The Texas Department of Insurance approved TRLIC’s life insurance charter on August 1, 2016. The Company capitalized TRLIC with $3,000,000 and owns 100% of TRLIC. TRLIC began insurance operations on April 3, 2017 and is currently selling life and annuity products in the state of Texas. Texas Republic Life Solutions (“TRLS”), an insurance agency, was incorporated February 1, 2017. The Company capitalized TRLS with $50,000 and owns 100% of TRLS.
We are a financial services holding company and have incurred significant net losses since our inception. As of December 31, 2017, we had an accumulated deficit of $4,218,199. These losses have resulted primarily from costs incurred while raising capital. We expect to continue to incur operating losses until we achieve a volume of inforce life insurance policies that provides premiums that are sufficient to cover our operating costs.
Our management’s discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. On a continuing basis, we evaluate our estimates and assumptions.
Expenses were $1,736,796 for the year ended December 31, 2017, an increase of $713,412 from $1,023,384 for the year ended December 31, 2016. Direct policy related expense of $217,658 related to commissions, policyholder benefits and deferred expense were new in 2017. Increases in professional fees, third-party administrative fees, salaries, wages and benefits, travel, meals and entertainment, and office and other expenses accounted for $453,050 of this increase. We expect our general and administrative expenses to continue to increase in the future based on administrative expenses necessary for the entry into the life insurance business.
The net loss was $1,335,583, or $(0.09) per share, for the year ended December 31, 2017 compared to a net loss of $931,496, or $(0.07) per share, for the year ended December 31, 2016. The $404,087 increase in the net loss was primarily attributable to the increase in expenses described above. We expect our losses to increase in the future as we incur increased costs to grow the life insurance business. The weighted average common shares outstanding and subscribed were 14,804,853 and 14,113,976 for the years ended December 31, 2017 and 2016, respectively. The total shares outstanding and subscribed were 14,864,097 and 14,484,647 at December 31, 2017 and 2016, respectively.
Total shareholder equity of the Company increased from $13,156,388 as of December 31, 2016 to $13,540,357 as of December 31, 2017, an increase of $383,969. The increase is mainly due to proceeds from the public stock offering of $1,902,250 which offset the net loss from operations of $1,335,583 and offering costs of $210,264. Additionally, the increase in unrealized appreciation added $32,566 but was somewhat offset by the purchase of treasury shares of $5,000.
Since inception, our operations have been financed primarily through an organizational offering, three private placement offerings and an intrastate public stock offering. Through December 31, 2017, we received $20,346,985 from the sale of 14,867,097 shares and incurred offering costs of $2,659,696. During 2017 and 2016 we paid $5,000 and $10,000 for 1,000 and 2,000 shares of Company’s common stock that is held as treasury stock, respectively. Our operations have not been profitable and have generated significant operating losses since we were incorporated in 2012.
We believe that our existing cash and cash equivalents will be sufficient to fund our anticipated operating expenses and capital expenditures for at least 12 months. We have based this estimate upon assumptions that may prove to be wrong and we could use our capital resources sooner than we currently expect. The growth of TRLIC may require additional capital as it continues to grow. As discussed above, the Company capitalized TRLIC with $3,000,000 cash during the third quarter of 2016.
Costs that relate to and vary with the successful production of new business are deferred over the life of the policy. Deferred acquisition costs, (DAC), consist of commissions and policy issuance, underwriting and agency expenses. DAC expenses are amortized primarily over the premium-paying period of the policies, using the same assumptions as were used in computing liabilities for future policy benefits.
Sales inducement costs (SIC) are related to policy bonuses issued on some of the Company’s annuity products. SIC is deferred at the issuance of the policy and amortized over the shorter of the bonus period or the life of the policy based on the expected future profits of the business. The amount deferred is based on the difference between the fund value with the bonus and the fund value without the bonus. There was $79,866 of SIC deferred at December 31, 2017 and no SIC amortized at December 31, 2017. There was no SIC deferred or amortized during 2016.
Advances and notes receivable are recorded at unpaid principal balances. Management evaluates the collectability of advances and notes receivable on the specific identification basis. Uncollectible amounts are reported in the results of operations in the year the determination is made.
The Company’s liability for policyholders’ account balances represents the contract value that has accrued to the benefit of the policyholder as of the financial statement date. This liability is generally equal to the accumulated account deposits plus applicable bonus and interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Interest crediting rates for individual annuities range from 2.65% to 4.50%.
Certain costs directly related to the sale of the Company’s securities are capitalized against the proceeds from the sales. These costs include legal fees, recruiting and training expenses, commissions, printing, mailing and other expenses related to the offering.
Net loss per common share is calculated using the weighted average number of common shares outstanding and subscribed during the year. Shares sold during the period are considered to be outstanding for one half of the month in which they were sold. The weighted average common shares outstanding and subscribed were 14,804,853 and 14,113,976 for the years ended December 31, 2017 and 2016, respectively.
During 2015, the Company entered into an administrative service agreement with First Trinity Financial Corporation (“FTFC”) for accounting and other services incidental to the operations of the Company and paid FTFC $11,963 and $33,000 for the year ended December 31, 2017 and 2016, respectively related to this agreement. The Company also paid FTFC $8,320 and $21,668 for the year ended December 31, 2017 and 2016, respectively for additional services performed outside of the administrative service agreement. The Chairman of the Company is also the Chairman, President and Chief Executive Officer of FTFC. The administrative service agreement with FTFC was terminated effective April 30, 2017.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern” (“ASU 2014-15”). ASU 2014-15 requires management to evaluate an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Management must evaluate whether conditions and events raise substantial doubt about an entity’s ability to continue as a going concern and then whether its plans alleviate that doubt. ASU 2014-15 was effective for annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Management has performed and continues to perform such required evaluation and has concluded there were no such conditions or events that raised substantial doubt about the Company’s ability to continue as a going concern. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
In March 2016, the FASB issued ASU 2016-07 “Investments-Equity Method and Joint Ventures (Topic 323), (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to retroactively apply the equity method of accounting when an investment that was previously accounted for using another method of accounting becomes qualified to apply the equity method due to an increase in the level of ownership interest or degree of influence. If the investment was previously accounted for as an available-for-sale security, any related unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for the equity method is recognized through earnings. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and is to be applied prospectively. Early adoption was permitted. The adoption of this guidance did not have a material effect on the Company’s results of operations, financial position or liquidity.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows, including, but not limited to: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions and (8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective, with retrospective adoption, for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. The Company has evaluated the impact of this guidance which will not have any material impact on the Company’s financial condition or results of operations from the adoption of this guidance.
Investments in fixed maturity securities available-for-sale as of December 31, 2017 and 2016 are summarized as follows:
For securities in an unrealized loss position as of the financial statement dates, the estimated fair value, pre-tax gross unrealized loss and number of securities by length of time that those securities have been continuously in an unrealized loss position as of December 31, 2017 and 2016 are summarized as follows:
Management believes that the Company will fully recover its cost basis in the securities held as of December 31, 2017, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature. The temporary impairments shown herein are primarily the result of the current interest rate environment rather than credit factors that would imply other-than-temporary impairment.
The carrying amount and fair value of the Company’s financial assets disclosed, but not carried, at fair value as of December 31, 2017 and 2016 and the level within the fair value hierarchy at which such assets and liabilities are measured on a recurring basis are summarized as follows:
The following methods and assumptions were used in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:
The Company files a federal income tax return but does not file a consolidated tax return with TRLIC. In 2016 TRLIC had no insurance sales or reserves, however TRLIC began insurance operations on April 3, 2017 and will be taxed as a life insurance company under the provisions of the Internal Revenue Code. Life insurance companies must file separate tax returns until they have been a member of the consolidated filing group for five years. Certain items included in income reported for financial statement purposes are not included in taxable income for the current period, resulting in deferred income taxes.
The Company has net operating loss carryforwards of approximately $3.6 million expiring in 2032 through 2037. A valuation allowance of $735,111 has been established for net operating losses arising from 2012 through 2017 since the Company has not demonstrated the ability to generate taxable income. The utilization of those losses is restricted by the tax laws and some or all the losses may not be available for use.
The Company maintains cash and cash equivalents at multiple institutions. The Federal Deposit Insurance Corporation insures non-interest-bearing accounts up to $250,000. Uninsured balances aggregate $4,993,908 as of December 31, 2017. The Company monitors the solvency of all financial institutions in which it has funds to minimize the exposure for loss. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
The Company entered into a lease with a third-party lessor in 2014 for utilization of office space in Austin, Texas. The lease agreement ended September 30, 2017. The lease required a deposit in the amount of $3,992 and abated the first month’s rent. The monthly rental payments were $2,432 for the first twelve months with annual increases of approximately 3% thereafter and the Company also paid a pro rata share of the operating expenses of the building.