LIFE PARTNERS HOLDINGS INC

In the fourth quarter of fiscal 2011, we were hurt by news articles critical of our business and by the announcement of a pending SEC investigation. Several putative securities class actions and shareholder derivative claims were subsequently filed against us and certain officers and, in the fourth quarter of fiscal 2012, the SEC filed a civil enforcement action against us and certain officers, and since these filings, demand for our services has been negatively impacted and our business has not recovered from the damage done by these events. Our volume of life settlement transactions dropped, as did our profitability. The events particularly affected our business in that we are the only publicly held company dedicated to life settlements and the only prominent company with a broad, retail base within the life settlement industry. We are working to repair the damage caused by the SEC suit, restore trust and confidence within our licensee network and purchaser base, and rebuild our reputation within the industry. Furthermore, the uncertainty of our appeal of the final judgment in the SEC case entered by the court on December 2, 2014 will most likely hinder our ability to rebuild confidence among our licensees and clients and to expand our client base. We cannot say, however, when or if we can accomplish these tasks and return to the levels of activity we previously enjoyed.

We rely primarily upon brokers to refer potential sellers of policies to us and upon financial professionals, known as licensees, to refer retail purchasers to us. These relationships are essential to our operations and we must maintain these relationships to be successful. We do not have fixed contractual arrangements with life settlement brokers, and they are free to do business with our competitors. Our network of licensees is much broader, but no less important. The announcements of the SEC investigation and subsequent enforcement action and court judgment, other private litigation, illegal short selling and critical news articles have damaged our reputation within the industry and have hurt our business. Our licensee network was particularly hurt, which has reduced the supply of capital for the purchase of life settlements and our transaction volumes. The restoration of the relationships with our licensees and brokers will depend upon our ability to rebut the adverse publicity and to restore trust in these relationships. If we are unable to restore our relationships with our licensees and brokers, it will have a material adverse effect on our business, financial condition and results of operations.

The expanding market for life settlement resales may divert purchasers from initial life settlement transactions.

As the life settlement industry matures, the secondary market for life insurance policies is expanding to include resales of life settlements. Our business model accommodates the resales of life settlements. Our revenues from resales, also referred to as tertiary sales, grew from 12% of our total revenues in fiscal 2013 to 45% of our total revenues in fiscal 2014. The growth in tertiary sales has to some extent offset a decline in our sales of life settlements from insureds to an initial purchaser. Our initial sales declined from $16.6 million in fiscal 2013 to $8.6 million in fiscal 2014. Rather than expanding the secondary life settlements market, it appears that tertiary sales are diverting purchasers from initial sales. While continuing to accommodate tertiary sales, we are taking additional steps to interest more purchasers in secondary sales. Without a solid volume of initial sales, the supply of policies for tertiary sales will eventually decline, which would result in further declines in our revenues.

In its enforcement action against us, the SEC asserted multiple claims against us and certain of our executive officers, including fraud and insider trading claims. The jury found in our favor on the majority of the claims, including all fraud and insider trading claims. However, the jury found against us and our CEO, Brian Pardo, and General Counsel, Scott Peden, regarding violations relating to our revenue recognition policies and a restatement of revenues. It also found against Mr. Pardo for having improperly certified our SEC reports. The SEC did not introduce any evidence regarding these revenue recognition issues and in a subsequent ruling the court found there was no evidence of any fraud.

On December 2, 2014, the court entered a final judgment in this case which enjoined us and our agents, servants, employees, attorneys, and all persons in active concert or participation with them from violating, directly or indirectly, from filing forms with the SEC containing false statements of material fact or failing to include material information that is necessary to make the statements not misleading, unless Defendants act in good faith and do not directly or indirectly induce the act or acts constituting the violation. The court also ordered that Messrs. Pardo and Peden, and their agents, servants, employees, attorneys, and all persons in active concert or participation with them are permanently restrained and enjoined from aiding and abetting any violation of federal securities laws and regulations by knowingly providing substantial assistance to an issuer that fails to file timely with the Commission all accurate and complete information, documents, and reports required by the rules and regulations prescribed by the Commission. The court further ordered that Mr. Pardo and his agents, servants, employees, attorneys, and all persons in active concert or participation with them are permanently restrained and enjoined from using any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange to include a false and misleading certification with any annual or quarterly report required to be filed with the SEC. The court further ordered Life Partners to disgorge $15,000,000 and to pay a civil penalty of $23,700,000. The court further ordered Mr. Pardo to pay a civil penalty of $6,161,843 and Mr. Peden to pay a civil penalty of $2,000,000. On December 30, 2014, we and Mr. Pardo and Mr. Peden filed a motion to alter or amend the judgment through which we challenged the amounts and basis for the judgment as well as a notice of appeal to the Fifth Circuit Court of Appeals. The court has not yet ruled on the motion to alter or amend. We and Mr. Pardo and Mr. Peden also filed motions to permit us to post security in an amount lower than the amount of the judgment in order to prevent execution on the judgment while we appeal. The District Court has not yet ruled on these motions. On January 5, 2015, the SEC filed a motion to appoint a receiver for us and our affiliates. A hearing on this motion is set for January 21, 2015 before Magistrate Judge Andrew Austin, to whom the court referred all dispositive and non-dispositive motions in this case. In addition, the SEC has moved for the appointment of a receiver for us and our affiliates which we believe is unsupported by the evidence in their case and which we will vigorously oppose. We cannot predict the impact on our business strategy, operations or financial results if the SEC is successful in its motion for the appointment of a receiver.

While we are working diligently on plans to increase business for both individual and institutional investors, our operating results for the First Nine Months of this year are disappointing and we must do more to improve our operating results. Despite the increase in revenues, the significant legal and professional fees and the operating losses we experienced in fiscal 2014 have eroded the strength of our financial condition. Our recurring operations are not currently generating sufficient cash to support operations. We may require additional capital from equity or debt financings in the future to fund our operations or respond to competitive pressures or strategic opportunities. We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may limit our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing shareholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us if and when we require it, our ability to conduct our business and to respond to business challenges could be significantly limited. As a result of the judgment, our ability to use certain exemptions from securities registration has been impaired, which may limit our ability to raise funds through the sale of securities. Our current cash position is not sufficient to settle the judgment at its current amount. If we are not successful in our motion to post security in an amount lower than the amount of the judgment in order to prevent execution on the judgment while we appeal, we may seek protection by Chapter 11 of the bankruptcy code.