NIBs are generally sold by an entity that holds the underlying insurance policies, either directly or indirectly through a subsidiary, such an entity being referred to herein as a “Holder.” A Holder, either directly or through a wholly owned subsidiary, purchases life insurance policies either from the insured or on the secondary market and aggregates them into a portfolio of policies. At the time of purchase, the Holder also (i) contracts with a service provider to manage the servicing of the policies until maturity, (ii) purchases mortality re-insurance (“MRI”) coverage under which payments will be made to the Holder in the event the insurance policies do not mature according to actuarial life expectancies, and (iii) arranges financing to cover the initial purchase of the insurance policies, the servicing of the life insurance policies until maturity and the payment of the MRI premiums. The financing obtained by the Holder for a portfolio of insurance policies is secured by the insurance policies for which the financing was obtained. After a Holder purchases policies, aggregates them into a portfolio and arranges for the servicing, MRI coverage and financing, the Holder contracts to sell NIBs related to the policies, which gives the holder of the NIBs the right to receive the proceeds from the settlement of the insurance policies after all of the expenses related to such policies have been paid. When an insurance policy underlying our NIBs comes to maturity, the insurance proceeds are first used to pay expenses associated with such policy. Once all of the expenses have been paid, the Holder will retain a small percentage of the proceeds and then will pay the remaining insurance proceeds to us in satisfaction of our related NIB.
Our plan of operation for the next 12 months is to continue the acquisition and possible sale of NIBs. We began purchasing NIBs during our fiscal year ended March 31, 2013.
We currently estimate proceeds of approximately $115 million on the NIBs we owned as of March 31, 2016, and acquired from PCH Financial S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg (“PCH”), Del Mar Financial S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg (“Del Mar”), and HFII Assets Solutions, LLC, a Delaware limited liability company (“HFII”). This amount is based on the estimated proceeds
from polices of $401 million in face value, which includes estimated return of premiums; less the senior loan debt and MRI repayments outstanding of approximately $109 million, expected premium payments of $107 million over the life expectancies of the insured persons in these portfolios and estimated expenses and interest of approximately $70 million over the term of the senior loans.
At the time of transfer or purchase of an investment in NIBs, we estimate the future expected cash flows from such NIBs and determine the effective interest rate that, when applied to our initial investment in such NIBs, would yield these estimated cash flows. The Company accrues income on a monthly basis by applying this interest rate to our investment in the related NIBs, and such income is recorded as interest income on investment in NIBs in the statement of operations. This accretable income is based on the effective yield method and effectively represents the total amount of cash flows we expect to receive over the life of each pool of NIBs less the amount of our initial investment in such NIBs. Subsequent to the purchase of a given pool of NIBs and on a regular basis, these future estimated cash flows are evaluated for changes. If we determine that the future estimated cash flows should be significantly adjusted, a revised effective yield is calculated and applied prospectively. Any positive or adverse change in cash flows that does not result in the recognition of an “other-than-temporary impairment” (“OTTI”) results in a prospective increase or decrease in the effective interest rate used to recognize interest income. We have not recognized any significant adverse change in future estimated cash flows relating to our investment in NIBs since inception.
During the fiscal years ended March 31, 2015, and 2014, we engaged in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies. General and administrative expenses totaled $2,338,266 and $2,278,009 during the fiscal years ended March 31, 2015, and 2014, respectively. A significant portion of these expenses were professional fees, payroll and travel expenses. Approximately $363,000 of the professional fees were legal and accounting fees related to the preparation and filing of reports with the SEC under the Exchange Act. Payroll is made up of payroll costs and non-cash equity issuances to management, directors and others.
For the fiscal year ended March 31, 2014, we deemed the amendment to the PCH Secured Promissory Note payable, by which such note was amended and restated and reduced by $1,499,999, to be an extinguishment of debt and recorded a gain of $1,672,124. We had interest income in the amount of $17,947 and $13,788, respectively.
Since our inception on January 31, 2013, our operations have been primarily financed through sales of equity, debt financing, lines of credit from related parties and the issuance of notes payable and convertible debentures to related parties. As of March 31, 2016, we had $24,717 of cash assets, compared to $336,370 as of March 31, 2015. Our monthly cash expenses are between approximately $140,000 and $290,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. We believe that our existing capital resources, together with the issuance of additional notes payable and convertible debentures and availability under our existing lines of credit with related parties, will be sufficient to fund our operating working capital requirements for at least the next 12 months, or through June 15, 2017. While we believe we have sufficient liquidity and capital resources to fund our projected operating requirements through June 15, 2017, we do not anticipate having adequate cash flows from operations for three to four years, and until a cash flow stream from NIBs has been established. We will require debt or equity financing to fund our current and intended business and any future purchases of NIBs.
For the fiscal years ended March 31, 2015, and 2014, we recorded net cash used in operating activities of $1,998,842 and $10,471,080, respectively. The decrease in cash used from 2015 to 2014 is primarily due to the delay in Del Mar delivering the remaining portion of the $400 million in Qualified NIBs. In addition, the net cash used of $1,998,842 from 2015 includes a refund of advance for investment in NIBs from Del Mar totaling $904,274 because of the delay and our having advanced monies to Del Mar in the excess of the purchase price of the Qualified NIBs received by us. We used cash of $815,798 and $3,584,862 on advance for investments in NIBs under the Del Mar ATA and, with the refund included, we recorded a net cash inflow of $88,476 on advance for investment in NIBs during the year ended March 31, 2015.
The accompanying financial statements have been prepared on a going concern basis under which we are expected to be able to realize our assets and satisfy our liabilities in the normal course of business. To continue as a going concern beyond the year ended March 31, 2016 and to continue to acquire NIBs we will need to complete securities and debt offerings or obtain alternative sources of financing. Absent additional financing, we will not have the necessary resources to execute our business plan.
The following table sets forth payments due by period for fixed contractual obligations as of March 31, 2016:
At March 31, 2016, we owed $5,462,335, including accrued interest, for debt obligations and Mandatorily Redeemable Common Stock. At March 31, 2016, we owed $3,820,178, excluding accrued interest, pursuant to notes payable and lines-of-credits from related parties and $700,000, excluding accrued interest, pursuant to an 8%
Convertible Debenture. The notes payable and lines-of-credit are due on June 30, 2017, or when the Company completes a successful equity raise, at which time principal and interest is due in full, and the convertible debenture is due August 31, 2017. As of June 14, 2016, there was $1,509,822 available under the lines-of-credit we currently have with related parties. We may borrow money in the future to finance our operations, but can make no guarantees that such credit will be made available to us. Any such borrowing will increase the risk of loss to the debt holder in the event we are unsuccessful in repaying such loans.
Consolidated Statements of Operations for the Years Ended March 31, 2016, 2015 and 2014
Income Recognition, Interest income on investment in NIBs represents the excess of all cash flows attributable to the investment in net insurance benefits greater than the initial investment over the life of each pool of net insurance benefits using the effective yield method. Changes in the estimate of expected cash flows from investments in NIBs would be adjusted prospectively.
During the period from April 1, 2013 through December 31, 2013, the Company’s investment in NIBs was on non-accrual status. This decision was primarily based on the initial incremental uncertainty experienced by the Company during these first three quarters after closing on the first pool of NIBs. Management concluded these uncertainties were significantly mitigated in the fourth quarter of 2014, as additional experience and information was obtained, including the observation of the proper functioning of the entire system in response to the death of an insured in the fourth quarter of 2014. Non-accrual status was removed effective January 1, 2014.
Basic and Diluted Net Income (Loss) Per Common Share, Basic net income (Loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the periods presented using the treasury stock method. Diluted net income (loss) per common share is computed by including common shares that may be issued subject to existing rights with dilutive potential, when applicable. Dilutive common stock equivalents are primarily comprised of stock options and warrants.
Diluted weighted-average number of common and common equivalent shares outstanding during the year
Reclassification - Not Material, Certain reclassifications have been made to the 2014 and 2015 balances to conform to the 2016 presentation. These reclassifications did not affect net income (loss) for the periods.
The Company accounts for stock options to purchase shares of stock that are issued to non-employees based on the estimated fair value of such instruments using the Black-Scholes option pricing model. The measurement of stock-based compensation expense for these instruments is variable and subject to periodic adjustments to the estimated fair value until the awards vest. Any resulting change in the estimated fair value is recognized in the Company’s consolidated statements of operations during the period in which the related services are rendered.
Investment in Net Insurance Benefits, The investment in NIBs is a residual economic beneficial interest in a portfolio of life insurance contracts that have been financed by an independent third party via a loan from a lender and insured via a mortality risk insurance product or mortality re-insurance (“MRI”). Future expected cash flow is defined as the net insurance proceeds from death benefits after senior debt repayment, mortality risk repayment, and service provider or other third-party payments. The Company is not responsible for maintaining premiums or other expenses related to maintaining the underlying life insurance contracts. Therefore, the investment in NIBs balance on the Company’s balance sheet does not increase when premiums or other expenses are paid. The Company held a 100% interest in the NIBs relating to the underlying life insurance policies as of March 31, 2015. The Company holds between 72.2% and 100% in the NIBs relating to the underlying life insurance policies as of March 31, 2016.
We evaluate the carrying value of our investment in NIBs for impairment on a regular basis and, if necessary, adjust our total basis in the NIBs using new or updated information that affects our assumptions. We recognize impairment on a NIB contract if the expected discounted cash flows are less than the carrying amount of the investment, plus anticipated undiscounted future premiums and direct external costs, if any. We have not recognized any impairment on our investment in NIBs from January 31, 2013 (inception), to the periods ended March 31, 2016.
Cash and cash equivalents consists principally of currency on hand and demand deposits at commercial banks. The Company had $24,717 and $336,370 in cash and cash equivalents as of March 31, 2016, and 2015, respectively. The Company maintains non-interest bearing accounts at one financial institution. The accounts at this institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
As explained in Note 6, the Company transferred $3,368,380 from advance for investment in NIBs into investment in NIBs on September 30, 2015.
The estimated fair value of the Company’s investment in NIBs approximated carrying value at March 31, 2016, with fair value calculated using level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.
** The Life Expectancy ("LE") input is the 70%/30% weighted average of two LEs available at the time of the original creation of the NIB portfolio. The Adjusted Life Expectancy is an unofficial calculation that simply reduces the original LE by the number of months since the last LE report. It should be noted that the insured’s health, medical conditions and other considerations may have changed since the LE report, so that the Adjusted LE is simply an estimate. These LEs were produced by third-party life expectancy companies and represent the actuarial mean of how long an individual is expected to live. The number is a calculation done with the LE provider's proprietary statistical model that is typically based on individualized mortality curves for each life factoring in the insured's gender, age, health and family history, medical conditions, and other considerations. In purchasing, financing or insuring life insurance policies or NIBs, we may use alternate life expectancy companies or may use weighted averages of two or more life expectancy companies, depending on the facts and circumstances of the case and requirements of the various counterparties. The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known with absolute certainty.
The original face value of the underlying life insurance policies was $412,820,622. This value takes into account the approximately 72.2% of the NIBs associated with a portfolio of life settlement policies having a face value that originally totaled $94,000,000 (see Note 6). One policy matured during March 2014, totaling $8,000,000. Another policy with a face value of $10,000,000 matured during June 2015, of which value approximately 72.2% was apportioned to the Company. The remaining $397,598,400 represents the total insurance settlement on the life insurance policies as of March 31, 2016, including the estimated future increase for certain policies that have return of premium provisions. Effectively, as of March 31, 2016, the policy holders had paid $106,107,649 on policy premiums and other expenses on the insurance contracts. The policy holders are independent of the Company, and as separate entities there is a risk that such entities might not continue to pay the policy premiums and other expenses as has been done historically. The Company monitors the policy holders’ ability to maintain the underlying policies, and in the event the policy holders are unable to make the required payments, the Company would evaluate whether to directly maintain the underlying policies through the policy holders or allow them to elapse. The policy holders currently have senior loan agreements and MRI reinsurance to cover these payments. As of March 31, 2016, none of the underlying policies have elapsed and the required payments remain current.
The remaining consideration and collateral under the Del Mar ATA, as of September 1, 2015, primarily consisted of approximately 72.2% of the NIBs associated with a portfolio of life settlement policies having a face value that originally totaled $94,000,000. The remaining 27.8% interested in the NIBs were held by other parties. During June 2015, one of the life settlement policies matured for $10,000,000 (the “Matured Policy”), lowering the remaining face value of such life settlement policies to $84,000,000. The premiums and expenses related to the maintenance of these life insurance policies are financed by a loan from a lender.
In addition to obtaining full and unrestricted rights to the NIBs upon termination of the Del Mar ATA and Europa Agreement, the Company also is entitled to receive liquidated damages from Del Mar in an amount equal to 100% of any cash advances made under the Del Mar ATA. The Company is currently determining the extent of the liquidated damages claim and Del Mar’s ability to pay any such liquidated damages. The liquidated damages are computed pro rata, based upon the percentage of Qualified NIBs delivered by Del Mar under the Del Mar ATA. The Company received $90,600,000 in Qualified NIBs or approximately 22.65% of the $400,000,000 in Qualified NIBs due under the Del Mar ATA. Accordingly, once 22.65% of its costs and expenses are deducted, the Company would be entitled to receive the remaining amount of its costs and expenses, times two, as liquidated damages. As a result of the termination, the Company has no further payment obligations to Del Mar or fee obligations to Europa.
The Company is determining whether Europa is liable to the Company for any damages related to Del Mar’s failure to provide the required Qualified NIBs.
On December 9, 2013, the Company made a loan totaling $211,000 in the form of a note receivable to Majestic Ventures S.a.r.l. The Company had a secondary security interest in certain assets of Majestic, which are participating life settlements.
Pursuant to a month-to-month lease agreement, we currently occupy office space located in Provo, Utah. The total lease expense is approximately $2,700 per month, payable in cash.
Rent expense for the year ended March 31, 2016, was $112,956.
Net operating loss carry forwards $ 2,811,596 $ 1,574,512 $ 760,250
The cumulative Net Operating Loss (“NOL”) totaled $7,537,790 and $4,221,212 at March 31, 2016 and 2015, respectively, and will begin to expire in 2020. The total valuation allowance is equal to the total deferred tax asset less any associated deferred tax liabilities. The valuation allowance was $326,752 and $358,117 for the years ended March 31, 2016, and 2015, respectively.
The Company has no tax positions at March 31, 2016 and 2015, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.
As of March 31, 2016, the Company had borrowed $3,820,178 from related parties under notes payable and lines-of-credit agreements that allow for borrowings of up to $5,230,000 through the earlier of June 30, 2017, or when the Company completes a successful equity raise, at which time principal and interest is due in full. The notes payable and lines-of-credit incur interest at 7.5 percent, allow for origination fees and are collateralized by Investment in NIBs. The Company borrowed $2,520,178 and $1,500,000 under these agreements during the years ended March 31, 2016 and 2015, respectively. The Company also repaid $200,000 during the year ended March 31, 2016. The related parties include a person who is the Chairman of the Board of Directors and a stockholder, and Radiant Life, LLC, an entity partially owned by the Chairman of the Board of Directors.
as compensation for her service, in conjunction with its planned adoption of a stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors that will outline the terms and conditions of the stock option which will not have any effect on the grant date, the exercise price or vesting that have been approved. The stock option has an exercise price of $0.77 per share, which vested immediately, and a contractual term of five years.
On April 5, 2013, the Company also issued 80,000 stock options to non-employees which vested immediately. The Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the
measurement date guidelines enumerated in FASB ASC 505-50-30. The Company valued the 80,000 options using the Black-Scholes option pricing model under the following assumptions: $1.0294 market price, $0.77 exercise price, 5 years expected life, 79% volatility, 0.68% risk free rate.
On October 11, 2013, the Company issued 400,000 stock options to an executive. The stock options have an exercise price of $5.00 per share. The options have a contractual term of five years.
The Company valued the 70,000 warrants using the Black-Scholes option pricing model under the following assumptions: $5.00 market price, $5.00 exercise price, 2 years expected life, 73% expected volatility, 0.30% risk free rate.
On April 8, 2013, the Company approved a private offering of up to 3,000,000 common shares of restricted stock to investors at $5.00 per share. The purpose of the offering was to acquire additional NIBs. As of the March 31, 2014, the Company has collected $11,792,500 for 2,358,500 common shares at $5.00 per share of which 2,218,500 shares were issued for cash of $11,092,500 and 140,000 shares are to be issued for cash of $700,000; paid $841,651 in introduction fees; and issued two year warrants to acquire 70,000 shares of our common stock at an exercise price of $5.00 per share.
During July 2014 the Company issued 30,000 shares of common stock for cash of $150,000.
On June 9, 2015 the remaining 942,500 common shares were issued. In addition, as explained in Note 5, 11 and 18, the 187,500 of redeemable common shares were issued and subsequently redeemed.
Since the Company’s inception on January 31, 2013, its operations have been primarily financed through sales of equity, debt financing, lines of credit from related parties and the issuance of notes payable and convertible debentures to related parties. As of March 31, 2016, the Company had $24,717 of cash assets, compared to $336,370 as of March 31, 2015. The Company’s monthly expenses are between approximately $140,000 and $290,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. The Company believes that its existing capital resources, together with the issuance of additional notes payable and convertible debentures and availability under its existing lines of credit with related parties, will be sufficient to fund its operating working capital requirements for at least the next 12
As explained in Note 11, on April 12, 2016, 93,750 shares of Mandatorily Redeemable Common Stock were redeemed and cancelled by the Company for $750,000.
On June 1, 2016, the Company agreed to amend the 8% Convertible Debenture Agreement (see Note 12) that extends the due date and conversion rights to August 31, 2017.