost of revenues is primarily due to an increase of payroll expenses related to increased headcount, changes to various benefit packages, cost of revenue for Abacus Settlement primarily for third party commissions for origination activity, the issuance of stock-based compensation expense and expansion of active management services in
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Table of Contents
2023. Related party cost of revenue of $7,981 is associated with third party commission expense for related party origination activity, which is now included within the consolidated financial statements for the Company subsequent to the Business Combination that took place on June 30, 2023.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Cost of revenue (excluding depreciation) |
$ | 6,245,131 | $ | 735,893 | $ | 5,509,238 | 749 | % | ||||||||
Cost of revenues (excluding depreciation) increased by $5,509,238, or 749%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in cost of revenues is primarily due to a $5,012,394 increase in consulting expenses which represent primarily discretionary commissions for individuals directly related to active management trading revenue along with various due diligence and consulting fees. There was also a $708,727 increase in wages related to policy servicing activity as a result of increased headcount and changes to various benefit packages in 2022, offset by a $211,883 decrease in policy serving.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Gross profit |
$ | 17,755,973 | $ | 9,752,854 | $ | 8,003,119 | 82.1 | % | ||||||||
Gross profit increased by $8,003,119, or 82.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in gross profit is primarily due to an increase in active management services and origination revenue, offset by an increase in cost of revenues.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Gross profit |
$ | 37,877,997 | $ | 25,943,079 | $ | 11,934,918 | 46.0 | % | ||||||||
Gross profit increased by $11,934,918, or 46.0%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in gross profit is primarily due to an increase in active management services, offset by an increase in cost of revenues.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Gross profit |
$ | 38,468,422 | $ | 464,093 | $ | 38,004,329 | 8,189 | % | ||||||||
Gross profit increased by $38,004,329, or 8,189%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in gross profit is primarily due to the expansion of the active service management services which resulted in increased revenues of $43,049,541, or 99%, of the total increase in revenues of $43,122,581, offset by an increase in cost of revenues of 5,509,238.
Operating Expenses
Sales and Marketing Expenses
Sales and marketing expenses primarily consist of advertising and marketing related expenses.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Sales and marketing expenses |
$ | 1,704,154 | $ | 14,905 | $ | (1,689,249) | (11,333.4 | )% | ||||||||
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Sales and marketing expenses increased by $1,689,249 or 11,333.4%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in sales and marketing expense was attributable to an increase in television advertising costs.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Sales and marketing expenses |
$ | 3,116,999 | $ | 1,664,403 | $ | 1,452,596 | 87.3 | % | ||||||||
Sales and marketing expenses increased by $1,452,596, or 87.3%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase in sales and marketing expense was attributable to an increase in television advertising costs in the nine months ended September 30, 2023.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Sales and marketing expenses |
$ | 2,596,140 | $ | — | $ | 2,596,140 | — | % | ||||||||
Sales and marketing expenses increased by $2,596,140, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in 2022 is attributable to marketing of the new active management segment. Sales and marketing expense relates to sponsoring a sports organization and are not directly attributable to revenue generating activity, therefore these expenses do not represent cost of revenue.
General, Administrative, and Other
General, administrative, and other primarily consists of compensation and benefits related costs associated with our finance, legal, human resources, information technology, and administrative functions. General, administrative and other costs also consist of third-party professional service fees for external legal, accounting and other consulting services, rent and lease charges, insurance costs, and software expense.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| General, administrative and other (including stock based compensation of $4,583,632) |
$ | 9,838,951 | $ | 59,816 | $ | 9,779,135 | 16,348.7 | % | ||||||||
General, administrative, and other expenses increased by $9,779,135, or 16,348.7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase is related to various expenses resulting from expansion of active management services, including, but not limited to, increases in stock based compensation of $4,583,632, payroll expenses of $2,197,564, legal consulting fees of $682,273 in connection with the Merger Agreement, Life Expectancy report fees of $515,903, medical record consulting fees of $279,591, Directors and Officers insurance of $185,377, financing charges related to debt issuance of $133,211. The remaining difference is attributable to other various consolidated entities pertaining to policy servicing and administrator expenses, and accounting fees in connection with the Business Combination.
| Nine Months September June 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| General, administrative and other (including stock based compensation of $4,583,632) |
$ | 11,113,382 | $ | 706,523 | $ | 10,406,859 | 1,473.0 | % | ||||||||
General, administrative, and other expenses increased by $10,406,859, or 1,473.0%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase is related to various expenses resulting from expansion of active management services, including, but not limited to, increases
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in the stock based compensation of $4,583,632, payroll expense of $2,197,564, legal consulting fees of $729,076 in connection with the Merger Agreement, Life Expectancy report fees of $515,903, medical record consulting fees of $412,279, bank fee of $231,570, Directors and Officers insurance of $185,377, financing charges related to debt issuances of $133,211, and Errors and Omissions insurance of $116,343. The remaining difference is attributable to other various consolidated entities pertaining to policy servicing and administrator expenses, and accounting fees in connection with the Business Combination.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| General, administrative and other |
$ | 1,066,403 | $ | 101,406 | $ | 964,997 | 952 | % | ||||||||
General, administrative, and other expenses increased by $964,997, or 952%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase is related to various expenses, including, but not limited to, increases in payroll expense and payroll related expense of $242,628, an increase in legal expense of $83,644, and an increase in rent expense of $31,561. Additionally, $384,374 in general, administrative and other expenses were recorded in various consolidated entities pertaining to consulting charges, administrator expenses, accounting, legal, and bank fees.
Depreciation and amortization expense
Depreciation and amortization expense consists primarily of depreciation on property and equipment purchased and leasehold improvements and amortization of intangible assets. The property at the Company currently consists of furniture, fixtures and leasehold improvements for the office and are not directly used to support the servicing or trading of life settlement policies. The intangible assets at the Company consist of customer relationships, internally developed and used technology, and non-compete agreements.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Depreciation |
$ | 1,694,853 | $ | 1,071 | $ | 1,693,782 | 158,149.6 | % | ||||||||
The increase of $1,693,782, or 158,149.6%, in depreciation and amortization expense is related to $1,682,083 amortization of intangible assets related to the customer relationships, internally developed and used technology, trade name, non-compete agreements and licensing, and current depreciation of $12,770. There was no amortization recorded in the third quarter of September 30, 2022.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Depreciation and amortization |
$ | 1,696,994 | $ | 3,211 | $ | 1,693,783 | 52,749.4 | % | ||||||||
The increase of $1,693,783, or 52,749.4%, in depreciation and amortization expense is related to $1,682,083 amortization of intangible assets related to the customer relationships, internally developed and used technology, trade name, non-compete agreements and licensing, and depreciation of $14,911. There was no amortization expense recorded during the nine months ended September 30, 2022.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Depreciation |
$ | 4,282 | $ | 2,447 | $ | 1,835 | 75 | % | ||||||||
Depreciation increased by $1,835, or 75%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The $1,835 increase in depreciation is primarily due to the acquisition of furniture and fixtures in 2022 and the incremental depreciation expense that accompanies its acquisition.
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Unrealized Gain (Loss) on Investments
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Unrealized gain on investments |
$ | 306,800 | $ | 246,846 | $ | 59,954 | 24.3 | % | ||||||||
Unrealized gain on investments increased by $59,954, or 24.3%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The primary cause of this increase is driven by changes in fair value of purchased put and call options. During the three months ended September 30, 2023, the unrealized gain was $195,521, $105,038 and $2,766 for LMATT Series 2024, Inc., LMATT Growth Series, Inc., and LMATT Growth and Income Series Inc, respectively, which represents a change in fair value of those options and is classified as an unrealized loss on investments within the results of operations.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Unrealized loss (gain) on investments |
$ | (491,356 | ) | $ | 1,301,821 | $ | (1,793,177 | ) | (137.7 | )% | ||||||
Unrealized loss (gain) on investments decreased by $1,793,177, or 137.7%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. During the first and third quarters of 2022, the Company, through three subsidiaries, LMATT Series 2024, Inc., LMATT Growth Series, Inc., and LMATT Growth and Income Series, Inc., purchased S&P 500 call options and sold S&P 500 put options through a broker as an economic hedge related to the market-indexed instruments described below. The primary cause of this decrease pertains to $345,297, $125,194 and $20,865, respectively, which represents a change in fair value of those options and is classified as an unrealized loss on investments within the results of operations.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Unrealized loss on investments |
$ | 1,045,623 | $ | — | $ | 1,045,623 | — | % | ||||||||
Unrealized loss on investments increased by $1,045,623 for the year ended December 31, 2022 compared to the year ended December 31, 2021. During the first and third quarters of 2022, LMA, through three subsidiaries, LMATT Series 2024 Inc., LMATT Growth Series Inc., and LMATT Growth and Income Series Inc., purchased S&P 500 put and call options through a broker as an economic hedge related to the market-indexed instruments described below. The primary cause of this increase pertains to $971,281, $68,965, and $5,377, respectively, which represents a change in fair value of those options and is classified as an unrealized loss on investments within the results of operations.
(Gain) Loss on Change in Fair Value of Debt
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (Gain) Loss on change in fair value of debt |
$ | (2,088,797 | ) | $ | (1,235,032 | ) | $ | (853,765 | ) | 69.1 | % | |||||
Change in gain on fair value of debt increased by $853,765, or 69.1%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase is primarily attributable to changes in the risk-free fair value of LMATT Series 2024, Inc., LMATT Growth Series, Inc., and LMATT Growth and Income Series, Inc. related debt.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| (Gain) Loss on change in fair value of debt |
$ | 309,865 | $ | (859,519 | ) | $ | 1,169,384 | (136.1 | )% | |||||||
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Change in gain on fair value of debt decreased by $1,169,384, or 136.1% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The decrease is primarily attributable to changes in the risk-free fair value of LMATT Series 2024, Inc., and LMATT Growth Series, Inc., LMATT Growth and Income Series, Inc. related debt.
On March 31, 2022, LMATT Series 2024, Inc., a 70% owned subsidiary which the Company consolidates for financial reporting, issued $10,166,900 in market-indexed private placement notes. The notes, titled the Longevity Market Assets Target-Term Series (LMATTS) 2024 notes (the “Series 2024 notes”), are market-indexed instrument designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the Series 2024 notes in 2024, the principal, plus the return based upon the S&P 500 Index, must be paid. The Series 2024 notes have a feature to protect debt holders from market downturns, up to 40%. Any subsequent losses below the 40% threshold will reduce the Series 2024 notes on a one-to-one basis. As of September 30, 2023, $9,866,900 of the principal amount remained outstanding. The Series 2024 notes are held at fair value, which represents the exit price, or anticipated price to transfer the liability to a third party. As of September 30, 2023, the fair value of the Series 2024 notes was $9,311,800. The Series 2024 notes are secured by the assets of the issuing entities, which consisted of cash, S&P 500 options, and life settlement policies totaling $10,358,535 as of September 30, 2023. The note agreements do not restrict the trading of life settlement contracts prior to maturity of the Series 2024 notes, as total assets of the issuing companies are considered as collateral. There are also no restrictive covenants associated with the Series 2024 notes with which the entities must comply.
On September 16, 2022, LMATTS Growth Series 2.2024, Inc., a 100% owned subsidiary which the Company consolidates for financial reporting, issued $2,333,391 in market-indexed private placement notes. The notes, titled the Longevity Market Assets Target-Term Growth Series 2.2024, Inc. notes (the “Series 2.2024 notes”), are market-indexed instruments designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the Series 2.2024 notes in 2024, the principal, plus the return based upon the S&P 500 Index, must be paid. The Series 2.2024 notes have a feature to provide upside performance participation that is capped at 120% of the performance of the S&P 500. A separate layer of the Series 2.2024 notes has a feature to protect debt holders from market downturns by up to 20% if the index price experiences a loss during the investment period. After the underlying index has decreased in value by more than 20%, the investment will experience all subsequent losses on a one-to-one basis. As of September 30, 2023, the entire principal amount remained outstanding. The Series 2.2024 notes are held at fair value, which represents the exit price, or anticipated price to transfer the liability to a third party. As of September 30, 2023, the fair value of the Series 2.2024 notes was $3,027,681. The Series 2.2024 notes are secured by the assets of the issuing entity, LMATTS Growth Series 2.2024, Inc., which consisted of cash, S&P 500 options, and life settlement policies totaling $2,983,754 as of September 30, 2023. The note agreements do not restrict the trading of life settlement contracts prior to maturity of the Series 2.2024 notes, as total assets of the issuing company are considered as collateral. There are also no restrictive covenants associated with the Series 2.2024 notes with which the entity must comply.
Additionally, on September 16, 2022, LMATTS Growth and Income Series 1.2026, Inc., a 100% owned subsidiary which the Company consolidates for financial reporting, issued $400,000 in market-indexed private placement notes. The notes, titled the Longevity Market Assets Target-Term Growth and Income Series 1.2026, Inc. notes (the “Series 1.2026 notes”) are market-indexed instrument designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the Series 1.2026 notes in 2026, the principal, plus the return based upon the S&P 500 Index, must be paid. The Series 1.2026 notes have a feature to provide upside performance participation that is capped at 140% of the performance of the S&P 500. A separate layer of the Series 1.2026 notes has a feature to protect debt holders from market downturns by up to 10% if the index price experiences a loss during the investment period. After the underlying index has decreased in value by more than 10%, the investment will experience all subsequent losses on a one-to-one basis. The Series 1.2026 notes also includes a 4% dividend feature that will be paid annually. As of September 30, 2023, the entire principal amount remained outstanding. The Series 1.2026 notes are held at fair value, which represents
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the exit price, or anticipated price to transfer the liability to a third party. As of September 30, 2023, the fair value of the Series 1.2026 notes was $427,284. The Series 1.2026 notes are secured by the assets of the issuing entity, LMATTS Growth and Income Series 1.2026, Inc., which consisted of cash, S&P 500 options, and life settlement policies totaling $369,253 as of September 30, 2023. The note agreements do not restrict the trading of life settlement contracts prior to maturity of the Series 1.2026 note, as total assets of the issuing company are considered as collateral. There are also no restrictive covenants associated with the Series 1.2026 notes with which the entity must comply. See additional fair value considerations within Note 12 of the Company’s interim financial statements.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Change in fair value of debt |
$ | 90,719 | $ | — | $ | 90,719 | — | % | ||||||||
Loss on change in fair value of debt increased by $90,719 for the year ended December 31, 2022 compared to the year ended December 31, 2021.
As of December 31, 2022, $9,886,900 of the principal amount of the Series 2024 notes remained outstanding. As of December 31, 2022, the fair value of the Series 2024 notes was $8,067,291. The Series 2024 notes are secured by the assets of the issuing entities, which consisted of cash, S&P 500 options, and life settlement policies totaling $12,200,797 as of December 31, 2022.
As of December 31, 2022, the entire principal amount of the Series 2.2024 notes remained outstanding. As of December 31, 2022, the fair value of the Series 2.2024 notes was $2,354,013. The Series 2.2024 are secured by the assets of the issuing entity, LMATT Series 2.2024, Inc., which consisted of cash, S&P 500 options, and life settlement policies totaling $3,246,756, as of December 31, 2022.
As of December 31, 2022, the entire principal amount of the Series 1.2026 notes remained outstanding. As of December 31, 2022, the fair value of the Series 1.2026 notes was $400,000. The Series 1.2026 notes are secured by the assets of the issuing entity, LMATT Growth and Income Series 1.2026, Inc., which consisted of cash, S&P 500 options, and life settlement policies totaling $752,236 as of December 31, 2022.
Other Operating Expenses
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Other operating expense |
$ | — | $ | 493,849 | $ | (493,849 | ) | — | % | |||||||
Other operating expense decreased by $493,849, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This decrease in other operating expense consisted primarily of legal, bank, and consulting expenses related to the start-up for LMATT Series 2024 Inc. which occurred in 2021.
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Other Income (Expense)
Other income (expense) consists of working capital support that Abacus Life, Inc. provides to two life settlement Providers through a contractual agreement (the “Strategic Services and Expenses Support Agreement” or “SSES”). Abacus Life, Inc. entered into the SSES with the Providers and simultaneously acquired an option to purchase the outstanding equity ownership of the Providers, upon the achievement by the Providers of certain financial targets. For the years ended December 31, 2022 and December 31, 2021, the Providers were considered to be VIEs, but were not consolidated in our interim condensed consolidated financial statements as we do not hold a controlling financial interest in the Providers.
| Three Months Ended September 30, | $ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Other income (expense) |
$ | 20,086 | $ | 42,289 | $ | (22,203 | ) | (52.5 | )% | |||||||
| Interest (expense) |
(2,679,237 | ) | — | (2,679,237 | ) | 100 | % | |||||||||
| Interest income |
63,826 | — | 63,826 | 100 | % | |||||||||||
| Loss on change in fair value of warrant liability |
(943,400 | ) | — | (943,400 | ) | 100 | % | |||||||||
Other income decreased by $22,203, or 52.5%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The decrease in other income is driven by a reduction in expense support provided to the Providers.
Interest expense was $2,679,237 for the three months ended September 30, 2023, compared to $0 for the three months ended September 30, 2022. Interest expense increase is driven by the Owl Rock Credit Facility, the SPV Purchase and Sale Note, and the Sponsor PIK Note. Refer to Note 13 of the Company’s interim financial statements for additional information. The remaining increase is attributable to interest expense related to LMATT Growth & Income Series, Inc. and the dividend required to be paid out by the LMA Income Series, LP and LMA Income Series II, LP to its limited partner investors.
Interest income was $63,826 for the three months ended September 30, 2023, compared to $0 for the three months ended September 30, 2022. The increase in interest income is due to money market sweeps that LMA and its subsidiaries participated in during the third quarter of 2023.
Loss on change in fair value of warrant liability was $943,400 for the three months ended September 30, 2023, compared to $0 for the three months ended September 30, 2022. The loss is primarily attributable to the increase in the price for the public warrants from June 30, 2023 to September 30, 2023, which is a determining factor for measuring the fair value of the private warrants.
| Nine Months Ended September 30, | $ Change | % Change | ||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Other income (expense) |
$ | (1,565 | ) | $ | (199,958 | ) | $ | 198,393 | (99.2 | )% | ||||||
| Interest (expense) |
(3,620,695 | ) | — | (3,620,695 | ) | 100 | % | |||||||||
| Interest income |
71,283 | — | 71,283 | 100 | % | |||||||||||
| Loss on change in fair value of warrant liability |
(943,400 | ) | — | (943,400 | ) | 100 | % | |||||||||
Other expense decreased by $198,393, or 99.2%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The decrease in other expense is driven by reduction of excess return expense. The remaining difference is attributable to dividend income at LMA Income Series GP and other income at Regional Investment Services for the nine months ended September 30, 2023.
Interest expense was $3,620,695 for the nine months ended September 30, 2023, compared to $0 for the nine months ended September 30, 2022. Interest expense increase is related to the Owl Rock Credit Facility, the
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SPV Purchase and Sale Note, the Sponsor PIK Note, and the launch of two income funds, LMA Income Series, LP and LMA Income Series II, LP, for the nine months ended September 2023.
Interest income was $71,283 for the nine months ended September 30, 2023, compared to $0 for the nine months ended September 30, 2022. $63,825 of the increase in interest income is attributable to money market sweeps that LMA and its subsidiaries participated in the third quarter of 2023. The remaining difference is attributable to interest on proceeds from policies that matured in the first three months of 2023.
Loss on change in fair value of warrant liability was $943,400, for the three months ended September 30, 2023, compared to $0 for the three months ended September 30, 2022. The loss is primarily attributable to the increase in the price for the public warrants from June 30, 2023 to September 30, 2023, which is a determining factor for measuring the fair value of the private warrants.
| Years Ended December 31, | $ Change | % Change | ||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Other (expense)/income |
$ | (347,013 | ) | $ | — | $ | (347,013 | ) | — | % | ||||||
| Interest (expense) |
(42,798 | ) | — | (42,798 | ) | — | % | |||||||||
| Interest income |
1,474 | — | 1,474 | — | % | |||||||||||
Other expense increased by $347,013 for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in other expense is driven by an increase in SSES paid to the Providers described above of $347,013.
Interest expense increased by $42,798 for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in interest expense is driven primarily by a $26,587 accrued interest payment relating to LMA Income Series LP along with $11,111 and $5,100 in interest expense for LMA and LMATT Growth & Income Series, Inc., respectively, for the year ended December 31, 2022.
Interest income increased by $1,474 for the year ended December 31, 2022, compared to the year ended December 31, 2021. The increase in interest income is driven by increases in bank interest.
Provision for income taxes
As the Company elected to file as an S corporation for federal and Florida state income tax purposes, the Company incurred no federal or Florida state income taxes, except for income taxes recorded related to LMATT Series 2024, Inc., a Delaware C corporation and wholly owned subsidiary of LMX Series, LLC (“LMX”), which the Company consolidates. Accordingly, tax expense has historically been attributable to tax expense for LMATT Series 2024, Inc. However, the Business Combination resulted in changes to the tax status of certain entities which impacted the provision for income taxes by $1,383,692.
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Provision for income taxes |
$ | 1,710,315 | $ | 352,081 | $ | 1,358,234 | 385.8 | % | ||||||||
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Income tax expense increased by $1,358,234, or 385.8%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Our effective income tax rate for the three months ended September 30, 2023 and three months September 30, 2022, was 61.9% and 3.3%, respectively. The Company’s effective tax rate as of September 30, 2022 differed from the statutory rate of 21.0% due to state taxes and the release of the valuation allowance. The income tax expense for the three months ended September 30, 2023 is mainly related to the unfavorable adjustment related to restricted stock award deductions limited by IRC 162(m).
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Provision for income taxes |
$ | 2,238,419 | $ | 648,887 | $ | 1,589,532 | 245.0 | % | ||||||||
Income tax expense increased by $1,589,532, or 245.0%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Our effective income tax rate for the nine months ended September 30, 2023 and nine months ended September 30, 2022, was 12.7% and 2.8%, respectively. The Company’s effective tax rate as of September 30, 2022 differed from the statutory rate of 21.0% due to the impact of state income taxes and valuation allowance released, as there was sufficient evidence of the Company’s ability to generate future taxable income at September 30, 2022. The existence of non-taxable flow-through entities within the Company as well as a change in tax status of certain entities upon the Business Combination caused the effective tax rate to be significantly lower than the statutory rate for the nine months ended September 30, 2023. The income tax expense for the nine months ended September 30, 2023 is mainly related to the unfavorable adjustment related to restricted stock award deductions limited by IRC 162(m).
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Income tax expense |
$ | (889,943 | ) | $ | — | $ | (889,943 | ) | — | % | ||||||
Income tax expense decreased by $889,943 for the year ended December 31, 2022 compared to the year ended December 31, 2021. Our effective income tax rate for the year ended December 31, 2022 and year ended December 31, 2021 was 22.22% and 0.0%, respectively. The difference in the effective tax rate for the year ended December 31, 2021 and year ended December 31, 2021 is related to LMX’s taxable income of $3,088,732 resulting in $657,673 of income tax expense, LMATT Growth Series, Inc. taxable income of $562,263 resulting in $142,505 of income tax expense, and LMATT Growth & Income Series, Inc. taxable income of $358,658 resulting in $90,902 of income tax expense.
Results of Operations—Segment Results
Abacus Life, Inc. organizes its business into two reportable segments (i) portfolio servicing and (ii) active management, which generate revenue in different manners. During 2021, we primarily focused on the Portfolio Servicing business. At the end of June 2021, we underwent a change in our business to focus on active management services in addition to portfolio servicing.
This segment structure reflects the financial information and reports used by Abacus Life, Inc.’s management, specifically its chief operating decision maker (CODM), to make decisions regarding Abacus Life, Inc.’s business, including resource allocations and performance assessments as well as the current operating focus in accordance with ASC 280, Segment Reporting. Abacus Life, Inc.’s CODM is the Chief Executive Officer of Abacus Life, Inc.
The portfolio servicing segment generates revenues by providing policy services to customers on a contract basis. The active management segment generates revenues by buying, selling and trading policies and maintaining policies through to death benefit. Abacus Life, Inc.’s reportable segments are not aggregated.
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The following tables provide supplemental information on revenue and profitability by operating segment:
Portfolio Servicing
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 224,569 | $ | 382,246 | (157,677 | ) | (41.3 | )% | ||||||||
| Gross profit (Loss) |
(626,045 | ) | (106,817 | ) | (519,228 | ) | 486.1 | )% | ||||||||
Total revenue for the portfolio servicing segment decreased by $157,677, or 41.3%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in portfolio servicing revenue is primarily attributable to a decrease in the non-recurring consulting projects in Portfolio servicing revenue. Gross profit from our portfolio servicing segment decreased by $519,228 or 486.1%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The decrease in gross margin is primarily due to increases in total cost of revenue of $361,552 or 74.0% and the reduction of revenue by $157,677, or 41.3%.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 814,626 | $ | 1,372,573 | $ | (557,947 | ) | (40.6 | )% | |||||||
| Gross profit |
(792,173 | ) | 561,935 | (1,354,108 | ) | (241.0 | )% | |||||||||
Total revenue for the portfolio servicing segment decreased by $557,947 or 40.6%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in portfolio servicing revenue is primarily attributable to a decrease in the non-recurring consulting projects in Portfolio servicing revenue. Gross profit from our portfolio servicing segment decreased by $1,354,108, or 241.0%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in gross margin is primarily due to increases in total cost of revenue of $796,161, or 98.2% and the reduction of revenue by $557,947, or 40.6%.
Active Management
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 18,926,144 | $ | 11,125,503 | 7,800,641 | 70.1 | % | |||||||||
| Gross profit |
13,856,637 | 9,859,672 | 3,996,965 | 40.5 | % | |||||||||||
Total revenue for the active management segment increased by $7,800,641, or 70.1% for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Gross profit from our active management segment increased by $3,996,965, or 40.5% for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The increase in active management revenue and gross profit was primarily attributable to the increase in revenue of $7,800,641 or 70.1%, offset by the increase in cost of revenue of $102,750, or 8.1%.
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 39,921,061 | $ | 28,411,475 | 11,509,586 | 40.5 | % | |||||||||
| Gross profit |
34,144,789 | 25,381,144 | 8,763,645 | 34.5 | % | |||||||||||
Total revenue for the active management segment increased by $11,509,586, or 40.5% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. Gross profit from our active
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management segment increased $8,763,645, or 34.5% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increase in Active management revenue and gross profit was primarily attributable to the increase in revenue of $11,509,586, or 40.5%, and decrease in cost of revenue from 11.0% of revenue in 2022 to 5.0% of revenue in 2023. The decrease in cost of revenue of approximately $954,984, or 31.5% was related to the decrease in discretionary commissions for individuals directly related to active management trading revenue.
| Twelve Months Ended December 31, |
||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 43,242,581 | $ | 120,000 | $ | 43,122,581 | 35.934 | % | ||||||||
Total revenue for the active management segment increased by $43,122,581 for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in Active management revenue was primarily attributable to LMA making a strategic shift and re-organizing the business to focus on active management services in addition to portfolio servicing at the end of September 2021.
Originations
| Three Months Ended September 30, |
||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 10,214,489 | $ | — | $ | 10,214,489 | 100.0 | % | ||||||||
| Gross profit |
4,525,381 | — | 4,525,381 | 100 | % | |||||||||||
Total revenue for the originations segment increased by $10,214,489 for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Among the total originations revenue, the majority of the balance is related to the eliminated intercompany activity of $8,244,272 that is related to policies that Abacus originated for LMA. No originations revenue was recorded prior the Business Combination in June 2023.
| Nine Months Ended September 30, |
||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Total revenue |
$ | 10,214,489 | $ | — | $ | 10,214,489 | 100.0 | % | ||||||||
| Gross profit |
4,525,381 | — | 4,525,381 | 100 | % | |||||||||||
Total revenue for the originations segment increased by $10,214,489 for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Among the total originations revenue, the majority of the balance is related to the eliminated intercompany activity of $8,244,272 that is related to policies that Abacus originated for LMA. No originations revenue was recorded prior the Business Combination in June 2023.
Key Business Metrics and Non-GAAP Financial Measures
The consolidated financial statements of Abacus Life, Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and are prepared in accordance with U.S. GAAP. We monitor key business metrics and non-GAAP financial measures that assist us in evaluating our business, measuring our performance, identifying trends and making strategic decisions. We have presented the following non-GAAP measures, their most directly comparable GAAP measure, and key business metrics:
| Non-GAAP Measure | Comparable GAAP Measure | |
| Adjusted Net Income, Adjusted EPS | Net Income attributable to Abacus Life, Inc. and EPS | |
| Adjusted EBITDA | Net Income |
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Adjusted Net Income, Adjusted EPS, Adjusted EBITDA and Adjusted EBITDA Margin, are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, net income (loss) (for Adjusted EBITDA and Adjusted EBITDA Margin), net income (loss) attributable to Abacus Life, Inc. (for Adjusted Net Income) or earnings (loss) per share (for Adjusted EPS), which are considered to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing Company’s operating performance, these non-GAAP financial measures should not be considered in isolation or as substitutes for net income (loss), net income (loss) attributable to Abacus Life, Inc., earnings (loss) per share or other consolidated statements of operations and comprehensive income data prepared in accordance with GAAP.
Adjusted Net Income is presented for the purpose of calculating Adjusted EPS. The Company defines Adjusted Net Income as net income (loss) attributable to Abacus Life, Inc. adjusted for non-controlling interest income, amortization, change in fair value of warrants and non-cash stock-based compensation and the related tax effect of those adjustments. Management believes that Adjusted Net Income is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance.
Adjusted EPS measures our per share earnings and is calculated as Adjusted Net Income divided by adjusted weighted-average shares outstanding. We believe Adjusted EPS is useful to investors because it enables them to better evaluate per share operating performance across reporting periods and management believes that Adjusted EPS is an appropriate measure of operating performance because it eliminates the impact of expenses that do not relate to business performance.
Adjusted Net Income and Adjusted EPS
The following table presents a reconciliation of Adjusted Net Income to the most comparable GAAP financial measure, net income (loss) attributable to Abacus Life, Inc. and Adjusted EPS to the most comparable GAAP financial measure, earnings per share, on a historical basis for the periods indicated below:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income attributable to Abacus Life, Inc. |
$ | 903,361 | $ | 9,992,004 | $ | 15,739,009 | $ | 21,507,702 | ||||||||
| Net income attributable to non-controlling interests |
147,611 | 363,452 | (339,692 | ) | 770,093 | |||||||||||
| Amortization expense |
1,682,083 | — | 1,682,083 | — | ||||||||||||
| Stock based compensation |
4,583,632 | — | 4,583,632 | — | ||||||||||||
| Loss on change in fair value of warrant liability |
943,400 | — | 943,400 | — | ||||||||||||
| Tax impact [1] |
908,271 | — | 908,271 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Adjusted Net Income |
$ | 9,168,357 | $ | 10,355,456 | $ | 23,516,703 | $ | 22,277,795 | ||||||||
| Weighted-average shares of Class A common stock outstanding |
63,349,823 | 50,369,350 | 54,632,826 | 50,369,350 | ||||||||||||
| Adjusted EPS |
$ | 0.14 | $ | 0.21 | $ | 0.43 | $ | 0.44 | ||||||||
| [1] | Tax impact represents the permanent difference in tax expense related to the restricted stock awards granted to the CEO due to IRC 162(m) limitations. |
Adjusted Net income for the three months ended September 30, 2023 was $9,168,357 compared to adjusted net income of $10,355,456 for the three months ended September 30, 2022. The decrease of $1,187,099, or 11.5%, in adjusted Net Income is primarily due to the decrease of $9,088,643, or 91.0%, in net income. Adjusted EPS for the three months ended September 30, 2023 was $0.14 compared to $0.21 for the three months ended September 30, 2022.
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Adjusted Net Income for the nine months ended September 30, 2023 was $23,516,703 compared to $22,277,795 for the nine months ended September 30, 2022. The decrease of $1,238,908, or 5.6%, in adjusted Net Income is primarily due to a decrease of $6,878,478, or 30.9%, in net income. Adjusted EPS for the nine months ended September 30, 2023 was $0.43 compared to $0.44 for the nine months ended September 30, 2022.
Adjusted EBITDA and Adjusted EBITDA Margin
Adjusted EBITDA is net income adjusted for depreciation expense, amortization, interest expense, income tax and other non-cash and non-recurring items that in our judgement significantly impact the period-over-period assessment of performance and operating results that do not directly relate to business performance within Abacus Life, Inc.‘s control. These items may include payments made as part of the Company’s expense support commitment, (gain) loss on change in fair value of debt, loss on change in fair value of warrant liability, S&P 500 put and call options that were entered into as an economic hedge related to the debt (described as the unrealized loss on investments), non-cash stock based compensation, and other non-recurring items. Management plans to terminate the agreement for the expense support commitment within the next twelve months. As such, management has deemed this to be a non-recurring item. Adjusted EBITDA should not be determined as substitution for net income (loss), cash flows provided (used in) operating, investing, and financing activities, operating income (loss), or other metrics prepared in accordance with U.S. GAAP.
Management believes the use of Adjusted EBITDA assists investors in understanding the ongoing operating performance by presenting comparable financial results between periods. We believe that by removing the impact of depreciation and amortization and excluding certain non-cash charges, amounts spent on interest and taxes and certain other non-recurring charges that are highly variable from year to year, Adjusted EBITDA provides our investors with performance measures that reflect the impact to operations from trends in changes in revenue, policy values and operating expenses, providing a perspective not immediately apparent from net income and operating income. The adjustments we make to derive the non-GAAP measure of Adjusted EBITDA exclude items which may cause short-term fluctuations in net income and operating income and which we do not consider to be the fundamental attributes or primary drivers of our business.
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The following table presents a reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to the most comparable GAAP financial measure, net income (loss), on a historical basis for the periods indicated below:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
Twelve Months Ended December 31, |
||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2022 | 2021 | |||||||||||||||||||
| Net income |
$ | 1,050,972 | $ | 10,355,456 | $ | 15,399,317 | $ | 22,277,795 | $ | 32,386,975 | $ | (133,609 | ) | |||||||||||
| Depreciation and amortization expense |
1,694,853 | 1,071 | 1,696,994 | 3,211 | 4,284 | 2,447 | ||||||||||||||||||
| Interest Income |
(63,826 | ) | — | (71,283 | ) | — | (1,474 | ) | — | |||||||||||||||
| Income tax |
1,710,315 | 352,081 | 2,238,419 | 648,887 | 889,943 | — | ||||||||||||||||||
| Other income (expense) |
(20,086 | ) | (42,289 | ) | 1,565 | 199,958 | 389,811 | 485,405 | ||||||||||||||||
| Loss on change in fair value of warrant liability |
943,400 | — | 943,400 | — | — | — | ||||||||||||||||||
| Stock based compensation |
4,583,632 | — | 4,583,632 | — | — | — | ||||||||||||||||||
| Expense support agreement |
— | 283,047 | — | 283,047 | — | — | ||||||||||||||||||
| Loss on change in fair value of debt |
(2,088,797 | ) | (1,235,032 | ) | 309,865 | (859,519 | ) | 90,718 | — | |||||||||||||||
| Unrealized loss (gain) on investments |
306,800 | ) | 246,846 | (491,356 | ) | 1,301,821 | 1,045,623 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Adjusted EBITDA |
$ | 10,796,499 | $ | 9,961,180 | $ | 28,231,248 | $ | 23,855,200 | $ | 34,805,879 | $ | 354,243 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Adjusted EBITDA Margin |
51.1 | % | 86.6 | % | 66.1 | % | 80.1 | % | 77.8 | % | 29.5 | % | ||||||||||||
| Net Income Margin |
5.0 | % | 90.0 | % | 36.1 | % | 74.8 | % | 72.4 | % | -11.1 | % | ||||||||||||
Adjusted EBITDA for the three months ended September 30, 2023 was $10,796,499 compared to $9,961,180 for the three months ended September 30, 2022. The increase of $835,319, or 8.4% in adjusted EBITDA is primarily due to stock-based compensation of $4,583,632, $2,679,237 in interest expense, $943,400 loss on change in fair value of warrant liability, an increase in depreciation and amortization expense of $1,693,782, or 158149.6%, and the increase of $59,954, or 24.3%, in unrealized gain on investments. There is an offset by a decrease of $9,304,484, or 89.9%, in net and comprehensive income and a decrease in fair value of debt of $853,765, or 69.1%.
Adjusted EBITDA for the nine months ended September 30, 2023 was $28,231,248 compared to $23,855,200 for the nine months ended September 30, 2022. The increase of $4,376,046, or 18.3%, in adjusted EBITDA is primarily due to stock-based compensation of $4,583,632, $3,620,695 in interest expense, $943,400 loss on change in fair value of warrant liability, an increase in depreciation and amortization expense of $1,693,783, or 52749.4%, and an increase of $1,169,384, or 136.1%, in gain on change in fair value of debt. There is an offset by a decrease of $6,878,478, or 30.9%, in net and comprehensive income and an increase in unrealized loss on investments of $1,793,177, or 137.7%.
Adjusted EBITDA for the year ended December 31, 2022 was $34,805,879 compared to $354,243 for the year ended December 31, 2021. The increase in adjusted EBITDA is primarily due to the expansion of the active management services which resulted in increased revenues of $43,122,581, offset by an increase in cost of revenues of $38,110,187 for active management sales.
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We monitor the following key business metrics: (i) number of policies serviced, (ii) value of policies serviced, and (iii) total invested dollars. Servicing revenue involves the provision of services to one affiliate by common ownership and third parties which own life insurance policies. The number of policies and the value of policies serviced represents the volume and dollar value of policies over which the above services are performed. Total invested dollars represent the acquisition cost plus premiums paid by the policy. We use the aforementioned metrics to assess business operations and provide concrete benchmarks that provide a clear snapshot of growth between the periods under consideration. Please refer to the following Key Business Metrics below:
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| Key business metric |
||||||||||||||||
| Number of policies serviced |
904 | 437 | 467 | 106.9 | % | |||||||||||
| Value of policies serviced ($) |
943,913,658 | 630,312,740 | 313,600,918 | 49.8 | % | |||||||||||
| Total invested dollars ($) |
233,180,176 | 163,731,777 | 69,448,399 | 42.4 | % | |||||||||||
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Key business metric |
||||||||||||||||
| Number of policies serviced |
421 | 379 | 42 | 11 | % | |||||||||||
| Value of policies serviced ($) |
649,842,091 | 600,651,852 | 49,190,239 | 8 | % | |||||||||||
| Total invested dollars ($) |
163,939,204 | 153,378,077 | 10,561,127 | 7 | % | |||||||||||
| Non-GAAP Measure | Comparable GAAP Measure | |
| Proforma Adjusted Net Income, Proforma Adjusted EPS | Net Income attributable to Abacus Life, Inc. and Net Income for Abacus Settlements, LLC and EPS for Abacus Life, Inc. | |
| Proforma Adjusted EBITDA | Net Income for Abacus Life, Inc. and Net Income for Abacus Settlements, LLC |
Proforma adjusted Net Income and Proforma Adjusted EPS
Proforma Adjusted Net Income, Proforma Adjusted EPS, Proforma Adjusted EBITDA and Proforma Adjusted EBITDA Margin, are not measures of financial performance under GAAP and should not be considered substitutes for GAAP measures, net income (loss) for Abacus Life Inc. and Abacus Settlements, LLC (for Proforma Adjusted EBITDA and Proforma Adjusted EBITDA Margin), net income (loss) attributable to Abacus Life, Inc. and net income for Abacus Settlements, LLC (for Proforma Adjusted Net Income) or earnings (loss) per share (for Proforma Adjusted EPS), which are considered to be the most directly comparable GAAP measures. These non-GAAP financial measures have limitations as analytical tools, and when assessing Company’s operating performance, these non-GAAP financial measures should not be considered in isolation or as substitutes for net income (loss) for Abacus Life, Inc. and Abacus Settlements, LLC, net income (loss) attributable to Abacus Life, Inc. and Abacus Settlements, LLC, earnings (loss) per share or other consolidated statements of operations and comprehensive income data prepared in accordance with GAAP.
Proforma Adjusted Net Income is presented for the purpose of calculating Proforma Adjusted EPS. The Company defines Proforma Adjusted Net Income as net income (loss) attributable to Abacus Life, Inc. plus historical net income for Abacus Settlements, LLC prior to the Business Combination adjusted for non-controlling interest, amortization, stock based compensation, change in fair value of warrants, and the related tax effect of those adjustments. Management believes that Proforma Adjusted Net Income is an appropriate measure of operating performance because it represents the combined results for the two legacy operating companies, Abacus Settlements, LLC and Longevity Market Assets, LLC year-over-year as if the business combination had occurred at the beginning of the years shown and eliminates the impact of expenses that do not relate to business performance.
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The following table presents a reconciliation of Proforma Adjusted Net Income to the most comparable GAAP financial measure, net income (loss) attributable to Abacus Life, Inc. and net income for Abacus Life, Inc. and Proforma Adjusted EPS to the most comparable GAAP financial measure, earnings per share, on a historical basis for the periods indicated below:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net income attributable to Abacus Life, Inc. |
903,361 | 9,992,003 | 15,739,009 | 21,507,702 | ||||||||||||
| Net income for Abacus Settlements, LLC |
— | (122,998 | ) | (974,901 | ) | 149,790 | ||||||||||
| Net income attributable to Abacus Life, Inc. |
903,361 | 9,869,005 | [1] | 14,764,108 | [2] | 21,657,492 | [3] | |||||||||
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|
|
|
|
|
|
|
|
|||||||||
| Net income attributable to non-controlling interests |
147,611 | 363,452 | (339,692 | ) | 770,093 | |||||||||||
| Amortization expense |
1,682,083 | — | 1,682,083 | — | ||||||||||||
| Stock compensation expense |
4,583,632 | — | 4,583,632 | — | ||||||||||||
| Loss on change in fair value of warrant liability |
943,400 | — | 943,400 | — | ||||||||||||
| Tax impact [4] |
908,271 | — | 908,271 | — | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
| Proforma Adjusted Net Income |
9,168,358 | 10,232,457 | 22,541,802 | 22,427,585 | ||||||||||||
| Weighted-average shares of Class A common stock outstanding |
62,961,688 | 50,369,350 | 54,612,922 | 50,369,350 | ||||||||||||
| Proforma Adjusted EPS |
0.15 | 0.20 | 0.41 | 0.45 | ||||||||||||
| [1] | Includes historical net income attributable to Abacus, Life, Inc. for the three months ended September 30, 2022 of $9,992,003 and a net loss of ($122,998) for Abacus Settlements, LLC. |
| [2] | Includes year-to-date net income attributable to Abacus Life, Inc. as of September 30, 2023 of $15,739,009 plus net loss for the six month period ended on June 30, 2023 for Abacus Settlements, LLC of ($974,901). |
| [3] | Includes historical net income attributable to Abacus Life, Inc. for the nine months ended September 30, 2022 of $21,507,702 and $149,790 for Abacus Settlements, LLC. |
| [4] | Tax impact represents the permanent difference in tax expense related to the restricted stock awards granted to the CEO due to IRC 162(m) limitations. |
Proforma Adjusted Net income for the three months ended September 30, 2023 was $9,168,358 compared to proforma adjusted net income of $10,232,457 for the three months ended September 30, 2022. The decrease of $1,064,099, or (10.4)%, in proforma adjusted Net Income is primarily due to the decrease of $8,965,644, or (90.8)%, in proforma net income attributable to Abacus Life Inc., which is partially offset by the adjustments amounting to $8,264,997. When adjusting for the impact of those items, the main driver is the increase in interest expense related to the credit facilities that were entered into at the end of the second quarter. Proforma Adjusted EPS for the three months ended September 30, 2023 was $0.15 compared to $0.20 for the three months ended September 30, 2022.
Proforma Adjusted Net Income for the nine months ended September 30, 2023 was $22,541,802 compared to $22,427,585 for the nine months ended September 30, 2022. The increase of $114,217, or 0.5%, in Proforma adjusted Net Income is primarily due to the increase in proforma revenue attributable to Abacus Life Inc. Proforma Adjusted EPS for the nine months ended September 30, 2023 was $0.41 compared to $0.45 for the nine months ended September 30, 2022.
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Proforma Adjusted EBITDA
Proforma Adjusted EBITDA is net income for Abacus Life, Inc. plus historical net income for Abacus Settlements, LLC prior to the Business Combination and adjusted for depreciation expense, amortization expense, interest expense, income tax and other non-cash and non-recurring items that in our judgement significantly impact the period-over-period assessment of performance and operating results that do not directly relate to business performance within Abacus Life, Inc.‘s control. These unusual items may include payments made as part of the Company’s expense support commitment, (gain) loss on change in fair value of debt, loss on change in fair value of warrant liability, S&P 500 put and call options that were entered into as an economic hedge related to the debt (described as the unrealized loss on investments), non-cash stock based compensation, and other non-recurring items. Management plans to terminate the agreement for the expense support commitment within the next twelve months. As such, management has deemed this to be a non-recurring item. Proforma Adjusted EBITDA should not be determined as substitution for net income (loss), cash flows provided (used in) operating, investing, and financing activities, operating income (loss), or other metrics prepared in accordance with U.S. GAAP.
Management believes the use of Proforma Adjusted EBITDA assists investors in understanding the ongoing operating performance by presenting comparable financial results between periods and represents the combined results for the two legacy operating companies, Abacus Settlements, LLC and Longevity Market Assets, LLC year-over-year as if the business combination had occurred at the beginning of the years shown. We believe that by removing the impact of depreciation and amortization and excluding certain non-cash charges, amounts spent on interest and taxes and certain other non-recurring charges that are highly variable from year to year, Proforma Adjusted EBITDA provides our investors with performance measures that reflect the impact to operations from trends in changes in revenue, policy values and operating expenses, providing a perspective not immediately apparent from net income and operating income. The adjustments we make to derive the non-GAAP measure of Proforma Adjusted EBITDA exclude items which may cause short-term fluctuations in net income and operating income and which we do not consider to be the fundamental attributes or primary drivers of our business.
The following table presents a reconciliation of Proforma Adjusted EBITDA and Proforma Adjusted EBITDA margin to the most comparable GAAP financial measure, net income (loss) for Abacus Life Inc. and net income (loss) for Abacus Settlements, LLC, on a historical basis for the periods indicated below:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net Income for Abacus Life Inc. |
$ | 1,050,972 | $ | 10,355,455 | $ | 15,399,317 | $ | 22,277,795 | ||||||||
| Net Income for Abacus Settlements, LLC |
— | (122,998 | ) | (974,901 | ) | 149,790 | ||||||||||
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|
|
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|
|
|
|||||||||
| Proforma Net Income |
1,050,972 | 10,232,457 | [1] | 14,424,416 | [2] | 22,427,585 | [3] | |||||||||
| Depreciation |
12,770 | 4,219 | 20,508 | 12,360 | ||||||||||||
| Amortization |
1,682,083 | — | 1,682,083 | — | ||||||||||||
| Interest expense |
2,679,237 | 2,449 | 3,632,420 | 1,449 | ||||||||||||
| Interest income |
(63,826 | ) | — | (73,200 | ) | — | ||||||||||
| Income Tax |
1,710,315 | (948,600 | ) | 2,240,708 | (650,794 | ) | ||||||||||
| Stock compensation |
4,583,632 | — | 4,583,632 | — | ||||||||||||
| Other (Income) / Expenses |
(20,086 | ) | (42,289 | ) | 1,565 | 199,958 | ||||||||||
| Loss on change in fair value of warrant liability |
943,400 | — | 943,400 | — | ||||||||||||
| Expense support agreement |
— | 283,047 | — | 283,047 | ||||||||||||
| (Gain) loss on change in fair value of debt |
(2,088,797 | ) | (1,235,032 | ) | 309,865 | (859,519 | ) | |||||||||
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| Three Months Ended September 30, | Nine Months Ended September 30, |
|||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Unrealized loss / (gain) on investments |
306,800 | 246,846 | (491,356 | ) | 1,301,821 | |||||||||||
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|
|
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| Proforma Adjusted EBITDA |
$ | 10,796,500 | $ | 8,543,097 | $ | 27,274,041 | $ | 22,715,907 | ||||||||
| Revenue |
21,120,930 | 17,538,734 | 55,890,580 | 48,830,191 | ||||||||||||
| Proforma Adjusted EBITDA Margin |
51.12 | % | 48.71 | % | 48.80 | % | 46.52 | % | ||||||||
| Proforma Net Income Margin |
4.98 | % | 58.34 | % | 25.81 | % | 45.93 | % | ||||||||
| [1] | Includes historical net income for the three months ended September 30, 2022 of $10,355,455 for Abacus Life, Inc. and a loss of ($122,998) for Abacus Settlements, LLC. |
| [2] | Includes year-to-date net income as of September 30, 2023 of $15,399,317 plus net loss for the six month period ended on June 30, 2023 for Abacus Settlements, LLC of ($974,901). |
| [3] | Includes historical net income for the nine months ended September 30, 2022 of $22,277,795 for Abacus Life, Inc. and $149,790 for Abacus Settlements, LLC. |
Proforma Adjusted EBITDA for the three months ended September 30, 2023 was $10,796,500 compared to $8,543,097 for the three months ended September 30, 2022. The increase of $2,253,403, or 26.4% in proforma adjusted EBITDA is primarily due to an increase in proforma revenue. While expenses also increased, many of these increases in expenses are being reflected in the non-recurring and non-cash adjustments shown herein as a result of the Business Combination.
Proforma Adjusted EBITDA for the nine months ended September 30, 2023 was $27,274,041 compared to $22,715,907 for the nine months ended September 30, 2022. The increase of $4,558,134 or 20.1%, in proforma adjusted EBITDA is primarily due to the increase in proforma revenue. While expenses also increased, many of these increases in expenses are being reflected in the non-recurring and non-cash adjustments shown herein as a result of the Business Combination.
Proforma Segment revenue
Proforma Segment Revenue is not a measure of financial performance under GAAP and should not be considered substitutes for GAAP measures, segment revenue for Abacus Life Inc. and Abacus Settlements, LLC, which are considered to be the most directly comparable GAAP measures. This non-GAAP financial measure has limitations as analytical tools, and when assessing Company’s operating performance, this non-GAAP financial measures should not be considered in isolation or as substitutes for segment revenue for Abacus Life Inc. and Abacus Settlements, LLC, or other consolidated statements of operations and comprehensive income data prepared in accordance with GAAP.
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The Company defines Proforma Segment Revenue as segment revenue for Abacus Life, Inc. plus historical revenue for Abacus Settlements, LLC prior to the Business Combination adjusted for inter-segment activity for policies that Abacus Settlements, LLC has originated on behalf of Longevity Market Assets, LLC. Management believes that Proforma Segment Revenue is an appropriate measure of operating performance because it represents the combined results for the two legacy operating companies, Abacus Settlements, LLC and Longevity Market Assets, LLC year-over-year as if the business combination had occurred at the beginning of the years shown and eliminates inter-segment revenue.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Portfolio Servicing |
$ | 224,569 | $ | 382,245 | $ | 814,626 | $ | 1,372,573 | ||||||||
| Proforma Active Management |
18,926,144 | 12,080,008 | 46,715,702 | 29,836,674 | ||||||||||||
| Proforma Originations |
10,214,489 | 6,031,481 | 23,399,165 | 19,046,144 | ||||||||||||
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|
|
|
|
|
|
|||||||||
| Total Proforma Revenue (including intersegment) |
29,365,202 | 18,493,734 | 70,929,493 | 50,255,391 | ||||||||||||
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|
|
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| Intersegment elimination |
(8,244,272 | ) | (955,000 | ) | (15,038,913 | ) | (1,425,200 | ) | ||||||||
|
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|
|
|
|
|
|
|
|||||||||
| Total Proforma Revenue |
21,120,930 | 17,538,734 | 55,890,580 | 48,830,191 | ||||||||||||
|
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|
|
|
|
|
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Proforma Segment Revenue for the three months ended September 30, 2023 was $21,120,930 compared to $17,538,734 for the three months ended September 30, 2022. The increase of $3,582,196, or 20.4%, in Proforma Segment revenue is primarily due to an increase in Active Management revenue and Originations revenue, prior to the inter-segment elimination.
Proforma Segment Revenue for the nine months ended September 30, 2023 was $55,890,580 compared to $48,830,191 for the nine months ended September 30, 2022. The increase of $7,060,389 or 14.5% in Proforma Segment revenue is primarily due to an increase in Active Management revenue and Originations revenue, prior to the inter-segment elimination.
Liquidity and Capital Resources
The Company finances its operations primarily through cash generated from operations and net proceeds from debt or equity financing. The Company actively manages its working capital and the associated cash requirements when servicing policies while also effectively utilizing cash and other sources of liquidity to purchase additional policies. As of September 30, 2023, our principal source of liquidity was cash totaling $36,649,190. During the nine months ended September 30, 2023, the Company had a net income attributable to Abacus Life, Inc. of $15,739,009 and during the nine months ended September 30, 2022, the Company had net income attributable to Abacus Life, Inc. of $21,507,702. During the nine months ended September 30, 2023, and 2022, the Company had used $51,176,074 and $6,395,331 in cash for operations, respectively.
The Company is obligated to provide financial support to the Providers as described in Note 2 and Note 11 of the Company’s financial statements. Since inception of the SSES on January 1, 2021 through December 31, 2021, the Company had incurred $120,000 related to initial funding of operations, and $0 related to expenses. For the three month and nine month periods ended September 30, 2023, the Company incurred expense of $0 and $29,721, respectively, to fund the Providers’ deficits. In 2022, the Providers reimbursed the Company for the initial funding of $120,000. For the three months and nine months ended September 30, 2023, the Providers were considered to be VIEs, but were not consolidated in our consolidated financial statements due to a lack of the power criterion or the losses/benefits criterion.
Our future capital requirements will depend on many factors, including our revenue growth rate and the expansion of our active management and portfolio activities. Abacus Life, Inc. may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies. Abacus Life, Inc. may be required to seek additional equity or debt financing.
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Cash Flows from our operations
The following table summarizes our cash flows for the periods presented:
| Nine Months Ended September 30, |
Twelve Months Ended December 31, |
|||||||||||||||
| 2023 | 2022 | 2022 | 2021 | |||||||||||||
| Net cash used in operating activities |
$ | (51,176,074 | ) | $ | (6,395,331 | ) | $ | 10,693,252 | $ | (139,168 | ) | |||||
| Net cash provided/(used) in investing activities |
2,569,437 | (1,932,664 | ) | (3,704,654 | ) | (275,346 | ) | |||||||||
| Net cash provided by financing activities |
55,203,004 | 12,069,661 | 22,961,795 | 381,663 | ||||||||||||
Operating Activities
During the nine months ended September 30, 2023, our operating activities used $51,176,074 of net cash as compared to $6,395,331 of net cash used from operating activities during the nine months ended September 30, 2022. The increase in net cash used from operating activities during the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, was primarily due to $55,516,357 net cash used to purchase life settlement policies accounted for at fair value and $5,601,493 net cash used to purchase life settlement policies accounted for at cost during the nine months ended September 30, 2023, partially offset by $3,163,451 in higher operational expense accruals and $4,583,632 of non-cash stock-based compensation, compared to purchases of $7,105,000 life settlement polices accounted for at fair value and $61,876,742 life settlement polices accounted for at cost, partially offset by $45,456,779 in higher operational expense accruals and receipts from active management services, during the nine months ended in September 30, 2022.
During the year ended December 31, 2022, our operating activities generated $10,693,252 of net cash as compared to net cash used from operating activities of $139,168 during the year ended December 31, 2021. The increase in net cash from operating activities during 2022 compared to 2021 was primarily due to the increased net income, which was primarily attributable to increases in Active management revenue.
Investing Activities
During the nine months ended September 30, 2023, investing activities provided $2,569,437 of net cash as compared to $1,932,664 net cash used during the nine months ended September 30, 2022. $2,569,437 of net cash provided in investing activities during the nine months ended September 30, 2023, was related to receipts of $3,016,158 from affiliates, $350,000 used to purchase other investments, and $96,721 used to purchase equipment. $1,932,664 of net cash used in investing activities during the nine months ended September 30, 2022, $1,682,664 was used to repay affiliates and $250,000 was used to purchase other investments.
During the year ended December 31, 2022, investing activities used $3,704,645 of net cash as compared to $275,346 during the year ended December 31, 2021. Net cash used in investing activities during the year ended December 31, 2022 was related to purchase of available-for-sale investments, other investments and the increase in the amounts due from affiliates during the year. Net cash used in investing activities during the year ended December 31, 2021 was related to purchase of available-for-sale investments and the purchase of property and equipment during the year, along with amounts due from affiliates of $2,904,646.
Financing Activities
During the nine months ended September 30, 2023, financing activities generated $55,203,004 of net cash as compared to $12,069,661 of net cash generated during the nine months ended September 30, 2022. The increase of $43,133,343 in net cash generated in financing activities during the nine months ended September 30, 2023 compared to September 30, 2022, was mainly related to the proceeds of $87,478,232 from the issuance of debt certificates, offset by $23,533,073 of capital distributions to members and $10,841,551 in transaction costs during September 30, 2023.
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During the year ended December 31, 2022, financing activities generated $22,961,795 of net cash as compared to net cash generated of $381,663 during the year ended December 31, 2021. Net cash generated in financing activities during the year ended December 31, 2022 was related to the increase in amount for issuance of debt securities of $ 30,028,640, partially offset by amount due to affiliates of $666,845 and distributions to members of $6,400,000. Net cash generated in financing activities during the year ended December 31, 2021 was related to the increase in the amounts due to members of $781,663, partially offset by distributions to members of $400,000.
Contractual Obligations and Commitments
Our significant contractual obligations as of September 30, 2023, include three notes, LMATTSTM 2024, LMATTSTM 2.2024, and LMATTSTM 1.2026. The $10,166,900 LMATTSTM 2024 notes are a market-indexed instrument designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the notes in 2024, the principal, plus the return based upon the S&P 500 Index must be paid. The notes have a feature to protect debt holders from market downturns, up to 40%. Any subsequent losses below the 40% threshold will reduce the notes. The notes do not pay interest to the holders. As of September 30, 2023, $9,866,900 of the principal amount remained outstanding.
The $2,333,391 LMATTSTM 2.2024 notes are market-indexed instruments designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the notes in 2024, the principal, plus the return based upon the S&P 500 Index must be paid. The notes have a feature to protect debt holders from market downturns, up to 20%. Any subsequent losses below the 20% threshold will reduce the notes. The notes do not pay interest to the holders. As of September 30, 2023, the $2,333,391 principal amount remained outstanding.
The $400,000 LMATTSTM 1.2026 notes are market-indexed instruments designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the notes in 2026, the principal, plus the return based upon the S&P 500 Index must be paid. The notes have a feature to protect debt holders from market downturns, up to 10%. Any subsequent losses below the 10% threshold will reduce the notes. The notes pay annual interest of 4% on invested capital to the holders. As of September 30, 2023, the $400,000 principal amount remained outstanding.
Additionally, LMA Income Series, GP, LLC, wholly owned and controlled by that LMA Series, LLC, formed a limited partnership, LMA Income Series, LP and issued partnership interests to limited partners in a private placement offering. The initial term of the offering is three years with the ability to extend for two additional one-year periods at the discretion of the general partner, LMA Income Series, GP, LLC. The limited partners will receive an annual dividend of 6.5% paid quarterly and 25% of returns in excess of a 6.5% internal rate of return capped at a 15% net internal rate of return. The General Partner will receive 75% of returns in excess of a 6.5% internal rate of return to limited partners then 100% in excess of a 15% net internal rate of return. It was determined that LMA Series, LLC is the primary beneficiary of LMA Income Series, LP and thus has fully consolidated the limited partnership in its consolidated financial statements for the year ended December 31, 2022, and interim condensed consolidated financial statements for the three and nine months ended September 30, 2023.
During the three months ended March 31, 2023, LMA Income Series II, GP, LLC, wholly owned and controlled by that LMA Series, LLC, formed a limited partnership, LMA Income Series II, LP and issued partnership interests to limited partners in a private placement offering. The initial term of the offering is three years with the ability to extend for two additional one-year periods at the discretion of the general partner, LMA Income Series II, GP, LLC. The limited partners will receive annual dividends equal to the Preferred Return Amounts as follows: Capital commitment less than $500,000, 7.5%; between $500,000 and $1,000,000, 7.8%; over $1,000,000, 8%. Thereafter, 100% of the excess to be paid to the General Partner. It was determined that LMA Series, LLC is the primary beneficiary of LMA Income Series, LP and thus has fully consolidated the limited partnership in its consolidated financial statements for the three and nine months ended September 30, 2023.
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The private placement offerings proceeds for both LMA Income Series, LP and LMA Income Series II, LP will be used to acquire an actively managed large and diversified portfolio of financial assets. Abacus Life, Inc. elected to account for the secured borrowings at fair value under the collateralized financing entity guidance within ASC 810-10-30. As of September 30, 2023, the fair value of the LMA Income Series, LP secured borrowing was $22,242,291. As of September 30, 2023, the fair value of the LMA Income Series II, LP secured borrowing was $24,535,851.
Additionally, Abacus Life, Inc. has operating lease obligations, which are included as liabilities on our balance sheet, for our office space. As of September 30, 2023, operating lease obligations were $173,799 with $173,799 due in less than one year and $0 due within one to three years, which are comprised of the minimum commitments for our office space.
Critical Accounting Policies and Estimates
Abacus Life, Inc. has prepared our consolidated financial statements in accordance with GAAP. Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements, as well as revenue and expense recorded during the reporting periods. Abacus Life, Inc. evaluates our estimates and judgments on an ongoing basis. Abacus Life, Inc. bases our estimates on historical experience and or other relevant assumptions that Abacus Life, Inc. believes to be reasonable under the circumstances. Actual results may differ materially from management’s estimates.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements contained herein, Abacus Life, Inc. believes the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Longevity Market Assets Target-Term Series (LMATTSTM) Note
On March 31, 2022, LMATT Series 2024, Inc., which Abacus Life, Inc. consolidates for financial reporting, issued $10,166,900 in market-indexed private placement notes. The notes, LMATTSTM 2024, are market-indexed instruments designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the notes in 2024, the principal, plus the return based upon the S&P 500 Index must be paid. The notes have a feature to protect debt holders from market downturns, up to 40%. Any subsequent losses below the 40% threshold will reduce the notes. The notes do not pay interest to the holders. As of September 30, 2023, $9,866,900 of the principal amount remained outstanding.
On September 16, 2022, LMATT Growth Series, Inc., which Abacus Life, Inc. consolidates for financial reporting, issued $2,333,391 in market-indexed private placement notes. The notes, LMATTSTM 2.2024, are market-indexed instruments designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the notes in 2024, the principal, plus the return based upon the S&P 500 Index must be paid. The notes have a feature to protect debt holders from market downturns, up to 20%. Any subsequent losses below the 20% threshold will reduce the notes. The notes do not pay interest to the holders. As of September 30, 2023, the entire $2,333,391 principal amount remained outstanding.
On September 16, 2022, LMATT Growth and Income Series, Inc., which Abacus Life, Inc. consolidates for financial reporting, issued $400,000 in market-indexed private placement notes. The notes, LMATTSTM 1.2026, are market-indexed instruments designed to provide upside performance exposure of the S&P 500 Index, while limiting downward exposure. Upon maturity of the notes in 2024, the principal, plus the return based upon the S&P 500 Index must be paid. The notes have a feature to protect debt holders from market downturns, up to 10%. Any subsequent losses below the 10% threshold will reduce the notes. The notes pay an annual 4% interest rate on invested capital to the holders. As of September 30, 2023, the entire $400,000 principal amount remained outstanding.
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Abacus Life, Inc. has elected the fair value option in accounting for the instruments. Fair value is determined using Level 3 inputs. The valuation methodology is based on the Black-Scholes-Merton option-pricing formula and a discounted cash flow analysis. Inputs to the Black-Scholes-Merton model include (i) the S&P 500 Index price, (ii) S&P 500 Index volatility, (iii) a risk-free rate based on data published by the US Treasury, and (iv) a term assumption based on the contractual term of the LMATTTM note. The discounted cash flow analysis includes a discount rate that is based on the implied discount rate assumption developed by calibrating a valuation model to the purchase price on the initial investment date. The implied discount rate is evaluated for reasonableness by benchmarking it to yields on actively traded comparable securities.
For the three months ended September 30, 2023, Abacus Life, Inc. has recognized a gain of $1,293,945 and a loss of $ 753,978 for the LMATTSTM 2024, Inc. notes and LMATTSTM Growth Series, Inc. notes respectively on the change in fair value fair value of the debt resulting from risk-free valuation scenarios, which is included within (gain) loss on change in fair value of debt within the interim Condensed Consolidated Statement of Operations. For the nine months ended September 30, 2023, Abacus Life, Inc. has recognized a loss of $11,349 and a loss of $279,838 for the LMATTSTM 2024, Inc. notes and LMATTSTM Growth Series, Inc. notes, respectively on the change in fair value fair value of the debt resulting from risk-free valuation scenarios, which is included within (gain) loss on change in fair value of debt within the interim Condensed Consolidated Statement of Operations.
Longevity Market Assets Income Series, LP
On November 30, 2022, LMA Income Series, GP, LLC, wholly owned and controlled by that LMA Series, LLC, which Abacus Life, Inc. consolidates, formed a limited partnership, LMA Income Series, LP and issued partnership interests to limited partners in a private placement offering. It was determined that LMA Series, LLC is the primary beneficiary of LMA Income Series, LP and thus has fully consolidated the limited partnership in its consolidated financial statements for the year ended December 31, 2022. The limited partners will receive an annual dividend of 6.5% paid quarterly and 25% of returns in excess of a 6.5% internal rate of return capped at 9% which would require a 15% net internal rate of return. The General Partner will receive 75% of returns in excess of a 6.5% internal rate of return to limited partners then 100% in excess of a 15% net internal rate of return. The general partner committed $250,000, with the limited partners contributing $17,428,349. Additional limited partner contributions of $4,461,095 were raised in the first quarter of 2023 bringing the total deposit amount to $22,139,444.
The private placement offerings proceeds were used to acquire an actively managed large and diversified portfolio of financial assets. Abacus Life, Inc., through its consolidated subsidiaries, serves as the portfolio manager for the financial asset portfolio, which includes investment sourcing and monitoring. In this role, Abacus Life, Inc. has the unilateral ability to acquire and dispose of any of the above investments. Abacus Life, Inc. elected to account for the secured borrowing at fair value under the collateralized financing entity guidance within ASC 810-10-30. As of September 30, 2023, the fair value of the secured borrowing, not including the $250,000 committed from the general partner, was $22,242,292 and there was no gain or loss recognized.
Longevity Market Assets Income Series II, LP
On January 31, 2023, LMA Series, LLC, a wholly owned subsidiary of the Company, signed an Operating Agreement to be the sole member of a newly created general partnership, LMA Income Series II, GP, LLC. Subsequent to that, LMA Income Series II, GP, LLC formed a limited partnership, LMA Income Series II, LP and issued partnership interests to limited partners in a private placement offering. It was determined that LMA Series, LLC is the primary beneficiary of LMA Income Series II, LP and thus has fully consolidated the limited partnership in its consolidated financial statements for the three months ended June 30, 2023. The limited partners will receive annual dividends equal to the preferred return amounts as follows: Capital commitment less than $500,000, 7.5%; between $500,000 and $1,000,000, 7.8%; over $1,000,000, 8%. Thereafter, 100% of the excess to be paid to the General Partner.
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The private placement offerings proceeds were used to acquire an actively managed large and diversified portfolio of financial assets. Abacus Life, Inc., through its consolidated subsidiaries, serves as the portfolio manager for the financial asset portfolio, which includes investment sourcing and monitoring. In this role, Abacus Life, Inc. has the unilateral ability to acquire and dispose of any of the above investments. Abacus Life, Inc. elected to account for the secured borrowing at fair value under the collateralized financing entity guidance within ASC 810-10-30. As of September 30, 2023, the fair value of the secured borrowing, not including the commitment from the general partner, was $24,535,851 and there was no gain or loss recognized.
Valuation of Life Insurance Policies
Abacus Life, Inc. accounts for its holdings of life insurance settlement policies at fair value in accordance with ASC 325-30, Investments in Insurance Contracts. Any resulting changes in estimates are reflected in operations in the period the change becomes apparent.
Abacus Life, Inc. follows ASC 820, Fair Value Measurements and Disclosures, in estimating the fair value of its life insurance policies, which defines fair value as an exit price representing the amount that would be received if an asset were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance establishes a three-level, fair value hierarchy that prioritizes the inputs used to measure fair value. Level 1 relates to quoted prices in active markets for identical assets or liabilities. Level 2 relates to observable inputs other than quoted prices included in Level 1. Level 3 relates to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Abacus Life, Inc.’s valuation of life settlements is considered to be Level 3, as there is currently no active market where Abacus Life, Inc. is able to observe quoted prices for identical assets. Abacus Life, Inc.’s valuation model incorporates significant inputs that are not observable.
The aggregate face value of policies held at fair value is $303,605,030 as of September 30, 2023, with a corresponding fair value of $83,585,374. The aggregate face value of policies accounted for using the investment method is $37,300,000 as of September 30, 2023, with a corresponding carrying value of $4,116,499.
Credit Exposure to Insurance Companies
The following table provides information about the life insurance issuer concentrations that exceed 10% of total face value or 10% of total fair value of the Company’s life insurance policies as of June 30, 2023:
| Carrier |
Percentage of Face Value |
Percentage of Fair Value |
Carrier Rating | |||||||||
| American General Life Insurance Company |
14.0 | % | 11.0 | % | A | |||||||
| ReliaStar Life Insurance Company |
6.0 | % | 12.0 | % | A | |||||||
| Lincoln National Life Insurance Company |
14.0 | % | 12.0 | % | A | |||||||
The Company reviews the composition of its portfolio with respect to the concentration of life insurance carriers on an ongoing basis. In addition, as a general policy, the Company typically invests in life insurance policies issued by “A-” rated or better life insurance carriers.
Equity Investments in Privately-Held Companies
Equity investments without readily determinable fair values include our investments in privately-held companies in which Abacus Life, Inc. holds less than a 20% ownership interest and does not have the ability to exercise significant influence. Abacus Life, Inc. determines fair value using level 3 inputs under the measurement alternative. These investments are recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
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In addition, Abacus Life, Inc. monitors these investments to determine if impairment charges are required based primarily on the financial condition and near-term prospects of these companies. As of September 30, 2023, Abacus Life, Inc. did not identify any impairment indicators and determined that the carrying value of $1,650,000 is the fair value for these equity investments in privately held companies, given that there have been no observable price changes.
Available-For-Sale Securities
Abacus Life, Inc. has investments in securities that are classified as available-for-sale securities, and which are reflected on the Consolidated Balance Sheets at fair value. These securities solely consist of a convertible promissory note in a private company that was entered into an arms-length. Abacus Life, Inc. determines the fair value using unobservable inputs by considering the initial investment value, next round financing, and the likelihood of conversion or settlement based on the contractual terms in the agreement. Unrealized gains and losses on these investments are included as a separate component of accumulated other comprehensive loss, net of tax, on the Consolidated Balance Sheets. Abacus Life, Inc. classifies its available-for-sale securities as short-term or long-term based on the nature of the investment, its maturity date and its availability for use in current operations. Abacus Life, Inc. monitors its available-for-sale securities for possible other-than-temporary impairment when business events or changes in circumstances indicate that the carrying value of the investment may not be recoverable. As of September 30, 2023, Abacus Life, Inc. evaluated the fair value of its investment and determined that the fair value approximates the carrying value of $1,000,000, and no unrealized gains and losses were recorded.
Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
JOBS Act Election
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.
Abacus Life, Inc. has irrevocably elected to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, Abacus Life, Inc., as an emerging growth company, will adopt the new or revised standard at the time public companies adopt the new or revised standard. As a result, following the consummation of the Business Combination, Abacus Life, Inc. will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.
Abacus Settlements
Overview
Abacus Settlements originates life insurance policy settlement contracts as a licensed life settlement provider on behalf of third-party institutional investors (“Financing Entities”) interested in investing in the life settlement asset class. Specifically, Abacus Settlements originates policies through three primary origination channels (Agents/Financial Advisors, Direct-to-Consumers, Life Settlement Brokers and Third-Party Intermediaries), screens them for eligibility by verifying that the policy is in force, obtaining consents and disclosures, and submitting cases for life expectancy estimates. This process is characterized as our origination services, which averages a fee of approximately 2% of face value (“Origination Revenue”).
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Our Business Model
As a life settlement provider, Abacus Settlements serves as a purchaser of outstanding life insurance policies. When serving as a purchaser, Abacus Settlements’ primary purpose in the transaction is to connect buyers and sellers through an origination process. The origination process is core to Abacus Settlements’ business and drives its economics. Abacus Settlements averages approximately 2% of face value in origination fees on policies and has developed three high quality origination channels which include agents and financial advisors, direct to consumer, life settlements brokers and third-party intermediaries. Generally, diversification across multiple origination channels lowers average policy acquisition cost and increases estimated returns. Abacus Settlements finds sellers through its origination channels using strategic marketing practices in its core markets, with the purpose of finding policy owners who want to capitalize on their investments prior to death by extracting value from their policies through the sale of such policies to Financing Entities.
Key Factors Affecting Our Performance
Our operations and financial performance are impacted by economic factors affecting the industry, including:
Opportunities in the Life Settlements Industry
Within the life settlements industry, there is significant policy value that lapses on an annual basis. Currently, the life settlements industry only captures a narrow portion of the potential market leaving significant runway for future growth for industry participants. With the anticipation of growth in total face value of life insurance policies, we believe we are well positioned to capitalize on the overall market growth. Abacus is currently conducting business in 49 states and the District of Columbia. The company holds viatical settlement and or life settlement provider licenses in forty-three (43) of those jurisdictions. Abacus also conducts business in seven (7) jurisdictions which do not currently have life and or viatical settlement provider licensing requirements. Abacus conducts business where is it legally allowed to across the United States. The only state Abacus is not currently conducting business in is Alaska and there are no current plans to procure a license.
Our ability to originate policies is essential to scale our business over time. In order to support this expected growth, we continue to invest in our technology and marketing infrastructure. In general, we expect our efforts will continue to focus on driving education and awareness of life settlements. In order to meet this growing demand, we have increased our total headcount by 18% since December, 2022, and anticipate a total of 36% growth of our total headcount from December 31, 2022 to December 31, 2024, of which 18% has already been captured.
Macroeconomic Changes
Global macroeconomic factors, including regulatory policies, unemployment, changes in retirement savings, the cost of healthcare, inflation, and tax rate changes impact demand for our origination services. These factors evolve over time and while these changes have not currently made any significant impact on performance, these trends may shift the timing and volume of transactions, or the number of customers using our origination services.
Components of Results of Operations
Results of Operations
The following tables set forth our results of operations for each of the periods indicated, and we presented and expressed the relationship of certain line items as a percentage of revenue for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.
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The following tables set forth our historical results for the periods indicated, and the changes between periods:
| Three Months Ended June 30, 2023 |
Three Months Ended September 30, 2022 |
Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
Twelve Months Ended December 31, |
||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||
| Origination Revenue |
$ | 1,689,088 | $ | 1,766,853 | $ | 3,252,738 | $ | 4,951,921 | $ | 7,050,007 | $ | 4,906,374 | ||||||||||||
| Related-party revenue |
5,195,602 | 4,264,628 | 9,931,938 | 14,094,223 | 18,153,456 | 17,685,770 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
| Total Revenue |
6,884,690 | 6,031,481 | 13,184,676 | 19,046,144 | 25,203,463 | 22,592,144 | ||||||||||||||||||
| Cost of revenue |
1,505,333 | 933,089 | 2,734,949 | 4,198,402 | 5,538,470 | 2,678,029 | ||||||||||||||||||
| Related party cost of revenue |
3,392,647 | 2,930,990 | 6,558,354 | 8,453,302 | 11,022,535 | 11,527,312 | ||||||||||||||||||
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|
|
|
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| Gross Profit |
1,986,710 | 2,167,401 | 3,891,373 | 6,394,440 | 8,642,458 | 8,386,803 | ||||||||||||||||||
| Operating expenses |
||||||||||||||||||||||||
| General, administrative and other |
2,297,577 | 3,161 | 4,848,580 | 6,232,419 | 8,674,425 | 7,439,549 | ||||||||||||||||||
| Depreciation expense |
2,561 | 3,161 | 5,597 | 9,149 | 12,165 | 10,139 | ||||||||||||||||||
|
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|
|
|
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|
|
|
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| Total operating expenses |
2,300,138 | 2,287,222 | 4,854,177 | 6,241,568 | 8,686,590 | 7,449,688 | ||||||||||||||||||
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|
|
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|
|
|
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| Income (loss) from operations |
(313,428 | ) | (119,820 | ) | (962,804 | ) | 152,872 | (44,132 | ) | 937,115 | ||||||||||||||
| Other income (expense) |
||||||||||||||||||||||||
| Interest income |
1,193 | 358 | 1,917 | 1,505 | 2,199 | 11,500 | ||||||||||||||||||
| Interest (expense) |
(5,863 | ) | (2,954 | ) | (11,725 | ) | (2,954 | ) | (8,817 | ) | — | |||||||||||||
| Other income |
— | — | — | 273 | 273 | 50,000 | ||||||||||||||||||
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|
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|
|
|
|
|
|
|
|||||||||||||
| Total other income (expense) |
(4,670 | ) | (2,596 | ) | (9,808 | ) | (1,176 | ) | (6,345 | ) | 61,500 | |||||||||||||
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|
|
|
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|
|
|
|
|
|||||||||||||
| Income (loss) before income taxes |
(318,098 | ) | (122,417 | ) | (972,612 | ) | 151,696 | (50,477 | ) | 998,615 | ||||||||||||||
| Provision for income taxes |
— | 582 | 2,289 | 1,907 | 2,018 | 1,200 | ||||||||||||||||||
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|
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| Net income attributable to Abacus Life, Inc. |
$ | (318,098 | ) | $ | (122,999 | ) | $ | (974,901 | ) | $ | 149,789 | $ | (52,495 | ) | $ | 997,415 | ||||||||
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Origination Revenue
Abacus recognizes revenue from origination activities by acting as a provider of life settlements and viatical settlements by representing investors that are interested in purchasing life settlements on the secondary or tertiary market. Revenue from origination services consists of fees negotiated for each purchase and sale of a policy to an investor, which also include any agent and broker commissions received and the reimbursement of transaction costs.
| Three Months Ended June 30, 2023 |
Three Months Ended September 30, 2022 |
|||||||
| Origination revenue |
$ | 1,689,088 | $ | 1,766,853 | ||||
Revenue for the three months ended June 30, 2023 and September 30, 2022 was $1,689,088 and $1,766,853, respectively, and is comprised of sales commission, origination fees revenue, services revenue, and transaction fees reimbursements.
| Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
|||||||
| Origination revenue |
$ | 3,252,738 | $ | 4,951,921 | % | |||
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Revenue for the six months ended June 30, 2023 and nine months ended September 30, 2022 was $3,252,738 and $4,951,921, respectively, and is comprised of revenue in broker channel based on face values on the policies originated with consistent third party customers, origination fees, services revenue, and transaction fees reimbursements.
| Years Ended December 31, | $ Change | % Change | ||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Origination revenue |
$ | 7,050,007 | $ | 4,906,374 | 2,143,633 | 44 | % | |||||||||
Revenue increased by $2,143,633, or 44%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in revenue is primarily attributable to an increase in agent and broker sales during 2022 of $489,687 and $1,681,175, which is driven by higher face values on the policies originated, partially offset by a decrease in client direct sales of $63,297. The agent, broker, and client direct sales are all in line with normal, recurring business.
Related Party Revenue
Abacus has a related party relationship with the Nova Funds as the owners of Abacus jointly own 11% of the Nova Funds. Pricing for origination fees is governed by origination contracts that have been negotiated by both parties and are considered to be arms-length and consistent with origination fees charged to third party customers. For its origination services to the Nova Funds, Abacus earns origination fees equal to the lesser of (i) 2% of the net death benefit for the policy or (ii) $20,000.
| Three Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
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| Related Party Revenue |
$ | 5,195,602 | $ | 4,264,628 | ||||
Related Party Revenue for the three months ended June 30, 2023 and September 30, 2022 was $5,195,602 and $4,264,628, respectively. For the three months ended June 30, 2023 and September 30, 2022, Abacus had originated 38 and 77 policies for the Nova funds with a total value of $56,688,680 and $15,719,830, respectively, and is comprised of origination services to LMA and transaction fees reimbursed by the related party. Further, Abacus had originated 69 policies for LMA with a total value of $114,999,768 for the three months ended June 30, 2023.
| Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
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| Related Party Revenue |
$ | 9,931,938 | $ | 14,094,223 | ||||
Related party revenue for the six months ended June 30, 2023 and the nine months ended September 30, 2023 was $9,931,938 and $14,094,223, respectively. For the six months ended June 30, 2023 and nine months ended September 30, 2022, Abacus had originated 72 and 265 policies for the Nova Funds with a total value of $96,674,080 and $67,019,830, respectively, primarily comprised of origination services to LMA and transaction fees reimbursed by the related party. Further, for the six months ended June 30, 2023, Abacus had originated 103 policies for LMA with a total value of $192,685,578.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Related Party Revenue |
$ | 18,153,456 | $ | 17,685,770 | $ | 467,686 | 3 | % | ||||||||
For the years ended December 31, 2022 and December 31, 2021, Abacus Settlements originated 333 and 313 policies, respectively, for the Nova Funds with a total value of approximately $87,143,005 and $106,633,792, respectively. Related party revenue increased by $467,686, or 3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in related party revenue is primarily attributable to increased agent and direct client sales of $3,627,939, partially offset by decreased broke sales during 2022 of $3,160,223. There was an increase in origination policies of 16% in 2022, with origination fees increasing 13%.
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Cost of Revenue, Related Party Cost of Revenue, and Gross Margin
Cost of revenue is primarily comprised of third-party commissions, which includes third-party sales and marketing commission fees, as well as transaction costs that are reimbursed as part of the origination activity and depreciation and amortization expense. Abacus receives an origination fee plus any commission to be paid from the purchaser for its part in arranging the life settlement transactions. Out of that fee income, Abacus pays commissions to the licensed representative of the seller, if one is required. Commission expense is recorded at the same time revenue is recognized and is included within cost of revenue. Depreciation expense consists of depreciation of property and equipment assets, which are computer equipment. Amortization expense consists primarily of amortization of capitalized costs incurred for the development of internal use software. The costs incurred exclusively consist of fees incurred from an external consulting firm during the development stage of the project and is amortized on the straight-line basis over an estimated useful life of three years.
| Three Months Ended June 30 2023 |
Three Months Ended September 30 2022 |
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| Cost of revenue |
$ | 1,505,333 | $ | 933,089 | ||||
| Related party cost of revenue |
3,392,647 | $ | 2,930,990 | |||||
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| Gross Profit |
1,986,710 | 2,167,402 | ||||||
| Gross Margin |
29 | % | 36 | % | ||||
Cost of revenue for the three months ended June 30, 2022 and September 30, 2023 was $1,505,333 and $933,089, respectively, and is comprised of sales agents commission, professional and consulting fees.
Related party cost of revenue for the three months ended June 30, 2023 and September 30, 2022 was $3,392,647 and $2,930,990, respectively, and is comprised of LMA agent commission expenses and originations of policies sold to the Nova Funds.
Gross profit for the three months ended June 30, 2023 and for the three months ended September 30, 2022 was $1,986,710 and $2,167,402, respectively. Gross margin for the three months ended June 30, 2023 and for the three months ended September 30, 2022 was 29% and 36%, respectively.
| Six Months Ended June 30 2023 |
Nine Months Ended September 30 2022 |
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| Cost of revenue |
$ | 2,734,949 | $ | 4,198,401 | ||||
| Related party cost of revenue |
6,558,354 | 8,453,302 | ||||||
| Gross Profit |
3,891,373 | 6,394,440 | ||||||
| Gross Margin |
30 | % | 34 | % | ||||
Cost of revenue for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $2,734,949 and $4,198,401, respectively, and is comprised of sales agents commission, professional and consulting fees.
Related party cost of revenue for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $6,558,354 and $8,453,302, respectively, and is comprised of LMA agent commission expenses, originations of policies sold to the Nova Funds, and transaction fees reimbursements.
Gross profit for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $3,891,373 and $6,394,440, respectively. Gross margin for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was 30% and 34%, respectively.
| Years Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Cost of revenue |
$ | 5,538,470 | $ | 2,678,029 | 2,860,441 | 107 | % | |||||||||
| Related party cost of revenue |
11,022,535 | 11,527,312 | (504,777 | ) | -4 | % | ||||||||||
| Gross Profit |
8,642,458 | 8,386,803 | 255,656 | 3 | % | |||||||||||
| Gross Margin |
34 | % | 37 | % | -8 | % | ||||||||||
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Cost of revenue increased by $2,860,441, or 107%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in cost of revenue is primarily due to increases in agent commission expenses of $1,570,908 due to increases in agent and broker origination revenue, which is driven by increased origination activity and an increase in the face value of policies sold to third parties. There was also an increase in life expectancy report fees of $470,883 which is driven off of increases in agent and broker activity during 2022.
Related party cost of revenue decreased by $504,777, or 4%, for the year ended December 31, 2022 compared to the year ended December 30, 2021. The decrease in related party cost of revenue is primarily attributable to decreases in agent commission expenses of $569,229 as a result of decrease in the total face value of policies sold to the Nova Funds, which agent commission expense is primarily based off of.
Gross profit increased by $255,656, or 3%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. Gross margin decreased to 34% for the year ended December 31, 2022 compared to 37% for the year ended December 31, 2021. The increase in gross profit and decrease in gross margin is primarily due to a decrease in client direct sales of 12%, as no agent commission needs to be paid for client direct sales, so the margins are much higher than agent and broker origination sales which increased by 16% in 2022.
Operating Expenses
Operating expenses is comprised of general and administrative expenses as well as depreciation expense.
General and administrative expenses include compensation, payroll, advertising, marketing, rent, insurance, recruitment, trade shows, telephone & internet, licenses, and other professional fees.
Depreciation expense consists of depreciation of property and equipment assets, which are computer equipment, office furniture and lease improvement.
| Three Months Ended June 30 2023 |
Three Months Ended September 30 2022 |
|||||||
| General and administrative expenses |
$ | 2,297,577 | $ | 2,284,061 | ||||
| Depreciation expense |
$ | 2,561 | $ | 3,161 | ||||
General and administrative expenses for the three months ended June 30, 2023 and September 30, 2022 were $2,297,577 and $2,284,061, respectively, and are comprised of payroll expenses for administration support and for sales departments, marketing expenses, sponsorship costs, rent costs, office expenses, escrow fees, professional fees, and legal fees.
Depreciation expense for the three months ended June 30, 2023 and for the three months ended September 30, 2022 was $2,561 and $3,161, respectively. The depreciation expense for both periods was computed on property and equipment (i.e., computer equipment, office furniture, and leasehold improvements).
| Six Months Ended June 30 2023 |
Nine Months Ended September 30 2022 |
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| General and administrative expenses |
$ | 4,848,580 | $ | 6,232,419 | ||||
| Depreciation expense |
5,597 | 9,149 | ||||||
General and administrative expenses for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 were $4,848,580 and $6,232,419, respectively, and are comprised of payroll expenses for administration support, sales department, marketing expenses, sponsorships, rent and office expenses.
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Depreciation expense for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $5,597 and $9,149, respectively. The depreciation expense for both periods was computed on property and equipment (i.e., computer equipment, office furniture, and leasehold improvements).
| Year Ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| General and administrative expenses |
$ | 8,674,425 | $ | 7,439,549 | $ | 1,234,876 | 17 | % | ||||||||
| Depreciation expense |
12,165 | 10,139 | 2,026 | 20 | % | |||||||||||
General and administrative expenses increased by $1,234,876, or 17%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in general and administrative expenses is primarily due to increases in payroll expenses as a result of a 40% increase in employee headcount during 2022, and compensation raises. There was an increase in marketing expenses due to increased television ads and radio commercials, as well as increased spending on internet advertising. Salaries and payroll expense as a percentage of total revenue, were 21% and 18% for the years ended December 31, 2022 and 2021, respectively.
Depreciation expense increased by $2,026, or 20%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in the expense is primarily due to an increase in the purchase of depreciable assets. The majority of the purchases are computer equipment.
Other income (expense)
Other income (expense) includes interest income, consulting income, and other income. Interest income represents the interest earned on Abacus’ certificates of deposits. Consulting income represents income earned on various origination consulting services performed. Other income is comprised of income from credit card cash rewards.
| Three Months Ended June 30 2023 |
Three Months Ended September 30 2022 |
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| Interest income |
$ | 1,193 | $ | 358 | ||||
| Interest (expense) |
$ | (5,863 | ) | (2,954 | ) | |||
Interest income for the three months ended June 30, 2023 and for the three months ended September 30, 2022 was $1,193 and $358, respectively. The interest income for both periods represents interest earned on Abacus’ certificates of deposit.
Interest expense for the three months ended June 30, 2023 and September 30, 2022 was $5,863 and 2,954, respectively, and is comprised of amortization of the deferred financing fees and certificate of deposit fees.
| Six Months Ended June 30 2023 |
Nine Months Ended September 30 2022 |
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| Interest income |
$ | 1,917 | $ | 1,505 | ||||
| Interest (expense) |
$ | (11,725 | ) | (2,954 | ) | |||
| Other income |
— | 273 | ||||||
Interest income for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $1,917 and $1,505, respectively. The interest income for both periods represents interest earned on Abacus’ certificates of deposit.
Interest expense for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $11,725 and $2,954, respectively, and is comprised of amortization of deferred financing fees.
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Other Income for the nine months ended September 30, 2022 was $273.
| Years ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Interest income |
$ | 2,199 | $ | 11,500 | $ | (9,301 | ) | (81 | )% | |||||||
| Interest (expense) |
(8,817 | ) | — | (8,817 | ) | 100 | % | |||||||||
| Other income |
273 | 50,000 | (49,727 | ) | (99 | )% | ||||||||||
Interest income decreased by $9,301, or 81%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in interest income is primarily due to an unfavorable change in interest rate terms for Abacus Settlements’ certificates of deposit.
Interest expense increased by $8,817, or 100%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in interest expense is primarily due to a fee for the certificates of deposit of $1,000 as well as amortized deferred financing fees of $7,817 for the year ended December 31, 2022.
Other income decreased by $49,727, or 99%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease in other income is primarily due to a decrease in consulting income as the Company serviced a policy during 2021 for $50,000 that did not occur for the year ended December 31, 2022.
Provision for Income Taxes
| Three Months Ended June 30 2023 |
Three Months Ended September 30 2022 |
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| Provision for income taxes |
$ | — | $ | 582 | ||||
Provision for income taxes for the three months ended June 30, 2023 was $0. Provision for income taxes for the three months ended September 30, 2022 was $582. This amount is primarily attributable to annual report filing fees with various states.
| Six Months Ended June 30 2023 |
Nine Months Ended September 30 2022 |
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| Provision for income taxes |
$ | 2,289 | $ | 1,907 | ||||
Provision for income taxes for the six months ended June 30, 2023 and for the nine months ended September 30, 2022 was $2,289 and $1,907, respectively. The amounts for both the periods are primarily annual report filing fees with various states.
| Years ended December 31, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Provision for income taxes |
$ | (2,018 | ) | $ | (1,200 | ) | $ | (818 | ) | 68 | % | |||||
Provision for income taxes decreased by $818, or 68%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. These amounts are primarily LLC annual report filing fees within the various states.
Business Segments
Operating as a centrally led life insurance policy intermediary, Abacus’ Chief Executive Officer is the Chief Operating Decision Maker (CODM) who allocates resources and assesses financial performance. As a result of this management approach, Abacus is organized as a single operating segment. The CODM reviews performance and allocates resources based on the total originations, total corresponding revenue generated for the period, gross profit, and adjusted EBITDA.
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Key Business Metrics and Non-GAAP Financial Measures
Management uses non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (i) monitor and evaluate the performance of our business operations and financial performance; (ii) facilitate internal comparisons of the historical operating performance of our business operations; (iii) review and assess the operating performance of our management team; (iv) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (v) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
We monitor the following key business metrics and non-GAAP financial measures that assist us in evaluating our business, measuring our performance, identifying trends and making strategic decisions. As such, we have presented the following non-GAAP measure, their most directly comparable U.S. GAAP measure, and key business metrics:
| Non-GAAP Measure | Comparable U.S. GAAP Measure | |
| Adjusted EBITDA | Net Income |
Adjusted EBITDA is net income adjusted for depreciation expense, provision for income taxes, interest income, and non-recurring items that in our judgement significantly impact the period-over-period assessment of performance and operating results. Adjusted EBITDA should not be construed as an indicator of our operating performance, liquidity, or cash flows provided by or used in operating, investing, and financing activities, as there may be significant factors or trends that it fails to address. We caution investors that non-GAAP financial information departs from traditional accounting conventions. Therefore, its use can make it difficult to compare current results with results from other reporting periods and with the results of other companies.
Management believes the use of Adjusted EBITDA measures assists investors in understanding the ongoing operating performance by presenting comparable financial results between periods. We believe that by removing the impact of depreciation and amortization, amounts spent on interest and taxes and certain other non-recurring income and charges that are highly variable from year to year, Adjusted EBITDA provides our investors with performance measures that reflect the impact to operations from trends in changes in revenue and operating expenses, providing a perspective not immediately apparent from net income and operating income. The adjustments we make to derive the non-GAAP measure of Adjusted EBITDA exclude items which may cause short-term fluctuations in net income and operating income and which we do not consider to be the fundamental attributes or primary drivers of our business.
The following table illustrates the reconciliations from net income to adjusted EBITDA for the three months ended June 30, 2023, the three months ended September 30, 2022 and for the six months ended June 30, 2023, and the nine months ended September 30, 2022:
| Three Months Ended June 30, 2023 |
Three Months Ended September 30, 2022 |
Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
Twelve Months Ended December 31, |
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| 2022 | 2021 | |||||||||||||||||||||||
| Net income |
$ | (318,098 | ) | $ | (122,999 | ) | $ | (974,901 | ) | $ | 149,789 | $ | (52,495 | ) | $ | 997,415 | ||||||||
| Depreciation expense |
2,561 | 3,161 | 5,597 | 9,149 | 12,165 | 10,139 | ||||||||||||||||||
| Interest Income |
(1,193 | ) | (358 | ) | (1,917 | ) | (273 | ) | (2,199 | ) | (11,500 | ) | ||||||||||||
| Income tax |
— | 582 | 2,289 | 1,907 | 2,018 | 1,200 | ||||||||||||||||||
| Other income (expense) |
5,863 | 2,954 | 11,725 | 1,449 | 8,818 | — | ||||||||||||||||||
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| Adjusted EBITDA |
$ | (310,867 | ) | $ | (116,660 | ) | $ | (957,207 | ) | $ | 162,021 | $ | (31,694 | ) | $ | 997,254 | ||||||||
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Adjusted EBITDA for the three months ended June 30, 2023 and September 30, 2022 was $(310,867) and $(116,660), respectively.
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Adjusted EBITDA for the six months ended June 30, 2023, was $(957,207) and for the nine months ended September 30, 2022 was $162,021.
Adjusted EBITDA for the year ended December 31, 2022 was $(31,694), compared to $997,254 for the year ended December 31, 2021. This decrease was attributable to higher costs of revenue primarily driven by higher commission expense during 2022 as well as increased general and administrative costs including payroll and marketing for the year ended December 31, 2022.
We monitor the following key business metrics such as the number of policies originated year-over-year in measuring our performance. Origination revenues represent fees negotiated for each purchase and sale of a policy to an investor. The number of policy originations represents the volume of policies over which the above origination services are performed. The number of policy originations directly correlates with origination revenues allowing management to evaluate fees earned upon each transaction. There are no estimates, assumptions, or limitations specific to the number of policy originations.
| Three Months Ended June 30, 2023 |
Three Months Ended September 30, 2022 |
Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
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| Number of Policy Originations |
141 | 112 | 253 | 371 | ||||||||||||
| Years Ended December 31, | % Change | |||||||||||
| 2022 | 2021 | |||||||||||
| Number of Policy Originations |
$ | 487 | $ | 445 | 9 | % | ||||||
Liquidity and Capital Resources
We have financed operations since our inception primarily through customer payments and net proceeds from equity financings in the form of capital contributions from our members. Our principal uses of cash and cash equivalents in recent periods have been funding our operations. As of June 30, 2023 and September 30, 2022, our principal sources of liquidity were cash and cash equivalents of $808,226 and $919,424, respectively, and retained earnings of $509,953 and $2,127,476, respectively. During the three months ended June 30, 2023, we had a net loss of $318,098 and net cash provided by operations of $20,655. During the six months ended June 30, 2023, we had a net loss of $974,901 and net cash used by operations of $24,292. We believe our existing cash and cash equivalents as well as proceeds from equity financings will be sufficient to fund anticipated cash requirements for the next twelve months.
Our future capital requirements will depend on many factors, including our revenue growth rate, the expansion of our sales and marketing activities, the timing and extent of spending to support product development efforts. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products and technologies. We may be required to seek additional equity or debt financing. The additional debt financing would result in debt service obligations, and any future instruments governing such debt could provide for operating and financing covenants that could restrict our operations.
Cash Flows
Cash Flows for the Six Months Ended June 30, 2023 and Nine Months Ended September 30, 2022:
The following table summarizes our cash flows for the six months ended June 30, 2023 and nine months ended September 30, 2022:
| Six Months Ended June 30 2023 |
Nine Months Ended September 30 2022 |
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| Net cash used in operating activities |
$ | (24,292 | ) | $ | (875,892 | ) | ||
| Net cash used in investing activities |
(182,528 | ) | (130,821 | ) | ||||
| Net cash used in financing activities |
(443,694 | ) | (673,165 | ) | ||||
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Cash Flows for the Years Ended December 31, 2022 and 2021
The following table summarizes our cash flows for the years ended December 31, 2022 and 2021:
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided by (used) in operating activities |
$ | (383,291 | ) | $ | 1,342,763 | |||
| Net cash (used) in investing activities |
(64,011 | ) | (241,528 | ) | ||||
| Net cash (used) in financing activities |
(693,259 | ) | (354,577 | ) | ||||
Operating Activities
During the six months ended June 30, 2023 and the nine months ended September 30, 2022, our operating activities used $24,292 and $875,892 of net cash in operating activities, respectively.
During the year ended December 31, 2022, our operating activities used $383,291 of net cash as compared to net cash provided from operating activities of $1,342,763 during the year ended December 31, 2021. The decrease in net cash from operating activities during 2022 compared to 2021 was primarily due to decreases in contract liabilities. The timing of revenue recognition, customer billing, and cash collection can result in billed accounts receivable, unbilled revenue (contract assets), and deferred revenues (contract liabilities). This decrease in contract liabilities was partially offset by increases in related party receivables.
Investing Activities
During the six months ended June 30, 2023 and the nine months ended September 30, 2022, our investing activities used $182,528 and $130,821 of net cash, respectively.
During the year ended December 31, 2022, investing activities used $64,011 of net cash as compared to net cash used in investing activities of $241,528 during the year ended December 31, 2021. The change in cash used in investing activities was primarily attributable to the amortization of the marketplace development software acquired during December 31, 2021, partially offset by purchases of property, plant, and equipment.
Financing Activities
During the six months ended June 30, 2023 and the nine months ended September 30, 2022, our financial activities used $443,694 and $673,165 of net cash, respectively.
During the year ended December 31, 2022, financing activities used $693,259 of net cash as compared to $354,577 during the year ended December 31, 2021. The change in cash used in financing activities was primarily attributable to the distributions to members of $659,363 partially offset by an inflow of $980 for amounts due to members and affiliates of $10,877.
Contractual Obligations and Commitments
Our contractual obligations as of June 30, 2023, which are included as liabilities on our balance sheet, include operating lease obligations of $190,521 with $177,873 due in less than one year and $12,648 due within one to three years, which are comprised of the minimum commitments for our office space.
Critical Accounting Policies and Estimates
We have prepared our financial statements in accordance with GAAP. Our significant accounting policies are described in more detail in Note 2 to our financial statements contained herein. While our preparation of these financial statements requires us to make estimates, assumptions and judgments from time to time that may affect the reported amounts of assets, liabilities and related disclosures, as of the date of these financial statements, we have not identified any estimates made in accordance with generally accepted accounting
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principles that involve a significant level of estimation uncertainty which have had or are reasonably likely to have a material impact on the financial condition or results of operations.
Related Party Receivables
Related party receivables include fees to be reimbursed to Abacus from life expectancy reports, assisted physician services and escrow services incurred on policies that related party financing entities purchase as part of the origination agreement with Abacus. Related party receivables are stated at their net realizable value. All of the outstanding receivables of $5,710 as of June 30, 2023 were collected in July, 2023. About 36% of due fees as of September 30, 2022, in the amount of $386,724, were collected in October 2022. Abacus provides an allowance for doubtful accounts equal to the estimated collection losses that will be incurred in collection of all receivables. The estimated losses are based upon historical collection experience coupled with a review of the current status of all existing receivables. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is remote. There was no allowance for doubtful accounts as of, June 30, 2023, or September 30, 2022.
Intangible Assets
Intangible assets are stated at cost, less accumulated amortization, and consist of capitalized costs incurred for the development of internal use software. The costs incurred exclusively consist of fees incurred from an external consulting firm during the development stage of the project and are subject to capitalization under ASC 350-40, Internal-Use Software. The software is amortized on the straight-line basis over an estimated useful life of 3 years. Abacus reviews definite-lived intangible assets and other long-lived assets for impairment at least annually or whenever an event occurs that indicates the carrying amount of an asset may not be recoverable. No impairment was recorded for the three months ending June 30, 2023, and September 30, 2022 or for the six months ending June 30, 2023, and nine months ended September 30, 2022.
Revenue Recognition
Abacus recognizes revenue from origination activities by acting as a provider of life settlements and viatical settlements representing investors that are interested in purchasing life settlements on the secondary or tertiary market. Revenue from origination services consists of fees negotiated for each purchase and sale of a policy to an investor, which also include any agent and broker commissions received and the reimbursement of transaction costs.
Abacus’ revenue-generating arrangements are within the scope of ASC 606, Revenue from Contracts with Customers. Abacus originates life settlements policies with third parties that include settlement brokers, life insurance agents, and direct consumers or policyholders. Abacus then provides the administration services needed to initiate the transfer of the life settlement policies to investors in exchange for an origination fee. Such transactions are entirely performed through an escrow agent. In these arrangements, the customer is the investor, and Abacus has a single performance obligation to originate a life settlement policy for the investor. The consideration transferred upon each policy is negotiated directly with the investor by Abacus and is dependent upon the policy death benefits held by each life settlement policy. The revenue is recognized when the performance obligation under the terms of the contracts with customers are satisfied. Abacus recognizes revenue from life settlement transactions when the closing has occurred and any right of rescission under applicable state law has expired (i.e., the customer obtains control over the policy and has the right to use and obtain the benefits from the policy). While rescission periods may vary by state, most states grant the owner the right to rescind the contract before the earlier of 30 calendar days after the execution date of the contract or 15 calendar days after life settlement proceeds have been sent to the owner. Purchase and sale of the policies generally occurs simultaneously, and only the fees received, including any agent and broker commissions and transaction costs reimbursed, are recorded as gross revenue.
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For agent and broker commissions received and transaction costs reimbursed, Abacus has determined that they are acting as the principal in the relationship as they maintain control of the services being performed as part of performance obligation prior to facilitating the transfer of the life settlement policy to the investor.
While the origination fees are fixed amounts based on the face value of the policy death benefit, there is variable consideration present due to the owner’s rescission right. When variable consideration is present in a contract, Abacus estimates the amount of variable consideration to which it expects to be entitled at contract inception and again at each reporting period until the amount is known. Abacus applies the variable consideration constraint so that variable consideration is included in the transaction price only to the extent it is probable that a subsequent change in estimate will not result in a significant revenue reversal. While origination fees are variable due to the rescission periods, given the that the rescission periods are relatively short in nature, Abacus has concluded that such fees are fully constrained until the rescission period lapses and thus records revenue at a fixed amount based on the face value of the policy death benefit after the rescission period is over.
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BUSINESS
Our Mission
Abacus’ Mission: to educate every life insurance policy owner that their life insurance is personal property and, like any other asset they own, has a market value that can be monetized by selling into the secondary market.
Abacus Overview
Abacus is a leading vertically integrated alternative asset manager specializing in investing in in-force life insurance products throughout the lifecycle of a life insurance policy. Traditionally, life insurance policies are owned by individuals to insure their lives. Consistent with our mission, we educate policyholders regarding the potential to sell their policies to investors, often at a significant premium to the current cash surrender value. As an alternative asset manager, we purchase life insurance policies from consumers seeking liquidity and actively manage these policies over time via trading, holding and/or servicing. To date, we have purchased over $2.9 billion in policy value and have helped thousands of clients maximize the value of their life insurance.
As one of the leading buyers of life insurance policies in the U.S. for the last 18 years, we sit at the heart of the life settlements industry. We leverage our strong market position, highly efficient origination platform and proprietary technology to drive our revenue and profitability. Abacus and its executive team have deep experience in the life settlement industry. Using this experience, the Company has established policies and guidelines with respect to its purchase of universal life, whole life and convertible term life insurance policies. Currently, the Company principally invests in non-variable universal life insurance policies, with approximately 89% of the insurance policies, measured by face value, acquired by the Company in fiscal year 2021 being non-variable universal life policies, but the Company retains the discretion to invest in whole life or convertible term life insurance policies. These guidelines focus on the age of the insured, whether the insured is a man or a woman, the duration of the underlying life insurance policy, the expected mortality risk of the underlying life insurance policy, the projected internal rate of return of the investment in the underlying life insurance policy and the amount of the death benefit of the underlying life insurance policy. The Company excludes making investments in life insurance policies based on certain types of the primary health impairment associated with the underlying insured to ensure that all policies are purchased in accordance with established industry standards and state law requirements. The Company’s guidelines are designed to allow the Company to target the life insurance policies that it believes have the most upside potential to generate attractive risk-adjusted returns to the Company through either its hold or trade portfolio. Our proven policy origination process first locates policies and screens them for eligibility for a life settlement. This process includes verifying that the policy is in force, obtaining consents and disclosures and submitting cases for life expectancy estimates, which is a process known as origination services. We generate fees on the policies we originate, which are sourced from three channels: (i) a large and growing network of financial advisors and agents, (ii) an on-going direct-to-consumer marketing campaign and (iii) a number of traditional life settlements intermediaries that submit policies to us on behalf of an advisor or client. Once identified, we utilize our proprietary “heat-map” technology platform to determine the initial risk and viability of policies. Thereafter, a purchased policy is “actively managed,” whereby we consistently monitor the policy risk to optimize revenue by choosing to either (x) trade the policy to a third-party institutional investor (i.e., receive a trade spread) or (y) hold the policy over time (i.e., pay premiums and receive payout). Additionally, we service policies on behalf of third parties for which we receive fees as a percentage of the values of the policies. Our multi-faceted and dynamic revenue model is made possible by the fact that we sit at the heart of the entire life settlements industry.
Our revenue generation platform and economic model is best summarized below:
| 1. | Origination Fees (on average, 2% of face value of acquired policies) |
| 2. | Active Management (spreads for traded policies and realized returns for held policies) |
| 3. | Third Party Portfolio Servicing (on average, 0.5% of total asset value) |
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We are currently a leader in the life settlements industry. The Company has approximately 20% market share based on our 2021 capital invested/total industry capital invested and data compiled in a 2021 report by The Deal and Life Settlements Report, a U.S. life settlements industry news source. Data for the report was aggregated from each state based on 2021 annual reporting. We have a proven track record of growth and strong asset returns. We are currently operational in 49 states, which is a key differentiator in an industry with high barriers to entry given the significant regulatory requirements. Our business is supported by a total of approximately 105 employees and innovative leadership team members, each of whom has an average of over 20 years of experience in the U.S. life settlements industry.
Our outstanding operations and execution team are led by a seasoned management team. Jay Jackson (CEO) has worked in the investment industry for over 25 years (including at a family office, major investment firms and alternative asset managers) and pioneered the origination process and trading platform for our firm. William McCauley (CFO) has over 20-years of experience and has held Senior Finance positions for some of the largest insurance carriers (including Transamerica, MassMutual and John Hancock). In addition, we have three Managing Partners (Todd “Sean” McNealy, Kevin “Scott” Kirby and Matthew Ganovsky) who co-founded Abacus in 2004 and helped build the institutional and broker market for the entire industry. In summary, our leaders are innovators and have directly contributed to the development of the broader life settlements industry.
We have grown our origination business by nearly four times since 2016 and have serviced approximately $950 million in policies since October 2021. With a previous $150 million capital base from a top alternative asset manager, we have acquired nearly 1,600 policies over the past three years via our active portfolio management strategy. Within our traded portfolio, we acquired 1,245 policies and generated a 22% realized return. Within our hold portfolio, we acquired 238 policies with a 12% projected annual return and held an additional 71 policies to maturity yielding a 102% realized return. These returns demonstrate our ability to originate policies and drive meaningful economics with a scaled capital base.
Abacus Settlements was formed as a New York limited liability company in 2004 and LMA was formed in 2017 as a Florida limited liability company. In 2016, Abacus Settlements was licensed in Florida as a life settlement broker and became a Florida limited liability company. We are not an insurance company, are not licensed or regulated as an insurance company and therefore do not underwrite insurable risks for our own account.
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Our Industry / Opportunity
Large Addressable Market with Meaningful Growth Potential
We operate within a large, growing and currently underpenetrated market. The U.S. life insurance industry is an approximately $13 trillion market, which is almost three times the size of the entire real estate industry in the Americas. Notably, given the scale of the overall life insurance industry, more than 90% of life insurance policies will never end up paying a claim. Approximately 75% of policyholders over the age of 65 will either cancel or allow their coverage to lapse, forfeiting the right to ever receive a payout. The life settlements industry helps solve this problem by allowing policyholders the opportunity to monetize their otherwise underutilized asset.
The combination of the large U.S. life insurance market and the high percentage of policies that never pay a claim creates a considerable opportunity for Abacus and the broader life settlements industry. Specifically, the scale of the life settlements market opportunity is $233 billion each year. However, in 2021, the life settlements industry only captured $4 billion, or approximately 2% of the annual market of lapsed life insurance policies. We believe there is a significant opportunity to increase this market penetration, primarily by driving awareness and education regarding the ability to monetize life insurance policies by utilizing our services.
Life insurance is often a senior citizen’s largest asset and one that can be used to alleviate retirement challenges, but it is rarely treated in this way. This can be partially attributed to the fact that almost half of all financial advisors are not aware that selling a life insurance policy is an option for their clients. We help financial advisors and their clients understand that a life insurance policy is personal property and selling it for a fair market value is a legitimate, safe and viable choice to create more options for the future. While less than 1% of financial advisors and agents currently transact in the life settlements market, based on research conducted by the Life Insurance Settlement Association, the primary industry trade association for the U.S. life settlements industry, of which the Company is a long-standing member, we believe approximately 90% of senior citizens who let their life insurance policies lapse, or surrendered their policies, would have considered this alternative if they had been made aware of it before lapsing or surrendering their policies. The reference to this study can be found at the Life Insurance Settlement Association—https://www.lisa.org/life-settlements-industry-will-grow-as-more-seniors-are-informed-of-their-options-say-experts-at-lisa-conference/.
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Selling a life insurance policy is a valuable transaction and for those consumers who transact, the benefits can be substantial. On average, life settlements companies pay sellers nearly eight times more than the current cash value of a policy. Selling a life insurance policy not only alleviates the requirement for a policyholder to pay premiums but creates a meaningful and immediate monetization event. Sellers use these proceeds in a variety of ways, including to support their retirement, transfer wealth and pay medical bills.
Generally Uncorrelated Alternative Asset Class with Institutional Investment Grade Counterparts
While selling life insurance policies at a fair market value can have significantly positive impacts on a person’s life, it is a mutually beneficial transaction. The underlying life insurance policy is a highly attractive asset that has minimal payout risk and generally uncorrelated returns. The counterparties to these transactions are generally high-quality investment grade insurance companies. In fact, 95% of our carriers have an “A Rating” or better. Additionally, these life insurance policies are cash backed by the carriers, which means they are required to pay policy claims ahead of any other contractual obligation, including senior debt. We do not believe that there has ever been a life insurance policy issued that did not ultimately pay a claim at mortality due to the illiquidity of a carrier.
In addition to counterparty quality, this is a largely a-cyclical asset class. A life insurance policy is sometimes described as a “mortality-driven zero-coupon bond” because its underlying value will appreciate over time as it approaches maturity (i.e., as the policyholder ages). This is best demonstrated when comparing our historical risk-adjusted returns relative to other benchmark asset classes.
Our stockholders will have the opportunity to gain access to this unique asset class, which has historically been reserved for firms that can either directly originate policies or large institutional investors that can deploy meaningful amounts of capital.
We are at the Heart of the Life Settlements Industry
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Abacus’ Origination Model
Our “Origination Process” is core to our entire business and drives our economics. We average approximately 2% of face value in origination fees on policies and have spent the last 20 years developing three high quality origination channels (financial advisors or agents, direct to consumer and life settlements brokers).
An example of our target market includes policyholders averaging 75 years old whose insurance needs have changed, rendering their life insurance policy no longer necessary. We then focus our origination process on these targeted individuals, developing processes and procedures for identifying and screening policies that have the most potential return for the least projected cost.
We have three distinct origination channels to reach this target market.
| 1. | Financial Advisor or Agent—Our largest origination channel involves working directly with financial advisors to facilitate the sale of client policies. Since our founding, we have been at the forefront of developing this market and are now ingrained in a network of over 30,000 financial advisors. We are currently on multiple national platforms, we present at conferences, and we develop marketing tools specifically to help advisors efficiently present the benefits of this product to their clients. As we highlighted earlier, 49% of financial advisors are unaware this financial option exists and less than 1% have completed a life settlement transaction. This origination channel has driven our four times growth over the last six years, and we believe it will continue to be a priority for our future growth. |
| 2. | Direct to Consumer—We have been building this channel for several years and have focused heavily on increasing broad consumer awareness and education regarding the ability to monetize life insurance policies by utilizing our services. We have been active in a variety of common direct-to-consumer advertisement channels, including radio and television advertisements in particular. In addition, we have created a unique “Policy Value Calculator” whereby individuals can receive an instant valuation on their life insurance policies. The direct-to-consumer channel has historically driven origination on smaller face value policies through our financial advisor or agent channel, thereby expanding the scope of policies we are able to value and acquire. |
| 3. | Traditional Life Settlements Intermediaries—Within this channel, we engage with life settlements intermediaries or brokers who submit policies to us on behalf of an advisor or client, for which the life settlement intermediary earns a commission. We intend to slowly reduce our reliance on these intermediaries over time and focus our efforts on building out the technology required to gain access to and educate both the financial advisor and direct-to-consumer channels. |
Abacus currently has a dedicated 45-person origination team with 16 sales members assigned by channel. We intend to continue to fuel origination growth by expanding our team and outreach. In order to drive awareness across all origination channels, we plan to expand our marketing and launch national television advertising campaigns.
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Abacus’ Policy Acquisition Process
A life settlement transaction is the process by which a third-party intermediary acquires an existing life insurance policy for an amount greater than its current cash surrender value. Upon closing of the life settlement transaction, the insured receives an immediate cash payment, and the third-party intermediary receives ownership of the policy. Thus, the third-party intermediary becomes the beneficiary of the insured’s claim payout but is now solely responsible for all future premium payments. Our company functions as this third-party intermediary.
The process of acquiring a policy is highly regulated and policyholder friendly. Unique licenses are mandatory to operate, and significant disclosures are required to be made available to consumers. We originate these policies through three distinct channels (i.e., financial advisors / agents, direct-to-consumer and traditional life settlements intermediaries). We first screen each policy to ensure it is eligible for a life settlement, including verifying the policy is in force, obtaining appropriate consents and disclosures, and submitting cases for medical underwriting and life expectancy estimates. In connection with this process, we use our proprietary analytics and risk-rating systems to determine an estimated market value for each individual policy.
The Company has established policies and guidelines with respect to its purchase of life insurance policies. These guidelines focus on the age of the insured, the sex of the insured, the duration of the underlying life insurance policy, the expected mortality risk of the underlying life insurance policy, the projected internal rate of return of the investment in the underlying life insurance policy and the amount of the death benefit of the underlying life insurance policy. The Company excludes making investments in life insurance policies based on certain types of the primary health impairment associated with the underlying insured to ensure that all policies are purchased in accordance with established industry standards and state law requirements.
Following the origination, underwriting and valuation processes, we formally present our proposed purchase price to the policyholder or advisor. If agreed upon, the settlement closing process begins. Appropriate closing documents are reviewed by our in-house counsel, and we send funds to an independent escrow agent. Simultaneously, change of ownership and beneficiary documentation is sent to the underlying insurance carrier. Once the changes are confirmed by the carrier, the escrow agent sends the proceeds to the appropriate party, and we become responsible for the underlying insurance policy (i.e., paying premiums and receiving claim). The proceeds from the escrow agent will also include the commission(s) we owe to the broker and / or agent as well as our fee for completing the origination services.
While the transaction is deemed closed, it is important to note that the policy owner may generally rescind the life settlement contract within 30 days from execution of the agreement or 15 days from the receipt of cash proceeds by the owner. As such, revenue is not recorded until this rescission process is over.
Once the transaction is closed, the policy enters our active portfolio management whereby we determine whether a policy should be sold to a third-party institutional investor or held on our balance sheet.
Proprietary Technology Platforms Support Our Business
We have and continue to develop a comprehensive suite of technology products that helps drive origination, underwriting and trading. Specifically, we have created:
| 1. | Risk Rating Heat Map—Using the large amount of data we have gathered over time, we have developed a proprietary risk-rating platform that measures the risk of life insurance contracts on a range from 1–5 (low–high risk, respectively). This risk score is calculated on a wide range of factors, including (i) duration and extension risk, (ii) policy face value and purchase type, (iii) policy type, (iv) carrier rating, (v) life expectancy (“LE”) and LE extension ratios, (vi) age and age on LE date and (vii) survival probability. We believe this platform is a key differentiating factor relative to our competitors as it gives us a meaningful advantage when valuing and purchasing life insurance policies. |
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| 2. | Policy Value Creator—Our “Policy Value Calculator” drives origination by using proprietary data to instantly value policies for both individuals and financial advisors. This easy-to-use online tool only requires four pieces of information: (i) gender, (ii) age, (iii) face value and (iv) policy type. These data points then generate a valuation range that advisors and individuals can use to quickly assess the current value of their policy. This product helps educate consumers and bridges the gap between our specific offering and the $233 billion annual market of lapsed policies. |
| 3. | Innovations in “InsurTech”—More recently, we have begun developing “Abacusmarketplace.com”, which is a blockchain tertiary trading, servicing and valuation platform. Given we will be able to see a large suite of data gathered by this website, we believe it will help us maintain our leading market position and keep us at the heart of the life settlements industry. We added the ability for investors to directly purchase policies in the third quarter of 2023. Abacusmarketplace.com is still in the early stages of development and we do not currently expect that Abacusmarketplace.com will have a material impact on the Company’s future financial results. |
Active Portfolio Management Strategy
With meaningful support from our proprietary risk rating heat map, we consistently evaluate policies (at origination and throughout the lifecycle) to generate essentially uncorrelated risk adjusted returns. Upon acquiring a policy, we have the option to either (i) trade that policy to a third-party institutional investor (i.e., generating a spread on each trade) or (ii) hold that policy on our balance sheet until maturity (i.e., paying the premiums over time and receiving the final claim / payout). This process is predicated on driving the best economics for Abacus.
| 1. | Traded Portfolio—Our traded portfolio returns are driven by (i) the spread we generate by selling policies to third-party institutional investors and (ii) our ability to quickly recycle capital. Our trade |
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| spreads average 20% and we have historically recycled capital 3.6 times per year. These two metrics are driven by our ability to effectively originate new policies (supply) and the underlying market interest for the policies (demand). |
| 2. | Hold Portfolio—Relative to our traded portfolio, our hold portfolio has the potential to generate a higher estimated annual return than our traded portfolio but requires approximately a 3 to 4 times greater capital investment, which is driven by the need to hold policies, rather than recycle the policies in trading, and to fund premium payments during the holding period for a policy. To the extent that we are not able to commit the required capital, we then focus efforts more on our traded portfolio. Our origination platform and proprietary risk rating heat map has allowed us to hold only what we determine to be the highest quality policies which have our lowest risk ratings. Of the 71 policies we have held to maturity ($37 million in face value), we have achieved a 102% realized return. We currently have an additional 238 policies with a projected 12% annual return ($317 million in face value). We anticipate growing the size of our hold portfolio over time as we scale our capital base. We believe there is a unique opportunity to securitize a basket of high-quality policies to sell to a third-party investor for a realized profit much sooner than contracts may actually expire. |
Policy Servicing
In addition to generating economics on the polices we directly originate and actively manage, we have a dynamic platform to service bundles of policies for a variety of third-party institutions. We generate revenue by charging a base servicing fee of approximately 0.5% of total asset value of the portfolio. We have experience servicing a large number of policies for highly sophisticated institutions, including policies for KKR and Apollo. Beyond our fees, servicing policies at scale supports our data analytics and keeps us at the heart of the life settlements industry. We have a sophisticated team of professionals solely focused on servicing these policies.
Prospects for Future Growth
Continued Maturation of the Life Settlements Industry
As described above, there is $233 billion in policy value that lapses on an annual basis. However, the life settlements industry captured only approximately 2% of the potential market in 2021, which leaves significant runway for future growth for industry participants. The total face value of life insurance policies is expected to grow from approximately $6 billion in 2022 to approximately $8 billion in 2028, which is a 5% compounded annual growth rate. Given our position at the heart of the life settlements industry, we believe that we are well positioned to capitalize on this anticipated market growth.
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Focus on Growing our Origination Process
Our ability to originate policies is essential to scale our business over time. In order to support this expected growth, we continue to invest in our technology and marketing infrastructure. In general, we expect our efforts will continue to focus on driving education and awareness of life settlements. In order to meet this growing demand, we have increased our total employee headcount by 23% over the last twelve months and we anticipate a 50% increase in our headcount by 2024.
Continued Innovation in Technology
Using technology to improve our analytics, market liquidity and velocity of capital use is a key priority. Certain key technology elements are:
| 1. | Analytics (Abacus Analytics)—the standard pricing and valuation platform for policy valuation and portfolio assessment that we believe will allow us to obtain visibility into every transaction in the industry. |
| 2. | Liquidity (Abacusmarketplace.com)—tertiary trading, servicing and valuation platform (added direct purchase in 2023). Abacusmarketplace.com is a proprietary technology platform that has been designed in order to facilitate tertiary trading, servicing and valuation for the life settlement industry. This platform is intended to increase the trading volume for the entire industry by removing intermediaries and improving the efficiency and security of the transactions. The Company expects to realize future revenue through licensing agreements with Abacusmarketplace.com. However, Abacusmarketplace.com is still in the early stages of development, and we do not currently expect that Abacusmarketplace.com will have a material impact on the Company’s future financial results. With blockchain technology, we expect that there will be increased comfort that the documents are secure on a private blockchain, which we believe will facilitate faster closing times. The blockchain technology to be used is still in the early stages of development and is currently not a material part of the Company’s business. We believe that Abacusmarketplace.com could be a leader in the industry and will allow an investor to fully understand how it may impact future business strategies and financial results. |
| 3. | Velocity (Lapetus Life Event Solutions, AgingIQ and BlockCerts)—key partnerships and tools that complement and enhance our core analytics platforms. |
| a. | Lapetus Life Event Solutions—partnership between Abacus and Lapetus Solutions, Inc. to build and develop current life expectancy tables based on our 18 years of data. This information includes tens of thousands of unique datapoints, aiding more accurate predictions of mortality experience related to several demographics including age, income and location. |
| b. | AgingIQ—lifespan prediction tool utilizing our mortality database. This tool explores how people can extend their lifespans and healthspans by adjusting current lifestyle related decisions (financial, healthy living and education). |
| c. | BlockCerts—partnership utilizing BlockCerts Web 4.0 technology to lead the next generation of life insurance and annuity purchases using blockchain capabilities. The resulting benefit includes cost reductions, enhanced data security and a competitive edge in the origination marketplace. |
Access to Capital Markets Provides More Attractive Financing
We believe that as a publicly traded company, we will have access to a lower cost of capital, which will optimize our per policy revenue and allow us to fund additional investment in infrastructure. Additionally, as discussed in more detail below, we plan to begin increasing our balance sheet hold portfolio, which we believe will drive higher long-term returns.
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Transitioning Our Business Model as Our Capital Base Scales
As our capital base scales, we aim to increase the proportion of policies that we hold on our balance sheet so that the policies we hold and the policies we trade each comprise 50% of our business model. One of the most obvious benefits to a larger hold portfolio is that it increases the predictability of returns (i.e., held policies will likely increase in value over time, largely independent of trading market conditions). Additionally, with a larger hold portfolio, there is a unique opportunity to begin securitizing policies. In the long-term, we believe securitized portfolios can drive an even lower cost of capital and can be sold in scale to third parties at a significant multiple.
Proven Ability to Deploy Capital and Scale
Over the past few years, we managed a $150 million capital base via a joint venture with a large alternative asset manager. This joint venture was terminated on the Closing Date. Under GAAP the financial results of the entire joint venture are not included in our financial statements as the joint venture is not under common control and neither Abacus nor LMA have a direct ownership interest or investment in the joint venture. The financial impacts of the joint venture recognized in the financial statements solely relate to the services provided by Abacus and LMA to the joint venture and are discussed in the respective related party transaction notes in the financial statements. However, our track record shows our ability to operate and generate highly attractive returns. The joint venture produced $21.6 million and $27.4 million in revenue and $16.2 million and $22.5 million in net income for fiscal year ended December 31, 2021 and December 31, 2020, respectively. We believe that becoming a publicly traded company will allow us to more effectively deploy capital to scale our business.
Over the past six years, we have grown our total originations by approximately four times. Within our traded portfolio we have acquired 1,245 policies for a total face value of $1.9 billion, generating a 22% realized return per policy. Within our hold portfolio, we have acquired 309 policies, with 238 policies currently on our balance sheet with a projected annual return of 12% and 71 policies that have matured and generated a realized return of 102%.
Beyond our traded and held portfolios, we have serviced approximately $950 million in policies over the last twelve months (including assets for KKR and Apollo). Additionally, we have underwritten and valued approximately $520 million of policies on behalf of third parties.
It is currently expected that the Company will require approximately thirty-five million dollars ($35,000,000) to fund its operations over the next 12 months. The Company believes that its funds from operations will provide sufficient funds to continue its operations for the foreseeable future.
Business Combination
On August 30, 2022, East Resource Acquisition Company entered into the Merger Agreement with the Merger Subs, pursuant to which, among other things and subject to the terms and conditions contained in the Merger Agreement, Abacus Merger Sub merged with and into Abacus Settlements, with Abacus Settlements surviving the Abacus Merger as a wholly owned subsidiary of East Resource Acquisition Company, and LMA Merger Sub merged with and into LMA, with LMA surviving the LMA Merger as a wholly owned subsidiary of East Resource Acquisition Company. In connection with the Closing of the Merger, East Resource Acquisition Company was renamed Abacus Life, Inc.
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, on June 30, 2023, the Business Combination was consummated.
Our Employees
As of January 31, 2024, we had 105 employees, none of whom are subject to any collective bargaining agreement or represented by a labor union. All of our employees are based in the United States. To date, we have
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not experienced any work stoppages and we consider our employee relations to be good. We believe that our employees are critical to our long-term success, and in 2019, we were ranked a top 3 place to work in Orlando based on employee reviews.
The core of our business is driven by our ability to successfully originate new policies. We have built a highly experienced forty-five (45) person team dedicated solely on the origination and policy acquisition process. Specifically, we have a (i) sixteen (16) person sales team, (ii) ten (10) person team of acquisition managers and case processors, (iii) fifteen (15) person team focused on policy evaluation and closing processes (i.e., contracts, legal and accounting) and (iv) four (4) person team supporting our broad marketing and information technology efforts. In addition, we have a fourteen (14) person team that supports our active portfolio management and portfolio servicing efforts. Specifically, we have (a) three (3) actuarial review and financial analysts, (b) three (3) contract and accounting professionals, (c) six (6) servicing specialists and (d) two (2) institutional traders. While our employees have a wide range of roles and responsibilities, we have spent the last 19 years building a highly efficient model.
Customers
As of December 31, 2021, we have served over 3,000 customers with operations in forty-nine (49) states. Abacus maintains a broad customer base with a balance of policy origination across three distinct channels described above.
Our customers include institutional investors seeking to invest in life settlement assets as well as life settlement policy sellers. During the years ended December 31, 2021 and 2020, our largest origination customer based on revenue accounted for 33% and 35% of our revenue, respectively, and our ten largest customers together accounted for 80% and 81% of our revenue, respectively.
In May of 2019, Abacus owners and certain executives of Abacus formed a joint venture with KKR called Nova Trading and Nova Holding (funds that KKR invested money in and Abacus provided investment and trading services). These related party funds, Nova Trading and Nova Holding, are collectively called the “Nova Funds.” Following the Business Combination, Abacus does not intend to continue its relationship with the Nova Funds or provide management services to the Nova Funds. While the Company does not intend to continue its joint venture relationship with the Nova Funds after the expiration of this joint venture following the Business Combination, the Company expects to retain KKR as a client. For the fiscal years ended December 31, 2021 and December 31, 2020, the Nova Funds generated $21.6 million and $27.4 million in revenue and $16.2 million and $22.5 million in net income, respectively. For the percent of revenue that the Nova Funds contributed to Abacus, please refer to the footnote disclosures on page F-115-F-116 of the Abacus Audited Financials for fiscal years ended December 31, 2021 and December 31, 2020.
Intellectual Property
Our business depends, in part, on our ability to develop and maintain the proprietary aspects of its core technology. We rely on patents and trademarks to protect our intellectual property.
As of October 14, 2022, we own one pending United States patent application relating to market-linked investment vehicles secured by non-correlated or low-correlated assets, and we have been issued a federal registration for our “Abacus Settlements” trademark. We also hold various domain names for websites that we use in our business. Additionally, we have developed and maintain proprietary software for our internal use to aid in pricing, valuation and risk analysis of life settlement policies.
Regulatory Overview
We are subject to various laws, regulations and licensing requirements in the United States which may expose us to liability, increase costs or have other adverse effects that could harm our business. These laws and regulations include, but are not limited to, data privacy and data localization, healthcare, insurance, copyright or
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similar laws, anti-spam, consumer protection, employment and taxation. Compliance with such laws can require changes to our business practices and significant management time and effort. Additionally, as we continue to develop and improve consumer-facing products and services, and as those offerings grow in popularity, the risk that additional laws and regulations will impact our business will continue to increase. We believe that we are in material compliance with all such laws, regulations and licensing requirements.
Data Privacy Laws and Regulations
Because we receive, use, transmit, disclose and store personal data, we are subject to numerous state and federal laws and regulations that address privacy, data protection and the collection, storing, sharing, use, transfer, disclosure and protection of certain types of data. We are subject to the TCPA which restricts the making of telemarketing calls and the use of automatic telephone dialing systems. Violators of the TCPA face regulatory enforcement action, substantial civil penalties, injunctions, and in some states, private lawsuits for damages.
Privacy and data security regulation in the U.S. is rapidly evolving. For example, California enacted the California Consumer Privacy Act (“CCPA”), which came into force in 2020. The CCPA and related regulations give California residents expanded rights to access and request deletion of their personal information, opt out of certain personal information sharing and receive detailed information about how their personal information is used and shared. The CCPA allows for the California Attorney General to impose civil penalties for violations, as well as providing a private right of action for certain data breaches. California voters also recently passed the California Privacy Rights Act (“CPRA”), which will take effect on January 1, 2023. The CPRA significantly modifies the CCPA, including by imposing additional obligations on covered companies and expanding California consumers’ rights with respect to certain personal information. The CCPA’s restrictions on “sales” of personal information may restrict our use of cookies and similar technologies for advertising purposes, as well as increasing our compliance costs and potential liability. The CCPA excludes information covered by the Gramm-Leach-Bliley Act, the Driver’s Privacy Protection Act, the Fair Credit Reporting Act and the California Financial Information Privacy Act from the CCPA’s scope, but the CCPA’s definition of “personal information” is broad and may encompass other information that we maintain.
The passage of the CCPA likely marked the beginning of a trend toward more stringent privacy legislation in the U.S., and multiple states have enacted or proposed similar laws. For example, in 2020, Nevada enacted SB 220 which restricts the “selling” of personal information and, in 2021, Virginia passed the Consumer Data Protection Act which is set to take effect on January 1, 2023 and creates new privacy rights for Virginia residents. There is also discussion in Congress of new comprehensive federal data protection and privacy law to which we likely would be subject if it is enacted.
Various regulators are interpreting existing state consumer protection laws to impose evolving standards for the online collection, use, dissemination and security of other personal data. Courts may also adopt the standards for fair information practices which concern consumer notice, choice, security and access. Consumer protection laws require us to publish statements that describe how we handle personal information and choices individuals may have about the way we handle their personal data.
Our failure to comply with these privacy laws or regulations could expose us to significant fines and penalties imposed by regulators and has in the past and could in the future expose us to legal claims by buyers, or other relevant stakeholders. Some of these laws, such as the CCPA, permit individual or class action claims for certain alleged violations, increasing the likelihood of such legal claims. Similarly, many of these laws require us to maintain an online privacy policy, terms of service and other informational pages that disclose our practices regarding the collection, processing and disclosure of personal information. If these disclosures contain any information that a court or regulator finds to be inaccurate, we could also be exposed to legal or regulatory liability. Any such proceedings or violations could force us to spend money in defense or settlement of these proceedings, result in the imposition of monetary liability or demanding injunctive relief, divert management’s time and attention, increase our costs of doing business and materially adversely affect our reputation.
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Insurance Laws and Regulations
We operate as a life settlement producer in forty-nine (49) states. We have a strong track record with each state in which we are licensed and have not had any reportable incidents. Our in-house counsel and compliance staff reviews every life insurance policy we consider acquiring for compliance with applicable state regulations.
We file an annual report with each state in which it operates, and each state has the ability to request an audit at its discretion. Currently, 42 states have regulations that support the sale of life insurance policies to a third party, like our Company. Each state also has its own policyholder-facing disclosure requirements that we comply with in the ordinary course of its business.
We focus on acquiring and trading non-variable, non-fractionalized life insurance policies. These life insurance policies are deemed to be personal property of the owner based upon the Supreme Court decision Grigsby v. Russell in 1911. Furthermore, non-variable, non-fractionalized life insurance policies are not deemed to be securities under the federal securities laws, and so the Company is not required to register as an investment adviser or an investment company under the Investment Advisers Act of 1940, as amended or the Investment Company Act, respectively.
The Company may, in the future, purchase some amount of variable life insurance policies or interests in the death benefit of underlying life insurance policies. The Company has recently acquired a limited purpose broker dealer, which the Company intends to license to engage in transactions for variable and fractionalized life insurance policies. Abacus expects that any transactions in variable or fractionalized life insurance policies will represent less than 20% of the life insurance policies acquired by the Company at any time. The Company does not, and does not in the future intend to, engage in any life insurance securitization.
Facilities
Our corporate headquarters is located at 2101 Park Center Drive, Suite 170, Orlando, Florida 32835 and our telephone number is 800-561-4148. The headquarters consists of 6,812 square feet of “Class A” office space pursuant to a lease that expires in June 2024. We also sublease additional office space in Orlando, Florida, which consists of approximately 3,000 square feet of space pursuant to a sublease that expires in October 2023. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
Legal Proceedings
We are not currently a party to any material legal proceedings. However, in the ordinary course of business we may be subject from time to time to various claims, lawsuits and other legal and administrative proceedings. Some of these claims, lawsuits and other proceedings may involve highly complex issues that are subject to substantial uncertainties, and could result in damages, fines, penalties, non-monetary sanctions or relief. We intend to recognize provisions for claims or pending litigation when we determine that an unfavorable outcome is probable, and the amount of loss can be reasonably estimated. Due to the inherent uncertain nature of litigation, the ultimate outcome or actual cost of settlement may materially vary from estimates. Additionally, any such claims, lawsuits and proceedings, whether or not successful, could damage our reputation and business.
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MANAGEMENT
Management and Board of Directors
The following sets forth certain information, as of January 29, 2024, concerning the executive officers and members of the board of directors of the Company. Each of the Company’s officers is appointed for a term of one year, or until earlier removed or replaced. Messrs. Gusky and McNealy were appointed to serve as Class I directors, with terms expiring at the Company’s annual meeting of stockholders to be held in 2024; Mr. Katwijk and Mmes. Schulte and Radka were appointed to serve as Class II directors, with terms expiring at the Company’s annual meeting of stockholders to be held in 2025; and Messrs. Jackson and Corbett were appointed to serve as Class III directors, with terms expiring at the Company’s annual meeting of stockholders to be held in 2026.
| Name | Age | Title | ||||
| Jay Jackson |
51 | Chief Executive Officer and Director | ||||
| Matthew Ganovsky |
59 | Co-Founder and President | ||||
| Kevin Scott Kirby |
56 | Co-Founder and President | ||||
| Sean McNealy |
58 | Co-Founder, President and Director | ||||
| William McCauley |
51 | Chief Financial Officer | ||||
| Adam Gusky |
49 | Director | ||||
| Karla Radka |
55 | Director | ||||
| Cornelis Michiel van Katwijk |
57 | Director | ||||
| Thomas W. Corbett, Jr. |
74 | Director | ||||
| Mary Beth Schulte |
58 | Director | ||||
Executive Officers
Jay Jackson—Chief Executive Officer and Director
Mr. Jackson is the President and Chief Executive Officer of Abacus. He joined Abacus Settlements in 2016 as President & Chief Executive Officer and has also served as Chief Executive Officer of LMA since June 2019. His strategic business development and creation of innovative new processes and efficiencies has propelled Abacus forward. Mr. Jackson is an industry thought leader relating to longevity and senior finances; he co-authored the book “Pursuing Wealthspan.” Mr. Jackson also serves as a current member of the Orlando Mayor’s Committee on Livability and Healthy Aging and serves as an Executive Board Member for the Senior Resource Alliance, an agency of the Florida Department of Elder Affairs. Mr. Jackson began his career at Franklin Templeton Investments, where he served as vice president for more than a decade. Prior to joining Abacus, Mr. Jackson co-founded and managed the Fayerweather Street Life Fund, as well as the Cambridge Life Management origination platform for FDO Partners, a $3 billion quantitative investment firm founded by Harvard Business School Professor Ken Froot. We believe that Mr. Jackson is qualified to serve on the board of directors of the Company due to his current role as Chief Executive Officer of Abacus and his 20 years of experience in the financial services and life settlement industry.
Sean McNealy—Co-Founder, President and Director
Mr. McNealy is the Co-Founder and President of Abacus. Mr. McNealy has been a leader in the life settlements industry for over 16 years with extensive industry experience in marketing and capital markets. Along with the other two Managing Partners, he co-founded Abacus Settlements in 2004, and has served as Co-Founder and President of Abacus since that date. Mr. McNealy has written numerous articles about the life settlement industry that have been published in various trade magazines, and has presented to many large insurance broker consortiums, producer groups and key national accounts. In 1991, he graduated from the University of Central Florida with a Bachelor of Science in Marketing. We believe that Mr. McNealy is qualified to serve on the board of directors of the Company due to his current role as President of Abacus and experience in the life settlement industry.
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William McCauley—Chief Financial Officer
Mr. McCauley currently serves as the Chief Financial Officer of LMA. Upon the closing of the Business Combination, Mr. McCauley began serving as the Chief Financial Officer of the Company. From January 2020 through May 2022, Mr. McCauley served as the Chief Financial Officer of Abacus Settlements, where he managed financial activities and developed financing models. Prior to joining Abacus, he served as the Chief Financial Officer at IFP Advisors, LLC, a registered investment adviser and broker, where he was responsible for all financial activities of the company and was involved in both debt and equity financing. Mr. McCauley also served as a Director of Finance at McKinsey & Company from January 2017 until May 2018, where he was responsible for the financial statements of more than 30 start-up businesses. Mr. McCauley received his Bachelor of Science in Accounting from Bentley University and his MBA from Babson College.
Matthew Ganovsky—Co- Founder and President
Mr. Ganovsky has been a leader in the life settlements industry for over 25 years with extensive industry experience. He co-founded Abacus Settlements, in 2004, and has served as Co-Founder and Managing Partner of Abacus since that date. Mr. Ganovsky manages our broker division, with involvement in more than 3,000 transactions. Upon the closing of the Business Combination, Mr. Ganovsky began serving as the President of the Company. Mr. Ganovsky received his degree in Hospitality and Real Estate from Valencia College.
Kevin Scott Kirby—Co- Founder and President
Mr. Kirby co-founded Abacus Settlements, in 2004, and has served as Co-Founder and Managing Partner of Abacus since that date. Upon the closing of the Business Combination, Mr. Kirby began serving as the President of the Company. Mr. Kirby has held a Life and Annuity license in the state of Florida since 2006. He received his Bachelor of Science in Business Administration in Business Management from the University of Central Florida.
Independent Board Members
Karla Radka—Director
Ms. Radka has been the President and Chief Executive Officer of Senior Resource Alliance, a non-profit agency for the Florida Department of Elder Affairs, since 2019. Ms. Radka previously held leadership roles at Goodwill Industries of Central Florida, where she served as Chief Operating Officer from 2015 through 2019, Florida Family Care, and Community Based Care of Central Florida, a child welfare non-profit. She also founded Public Allies Central Florida, a nationally recognized program, and served as its executive director until 2014. Ms. Radka received her Bachelor of Science and Master of Science in Counseling from Central Christian University. She also later received a mini-MBA at Rollins College Crummer Graduate School of Business. We believe that Ms. Radka is qualified to serve on the board of directors of the Company due to her relevant experience as the Chief Executive Officer of Senior Resource Alliance, a non-profit that assists seniors in everyday living and a division of the Department of the Elder Affairs in Florida.
Thomas W. Corbett, Jr.—Director
Mr. Corbett has been the principal member of Corbett Consulting, LLC since 2015 and, from 2011 to 2015, served as the Governor of Pennsylvania. He has also served as Pennsylvania’s Attorney General and as the US Attorney for the Western District of Pennsylvania. Mr. Corbett received a Bachelor of Arts in political science from Lebanon Valley College and a Juris Doctor from St. Mary’s University Law School. He was a member of the board of directors for Composites Consolidation Company LLC from 2015 to 2016 and was a member of the board for Animal Friends of Pittsburgh until 2019. Mr. Corbett has served as a member of the Company Board since July 2020. In addition, he currently serves on the board of the Variety Club, The Children’s Charity Pittsburgh. We believe that Mr. Corbett is qualified to serve on the board of directors of the Company due to his extensive leadership and risk management experience as former Governor of Pennsylvania and former Pennsylvania State Attorney General, as well as his service on other public company boards of directors.
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Cornelis Michiel van Katwijk—Director
Cornelis Michiel van Katwijk is the former Chief Financial Officer, Treasurer, Director & Executive Vice President at Transamerica Life Insurance Co. (Iowa) and the former Treasurer & Senior Vice President at Transamerica Advisors Life Insurance Company of New York where he was employed from September 2012 through September 2021. He also served on the board of Transamerica Advisors Life Insurance Co. He previously held the position of Group Treasurer at Aegon NV and Chief Financial Officer at AEGON USA LLC (a subsidiary of Aegon NV). Mr. van Katwijk received an MBA from the University of Rochester and an undergraduate degree from Nyenrode Business Universiteit. We believe that Mr. van Katwijk is qualified to serve on the board of directors of the Company due to former roles as the Chief Financial Officer of Transamerica and financial leadership positions at Aegon NV and AEGON USA LLC.
Adam Gusky—Director
Mr. Gusky has served as the Chief Investment Officer of East Management Services, LP, an affiliate of East Sponsor, LLC, since the inception of East Management Services in 2010. At East Management Services, Mr. Gusky was responsible for all financial due diligence for acquisitions, and he was in charge of the reserve-based lending facility. He also developed and implemented the corporate hedging strategy. Mr. Gusky currently serves on the Board of Directors of Rand Capital Corporation, a publicly traded business development company, where East Asset Management made a control investment. Mr. Gusky received his Bachelor of Arts in History and his MBA from Duke University. We believe that Mr. Gusky is qualified to serve on the board of directors of the Company due to his role as the Chief Investment Officer of East Management Services and his history as an investor in both public and private companies.
Mary Beth Schulte—Director
Ms. Schulte has been a Certified Public Accountant for over 30 years and is currently the Chief Financial Officer of Attivo Partners. In this role, Ms. Schulte is responsible for providing CFO strategy and accounting services to promote business development to primarily early stage companies. Ms. Schulte formerly served as a Director at Anders CPAs & Advisors until 2022, as well as a Principal at UHY Advisors MO, Inc. from 2015 to 2020. Ms. Schulte also currently serves on the Board of Directors of Richard A. Chaifetz School of Business – St. Louis University, Capital Innovators, Cultivation Capital and Arch Grants. Ms. Schulte received her MBA and Bachelor of Science in Business Administration for Accounting from the Richard A. Chaifetz School of Business – St. Louis University. We believe that Ms. Schulte is qualified to serve on the board of directors of the Company due to her prior experience as a Chief Financial Officer of a public company and a Certified Public Accountant.
Corporate Governance
Our corporate governance is structured in a manner the Company believes closely aligns our interests with those of our stockholders. Notable features of this corporate governance include:
| • | we have independent director representation on our audit, compensation and nominating committees, and our independent directors will meet regularly in executive sessions without the presence of our corporate officers or non-independent directors; |
| • | at least one of our directors will qualify as an “audit committee financial expert” as defined by the SEC; and |
| • | we have implemented a range of other corporate governance best practices, including implementing a robust director education program. |
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Composition of the Board of Directors
Our business and affairs are managed under the direction of our board of directors. Our board of directors is staggered in three classes, with two (2) directors in Class I (Adam Gusky and Sean McNealy), three (3) directors in Class II (Cornelis Michiel van Katwijk, Mary Beth Schulte and Karla Radka) and two (2) directors in Class III (Thomas W. Corbett, Jr. and Jay Jackson).
Board Committees
Our board of directors directs the management of our business and affairs, as provided by Delaware law, and conducts its business through meetings of the board of directors and standing committees. We have a standing audit committee, nominating committee and compensation committee. In addition, from time to time, special committees may be established under the direction of the board of directors when necessary to address specific issues.
Audit Committee
Our audit committee is responsible for, among other things:
| • | appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm; |
| • | discussing with our independent registered public accounting firm their independence from management; |
| • | reviewing, with our independent registered public accounting firm, the scope and results of their audit; |
| • | approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
| • | overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the quarterly and annual financial statements that we file with the SEC; |
| • | overseeing our financial and accounting controls and compliance with legal and regulatory requirements; |
| • | reviewing our policies on risk assessment and risk management; |
| • | reviewing related person transactions; and |
| • | establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters. |
Our audit committee consists of Mary Beth Schulte, Karla Radka and Cornelis Michiel van Katwijk, with Ms. Schulte serving as chair. Rule 10A-3 of the Exchange Act and NASDAQ rules require that our audit committee be composed entirely of independent members. Our board of directors has affirmatively determined that Ms. Schulte, Ms. Radka and Mr. van Katwijk each meets the definition of “independent director” for purposes of serving on the audit committee under Rule 10A-3 of the Exchange Act and NASDAQ rules. Each member of our audit committee also meets the financial literacy requirements of NASDAQ listing standards. In addition, our board of directors has determined that Ms. Schulte and Mr. van Katwijk will each qualify as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K. Our board of directors has adopted a written charter for the audit committee, which is available on our corporate website at https://abacuslife.com/. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
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Compensation Committee
Our compensation committee is responsible for, among other things:
| • | reviewing and approving the corporate goals and objectives, evaluating the performance of and reviewing and approving (either alone or, if directed by the board of directors, in conjunction with a majority of the independent members of the board of directors) the compensation of our Chief Executive Officer; |
| • | overseeing an evaluation of the performance of and reviewing and setting or making recommendations to our board of directors regarding the compensation of our other executive officers; |
| • | reviewing and approving or making recommendations to our board of directors regarding our incentive compensation and equity-based plans, policies and programs; |
| • | reviewing and approving all employment agreement and severance arrangements for our executive officers; |
| • | making recommendations to our board of directors regarding the compensation of our directors; and |
| • | retaining and overseeing any compensation consultants. |
Our compensation committee consists of Mary Beth Schulte, Karla Radka and Cornelis Michiel van Katwijk, with Ms. Schulte serving as chair. Our board of directors has affirmatively determined that Ms. Schulte, Ms. Radka and Mr. van Katwijk each meets the definition of “independent director” for purposes of serving on the compensation committee under NASDAQ rules, and are “non-employee directors” as defined in Rule 16b-3 of the Exchange Act. Our board of directors has adopted a written charter for the compensation committee, which is available on our corporate website at https://abacuslife.com/. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Nominating Committee
Our nominating committee is responsible for, among other things:
| • | identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; |
| • | overseeing succession planning for our Chief Executive Officer and other executive officers; |
| • | periodically reviewing our board of directors’ leadership structure and recommending any proposed changes to our board of directors; |
| • | overseeing an annual evaluation of the effectiveness of our board of directors and its committees; and |
| • | developing and recommending to our board of directors a set of corporate governance guidelines. |
Our nominating committee consists of Karla Radka, Mary Beth Schulte and Thomas W. Corbett, Jr. with Ms. Radka serving as chair. Our board of directors has affirmatively determined that Ms. Radka, Ms. Schulte and Mr. Corbett, Jr. each meets the definition of “independent director” under NASDAQ rules. Our board of directors has adopted a written charter for the nominating committee, which is available on our corporate website at https://abacuslife.com/. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Risk Oversight
Our board of directors is responsible for overseeing our risk management process. Our board of directors focuses on our general risk management strategy, the most significant risks facing us and oversees the implementation of risk mitigation strategies by management. Our audit committee is also responsible for
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discussing our policies with respect to risk assessment and risk management. Our board of directors believes its administration of its risk oversight function has not negatively affected our board of directors’ leadership structure.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors or compensation committee (or other committee performing equivalent functions) of any entity that has one or more executive officers serving on our board of directors or compensation committee.
Code of Business Conduct and Ethics
Upon completion of the Business Combination, we adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code is posted on our corporate website at https://abacuslifesettlements.com/. In addition, we have posted on our website all disclosures that are required by law or NASDAQ listing standards concerning any amendments to, or waivers from, any provision of the code. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Compensation of Directors and Officers
The Company’s executive compensation program is consistent with Abacus Settlements’ and LMA’s compensation policies and philosophies in effect prior to the Business Combination, which are designed to:
| • | attract, retain and motivate senior management leaders who are capable of advancing our mission and strategy and ultimately, creating and maintaining our long-term equity value. Such leaders must engage in a collaborative approach and possess the ability to execute our business strategy in an industry characterized by competitiveness and growth; |
| • | reward senior management in a manner aligned with our financial performance; and |
| • | align senior management’s interests with our equity owners’ long-term interests through equity participation and ownership. |
Decisions with respect to the compensation of our executive officers, will be made by the compensation committee of our board of directors.
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EXECUTIVE AND DIRECTOR COMPENSATION
This section discusses the material components of the executive compensation program for our executive officers who are named in the “2023 Summary Compensation Table” below. As an emerging growth company, Abacus complies with the executive compensation disclosure rules applicable to “smaller reporting companies,” as such term is defined in the rules promulgated under the Securities Act, which require compensation disclosure for our principal executive officer and our two most highly compensated executive officers other than our principal executive officer. In 2023, our “named executive officers” and their positions were as follows:
| • | Jay Jackson, Founder, President and Chief Executive Officer; |
| • | William McCauley, Chief Financial Officer; and |
| • | Sean McNealy, Founder and President. |
Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers for the years ended December 31, 2023 and 2022.
| Name | Principal Position | Year | Salary ($) |
Stock Awards ($) |
All other compensation ($)(1) |
Total ($) | ||||||||||||||||||
| Jay Jackson |
Chief Executive Officer | 2023 | 280,000 | 15,089 | 310,179 | |||||||||||||||||||
| 2022 | 210,000 | 28,846 | 238,846 | |||||||||||||||||||||
| William McCauley |
Chief Financial Officer | 2023 | 250,000 | 3,060,000 | 15,584 | 3,325,584 | ||||||||||||||||||
| 2022 | 192,308 | 30,133 | 222,441 | |||||||||||||||||||||
| Sean McNealy |
President | 2023 | 255,000 | 27,978 | 282,978 | |||||||||||||||||||
| 2022 | 210,000 | 210,000 | ||||||||||||||||||||||
| (1) | Other compensation reflects the Company’s 401(k) match and medical insurance paid on behalf of the named executive officers. |
Grant of Plan Based Awards
The following table sets forth information concerning the grant of awards made to our named executive officers for the year ended December 31, 2023.
| Name |
Grant Date | All Other Stock Awards; Number of Shares of Stock or Units |
Grant Date Fair Value of Stock and Option Awards ($) |
|||||
| William McCauley |
October 27, 2023 | 500,000 | 3,060,000 | |||||
Narrative to the Summary Compensation Table
2023 Annual Base Salary
Abacus pays the named executive officers a base salary to compensate them for services rendered to Abacus. The base salary payable to the named executive officers is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. In connection with entering into their executive employment agreements in 2023, each of the named executive officers received an increase in their base salary effective on July 2, 2023, as follows:
| • | Mr. Jackson’s base salary was increased from $260,000 to $300,000; |
| • | Mr. McCauley’s base salary was increased from $200,000 to $300,000; and |
| • | Mr. Nealy’s base salary was increased from $236,000 to $300,000. |
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Annual Bonus Plan
For 2023, each of our named executive officers was eligible to earn a cash bonus under our annual bonus program based on the achievement of individual performance objectives. The target annual bonus percentage for each of our named executive officers for 2023 is equals 50% to 200% of the executive’s base salary at the beginning of such year.
We have not yet determined the annual cash bonuses that will be payable to our named executive officers with respect to 2023 based on the attainment of corporate and individual goals for 2023. We expect that 2023 annual cash bonus amounts will be determined in the first quarter of 2024.
Equity Compensation
The Company has adopted the Abacus Life, Inc. 2023 Long-Term Equity Incentive Plan (the “Incentive Plan”) in order to facilitate the grant of cash and equity incentives to directors, employees, including named executive officers, and consultants to help attract and retain the services of these individuals. On October 27, 2023 the Compensation Committee of the Board of Directors of the Company approved the grant of 500,000 restricted stock units to Mr. McCauley under the Incentive Plan. Ten percent (10%) of the restricted stock units will vest and be converted to the Company’s common stock (or, at the Company’s option, the cash equivalent) on July 3, 2024, and the remaining ninety percent (90%) of the restricted stock units will do so on July 3, 2026. Mr. McCauley must remain employed through the end of the applicable vesting period to receive any award under the Incentive Plan, except that he may be entitled to a prorated portion of the award in the event of involuntary termination without cause, death, disability or retirement. In addition, in the event of such a termination in connection with a change in control, all unvested awards generally vest immediately. A change in control is defined in the Plan generally as an event that would be considered as a change in control in the Treasury Regulations published under Section 409A of the Code.
The Incentive Plan
The purpose of the Incentive Plan is to provide a means through which Abacus and its affiliates may attract, retain and motivate persons who make (or are expected to make) important contributions by providing these individuals with equity ownership opportunities and/or equity-linked compensatory opportunities. Equity awards and equity-linked compensatory opportunities are intended to motivate high levels of performance and align the interests of directors, employees and consultants with those of stockholders by giving directors, employees and consultants the perspective of an owner with an equity or equity-linked stake in Abacus and provide a means of recognizing their contributions to our success. The board of directors believes that equity awards are necessary for Abacus to remain competitive in its industry and are essential to recruiting and retaining highly qualified employees.
Summary of the Incentive Plan
This section summarizes certain principal features of the Incentive Plan. The summary is qualified in its entirety by reference to the complete text of the Incentive Plan.
Eligibility and Administration
Our employees, consultants and directors may be eligible to receive awards under the Incentive Plan. As of January 31, 2024, Abacus has 105 employees, five (5) non-employee directors and no other individual service providers who may be eligible to receive awards under the Incentive Plan.
The Incentive Plan provides that it will be administered by a committee of, and appointed by, the board of directors of Abacus that shall be composed of two or more independent directors, and which shall be subject to
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the limitations imposed under the Incentive Plan, Section 16 of the Exchange Act, stock exchange rules and other applicable laws. The compensation committee of the board of directors was appointed to administer the Incentive Plan.
The committee will have the authority to take all actions and make all determinations under the Incentive Plan, to construe the Incentive Plan and award agreements and to prescribe rules and regulations relating to the administration of the Incentive Plan as it deems necessary or advisable. The committee will also have the authority to determine which eligible directors, employees and consultants receive awards, grant awards and set the terms and conditions of all awards under the Incentive Plan, including any vesting and vesting acceleration provisions, subject to the conditions and limitations in the Incentive Plan. The compensation committee will make determinations as to awards grants under the Incentive Plan at the time of hiring of a participant and, annually, following the release of material non-public information.
Shares Available for Awards
The aggregate number of shares that may be issued under the Plan shall be equal to 5% of the issued and outstanding common stock of the Company. The aggregate number of shares with respect to which incentive stock options may be granted under the Incentive Plan shall be equal to 5% of the issued and outstanding common stock of the Company. The aggregate fair market value compensation on the date of grant of an award made to a non-employee director during a calendar year shall be determined by the committee and shall not exceed $75,000 per calendar year.
If an award under the Incentive Plan is forfeited, expires unexercised or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, immediately be used again for new grants under the Incentive Plan. Any shares that are the subject of awards under the Incentive Plan which are exchanged for awards that do not involve shares shall also again immediately become available to be issued pursuant to awards granted under the Incentive Plan. If shares are withheld to satisfy tax obligations with respect to an option or a stock appreciation right, such shares shall not again be available for issuance under the Incentive Plan. If shares are tendered in payment of an option price of an option or the exercise price of a stock appreciation right, such shares shall not be available for issuance under the Incentive Plan.
Awards granted under the Incentive Plan upon the assumption of, or in substitution for, awards authorized or outstanding under a qualifying equity plan maintained by an entity with which we enter into a merger or similar corporate transaction will not reduce the shares available for grant under the Incentive Plan, nor shall such shares subject to substitute awards again be available for grant under the Incentive Plan to the extent of any forfeiture, expiration, or cash settlement under an award.
Awards
The Incentive Plan provides for the grant of stock options, stock appreciation rights (“SARs”), restricted stock awards, performance awards, phantom stock awards, restricted stock unit awards (“RSUs”) and stock awards. Certain awards under the Incentive Plan may constitute or provide for payment of “nonqualified deferred compensation” under Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards under the Incentive Plan will be evidenced by award agreements, which will detail the terms and conditions of awards, including any applicable vesting and payment terms and post-termination exercise limitations. Awards other than cash awards generally will be settled in shares of Abacus common stock, but the applicable award agreement may provide for cash settlement of any award. A brief description of each award type follows.
| • | Stock Options and SARs. Stock options provide for the purchase of shares of our Common Stock in the future at an exercise price set on the grant date. Incentive stock options, in contrast to non-qualified stock options, may provide tax deferral beyond exercise and favorable capital gains tax treatment to |
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| their holders if certain holding period and other requirements of the Code are satisfied. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. Unless otherwise determined by the compensation committee, the exercise price of a stock option or SAR may not be less than 100% of the fair market value of the underlying share on the grant date (or 110% in the case of incentive stock options granted to certain significant stockholders), except with respect to certain substitute awards granted in connection with a corporate transaction. Unless otherwise determined by the compensation committee, the term of a stock option or SAR may not be longer than ten years (or five years in the case of incentive stock options granted to certain significant stockholders). |
| • | Restricted Stock. Restricted stock is an award of non-transferable shares of our Common Stock that are subject to certain vesting conditions and other restrictions. |
| • | Performance Awards. A Performance Award under the Incentive Plan is an award of rights subject to vesting and transferability restrictions generally based upon the attainment of performance goals as the committee may determine, payment of which may be made in cash or shares of our Common Stock, as specified in the holder’s Performance Award agreement. The Incentive Plan provides that a performance goal may be based on one or more business criteria that apply to the holder, one or more of our business units, or us as a whole. |
| • | Phantom Stock. Phantom Stock Awards under the Incentive Plan are awards of rights to receive the value of shares of our Common Stock that are subject to certain vesting conditions. Following the end of the vesting period for a Phantom Stock Award (or at such other time as may be provided in a Phantom Stock Award agreement), the holder of a Phantom Stock Award will be entitled to receive payment of cash, our Common Stock, or a combination thereof as determined by the committee, in an amount not exceeding the maximum value of the Phantom Stock Award, based on the then vested value of the award. |
| • | Restricted Stock Units. RSUs are contractual promises to deliver shares of our Common Stock in the future or an equivalent in cash and other consideration determined by the committee, which may also remain forfeitable unless and until specified conditions are met and may be accompanied by the right to receive the equivalent value of dividends paid on shares of our Common Stock prior to the delivery of the underlying shares (i.e., dividend equivalent rights). The terms and conditions applicable to RSUs will be determined by the committee, subject to the conditions and limitations contained in the Incentive Plan. |
| • | Stock Awards. Stock awards are awards of fully vested shares of our Common Stock. |
| • | Dividend Equivalents. Dividend equivalents represent the right to receive the equivalent value of dividends paid on shares of our Common Stock and may be granted alone or in tandem with awards other than stock options or SARs. Dividend equivalents are credited as of the dividend record dates during the period between the date an award is granted and the date such award vests, is exercised, is distributed or expires, as determined by the committee. |
Certain Transactions
The compensation committee has broad discretion to take action under the Incentive Plan, as well as make adjustments to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our Common Stock, such as stock dividends (other than ordinary cash dividends), stock splits, spinoffs, recapitalizations, mergers, acquisitions, combinations, exchange of shares, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our stockholders known as “equity restructurings,” the committee will make equitable adjustments to the Incentive Plan and outstanding awards.
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No Repricing
Except in connection with certain changes in our capital structure, stockholder approval will be required for any amendment that reduces the exercise price of any stock option or SAR, or cancels any stock option or SAR that has an exercise price that is greater than the then-current fair market value of Common Stock in exchange for cash, other awards or stock options or SARs with an exercise price per share that is less than the exercise price per share of the original stock options or SARs.
Transferability
An Incentive Stock Option is not transferable other than by will or the laws of descent and distribution, and may be exercised during the employee’s lifetime only by the employee or such employee’s guardian or legal representative. All other awards under the Incentive Plan are not transferable other than by will or the laws of descent and distribution, pursuant to a qualified domestic relations order, or with the consent of the committee (as to certain family transfers, or otherwise).
Plan Amendment and Termination
The board of directors may amend or terminate the Incentive Plan at any time; however, no amendment may impair the rights of a participant with respect to an award outstanding under the Incentive Plan without the consent of the affected participant. Further, the board of directors may not, without the consent of the stockholders, amend the Incentive Plan to increase the maximum aggregate number of shares that may be issued under the Incentive Plan or change the class of individuals eligible to receive awards under the Incentive Plan or amend or eliminate the restrictions on repricing of awards. No awards may be granted under the Incentive Plan after its termination.
Material U.S. Federal Income Tax Consequences
The following is a general summary under current law of the Internal Revenue Code (the “Code”) principal U.S. federal income tax consequences related to awards under the Incentive Plan. Deductions described below may be limited by Section 162(m) of the Code. This summary deals with the general federal income tax principles that apply and is provided only for general information. Phantom Stock, and certain other awards that may be granted pursuant to the Incentive Plan, could be subject to additional taxes unless they are designed to comply with certain restrictions set forth in Section 409A of the Code and guidance promulgated thereunder.
Some kinds of taxes, such as state, local and foreign income taxes and federal employment taxes, are not discussed. This summary is not intended as tax advice to participants, who should consult their own tax advisors.
| • | Restricted Stock. The recipient of a Restricted Stock award generally will not realize taxable income at the time of grant, and we generally will not be entitled to a deduction at that time, assuming that the restrictions constitute a substantial risk of forfeiture for federal income tax purposes. When the risk of forfeiture with respect to the stock subject to the award lapses, the holder generally will realize ordinary income in an amount equal to the fair market value of the shares of our Common stock at such time less the amount paid for the stock (if any), and, subject to Section 162(m), we will be entitled to a corresponding deduction. All dividends and distributions (or the cash equivalent thereof) with respect to a Restricted Stock award paid to the holder before the risk of forfeiture lapses generally will also be compensation income to the holder when paid and, subject to Section 162(m) as discussed below, deductible as such by us. Notwithstanding the foregoing, the holder of a Restricted Stock award may elect under Section 83(b) of the Code to be taxed at the time of grant of the Restricted Stock award based on the fair market value of the shares of our Common Stock on the date of the award less the amount paid for the stock (if any), in which case (a) subject to Section 162(m), we will be entitled to a deduction at the same time and in the same amount, (b) dividends paid to the recipient during the period the forfeiture restrictions apply will be taxable as dividends and will not be deductible by us and |
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| (c) there will be no further federal income tax consequences when the risk of forfeiture lapses. Such election must be made not later than 30 days after the grant of the Restricted Stock award, and is irrevocable. |
| • | Restricted Stock Unit Awards. The grant of a Restricted Stock Unit Award (“RSU Award”) under the Incentive Plan generally will not result in the recognition of any U.S. federal taxable income by the recipient or a deduction for us at the time of grant. At the time an RSU Award is settled the recipient will generally recognize ordinary income and, subject to Section 162(m) of the Code, we will be entitled to a corresponding deduction. Generally, the measure of the income and the deduction will be based on the number of shares of common stock issued in settlement of the RSU Award multiplied by the value of our Common Stock at the time the RSU Award is settled. |
| • | Stock Awards. The recipient of a Stock Award generally will realize taxable ordinary income at the time of grant in an amount equal to the fair market value of the shares of our Common Stock on the date of the award, and, subject to Section 162(m) of the Code, we will be entitled to a corresponding deduction. |
| • | Incentive Stock Options. Incentive Stock Options are subject to special federal income tax treatment. No federal income tax is imposed on the optionee upon the grant or the exercise of an Incentive Stock Option if the optionee does not dispose of the shares acquired pursuant to the exercise within the two-year period beginning on the date the option was granted or within the one-year period beginning on the date the option was exercised (collectively, the “holding period”). In such event, we would not be entitled to any deduction for federal income tax purposes in connection with the grant or exercise of the option or the disposition of the shares so acquired. With respect to an Incentive Stock Option, the difference between the fair market value of the stock on the date of exercise and the exercise price must generally be included as an item of adjustment for purposes of the optionee’s alternative minimum taxable income for the year in which such exercise occurs. However, if the optionee exercises an Incentive Stock Option and disposes of the shares received in the same year and the amount realized is less than the fair market value of the shares on the date of exercise, then the amount included in alternative minimum taxable income will not exceed the amount realized over the adjusted basis of the shares. |
| • | Upon disposition of the shares received upon exercise of an Incentive Stock Option after the holding period, any appreciation of the shares above the exercise price should constitute long-term capital gain. If an optionee disposes of shares acquired pursuant to his or her exercise of an Incentive Stock Option prior to the end of the holding period, the optionee will be treated as having received, at the time of disposition, compensation taxable as ordinary income. In such event, and subject to Section 162(m) of the Code, we may claim a deduction for compensation paid at the same time and in the same amount as compensation is treated as received by the optionee. The amount treated as compensation is the excess of the fair market value of the shares at the time of exercise (or in the case of a sale in which a loss would be recognized, the amount realized on the sale if less) over the exercise price; any amount realized in excess of the fair market value of the shares at the time of exercise would be treated as short-term or long-term capital gain, depending on the holding period of the shares. |
| • | Non-statutory Stock Options and Stock Appreciation Rights. Generally, no federal income tax is imposed on the optionee upon the grant of a Non-statutory Stock Option or a SAR, and we are not entitled to a tax deduction by reason of such grant. Generally, upon the exercise of a Non-statutory Stock Option, the optionee generally will be treated as receiving compensation taxable as ordinary income in the year of exercise in an amount equal to the excess of the fair market value of the shares of stock at the time of exercise over the option price paid for such shares. In the case of the exercise of a SAR, the holder generally will be treated as receiving compensation taxable as ordinary income in the year of exercise in an amount equal to the cash received or the fair market value of the shares distributed to the optionee. Upon the exercise of a Non-statutory Stock Option or a SAR, and subject to Section 162(m) of the Code, we may claim a deduction for compensation paid at the same time and in |
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| the same amount as compensation income is recognized by the optionee assuming any federal income tax reporting requirements are satisfied. |
| • | Performance Awards, Phantom Stock Awards and Stock Awards. An individual who has been granted a Performance Award, a Phantom Stock Award or a Stock Award generally will not realize taxable income at the time of grant, and we will not be entitled to a deduction at that time. Whether such an award is paid in cash or shares of Common Stock, the individual generally will have taxable compensation and, subject to Section 162(m) of the Code, we generally will have a corresponding deduction. The measure of such income and deduction will be based on the amount of any cash paid and the fair market value of any shares of our Common Stock either at the time the award is paid or at the time any restrictions on the shares subsequently lapse, depending on the nature, if any, of the restrictions imposed and whether the individual elects to be taxed without regard to any such restrictions. |
| • | Section 162(m). Generally, Section 162(m) of the Code precludes a public corporation from taking a deduction for annual compensation in excess of $1,000,000 paid to its covered employees (as defined in Section 162(m) of the Code). |
Section 409A of the Code
Certain types of awards under the Incentive Plan may constitute, or provide for, a deferral of compensation subject to Section 409A of the Code. Unless certain requirements set forth in Section 409A of the Code are complied with, holders of such awards may be taxed earlier than would otherwise be the case (e.g., at the time of vesting instead of the time of payment) and may be subject to an additional 20% penalty tax (and, potentially, certain interest, penalties and additional state taxes). To the extent applicable, the Incentive Plan and awards granted under the Incentive Plan are intended to be structured and interpreted in a manner intended to either comply with or be exempt from Section 409A of the Code and the Department of Treasury regulations and other interpretive guidance that may be issued under Section 409A of the Code. To the extent determined necessary or appropriate by the committee, the Incentive Plan and applicable award agreements may be amended to further comply with Section 409A of the Code or to exempt the applicable awards from Section 409A of the Code.
Retirement Plans
Abacus currently maintains a 401(k) retirement savings plan for its employees, including its named executive officers, who satisfy certain eligibility requirements. Our named executive officers are eligible to participate in the 401(k) plan on the same terms as other full-time employees. The Code allows eligible employees to defer a portion of their compensation, within prescribed limits, through contributions to the 401(k) plan. Abacus believes that providing a vehicle for tax-deferred retirement savings though its 401(k) plan adds to the overall desirability of its executive compensation package and further incentivizes its employees, including its named executive officers, in accordance with our compensation policies. Abacus did not make any matching contributions under the 401(k) plan with respect to 2023.
Employee Benefits and Perquisites
Our named executive officers are eligible to participate in our employee benefit plans and programs, including medical and dental benefits and life insurance, to the same extent as our other full-time employees, subject to the terms and eligibility requirements of those plans. Abacus provides perquisites on a case-by-case basis when it believes it is necessary to attract or retain a named executive officer.
No Tax Gross-Ups
Abacus has no obligations to make gross-up payments to cover named executive officers’ personal income taxes that may pertain to any of the compensation or perquisites paid or provided by Abacus.
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Executive Compensation Arrangements
The named executive officers were not party to or covered by any employment or severance arrangements for 2022 or 2023. In connection with the Business Combination, Abacus entered into employment agreements with its named executive officers. These agreements provide for at-will employment and generally include the named executive officer’s initial base salary, standard benefit plan eligibility and other terms and conditions of employment with Abacus. The terms of each of these employment agreements provide for a term of 36 months with 12-month renewals if not terminated at least 90 days before the expiration date. The agreements also provide for payments in the event of certain terminations of employment, including a higher severance payment if a termination occurs in connection with a change in control event.
Under the terms of each of these employment agreements, if the executive is terminated without cause or resigns for good reason, and timely executes a release of claims against Abacus, he or she will receive the greater of one year of continued base salary or continued salary for the balance of the then-current employment term. The employment agreements also include non-competition and non-solicitation covenants in favor of Abacus for a period of one year after the executive’s termination of employment.
Managers
Our named executive officers did not receive any compensation in their role as managers of the Company in 2023.
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PRINCIPAL SECURITYHOLDERS
The following table and accompanying footnotes set forth information with respect to the beneficial ownership of Common Stock, as of January 27, 2024, for (1) each person known by us to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (2) each member of the Board, and (3) each of our named executive officers.
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days. Shares of Common Stock issuable pursuant to options or warrants are deemed to be outstanding for purposes of computing the beneficial ownership percentage of the person or group holding such options or warrants but are not deemed to be outstanding for purposes of computing the beneficial ownership percentage of any other person.
As of November 13, 2024 after the completion of the Business Combination, there were outstanding 63,349,823, shares of Common Stock.
Unless otherwise noted in the footnotes to the following table, and subject to applicable community property laws, the persons and entities named in the table have sole voting and investment power with respect to their beneficially owned shares of Common Stock.
| Name of Beneficial Owners |
Number of Shares of Common Stock Beneficially Owned |
Percentage of Outstanding Common Stock |
||||||||||
| 5% Stockholders: |
||||||||||||
| East Sponsor, LLC (1) |
11,417,000 | (2) | 18.0 | % | ||||||||
| Terry Pegula |
11,417,000 | (2) | 18.0 | % | ||||||||
| Jay Jackson |
12,593,250 | 20.0 | % | |||||||||
| K. Scott Kirby |
12,593,250 | 20.0 | % | |||||||||
| Matthew Ganovsky |
12,593,250 | 20.0 | % | |||||||||
| Sean McNealy |
12,593,550 | 20.0 | % | |||||||||
| Directors and Named Executive Officers: |
||||||||||||
| Jay Jackson |
12,593,250 | 20.0 | % | |||||||||
| Kevin Scott Kirby |
12,593,250 | 20.0 | % | |||||||||
| Matthew Ganovsky |
12,593,250 | 20.0 | % | |||||||||
| Sean McNealy |
12,593,550 | 20.0 | % | |||||||||
| Adam Gusky |
22,718 | * | ||||||||||
| Karla Radka |
7,500 | — | ||||||||||
| Cornelis Michiel van Katwijk |
7,500 | — | ||||||||||
| Thomas M. Corbett, Jr. |
17,500 | * | ||||||||||
| Mary Beth Schulte |
22,000 | — | ||||||||||
| * | Less than 1% |
| (1) | East Sponsor, LLC is the record holder of the shares of Common Stock and the Private Placement Warrants reported herein. East Asset Management, LLC is the managing member of East Sponsor, LLC. Trusts controlled by Terrence M. Pegula are the sole members of East Asset Management, LLC. As such, Mr. Pegula may be deemed to have or share beneficial ownership of the shares of Common Stock and the Private Placement Warrants held directly by East Sponsor, LLC. Mr. Pegula disclaims any beneficial ownership of the reported shares of Common Stock and the Private Placement Warrants other than to the extent of any pecuniary interest he may have therein, directly or indirectly. The business address of East Sponsor, LLC is c/o East Asset Management, LLC, 7777 NW Beacon Square Boulevard, Boca Raton, Florida 33487. |
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| (2) | Consists of (i) 5,813,000 shares of Common Stock and (ii) 7,180,000 Private Placement Warrants to purchase the same number of shares of Common Stock that are exercisable within 60 days of the date hereof. |
Warrant Forfeiture Agreement
On the Closing Date of the Business Combination, the Company and Sponsor entered into the Warrant Forfeiture Agreement (the “Warrant Forfeiture Agreement”), pursuant to which Sponsor forfeited 1,780,000 of the Private Placement Warrants held by Sponsor. The above description of the Warrant Forfeiture Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Warrant Forfeiture Agreement.
Registration Rights Agreement
On the Closing Date of the Business Combination, certain stockholders of the Company and certain holders of limited liability company interests in Abacus Settlements and LMA entered into that certain Amended and Restated Registration Rights Agreement (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company has agreed to register for resale, pursuant to Rule 415 under the Securities Act, certain shares of Common Stock and other equity securities of the Company that are held by the parties thereto from time to time. Pursuant to the Registration Rights Agreement, the Company agreed to file a shelf registration statement registering the resale of the Common Stock (including those held as of the effective time or issuable upon future exercise of the Private Placement Warrants) and the Private Placement Warrants (the “Registrable Securities”) under the Registration Rights Agreement within 30 days of the closing of the Business Combination. The Holders may request to sell all or any portion of their Registrable Securities in an underwritten offering (the “Underwritten Shelf Takedown”) so long as the total offering price is reasonably expected to exceed $20,000,000. The Sponsor may not demand more than two Underwritten Shelf Takedowns, the Holders (other than the Sponsor) may not demand more than two Underwritten Shelf Takedowns and the Company shall not be obligated to participate in more than four Underwritten Shelf Takedowns, in the aggregate, in any 12-month period. The Company also agreed to provide customary “piggyback” registration rights, subject to certain requirements and customary conditions. The Registration Rights Agreement also provides that the Company will pay certain expenses relating to such registrations and indemnify the stockholders against certain liabilities. The above description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Registration Rights Agreement.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Registration Rights Agreement
Following the closing of the Business Combination, the Company, and certain stockholders of the Company entered into an Amended and Restated Registration Rights Agreement, pursuant to which the Company will agree to register for resale, pursuant to Rule 415 under the Securities Act, certain shares of Company Class A Common Stock and other equity securities of the Company that are held by the parties thereto from time to time. Pursuant to the Registration Rights Agreement, the Company agreed to file a shelf registration statement registering the resale of the Class A Common Stock (including those held as of the effective time or issuable upon future exercise of the Private Placement Warrants) and the Private Placement Warrants (the “Registrable Securities”) under the Registration Rights Agreement within 30 days of the closing of the Business Combination. The holders may request to sell all or any portion of their Registrable Securities in an underwritten offering (an “Underwritten Shelf Takedown”) so long as the total offering price is reasonably expected to exceed $20,000,000. The sponsor may not demand more than two Underwritten Shelf Takedowns, the holders (other than the sponsor) may not demand more than two Underwritten Shelf Takedowns and the Company shall not be obligated to participate in more than four Underwritten Shelf Takedowns, in the aggregate, in any 12-month period. The Company also agreed to provide customary “piggyback” registration rights, subject to certain requirements and customary conditions. The Registration Rights Agreement also provides that the Company will pay certain expenses relating to such registrations and indemnify the stockholders against certain liabilities.
Procedures with Respect to Review and Approval of Related Person Transactions
The board of directors of the Company recognizes the fact that transactions with related persons present a heightened risk of conflicts of interests (or the perception thereof). The board of directors has adopted a written policy on transactions with related persons that is in conformity with the requirements for issuers having publicly held common stock that is listed on Nasdaq. Under the policy, the Company’s legal team will be primarily responsible for developing and implementing processes and procedures to obtain information regarding related persons with respect to potential related person transactions and then determining, based on the facts and circumstances, whether such potential related person transactions do, in fact, constitute related person transactions requiring compliance with the policy. If the legal team determines that a transaction or relationship is a related person transaction requiring compliance with the policy, the Company’s general counsel will be required to present to the audit committee all relevant facts and circumstances relating to the related person transaction. The audit committee will be required to review the relevant facts and circumstances of each related person transaction, including if the transaction is on terms comparable to those that could be obtained in arm’s length dealings with an unrelated third party and the extent of the related person’s interest in the transaction, take into account the conflicts of interest and corporate opportunity provisions of the Company’s code of business conduct and ethics, and either approve or disapprove the related person transaction. If advance audit committee approval of a related person transaction requiring the audit committee’s approval is not feasible, then the transaction may be preliminarily entered into by management upon prior approval of the transaction by the chair of the audit committee, subject to ratification of the transaction by the audit committee at the audit committee’s next regularly scheduled meeting; provided, that if ratification is not forthcoming, management will make all reasonable efforts to cancel or annul the transaction. If a transaction was not initially recognized as a related person transaction, then, upon such recognition, the transaction will be presented to the audit committee for ratification at the audit committee’s next regularly scheduled meeting; provided, that if ratification is not forthcoming, management will make all reasonable efforts to cancel or annul the transaction. The Company’s management will update the audit committee as to any material changes to any approved or ratified related person transaction and will provide a status report at least annually of all then current related person transactions. No director will be permitted to participate in approval of a related person transaction for which he or she is a related person.
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DESCRIPTION OF THE NOTES
The following summary description sets forth certain terms and provisions of the notes, and to the extent inconsistent therewith replaces the description of the general terms and provisions of the notes set forth in the prospectus, to which we refer you. Because this description is a summary, it does not describe every aspect of the notes. The following summary does not purport to be complete and is subject to and is qualified in its entirety by reference to all of the provisions of the notes and the indenture, including the definitions therein.
The indenture will be qualified under the Trust Indenture Act of 1939, as amended (the “Trust Indenture Act”), and you should refer to the Trust Indenture Act for provisions that apply to the notes.
General
The notes will be issued under the indenture, dated as of November 10, 2023, which we refer to as the base indenture, between us and U.S. Bank Trust Company, National Association, as trustee, which we refer to as the trustee, as supplemented by a supplemental indenture, which we refer to as the first supplemental indenture, to be dated as of the date of initial issuance of the notes. We refer to the base indenture and the first supplemental indenture, collectively, as the indenture. This description of the notes is subject to and qualified in its entirety by reference to the indenture and the forms of notes. The notes will be represented by one or more global notes registered in the name of Cede & Co., as nominee of DTC, as depositary, in minimum denominations of $25 or any amount in excess thereof that is an integral multiple of $25. See “Book-Entry Issuance—Book-Entry System.” The notes will be fully fungible for U.S. federal income tax purposes with the existing notes, will be treated as a single series of debt securities with the existing notes for all purposes under the indenture and will be issued under same CUSIP and ISIN numbers as the existing notes. Upon completion of this offering, the aggregate principal amount of 9.875% senior notes outstanding will be $50,650,000 ($52,900,000 if the underwriters’ over-allotment option to purchase additional notes referred to herein is exercised in full).
The notes will be our senior unsecured obligations. No recourse will be had for the payment of principal of or interest on any note, for any claim based thereon, or otherwise in respect thereof, against any shareholder, employee, agent, officer or director as such, past, present or future, of us or of any successor person. The notes will not contain any provision that would provide protection to the holders of the notes against a sudden and dramatic decline in credit quality resulting from a merger, takeover, recapitalization, or similar restructuring of us or our subsidiaries or significant sales of our capital stock by holders of such stock or any other event involving us or our subsidiaries that may adversely affect our credit quality, except as set forth under “- Offer to Repurchase Upon a Change of Control Repurchase Event.”
Principal Amount; Maturity and Interest
The Company will issue the notes offered by this prospectus in an initial aggregate principal amount of $15,000,000 (or up to $17,250,000 aggregate principal amount if the underwriters’ overallotment option to purchase additional notes is exercised in full). The notes will mature on November 15, 2028.
The notes will be denominated in U.S. dollars and all payments of principal and interest thereon will be paid in U.S. dollars. The notes do not have the benefit of a sinking fund.
Interest will be paid to the person in whose name a note is registered at the close of business on the 15th calendar day (whether or not a Business Day) preceding the related date an interest payment is due with respect to such note; provided that if the notes are global notes held by DTC, the record date for such notes will be the close of business on the Business Day preceding the applicable interest payment date; provided further that interest payable on the maturity of the principal of the notes or (subject to the exceptions described under the heading “—Optional Redemption of the Notes”) any redemption date will be paid to the person to whom principal is paid.
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Interest on the notes will accrue from and including the date the notes are issued (the “issue date”) or from and including the most recent interest payment date (whether or not such interest payment date was a Business Day) for which interest has been paid or provided for with respect to the notes to, but excluding, the next interest payment date, redemption date or the maturity date, as the case may be. Each of these periods is referred to as an “interest period” for the notes. Interest not punctually paid or duly made available for payment with respect to an interest period, if any, will be paid instead to the person in whose name the note is registered on a special record date rather than on the regular record date.
If any interest payment, any redemption date or the maturity date falls on a day that is not a Business Day, then payment of any interest, principal or premium payable on such date will be postponed to the next succeeding Business Day, with the same force and effect as if made on the date such payment was due, and no interest or other payment will accrue as a result of such delay.
For purposes of this description of the notes, the term “Business Day” means any day that is not a Saturday or Sunday and that is not a day on which banking institutions are generally authorized or obligated by law or executive order to close in The City of New York or on which the corporate trust office of the trustee is closed for business.
Interest Rate Periods
During the period from, and including, the issue date, the notes will bear interest at the rate of 9.875% per annum. Interest will be payable quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year, beginning on May 15, 2024 and ending on the maturity date. The notes will mature on November 15, 2028. Interest will be computed on the basis of a 360-day year consisting of twelve 30-day months.
No Additional Amounts
In the event that any payment on the notes is subject to withholding of any U.S. federal income tax or other tax or assessment (as a result of a change in law or otherwise), we will not pay additional amounts with respect to such tax. For a discussion relating to certain U.S. federal income tax consequences of the ownership and disposition of the notes for non-U.S. holders, see “Material U.S. Federal Income Tax Consequences—Tax Consequences to Non-U.S. Holders.”
Optional Redemption of the Notes
The notes will be redeemable at our option, in whole or in part, at any time and from time to time, on or after February 15, 2027, upon not less than 15 days nor more than 60 days written notice to holders prior to the date fixed for redemption thereof, at a redemption price of 100% of the outstanding principal amount of the notes to be redeemed plus accrued and unpaid interest otherwise payable thereon for the then-current quarterly interest period accrued to, but excluding, the date fixed for redemption. We must provide notice to the trustee of any redemption no later than 5 days prior to when notice is sent to holders, unless some shorter period is reasonably agreed to by us and the trustee. A notice of redemption may be made subject to the satisfaction of certain conditions set forth therein, and may be revoked if such conditions are not satisfied.
If the notes are held in book-entry form through DTC, we may provide notice in any manner permitted or required by DTC.
Prior to any redemption date, we will deposit with the trustee or a paying agent an amount of money sufficient to pay the redemption price of, and (except if the redemption date is an interest payment date) accrued interest on, the notes which are to be redeemed on such date.
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Unless we default in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the notes called for redemption. If fewer than all of the notes of any series are to be redeemed, the particular notes to be redeemed will be selected by us, not more than 60 days prior to the redemption date, from the outstanding notes not previously called for redemption, in compliance with the policies and procedures of the trustee and the requirements of DTC, as applicable, provided that the unredeemed portion of the principal amount of any note will be in an authorized denomination (which will not be less than the minimum authorized denomination) for such note.
In addition, we may at any time purchase notes by tender, in the open market or by private agreement, subject to applicable law.
The notes will not be subject to repayment at the option of the holder at any time prior to the maturity date, except as set forth under “- Offer to Repurchase Upon a Change of Control Repurchase Event.”
Offer to Repurchase Upon a Change of Control Repurchase Event
If a Change of Control Repurchase Event (as defined below) occurs, unless we have exercised our option to redeem the notes as described under “—Optional Redemption of the Notes,” each holder of notes will have the right, at such holder’s option, to require that we repurchase for cash all of such holder’s notes, or any portion thereof, on a date specified by us that is not less than 20 calendar days nor more than 35 calendar days following the date on which we deliver notice of such Change of Control Repurchase Event, at a purchase price equal to 100% of the principal amount of notes to be repurchased, plus accrued and unpaid interest thereon, if any, to, but excluding, the date of repurchase, pursuant to the offer described below. On or before the 20th calendar day after the occurrence of a Change of Control Repurchase Event, we shall provide to all holders of the notes and the trustee notice of the occurrence of such Change of Control Repurchase Event and of the purchase right at the option of the holders arising as a result thereof. Simultaneously with providing such notice, we shall publish this information in a newspaper of general circulation in The City of New York or publish the information on our website or through such other public medium as we may use at that time. The notice shall, if given prior to the date of consummation of the Change of Control Repurchase Event, state that the offer to purchase is conditioned on the Change of Control Repurchase Event occurring on or prior to the payment date specified in the notice.
Notwithstanding the foregoing, interest due on an interest payment date falling on or prior to a repurchase date will be payable to holders at the close of business on the record date for such interest payment date.
We will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent those laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control Repurchase Event. To the extent that the provisions of any securities laws or regulations conflict with the Change of Control Repurchase Event provisions of the notes, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the Change of Control Repurchase Event provisions of the indenture by virtue of such conflict.
On the Change of Control Repurchase Event payment date, we will, to the extent lawful:
| • | accept for payment all notes or portions of notes properly tendered pursuant to our offer; |
| • | deposit with the paying agent an amount equal to the aggregate repurchase price in respect of all notes or portions of notes properly tendered; and |
| • | deliver or cause to be delivered to the trustee the notes properly accepted, together with an officers’ certificate stating the aggregate principal amount of notes being repurchased by us and requesting that such notes be cancelled. |
The paying agent will promptly send to each holder of notes properly tendered the purchase price for the notes, and the trustee will promptly authenticate and send (or cause to be transferred by book entry) to each
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holder a new note equal in principal amount to any unrepurchased portion of any notes surrendered; provided that each new note will be in a minimum principal amount of $25 and integral multiples of $25 in excess thereof.
Notwithstanding anything to the contrary in the foregoing, we will not be required to purchase, or to make an offer to purchase, the notes upon a Change of Control Repurchase Event if a third party makes the offer in the manner, at the times, and otherwise in compliance with the requirements set forth in the indenture applicable to an offer by us to purchase the notes upon a Change of Control Repurchase Event, and such third party purchases all notes validly tendered and not withdrawn upon such offer in the manner and otherwise in compliance with such requirements.
There can be no assurance that sufficient funds will be available at the time of any Change of Control Repurchase Event to make required repurchases of notes tendered. Our failure to repurchase the notes upon a Change of Control Repurchase Event would result in an Event of Default under the indenture.
“Change of Control Repurchase Event” means the occurrence of any of the following:
| (1) | any “person” or “group” (within the meaning of Section 13(d) of the Exchange Act), files a Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or group has become the direct or indirect ultimate “beneficial owner,” as defined in Rule 13d-3 under the Exchange Act, of our common stock representing more than 50% of the voting power of our common stock; |
| (2) | the consummation of (x) any consolidation, merger, amalgamation, scheme of arrangement or other binding share exchange or reclassification or similar transaction between us and another person, in each case pursuant to which our common stock shall be converted into cash, securities or other property, other than a transaction (i) that results in the holders of all classes of our common stock immediately prior to such transaction owning, directly or indirectly, as a result of such transaction, more than 50% of the surviving corporation or transferee or the parent thereof immediately after such event, or (ii) effected solely to change our jurisdiction of formation or to form a holding company for us and that results in a share exchange or reclassification or similar exchange of the outstanding common stock solely into common shares of the surviving entity or (y) any sale or other disposition in one transaction or a series of transactions of all or substantially all of our assets to another person; |
| (3) | our shareholders approve any plan or proposal for the liquidation or dissolution of us (other than in a transaction described in clause (2) above); or |
| (4) | our common stock ceases to be listed on the Nasdaq Capital Market, the Nasdaq Global Select Market, the Nasdaq Global Market or the New York Stock Exchange (or any of their respective successors). |
Ranking of the Notes
The notes will be our senior unsecured obligations and will rank equal in right of payment to our other existing or future senior unsecured obligations.
As of September 30, 2023, we had approximately $118 million in long-term debt outstanding. The notes will be effectively subordinated to all of our future secured indebtedness to the extent of the value of our assets securing such indebtedness. Our subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on the notes or to provide us with funds to pay our obligations, whether by dividends, distributions, loans or other payments.
Our right to participate in any distribution of assets of any of our subsidiaries upon the subsidiary’s liquidation or otherwise will generally be subject to the prior claims of creditors of that subsidiary. The notes will be our obligations and not those of our subsidiaries and, as such, will be structurally subordinated to all of the existing and future indebtedness and other liabilities of our subsidiaries.
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The notes will be senior in right of payment to any unsecured and subordinated indebtedness of ours that is subordinated in right of payment to the notes.
Events of Default; Waivers
The following events will be “Events of Default” under the indenture with respect to the notes:
| • | Default for 30 days in any interest payment in respect of the notes; |
| • | Default in any principal or premium payment at maturity of the notes, including a redemption or repurchase date; |
| • | Default in the performance or breach of any covenant or warranty of ours in the indenture for 90 days after the receipt of a notice of default; |
| • | Default by us under any bond, debenture, note or other evidence of indebtedness for money borrowed by us having an aggregate principal amount outstanding of at least $10,000,000, whether such indebtedness now exists or is created or incurred in the future, which default (i) constitutes a failure to pay an aggregate principal amount of such indebtedness, individually or in the aggregate for all such indebtedness, in excess of $10,000,000, when due and payable after the expiration of any applicable grace period or (ii) results in such indebtedness becoming due or being declared due and payable prior to the date on which it otherwise would have become due and payable without, in the case of clause (i), such indebtedness having been discharged or, in the case of clause (ii), such indebtedness having been discharged or such acceleration having been rescinded or annulled; provided, that for purposes of the indenture, the term “indebtedness” shall not include any indebtedness or obligations of subsidiaries of us that is guaranteed by us; and |
| • | Our bankruptcy, insolvency or reorganization. |
If an Event of Default relating to the notes has occurred and is continuing, either the trustee or the holders of at least 25% in aggregate principal amount of the outstanding notes of such series may declare the principal amount of the notes to be due and payable immediately. No such declaration is required, however, with respect to an Event of Default triggered by bankruptcy, insolvency or reorganization. Subject to certain conditions, this declaration may be annulled by the holders of a majority in principal amount of the notes. In addition, the holders of a majority in principal amount of notes of all affected series (voting as one class except in the case of Events of Default regarding a default in any principal, premium or interest payment or deposit of any sinking fund, as to which each series so affected will vote as a separate class) may waive any past default with respect to the notes of such series. The trustee shall not be deemed to have knowledge or notice of the occurrence of any default or event of default, unless a responsible trust officer of the trustee shall have received written notice from us or a holder describing such default or event of default and stating that such notice is a notice of default or event of default.
Modification and Waiver
Without the consent of any holders of any notes, we, when authorized by a board resolution, and the trustee, at any time and from time to time, may enter into one or more supplemental indentures, in form satisfactory to the trustee, for any of the following purposes:
| • | to evidence the succession of another person to us and the assumption by any such successor of the covenants of us in the indenture and in the notes; or |
| • | to add to the covenants of us for the benefit of the holders of all or any series of debt securities, including the notes (and if such covenants are to be for the benefit of less than all series of debt securities, stating that such covenants are expressly being included solely for the benefit of such series), or to surrender any right or power conferred upon us pursuant to the indenture; or |
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| • | to add any additional Events of Default for the benefit of the holders of all or any series of debt securities (and if such additional Events of Default are to be for the benefit of less than all series of debt securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); or |
| • | to add to or change any of the provisions of the indenture to such extent as will be necessary to permit or facilitate the issuance of debt securities, including the notes, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of notes in uncertificated form; or |
| • | to add to, change or eliminate any of the provisions of the indenture in respect of one or more series of debt securities under the indenture, provided that any such addition, change or elimination (i) will neither (A) apply to any such securities of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (B) modify the rights of the holder of any such securities with respect to such provision or (ii) will become effective only when there is no such securities outstanding; or |
| • | to secure the notes or provide for guarantees of the notes; or |
| • | to establish the form or terms of debt securities of any series under the indenture as permitted pursuant thereto; or |
| • | to evidence and provide for the acceptance of appointment under the indenture by a successor trustee with respect to the debt securities of one or more series, including the notes, and to add to or change any of the provisions of the indenture as will be necessary to provide for or facilitate the administration of the trusts thereunder by more than one trustee; or |
| • | to comply with any requirements of the SEC in connection with qualifying the indenture under the Trust Indenture Act; or |
| • | to cure any ambiguity, to correct or supplement any provision in the indenture which may be defective or inconsistent with any other provision therein; or |
| • | to supplement any of the provisions of the indenture to the extent necessary to permit or facilitate the defeasance and discharge of any series of debt securities pursuant to the indenture; provided that any such action will not adversely affect the interests of the holders of securities of any series in any material respect; or |
| • | to make provisions with respect to conversion or exchange rights of holders of securities of any series; or |
| • | to add, delete from or revise the conditions, limitations or restrictions on issue, authentication and delivery of securities; or |
| • | to conform the terms of the notes or the indenture with the description set forth in this prospectus or with the requirements of the Trust Indenture Act; or |
| • | to make any other provisions with respect to matters or questions arising under the indenture, provided that such action pursuant to this clause will not adversely affect the interests of the holders of debt securities of any series, including the notes, in any material respect. |
With the consent of the holders of not less than a majority in principal amount of the outstanding notes of each series affected by such supplemental indenture, by act of such holders delivered to us and the trustee, we, when authorized by a board resolution, and the trustee may enter into one or more supplemental indentures for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the indenture or of modifying in any manner the rights of the holders of notes of such series under the indenture;
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provided, however, that no such supplemental indenture will, without the consent of the holder of each outstanding note affected thereby:
| • | change the stated maturity of the principal of, or any installment of principal of or interest on, any note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of any note which would be due and payable upon a declaration of acceleration of the maturity thereof pursuant to the terms of the indenture, adversely affect any right of repayment at the option of the holder of any security, or change any place of payment where any note or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity thereof (or, in the case of redemption, on or after the redemption date), or |
| • | reduce the percentage in principal amount of the outstanding notes of any series, the consent of whose holders is required for any such supplemental indenture, or the consent of whose holders is required for any waiver (of compliance with certain provisions of the indenture or certain defaults thereunder and their consequences) provided for in the indenture, or |
| • | modify any of the provisions of this paragraph or certain provisions of the indenture relating to waivers of past defaults and waivers of certain covenants, except to increase any such percentage or to provide that certain other provisions of the indenture cannot be modified or waived without the consent of the holder of each outstanding note affected thereby; provided, however, that this clause will not be deemed to require the consent of any holder with respect to changes in the references to “the trustee” and concomitant changes in this paragraph, or the deletion of this proviso, in certain circumstances. |
A supplemental indenture which changes or eliminates any covenant or other provision of the indenture which has expressly been included solely for the benefit of one or more particular series of debt securities, or which modifies the rights of the holders of debt securities of such series with respect to such covenant or other provision, will be deemed not to affect the rights under the indenture of the holders of debt securities of any other series.
In connection with any modification, amendment, supplement or waiver in respect of the indenture or the notes, we must deliver to the trustee an officers’ certificate and an opinion of counsel, each stating (i) that such modification, amendment, supplement or waiver is authorized or permitted pursuant to the terms of the indenture and the notes, (ii) that all related conditions precedent to such modification, amendment, supplement or waiver have been complied with; and (iii) that such supplemental indenture will be valid and binding upon us in accordance with its terms.
Consolidation, Merger and Sale of Assets
The indenture will provide that we may not consolidate with or merge into another person or convey, transfer or lease our properties and assets substantially as an entirety to another person or permit any person to consolidate with or merge into us or convey, transfer or lease its properties and assets substantially as an entirety to us unless: (i) in case we will consolidate with or merge into another person or convey, transfer or lease our properties and assets substantially as an entirety to another person, the person formed by the consolidation or into which we are merged or the person which acquires by conveyance or transfer, or which leases the properties and assets of us substantially as an entirety, (a) is a corporation organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and (b) expressly assumes by supplemental indenture, executed and delivered to the trustee, the due and punctual payment of the principal of and any premium and interest on all the notes and the performance or observance of every covenant of the indenture on the part of us to be performed or observed; and (ii) immediately after giving effect to the transaction, no Event of Default and no event which, after notice or lapse of time or both, would become an Event of Default will have occurred and be continuing under the indenture, and we have delivered to the trustee an officers’ certificate and an opinion of counsel as required by the indenture.
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Trustee
The notes will be issued under the base indenture as supplemented by the first supplemental indenture by and between us and U.S. Bank Trust Company, National Association, as trustee. U.S. Bank Trust Company, National Association, in each of its capacities, including without limitation as trustee, security registrar, and paying agent, assumes no responsibility for the accuracy or completeness of the information contained in this document or the related documents or for any failure by us or any other party to disclose events that may have occurred and may affect the significance or accuracy of such information.
Defeasance and Discharge
The defeasance provisions of the indenture will apply to the notes. The “defeasance” provisions of the indenture provide that we may terminate some of our obligations with respect to any series of notes by depositing with the trustee as trust funds a combination of money and U.S. government obligations sufficient to pay the principal of or premium, if any, and interest on, the securities of such series as they come due. Defeasance is permitted only if, among other things, we deliver to the trustee an officers’ certificate and opinion of counsel on the terms described in the indenture.
The indenture also provides that we are entitled to cause the indenture to cease to be of further effect (a “satisfaction and discharge”), with certain limited exceptions, if (i) either (a) all securities under the indenture, with certain exceptions, have been delivered to the trustee for cancellation or (b) all such securities not delivered to the trustee for cancellation (x) have become due and payable or (y) will become due and payable at their stated maturity within one year or (z) are to be called for redemption within one year under arrangements satisfactory to the trustee and us (in the case of (x), (y), or (z) above) has deposited or caused to be deposited with the trustee as trust funds money sufficient to pay the principal of or premium, if any, and interest on, such securities as they come due or are to be redeemed, (ii) we have paid or caused to be paid all other sums payable under the indenture by us and (iii) we have delivered the trustee an officers’ certificate and opinion of counsel stating that all conditions precedent provided for in the indenture relating to the satisfaction and discharge of the indenture have been complied with.
Further Issuances
The amount of notes we can issue under the indenture is unlimited. We will issue the notes in the initial aggregate principal amount of $15,000,000 (or up to $17,250,000 aggregate principal amount if the underwriters’ overallotment option to purchase additional notes is exercised in full). However, we may, without your consent and without notifying you, create and issue further notes, which notes may be consolidated and form a single series with the notes offered by this prospectus and the existing notes and may have the same terms as to interest rate, maturity, covenants or otherwise; provided that if any such additional notes are not fungible with the notes for U.S. federal income tax purposes, such additional notes will have a separate CUSIP or other identifying number.
Notices
Notices to holders of notes will be given by first-class mail to the addresses of such holders as they appear in the note register. Where notices are to be provided to a holder of a global security, the notice will be deemed sufficiently given if provided to the depositary for such security pursuant to its applicable procedures.
Governing Law
The notes and the indenture will be governed by and construed in accordance with the laws of the State of New York.
Miscellaneous
We or our affiliates may from time to time purchase any of the notes that are then outstanding by tender, in the open market or by private agreement.
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BOOK-ENTRY ISSUANCE
Book-Entry System
The notes will be represented by global securities that will be deposited and registered in the name of DTC or its nominee. This means that, except in limited circumstances, you will not receive certificates for the notes. Beneficial interests in the notes will be represented through book-entry accounts of financial institutions acting on behalf of beneficial owners as direct and indirect participants in DTC. Investors may elect to hold interests in the notes through either DTC, if they are a participant, or indirectly through organizations that are participants in DTC.
The notes will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for each issuance of the notes, in the aggregate principal amount thereof, and will be deposited with DTC. Interests in the notes will trade in DTC’s Same Day Funds Settlement System, and any permitted secondary market trading activity in such notes will, therefore, be required by DTC to be settled in immediately available funds. None of the Company, the trustee or the paying agent will have any responsibility for the performance by DTC or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
DTC is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”).
DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has a Standard & Poor’s Ratings Services’ rating of AA+. The DTC rules applicable to its participants are on file with the SEC. More information about DTC can be found at www.dtcc.com.
Purchases of the notes under the DTC system must be made by or through Direct Participants, which will receive a credit for the notes on DTC’s records. The ownership interest of each actual purchaser of each security, or the “Beneficial Owner,” is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the notes are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in the notes, except in the event that use of the book-entry system for the notes is discontinued.
To facilitate subsequent transfers, all notes deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co. or such other name as may be requested by an authorized
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representative of DTC. The deposit of the notes with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the notes; DTC’s records reflect only the identity of the Direct Participants to whose accounts the notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
Redemption notices shall be sent to DTC. If less than all of the notes within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.
Redemption proceeds, distributions, and interest payments on the notes will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from us or the trustee on the payment date in accordance with their respective holdings shown on DTC’s records. Payments by participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such participant and not of DTC nor its nominee, the trustee, or us, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of us or the trustee, but disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.
DTC may discontinue providing its services as securities depository with respect to the notes at any time by giving reasonable notice to us or to the trustee. Under such circumstances, in the event that a successor securities depository is not obtained, certificates are required to be printed and delivered. We may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, certificates will be printed and delivered to DTC.
The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that we believe to be reliable, but we take no responsibility for its accuracy.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material U.S. federal income tax consequences of the purchase, beneficial ownership and disposition of the notes by a U.S. Holder or a Non-U.S. Holder (each as defined below).
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations promulgated under the Code, judicial authority and administrative rulings and practice, all of which are subject to change and differing interpretation. Any such change or interpretation may be applied retroactively and may affect the accuracy of the statements and conclusions set forth in this prospectus. This summary addresses only tax consequences to investors that purchase the notes pursuant to this prospectus at their offering price and hold them as “capital assets” within the meaning of Section 1221 of the Code. This summary does not discuss all of the tax consequences that may be relevant to particular investors or to investors subject to special treatment under the U.S. federal income tax laws (such as insurance companies, financial institutions, tax-exempt persons, partnerships or other pass-through entities (and persons holding the notes through a partnership or other pass-through entity), retirement plans, regulated investment companies, dealers in securities or currencies, traders in securities who elect to apply a mark-to-market method of accounting, persons holding the notes as part of a “straddle,” “constructive sale,” or a “conversion transaction” for U.S. federal income tax purposes, or as part of some other integrated investment or risk reduction transaction, “passive foreign investment companies,” “controlled foreign corporations,” expatriates or U.S. Holders (as defined below) whose functional currency for tax purposes is not the U.S. dollar). This summary also does not discuss any tax consequences arising under the laws of any state, local, foreign or other tax jurisdiction or any tax consequences arising under U.S. federal tax laws other than U.S. federal income tax laws. Furthermore, this summary does not discuss any tax consequences arising under the Foreign Account Tax Compliance Act (including the Treasury Regulations promulgated thereunder and any intergovernmental agreements entered into in connection therewith) nor any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010. The term “holder” as used in this section refers to a beneficial holder of the notes and not the record holder.
Persons considering the purchase of the notes should consult their own tax advisors concerning the application of U.S. federal tax laws to their particular situations as well as any consequences of the purchase, beneficial ownership and disposition of the notes arising under the laws of any other taxing jurisdiction.
For purposes of this discussion, a “U.S. Holder” means:
| • | a citizen or resident of the United States; |
| • | a corporation or other entity or arrangement taxable as a corporation created or organized in or under the laws of the United States or any State thereof or the District of Columbia; |
| • | an estate whose income is subject to U.S. federal income taxation regardless of its source; or |
| • | a trust if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons (within the meaning of Section 7701(a)(30) of the Code) have the authority to control all substantial decisions of the trust, or the trust has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person. |
If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds notes, the tax treatment of such partnership and a partner thereof will generally depend on the status of the partner and upon the activities of the partner and the partnership. Persons who are partners in a partnership, or other entity or arrangement treated as a partnership for U.S. federal income tax purposes, holding notes should consult their tax advisors.
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Certain Additional Payments
In certain circumstances under “Description of the Notes” such as a Change of Control or Optional Redemption, we may be obligated to make payments in excess of stated interest and the principal amount of the notes. Although not free from doubt, we intend to take the position that the notes should not be treated as contingent payment debt instruments despite the possibility of these additional payments. This position is based in part on assumptions regarding the likelihood, as of the date of issuance of the notes, that such additional payments will have to be paid. Our position that the contingencies described above are remote is binding on a holder unless such holder discloses its contrary position in the manner required by applicable Treasury Regulations. If the IRS successfully challenged our position, then the notes could be treated as contingent payment debt instruments, in which case holders could be required to accrue interest income at a rate higher than the stated interest rate on the notes and to treat as ordinary income, rather than capital gain, any gain recognized on a sale, exchange, redemption, or other taxable disposition of a note. Holders are urged to consult their tax advisors regarding the potential application of the contingent payment debt instrument rules to the notes and the consequences thereof. The remainder of this discussion assumes that the notes are not treated as contingent payment debt instruments.
Qualified Reopening and Issue Price of the Notes
For U.S. federal income tax purposes, we currently intend to treat the notes as being issued in a “qualified reopening” of the existing notes. For U.S. federal income tax purposes, debt instruments issued in a qualified reopening are deemed to be part of the same issue as the original debt instruments. Under the treatment described in this paragraph, the notes will have the same issue date, the same issue price and the same adjusted issue price as the existing notes for U.S. federal income tax purposes. Under the qualified reopening rules, because (i) the existing notes were not issued with original issue discount (“OID”) for U.S. federal income tax purposes, and (ii) the notes will be issued with no more than a de minimis amount of original issue discount (determined without the application of the qualified reopening rules) for U.S. federal income tax purposes, the notes also do not have original issue discount. The remainder of this discussion assumes the correctness of the treatment described in this paragraph.
U.S. Federal Tax Consequences to U.S. Holders
It is anticipated, and this discussion assumes, that the issue price of the notes will be equal to the stated principal amount or, if the issue price is less than the stated principal amount, the difference will be a de minimis amount (as set forth in the applicable Treasury Regulations).
Taxation of Interest
Interest on the notes will be taxable to a U.S. Holder as ordinary interest income. A U.S. Holder must report this income either when it accrues or is received, depending on the holder’s method of accounting for U.S. federal income tax purposes.
Treatment of Dispositions of Notes
Upon the sale, exchange, retirement or other taxable disposition of a note, a U.S. Holder generally will recognize gain or loss equal to the difference between the amount received on such disposition (other than amounts received in respect of accrued and unpaid interest, which will be taxable as ordinary income to the extent not previously included in income) and the U.S. Holder’s tax basis in the note. A U.S. Holder’s tax basis in a note generally will be the cost of the note. Gain or loss realized on the sale, exchange, retirement or other taxable disposition of a note generally will be capital gain or loss, and will be long-term capital gain or loss if, at the time of such sale, exchange, retirement or other taxable disposition, the U.S. Holder has held the note for more than one year.
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Long-term capital gains generally are taxed at reduced rates for individuals and certain other non-corporate U.S. Holders. The ability to deduct capital losses is subject to limitation under U.S. federal income tax laws. Net long-term capital gain recognized by a non-corporate U.S. Holder is generally taxed at preferential rates.
Medicare Tax
A U.S. Holder that is an individual, estate, or a trust that does not fall into a special category of trusts that is exempt from such tax will be subject to an additional 3.8% Medicare tax on the lesser of (1) the U.S. Holder’s “net investment income” for the relevant taxable year and (2) the excess of the U.S. Holder’s modified gross income for the taxable year over a certain threshold (which in the case of individuals will be between $125,000 and $250,000 depending on the individual’s circumstances). Net investment income generally includes interest income and net gains from the disposition of the notes, unless such interest income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). A U.S. Holder that is an individual, estate, or trust should consult its tax advisor regarding the applicability of this tax to its income and gains in respect of its investment in the notes.
U.S. Federal Tax Consequences to Non-U.S. Holders
The following is a general discussion of U.S. federal income consequences of the purchase, beneficial ownership and disposition of the notes by a holder that is a beneficial owner of notes (other than a partnership or other pass-through entity) that is not a U.S. Holder (a “Non-U.S. Holder”).
Taxation of Interest
Subject to the discussion below under “—U.S. Information Reporting Requirements and Backup Withholding Tax Applicable to U.S. Holders and Non-U.S. Holders,” a Non-U.S. Holder will not be subject to U.S. federal income or withholding tax in respect of interest income on the notes if each of the following requirements is satisfied:
| • | the interest is not effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (or, in the case of an income tax treaty resident, is not attributable to a permanent establishment of the Non-U.S. Holder in the United States); |
| • | the Non-U.S. Holder provides to the applicable withholding agent a properly completed and executed Internal Revenue Service (“IRS”) Form W-8BEN or IRS Form W-8BEN-E, as applicable, together with all appropriate attachments, signed under penalties of perjury, identifying the Non-U.S. Holder and stating, among other things, that the Non-U.S. Holder is not a U.S. person, and the payor does not have actual knowledge or reason to know that such holder is a U.S. person. If a note is held through a securities clearing organization, bank or another financial institution that holds customers’ securities in the ordinary course of its trade or business, this requirement is satisfied if (i) the Non-U.S. Holder provides such a form to the organization or institution, and (ii) the organization or institution, under penalties of perjury, certifies to the applicable withholding agent that it has received such a form from the beneficial owner or another intermediary and furnishes the applicable withholding agent with a copy thereof; |
| • | the Non-U.S. Holder is not a bank whose receipt of interest on the notes is in connection with an extension of credit made pursuant to a loan agreement entered into in the ordinary course of such non-U.S. holder’s trade or business; |
| • | the Non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of the Company’s stock within the meaning of the Code and applicable Treasury Regulations; and |
| • | the Non-U.S. Holder is not a “controlled foreign corporation” that is actually or constructively related to the Company. |
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If these conditions are not met, a 30% withholding tax will apply to interest income on the notes, unless one of the following two exceptions is satisfied. The first exception is that an applicable income tax treaty reduces or eliminates such tax, and a Non-U.S. Holder claiming the benefit of that treaty provides to the applicable withholding agent a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or other applicable IRS Form) and the payor does not have actual knowledge or reason to know that such holder is a U.S. person. The second exception is that the interest is effectively connected with such Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment of the Non-U.S. Holder in the United States) and the Non-U.S. Holder provides an appropriate statement to that effect on an IRS Form W-8ECI (or other applicable IRS Form). In the case of the second exception, such Non-U.S. Holder generally will be subject to U.S. federal income tax with respect to all income from the notes in the same manner as U.S. Holders, as described above. Additionally, in such event, Non-U.S. Holders that are corporations could be subject to an additional “branch profits” tax on such income. Non-U.S. Holders eligible for an exemption from or reduced rate of U.S. federal withholding tax under an applicable income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim with the IRS. Non-U.S. Holders should consult their own tax advisors regarding their entitlement to benefits under an applicable income tax treaty and the requirements for claiming any such benefits.
Treatment of Dispositions of Notes
Subject to the discussion below under “—U.S. Information Reporting Requirements and Backup Withholding Tax Applicable to U.S. Holders and Non-U.S. Holders,” and except with respect to accrued and unpaid interest (which will be treated as described above under “U.S. Federal Tax Consequences to Non-U.S. Holders—Taxation of Interest,” generally, a Non-U.S. Holder will not be subject to U.S. federal income tax on gain realized upon the sale, exchange, retirement or other disposition of a note unless:
| • | the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment of the non-U.S. holder in the United States); or |
| • | such holder is an individual present in the United States for 183 days or more in the taxable year of the sale, exchange, retirement or other disposition and certain other conditions are met. |
Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates in the same manner as if such Non-U.S. Holder were a U.S. person. A Non-U.S. Holder that is a corporation also may be subject to an additional “branch profits tax” at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty) of its “effectively connected earnings and profits” for the taxable year, subject to certain adjustments.
Gain described in the second bullet point above generally will be subject to U.S. federal income tax at a 30% rate (or such lower rate as may be specified by an applicable income tax treaty), but may be offset by U.S. source capital losses, if any, of the Non-U.S. Holder.
FATCA
Under Sections 1471 through 1474 of the Code, Treasury regulations promulgated thereunder and applicable administrative guidance (collectively, “FATCA”), a 30% U.S. federal withholding tax will generally apply to payments of interest on the notes made to (i) a foreign financial institution (whether such foreign financial institution is a beneficial owner or an intermediary), unless such institution undertakes either under an agreement with the U.S. Department of Treasury or an intergovernmental agreement between the jurisdiction in which it is a resident and the U.S. Department of Treasury to generally identify accounts held by certain U.S. persons and non-U.S. entities with substantial U.S. owners, annually report certain information about such accounts and withhold 30% on payments made to non-compliant foreign financial institutions and certain other account holders or such institution qualifies for an exemption from these rules or (ii) a non-financial foreign entity
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(whether such non-financial foreign entity is a beneficial owner or an intermediary), unless such entity provides the paying agent with a certification that it does not have any substantial United States owners or a certification identifying the direct and indirect substantial United States owners of the entity and meets certain other specified requirements or such entity qualifies for an exemption under these rules.
While withholding under FATCA would also have applied to payments of gross proceeds from the sale or other disposition of the notes (including retirement or redemption) on or after January 1, 2019, proposed Treasury Regulations have been issued that, if finalized, will eliminate FATCA withholding on payments of gross proceeds entirely. Although these Treasury regulations are not final, the preamble to these Treasury regulations indicates that taxpayers may rely on them pending their finalization.
Prospective investors are urged to consult their own tax advisors regarding the application of FATCA to the notes.
U.S. Information Reporting Requirements and Backup Withholding Tax Applicable to U.S. Holders and Non-U.S. Holders
Information reporting generally will apply to payments of interest on the notes and to the proceeds of a sale or other taxable disposition of a note paid to a U.S. Holder unless the U.S. Holder is an exempt recipient. U.S. federal backup withholding (currently, at a rate of 24% for payments made before January 1, 2026) generally will apply to such payments if the U.S. Holder fails to provide the applicable withholding agent with a properly completed and executed IRS Form W-9 providing such U.S. Holder’s correct taxpayer identification number and certifying that such U.S. Holder is not subject to backup withholding, or to otherwise establish an exemption.
Generally, we must report annually to the IRS and to each Non-U.S. Holder the amount of interest paid to such Non-U.S. Holder and the amount of tax, if any, withheld with respect to such payments. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable income tax treaty.
U.S. backup withholding tax (currently, at a rate of 24% for payments made before January 1, 2026) is imposed on certain payments to persons that fail to furnish the information required under the U.S. information reporting rules. Interest paid to a non-U.S. Holder generally will be exempt from backup withholding if the non-U.S. holder provides the applicable withholding agent with a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable, or otherwise establishes an exemption (and the applicable withholding agent does not have actual knowledge or reason to know that such holder is a U.S. person or that the conditions of any exemption are not in fact satisfied).
Under Treasury Regulations, the payment of proceeds from the disposition of a note by a Non-U.S. Holder effected at a U.S. office of a broker generally will be subject to information reporting and backup withholding, unless the Non-U.S. Holder provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or other applicable IRS Form W-8), certifying such Non-U.S. Holder’s non-U.S. status and such broker does not have actual knowledge or reason to know that such Non-U.S. Holder is a U.S. person, or otherwise establishes an exemption. The payment of proceeds from the disposition of notes by a Non-U.S. Holder effected at a non-U.S. office of a U.S. broker or a non-U.S. broker with certain specified U.S. connections generally will be subject to information reporting (but not backup withholding) unless such Non-U.S. Holder provides a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, as applicable (or other applicable IRS Form W-8), certifying such Non-U.S. Holder’s non-U.S. status and such broker does not have actual knowledge or reason to know that such evidence is false, or otherwise establishes an exemption. Backup withholding will apply if the disposition is subject to information reporting and the broker has actual knowledge that the Non-U.S. Holder is a U.S. person.
Backup withholding is not an additional tax and may be refunded or credited against the holder’s U.S. federal income tax liability, provided that certain required information is timely furnished to the IRS. The information
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reporting requirements may apply regardless of whether withholding is required. Copies of the information returns reporting such interest and withholding may be made available to the tax authorities in foreign countries under the provisions of a tax treaty or agreement. Holders should consult their own tax advisors regarding the effect, if any, of these rules with respect to their particular situation.
The preceding discussion of material U.S. federal income tax considerations is for general information only and is not tax advice. We urge you to consult your own tax advisor with respect to the particular tax consequences to you of an investment in the notes, including the possible effect of any pending legislation or proposed regulations.
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UNDERWRITING
We are offering the notes through a number of underwriters. We have entered into an underwriting agreement dated as of the date of this prospectus with the underwriters listed below. Piper Sandler & Co. is acting as representative of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement between the Company and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the principal amount of notes set forth opposite its name below.
| Name of Underwriter | Principal Amount of Notes |
|||
| Piper Sandler & Co. |
$ | |||
| A.G.P. / Alliance Global Partners |
● | |||
| Ladenburg Thalmann & Co. Inc. |
● | |||
|
|
|
|||
| Total |
$ | |||
|
|
|
|||
The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of a non-defaulting underwriter may also be increased or the offering may be terminated. The offering of the notes by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriting agreement provides that the obligations of the underwriters to purchase the notes are subject to approval of legal matters by counsel to the underwriters and certain other conditions, including the receipt by the underwriters of officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part. Investors must pay for the notes purchase in this offering on or about February 15, 2024.
Commissions and Discounts
An underwriting discount of 3.15% per note will be paid by us. This underwriting discount will also apply to any notes purchased pursuant to the overallotment option. The underwriters have advised us that they propose initially to offer the notes to the public at the public offering price on the cover of this prospectus and to certain other Financial Industry Regulatory Authority, Inc. members at that price less a concession not in excess of $0.50 per note. The underwriters may allow, and the dealers may reallow, a discount not in excess of $0.25 per note.
The following table shows the total underwriting discounts and commissions that we are to pay to the underwriters in connection with this offering. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.
| Per Note | Without Option |
With Option | ||||||||||
| Public offering price |
$ | 25.00 | $ | 15,000,000 | $ | 17,250,000 | ||||||
| Underwriting discounts and commissions |
$ | 0.7875 | $ | 472,500 | $ | 543,375 | ||||||
| Proceeds, before expenses, to us |
$ | 24.21 | $ | 14,527,500 | $ | 16,706,625 | ||||||
The expenses of the offering, not including the underwriting discounts and commissions, are estimated at $250,000 and are payable by us. We have agreed to reimburse the underwriters for their reasonable and documented out-of-pocket expenses incurred in connection with the transactions, including their legal fees and
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expenses, marketing, syndication and travel expenses; provided, that such fees and expenses, including legal fees and legal expenses, will not exceed $105,000 without the prior written consent of the Company and will be reimbursed through Piper Sandler & Co.
Overallotment Option
We have granted an option to the underwriters to purchase up to an additional $2,250,000 aggregate principal amount of the notes offered hereby at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a principal amount of additional notes proportionate to that underwriter’s initial principal amount reflected in the table above.
No Sales of Similar Securities
We have agreed not to directly or indirectly offer, sell, short sell or otherwise dispose of, or enter into any agreement to offer, sell, short sell or otherwise dispose of, any debt securities issued or guaranteed by us or other securities convertible into or exchangeable or exercisable for debt securities issued or guaranteed by us or derivative of debt securities issued or guaranteed by us for a period of 30 days after the date of this prospectus without first obtaining the written consent of Piper Sandler & Co. This consent may be given at any time without public notice.
Listing
The existing notes are listed on NASDAQ under the trading symbol of “ABLLL.” We intend to apply to list the notes on NASDAQ under the same symbol and will use our reasonable best efforts to maintain such listing.
We have been advised by certain of the underwriters that they presently intend to make a market in the notes as permitted by applicable laws and regulations. The underwriters are not obligated, however, to make a market in the notes and any such market-making may be discontinued at any time in the sole discretion of the underwriters without any notice. Accordingly, no assurance can be given as to the liquidity of, or maintenance of a public trading market for, the notes. If an active public trading market for the notes is not maintained, the market price and liquidity of the notes may be adversely affected.
Price Stabilization and Short Positions
In connection with the offering, the underwriters may purchase and sell notes in the open market. These transactions may include overallotment, covering transactions and stabilizing transactions, which may have the effect of stabilizing or maintaining the market price of the notes at a level above that which might otherwise prevail in the open market. Overallotment involves sales of securities in excess of the aggregate principal amount of securities to be purchased by the underwriters in the offering, which creates a short position for the underwriters. Covering transactions involve purchases of the notes in the open market after the distribution has been completed in order to cover short positions. Stabilizing transactions consist of certain bids or purchases of securities made for the purpose of preventing or retarding a decline in the market price of the notes while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representative has repurchased notes sold by or for the account of such underwriter in stabilizing or short covering transactions.
The underwriters are not obligated to engage in these activities and, if commenced, any of the activities may be discontinued at any time.
Any of these activities may cause the price of the notes to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be affected in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time without any notice relating thereto.
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Other Relationships
Certain of the underwriters and their affiliates have provided in the past and may provide from time to time in the future in the ordinary course of their business certain commercial banking, financial advisory, investment banking and other services to us or our affiliates for which they have received or will be entitled to receive separate fees. In particular, the underwriters or their affiliates may execute transactions with us, on behalf of us or our affiliates. In addition, after the offering period for the sale of the notes, the underwriters or their affiliates may act as arrangers, underwriters or placement agents for companies whose securities are sold to or whose loans are syndicated to us or our affiliates.
The underwriters or their affiliates may also trade in our securities or other financial instruments related thereto for their own accounts or for the account of others and may extend loans or financing directly or through derivative transactions to us or our affiliates.
After the date of this prospectus, the underwriters and their affiliates may from time to time obtain information regarding our subsidiaries or us that may not be available to the general public. Any such information is obtained by the underwriters and their affiliates in the ordinary course of its business and not in connection with the offering of the notes. In addition, the underwriters or their affiliates may develop analyses or opinions related to us and may engage in competitive activities. There is no obligation on behalf of these parties to disclose their respective analyses, opinions or purchase and sale activities regarding us to our noteholders or any other persons.
In the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
The principal business address of the representative for the underwriters is Piper Sandler & Co., Piper Sandler & Co., 1251 Avenue of the Americas, 6th Floor, New York, NY 10020.
Alternative Settlement Cycle
It is expected that delivery of the notes will be made against payment therefor on or about February 15, 2024, which is the fourth business day following the date of this Prospectus (such settlement cycle being referred to as “T+4”). Under Rule 15c6-1 under the Exchange Act, trades in the secondary market generally are required to settle in two business days unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the notes on any date prior to the second business day before delivery thereof will be required, by virtue of the fact that the notes initially will settle in T+4, to specify an alternative settlement cycle at the time of any such trade to prevent failed settlement. Purchasers of the notes who wish to trade the notes prior to their date of delivery hereunder should consult their own advisors.
Other Jurisdictions
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the notes offered by this prospectus in any jurisdiction where action for that purpose is required. The notes offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such notes be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restriction relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy the notes offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
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LEGAL MATTERS
Certain legal matters in connection with the notes offered by this prospectus will be passed upon for the Company by Locke Lord LLP, New York, New York. Legal matters in connection with the notes offered hereby will be passed upon for the underwriters by Alston & Bird LLP, New York, New York.
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EXPERTS
The financial statements for Abacus Settlements included in this prospectus and elsewhere in the Registration Statement have been so included in reliance upon the report of Grant Thornton LLP, an independent registered public accounting firm, upon the authority of said firm as experts in accounting and auditing.
The consolidated financial statements for Abacus Life, Inc. included in this prospectus and elsewhere in the Registration Statement have been so included in reliance upon the report of Grant Thornton LLP, an independent registered public accounting firm, upon the authority of said firm as experts in accounting and auditing.
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WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933 with respect to the notes offered in this document. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement. Such information is available through the SEC’s web site on the internet at http://www.sec.gov. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions thereof and are not necessarily complete.
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and in accordance with the Exchange Act we file reports and other information with the SEC. The Company’s SEC filings are available through the SEC’s web site on the internet at http://www.sec.gov. We also maintain a website at https://abacuslife.com where information about Abacus can be obtained. The information contained on the Abacus web site is not part of nor is it incorporated by reference into this prospectus.
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Page |
||||
| F-3 | ||||
AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021: |
||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8-F-18 | ||||
2022 |
2021 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Related party receivables |
||||||||
Other receivables |
||||||||
Prepaid expenses |
||||||||
Other current assets |
||||||||
Total current assets |
||||||||
PROPERTY AND EQUIPMENT—Net |
||||||||
INTANGIBLE ASSETS—Net |
||||||||
OTHER ASSETS: |
||||||||
Operating right-of-use asset |
||||||||
Due from members and affiliates |
||||||||
State security deposits |
||||||||
Certificate of deposit |
||||||||
Other non-current assets |
||||||||
Total other assets |
||||||||
TOTAL ASSETS |
$ | $ | ||||||
LIABILITIES AND MEMBERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts Payable |
$ | $ | ||||||
Accrued payroll and other expenses |
||||||||
Operating lease liabilities- current portion |
||||||||
Contract liability—deposits on pending settlements |
||||||||
Due to members |
||||||||
Total current liabilities |
||||||||
Operating lease liabilities- noncurrent portion |
||||||||
Total liabilities |
$ | $ | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 7) |
||||||||
MEMBERS’ EQUITY: |
||||||||
Common units; $ |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Total members’ equity |
||||||||
TOTAL LIABILITIES AND MEMBERS’ EQUITY |
$ | $ | ||||||
2022 |
2021 |
|||||||
ORIGINATION REVENUE |
$ | $ | ||||||
RELATED PARTY REVENUE |
||||||||
Total revenue |
||||||||
COST OF REVENUE |
||||||||
RELATED PARTY COST OF REVENUE |
||||||||
Total cost of revenue |
||||||||
GROSS PROFIT |
||||||||
OPERATING EXPENSES: |
||||||||
General and administrative expenses |
||||||||
Depreciation expense |
||||||||
Total operating expenses |
||||||||
(LOSS) INCOME FROM OPERATIONS |
( |
) | ||||||
OTHER (EXPENSE) INCOME: |
||||||||
Interest income |
||||||||
Interest (expense) |
( |
) | ||||||
Consulting income |
||||||||
Total other (expense)/ income |
( |
) | ||||||
(LOSS) INCOME BEFORE INCOME TAXES |
( |
) | ||||||
INCOME TAX EXPENSE |
||||||||
Net (loss) income and comprehensive (loss) income |
$ | ( |
) | $ | ||||
WEIGHTED-AVERAGE UNITS USED IN COMPUTING NET INCOME (LOSS) PER UNIT: |
||||||||
Basic |
||||||||
Diluted |
||||||||
NET INCOME (LOSS) PER UNIT: |
||||||||
Basic earnings per unit |
$ | ( |
) | $ | ||||
Diluted earnings per unit |
$ | ( |
) | $ | ||||
2022 |
2021 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net (loss) income |
$ | ( |
) | $ | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation expense |
||||||||
Amortization expense |
||||||||
Amortization of deferred financing fees |
||||||||
Non-cash lease expense |
||||||||
Changes in operating assets and liabilities: |
||||||||
Related party receivables |
( |
) | ||||||
Other receivables |
( |
) | ( |
) | ||||
Prepaid expenses |
( |
) | ||||||
Other non-current assets |
( |
) | ||||||
Accounts payable |
||||||||
Accrued payroll and other expenses |
( |
) | ||||||
Contract liability—deposits on pending settlements |
( |
) | ||||||
State security deposit |
( |
) | ( |
) | ||||
Certificate of deposit |
||||||||
Net cash (used in)/ from operating activities |
( |
) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property and equipment |
( |
) | ||||||
Purchase of intangible asset |
( |
) | ( |
) | ||||
Change in due from members and affiliates |
( |
) | ||||||
Net cash (used in) investing activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Financing fees |
( |
) | — | |||||
Change in due to members |
( |
) | ||||||
Distributions to members |
( |
) | ( |
) | ||||
Net cash (used in) financing activities |
( |
) | ( |
) | ||||
NET (DECREASE)/ INCREASE IN CASH AND CASH EQUIVALENTS |
( |
) | ||||||
CASH AND CASH EQUIVALENTS—Beginning of year |
||||||||
CASH AND CASH EQUIVALENTS—End of year |
$ | $ | ||||||
Additional Paid-in Capital |
Retained Earnings |
Total Members’ Equity |
||||||||||||||||||
Common units |
||||||||||||||||||||
Units |
Amount |
|||||||||||||||||||
BALANCE—January 1, 2021 |
$ | $ | ||||||||||||||||||
Net income |
— | — | — | |||||||||||||||||
Distributions |
— | — | — | ( |
) | ( |
) | |||||||||||||
BALANCE—December 31, 2021 |
||||||||||||||||||||
Net (loss) |
— | — | — | ( |
) | ( |
) | |||||||||||||
Distributions |
— | — | — | ( |
) | ( |
) | |||||||||||||
BALANCE—December 31, 2022 |
$ | $ | $ | $ | ||||||||||||||||
1. |
DESCRIPTION OF THE BUSINESS |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Years |
||||
Computer equipment |
||||
Office furniture |
||||
3. |
SEGMENT REPORTING |
4. |
PROPERTY AND EQUIPMENT—NET |
2022 |
2021 |
|||||||
Computer equipment |
$ | $ | ||||||
Office furniture |
||||||||
Leasehold improvement |
||||||||
Total property and equipment |
||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||
Property and equipment—net |
$ | $ | ||||||
5. |
INTANGIBLE ASSETS—NET |
2022 |
2021 |
|||||||
Software |
$ | $ | ||||||
Less: accumulated amortization |
||||||||
Intangible assets—net |
$ | $ | ||||||
6. |
ACCRUED PAYROLL AND OTHER EXPENSES |
2022 |
2021 |
|||||||
Accrued payroll |
$ | $ | ||||||
Accrued credit card fees |
||||||||
Other expenses |
||||||||
Total accrued payroll and other expenses |
$ | $ | ||||||
7. |
COMMITMENTS AND CONTINGENCIES |
8. |
REVENUE |
2022 |
2021 |
|||||||
Agent |
$ | $ | ||||||
Broker |
||||||||
Client direct |
||||||||
Total |
$ | $ | ||||||
2022 |
2021 |
|||||||
Contract liabilities—beginning of year |
$ | $ | ||||||
Additions to Contract Liabilities |
||||||||
Recognition of revenue deferred in the prior year |
( |
) | ( |
) | ||||
Contract liabilities—end of year |
$ | $ | ||||||
9. |
INCOME TAXES |
2022 |
2021 |
|||||||
State income taxes: |
||||||||
Current |
$ | $ | ||||||
Deferred |
||||||||
Expense for income taxes |
$ | $ | ||||||
Tax at federal statutory rate |
% | % | ||||||
State taxes, net of federal benefit |
( |
) | ||||||
U.S. income attributable to pass-through entity |
( |
) | ( |
) | ||||
Effective income tax rate |
( |
)% | % | |||||
10. |
RETIREMENT PLAN |
11. |
MEMBERS’ EQUITY |
12. |
RELATED PARTY TRANSACTIONS |
December 31, |
December 31, |
|||||||
2022 |
2021 |
|||||||
Origination fee revenue |
$ | $ | ||||||
Commissions and transaction reimbursement revenue |
$ | $ | ||||||
Total revenue |
$ | $ | ||||||
Cost |
||||||||
Face value |
||||||||
Total policies |
||||||||
Average Age |
||||||||
13. |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION. |
2022 |
2021 |
|||||||
Supplemental cash flow information: |
||||||||
Cash paid for income taxes |
$ | $ | ||||||
Supplemental disclosure of non-cash investing and financing activity: |
||||||||
Distributions owed to the members |
||||||||
14. |
LEASES |
As of December 31, |
||||||||
2022 |
2021 |
|||||||
Assets |
||||||||
Operating lease right-of-use asset |
$ | $ | ||||||
Liabilities |
||||||||
Operating lease liability, current |
||||||||
Operating lease liability, noncurrent |
||||||||
Total operating lease liabilities |
$ | $ | ||||||
Year Ended December 31, |
||||||||
2022 |
2021 |
|||||||
Operating lease cost |
$ | $ | ||||||
Variable lease cost |
||||||||
Total lease cost |
$ | $ | ||||||
Year Ended December 31, |
||||||||
2022 |
2021 |
|||||||
Cash paid for amounts included in the measurement of the lease liability |
||||||||
Operating cash flows from operating leases |
||||||||
ROU assets obtained in exchange for new lease liabilities |
||||||||
As of December 31, |
||||||||
2022 |
2021 |
|||||||
Weighted-average remaining lease term (in years) |
||||||||
Weighted-average discount rate |
% | % | ||||||
Operating Leases |
||||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total operating lease payments (undiscounted) |
$ | |||
Less: Imputed interest |
( |
) | ||
Lease liability as of December 31, 2022 |
$ | |||
15. |
SUBSEQUENT EVENTS |
Page |
||||
| F-21 | ||||
| F-22 | ||||
| F-23 | ||||
| F-25 | ||||
F-26-F-58 |
||||
Financial Statements of Abacus Settlements LLC (as predecessor) (Unaudited) |
||||
| F-59 | ||||
| F-60 | ||||
| F-62 | ||||
| F-63 | ||||
September 30, 2023 (unaudited) |
December 31, 2022 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable |
||||||||
Accounts receivable, related party |
||||||||
Due from affiliates |
||||||||
Prepaid expenses and other current assets |
||||||||
Total current assets |
||||||||
Property and equipment, net |
||||||||
Intangible assets, net |
||||||||
Goodwill |
||||||||
Operating right-of-use assets |
||||||||
Life settlement policies, at cost |
||||||||
Life settlement policies, at fair value |
||||||||
Available-for-sale securities, at fair value |
||||||||
Other investments, at cost |
||||||||
Other assets |
||||||||
Equity securities, at fair value |
||||||||
TOTAL ASSETS |
$ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accrued expenses |
$ | $ | ||||||
Accounts payable |
||||||||
Operating lease liability, current |
||||||||
Due to affiliates |
||||||||
Due to owners |
||||||||
Contract liabilities—deposits on pending settlements |
||||||||
Accrued transaction costs |
||||||||
Other current liabilities |
||||||||
Income taxes payable |
||||||||
Total current liabilities |
||||||||
Long-term debt- Related party |
||||||||
Long-term debt |
||||||||
Operating lease liability, noncurrent |
||||||||
Deferred tax liability |
||||||||
Warrant liability |
||||||||
TOTAL LIABILITIES |
||||||||
COMMITMENTS AND CONTINGENCIES (Note 11) |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Class A common stock, |
||||||||
Additional paid-in capital |
||||||||
(Accumulated deficit) retained earnings |
( |
) | ||||||
Accumulated other comprehensive income |
||||||||
Non-controlling interest |
||||||||
Total shareholders’ equity |
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | $ | ||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
REVENUES: |
||||||||||||||||
Portfolio servicing revenue |
||||||||||||||||
Related party service revenue |
$ | $ | $ | $ | ||||||||||||
Portfolio servicing |
||||||||||||||||
Total portfolio servicing revenue |
||||||||||||||||
Active management revenue |
||||||||||||||||
Investment Income from life insurance policies held using investment method |
||||||||||||||||
Change in fair value of life insurance policies (policies held using fair value method) |
||||||||||||||||
Total active management revenue |
||||||||||||||||
Originations revenue |
||||||||||||||||
Related Party origination revenue |
||||||||||||||||
Origination revenue |
||||||||||||||||
Total origination revenue |
||||||||||||||||
Total revenues |
||||||||||||||||
COST OF REVENUES (excluding depreciation and amortization stated below) |
||||||||||||||||
Total cost of revenue |
||||||||||||||||
Gross Profit |
||||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
Sales and marketing |
||||||||||||||||
General and administrative (including stock based compensation of $ |
||||||||||||||||
(Gain) loss on change in fair value of debt |
( |
) | ( |
) | ( |
) | ||||||||||
Unrealized loss (gain) on investments |
( |
) | ||||||||||||||
Depreciation and amortization expense |
||||||||||||||||
Total operating expenses |
( |
) | ||||||||||||||
Operating Income |
$ | $ | $ | $ | ||||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Loss on change in fair value of warrant liability |
( |
) | ( |
) | ||||||||||||
Interest (expense) |
( |
) | ( |
) | ||||||||||||
Interest income |
||||||||||||||||
Other income (expense) |
( |
) | ( |
) | ||||||||||||
Total other income (expense) |
( |
) | ( |
) | ( |
) | ||||||||||
Net income before provision for income taxes |
||||||||||||||||
Income tax expense |
||||||||||||||||
NET INCOME |
||||||||||||||||
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST |
( |
) | ||||||||||||||
NET INCOME ATTRIBUTABLE TO SHAREHOLDERS |
$ | $ | $ | $ | ||||||||||||
EARNINGS PER SHARE: |
||||||||||||||||
Earnings per share—basic and diluted |
||||||||||||||||
Weighted-average units outstanding-basic and diluted |
||||||||||||||||
NET INCOME |
||||||||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Change in fair value of debt (risk adjusted) |
( |
) | ( |
) | ( |
) | ||||||||||
Comprehensive income before non-controlling interests |
||||||||||||||||
Net and comprehensive income (loss) attributable to non-controlling interests |
( |
) | ( |
) | ||||||||||||
Comprehensive income attributable to Abacus Life, Inc. |
$ | $ | $ | $ | ||||||||||||
Class A Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Non- Controlling Interests |
Total Shareholders’ Equity |
|||||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2022 (1) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Other comprehensive income |
— | — | — | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
Net Income |
— | — | — | — | ||||||||||||||||||||||||
BALANCE AS OF SEPTEMBER 30, 2022 (1) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Class A Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Loss |
Non- Controlling Interests |
Total Shareholders’ Equity |
|||||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||||
BALANCE AS OF JUNE 30, 2023 (1) |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
Merger with East Resources Acquisition Company |
( |
) | — | — | — | — | ||||||||||||||||||||||
Proceeds received from SPAC trust |
— | — | — | — | — | |||||||||||||||||||||||
Stock based compensation |
— | — | — | — | — | |||||||||||||||||||||||
Transfer of non-controlling interest |
— | — | — | ( |
) | — | — | |||||||||||||||||||||
Other Comprehensive Income |
— | — | — | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
Net Income |
— | — | — | — | ||||||||||||||||||||||||
BALANCE AS OF SEPTEMBER 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| (1) | Both the number of shares outstanding and their par value have been retrospectively recast for all prior periods presented to reflect the par value of the outstanding stock of Abacus Life, Inc. as a result of the successful Business Combination. |
Class A Common Stock |
Additional Paid-In Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Non- Controlling Interests |
Total Shareholders’ Equity |
|||||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2021 (1) |
$ | $ | $ | $ | $ | ( |
) | $ | ||||||||||||||||||||
Distributions |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
Other Comprehensive Income |
— | — | — | — | ||||||||||||||||||||||||
Net Income |
— | — | — | — | ||||||||||||||||||||||||
BALANCE AS OF SEPTEMBER 30, 2022 (1) |
$ | $ | $ | $ | $ | |||||||||||||||||||||||
Class A Common Stock |
Additional Paid-In Capital |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Loss |
Non- Controlling Interests |
Total Shareholders’ Equity |
|||||||||||||||||||||||
Shares |
Amount |
|||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2022 (1) |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Distributions |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
Deferred transaction costs |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||
Public warrants |
— | — | ( |
) | — | — | ||||||||||||||||||||||
Merger with East Resources Acquisition Company |
( |
) | — | — | ( |
) | ||||||||||||||||||||||
Acquisition of Abacus Settlements, LLC |
— | — | — | — | — | |||||||||||||||||||||||
Proceeds received from SPAC trust |
— | — | — | — | — | |||||||||||||||||||||||
Stock based compensation |
— | — | ||||||||||||||||||||||||||
Transfer of non-controlling interest |
— | — | — | ( |
) | — | ||||||||||||||||||||||
Other Comprehensive Income |
— | — | — | — | ( |
) | ( |
) | ( |
) | ||||||||||||||||||
Net Income |
— | — | — | — | ( |
) | ||||||||||||||||||||||
BALANCE AS OF SEPTEMBER 30, 2023 |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||||||
| (1) | Both the number of shares outstanding and their par value have been retrospectively recast for all prior periods presented to reflect the par value of the outstanding stock of Abacus Life Inc. as a result of the successful Business Combination. |
Nine Months Ended September 30, |
||||||||
2023 |
2022 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization |
||||||||
Stock based compensation |
||||||||
Deferred financing fees |
||||||||
Unrealized (gain) loss on investments |
( |
) | ||||||
Unrealized (gain) on policies |
( |
) | ( |
) | ||||
(Gain) loss on change in fair value of debt |
( |
) | ||||||
Deferred income taxes |
||||||||
Non-cash interest expense |
||||||||
Non-cash lease expense |
( |
) | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
( |
) | ||||||
Accounts receivable, related party |
( |
) | ||||||
Prepaid expenses and other current assets |
( |
) | ( |
) | ||||
Other noncurrent assets |
( |
) | ||||||
Accounts payable |
( |
) | ||||||
Accrued expenses |
||||||||
Accrued transaction costs |
( |
) | ||||||
Contract liabilities—deposits on pending settlement |
( |
) | ||||||
Other current liabilities |
||||||||
Life settlement policies, at fair value |
( |
) | ( |
) | ||||
Life settlement policies, at cost |
( |
) | ( |
) | ||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of other investments |
( |
) | ( |
) | ||||
Purchase of property and equipment |
( |
) | ||||||
Due from affiliates |
( |
) | ||||||
Net cash provided (used) in investing activities |
( |
) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Due to owners |
||||||||
Issuance of debt certificates |
||||||||
Issuance of private warrants |
||||||||
Transaction costs |
( |
) | ||||||
Capital distribution to members |
( |
) | ( |
) | ||||
Proceeds received from SPAC trust |
||||||||
Due to affiliates |
( |
) | ( |
) | ||||
Net cash provided by financing activities |
||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
||||||||
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD |
||||||||
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD |
$ | $ | ||||||
1. |
DESCRIPTION OF BUSINESS |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
3. |
BUSINESS COMBINATION |
Net Assets Identified |
Fair Value |
|||
Intangibles |
$ | |||
Goodwill |
||||
Current Assets |
||||
Non-Current Assets |
||||
Deferred Tax Liabilities |
( |
) | ||
Accrued Expenses |
( |
) | ||
Other Liabilities |
( |
) | ||
Total Fair Value |
$ | |||
Value Conveyed |
Amount |
|||
Abacus Purchase Consideration |
$ | |||
LMA Business Enterprise Value |
$ | |||
Total Consideration |
$ | |||
Asset Type |
Fair Value |
Useful Life |
Valuation Methodology |
|||||||||
Customer Relationships-Agents |
$ | Multi-period excess earnings method |
||||||||||
Customer Relationships-Financing Entities |
Multi-period excess earnings method | |||||||||||
Internally Developed and Used Technology-APA |
Relief from royalty method | |||||||||||
Internally Developed and Used Technology-Marketplace |
Replacement cost method | |||||||||||
Trade Name |
Indefinite | Relief from royalty method | ||||||||||
Non-Compete Agreements |
With and without method | |||||||||||
State Insurance Licenses |
Indefinite | Replacement cost method | ||||||||||
Total Fair Value |
$ | |||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Proforma revenue |
$ | $ | $ | $ | ||||||||||||
Proforma net income |
||||||||||||||||
4. |
LIFE INSURANCE SETTLEMENT POLICIES |
Remaining Life Expectancy (Years) |
Policies |
Face Value |
Fair Value |
|||||||||
0-1 |
$ | $ | ||||||||||
1-2 |
||||||||||||
2-3 |
||||||||||||
3-4 |
||||||||||||
4-5 |
||||||||||||
Thereafter |
||||||||||||
| $ | $ | |||||||||||
Remaining Life Expectancy (Years) |
Number of Life Insurance Policies |
Face Value |
Carrying Value |
|||||||||
0-1 |
$ | $ | ||||||||||
1-2 |
||||||||||||
2-3 |
||||||||||||
3-4 |
||||||||||||
4-5 |
||||||||||||
Thereafter |
||||||||||||
| $ | $ | |||||||||||
2023 remaining |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total |
$ | |||
5. |
PROPERTY AND EQUIPMENT-NET |
September 30, 2023 |
December 31, 2022 |
|||||||
Computer equipment |
$ | $ | ||||||
Furniture and fixtures |
||||||||
Leasehold improvements |
||||||||
Property and equipment—gross |
||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||
Property and equipment—net |
$ | $ | ||||||
6. |
GOODWILL AND OTHER INTANGIBLE ASSETS |
Portfolio Servicing |
Active Management |
Originations |
||||||||||
Goodwill at January 1, 2023 |
$ | $ | $ | |||||||||
Additions |
||||||||||||
Goodwill at September 30, 2023 |
$ | $ | $ | |||||||||
Asset Type |
Fair Value |
Useful Life |
Valuation Methodology | |||||||
Customer Relationships—Agents |
$ | Multi-period excess-earnings method | ||||||||
Customer Relationships—Financial Relationships |
Multi-period excess-earnings method | |||||||||
Internally Developed and Used Technology-APA |
Relief from Royalty Method | |||||||||
Internally Developed and Used Technology-Market Place |
Replacement Cost Method | |||||||||
Trade Name |
Indefinite | Relief from Royalty Method | ||||||||
Non-Compete Agreements |
With or Without Method | |||||||||
State Insurance Licenses |
Indefinite | Replacement Cost Method | ||||||||
| $ | ||||||||||
September 30, 2023 |
||||||||||||
Definite Lived Intangible Assets: |
Gross Value |
Accumulated Amortization |
Net Book Value |
|||||||||
Customer Relationships—Agents |
$ | $ | $ | |||||||||
Customer Relationships—Financial Relationships |
||||||||||||
Internally Developed and Used Technology-APA |
||||||||||||
Internally Developed and Used Technology-Market Place |
||||||||||||
Non-Compete Agreements |
||||||||||||
Balance at September 30, 2023 |
$ | $ | $ | |||||||||
Indefinite Lived Intangible Assets: |
||||||||||||
Trade Name |
— | |||||||||||
State Insurance Licenses |
— | |||||||||||
Total Intangible Asset Balance at September 30, 2023 |
$ | $ | $ | |||||||||
Remainder of 2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total |
$ | |||
7. |
AVAILABLE-FOR-SALE SECURITIES, AT FAIR VALUE |
8. |
OTHER INVESTMENTS AND OTHER NONCURRENT ASSETS |
9. |
CONSOLIDATION OF VARIABLE INTEREST ENTITIES |
10. |
SEGMENT REPORTING |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Portfolio servicing |
$ | $ | $ | $ | ||||||||||||
Active management |
||||||||||||||||
Originations |
||||||||||||||||
Segment revenue (including inter-segment) |
||||||||||||||||
Inter-segment elimination |
( |
) | ( |
) | ||||||||||||
Total revenue |
$ | $ | $ | $ | ||||||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Portfolio servicing |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||
Active management |
||||||||||||||||
Originations |
||||||||||||||||
Total gross profit |
||||||||||||||||
Sales and marketing |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
General and administrative (including stock based compensation of $ |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Depreciation and amortization expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other (expense) income |
( |
) | ( |
) | ||||||||||||
Loss on change in fair value of warrant liability |
( |
) | ( |
) | ||||||||||||
Interest expense |
( |
) | ( |
) | ||||||||||||
Interest income |
||||||||||||||||
Gain (Loss) on change in fair value of debt |
( |
) | ||||||||||||||
Unrealized (loss) gain on investments |
( |
) | ( |
) | ( |
) | ||||||||||
Provision for income taxes |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Less: Net gain (loss) attributable to non-controlling interests |
( |
) | ( |
) | ( |
) | ||||||||||
Net income attributable to Abacus Life, Inc. |
$ | $ | $ | $ | ||||||||||||
11. |
COMMITMENTS AND CONTINGENCIES |
12. |
FAIR VALUE MEASUREMENTS |
| • | Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| • | Level 2 inputs: Other than quoted prices in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| • | Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
Fair Value Hierarchy |
||||||||||||||||
As of September 30, 2023 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Assets: |
||||||||||||||||
Life settlement policies |
$ | $ | $ | $ | ||||||||||||
Available-for-sale securities, at fair value |
||||||||||||||||
Other investments |
||||||||||||||||
S&P 500 options |
||||||||||||||||
Other assets |
||||||||||||||||
Total assets held at fair value |
$ | $ | $ | $ | ||||||||||||
Liabilities: |
||||||||||||||||
Long-term debt |
$ | $ | $ | $ | ||||||||||||
Private placement warrants |
||||||||||||||||
Total liabilities held at fair value: |
$ | $ | $ | $ | ||||||||||||
Fair Value Hierarchy |
||||||||||||||||
As of December 31, 2022 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Assets: |
||||||||||||||||
Life settlement policies |
$ | $ | $ | $ | ||||||||||||
Available-for-sale securities, at fair value |
||||||||||||||||
Other investments |
||||||||||||||||
S&P 500 options |
||||||||||||||||
Total assets held at fair value |
$ | $ | $ | $ | ||||||||||||
Liabilities: |
||||||||||||||||
Long-term debt |
$ | $ | $ | $ | ||||||||||||
Total liabilities held at fair value: |
$ | $ | $ | $ | ||||||||||||
As of September 30, 2023 Rate Adjustment |
Fair Value |
Change in Fair Value |
||||||
+2% |
$ | $ | ( |
) | ||||
No change |
||||||||
-2% |
||||||||
Carrier |
Percentage of Face Value |
Percentage of Fair Value |
Carrier Rating |
|||||||||
American General Life Insurance Company |
% | % | A+ | |||||||||
Transamerica |
% | % | A | |||||||||
Fair value at December 31, 2022 |
$ | |||
Policies purchased |
||||
Realized gain (loss) on matured/sold policies |
||||
Premiums paid |
( |
) | ||
Unrealized gain(loss) on held policies |
||||
Change in estimated fair value |
||||
Matured/sold policies |
( |
) | ||
Premiums paid |
||||
Fair value at September 30, 2023 |
$ | |||
Fair value at December 31, 2022 |
$ | |||
Debt issued to third parties |
||||
Unrealized loss on change in fair value (risk-free) |
||||
Unrealized loss on change in fair value (credit-adjusted) included in OCI |
||||
Change in estimated fair value resulted into gain |
||||
Fair value at September 30, 2023 |
$ | |||
Private Placement Warrants |
||||
Expected implied volatility |
de minimis | |||
Risk-free interest rate |
% | |||
Term to expiration |
||||
Exercise price |
$ | |||
Common Stock Price |
$ | |||
Dividend Yield |
% | |||
13. |
LONG-TERM DEBT |
September 30, 2023 |
December 31, 2022 |
|||||||||||||||
Cost |
Fair value |
Cost |
Fair value |
|||||||||||||
Market-indexed notes: |
||||||||||||||||
LMATT Series 2024, Inc. |
$ | $ | $ | $ | ||||||||||||
LMATT Series 2.2024, Inc. |
||||||||||||||||
LMATT Growth & Income Series 1.2026, Inc |
||||||||||||||||
Secured borrowing: |
||||||||||||||||
LMA Income Series, LP |
||||||||||||||||
LMA Income Series II, LP |
||||||||||||||||
Unsecured borrowing: |
||||||||||||||||
Owl Rock Credit Facility |
||||||||||||||||
SPV Purchase and Sale Note |
||||||||||||||||
Sponsor PIK Note |
||||||||||||||||
Deferred Financing Cost |
( |
) | ( |
) | ||||||||||||
Total long-term debt |
$ | $ | $ | $ | ||||||||||||
| • | requires the Company and certain subsidiaries of the Company to guarantee the loans provided under the Owl Rock Credit Facility pursuant to separate loan documentation; |
| • | is secured by a first-priority security interest in substantially all of the assets of the Company and the subsidiary guarantors. No pledge of any equity interests in the Company is required by any holder of such equity interests; |
| • | provides for interest to accrue on the loans drawn under the Owl Rock Credit Facility at the election of the Company, by reference to either (i) an alternative base rate (such loans, “ABR Loans”) or (ii) an adjusted term Secured Overnight Financing Rate (SOFR) rate (such loans, “SOFR Loans”) plus an applicable margin. The adjusted term SOFR rate is determined by the applicable term SOFR for a relevant interest period plus a credit spread adjustment of |
| • | provides a default rate that will accrue at |
| • | provides for amortization payments based on the initial principal amount of the loans outstanding of |
| • | contains provisions requiring mandatory prepayment of the initial term loans and delayed draw term loans with |
| • | provides for financial covenants such that (i) a consolidated net leverage ratio cannot exceed 1.00 as of the last day of any fiscal quarter and (ii) a liquid asset coverage ratio cannot be less than |
| • | contains affirmative covenants related to, among other things, delivery of certain financial reports and compliance certificates, maintenance of existence, compliance with laws, material contracts, payment of taxes, property and insurance matters, inspection of property, books and records, notices, collateral matters and future subsidiaries, in each case, subject to specified limitations and exceptions; |
| • | contains an affirmative representation and corresponding covenant that the Company and certain subsidiaries of the Company do not, and will not during the term of the Owl Rock Facility (or if the term of the Owl Rock Credit Facility continues for longer than a year, during the Company’s and certain subsidiaries of the Company’s most recent fiscal year), derive more than fifteen percent ( |
| • | contains negative covenants related to, among other things, incurrence of debt, creation of liens, mergers, acquisitions and certain other fundamental changes, conditions concerning the creation of new subsidiaries, conditions concerning opening of new accounts, disposition of assets, dividends and other restricted payments, prepayment of certain indebtedness, transactions with affiliates, investments and limitations on lines of business, in each case, subject to specified limitations and exceptions; and |
| • | provides for certain specified events of default upon the occurrence and during the continuation of certain events or conditions (subject to specified exceptions, grace periods or cure rights, as applicable) each as set forth in the Owl Rock Credit Facility, which includes among other things, defaults with respect to nonpayment, breaches of representations and warranties, failure to comply with covenants, cross-default to other material indebtedness, bankruptcy and insolvency matters, ERISA matters, material judgments, collateral and perfection matters, the occurrence of a change of control and subordination matters with respect to certain specified indebtedness. The occurrence and continuance of an event of default that is not cured or waived will enable the agent and/or the lenders, as applicable, to accelerate the loans or take other remedial steps as provided in the Owl Rock Credit Facility and the other loan documents. |
| • | requires that certain subsidiaries of the Company guarantee the credit extensions provided under the SPV Investment Facility pursuant to separate documentation; |
| • | is unsecured without collateral security provided in favor of SPV and subordinated in right of payment to the Company’s obligations under the Owl Rock Credit Facility, subject to limited specified exceptions and circumstances for permitting early payment; |
| • | provides for certain credit extensions in an aggregate principal amount of $ |
closing of the SPV Investment Facility, and (ii) the SPV Purchase and Sale Note for the original principal amount of $ |
| • | provides for proceeds to be used for payment of certain transaction expenses, general corporate purposes and any other purposes not prohibited by the agreement or applicable law; |
| • | matures on July 5, 2026, |
| • | provides for interest to accrue on the SPV Investment Facility at a rate of |
| • | provides a default rate that will accrue at |
| • | provides that no principal payments shall be required prior to maturity; |
| • | contains financial and other covenants substantially similar and not materially worse than those contained in the Owl Rock Credit Facility from the perspective of the Company; and |
| • | provides for certain specified events of default (including certain events of default subject to grace or cure periods), with the occurrence and during the continuance of such events of default enabling the lender under the SPV Investment Facility to accelerate the obligations under the SPV Investment Facility, among other rights or remedies, subject to applicable subordination restrictions. |
14. |
SHAREHOLDERS’ EQUITY |
| • | in whole and not in part; |
| • | at a price of $ |
| • | upon not less than |
| • | if, and only if, the last sale price of the Class A common stock equals or exceeds $ |
| • | in whole and not in part; |
| • | at a price equal to a number of shares of Class A common stock to be determined by reference to the agreed table set forth in the warrant agreement based on the redemption date and the “fair market value” of the Class A common stock; |
| • | upon not less than |
| • | if, and only if, the last sale price of the Class A common stock equals or exceeds $ |
15. |
STOCK- BASED COMPENSATION |
| i. |
| ii. |
| iii. | Additionally, the Restricted Stock will become fully vested upon the first to occur of one of the following events: (i) separation from service due to disability, (ii) death, (iii) separation from service without cause; or (iv) separation from service for good reason. |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Stock-based compensation expense |
$ | $ | $ | $ | ||||||||||||
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Outstanding at December 31, 2022 |
$ | |||||||
Granted |
||||||||
Forfeited |
— | |||||||
Settled |
— | |||||||
Outstanding at September 30, 2023 |
$ | |||||||
16. |
EMPLOYEE BENEFIT PLAN |
17. |
INCOME TAXES |
18. |
RELATED-PARTY TRANSACTIONS |
Three and Nine Months Ended September 30, 2023 |
||||
Origination fee revenue |
$ | |||
Transaction reimbursement revenue |
||||
Total |
$ | |||
Cost |
$ | |||
Face value |
||||
Total policies |
||||
Average Age |
||||
19. |
LEASES |
Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||
Assets: |
||||||||
Operating lease right-of-use assets |
$ | $ | ||||||
Liabilities: |
||||||||
Operating lease liability, current |
||||||||
Operating lease liability, non-current |
||||||||
Total lease liability |
$ | $ | ||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Operating lease cost |
$ | $ | $ | $ | ||||||||||||
Variable lease cost |
||||||||||||||||
Total lease cost |
$ | $ | $ | $ | ||||||||||||
Nine Months Ended September 30, |
||||||||
2023 |
2022 |
|||||||
Cash paid for amounts included in the measurement of the lease liability |
||||||||
Operating cash flows from operating leases |
$ | $ | ||||||
ROU assets obtained in exchange for new lease liabilities |
||||||||
Nine Months Ended September 30, 2023 |
Year Ended December 31, 2022 |
|||||||
Weighted-average remaining lease term (in years) |
||||||||
Weighted-average discount rate |
% | % | ||||||
Operating leases |
||||
Remaining of 2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total operating lease payments (undiscounted) |
||||
Less: Imputed interest |
( |
) | ||
Lease liability as of September 30, 2023 |
$ | |||
20. |
EARNINGS PER SHARE |
Three Months Ended |
Nine Months Ended |
|||||||||||||||
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
|||||||||||||
Net income attributable to Longevity Market Assets |
$ | $ | $ | $ | ||||||||||||
Weighted-average shares used in computing net income per share, basic and diluted |
||||||||||||||||
Basic and diluted earnings per share: |
$ | $ | $ | $ | ||||||||||||
21. |
SUBSEQUENT EVENTS |
Three Months Ended June 30 |
Three Months Ended September 30 |
Six Months Ended June 30 |
Nine Months Ended September 30 |
|||||||||||||
2023 |
2022 |
2023 |
2022 |
|||||||||||||
Origination revenue |
$ | $ | $ | $ | ||||||||||||
Related party revenue |
||||||||||||||||
Total revenue |
||||||||||||||||
Cost of revenue |
||||||||||||||||
Related party cost of revenue |
||||||||||||||||
Total cost of revenue |
||||||||||||||||
Gross Profit |
||||||||||||||||
OPERATING EXPENSES: |
||||||||||||||||
General and administrative expenses |
||||||||||||||||
Depreciation |
||||||||||||||||
Total operating expenses |
||||||||||||||||
Income (Loss) from operations |
( |
) | ( |
) | ( |
) | ||||||||||
OTHER INCOME (EXPENSE) |
||||||||||||||||
Interest income |
||||||||||||||||
Interest (expense) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Other income |
||||||||||||||||
Total other income (expense) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Income (Loss) before provision for income taxes |
( |
) | ( |
) | ( |
) | ||||||||||
Provision for income taxes |
||||||||||||||||
NET INCOME (LOSS) AND COMPREHENSIVE |
$ | ( |
) | ( |
) | $ | ( |
) | ||||||||
WEIGHTED-AVERAGE UNITS USED IN COMPUTING NET INCOME (LOSS) PER UNIT: |
||||||||||||||||
Basic |
||||||||||||||||
Diluted |
||||||||||||||||
NET INCOME/(LOSS) PER UNIT: |
||||||||||||||||
Basic earnings per unit |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||
Diluted earnings per unit |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ||||||
Common Units |
Additional Paid-In Capital |
Retained Earnings |
Total |
|||||||||||||||||
Units |
Amount |
|||||||||||||||||||
BALANCE—March 31, 2023 |
$ | $ | $ | $ | ||||||||||||||||
Net income |
— | — | — | ( |
) | ( |
) | |||||||||||||
Distributions |
— | — | — | ( |
) | ( |
) | |||||||||||||
BALANCE—June 30, 2023 |
$ | $ | $ | $ | ||||||||||||||||
Common Units |
Additional Paid-In Capital |
Retained Earnings |
Total |
|||||||||||||||||
Units |
Amount |
|||||||||||||||||||
BALANCE—December 31, 2022 |
$ | $ | $ | |||||||||||||||||
Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
Distributions |
— | — | — | ( |
) | ( |
) | |||||||||||||
BALANCE—June 30, 2023 |
$ | $ | $ | $ | ||||||||||||||||
Common Units |
Additional Paid-In Capital |
Retained Earnings |
Total |
|||||||||||||||||
Units |
Amount |
|||||||||||||||||||
BALANCE—June 30, 2022 |
$ | $ | $ | $ | ||||||||||||||||
Net income |
— | — | — | ( |
) | ( |
) | |||||||||||||
Distributions |
— | — | — | ( |
) | ( |
) | |||||||||||||
BALANCE—September 30, 2022 |
$ | $ | $ | $ | ||||||||||||||||
Common Units |
Additional Paid-In Capital |
Retained Earnings |
Total |
|||||||||||||||||
Units |
Amount |
|||||||||||||||||||
BALANCE—December 31, 2021 |
$ | $ | $ | |||||||||||||||||
Net income |
— | — | — | |||||||||||||||||
Distributions |
— | — | — | ( |
) | ( |
) | |||||||||||||
BALANCE—September 30, 2022 |
$ | $ | $ | $ | ||||||||||||||||
Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | ( |
) | $ | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation expense |
||||||||
Amortization expense |
||||||||
Amortization of deferred financing fees |
||||||||
Non-cash lease expense |
||||||||
Changes in operating assets and liabilities: |
||||||||
Related party receivables |
||||||||
Other receivables |
( |
) | ||||||
Prepaid expenses |
( |
) | ( |
) | ||||
Other current assets |
( |
) | ( |
) | ||||
Certificate of deposit |
||||||||
Accrued payroll and other expenses |
( |
) | ||||||
Contract liability-deposits on pending settlements |
( |
) | ||||||
Accounts payable |
( |
) | ( |
) | ||||
Net cash used in operating activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
( |
) | ( |
) | ||||
Purchase of intangible asset |
( |
) | ||||||
Due from members and affiliates |
( |
) | ( |
) | ||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Due to members |
( |
) | ( |
) | ||||
Distributions to members |
( |
) | ( |
) | ||||
Net cash used in financing activities |
( |
) | ( |
) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
( |
) | ( |
) | ||||
CASH AND CASH EQUIVALENTS: |
||||||||
Beginning of period |
||||||||
End of period |
$ | $ | ||||||
1. |
DESCRIPTION OF THE BUSINESS |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
3. |
SEGMENT REPORTING |
4. |
REVENUE |
Three Months Ended June 30, 2023 |
Three Months Ended September 30, 2022 |
Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
|||||||||||||
Agent |
$ | $ | $ | $ | ||||||||||||
Broker |
||||||||||||||||
Client direct |
||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
5. |
INCOME TAXES |
6. |
RETIREMENT PLAN |
7. |
RELATED-PARTY TRANSACTIONS |
Three Months Ended June 30, 2023 |
Three Months Ended September 30, 2022 |
Six Months Ended June 30, 2023 |
Nine Months Ended September 30, 2022 |
|||||||||||||
Origination fee revenue |
$ | $ | $ | $ | ||||||||||||
Transaction reimbursement revenue |
||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
Cost |
$ | $ | $ | $ | ||||||||||||
Face value |
||||||||||||||||
Total policies |
||||||||||||||||
Average Age |
||||||||||||||||
8. |
SUBSEQUENT EVENT |
Page |
||||
| F-69 | ||||
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021: |
||||
| F-70 | ||||
| F-71 | ||||
| F-72 | ||||
| F-73 | ||||
| F-74-F-98 | ||||
/s/ GRANT THORNTON LLP |
We have served as the Company’s auditor since 2022. |
| Philadelphia, Pennsylvania |
| January 31, 2024 |
2022 |
2021 |
|||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | $ | ||||||
Accounts receivable |
||||||||
Related party receivable |
||||||||
Due from affiliates |
||||||||
Prepaid expenses and other current assets |
||||||||
Total current assets |
||||||||
PROPERTY AND EQUIPMENT—Net |
||||||||
OTHER ASSETS |
||||||||
Operating right-of-use |
||||||||
Life settlement policies, at cost |
||||||||
Life settlement policies, at fair value |
||||||||
Available for sale securities, at fair value |
||||||||
Other investments |
||||||||
Other non-current assets, at fair value |
||||||||
TOTAL ASSETS |
$ | $ | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Accounts payable |
$ | $ | ||||||
Due to affiliates |
||||||||
Operating lease liabilities- current portion |
||||||||
Accrued transaction costs |
||||||||
Other current liabilities |
||||||||
Total current liabilities |
||||||||
Long-term debt, at fair value |
||||||||
Operating lease liabilities- noncurrent portion |
||||||||
Deferred tax liability |
||||||||
TOTAL LIABILITIES |
||||||||
COMMITMENTS AND CONTINGENCIES (Note 9) |
||||||||
SHAREHOLDERS’ EQUITY: |
||||||||
Additional paid-in capital |
||||||||
Retained earnings |
||||||||
Accumulated other comprehensive income |
||||||||
Non-controlling interest |
( |
) | ||||||
Total shareholders’ equity |
||||||||
TOTAL LIABILITIES AND EQUITY |
$ | $ | ||||||
2022 |
2021 |
|||||||
REVENUES: |
||||||||
Portfolio servicing revenue |
||||||||
Related party servicing revenue |
$ | $ | ||||||
Portfolio Servicing revenue |
||||||||
Total portfolio servicing revenue |
||||||||
Active management revenue |
||||||||
Investment Income from life insurance policies held using investment method |
||||||||
Change in fair value of life insurance policies (policies held using fair value method) |
||||||||
Total active management revenue |
||||||||
Total revenues |
||||||||
COST OF REVENUES (Excluding depreciation stated below) |
||||||||
Gross profit |
||||||||
OPERATING EXPENSES: |
||||||||
Sales and marketing |
||||||||
General, administrative and other |
||||||||
Change in fair value of debt |
||||||||
Unrealized loss on investments |
||||||||
Other operating expenses |
||||||||
Depreciation |
||||||||
Total operating expenses |
||||||||
Operating income (loss) |
( |
) | ||||||
OTHER (EXPENSE) INCOME |
||||||||
Interest (expense), net |
( |
) | ||||||
Other (expense) |
( |
) | ||||||
Total other (expense) income |
( |
) | ||||||
Net income (loss) before tax |
( |
) | ||||||
Income tax expense |
||||||||
NET INCOME (LOSS) |
( |
) | ||||||
LESS: NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST |
( |
) | ||||||
NET INCOME ATTRIBUTABLE TO LONGEVITY MARKET ASSETS, LLC |
$ | $ | ||||||
EARNINGS PER UNIT: |
||||||||
Basic earnings per unit |
$ | $ | ||||||
Diluted earnings per unit |
$ | $ | ||||||
Weighted average shares outstanding—basic |
||||||||
Weighted average shares outstanding—diluted |
||||||||
NET INCOME |
— | |||||||
Other comprehensive income, net of tax: |
||||||||
Change in fair value of debt |
||||||||
Comprehensive income before non-controlling interests |
||||||||
Less: Net income attributable to non-controlling interests |
— | |||||||
Less: Comprehensive income attributable to non-controlling interests |
||||||||
Comprehensive income attributable to Longevity Market Assets, LLC |
$ | |||||||
Common Units |
Additional Paid-In Capital |
Retained Earnings |
Non- Controlling Interests |
Accumulated Other Comprehensive Income |
Total Shareholders’ Equity |
|||||||||||||||||||||||
Units |
Amount |
|||||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2021 |
$ | $ | $ | $ | — | — | $ | |||||||||||||||||||||
Distributions |
— | — | — | ( |
) | — | — | $ | ( |
) | ||||||||||||||||||
Net income (loss) |
— | — | — | ( |
) | — | $ | ( |
) | |||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2021 |
( |
) | — | |||||||||||||||||||||||||
Distributions |
— | — | — | ( |
) | — | — | $ | ( |
) | ||||||||||||||||||
Other Comprehensive Income |
— | — | — | — | $ | |||||||||||||||||||||||
Net income |
— | — | — | — | $ | |||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2022 |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
2022 |
2021 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | $ | ( |
) | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Depreciation |
||||||||
Unrealized loss on investments |
||||||||
Unrealized (gain) on policies |
( |
) | ||||||
Change in fair value of debt |
||||||||
Income tax expense |
||||||||
Non-cash lease expense |
||||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
( |
) | ||||||
Related party receivable |
( |
) | ( |
) | ||||
Other receivable |
||||||||
Prepaid expenses |
( |
) | ( |
) | ||||
Other noncurrent assets |
( |
) | ||||||
Accounts payable |
||||||||
Accrued transaction costs |
||||||||
Other current liabilities |
||||||||
Life Settlement Policies purchased, at fair value |
( |
) | ||||||
Life Settlement Policies purchased, at cost |
( |
) | ||||||
Net cash provided by/(used in) operating activities |
( |
) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property and equipment |
( |
) | ||||||
Purchase of available for sale securities |
( |
) | ( |
) | ||||
Purchase of other investments, at cost |
( |
) | — | |||||
Due from affiliates |
( |
) | ||||||
Net cash (used in) investing activities |
( |
) | ( |
) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Issuance of long term debt, at fair value |
||||||||
Due to affiliates |
( |
) | ||||||
Member capital distribution |
( |
) | ( |
) | ||||
Net cash provided by/(used in) financing activities |
||||||||
NET INCREASE (DECREASE) IN CASH |
( |
) | ||||||
CASH AT THE BEGINNING OF THE YEAR |
||||||||
CASH AT THE END OF THE YEAR |
$ | $ | ||||||
1. |
DESCRIPTION OF BUSINESS |
2. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Estimated Useful Life | ||
Furniture and fixtures |
||
Leasehold improvements |
3. |
LIFE INSURANCE SETTLEMENT POLICIES |
Remaining Life Expectancy (Years) |
Number of Life Insurance Policies |
Face Value |
Fair Value |
|||||||||
0-1 |
$ | $ | ||||||||||
1-2 |
||||||||||||
2-3 |
||||||||||||
3-4 |
||||||||||||
4-5 |
||||||||||||
Thereafter |
||||||||||||
| $ | $ | |||||||||||
Remaining Life Expectancy (Years) |
Number of Life Insurance Policies |
Face Value |
Carrying Value |
|||||||||
0-1 |
$ | $ | ||||||||||
1-2 |
||||||||||||
2-3 |
||||||||||||
3-4 |
||||||||||||
4-5 |
||||||||||||
Thereafter |
||||||||||||
| $ | $ | |||||||||||
2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total |
$ | |||
4. |
PROPERTY AND EQUIPMENT, NET |
As of |
As of |
|||||||
December 31, 2022 |
December 31, 2021 |
|||||||
Furniture and fixtures |
$ | $ | ||||||
Leasehold improvements |
||||||||
Property and equipment—gross |
||||||||
Less: accumulated depreciation |
( |
) | ( |
) | ||||
Property and equipment—net |
$ | $ | ||||||
5. |
AVAILABLE-FOR-SALE |
6. |
OTHER INVESTMENTS AND OTHER NONCURRENT ASSETS |
7. |
CONSOLIDATION OF VARIABLE INTEREST ENTITIES |
8. |
SEGMENT REPORTING |
As of December 31, 2022 |
As of December 31, 2021 |
|||||||
Portfolio Servicing |
$ | $ | ||||||
Active Management |
||||||||
Total Revenue |
$ | $ | ||||||
Portfolio Servicing |
$ | $ | ||||||
Active Management |
||||||||
Gross profit |
$ | $ | ||||||
Sales and Marketing |
$ | ( |
) | $ | ||||
General, administrative and other |
( |
) | ( |
) | ||||
Other operating expenses |
— | ( |
) | |||||
Depreciation |
( |
) | ( |
) | ||||
Other expense |
( |
) | ||||||
Interest (expense) |
( |
) | ||||||
Interest income |
||||||||
Change on fair value of debt |
( |
) | ||||||
Unrealized gain(loss) on investments |
( |
) | ||||||
Income tax expense |
( |
) | ||||||
Net loss attributable to non-controlling interest |
( |
) | ||||||
Net income attributable to Longevity Market Assets, LLC |
$ | $ | ||||||
9. |
COMMITMENTS AND CONTINGENCIES |
10. |
FAIR VALUE MEASUREMENTS |
| • | Level 1 inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| • | Level 2 inputs: Other than quoted prices in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| • | Level 3 inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
As of December 31, 2022 |
Fair Value Hierarchy |
|||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
Assets: |
||||||||||||||||
Life settlement policies |
$ | $ | $ | $ | ||||||||||||
Available-for-sale |
||||||||||||||||
Other Investments |
||||||||||||||||
S&P 500 options |
||||||||||||||||
Tot assets held at fair value |
$ | $ | $ | $ | ||||||||||||
Liabilities: |
||||||||||||||||
Long-term debt |
$ | $ | $ | $ | ||||||||||||
Fair Value Hierarchy |
||||||||||||||||
As of December 31, 2021 |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||
Assets: |
||||||||||||||||
Life settlement policies |
$ | $ | $ | $ | ||||||||||||
Available-for-sale |
||||||||||||||||
Other investments |
||||||||||||||||
Other non-current assets |
||||||||||||||||
Tot assets held at fair value |
$ | $ | $ | $ | ||||||||||||
Liabilities: |
||||||||||||||||
Long-term debt |
$ | $ | $ | $ | ||||||||||||
As of December 31, 2022 |
Change in |
|||||||
Rate Adjustment |
Fair Value |
Fair Value |
||||||
+2% |
$ | $ | ( |
) | ||||
No change |
— | |||||||
-2% |
||||||||
Carrier |
Face Value |
Fair Value |
Rating | |||||||
American General Life Insurance Company |
% | % | A | |||||||
John Hancock Life Insurance Company |
A+ | |||||||||
ReliaStar Life Insurance Company |
NR | |||||||||
Principal Life |
A+ | |||||||||
Securian Life Insurance Company |
A+ | |||||||||
Fair value at December 31, 2021 |
$ | |||
Policies purchased |
||||
Realized gain on matured/sold policies |
||||
Premius Paid |
( |
) | ||
Unrealized gain on held policies |
||||
Change in estimated fair value |
||||
Matured/sold policies |
( |
) | ||
Premiums paid |
||||
Fair value at December 31, 2022 |
$ | |||
Fair value at December 31, 2021 |
$ | |||
Debt issued to third parties |
$ | |||
Unrealized loss on change in fair value (risk-free) |
||||
Unrealized (gain) on change in fair value (credit-adjusted) |
( |
) | ||
Change in estimated fair value |
( |
) | ||
Fair value at December 31, 2022 |
$ | |||
11. |
LONG-TERM DEBT |
December 31, 2022 |
December 31, 2021 |
|||||||||||||||
Cost |
Fair value |
Cost |
Fair value |
|||||||||||||
Market-indexed notes: |
||||||||||||||||
LMATT Series 2024, Inc. |
$ | $ | $ | $ | ||||||||||||
LMATT Series 2.2024, Inc. |
||||||||||||||||
LMATT Growth & Income Series 1.2026, Inc. |
||||||||||||||||
Secured borrowing: |
||||||||||||||||
LMATT Income Series, LP |
||||||||||||||||
Total long-term debt |
$ | $ | $ | $ | ||||||||||||
12. |
SHAREHOLDERS’ EQUITY |
13. |
EMPLOYEE BENEFIT PLAN |
14. |
INCOME TAXES |
December 31, 2022 |
December 31, 2021 |
|||||||
Current provision: |
||||||||
Federal |
$ | $ | ||||||
State |
||||||||
Foreign |
||||||||
Total current tax |
||||||||
Deferred provision (benefit): |
||||||||
Federal |
||||||||
State |
||||||||
Foreign |
||||||||
Total deferred tax |
||||||||
Provision for income taxes |
$ | |||||||
Year Ended December 31, 2022 |
Year Ended December 31, 2021 |
|||||||
Income tax benefit computed at federal statutory rate |
$ | $ | ( |
) | ||||
Effect of pass through entities |
$ | ( |
) | $ | ( |
) | ||
State taxes, net of federal benefit |
( |
) | ||||||
Valuation allowance |
( |
) | ||||||
Income tax benefit at effective tax rate |
$ | $ | ||||||
Year Ended |
Year Ended |
|||||||
December 31, 2022 |
December 31, 2021 |
|||||||
Deferred tax assets: |
||||||||
Net operating loss carryforwards |
$ | $ | ||||||
Basis Difference in Life Insurance Contracts |
$ | |||||||
Other |
||||||||
Gross deferred tax assets |
||||||||
Less: valuation allowance |
( |
) | ||||||
Total deferred tax assets |
||||||||
Deferred tax liabilities: |
||||||||
Unrealized Gain |
( |
) | — | |||||
Other |
||||||||
Gross deferred tax liabilities |
( |
) | — | |||||
Deferred tax liabilities—net of allowance |
$ | ( |
) | $ | — | |||
15. |
RELATED PARTY TRANSACTIONS |
16. |
LEASES |
Year Ended |
Year Ended |
|||||||
December 31, 2022 |
December 31, 2021 |
|||||||
Assets: |
||||||||
Operating lease right-of-use |
$ | $ | ||||||
Liabilities: |
||||||||
Operating lease liability, current |
||||||||
Operating lease liability, non-current |
||||||||
Total lease liability |
— | — | ||||||
Year Ended |
Year Ended |
|||||||
December 31, 2022 |
December 31, 2021 |
|||||||
Operating lease cost |
$ | $ | ||||||
Variable lease cost |
||||||||
Cash paid for amounts included in the measurement of the lease liability |
||||||||
Operating cash flows from operating leases |
$ | $ | ||||||
ROU assets obtained in exchange for new lease liabilities |
$ | |||||||
Year Ended |
Year Ended |
|||||||
December 31, 2022 |
December 31, 2021 |
|||||||
Weighted-average remaining lease term (in years) |
||||||||
Weighted-average discount rate |
% | % | ||||||
Operating leases |
||||
2023 |
$ | |||
2024 |
||||
2025 |
||||
2026 |
||||
2027 |
||||
Thereafter |
||||
Total operating lease payments (undiscounted) |
||||
Less: Imputed interest |
( |
) | ||
Lease liability as of December 31, 2022 |
$ | |||
17. |
SUBSEQUENT EVENTS |
Table of Contents
Neither we nor the underwriters have authorized any other person to provide you with any information other than that contained or incorporated by reference in this prospectus. Neither we nor the underwriters take any responsibility for, or provide any assurance as to the reliability of, any other information that others may give you. We are not making an offer to sell these securities to any person in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Information contained on our web site is not part of this prospectus.
The table of contents is located on the inside of the front cover of this prospectus.
9.875% Fixed Rate Senior Notes due 2028
ABACUS LIFE, INC.
PROSPECTUS
February 9, 2024
Joint Book-Running Managers
| Piper Sandler | A.G.P. |
Ladenburg Thalmann |
Table of Contents
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The table below sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities being registered. All amounts are estimated, except for the SEC registration fee. All costs and expenses are payable by us.
| SEC Registration Fee |
$ | 4,243.50 | ||
| FINRA Filing Fees |
$ | * | ||
| Legal Fees and Expenses |
$ | * | ||
| Accounting Fees and Expenses |
$ | * | ||
| Miscellaneous Expenses |
$ | * | ||
|
|
|
|||
| Total |
$ | * | ||
|
|
|
| * | These fees are calculated based on the securities offered and the number of issuances and accordingly cannot be defined at this time. |
We will bear all costs, expenses and fees in connection with the registration of the securities, including with regard to compliance with state securities or “blue sky” laws. All amounts are estimates except the SEC registration fee.
Item 14. Indemnification of Directors and Officers.
Section 145 of the DGCL authorizes a court to award, or a corporation’s board of directors to grant, indemnity to officers, directors and other corporate agents in terms sufficiently broad to permit such indemnification under certain circumstances and subject to certain limitations.
Our charter and bylaws, as they will be in effect upon the completion of this offering, provide that we will indemnify our directors and officers, and may indemnify our employees and agents, to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law.
In addition, we have entered into separate indemnification agreements with our directors and executive officers which requires us, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors or officers. We will also maintain director and officer liability insurance.
These indemnification provisions may be sufficiently broad to permit indemnification of our officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act.
In addition, the employment agreements that we have entered into require the Company to indemnify any executive who is made a party or is threatened to be made a party to any action, suit or proceeding because he or she is or was a director or officer of the Company, subject to certain conditions. In such case, the Company will provide for the advancement of expenses.
Item 15. Recent Sales of Unregistered Securities.
On June 30, 2023, at the Closing of the Business Combination pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), as described in the Company’s definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 5, 2023, as supplemented, Jay Jackson, Sean McNealy, Matthew Ganovsky, and Kevin Scott Kirby received Common Stock of the Company as consideration for the common units of Longevity Market Assets, LLC and Abacus Settlements.
II-1
Table of Contents
Item 16. Exhibits and Financial Statement Schedules.
(a) List of Exhibits. See the Exhibit Index filed as part of this Registration Statement.
II-2
Table of Contents
II-3
Table of Contents
| * | Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Abacus Life, Inc. agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
| ** | To be filed by amendment. |
(b) Financial Statement Schedules. The following financial statement schedules are filed as a part of this registration statement beginning on page F-1 of the prospectus:
The following documents are filed as part of this prospectus:
(1) Financial Statements:
| Page | ||||
| Abacus Settlements, LLC d/b/a Abacus Life |
||||
| Report of Independent Registered Public Accounting Firm (PCAOB ID #248) |
F-3 | |||
| Audited Financial Statements as of and for the years ended December 31, 2022 and 2021: | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| Unaudited Condensed Financial Statements as of September 30, 2023 and December 31, 2022 and for the Nine Months Ended September 30, 2023 and 2022: | ||||
| F-21 | ||||
| F-22 | ||||
| F-23 | ||||
| F-25 | ||||
| F-26 | ||||
| Abacus Life, Inc. |
||||
| F-69 | ||||
| CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021: |
||||
| F-70 | ||||
| Consolidated Statements of Operations and Comprehensive Income (Loss) |
F-71 | |||
| F-72 | ||||
| F-73 | ||||
| F-74-F-98 | ||||
II-4
Table of Contents
(2) Financial Statement Schedules:
None.
(3) Exhibits
The exhibits listed in the following index are filed, furnished, or incorporated by reference as part of this prospectus.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
| A. | That, for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
| B. | That, for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| E. | That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
| (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
II-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Orlando, State of Florida, on February 8, 2024.
| ABACUS LIFE, INC. | ||
| By: | /s/ Jay J. Jackson | |
| Jay J. Jackson | ||
| Chairman of the Board, President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature |
Title |
Date | ||
| /s/ Jay J. Jackson Jay J. Jackson |
Director, President and Chief Executive Officer (Principal Executive Officer) | February 8, 2024 | ||
| /s/ William H. McCauley William H. McCauley |
Chief Financial Officer (Principal Financial Officer) | February 8, 2024 | ||
| /s/ Adam Gusky Adam Gusky |
Director | February 8, 2024 | ||
| /s/ Karla Radka Karla Radka |
Director | February 8, 2024 | ||
|
Cornelis Michiel van Katwijk |
Director | |||
|
Thomas W. Corbett, Jr. |
Director | |||
| /s/ Mary Beth Schulte Mary Beth Schulte |
Director | February 8, 2024 | ||
| /s/ Todd Sean McNealy Todd Sean McNealy |
Director | February 8, 2024 | ||
Exhibit 1.1
ABACUS LIFE, INC.
$15,000,000
9.875% Fixed Rate Senior Notes due 2028
UNDERWRITING AGREEMENT
February 9, 2024
Piper Sandler & Co., As representative of the several Underwriters
c/o Piper Sandler & Co.
1251 Avenue of the Americas, 6th Floor
New York, New York 10020
Ladies and Gentlemen:
Abacus Life, Inc., a Delaware corporation (the “Company”), confirms its agreements with Piper Sandler & Co. (“Piper Sandler”) and each of the other underwriters named in Exhibit A hereto (each, an “Underwriter,” and collectively, the “Underwriters,” which term shall also include any underwriter substituted as provided in Section 7 hereof), for whom Piper Sandler is acting as the representative (in such capacity, the “Representative”), (i) with respect to the issuance and sale by the Company of $15,000,000 aggregate principal amount (the “Initial Securities”) of the Company’s 9.875% Fixed Rate Senior Notes due 2028 (the “Notes”), and the purchase by the Underwriters, acting severally and not jointly, of the aggregate principal amount of Initial Securities set forth opposite their respective names in Exhibit A hereto, and (ii) with respect to the grant by the Company to the Underwriters of the option described in Section 2(b) hereof to purchase all or any part of $2,250,000 aggregate principal amount of Notes (the “Option Securities”) to cover over-allotments, if any. The Initial Securities to be purchased by the Underwriters and all or any part of the Option Securities are hereinafter called, collectively, the “Securities.”
The Company has filed, pursuant to the Securities Act of 1933, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “1933 Act”), with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File No. 333-276795) relating to the Securities.
The registration statement, as amended, including the exhibits and schedules thereto, at the time it first became effective, including all documents filed as a part thereof, and all documents (if any) incorporated therein by reference, and including any information contained in a prospectus subsequently filed with the Commission pursuant to Rule 424 under the 1933 Act (“Rule 424”) with respect to the offer, issuance and/or sale of the Securities and deemed to be a part of the registration statement at the time of effectiveness pursuant to Rule 430A under the 1933 Act (“Rule 430A”), and also including any registration statement relating to the Securities filed pursuant to Rule 462(b) under the 1933 Act (a “Rule 462(b) Registration Statement”), is hereinafter referred to as the “Registration Statement.” Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted information pursuant to Rule 430A that was used after such effectiveness and prior to the execution and delivery of this Agreement (including all documents (if any) incorporated therein by reference) is hereinafter referred to as a “Preliminary Prospectus”. The prospectus in the form first used to confirm sales of the Securities (or in the form first made available to the Underwriters by the Company to meet requests of purchasers pursuant to Rule 173 under the 1933 Act) is hereinafter referred to as the “Prospectus.” Any reference herein to the Registration Statement, the Preliminary Prospectus, or the
Prospectus shall be deemed to refer to and include any supplements or amendments thereto, filed with the Commission after the date of filing of the Prospectus under Rule 424 and prior to the termination of the offering of the Securities by the Underwriters. The Notes will be issued under an indenture, dated as of November 10, 2023 (the “Base Indenture”), as supplemented by a supplemental indenture (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), dated as of November 10, 2023, each between the Company and U.S. Bank Trust Company, National Association, as trustee (the “Trustee”). The Notes will be issued as fully registered securities to Cede & Co. (or such other name as may be requested by an authorized representative of The Depository Trust Company (“DTC”)), as nominee of DTC.
The Company previously issued $35,650,000 aggregate principal amount of its 9.875% Fixed Rate Senior Notes due 2028 (the “Existing Notes”) under the Indenture. Except as otherwise disclosed in the Registration Statement, the Statutory Prospectus (as defined below) and the Prospectus, the Notes will have identical terms as the Existing Notes, will be treated as a single series of securities with the Existing Notes under the Indenture and will have the same CUSIP and ISIN numbers as the Existing Notes. Holders of the Notes and the Existing Notes will vote as one class under the Indenture.
All references in this Agreement to the Registration Statement, the Prospectus or any amendments or supplements to any of the foregoing shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”). In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereby agree as follows:
1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents and warrants to each Underwriter as of the date hereof, as of the Applicable Time defined in Section 1(a)(1) hereof, as of the Closing Date referred to in Section 2(c) hereof, and as of each Option Closing Date (if any) referred to in Section 2(b) hereof, and agrees with each Underwriter, as follows:
(1) Compliance with Registration Requirements. The Company meets the requirements for use of Form S-1 under the 1933 Act. The Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are threatened by the Commission, and any request on the part of the Commission for additional information has been complied with.
At the effective time of the Registration Statement (including the deemed effective date with respect to the Underwriters pursuant to Rule 430A or otherwise under the 1933 Act) and at the Closing Date (and, if any Option Securities are purchased, at each Option Closing Date), the Registration Statement and any amendments or supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act, and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectus, together with any amendments or supplements thereto, at their respective times of issuance and at the Closing Date, complied and will comply in all material respects with the requirements of the 1933 Act. Neither the Prospectus nor the Prospectus as amended or supplemented, at the time the Prospectus or any such amendment or supplement was issued and at the Closing Date (and, if any Option Securities are purchased, at each Option Closing Date), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
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As of the Applicable Time, the Statutory Prospectus (as defined below) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The Registration Statement contains, and the Prospectus and any amendments or supplements thereto contain and will contain, all statements which are required to be stated therein by, and conform and will conform to the requirements of, the 1933 Act and the Trust Indenture Act of 1939, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “TIA”).
As used in this subsection and elsewhere in this Agreement:
“Applicable Time” means [•] p.m. (Eastern time) on [•], 2024, or such other time as agreed by the Company and the Underwriters.
“Statutory Prospectus” as of any time means the prospectus that is included in the Registration Statement immediately prior to that time, together with the pricing terms set forth in Exhibit B hereto.
The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement, the Prospectus or any amendments or supplements thereto made in reliance upon and in conformity with written information furnished to the Company by any Underwriter expressly for use therein, it being understood and agreed that the only such information is that described in Section 6(a).
The Preliminary Prospectus complied when so filed in all material respects with the 1933 Act, and the Prospectus delivered to the Underwriters for use in connection with the offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
The Company has not, directly or indirectly, distributed and will not distribute any offering material in connection with the offering and sale of the Securities other than the Registration Statement, the Statutory Prospectus and the Prospectus or other materials, if any, permitted by the 1933 Act.
(2) Independent Accountants. The accounting firms that certified the financial statements and supporting schedules included or incorporated by reference in the Registration Statement, the Statutory Prospectus and the Prospectus are independent public accountants as required by the 1933 Act.
(3) Financial Statements. The financial statements included or incorporated by reference in the Registration Statement, the Statutory Prospectus and the Prospectus, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated Subsidiaries (as defined below) at the dates indicated; said financial statements have been prepared in conformity with generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods involved. The supporting schedules, if any, present fairly in accordance with GAAP the information required to be stated therein. No other financial statements are required to be set forth in the Registration Statement, the Statutory Prospectus or the Prospectus under the 1933 Act. The interactive data in eXtensible Business Reporting Language incorporated by reference in the Registration Statement, the Statutory Prospectus and the Prospectus fairly present in all material respects the required information and have been prepared in accordance with the Commission’s rules and guidelines applicable thereto.
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(4) No Material Adverse Change in Business. Since the respective dates as of which information is given in the Registration Statement, the Statutory Prospectus or the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or other event or development that would prevent the consummation of the transactions contemplated hereby and under the Indenture and the Securities (a “Material Adverse Effect”), (B) there have been no transactions entered into by the Company or its Subsidiaries, other than those arising in the ordinary course of business, which are material with respect to the Company and its Subsidiaries considered as one enterprise and (C) there has been no dividend or other distribution of any kind declared, paid or made by the Company on any class of its capital stock.
(5) Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Statutory Prospectus and the Prospectus and to enter into and perform its obligations under this Agreement, the Indenture and the Securities; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.
(6) Good Standing of Subsidiaries. Each “significant subsidiary” of the Company (as such term is defined in Rule 1-02(w) of Regulation S-X) and any other subsidiaries of the Company that in the aggregate would constitute a significant subsidiary (each, a “Subsidiary” and, collectively, the “Subsidiaries”) has been duly organized and is validly existing as an entity in good standing under the laws of the jurisdiction of its formation, has such entity power and authority to own, lease and operate its properties and to conduct its business as described in the Statutory Prospectus and the Prospectus and is duly qualified as a foreign entity to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, the Statutory Prospectus and the Prospectus, all of the issued and outstanding equity interests or capital stock, respectively, of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable (to the extent applicable) and is owned by the Company, directly or through a Subsidiary, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding equity interests or shares of capital stock, respectively, of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary.
(7) Capitalization. The authorized, issued and outstanding shares of capital stock of the Company is as set forth in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 (except for subsequent issuances, if any, pursuant to this Agreement or pursuant to separate offerings, reservations, agreements or employee benefit plans referred to in the Statutory Prospectus and the Prospectus or pursuant to the exercise of convertible or exchangeable securities, options or warrants referred to in the Statutory Prospectus and the Prospectus or, as a result of buybacks described in the Statutory Prospectus and the Prospectus). The issued and outstanding shares of capital stock in the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock in the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company.
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(8) Authorization of Agreement. This Agreement has been duly authorized, executed and delivered by the Company.
(9) Authorization and Description of Securities. The Securities have been duly authorized for issuance and sale by the Company to the Underwriters pursuant to this Agreement and the Indenture. The information set forth under the caption “Description of the Notes” in the Registration Statement, the Statutory Prospectus and the Prospectus, insofar as such statements purport to summarize provisions of the Company’s certificate of incorporation and bylaws or Delaware law, the Indenture and the Securities, fairly and accurately summarize such provisions in all material respects. The Indenture and the Securities materially conform to the description thereof contained in the Registration Statement, the Statutory Prospectus and the Prospectus. The form of the Securities will conform to the Indenture and the listing requirements for the Nasdaq Capital Market (“Nasdaq”).
(10) Authorization of Indenture. The Base Indenture and the Supplemental Indenture have been duly authorized, executed and delivered by the Company and, assuming the due authorization, execution and delivery thereof by the Trustee, the Indenture constitutes a legal, valid and binding agreement of the Company, enforceable in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles. The Securities have been duly authorized by the Company for sale to the Underwriters pursuant to this Agreement and, when executed and delivered by the Company and authenticated by the Trustee pursuant to the provisions of the Indenture relating thereto, against payment of the consideration set forth in this Agreement, will constitute legal, valid and binding agreements of the Company enforceable in accordance with their terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles. The Indenture has been duly qualified under the TIA.
(11) Absence of Defaults and Conflicts. Neither the Company nor any of its Subsidiaries is in violation of its organizational documents or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its Subsidiaries is subject (collectively, “Agreements and Instruments”) except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement, the Indenture and the Securities and the consummation of the transactions contemplated herein and therein and in the Registration Statement, the Statutory Prospectus and the Prospectus (including the issuance and sale of the Securities, and the use of the proceeds from the sale of the Securities as described in the Statutory Prospectus and the Prospectus under the caption “Use of Proceeds”) and compliance by the Company with its obligations hereunder have been duly authorized by all necessary action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its Subsidiaries pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of (i) the provisions of the organizational documents of the Company or any of its Subsidiaries or (ii) any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or any of their assets, properties or operations, except in the case of clause (ii) only, for such violations that would not result in a Material Adverse Effect. As used herein, a “Repayment Event” means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder’s behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its Subsidiaries.
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(12) Absence of Labor Dispute. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent, and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its or any of its Subsidiaries’ contractors, which, in either case, would result in a Material Adverse Effect.
(13) Absence of Proceedings. There is no action, suit, proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any of its Subsidiaries, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which, if determined adversely to the Company, would result in a Material Adverse Effect or materially and adversely affect the properties or assets thereof or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any of its Subsidiaries is a party or of which any of their respective property or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, would not result in a Material Adverse Effect.
(14) Possession of Intellectual Property. The Company and each of its Subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, software and design licenses, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, “Intellectual Property”) necessary to conduct their respective businesses as described in the Statutory Prospectus and the Prospectus, and neither the Company nor any of its Subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its Subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect.
(15) Cybersecurity. (A) (i) The Company and each of its Subsidiaries have materially complied and are presently in material compliance with all internal and external privacy policies, contractual obligations, industry standards, applicable laws, statutes, judgments, orders, rules and regulations of any court or arbitrator or other governmental or regulatory authority and any other legal obligations, in each case, relating to the collection, use, transfer, import, export, storage, protection, disposal and disclosure by the Company or any of its Subsidiaries of personal, personally identifiable, household, sensitive, confidential or regulated data (“Data Security Obligations”, and such data, “Data”); (ii) the Company or any of its Subsidiaries has not received any notification of or complaint regarding and is unaware of any other facts that, individually or in the aggregate, would reasonably indicate material non-compliance with any Data Security Obligation; and (iii) there is no action, suit or proceeding by or before any court or governmental agency, authority or body pending or, to the knowledge of the Company, threatened alleging non-compliance with any Data Security Obligation that would, singly or in the aggregate, result in a Material Adverse Effect. (B) The Company and its Subsidiaries have used reasonable efforts to establish and maintain, and have established, maintained, implemented and materially complied with, reasonable information technology, information security, cyber security and data protection controls, policies and procedures, including oversight, access controls, encryption, technological and physical safeguards and business continuity/disaster recovery and security
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plans that are designed to protect against and prevent breach, destruction, loss, unauthorized distribution, use, access, disablement, misappropriation or modification, or other compromise or misuse of or relating to any information technology system or Data used in connection with the operation of the Company’s and its Subsidiaries’ businesses (“Breach”). To the knowledge of the Company, there has been no such Breach that would, singly or in the aggregate, result in a Material Adverse Effect, and the Company and its Subsidiaries have not been notified of and have no knowledge of any event or condition that would reasonably be expected to result in, any such Breach that would, singly or in the aggregate, result in a Material Adverse Effect.
(16) Absence of Further Requirements. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency is necessary or required for the performance by the Company of its obligations hereunder or under the Indenture or the Securities, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, the Indenture and the Securities, except such as have been already obtained or as may be required under the 1933 Act or the Securities Exchange Act of 1934, as amended (collectively with the rules and regulations of the Commission promulgated thereunder, the “1934 Act” or state securities or blue sky laws or as may be required by Financial Industry Regulatory Authority (“FINRA”) or required by Nasdaq in connection with the listing of the Securities.
(17) Absence of Manipulation. None of the Company or any of its affiliates has taken, nor will take, directly or indirectly, any action which is designed to or which has constituted or which would reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.
(18) Possession of Licenses and Permits. The Company and its Subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, “Governmental Licenses”) issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct their business as described in the Statutory Prospectus and the Prospectus, except where the failure so to possess would not, singly or in the aggregate, result in a Material Adverse Effect; the Company and its Subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, result in a Material Adverse Effect; and neither the Company nor any of its Subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect.
(19) Title to Property. None of the Company or its Subsidiaries owns any real property. Each of the Company and its Subsidiaries hold a good and valid leasehold estate in all of the leases and subleases material to the business of the Company and its Subsidiaries, free and clear of all liens, except such as (a) are described in the Statutory Prospectus and the Prospectus or (b) do not, singly or in the aggregate, materially and adversely affect the value of such property or do not materially interfere with the use made and proposed to be made of such property by the Company and its Subsidiaries, respectively. All of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Statutory Prospectus and the Prospectus, are in full force and effect, and neither the Company nor any of its Subsidiaries has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its Subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.
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(20) Investment Company Act. The Company is not required, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Statutory Prospectus and the Prospectus will not be required, to register as an “investment company” under the Investment Company Act of 1940, as amended.
(21) Environmental Laws. Except as described in the Registration Statement, the Statutory Prospectus and the Prospectus or as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its Subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any applicable judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials or mold (collectively, “Hazardous Materials”) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, “Environmental Laws”), (B) the Company and its Subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the knowledge of the Company, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violations, investigations or proceedings relating to any applicable Environmental Law against the Company or any of its Subsidiaries and (D) to the knowledge of the Company, there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its Subsidiaries relating to Hazardous Materials or any Environmental Laws.
(22) Registration Rights. Other than those registration rights contained in agreements filed as exhibits to the Company’s reports filed under the 1934 Act or as disclosed in the Registration Statement, the Statutory Prospectus and the Prospectus (which registration rights are either not applicable to the offering contemplated by this Agreement or with respect to which waivers have been obtained), there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act.
(23) Accounting Controls. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management’s general or specific authorization; (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (E) the interactive data in eXtensible Business Reporting Language incorporated by reference in the Registration Statement, the Statutory Prospectus and the Prospectus fairly present in all material respects the required information and are prepared in accordance with the Commission’s rules and guidelines applicable thereto. Except as described in the Statutory Prospectus and the Prospectus, since the end of the Company’s most recent audited fiscal year, there has been (1) no material weakness in the Company’s internal control over financial reporting (whether or not remediated) and (2) no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially adversely affect, the Company’s internal control over financial reporting.
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(24) Disclosure Controls and Procedures. The Company maintains disclosure controls and procedures that are effective to perform the functions for which they were established and are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive officer or officers and principal financial officer or officers, as appropriate, to allow timely decisions regarding disclosure.
(25) Compliance with the Sarbanes-Oxley Act. There is and has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to comply in all material respects with all applicable provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof.
(26) Payment of Taxes. The Company has timely filed all federal, state, local and foreign tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a Material Adverse Effect), whether or not arising from transactions in the ordinary course of business, except as described in the Statutory Prospectus and the Prospectus, and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as would not have a Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, except as described in the Statutory Prospectus and the Prospectus. All such returns are true and correct in all material respects.
(27) Insurance. The Company and its Subsidiaries carry or are entitled to the benefits of insurance, with reputable and, to the knowledge of the Company, financially sound insurers, in such amounts and covering such risks as is generally maintained by companies of established repute engaged in the same or similar business, and all such insurance is in full force and effect. The Company has no reason to believe that it or any of its Subsidiaries will not be able (A) to renew its existing insurance coverage as and when such policies expire or (B) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Effect. Neither the Company nor any of its Subsidiaries has been denied any insurance coverage which it has sought or for which it has applied.
(28) ERISA Compliance. Each employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) maintained or contributed to by the Company or any Subsidiary or for which the Company or any Subsidiary or any member of its “Controlled Group” (defined as any organization which is a member of a controlled group of corporations or group of trades or business (whether or not incorporated) under common control within the meaning of Section 414 of the Internal Revenue Code of 1986, as amended (the “Code”) that includes the Company or any Subsidiary) would have any liability (each, a “Plan”) has been maintained in compliance with its terms and the requirements of any applicable statutes, orders, rules and regulations, including but not limited to, ERISA and the Code, except for noncompliance that could not reasonably be expected to result in material liability to the Company and its Subsidiaries taken as a whole; (ii) no prohibited transaction, within the meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with respect to any Plan (excluding transactions effected pursuant to a statutory or administrative exemption) that could reasonably be expected to result in a material liability to the Company and its Subsidiaries taken as a whole; (iii) for each Plan that is subject to the funding rules of
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Section 412 of the Code or Section 302 of ERISA, the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, as applicable, has been satisfied (without taking into account any waiver thereof or extension of any amortization period) and is reasonably expected to be satisfied in the future (without taking into account any waiver thereof or extension of any amortization period) except as could not reasonably be expected to result in material liability to the Company and its Subsidiaries taken as a whole; (iv) the fair market value of the assets of each Plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA exceeds the present value of all benefits accrued under such Plan (determined based on those assumptions used to fund such Plan) except as could not reasonably be expected to result in material liability to the Company and its Subsidiaries taken as a whole; (v) no “reportable event” (within the meaning of Section 4043(c) of ERISA) has occurred or is reasonably expected to occur with respect to any Plan subject to Title IV of ERISA that either has resulted, or could reasonably be expected to result, in material liability to the Company and its Subsidiaries taken as a whole; (vi) neither the Company nor any member of the Controlled Group has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than contributions to the Plan or premiums to the Pension Benefit Guaranty Corporation (“PBGC”), in the ordinary course and without default) in respect of a Plan (including a “multiemployer plan,” within the meaning of Section 4001(a)(3) of ERISA); and (vii) there is no pending audit or investigation by the Internal Revenue Service, the U.S. Department of Labor, the PBGC or any other governmental agency or any foreign regulatory agency with respect to any Plan maintained by the Company or any Subsidiary or, to the knowledge of the Company and the Operating Partnership, any other Plan, that could reasonably be expected to result in material liability to the Company and its Subsidiaries taken as a whole. A material increase in the aggregate amount of contributions required to be made to all Plans by the Company and its Subsidiaries in the current fiscal year of the Company compared to the amount of such contributions made in the Company’s most recently completed fiscal year has not occurred or is not reasonably likely to occur.
(29) No Personal Loans. As of the date hereof, there are no outstanding personal loans made, directly or indirectly, by the Company to any director or executive officer of the Company.
(30) Foreign Corrupt Practices Act. None of the Company, any of its Subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee, affiliate or other person acting on behalf of the Company or any of its Subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the “FCPA”), or any applicable law or regulation implementing the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, or committed an offense under any other applicable anti-bribery or anti-corruption laws, including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any “foreign official” (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company and its Subsidiaries and, to the knowledge of the Company, its affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.
(31) Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, those of the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
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of 2001, and the applicable money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any governmental agency (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
(32) OFAC. None of the Company, any of its Subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee, affiliate or person acting on behalf of the Company or any of its Subsidiaries is currently the subject or target of any U.S. sanctions administered or enforced by the United States Government, including, without limitation, the Office of Foreign Assets Control of the U.S. Treasury Department, the United Nations Security Council, the European Union, Her Majesty’s Treasury Department, or other relevant sanctions authority (collectively, “Sanctions”), nor is the Company or any of its Subsidiaries located, organized or resident in a country or territory that is the subject of Sanctions; and the Company will not directly or indirectly use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of or business with any person, or in a country or territory that, at the time of such financing, is the subject of Sanctions or in any other manner that will result in a violation by any person (including any person participating in the transaction, whether as an underwriter, advisor, investor or otherwise) of Sanctions. The Company and each of its Subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not engage in, any dealings or transactions with any person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.
(33) Finder’s Fees. The Company has not incurred any liability for any finder’s fees or similar payments in connection with the transactions herein contemplated, except as may otherwise exist with respect to the Underwriters pursuant to this Agreement.
(b) Officers’ Certificates. Any certificate signed by any officer of the Company or its Subsidiaries delivered to the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby.
2. Purchase Sale and Delivery of the Securities.
(a) On the basis of the representations and warranties herein contained, and subject to the terms and conditions herein set forth, the Company hereby agrees to sell to the Underwriters, severally and not jointly, the respective aggregate principal amount of Initial Securities set forth opposite the name of the Underwriter in Exhibit A hereto, and each Underwriter, severally and not jointly, agrees to purchase the respective aggregate principal amount of Initial Securities set forth opposite the name of such Underwriter on Exhibit A hereto, plus any additional aggregate principal amount of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 7 hereof, subject to such adjustments among the Underwriters as the Representative in its sole discretion shall make to eliminate any sales or purchases of fractional Securities, in each case at a purchase price equal to $[•] per Note (the “Purchase Price”), plus accrued interest, if any, from the Closing Date if settlement occurs after that date to but excluding the day on which settlement occurs.
(b) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase all or any portion of the Option Securities at a price equal to the Purchase Price (without giving effect to any accrued interest from the Closing Date to the applicable Option Closing Date). The option hereby granted will expire at 11:59 P.M. New York City
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time) on the 30th day after the date hereof and may be exercised on up to three occasions in whole or in part only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial Securities upon notice by the Representative to the Company setting forth the aggregate principal amount of Options Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (an “Option Closing Date”) shall be determined by the Representative, but shall not be earlier than two or later than five full business days after the exercise of said option, unless otherwise agreed upon by the Company and the Representative, nor in any event prior to the Closing Date. If the option is exercised as to all or any portion of the Option Securities, the Company will sell to the Underwriters that proportion of the aggregate principal amount of Option Securities then being purchased, and each of the Underwriters, acting severally and not jointly, will purchase that proportion of the aggregate principal amount of Option Securities then being purchased, which the aggregate principal amount of Initial Securities set forth in Exhibit A opposite the name of such Underwriter, plus any additional aggregate principal amount of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 7 hereof, bears to the aggregate principal amount of Initial Securities, subject in each case to such adjustments as the Representative in its discretion shall make to eliminate any sales or purchases of fractional Securities.
(c) Payment of the purchase price for, and delivery of any certificates for, the Initial Securities shall be made at the offices of Locke Lord LLP, 200 Vesey Street, 20th Floor, New York, New York 10281 or at such other place as shall be agreed upon by the Representative and the Company, at 9:00 a.m. (New York City time) on [•], 2024 (unless postponed in accordance with the provisions of Section 7 hereof), or such other time not later than ten business days after such date as shall be agreed upon by the Representative and the Company (such time and date of payment and delivery being herein called “Closing Date”).
ln addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the Purchase Price for, and delivery of any certificates for, such Option Securities shall be made at 9:00 a.m. (New York City time) at the above-mentioned offices, or at such other place as shall be agreed upon by the Representative and the Company, on each Option Closing Date.
Payment shall be made to the Company by wire transfer of immediately available funds to a single bank account designated by the Company against delivery to the Representative for the respective accounts of the Underwriters of the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representative, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. The Representative, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Date or the relevant Option Closing Date, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.
(d) Certificates for the Initial Securities and the Option Securities, if any, shall be in such denominations and registered in such names as the Representative may request in writing at least two full business days before the Closing Date or the relevant Option Closing Date, as the case may be.
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3. Expenses. The Company covenants and agrees to pay the reasonable costs and expenses relating to the following matters: (i) the preparation, printing or reproduction and filing with the Commission of the Registration Statement (including financial statements and exhibits thereto) and the Prospectus, and each amendment or supplement to either of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, the Statutory Prospectus, and the Prospectus, and all amendments or supplements to any of them, as may, in each case, be reasonably requested for use in connection with the offering and sale of the Securities; (iii) the costs and expenses incurred by the Company arising out of the marketing of the sale of the Securities to investors; (iv) the preparation, printing, authentication, issuance and delivery of the Securities; (v) the printing (or reproduction) and delivery of this Agreement, any blue sky memorandum and all closing documents printed (or reproduced) and delivered in connection with the offering of the Securities; (vi) the listing of the Securities on Nasdaq; (vii) any registration or qualification of the Securities for offer and sale under the securities or blue sky laws of the several states (including filing fees); (viii) any filings required to be made with FINRA (including filing fees); (ix) all reasonable and documented out-of-pocket expenses incurred by the Underwriters in connection with the transactions contemplated hereby, including legal fees and expenses, marketing, syndication and travel expenses; provided, that such fees and expenses, including legal fees and legal expenses, shall not exceed $[•] without the prior written consent of the Company and shall be reimbursed through the Representative; (x) the fees and expenses of the Company’s accountants and the fees and expenses of counsel for the Company; (xi) the fees and expenses of the Trustee; and (xii) all other reasonable costs and expenses incurred by the Company.
4. Agreements of the Company. The Company agrees with the Underwriters that:
(a) Prior to the termination of the offering of the Securities, the Company will not file any amendment of the Registration Statement or supplement to the Prospectus or any Rule 462(b) Registration Statement unless the Company has furnished the Representative a copy for its review prior to filing and will not file any such proposed amendment or supplement or Rule 462(b) Registration Statement to which the Representative reasonably objects. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A under the 1933 Act, or filing of the Prospectus is otherwise required under Rule 424, the Company will cause the Prospectus, properly completed, and any supplement thereto to be filed in a form approved by the Representative with the Commission pursuant to Rule 424 within the time period prescribed and will provide evidence satisfactory to the Representative of such timely filing. The Company will promptly advise the Representative (1) when the Prospectus, and any supplement thereto, will have been filed (if required) with the Commission pursuant to Rule 424 or when any Rule 462(b) Registration Statement will have been filed with the Commission, (2) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement will have been filed or become effective, (3) of any request by the Commission or its staff for any amendment of the Registration Statement or any Rule 462(b) Registration Statement, or for any supplement to the Prospectus or for any additional information, (4) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or, to the knowledge of the Company, threatening of any proceeding for that purpose, and (5) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the institution or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof.
(b) The Company will comply with the requirements of Rule 430A and will notify the Representative immediately, and confirm the notice in writing, of (i) the effectiveness of any post-effective amendment to the Registration Statement or any new registration statement relating to the Securities or the filing of any supplement or amendment to the Prospectus, (ii) the receipt of any comments from the Commission, (iii) any request by the Commission for any amendment to the Registration Statement or the filing of a new registration statement or any amendment or supplement to the Prospectus or for additional information, (iv) the issuance by the Commission of any stop order
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suspending the effectiveness of the Registration Statement or such new registration statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Company will promptly effect the filings required under Rule 424, in the manner and within the time periods required by Rules 424 and 430A, notify the Representative of the filing thereof; and take such steps as it deems necessary to ascertain promptly whether the Prospectus transmitted for filing under Rule 424 was received for filing by the Commission and, in the event that it was not, it will promptly file the Prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.
(c) If at any time when the Prospectus is required by the 1933 Act or the 1934 Act to be delivered in connection with sales of the Securities, any event will occur or condition will exist as a result of which it is necessary, in the reasonable opinion of outside counsel to the Underwriters or the Company, to amend the Registration Statement in order that the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or to amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it will be necessary, in the reasonable opinion of such outside counsel, at any such time to amend the Registration Statement, to file a new registration statement, or to amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act, the Company will (i) promptly prepare and file with the Commission, such amendment, supplement or new registration statement as may be necessary to correct such statement or omission or to comply with such requirements, provided that the Company shall not make any filing to which the Representative reasonably objects, (ii) use its best efforts to have such amendment or new registration statement declared effective as soon as practicable, and (iii) furnish to the Representative, without charge, such number of copies of such amendment, supplement or new registration statement as the Representative may reasonably request.
(d) The Company will cooperate with the Representative in endeavoring to qualify the Securities for sale under the securities laws of such jurisdictions as the Representative may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose; provided the Company will not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Securities.
(e) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Statutory Prospectus as the Representative may reasonably request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the 1933 Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may reasonably request. The Company will deliver to the Representative at or before the Closing Date, a copy of the signed Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested) and of all amendments thereto, as the Representative may reasonably request.
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(f) The Company will comply with the 1933 Act and the 1934 Act so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and the Prospectus.
(g) If the Statutory Prospectus is being used to solicit offers to buy the Securities at a time when the Prospectus is not yet available to prospective purchasers and any event will occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Statutory Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or to make the statements therein not conflict with the information contained in the Registration Statement then on file, or if it is necessary at any time to amend or supplement the Statutory Prospectus to comply with any applicable law, the Company will promptly notify the Underwriters and prepare, file with the Commission (if required) and furnish to the Underwriters and any dealers an appropriate amendment or supplement to the Statutory Prospectus.
(h) The Company will make generally available to its security holders, as soon as it is practicable to do so, an earnings statement or statements (which need not be audited), which will satisfy the requirements of Section 11(a) of the 1933 Act and Rule 158 under the 1933 Act.
(i) No offering, sale, short sale or other disposition of any debt securities issued or guaranteed by the Company or other securities convertible into or exchangeable or exercisable for debt securities issued or guaranteed by the Company or derivative of debt securities issued or guaranteed by the Company (or agreement for such) will be made for a period of 30 days after the date of the Prospectus, directly or indirectly, by the Company, otherwise than hereunder or with the prior written consent of the Representative.
(j) The Company will apply the net proceeds of its sale of the Securities as set forth in the Registration Statement, the Statutory Prospectus and the Prospectus.
(k) The Company will cooperate with the Representative and use its commercially reasonable efforts to permit the offered Securities to be eligible for clearance and settlement through the facilities of DTC.
(l) The Company will maintain a trustee, paying agent and registrar for the Notes.
(m) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company to facilitate the sale or resale of the Securities, except as may be allowed by law.
(n) The Company, during the period when the Prospectus is required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to the 1933 Act and the 1934 Act within the time periods required by such act, rule or regulation. To the extent the distribution of Securities has been completed, the Company will not be required to provide the Underwriters with reports it is required to file with the Commission under the 1934 Act.
(o) The Company will use commercially reasonable efforts to maintain a rating by a “nationally recognized statistical rating organization” as defined in Section 3(a)(62) of the 1934 Act (“NRSRO”) while any Notes remain outstanding.
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(p) The Company will use its reasonable best efforts to effect within thirty (30) days of the Closing Date and to maintain the listing of the Notes on Nasdaq.
5. Conditions to the Underwriters’ Obligations. The obligations of the Underwriters to purchase the Securities on the Closing Date and the Option Securities, if any, on the applicable Option Closing Date are subject to the accuracy, as of the Applicable Time, the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of the covenants and obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective and the Prospectus shall have been filed as required by Rules 424 or 430A, as applicable, within the time period prescribed by, and in compliance with the 1933 Act, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representative and complied with to its reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose or pursuant to Section 8A of the 1933 Act shall have been taken or, to the knowledge of the Company, shall be contemplated or threatened by the Commission and no injunction, restraining order or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date that would prevent the issuance of the Securities.
(b) The Representative shall have received from Locke Lord LLP, counsel for the Company, an opinion and a negative assurance letter, each dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Representative in form and substance reasonably satisfactory to the Representative.
(c) The Representative shall have received from Alston & Bird LLP, counsel to the Representative, an opinion and a negative assurance letter, each dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters, in form and substance reasonably satisfactory to the Representative.
(d) The Representative shall have received, on each of the date hereof, the Closing Date and, if applicable, the Option Closing Date, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representative, of Grant Thornton LLP, containing statements and information of the type ordinarily included in accountants’ “comfort letters” to underwriters (or as otherwise accepted by the Representative), delivered in accordance with Statement of Auditing Standards No. 72 (or any successor standard), with respect to the financial statements and certain financial and statistical information contained in the Registration Statement, the Statutory Prospectus and the Prospectus.
(e) The Company shall have furnished to the Representative, on the Closing Date and, if applicable, the Option Closing Date, as the case may be, a certificate substantially in the form of Exhibit C.
(f) [Reserved.]
(g) The Company shall have furnished to the Representative such further certificates and documents as the Representative may reasonably require for the purpose of enabling the Underwriters to pass upon the issuance and sale of the Securities as herein contemplated.
(h) The application for listing of the Securities shall have been submitted to Nasdaq.
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(i) At the Closing Date, the Securities shall be rated at least BBB by Egan-Jones Ratings Company and since the execution of this Agreement, there shall not have been any decrease in the rating of any debt of the Company by any NRSRO, or any written notice given of any intended or potential decrease in any such rating or of a possible change in any such rating that does not indicate the direction of the possible change, and no such organization shall have publicly announced it has under surveillance or review any such rating.
If any of the conditions hereinabove provided for in this Section 5 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representative by notifying the Company of such termination in writing at or prior to the Closing Date or the Option Closing Date, as the case may be.
In such event, the Company and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 4 and 7 hereof).
6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriters, the directors, officers, employees and agents of the Underwriters and each person who controls the Underwriters within the meaning of either Section 15 of the l933 Act or Section 20 of the 1934 Act:
(i) Against any and all loss, liability, claim, damage and expense whatsoever, arising out of any untrue or alleged untrue statement of a material fact contained in the Registration Statement for the Securities as originally filed or in any amendment thereof (and including any post-effective amendment), the Statutory Prospectus or the Prospectus or in any testing-the-waters materials authorized in writing by or prepared by the Company to be used in connection with the public offering of the Securities (or any amendment or supplement to any of the foregoing), or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that any such settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by the Representative), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative expressly for use in the Registration Statement (or any amendment thereto), or the Statutory Prospectus or the Prospectus (or any amendment or supplement thereto), it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: (i) their names and (ii) the third and fourth sentences of the fifth paragraph, the first and second sentences of the eleventh paragraph and the twelfth through fourteenth paragraphs of text, in each case, under the caption “Underwriting.”
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(b) Each Underwriter severally agrees to indemnify and hold harmless the Company and its directors, officers who sign the Registration Statement, and each person who controls the Company within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, to the same extent, as the indemnity from the Company to the Underwriters set forth in Section 6(a)(i) and the provision thereto, but only with reference to written information relating to the Underwriters furnished to the Company by or on behalf of the Underwriters specifically for inclusion in the documents referred to in the foregoing indemnity. The Underwriters agree to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any loss. claim, damage, liability or action to which they are entitled to indemnification pursuant to this Section 6(b). This indemnity agreement will be in addition to any liability which the Underwriters may otherwise have.
(c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 6, such person (the “indemnified party”) shall promptly notify the person against whom such indemnity may be sought (the “indemnifying party”) in writing. No indemnification provided for in Section 6 shall be available to any party who shall fail to give notice as provided in this Section 6(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 6. In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. Such firm shall be designated in writing by the Representative in the case of parties indemnified pursuant to Section 6(a) and by the Company in the case of parties indemnified pursuant to Section 6(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding and does not include any statement as to or any admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
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(d) To the extent the indemnification provided for in Section 6 is unavailable to or insufficient to hold harmless an indemnified party under Section 6(a) or (b) above in respect of any losses, liabilities, claims, damages or expenses (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the offering of the Securities. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case, as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or the Underwriters, on the other, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
The Company, and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 6(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 6(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Securities purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
7. Default by One or More Underwriters. If one or more of the Underwriters shall fail on the Closing Date or an Option Closing Date to purchase the Securities which it or they are obligated to purchase under this Agreement (the “Defaulted Securities”), the Representative shall use reasonable efforts, within 36 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representative shall not have completed such arrangements within such 36-hour period, then:
(a) if the aggregate principal amount of Defaulted Securities does not exceed 10% of the aggregate principal amount of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters; or
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(b) if the aggregate principal amount of Defaulted Securities exceeds 10% of the aggregate principal amount of Securities to be purchased on such date, this Agreement or, with respect to any Option Closing Date which occurs after the Closing Date, the obligation of the Underwriters to purchase and of the Company to sell the Option Securities that were to have been purchased and sold on such Option Closing Date, shall terminate without liability on the part of any non-defaulting underwriter.
No action taken pursuant to this Section 7 shall relieve any defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or, in the case of an Option Closing Date which is after the Closing Date, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, the Representative shall have the right to postpone the Closing Date or the relevant Option Closing Date, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement, the Statutory Prospectus or Prospectus or in any other documents or arrangements. As used herein, the term “Underwriter” includes any person substituted for an Underwriter under this Section 7.
8. Termination. This Agreement may be terminated by the Representative by notice to the Company (a) at any time prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to Option Securities) if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement, the Statutory Prospectus and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business, which in the judgment of the Representative is material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis (including, without limitation, an act of terrorism) or change in economic or political conditions, if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States that would, in the judgment of the Representative, be material and adverse and makes it impracticable or inadvisable to proceed with the offering, sale or delivery of the Securities on the terms and in the manner contemplated by this Agreement, (iii) suspension of trading in securities generally on the New York Stock Exchange or Nasdaq or limitation on prices (other than limitations on hours or numbers of days of trading), (iv) the declaration of a banking moratorium by United States or New York State authorities or (v) the suspension of trading of any security of the Company by Nasdaq, the Commission or any other governmental authority; or (b) as provided in Section 6 of this Agreement.
9. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its respective officers and of the Underwriters set forth in or made pursuant to this Agreement shall survive delivery of and payment for the Securities and shall remain in full force and effect, regardless of any termination of this Agreement or any investigation made by or on behalf of the Company, the Underwriters or any of their respective officers, directors, employees, agents or controlling persons referred to in Section 6 hereof. The provisions of Section 3, Section 6, Section 9, Section 13, Section 15 and Section 16 shall survive the termination or cancellation of this Agreement.
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10. Recognition of the U.S. Special Resolution Regimes.
(a) In the event that any Underwriter that is a Covered Entity (as defined below) becomes subject to a proceeding under a U.S. Special Resolution Regime (as defined below), the transfer from such Underwriter of this Agreement, and any interest and obligation in or under this Agreement, will be effective to the same extent as the transfer would be effective under the U.S. Special Resolution Regime if this Agreement, and any such interest and obligation, were governed by the laws of the United States or a state of the United States.
(b) In the event that any Underwriter that is a Covered Entity or a BHC Act Affiliate (as defined below) of such Underwriter becomes subject to a proceeding under a U.S. Special Resolution Regime, Default Rights (as defined below) under this Agreement that may be exercised against such Underwriter are permitted to be exercised to no greater extent than such Default Rights could be exercised under the U.S. Special Resolution Regime if this Agreement were governed by the laws of the United States or a state of the United States.
(c) For purposes of this Section 10, a “BHC Act Affiliate” has the meaning assigned to the term “affiliate” in, and shall be interpreted in accordance with, 12 U.S.C. § 184l(k). “Covered Entity” means any of the following: (i) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 252.82(b); (ii) a “covered bank” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 47.3(b); or (iii) a “covered entity” as that term is defined in, and interpreted in accordance with, 12 C.F.R. § 382.2(b). “Default Right” has the meaning assigned to that term, in, and shall be interpreted in accordance with, 12 C.F.R. §§ 252.81, 47.2 or 382.1, as applicable. “U.S. Special Resolution Regime” means each of (i) the Federal Deposit Insurance Act and the regulations promulgated thereunder and (ii) Title 11 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the regulations promulgated thereunder.
11. Notices. All communications hereunder will be in writing and effective only on receipt, and will be mailed (postage prepaid, certified or registered mail, return receipt requested), delivered or transmitted by any standard form of telecommunication:
(a) if to the Underwriters:
Piper Sandler & Co.
1251 Avenue of the Americas, 6th Floor
New York, New York 10020
Attention: Debt Capital Markets
with a copy to Piper Sandler General Counsel at
1251 Avenue of the Americas, 6th Floor
New York, New York 10020
(email: LegalCapMarkets@psc.com)
with an additional copy to:
Alston & Bird LLP
90 Park Avenue
New York, New York 10016
Attention: Michael J. Kessler (which copy shall not constitute notice)
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(b) if to the Company:
Abacus Life, Inc.
2101 Park Center Drive, Suite 170
Orlando, Florida 32835
Attention: Dani Theobald
with an additional copy to:
Locke Lord LLP
111 South Wacker Drive
Suite 4100
Chicago, IL 60606
Attention: Thomas V. Bohac (which copy shall not constitute notice)
12. Successors. This Agreement has been and is made solely for the benefit of the Underwriters, the Company, and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Securities from any Underwriter shall be deemed a successor or assign merely because of such purchase.
13. No Fiduciary Duty. The Company hereby acknowledges that (a) the offering and sale of the Securities pursuant to this Agreement is an arm’s-length commercial transaction between the Company, on the one hand, and the Underwriters and any affiliate through which an Underwriter may be acting, on the other, (b) the Underwriters have not assumed an advisory or fiduciary responsibility in favor of the Company with respect to the offering contemplated hereby or the process leading thereto (irrespective of whether any Underwriter has advised or is currently advising the Company on related or other matters), and (c) the Company’s engagement of the Underwriters in connection with the offering and the process leading up to the offering is as independent contractors and not in any other capacity. Furthermore, the Company agrees that the Company is solely responsible for making its own judgments in connection with the offering (irrespective of whether any Underwriter has advised or is currently advising the Company on related or other matters). The Company agrees that it will not claim that any Underwriter has rendered advisory services of any nature or respect, or owe an agency, fiduciary or similar duty to the Company, in connection with such transaction or the process leading thereto.
14. Integration. This Agreement supersedes all prior agreements and understandings (whether written or oral) between the Company and the Underwriters with respect to the subject matter hereof.
15. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York.
16. Waiver of Jury Trial. The parties hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
17. Counterparts. This Agreement may be signed in two or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement.
18. Headings. The section headings used herein are for convenience only and shall not affect the construction hereof.
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19. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable.
[Remainder of Page Intentionally Blank]
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If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof.
| Very truly yours, | ||
| Abacus Life, Inc. | ||
| By: |
| |
| Name: |
| |
| Title: |
| |
[Signature Page to Underwriting Agreement]
The foregoing Agreement is hereby confirmed and accepted as of the date first-written above.
| Piper Sandler & Co. | ||
| By: |
| |
| Name: |
| |
| Title: |
| |
| For itself and as Representative of the Underwriters named in Exhibit A hereto | ||
[Signature Page to Underwriting Agreement]
EXHIBIT A
| Name of Underwriter |
Number of $[•] Notes |
|||
| Piper Sandler & Co. |
||||
| A.G.P. / Alliance Global Partners |
||||
| Ladenburg Thalmann & Co. Inc. |
||||
|
|
|
|||
| Total |
||||
|
|
|
|||
EXHIBIT B
ORALLY CONVEYED PRICING INFORMATION
| 1. | Public offering price: $25 |
| 2. | Interest rate: 9.875% |
| 3. | Date interest starts accruing: February 15, 2024 |
| 4. | Initial aggregate principal amount being offered: $15,000,000 |
| 5. | Maturity date: November 15, 2028 |
| 6. | Interest payment dates: May 15, August 15, November 15 and February 15, beginning on May 15, 2024 |
| 7. | Optional redemption date: February 15, 2027 |
| 8. | Date of delivery: February 15, 2024 |
EXHIBIT C
Exhibit 5.1
|
Attorneys & Counselors |
111 South Wacker Drive Chicago, IL 60606 Telephone: 312-443-0700 Fax: 312-443-0336 www.lockelord.com |
February 9, 2024
Abacus Life, Inc.
2101 Park Center Drive, Suite 170
Orlando, Florida 32835
Ladies and Gentlemen:
We have acted as counsel to Abacus Life, Inc., a Delaware corporation (the “Company”), in connection with the filing of a Registration Statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Securities Act”), relating to the registration, issuance and sale under the Securities Act of the Company’s Fixed Rate Senior Notes due 2028 (the “Notes”), together with any additional Notes that may be issued by the Company pursuant to Rule 462(b) under the Securities Act (as prescribed by the Commission pursuant to the Act) in connection with the offering described in the Registration Statement.
The Notes will be issued pursuant to a base indenture (the “Base Indenture”), by and between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented by a first supplemental indenture (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”), by and between the Company and the Trustee, forms of which have been filed as Exhibits 3.3 and 3.4, respectively, to the Registration Statement.
In connection with this opinion, we have examined and relied upon: (a) the Registration Statement and the prospectus contained therein, (b) the Company’s certificate of incorporation and bylaws, each as currently in effect, (c) the Base Indenture and Supplemental Indenture, (d) the Notes, (e) resolutions relating to the Notes adopted by the Board of Directors of the Company, and (f) originals, or copies certified to our satisfaction, of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below. In our examination we have assumed (without any independent investigation) the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, the authenticity of originals of such copies and the authenticity of telegraphic or telephonic confirmations of public officials and others. As to facts material to our opinion, we have relied upon (without any independent investigation) certificates or telephonic confirmations of public officials and certificates, documents, statements and other information of the Company or its representatives or officers. Further, we have assumed (without any independent investigation) that the Indenture, the Notes and any related supplemental indenture or officers’ certificate establishing the terms thereof (collectively, the “Documents”) will constitute legally valid and binding obligations of the parties thereto other than the Company, enforceable against each of them in accordance with their respective terms, and that the status of each of the Documents as legally valid and binding obligations of the parties will not be affected by any (i) breaches of, or defaults under, agreements or instruments, (ii) violations of statutes, rules, regulations or court or governmental orders, or (iii) failures to obtain required consents, approvals or authorizations from, or to make required registrations, declarations or filings with, governmental authorities.
Abacus Life, Inc.
February 9, 2024
Page 2
Our opinions expressed below are also subject to the effect of: (a) bankruptcy, insolvency, reorganization, receivership, moratorium, avoidance, arrangement and other laws affecting contractholders’ rights generally (including, without limitation, the effect of statutory and other law regarding fraudulent conveyances, fraudulent transfers and preferential transfers); (b) the exercise of judicial discretion and the application of principles of equity, good faith, fair dealing, reasonableness, conscionability and materiality (regardless of whether the applicable agreements are considered in a proceeding in equity or at law) and the discretion of the court before which proceedings thereof may be brought; and (c) generally applicable rules of law that limit or affect the enforceability of provisions that purport to waive or require waiver of (or that otherwise purport to have the effect of waiving) procedural, judicial or substantive rights or defenses.
Based upon and subject to the foregoing, we are of the opinion that: as of the date hereof, when the Indenture has been duly authorized by all necessary corporate action of the Company and duly executed and delivered by the Company, and when the specific terms of the Notes have been duly established in accordance with the Indenture and authorized by all necessary corporate action of the Company, and the Notes have been duly executed, authenticated, issued and delivered against payment therefor in accordance with the Indenture and in the manner contemplated by the Registration Statement and/or the accompanying prospectus and by such corporate action, the Notes will be legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms.
Our opinion herein is expressed solely with respect to the General Corporation Law of the State of Delaware and the laws of the State of New York as in effect as of the date hereof. We express no opinion to the extent that any other laws are applicable to the subject matter hereof and express no opinion and provide no assurance as to compliance with any federal or state securities law, rule or regulation.
The opinion herein is limited to the matters expressly set forth in this opinion letter, and no opinion or representation is given or may be given beyond the opinion expressly set forth in this opinion letter. We consent to the reference to our firm under the heading “Legal Matters” in the prospectus forming a part of the Registration Statement, and to the filing of this opinion as Exhibit 5 to the Registration Statement. In giving this opinion, we do not admit that we are within the category of persons whose consent is required by Section 7 of the Securities Act or the rules and regulations promulgated thereunder.
Very truly yours,
/s/ LOCKE LORD LLP
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated February 17, 2023, with respect to the financial statements of Abacus Settlements, LLC contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption “Experts.”
| /s/ GRANT THORNTON LLP |
| Philadelphia, Pennsylvania |
| February 9, 2024 |
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated January 31, 2024, with respect to the consolidated financial statements of Abacus Life, Inc. contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption “Experts.”
| /s/ GRANT THORNTON LLP |
| Philadelphia, Pennsylvania |
| February 9, 2024 |