The following table sets forth certain information concerning our consolidated financial condition, operating results, and key operating ratios for the dates and periods indicated. This information does not purport to be complete and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto.
Special Note: Certain statements set forth below under this caption constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See Special Note Regarding Forward-Looking Statements for additional factors relating to such statements.
We provide the following discussion to assist in understanding our financial position as of February 28, 2013 (“fiscal 2013”), and results of operations for the year then ended, and as of and for the years ended February 29, 2012 (“fiscal 2012”), and February 28, 2011 (“fiscal 2011”). 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.
Our discussion and analysis of financial condition and results of operations are based on our Consolidated Financial Statements that were prepared in accordance with accounting principles generally accepted in the United States of America. To guide our preparation, we follow accounting policies, some of which represent critical accounting policies as defined by the SEC. The SEC defines critical accounting policies as those that are both most important to the portrayal of a company’s financial condition and results and require management’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates involve significant judgments, assumptions and estimates by management that may have a material impact on the carrying value of certain assets and liabilities, disclosures of contingent liabilities, and the reported amounts of income and expenses during the reporting period that management considers to be critical accounting estimates. The judgments, assumptions and estimates used by management are based on historical experience, management’s experience, knowledge of the accounts and other factors that are believed to be reasonable. Because of the nature of the judgments and assumptions made by management, actual results may differ materially from these judgments and estimates, which could have a material impact on the carrying values of our assets and liabilities and the results of our operations. Areas affected by our estimates and assumptions are identified below.
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 and long-term portions of our investments in policies were carried at $2,329,005 and $8,858,534 at February 28, 2013, and February 29, 2012, 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 $745,402, $906,451 and $6,212,150 during fiscal 2013, 2012 and 2011, respectively.
We review the carrying value of our property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment includes current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, there was no impairment for property and equipment during fiscal 2013, 2012 and 2011.
We are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include a tax provision or reduce our tax benefit in the statements of operations. We use our judgment to determine our provision or benefit for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets.
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, 2013, are not expected to have a material impact on our financial position, results of operations or liquidity.
We had a net loss of $2,877,025 for fiscal 2013, compared to a net loss of $3,123,478 for fiscal 2012 and net income of $23,425,749 for fiscal 2011. The net loss in fiscal 2013, with a 42.6% decrease in gross revenues and a 51.1% decline in revenues, net of brokerage fees, was due to two factors. First, our licensee network and purchaser base were damaged by the SEC investigation and subsequent lawsuit, the filing of multiple private suits, and publication of news articles criticizing our operations. A second contributing factor was the substantial decline in the life settlement market, which dropped from an estimated $7.6 billion in face value transactions in calendar 2009 to an estimated $3.8 billion in calendar 2010, $1.2 billion in calendar 2011 and $2.0 billion in calendar 2012 . Significant reductions in legal and professional fees and settlement costs were positive influences in fiscal 2013 when compared to fiscal 2012. The 67.6% decrease in gross revenue and 78.8% decrease in revenues, net of brokerage fees, in fiscal 2012 was primarily the result of the aforementioned general market decline, the news articles and disclosure of the SEC investigation, which occurred in the fourth quarter of fiscal 2011. In fiscal 2011, the aforementioned news articles and disclosure of the SEC investigation resulted in a 6.6% decrease in gross revenues and a 7.4% decrease in revenues, net of brokerage and licensee fees. The decrease in revenues, net of brokerage and licensee fees, together with a large increase in legal and professional fees and impairment expense, offset by significant reduction in settlement costs, resulted in a decrease in income from operations of 19.1%. Legal and professional costs were $3,713,536, $6,522,221 and $1,986,648 in fiscal 2013, 2012 and 2011, respectively, and were the largest single general and administrative expense. The legal and professional costs were attributable primarily to legal costs associated with the SEC investigation and lawsuit, related private litigation, and our audit fees. See Item 3, Legal Proceedings.
Operating Expense - General and administrative expenses were comparable at $7,813,970 in fiscal 2013 versus $7,778,958 in fiscal 2012. General and administrative expenses were $9,828,675 in fiscal 2011. The decrease in fiscal 2012 was primarily due to executive bonuses.
Legal and professional expenses were lower in fiscal 2013 - $3,713,536 compared to $6,522,221 in fiscal 2012. These expenses are primarily associated with the SEC investigation and lawsuit, the private litigation that followed disclosure of the SEC investigation, and auditing fees. Legal and professional expenses in fiscal 2011 were $1,986,648.
We recovered non-recurring settlement expenses of $104,453 in fiscal 2013 compared to payments of settlement expenses for various legal actions or claims of $613,374 in fiscal 2012 and $789,622 in fiscal 2011.
Income from Investment in Policies - Income from investments in policies increased $2,907,007 to $3,716,225 in fiscal 2013 from $809,218 in fiscal 2012. This income in both fiscal years was from sales and maturities of policies in which we owned an interest. No income was earned in fiscal 2011 from matured policies in which we owned an interest. See Footnote 11 to the Consolidated Financial Statements.
Loss on Settlement of Note Receivable - Loss on settlement of note receivable of $231,096 in fiscal 2013 is the net amount from the proceeds received of $350,000 vs. amount of note receivable on the consolidated balance sheet at February 29, 2012 of $581,096. See Footnote 9 to the Consolidated Financial Statements.
While our working capital position remains relatively strong, the large drops in revenues, the significant legal and professional fees, and large operating losses have eroded the strength of our financial condition. We are conserving our cash in anticipation that the SEC suit will not be quickly resolved. The suit is set for trial in December 2013. We have decreased our stock dividends and may make further cuts. In fiscal 2013, we sold most of the policies held in our account for $9.8 million. We presently hold policies carried at $2.3 million. In May 2013, we sold an interest in some of our future income from our life settlement trust investment for $5,650,000. We are closely monitoring general and administrative expenses. At this point, we believe we have more than sufficient cash and cash equivalents to support our operations .
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 2013 have eroded the strength of our financial condition. The SEC suit and other litigation have been highly damaging to our business, and we do not anticipate a substantial recovery in our revenues and net income while the SEC suit and the other private litigation continues. We believe we must generate approximately $40 million in annual revenues to cash flow our operations, and we are working toward that end. In the meanwhile, we are conserving our cash in anticipation that the suit will not be quickly resolved. We have decreased our cash dividends and may make further cuts and could eliminate the dividends. We have sold the majority of our portfolio of investments in policies. We recently monetized a portion of our investment in a life settlements trust to generate additional cash. Until we can realize improved operating results, we shall rely on our working capital position, which is still relatively strong. We believe we have sufficient cash and cash equivalents to support our operations. To further support our working capital, we are considering other possible asset dispositions, borrowings and equity sales.
We do not engage in any off-balance sheet arrangements or transactions.