Life Settlements is not a market sector without competition and, at present, we are a minor competitor. We will need substantial additional funds to effectively compete in this industry and no assurance can be given that we will be able to adequately fund our current and intended operations through debt or equity financing. We may be required to expend funds on premiums, interest and servicing costs to protect our interest in NIBs, though we have no legal responsibility nor adequate funds for these payments. In the event that neither party fulfils the financial obligations pertaining to the premiums, interest and servicing costs, we would be required to evaluate our investment in NIBs for possible adverse impairment. During October 2017, the entities completed a refinancing of the loans that had matured. The agreements are with a new senior lending facility who previously provided MRI for the underlying policies. Between May 2018 and July 2018, the Holders entered into agreements that completed a strict foreclosure transaction that transferred the underlying life insurance policies relating to the Company’s NIBs to the lenders in full satisfaction of the loan obligation. As a result of the foreclosure, the Company has lost its position in the residual benefits of the policies and has reduced the carrying value of the NIBs at March 31, 2018 to zero.
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 based on the current amortized cost of the investment, including accrued accretion. Any positive or adverse change in cash flows would result in a prospective increase or decrease in the effective interest rate used to recognize interest income. Any significant adverse change in the cash flows may result in the recognition of an “other-than-temporary impairment” (“OTTI”), and would be evaluated by the Company accordingly.
As of March 31, 2017 the Company’s deferred tax liabilities exceeded deferred tax assets, which resulted in the recording of income tax expense and a deferred tax liability. As a result, an income tax expense and corresponding deferred tax liability of $758,972 was recorded on the financial statement. During the year ended March 31, 2018, the Company’s deferred tax assets exceeded deferred tax liabilities. The Company assesses the need for a valuation allowance against its deferred income tax assets at March 31, 2018. Factors considered in this assessment include recent and expected future earnings and the Company’s liquidity and equity positions. Consequently, during the year ended March 31, 2018, management had placed a 100% valuation allowance, totaling $6,147,000 on the amount of the Company’s deferred tax assets exceeding deferred tax liabilities. An income tax benefit of $758,972 was recorded. The deferred tax assets primarily relate to net operating loss carryforwards.
We recognized the income tax effects of the Tax Reform Act in our fiscal year ending March 31, 2018 financial statements in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Reform Act was signed into law. The guidance addresses how a company recognizes provision amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. As such, the financial results reflect the income tax effects of the Tax Reform Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Reform Act for which the accounting under ASC 740 is incomplete, but a reasonable estimate could be determined. Pursuant to the SAB 118, we are allowed a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts.
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, 2018, we had $936,902 of cash, compared to $4,364 as of March 31, 2017. As of March 31, 2018, the Company had access to draw an additional $5,900,492 on the notes payable, related party and $3,000,000 on the Convertible Debenture Agreement. Our monthly expenses are approximately $60,000, which includes salaries of our employees, policy servicing expenses, consulting agreements and contract labor, general and administrative expenses, estimated legal and accounting expenses. Outstanding Accounts Payable as of March 31, 2018 totaled $162,594, and other accrued liabilities totaled $144,652. 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 2020.
For the years ended March 31, 2018 and 2017 no cash was used in or provided by investing activities.
During the year ended March 31, 2018 net cash used in financing activities was $5,085,245, compared to net cash provided by financing activities of $544,575 for the year ended March 31, 2017. During the year ended March 31, 2018, we repaid $4,385,245 of the principal outstanding on the Notes Payable, Related party agreements and borrowed $200,000 and repaid $900,000 on the Convertible Debenture. During the year ended March 31, 2017, we borrowed $1,544,575 under the Notes Payable, Related Party agreements and repaid $150,000 during the year. In addition, we paid out the $750,000 Mandatorily Redeemable Common Stock Payable recorded on the balance sheet as of March 31, 2017, and we also paid $100,000 as a financing advance. We subsequently determined that we would not be pursuing the opportunity related to the $100,000 advance, and therefore expensed the $100,000 as a Financing Expense during the year ended March 31, 2017.
At March 31, 2018, we owed $829,508, excluding accrued interest, pursuant to notes payable and lines-of-credits from related parties. At March 31, 2017, we owed $5,214,753, 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.
During the year ended March 31, 2018, we paid $549,643 in interest on the Note Payable, Related Party agreements and Convertible Debenture, and we accrued an additional $257,181 of interest payable on the Note Payable, Related Party agreements and the Convertible Debenture.
As explained in the General and Administrative Expenses section of our discussion, the Company had agreed, but was not contractually obligated, to pay for certain costs to maintain the structure of the underlying life insurance policies. As of March 31, 2017, the Company had remaining accrued expenses of $316,667 relating to the costs to maintain the structure of the life insurance policies. During the year ended March 31, 2018, the Company made payments totaling $127,504, after which the Company received notification from the Holders that the remaining $189,163 had been paid in full by the Holders. During the year ended March 31, 2018, the Company had reversed the effects of the remaining $189,163 accrued liability on its balance sheet.
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 future revenues. In order to continue to purchase additional NIBs or remove the NIBs out of foreclosure, the Company will need to raise additional capital. Management is currently engaged in obtaining long term financing and believes that it will secure the needed additional capital within one year from the date of this filing. As management believes that additional capital is a probable outcome, the Company has the ability to continue as a going concern for a period of one year from the date of issuance of these financial statements.
The following table sets forth payments due by period for fixed contractual obligations by maturity date as of March 31, 2018:
In accordance with the disclosure requirements of ASC Topic 825, “Financial Instruments” (“ASC 825”), the NIBs are not required to be carried at fair value, but only required to be disclosed in the footnotes to the financial statements. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. In estimating the fair value of the Company’s Investment in NIBs, the rate of return that a market participant would be willing to pay for each portfolio is used to recalculate the discounted estimated future cash flows. This present value is used to represent the fair value of the Investment in NIBs using level 3 inputs.
Our Investment in NIBs are classified as held-to-maturity investments at March 31, 2017 and as available-for-sale investments at March 31, 2018. At March 31, 2018, we have determined our investment in NIBs to have no fair value, as all remaining benefits had been received.
At March 31, 2018 the Company’s investment in NIBs was treated as a debt security, which was classified as an available for sale security.
Between May 2018 and July 2018, the Owners entered into agreements that completed a strict foreclosure transaction that transferred these policies from the owners to the lenders in full satisfaction of the loan obligation. As a result of the foreclosure, the Company has lost its position in the residual benefits of the policies and recognized a $22,950,126 impairment on the NIBs and $1,936,311 impairment of related interest receivable during the year ended March 31, 3018. Management concluded that the foreclosure event represented the culmination of conditions that provided indications affecting the realization of the Company’s investment in NIBs assets during the fiscal year ended March 31, 2018. As a result, the Company recorded the impairment of the NIBs during the fiscal year ended March 31, 2018, and changed the classification of the Investment in NIBs from Held to Maturity to Available for Sale.
The reconciliation between the basic and diluted weighted-average number of common shares for the years ended March 31, 2018 and 2017, is summarized as follows:
Principles of Consolidation, The consolidated financial statements include the accounts of the Company and its subsidiary. The subsidiary is wholly owned. All intercompany accounts and transactions are eliminated in consolidation.
Variable Interest Entities (“VIEs”), The owners of the Life Insurance Policies are variable interest entities (VIEs), for which the Company has a variable interest, but is not the primary beneficiary, as it does not have control over the significant activities affecting the economic performance of the owners. The Company’s maximum exposure to loss in the variable interest entities is limited to the investment in NIBs balance, which has a carrying value of $0 as of March 31, 2018. The Company does not have the power to direct activities of the VIEs. Further, the Company does not have the contractual obligation to absorb losses of the VIE beyond the Company’s initial investment. As further explained in Note 10, the Company had agreed, but was not contractually obligated, to pay for certain costs to maintain the structure of the underlying life insurance policies. The probable amount of these costs was $316,667 at March 31, 2017, and is recorded as accrued expense as of March 31, 2017. See Note 10 for updates to the estimated costs subsequent to March 31, 2017.
In accordance with the disclosure requirements of ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s Investment in NIBs, which are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. In estimating the fair value of the Company’s Investment in NIBs, the rate of return that a market participant would be willing to pay for each portfolio is used to recalculate the discounted estimated future cash flows. This present value is used to represent the fair value of the Investment in NIBs using level 3 inputs. The carrying amounts in the table are recorded in the consolidated balance sheets at March 31, 2018 and 2017:
The fair value of our investment in NIBs is determined by evaluating the sum of present value of the future cash flows expected from the NIBs. The key unobservable inputs used to arrive at the fair value estimates of the Company’s Investment in NIBs at March 31, 2018 and 2017, included a market rate discount rate range of approximately 15% to 18%, with a weighted average rate approximating 16%. The interest rate range and weighted average rate was obtained from the Market Rate - Life Insurance Settlement Association Statistics (weighted 50%), Build-up Method (weighted 25%) and Historical Cost Method (weighted 25%). As explained in Note 1, our current projections for the future cash flows are based off of various assumptions that are subject to uncertainties and contingencies, which are difficult to predict and are subject to future events that may impact our estimates and interest income. Therefore, subsequent to the purchase and on a regular basis, these future estimated cash flows are evaluated for changes. If the determination is made that the future estimated cash flows should be adjusted to the point of a material change in revenue, a revised effective yield is calculated prospectively based on the current amortized cost of the investment, including accrued accretion. During the year ended March 31, 2017, certain maturities were realized sooner than originally projected. The aggregate face value of these maturities was $14,500,000. In addition, there was a reduction of ongoing fees required to support the underlying policies. These two factors contributed to an overall increase in the estimated cash flows expected from the NIBs, which increased the estimated fair value from $29,432,917 as of March 31, 2016 to $45,643,224 as of March 31, 2017.
In December, 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard is designed to simplify the presentation of deferred income taxes, and requires all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The standard was adopted by the Company on April 1, 2017, and for interim periods within that fiscal year. The Company does not believe the adoption of this guidance had a material effect on the consolidated financial statements as the Company presents an unclassified balance sheet.
The Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, 2015-14, 2016-8, 10,11 and 12 and 2017-13 - Revenue from Contracts with Customers, which provides a single, comprehensive revenue recognition model for all contracts with customers. The core principal of the ASUs is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASUs also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB deferred the effective date of this standard. As a result, the standard and related amendments will be effective for the Company for its fiscal year beginning April 1, 2018, including interim periods within that fiscal year. Early application is permitted, but not before the original effective date of April 1, 2017. Entities are allowed to transition to the new standard by either retrospective application or recognizing the cumulative effect. The ASUs are not applicable to securitized beneficial interests that derive accreted yields and, therefore the Company will continue to follow the guidance in ASC 325-40. The adoption of this standard will not have an impact on the consolidated financial statements.
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 Company does not believe the adoption of this guidance will have a material effect on the consolidated financial statements because leases are month-to-month and not material to the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and supportable forecasts. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in estimating credit losses, as well as the credit quality. The amendments are effective for the Company’s fiscal year beginning April 1, 2020, including interim periods within that fiscal year. The Company is currently evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements and results of operations.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.
The amortized cost, aggregate fair value and gross unrecognized holding gains and losses at March 31, 2018 and 2017, were as follows:
During the year ended March 31, 2014, the Company issued common stock options to certain directors, officers, consultants and employees. On the date of grant, the contractual option terms were all 5 years, with all options have an expiration date between April and October of 2018. At March 31, 2018, all stock options had vested and all expenses relating to the outstanding options had been recognized as stock-based compensation expense.
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. In order to purchase NIBs, the Company will likely need to raise additional capital.
The Company had agreed, but was not contractually obligated, to pay for certain costs to maintain the structure of the underlying life insurance policies. As of March 31, 2017, the Company had remaining accrued expenses of $316,667 relating to the costs to maintain the structure of the life insurance policies. During the year ended March 31, 2018, the Company made payments totaling $127,504, after which the Company received notification from the Holders that the remaining $189,163 had been paid in full by the Holders. During the year ended March 31, 2018, the Company had reversed the effects of the remaining $189,163 accrued liability on its balance sheet.
The provision for income taxes for the years ended March 31, 2018 and 2017 consists of the following:
The Company assesses the need for a valuation allowance against its deferred income tax assets at March 31, 2018. Factors considered in this assessment include recent and expected future earnings and the Company’s liquidity and equity positions. At March 31, 2016 management had recorded a 100% valuation allowance, totaling approximately $275,000, on the amount the Company’s deferred tax assets exceeding the Company’s deferred tax liabilities. As a result, no income tax expense (benefit) or deferred tax asset or liability was recorded on the financial statement. As of the year ended March 31, 2017, our deferred tax liabilities began to exceed the Company’s deferred tax assets, which resulted in the recording of income tax expense and a deferred tax liability. As a result, during the year ended March 31, 2017, the $275,000 valuation allowance was released as the deferred tax liabilities exceeded the deferred tax liabilities and the expectation of cash inflows from the actual and anticipated maturities of the underlying life insurance policies, which will create taxable income to the Company. 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 deferred tax assets were reversed and the deferred tax liability as reduced to zero. 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.
In April 2013, 50,000 shares were transferred from a private party affiliate to a third party service provider in exchange for future services to be rendered on behalf of the Company. Effective November 6, 2018, the Company cancelled the 50,000 shares, as the agreed upon services were never performed. Also on November 6, 2018, 35,000 shares were issued to a third party for future services to be rendered on behalf of the Company. The remaining 15,000 shares were reissued to the original private party affiliate.
Effective December 6, 2018, three existing stockholders have contributed to the Company a portion of their common shares held at a repurchase price to the Company of $0.05 per share. The Company has cancelled the acquired shares, which decreased the outstanding common shares on the books of the Company. The total number of common shares canceled/retired was 8,000,000.. The Company anticipates paying the $0.05 per share repurchase price upon a major financing event, as agreed upon between the Company and the stockholders. As of the date of this filing, the shares have been cancelled, but have not yet been repurchased by the Company.
On December 6, 2018, the Company awarded three of its directors 300,000 shares each of the Company’s stock, in lieu of director compensation. The shares granted include a vesting period.
Subsequent to March 31, 2018, the Company has borrowed an additional $762,500 on the Notes Payable, Related Party (exclusive of the $535,000 loaned by Mr. Dickman). As of October 16, 2019, the outstanding principal balances of all Notes Payable, Related Party totaled $2,127,008 and the outstanding principal balance of the Convertible Debenture is $0.