NIBs are generally sold by an entity that holds the underlying life settlement or life 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) consider purchasing 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 life settlement or life 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.
When we hold NIBs, we use an estimation methodology to project cash flows and returns as presented. The estimation model requires many assumptions, including, but not limited to the following: (i) an assumption that the distinct number of lives in our portfolio would exhibit similar experience to a statistically diverse portfolio from which mortality tables have been created; (ii) an assumption that the life expectancies (the “LE” or “LEs”) provided by LE providers represent the actuarial mean of the life expectancies of the insureds in our portfolio, (iii) the weighted average of the LEs provided by the LE providers represents an appropriate method for adjusting for discrepancies in the LEs; (iv) life expectancy tables and projections are accurate; (v) the minimum premiums calculated based on the in-force illustrations provided by life insurance carriers are accurate and will not change over the course of the lifetime of our portfolio; and (vi) the Holders’ Lender fees, MRI fees, and insurance, servicing and custodial fees will not change materially over time. While this method of modeling cash flows is helpful in providing a theoretical expectation of potential returns that might be produced from our NIBs portfolio, actual cash flows and returns inevitably will be different (possibly materially) due to the fact that predicting the exact date of death of any individual is virtually impossible. The provision of a theoretical cash flow model is by no means any guarantee of any results. The actual performance of these NIB interests (as well as our future expectations as to what such performance might be) may differ substantially from our expectations, especially if any of the assumptions change or differ from our initial assumptions.
For the year ended March 31, 2020, other income and expenses totaled $284,388, consisting of $110,000 of expenses incurred pursuing potential financing alternatives and $174,388 in interest expense.
Since our inception our operations have been primarily financed through sales of equity instruments, debt financing, lines of credit and notes payable from related parties and the issuance of convertible debentures. As of March 31, 2020, we had $28,784 of cash, compared to $579 as of March 31, 2019. As of March 31, 2020, the Company had access to draw an additional $5,105,492 on the notes payable, related party and $3,000,000 on the Convertible Debenture Agreement. Our monthly expenses are approximately $70,000, which includes salaries of our employees, policy servicing expenses, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. Outstanding Accounts Payable as of March 31, 2020 totaled $481,716, and other accrued liabilities totaled $424,954. We believe that our availability under our existing lines of credit with related parties, our existing capital resources, together with the issuance of additional notes payable and convertible debentures and will be sufficient to fund our operating working capital requirements for at least the next 12 months, or through August 2021.
For the year ended March 31, 2020, we recorded net cash used in operating activities of $750,295, compared to $1,778,823 used in operating activities during the year ended March 31, 2019. The decrease in cash used in operating activities was primarily due to the overall reduction of operating expenses and cash used in exploring potential financing options.
For the years ended March 31, 2020 and 2019 no cash was used in or provided by investing activities.
At March 31, 2020, we owed 2,863,102, including accrued interest, for debt obligations. We owed $2,450,508 in principal pursuant to notes payable and lines-of-credits from related parties and had fully paid off the principal owing on the 8% Convertible Debenture. As of March 31, 2020, one note payable and line-of-credit had a principal balance of $829,508 and is due on August 31, 2021, or when the Company completes a successful equity raise, at which time principal and interest is due in full. The second note payable and line-of-credit had a principal balance of $795,000, and the line of credit is currently extended through August 31, 2021. A third series of promissory notes had a total principal balance of $826,000 and are due on November 30, 2021. The convertible debenture agreement, which has no principal balance due as of March 31, 2020 is open through November 30, 2021. As of August 10, 2020, there was $4,931,991 available under the lines-of-credit we currently have with related parties and $3,000,000 available under the 8% convertible debenture agreement.
When the Company holds NIBs classified as available-for-sale the investment in NIBs are recorded at fair value.
Basic and Diluted Net Loss Per Common Share, Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods presented using the treasury stock method. Diluted net loss per common share is computed by including common shares that may be issued subject to existing rights with dilutive potential, when applicable. Potential dilutive common stock equivalents are primarily comprised of potential dilutive shares resulting from convertible debt agreements and common stock warrants. Potentially dilutive shares resulting from convertible debt agreements are evaluated using the if-converted method. Potentially dilutive securities are not included in the calculation of diluted net loss per share for the years ended March 31, 2020 and 2019, because to do so would be anti-dilutive. Potentially dilutive securities outstanding as of March 31, 2020 include warrants convertible into 1,702,000 shares of common stock. No potentially dilutive securities were outstanding as of March 31, 2019.
The Company did not have any transfers of assets and liabilities between Levels 1, 2 and 3 of the fair value measurement hierarchy during the years ended March 31, 2020 and 2019.
The Company’s recorded values of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded values of the Notes Payable, Related Parties and Convertible Debenture approximates the fair values as the interest rate approximates market interest rates.
In February 2016, the FASB issued ASU 2016-02 related to the accounting for leases. This pronouncement requires lessees to record most leases on their balance sheet, while expense recognition on the income statement remains similar to current lease accounting guidance. The guidance also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. Under the new guidance, lease classification as either a finance lease or an operating lease will determine how lease-related revenue and expense are recognized. The pronouncement is effective for the Company’s fiscal year beginning April 1, 2019, and for interim periods within that fiscal year. The adoption of this standard did not have an impact on the consolidated financial statements because leases are month-to-month and not material to the Company’s financial statements.
On July 11, 2018, the Company issued 800,000 common shares in return for obtaining the remaining 27.8% ownership of certain NIBs. The transaction was recorded at $17,840, the estimated fair value of the common stock issued (which management believes approximated the fair value of the NIBs received on the date of the transaction). The additional NIBs acquired were reflected as an increase to the Investment in NIBs account, and the NIBs were immediately impaired on the date of the transaction, bringing the total impairment recognized on the NIBs to $22,967,966 plus $1,936,311 of impairment on accrued interest receivable.
As explained in Note 6, the related party lenders have received warrants to purchase common stock of the Company if extensions of due dates had been granted or additional monies had been loaned under the agreements.
Effective April 3, 2020, the related party, note payable and line of credit agreement with the Chairman of the Board of Directors and a stockholder (see Note 6) was amended to include a formal provision that provides the related party lender with common stock warrants upon the lenders extension of a maturity due date or upon the loaning of additional monies. The number of warrants issued will be based on the following formula: 10,000 warrants per month the due date is extended plus 1 warrant for every $2 of the principal balance outstanding (not including interest) at the time of the extension (rounded to the nearest whole warrant). Effective April 3, 2020, the number of warrants to be issued upon the loaning of additional monies is 2 warrants for each dollar loaned.
As of March 31, 2020 and 2019, the Company had borrowed $2,450,508 and $1,672,008 respectively, excluding accrued interest, from related parties. The interest associated with the Notes Payable, Related Party of $288,369 and $113,981 is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2020 and March 31, 2019, respectively.
As of March 31, 2020 and 2019, the Company owed $795,000 and $392,500, respectively, exclusive of accrued interest, under the note payable and line of credit agreement with the Chairman of the Board of Directors and a stockholder. The agreement allows for borrowings of up to $4,600,000. On January 8, 2020, the note payable and the line of credit agreement was extended from November 30, 2020 to August 31, 2021. In addition, the Company agreed to provide the Chairman with warrants for 500,000 shares of common stock at an exercise price of $0.05 per share and a five-year life. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was not significant. The inputs used in this calculation included a risk-free rate of 1.66%, volatility of 27.29% and a dividend rate of 0%. The note payable and line of credit agreement incurs interest at 7.5% per annum and are collateralized by the Company’s NIBS, if any. During the year ended March 31, 2020 the Company borrowed $402,500 of principal under this agreement and made no repayments. As of March 31, 2020, accrued interest on totaled $69,209. In the event the Company completes a successful equity raise all principal and interest on this note are due in full at that time.
As of March 31, 2020 and 2019, the Company owed $829,508, exclusive of accrued interest, under the note payable and lines of credit agreement with Radiant Life, LLC, an entity partially owned by the Chairman of the Board of Directors. The agreement allows for borrowings of up to $2,130,000. On December 19, 2019, the Company agreed to amend the agreement to extend the due date on the note payable and line of credit agreement from November 30, 2020 to August 31, 2021, or at the immediate time when alternative financing or other proceeds are received. The note payable and line of credit agreement incurs interest at 7.5% per annum and is collateralized by the Company’s NIBS, if any. During the year ended March 31, 2020 the Company neither borrowed nor repaid any principal under this agreement. As of March 31, 2020, accrued interest on this agreement totaled $151,408. In the event the Company completes a successful equity raise, all principal and interest on this note are due in full at that time.
The Company has entered into an 8% convertible debenture agreement with Satco International, Ltd., that allows for borrowings of up to $3,000,000 and is not collateralized. The holder originally had the option to convert the outstanding principal and accrued interest to unregistered, restricted common stock of the Company on June 2, 2016. Per the agreement, the number of shares issuable at conversion shall be determined by the quotient obtained by dividing the outstanding principal and accrued and unpaid interest by 90% of the 90 day average closing price of the Company’s common stock from the date the notice of conversion is received; and the price at which the Debenture may be converted will be no lower than $1.00 per share. The original maturity date was June 2, 2016, but was later extended, through a series of extensions, to August 31, 2019. On October 29, 2019, the Company agreed to amend the 8% Convertible Debenture Agreement and extended the due date and conversion rights to December 1, 2020. Subsequent to March 31, 2020, the Company agreed to further extend the due date and conversion rights to November 30, 2021. As of March 31, 2020 and 2019, the Company owed no principal under the agreement. The associated interest of $124,225 is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2020 and 2019.
Since the Company’s inception on January 31, 2013, its operations have been primarily financed through sales of equity, debt financing from related parties and the issuance of notes payable and convertible debentures. As of March 31, 2020, the Company had $28,784 of cash assets, compared to $579 as of March 31, 2019. As of March 31, 2020, the Company had access to draw an additional $5,105,492 on the notes payable, related party (see Note 6) and $3,000,000 on the Convertible Debenture Agreement (See Note 7). For the year ended March 31, 2020, the Company’s average monthly operating expenses were approximately $70,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and legal and accounting expenses. The Company anticipates the average monthly expenses of $70,000 to decrease by approximately $10,000 over the next 12 months, resulting in ongoing, average monthly expenses of approximately $60,000. In addition to the monthly operating expenses, the Company continues to pursue other debt and equity financing opportunities, and as a result, financing expenses of $110,000 and $849,806 were incurred during the years ended March 31, 2020, and 2019, respectively. As management continues to explore additional financing alternatives, beginning April 1, 2020 the Company is expected to spend up to an additional $400,000 on these efforts. Outstanding Accounts Payable as of March 31, 2020 totaled $481,716. Management has concluded that its existing capital resources and availability under its existing convertible debentures and debt agreements with related parties will be sufficient to fund its operating working capital requirements for at least the next 12 months, or through June 2020. Related parties have given assurance that their continued support, by way of either extensions of due dates, or increases in lines-of-credit, can be relied on. As mentioned above, the Company also continues to evaluate other debt and equity financing opportunities.
The recent outbreak of COVID-19 originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States and several European countries. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies and may affect the Company’s operations and those of third parties on which the Company relies. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic is difficult to assess or predict, the impact of the COVID-19 pandemic on the global financial markets may reduce the Company’s ability to access capital, which could negatively impact the Company’s short-term and long-term liquidity. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. The Company does not yet know the full extent of potential delays or impacts on its business, financing or other activities or on healthcare systems or the global economy as a whole. However, these effects could have a material impact on the Company’s liquidity, capital resources, operations and business and those of the third parties on which we rely.
The accompanying financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business. Due to the foreclosure on the NIBs mentioned above, the Company has no current source of operating revenues. In order to purchase NIBs, the Company will need to raise additional capital or secure alternative sources of debt financing.
The Company recorded no provision for income taxes for the years ended March 31, 2020 and 2019.
The tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2020 and 2019 were as follows:
The Company assesses the need for a valuation allowance against its deferred income tax assets at March 31, 2020. Factors considered in this assessment include recent and expected future earnings and the Company’s liquidity and equity positions. During the year ended March 31, 2018, the underlying policies related to the Company’s NIBs were subject to foreclosure (see Note 1). As a result, the Company has placed a 100% valuation allowance on the deferred tax assets. The deferred tax assets primarily relate to net operating loss carryforwards and the deferred tax liabilities primarily related to revenue recognized for financial reporting purposes, but not for tax reporting purposes.
Subsequent to March 31, 2020, the Company borrowed an additional $173,500 on Notes Payable, Related Party and issued 347,000 warrants.