We provide the following discussion to assist in understanding our financial position as of February 28, 2014 (“fiscal 2014”), and results of operations for the year then ended, and as of and for the years ended February 28, 2013 (“fiscal 2013”), and February 29, 2012 (“fiscal 2012”). As you read this discussion, refer to our Consolidated Financial Statements and Notes thereto. We analyze and explain the differences between periods in the material line items of these statements.
We recognize revenue at the time a settlement closes and defer a portion of the revenue in anticipation of policy monitoring services. We amortize the costs of these services over the anticipated life expectancy of the insureds.
We sometimes make short-term advances to facilitate life settlement transactions. These amounts are included in “Accounts receivable - trade” and are collected as the life settlement transactions close. All amounts are considered collectible as we are repaid the advance before any other parties involved in the transaction receive funds.
We follow the guidance contained in Financial Accounting Standards Board Accounting Standards Codification “FASB ASC” 325-30, Investments in Insurance Contracts, to account for our investments in life settlement contracts. ASC 325-30 states that a purchaser may elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election is made on an instrument by instrument basis and is irrevocable. Under the investment method, a purchaser recognizes the initial investment at the purchase price plus all initial direct costs. Continuing costs (e.g., policy premiums and direct external costs, if any) to keep the policy in force are capitalized. Under the fair value method, a purchaser recognizes the initial investment at the purchase price. In subsequent periods, the purchaser re-measures the investment at fair value in its entirety at each reporting period and recognizes changes in fair value earnings (or other performance indicators for entities that do not report earnings) in the period in which the changes occur. We elected to value our investments in life settlement contracts using the investment method. The current portion of our investments in policies was carried at $1,075,205 and $2,329,005 at February 28, 2014 and 2013, respectively. The long-term portion of our investments in policies was carried at $1,165,941 and $0 at February 28, 2014 and 2013, respectively.
We review the carrying value of our investments in policies for impairment whenever events and circumstances indicate that we might not recover the carrying value of the policies from future maturities. In cases where undiscounted expected proceeds from future maturities are less than the carrying value, we recognize an impairment loss equal to an amount by which the carrying value (including expected future costs to maintain the policies) exceeds the expected proceeds. Based on this assessment, we recorded impairment costs for our investments in policies of $297,610, $745,402, and $906,451 during fiscal 2014, 2013 and 2012, respectively.
For a discussion of recent accounting pronouncements, refer to Note 3 of our Consolidated Financial Statements. New pronouncements issued but not effective for us until after February 28, 2014, are not expected to have a material impact on our financial position, results of operations or liquidity.
Revenues from initial settlement transactions were $8,572,203 for fiscal 2014 compared to $16,573,473 for fiscal 2013. The drop in revenues from initial sales was largely offset by commissions and fees from resales or tertiary sales, which increased $4,782,672 from $2,331,364 in fiscal 2013 to $7,114,036 in fiscal 2014. This year’s increase in tertiary sale revenue included fee income from resales of abandoned interests of $2,314,888, which was not in place in fiscal 2013.
Since the filing of a civil action by the SEC in January 2012 and related private litigation, demand for our services has been negatively impacted. Since that time, we have devoted substantial resources and the personal time of our senior management to improve licensee relations, develop new clients and work to rebuild confidence in our company. During the 2013 calendar year, over 2,800 of our clients were paid more than $74 million in proceeds from their life settlement transactions. We believe these payouts will result in an increased demand for our services and will enable us to gradually rebuild our markets and expand our client base. We have observed an increase in new clients and deposits into escrow and greater interest in our services. We intend to continue devoting resources to rebuild our client base and increase demand for our services in fiscal 2015. However, restoration of demand approaching levels we recorded in fiscal 2012 may not occur, until and unless we are able 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.
Operating Expense - General and administrative expenses increased by 8.5% to $8,477,444 in fiscal 2014 versus $7,813,970 in fiscal 2013. General and administrative expenses were $7,778,958 in fiscal 2012. The increase in fiscal 2014 was primarily due to an increase in personnel costs.
Premium advances, net of reimbursements, in fiscal 2014, 2013 and 2012 were $931,304, $1,526,547, and $1,363,915 respectively. For business goodwill, we may make advances on policy premiums to maintain certain policies. In the typical life settlement, policy premiums for the insured’s projected life expectancy or a fixed period are added to the purchase price and those future premium amounts are set aside in an escrow account to pay future premiums. When the future premium amounts are exhausted, purchasers are contractually obligated to pay the additional policy premiums. We have several ways to proceed if a purchaser fails to pay premiums. In the past, we have negotiated a repurchase of the policy. In other instances, we have advanced the premiums to maintain the policies. With some advances, we historically allowed the purchaser to retain the policy as an accommodation and based our assumptions that we will ultimately recoup the advances upon the insured’s death. More recently, we have acquired and resold defaulted positions, as provided in the policy funding agreements with clients. We resell the abandoned policies at a fixed percentage of the policy face plus the amount of the premiums advanced. The resale of these policies has improved our cash flow and lowered premium advances.
We must make estimates of the collectability of these premium advances. We record an allowance against the premium advances at the time of the advance as needed and treat reimbursements as a reduction of the allowance if previously reserved. Our historical success of collecting premium advances has enabled us to build a body of evidence by which we can demonstrate full collectability of the remaining balance of advanced premiums.
Operating Activities - Net cash flows used in operating activities in fiscal 2014 were $2,343,287. Uses of cash flow resulted primarily from a net loss of $2,454,105, income from assignment of income stream of $5,254,500 and a decrease in accounts payable of $682,432. Cash flows provided by operating activities were from an increase in income taxes receivable of $3,445,564, a decrease in net premium advances of $1,907,054 and an increase in deferred policy monitoring costs of $1,245,032. Net cash flows used in operating activities decreased by 59.0%, decreasing $3,367,556 from $5,710,843 in fiscal 2013 to $2,343,287 in fiscal 2014. Net cash flows used in operating activities in fiscal 2013 decreased by 10.6%, decreasing by $676,851 from $6,387,694 in fiscal 2012 to $5,710,843 in fiscal 2013. Fiscal 2013’s uses of cash flow were primarily from a net loss of $2,877,025, an increase of income taxes receivable of $1,659,388, net premium advances of $2,591,934, gain on sales of investments in policies of $3,716,225, and the gain on investment in life settlements trust of $458,377, offset by an increase in accounts payable of $881,247 and an increase in deferred policy monitoring costs of $363,289. Fiscal 2012’s uses of cash flow were primarily from a net loss of $3,123,478 and a decrease in income taxes payable, a decrease in accounts payable and a gain on sales of investments in policies, while impairment of policies and deferred income taxes had a positive impact.
We used $4,661,900 in financing activities in fiscal 2014 versus $7,463,685 in fiscal 2013 and $14,920,716 in fiscal 2012. Financing activities in all three years were solely for dividends.
Working Capital and Capital Availability - As of February 28, 2014, we had cash and cash equivalents of $6,134,731 and working capital of $6,897,415, compared to working capital of $11,381,163 as of February 28, 2013. Our cash during fiscal 2014 decreased by $1,440,848, compared to a decrease of $3,787,109 in fiscal 2013 and a decrease of $16,247,876 in fiscal 2012.
We have confronted a decline in our life settlement markets and the fallout of the SEC action and the resulting private litigation. We believe the market has begun recover. We expect the supply of qualified life settlements to remain strong and believe the low correlation of life settlements returns to fixed-income and equity securities and their competitive rates offer an attractive alternative investment.
While these positive developments are encouraging, we must do more. The large drops in revenues, the significant legal and professional fees, and operating losses we have experienced during fiscal 2014 have eroded the strength of our financial condition. We believe we have sufficient currently available working capital to fund our current operations through fiscal 2015. Our recurring operations are not currently generating sufficient cash to support operations. To supplement recurring operations, we have sold most of the settlements we held for investment and have monetized our investment in the life settlement trust. While we believe we could further support our working capital through other possible asset dispositions, borrowings or equity sales, our opportunities for generating significant cash apart from continuing operations are narrowing. We believe we must generate approximately $30 million in annual revenues to cash flow our operations and pay dividends, and we are working toward that end. In the meanwhile, we are conserving our cash. We have decreased our cash dividends and may reduce or eliminate the dividends for fiscal 2015 and 2016 to conserve working capital until we can realize improved operating results.
Our audited Consolidated Financial Statements, together with the report of auditors and the notes to the Consolidated Financial Statements, are included in this Annual Report beginning on page 33.