The following are the initial terms of the Del Mar ATA and the related Europa Agreement as amended:
Effective June 7, 2013, we entered into the Del Mar ATA, which involved the purchase of certain life settlement assets consisting of 100% of the legal and net beneficial ownership interest or NIBs in two portfolios of life insurance policies having a face amount of approximately $284,270,924, among other assets, and provided for the conversion of the NIBs into Qualified NIBS having a face amount of $400 million, with Qualified NIBs meaning that: (i) the NIBs would have premium financing secured for up to five years; (ii) that any grouping of NIBs would have not less than 10 policies; (iii) that the average age of the insureds under the life insurance policies would be approximately 81 years; and (iv) that the NIBs would have mortality re-insurance coverage or what we formerly referred to as MRI and which is referred to in this Annual Report as mortality re-insurance or MRI, as discussed below. The additional assets that were conveyed to us under the Del Mar ATA were further consideration to ensure that any cash advances required of us on the anticipated receipt of Qualified NIBs would be secured until such Qualified NIBs were received. The purchase price of the assets was $20,000,000, $8,000,000 in cash and $12,000,000 represented by a promissory note or notes, to be executed and delivered on a pro rata portion of the $12,000,000, based upon the percentage of Qualified NIBs as provided. In the event Del Mar Financial was unable to provide the Qualified NIBs by December 31, 2013, we would have the option of selling any of these additional assets acquired up to a liquidated damages settlement payment equal to 100% of any cash payments made by us under the Del Mar ATA. These NIBs are collateral, with the other assets acquired, for the obligations of Del Mar under the Del Mar ATA.
We also entered into the Europa Agreement on June 7, 2013, in connection with the Del Mar ATA, whereby it was agreed that Europa would exclusively provide its NIBs related structuring and consulting services to us, with the understanding that we had no obligation to purchase any NIBs that Europa presented to us. Europa received an initial cash advance of $340,000 for its services (the Structuring Fee) related to its structuring and consulting services with respect to the Del Mar ATA. Europa will also receive a Structuring Fee of 1% of the face amount of the life insurance policies underlying all NIBs introduced and acquired, payable as follows: 50% of the fee on the delivery of the NIBs; and the remaining 50% being payable on the conversion of the NIBs to Qualified NIBs as defined in the Del Mar ATA. If all NIBs are Qualified NIBs, all fees will be due on closing. Del Mar Financial and Europa subsequently agreed that the total cash payment due from us under the Del Mar ATA ($8,000,000 to Del Mar Financial and $4,000,000 to Europa) would be reduced on a dollar for dollar basis for any cash payments or
expenses paid by us in excess of $8,000,000 under the Del Mar ATA. As of March 31, 2014, such cash payments and expenses were $9,020,862.
On November 14, 2013, we amended the Del Mar ATA and the Europa Agreement and other related agreements: (i) to reflect the dollar for dollar reduction in fees due to Del Mar Financial and Europa under the Del Mar ATA and the Europa Agreement to the extent that our cash payments and other expenses under the Del Mar ATA exceed $8,000,000 (ii); to announce a Collateral Release Agreement with PCH Financial, whereby PCH Financial released any lien it had on any assets we had purchased under the Del Mar ATA; (iii) set payment dates for certain payments due Europa under the Europa Agreement; (iv) to confirm that $8,241,319 had been expended by us in the Cash Payment and related expenses to that date; (v) to confirm that any excess of the Cash Payment and expenses that exceeds $12,000,000 shall be a liability of Del Mar due on demand; (vii) to confirm that liquidated damages under the Del Mar ATA were 100% or two times the cash payment and our expenses under the Del Mar ATA; (viii) to confirm payment to Michael Brown of $25,000 as a consultant under the Europa Agreement and that such payment was part of our expenses for all purposes under the Del Mar ATA; (ix) announce that our March 11, 2013, $2,999,999 promissory note to PCH Financial issued as partial payment by us to acquire our first $129 million in NIBs (acquired by ANEW LIFE) had been amended and restated to reduce the principal amount to $1,500,000 and to extend the due date to April 11, 2015 (the Amended and Restated Promissory Note), and that such Amended and Restated Promissory Note had been assigned to Del Mar Financial; and (x) our acquisition of certain buyback rights (the Buyback Rights) to acquire such Amended and Restated Promissory Note for $1,000,000 plus an additional 2% for each month (whole or partial) that elapsed from the time of the assignment of such Amended and Restated Promissory Note by Del Mar Financial to a third party, subject to a minimum buyback price of $1,120,000 (the Buyback Price), which Buyback Rights became ours by reason of Del Mar Financials failure to deliver the $400 million in Qualified NIBs to us by the date of our first extension to them of such obligation to April 1, 2014. To date, we have received $90.6 million in Qualified NIBs, and we have extended the due date of the delivery of the remaining Qualified NIBs until September 30, 2014, as discussed above under the heading Business Developments subsequent to the Fiscal Year Ended March 31, 2014. Although paid by the Policy Holder, the estimated premiums to be paid on the underlying policies for each of the five succeeding fiscal years to keep the Policies in force as of March 31, 2014, are as follows:
Presently, it is anticipated that all NIBs we acquire will be held until maturity. Through the combination of the Senior Loans, MRI coverage and debt or equity financing by us, management believes we should be well positioned to hold the NIBs until maturity. However, we will continuously analyze the Senior Loan amounts, MRI payments, NIBs and underlying Policies to determine, in conjunction with the Lux Sarls, whether any such assets should be liquidated. Further, in the event of any events of default under the Senior Loans or MRIs, we plan to attempt, in conjunction with the Policy Holders and Lux Sarls, to sell the affected assets, in conjunction with the Lux Sarls, if necessary or advisable; absent that, we may lose our interest in the affected NIBs. There is an active secondary market for Policies that we can access if it is determined that any of the Policies or NIBs should be liquidated. However, prices in the secondary market are relatively volatile, and our goal is to avoid the early sale of NIBs or Policies so that we can realize maximum net amount on maturity of the Policies. Through strategic alliances with well known Policies servicers and market participants, we believe we have substantial lines of communications with the potential participants active in the life settlement secondary market; however, no assurance can be given that if we are required to sell any of our NIBs or other insurance related products prior to maturity, that we will be able to do so without incurring a loss.
We have not had any recent public announcement of any new product or service.
The Senior Loans typically have a term of approximately five years and can be drawn upon during such term. The Senior Loan can be prepaid subject to certain pre-payment penalties. We intend to request that the Lux Sarls or their related parties or subsidiaries who are parties to the Senior Loans renegotiate the Senior Loans, or we intend to have alternate financing available, prior to the end of the Senior Loans terms; presently, we have no alternative sources of Senior Loans available to us. The Senior Lender is committed to the issuance of Senior Loans on life settlement products like NIBs, and we believe it has the capacity to continue to make such loans. The ongoing availability of these Senior Loans will allow for the creation of products like NIBs, and which are currently only sold by PCH Financial and Del Mar Financial; however, being committed and actually making the loans are entirely different matters. The failure of the Senior Lender to continue making these loans to PCH Financial and Del Mar Financial may result in their inability to provide NIBs to us for purchase and our business model may suffer substantially. It
should be noted that we do not have a direct contractual relationship with the Senior Lender and no written agreement in this regard has been provided.
We believe that the Senior Lender is a member of the Federal Association of German Banks; has been granted a license in accordance with the German Banking Act; and is registered and supervised by the German Federal Supervisory Authority. The Senior Lender is not rated.
and ongoing ownership of the NIBs. The Servicer does not provide advice regarding the economics or profitability of the NIBs. Europa provides us with financial analysis of the NIBs as our structuring consultant. We directly benefit from these services by our ownership of the NIBs, though we have no contractual arrangements with the Servicer. We also rely on our general counsel for due diligence related to non-insurance contractual matters, and have relied on our general counsel for certain chain of title issues relating the Policies since April 1, 2013. As NIBs are submitted to us, the Servicer or other servicing company will provide due diligence and valuation summaries. These summaries will then be reviewed by our general counsel and management team. We will perform a review of the Policies and NIBs, including a detailed review of the financing and MRI coverage, and, if our criteria are met, we will purchase the NIBs, subject to having available resources. Our general counsel was formerly general counsel to our current Servicer and has 10 years of experience in providing due diligence services and financing review for life insurance policies. See the heading Significant Employees of the caption Directors and Executive Officers of this Item below. We are also in the process of hiring an independent pricing consultant either as a full time employee or on a contract basis with years of experience in pricing life insurance policies. We have spoken to multiple candidates and hope to have a pricing consultant in the next 60 days. We do not track concentrations of the same pre-existing medical conditions among insured individuals. While the policy servicer does have detailed health records related to the insureds under the Policies, they have not engaged in such a comparison to our knowledge because most people in the 75 years of age and older category have multiple and ever changing health conditions. Some have had conditions in the past that are no longer present and vice versa. Accordingly, it would be difficult to separate and track them in this manner.
We do not purchase life insurance policies or life settlement products directly from any insured, accordingly, we are not required to have any special licenses to conduct our current and intended business operations; however, see the heading Effect of Existing or Probable Governmental Regulations on the Business directly below for additional information on the effect of existing or probable government regulations on our business.
, that discusses various issues in the life settlements market. In this Report, the SEC recommends that the Securities Act and the Exchange Act be amended to define life settlements as a security, so that persons involved in the life settlement markets would be afforded the protections of applicable federal securities laws, rules and regulations, along the probability of regulation under the Investment Company Act of 1940, as amended (the Investment Company Act); and that the SEC should continue to monitor the legal standards of conduct of participants in the life settlements market, the development of a life settlements securitization market, encourage Congress and state regulators to consider more significant and consistent regulation of the life expectancy underwriters and to consider instructing the SEC Staff to issue an investor bulletin regarding investments in life settlements. The adoption of these regulations could substantially increase the costs of our filings with the SEC, especially if we were determined to be subject to the provisions of the Investment Company Act, including further oversight of our business model that could limit our ability to change investment policies without stockholder approval, prohibit acquiring assets from an affiliate without an approved exemptive application from the SEC, limit our leveraging of assets to one-third of our total asset value and account for all derivatives as a leverage of assets to the extent that they create an obligation on our part to pay out assets to a counterparty ahead
of our stockholders and generally, require 40% of our directors to be independent directors, along with other requirements that may impact operations, like recordkeeping requirements, reporting requirements and privacy requirements. All of these potential regulations could have a substantial negative affect on our business model and revenues and greatly increase our expense of regulatory compliance.
We are subject to the following regulations of the Securities and Exchange Act of 1934, as amended (the Exchange Act), and applicable securities laws, rules and regulations promulgated under the Exchange Act by the SEC. Compliance with these requirements of the Exchange Act increases our legal and accounting costs.
We are subject to the reporting requirements of Section 13 of the Exchange Act, and subject to the disclosure requirements of Regulation S-K of the SEC, as a smaller reporting company. That designation will relieve us of some of the informational requirements of Regulation S-K.
We are also an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not an emerging growth company, like those applicable to a smaller reporting company, including, but not limited to, a scaled down description of our business in SEC filings; no requirements to include risk factors in Exchange Act filings; no requirement to include certain selected financial data and supplementary financial information in SEC filings; not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that we file under the Exchange Act; and exemptions from the requirements of holding an annual nonbinding advisory vote on executive compensation and seeking nonbinding stockholder approval of any golden parachute payments not previously approved. We are also only required to file audited consolidated financial statements for the previous two fiscal years when filing registration statements, together with reviewed financial statements of any applicable subsequent quarter.
We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We can remain an emerging growth company for up to five years. We would cease to be an emerging growth company prior to such time if we have total annual gross revenues of $1 billion or more and when we become a large accelerated filer, have a public float of $700 million or more or we issue more than $1 billion of non-convertible debt over a three-year period.
Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Except for the limitations excluded by the JOBS Act discussed under the preceding heading Emerging Growth Company, we are also subject to the Sarbanes-Oxley Act of 2002. The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence. It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members appointment, compensation and oversight of the work of public companies auditors; management assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and
establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will substantially increase our legal and accounting costs.
Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act like we are to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A (where proxies are solicited) or 14C (where consents in writing to the action have already been received or anticipated to be received) of Regulation 14, as applicable; and preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders.
We are also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.
We had no research and development costs during our last two fiscal years ended March 31, 2014, and 2013.
We have four full-time employees, Randall F. Pearson, our President; Glenn S. Dickman, our Secretary; Matthew G. Pearson, our Chief Operating Officer; and Lisa L. Fuller, Esq., our general legal counsel.
You may read and copy any materials that we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may also find all of the reports or registration statements that we have filed electronically with the SEC at its Internet site at www.sec.gov. Please call the SEC at 1-202-551-8090 for further information on this or other Public Reference Rooms. Our SEC reports and registration statements are also available from commercial document retrieval services, such as CCH Washington Service Bureau, whose telephone number is 1-800-955-0219.
As a smaller reporting company, we are not required to provide risk factors; however, we have included risk factors that we believe are applicable to our Company and our business.
You should carefully consider each of the following risks and uncertainties associated with our Company or the purchase or ownership of our common stock, as well as all of the other information contained in this Annual Report, including our financial statements.
The occurrence of any of the risks or uncertainties described below could significantly and adversely affect our business, prospects, financial condition and operating results. The following are representative of those risks.
Risk Factors relating to Our Company
We are newly formed, and our auditors have added a going concern qualification to their Independent Auditors Report issued for our financial statements.
Our Independent Auditors Report dated July 15, 2014, expresses a going concern reservation in connection with our audited consolidated financial statements for the year ended March 31, 2014. Note (16) of our audited consolidated financial statements states that At March 31, 2014, the Company had accumulated deficits of $310,789 and a working capital of $234,297, but has yet to receive cash payments on revenues. In addition, the Company has negative operating cash flows from inception through March 31, 2014. These factors raise substantial doubt about the Companys ability to continue as a going concern. See the caption Financial Statements and Supplementary Data, Part II, Item 8, below.
One member of our management has up to approximately five years (Matthew G. Pearson, our Chief Operating Officer) and our directors and President and Secretary have at least approximately 20 months (Messrs. Randall F. Pearson, Glenn S. Dickman and Ty Mattingly) experience in our chosen industry of operations and they rely on our general legal counsel and outside consultants and others in this industry to make informed business decisions; and potential conflicts of interest involving those parties who are relied upon could adversely affect the value of our life insurance products.
Members of our management have had a limited exposure to the life settlement industry. They have and will continue to rely on consultants and servicers in this industry, along with our general legal counsel, in evaluating life insurance products for purchase. Many of these consultants or servicers represent or provide services to others in this industry, and no assurance can be given that we, as a small competitor competing with larger competitors in this industry, will not be treated less favorably by these consultants than our competitors. Even as management accumulates expertise in this industry, we will still being relying on the expertise of outside consultants for various factors, including valuation, life expectancies, actuarials and other matters specific to life insurance policies, most of which are outlined below under this caption under the heading Risks related to Policies.
Proposed securities regulations and other governmental regulations may increase our costs of doing business substantially, and our results of operations will suffer.
The SEC and Congress, along with various states, have proposed various regulations of the life settlement industry, any of which could substantially increase our costs and limit our business operations, even though we intend to acquire life insurance products and hold them to maturity. Also, compliance with these regulations will be costly, and may hinder our ability to successfully implement our business model, and we may fail.
Our Projections, Forecasts and Estimates may be incorrect, which may subject us to liability or cause us to fail.
Any projections, forecasts and estimates contained herein are forward-looking statements and are based upon certain assumptions that we consider reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. Accordingly, any such projection is only an estimate. Actual results may vary from a projection, and such variations may be material. Our present business and revenues are dependent upon our reliance on others.
We are substantially dependent upon information provided by consultants and servicers of the life insurance policies underlying the NIBs for evaluating life settlements or NIBs for purchase. The success of our business largely depends on the skills, experience and efforts of servicers and consultants such as Europa, their management teams and other key personnel. The loss of the services of one or more members of such senior management teams or other employees with critical skills needed to operate their businesses could have a negative effect on our business. Competition for these types of personnel can be intense, and we and our consultants may not be successful in attracting, assimilating and retaining the personnel required to replace any of its senior management team and other key employees. This could substantially adversely affect our business.
Our projections are based on our ability to purchase NIBs related to Policies with combined face amounts in excess of $500,000,000 and at least 100 underlying insureds (we will not receive the face amount of the Policies, but only the net insurance benefit). The more underlying insureds we have related to our NIBs, the more reliable the actuarial results will be. We understand that rating agencies have stated that at least 1,000 lives are required to achieve actuarial stability. It will take years for us to reach such levels, if ever. The relative low number of insureds makes our models and projections less reliable. We currently own NIBs with life insurance policies in six portfolios, with an aggregate original face amount of $219,638,933 (including NIBs acquired from PCH Financial and Qualified NIBs acquired from Del Mar Financial), with 32 individual insureds spread over 62 underlying life insurance policies. There are only 32 individual insureds in these life insurance policies, which increases our risk that our actual yield may be less than expected as our portfolios may not be sufficiently diversified.
The Lux Sarls may not be able to pay fees and costs of the Senior Lender, and we may lose the interest in our NIBs, which could cause our business to fail.
The Senior Lender has entered into the Loan Facility, the proceeds from which will be available in certain circumstances for the payment of premiums in respect of the Policies and the Fees. No assurance can be given that amounts available under the Loan Facility will at all times be sufficient to pay all the premiums and fees due and payable. In addition, the Loan Facility generally has an initial term of five years, and no assurance can be given that the Loan Facility will be renewed. Furthermore, if an event of default occurs under the Loan Facility (which, among other things, includes an Event of Default), no assurance can be given that we will be able to cure such event of default, in which case the Senior Lender will have the right to exercise remedies against the Policies, and will be entitled to cause a disposition of Policies and receive proceeds of such disposition in priority to us. The Senior Lender is not rated, and although it currently anticipates having sufficient capital to honor its funding obligations under the Loan Facility, no assurance can be given that it will continue to have sufficient capital for the entire term of the Loan Facility. Our business activities are highly regulated and new or proposed government regulation or legislative reforms could increase our cost of doing business, reduce our revenues and liquidity, increase our losses or subject us to additional liability.
A demand for payment of the Senior Loans and a foreclosure by the Senior Lender on the policies could result in the loss of our entire investment in the NIBs.
The Senior Lender could demand repayment of the Senior Loans. Though we have no liability for the Senior Loans because we are not party to them, we could lose our entire investment in our NIBs. Since we are not party to the Senior Loans, we are not entitled to any notice of the Senior Lenders demand for the payment of the Senior Loans or any notice of any foreclosure of the Senior Lender on the policies. In the event of a foreclosure, we could only appear and bid at the foreclosure sale on the policies securing the Senior Loans in the same manner as any other unrelated party. Even if we had the ability to arrange other financing prior to any foreclosure sale, we would have to make arrangements with the Lux Sarls or their related parties or subsidiaries, who are the only parties to the Senior Loans, to pay off the Senior Loans for our benefit and then acquire their underlying interests in the policies for the Company. If the Senior Loans could not be renegotiated and foreclosure occurred, we would lose our entire interest in the NIBs.
The limited number of sellers of NIBs and similar life settlement products may have an adverse affect on our planned business model and may limit our ability to negotiate favorable prices in the acquisition of these life settlement interests.
To our knowledge, Del Mar Financial and PCH Financial, the two sellers from whom we have acquired all of our present interests in NIBs and similar life settlement products, are the only sources for these life settlement products. Unless other sources become available, our ability to purchase the life settlement products desired under our business model may be limited, and our ability to seek competitive pricing will be limited. These factors could have an adverse affect on our business, growth potential and our success. We are currently seeking other sources of providers of these life settlement products. Further, our business model includes acquiring life settlements directly and obtaining loans for premium payments and MRI or similar insurance arrangements to those associated with our NIBs, though no assurance can be given that we will be successful in these endeavors, or that the lack of competitors in providing NIBs and related life settlement products will not have an adverse effect on our business model and the quality and price of life settlement products we purchase.
We do not track concentrations of pre-existing medical conditions of insureds in our guidelines for purchasing NIBs.
Our guidelines for purchasing NIBs do not track concentrations of pre-existing medical conditions, and this could have an adverse effect on our estimates of life expectancies, which would in turn have an adverse effect on our anticipated revenues or projections.
We are not licensed in any state to engage in the purchase of life insurance policies from original policy owners.
Because we are not licensed in any state to allow us to purchase life insurance policies directly from insureds, our purchases of life insurance policies must be made in the secondary market where the prices are often higher and include fees to agents or providers. Accordingly, those with adequate licensing could obtain life insurance policies at prices that are less than we can acquire them. Although this lack of licensing for direct purchases may be a competitive disadvantage, we do not intend to purchase life insurance policies directly from insureds under our business model, and accordingly, the lack of such licensing is not otherwise material to our operations.
Current and future federal regulation may have an adverse effect on our business and our planned business operations.
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) into law. The Dodd-Frank Act contains significant changes to the regulation of financial institutions including the creation of new federal regulatory agencies, and the granting of additional authorities and responsibilities to existing regulatory agencies to identify and address emerging systemic risks posed by the activities of financial services firms. The Dodd-Frank Act also provides for enhanced regulation of derivatives and asset-backed securities offerings, restrictions on executive compensation and enhanced oversight of credit rating agencies. The provisions include a new independent Bureau of Consumer Financial Protection to regulate consumer financial services and products, and life settlement transactions may be within the scope of its jurisdiction. Actions taken by the Bureau of Consumer Financial Protection may have material adverse effects on the life settlement industry and could affect the value of the Collateral securing our NIBs and the value of our NIBs or life settlements in general. In addition, the Dodd-Frank Act also limits the ability of federal laws to preempt state and local consumer laws. While it is too early to assess the full impact of the Dodd-Frank Act generally on our business and prospects, the Collateral manager and the Servicers, prospective investors should be aware that the changes in the regulatory and business landscape as a result of the Dodd-Frank Act could have an adverse impact on us, the Collateral managers, the Servicers and/or on the value of the Collateral and the NIBs. Greater oversight of the life settlement industry may have a substantial adverse impact on how we conduct our business and may substantially increase our costs of operation.
In August 2009, the SEC established a Life Settlements Task Force to investigate the life settlements market. On July 22, 2010, the SEC released a Staff Report by the Life Settlements Task Force that recommended the SEC consider recommending to Congress that it amend the definition of security under the federal securities laws to include life settlement policies, such as the Policies, as securities. Prior to our fiscal year ended March 31, 2013, one U.S. Congressman sought to introduce a bill to amend the definition of security as recommended by the SEC. While that attempt did not result in any action, there can be no assurance that such a bill will not be passed at some future date. If federal securities laws are indeed amended to include such policies within the definition of security, or if courts with relevant jurisdiction interpret existing securities laws to that effect, our ability to operate our business under our current business model may be constrained by additional registration and securities compliance requirements under the Securities Act, the Exchange Act and the Investment Company Act. Intermediaries may be required to register as broker-dealers or registered investment advisers, and would otherwise be subject to oversight by the SEC and the Financial Industry Regulatory Authority, which require adherence to numerous rules and regulations.
The Senior Lender is believed to be one of only one or two current sources for financing the Senior Loans.
There is currently believed to be only one or two current sources of financing for the Senior Loans, one of which is the European financial institution that has provided the Senior Loans for our present NIBs portfolio. This European financial institution is unrated. The Senior Lender has confirmed that it is committed to the issuance of Senior Loans on life settlement products like NIBs, and we believe that it will have the capacity to meet our demands for financing related to NIBs we may desire to purchase from parties like PCH Financial and Del Mar Financial. We have no relationship with this institution; and we have no binding agreements or understandings pursuant to which this Senior Lender has agreed to finance other life settlement products for us. Our inability to finance life settlement products in the future with the Senior Lender or through some other source, could have a substantial adverse impact on our business, and the fact that our Senior Lender is unrated, raises questions about the stability of the Senior Lender and our Senior Loans. These factors can negatively affect the value of our NIBs portfolio and may make it difficult to use our present NIBs portfolio as a source of debt financing, if desired, and may also result in a decreased valuation in the event we are required to dispose of these assets.
If our NIBs are determined to be securities, we may be required to register as an investment company under the Investment Company Act, which would increase our SEC reporting costs and oversight of our business operations.
The SEC has recommended that the Securities Act and the Exchange Act be amended to define life settlements as a security, so that persons involved in the life settlement markets would be afforded the protections of applicable federal securities laws, rules and regulations, along the probability of regulation under the Investment Company Act. The adoption of these regulations could substantially increase the costs of our filings with the SEC, including further oversight of our business model that could limit our ability to change investment policies without stockholder approval, prohibit acquiring assets from an affiliate without an approved exemptive application from the SEC, limit our leveraging of assets to one-third of our total asset value and account for all derivatives as a leverage of assets to the extent that they create an obligation on our part to pay out assets to a counterparty ahead of our stockholders and generally, require 40% of our directors to be independent directors, along with other requirements that may impact operations, like recordkeeping requirements, reporting requirements and privacy requirements. All of these potential regulations could have a substantial negative affect on our business model and anticipated revenues and greatly increase our expense of regulatory compliance.
93% of our total assets are interests in life settlement policies, resulting in a lack of diversification of assets that are subject to significant fluctuations in fair value.
Our currently owned NIBs comprise approximately 93% of our assets, resulting in no diversification of our risks of business. Life settlement products like our NIBs and planned future purchases of life settlement products are subject to substantial fluctuations in value, primarily based upon matters that are not within our control, including financing costs, the solvency of our lenders and MRI Providers, the health and life expectancy of the insureds under our Policies and the costs of maintaining the Policies, along with continually updating information about the health of the insured. This lack of diversification increases our risk of loss, and there can be no assurance the effect of any of these factors will not result in a substantial adverse impact on our business.
The life settlement industry has overall transaction risks and involves a very speculative investment.
Despite a partys best efforts in design and implementation of a life settlement investment product, there can be no assurance that the transactions contemplated in our business model will perform as anticipated. It is a desirable goal to minimize, to the extent reasonably possible, risks relating to investments related to life settlements with the understanding that it is not possible with respect to the Policies, to determine in advance either the exact time that a life insurance policy will reach maturity (i.e., at the death of the insured) or the profit, loss or return on an investment in a life insurance policy.
In addition, no assurance can be given that any life insurance policy will perform in accordance with projections, and any such life insurance policy may decline in value. Consequently, there can be no assurance that we will realize a positive return on our investment and these types of investments should be considered to be speculative in nature. This, in turn, may directly affect the amount and timing of funding sought or received by us, which in turn will affect our ability to conduct our business. Thus, an investment in our Company is suitable only for investors having
substantial financial resources, a clear understanding of the risk factors associated with such investments and the ability to withstand the potential loss of their entire investment.
Recent Economic Events could have an adverse effect on our business.
Recent market and economic conditions have caused significant disruption in the credit markets. Continued concerns about the availability and cost of credit, the mortgage market, declining real estate values and the systemic impact of inflation or deflation, energy costs and geopolitical issues have contributed to increased market volatility and diminished expectations for the U.S. economy as well as economies of other countries. Beginning in 2008, concerns fueled by events such as the federal governments conservatorships of Freddie Mac and Fannie Mae, and the failure of Lehman Brothers Holdings, Inc., led to increased market uncertainty and instability in both U.S. and international capital and credit markets. These conditions, combined with declines in business and consumer confidence and increased unemployment, have contributed to volatility in domestic and international markets.
As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets and the strength of counterparties has led many lenders and institutional investors to reduce, and in some cases cease, lending to borrowers.
There continues to be uncertainty about the prospects for growth in the U.S. economy as well as economies of other countries. A number of factors influence the potential uncertainty, including, but not limited to, high current unemployment, rising government debt levels, prospective Federal Reserve (and similar foreign bodies) policy shifts, the withdrawal of government interventions into the financial markets, changing consumer spending patterns, and changing expectations for inflation and deflation. These factors have adversely affected the financial markets and the claims-paying ability of many insurers. Moreover, there is a risk that economic activity could be weaker and financial volatility and uncertainty could be greater than anticipated.
These factors and general market conditions could adversely affect the performance and market value of our NIBs and our future prospects. There can be no assurance that governmental or other actions will improve these conditions in the near future.
The costs in time and expense of being a publicly-held company are substantial and will only increase if our business model is successful.
We are a reporting issuer under Section 13 of the Exchange Act, required to file annual reports (SEC Form 10-K), quarterly reports (SEC Form 10-Q) and current reports respecting certain events (SEC Form 8-K), along with proxy or information statements for any meeting of stockholders or written consents of stockholders holding sufficient securities to effect corporate actions. Most of these reports require financial information, including the annual report, which requires year end audited consolidated financial statements by an independent public accountant that is PCAOB registered, like our auditors, and the quarterly reports, which require reviewed quarterly financial statements by such auditors. The preparation of these reports, their review by management and professionals, and the preparation of these financial statements by our in-house accountants and management, as well as the auditing and review process of such financial statements is time consuming in terms of management resources and costly in terms of professional fees for lawyers, accountants and auditors. It is difficult to quantify these costs, but they are expected to be not less than between approximately $150,000 and $250,000 annually. As our business grows, these costs can only increase.
Risk Factors Relating Our Common Stock
There is no established public market for our common stock, and any market that may develop could be volatile.
There is currently no established public market for our common stock, and no assurance can be given that any established public market for our shares will commence, or if one does commence, that it will continue, in any respect. Interest in our common stock may not lead to a liquid trading market, and the market price of our common
stock may be volatile. The following may result in short-term or long-term negative pressure on the trading price of our shares, among other factors:
Conditions and publicity regarding the life settlement market and related regulations generally;
Price and volume fluctuations in the stock market at large, which do not relate to our operating performance; and
Comments by securities analysts or government officials, including those with regard to the viability or profitability of the life settlement industry generally or with regard to our ability to meet market expectations.
The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies.
We are an emerging growth company, subject to less stringent reporting and regulatory requirements of other publicly-held companies, and this status may have an adverse effect on our ability to attract interest in our common stock.
We are an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting and regulatory requirements that are applicable to other public companies that are not an emerging growth company. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile. See the heading Emerging Growth Company of this Item 501 above.
Our Management and two stockholders own approximately 64.6% of our outstanding common stock and could elect all of our directors who in turn elect all of our officers.
This percentage of stock ownership is significant in that it could carry any vote on any matter requiring stockholder approval, including the subsequent election of directors, who in turn elect all officers. As a result, these persons effectively control the Company, regardless of the vote of other stockholders. As a result, other stockholders may not have an effective voice in our affairs. See the caption Security Ownership of Certain Beneficial Owners and Management, Part III, Item 12, below. This percentage does not include shares underlying outstanding options or warrants that can be exercised within 60 days.
Future sales of our common stock could adversely affect our stock price and our ability to raise capital in the future, resulting in our inability to raise required funding for our operations.
Sales of substantial amounts of our common stock could harm the market price of our common stock. This also could harm our ability to raise capital in the future. Of the 43,155,941 shares of our common stock that are currently outstanding, 37,275,000 of such shares are subject to Lock-Up/Leak-Out Agreements, and no public resale of any of these securities can be made until on or after October 6, 2014 (the Lock-Up Period); thereafter, each of these stockholders common stock can be sold in an amount equal to 0.0025% (1/4%) of our outstanding securities (to be defined for all purposes thereof as the amount indicated in our most recent filing with the SEC) during each of the next four successive quarterly periods following the Lock-Up Period; 0.005% (1/2%) of our outstanding securities during each of the next four successive quarterly periods; and 0.01% (1%) of our outstanding securities during each of the next four successive quarterly periods, all on a non-cumulative basis, meaning that if no common stock was sold during any quarterly period while common stock was qualified to be sold, such shares of common stock cannot be sold in the next successive quarterly period (the Leak-Out Period). Notwithstanding the foregoing, any stockholder subject to a Lock-Up/Leak-Out Agreement that owns less than 100,000 shares of common stock that are covered thereby, shall be allowed to sell one-fourth (1/4) of such stockholders common stock in each successive quarterly period following the Lock-Up Period, also on a non-cumulative basis. Our remaining outstanding shares are freely tradable under Rule 144, subject to limitations on the number of shares that can be sold quarterly by affiliates as defined under the Securities Act. Any sales of substantial amounts of our common stock in the public market, or the perception that those sales might occur, could harm the market price of our common stock. See the captions Market Price of Common Stock and Related Matters and Security Ownership of Certain Beneficial
Owners and Management of Part II, Item 5, below. Further, certain stockholders have piggy-back registration rights afforded to them if we file a registration statement with the SEC; these shares or any registered securities we may register can also have an adverse effect on any market for our common stock.
We will not solicit the approval of our stockholders for the issuance of authorized but unissued shares of our common stock unless this approval is deemed advisable by our Board of Directors or is required by applicable law, regulation or any applicable stock exchange listing requirements. The issuance of those shares could dilute the value of our outstanding shares of common stock.
Risks Related to the Policies.
Our Policies may be determined to have been issued without an insurable interest and could be void or voidable.
State insurance laws in the United States require that an insurance policy may only be initially procured by a person that has an insurable interest in the continuance of the life of the insured. Whether an owner has an insurable interest in the insured is a question of applicable state law. The general concept is that a person with an insurable interest is a person that has a continuing interest in the insured remaining alive, whether through the bonds of love and affection or due to certain recognized economic relationships. Typically this includes the insured, the insureds spouse and children, and in some states, other close relatives. In some jurisdictions, however, this could also include entities such as the insureds business partners, creditors, employer, business partners or certain charitable institutions. It also typically includes a trust that owns a life insurance policy insuring the life of the grantor or settlor of the trust where the beneficiaries of the trust are persons, who, by virtue of certain familial relationships with the grantor or settlor, also have an insurable interest in the life of the insured.
A policy purchased by a person without an insurable interest may, depending on relevant state insurance law, be (i) void, (ii) voidable by the insurer that issued the policy and/or (iii) subject to the claims of the insureds presumptive beneficiaries, such as his or her spouse or other family members. In some states, the insured must consent to the purchase of a policy by a person other than the insured.
Generally, state insurance law is clear that an individual has an insurable interest in his or her own life and may procure life insurance on his or her own life and may name any person as beneficiary. However, if a person purchases insurance on his or her own life for the benefit of a party who does not have an insurable interest in the life of the insured for the purpose of evading the insurable interest laws, the purchase may be viewed under applicable state law as a violation of the states insurable interest laws. Should the Issuer own an interest in a policy that was originally issued to an owner or for the benefit of a beneficiary (if required) that did not have an insurable interest, it is possible that the Issuer may not have a valid claim for the death benefits on such policy, and upon the death of the insured, the issuing insurance company may refuse to pay the death benefits on the policy to us or may be required to pay the death benefit to other beneficiaries of the insured. Should any such claims be successful, we may lose some or all of the amounts we have invested in our Policies, although in some states the issuing insurance company may be required to repay the premiums if it rescinds the policy. Some states, such as Florida, allow the carrier to retain all the premiums and some states that require premiums to be returned permit the carrier to maintain an action for damages. Even if such claims are unsuccessful, significant amounts may need to be expended in defending such claims, thereby reducing the amounts we may receive from our NIBs and other life settlement interests we may purchase.
Concern also exists regarding the applicability of state insurable interest requirements to the purchase of a policy by an insured or a person with an insurable interest in the life of the insured in circumstances in which the owner of the policy obtains a loan secured by the policy to finance the payment of premiums on the policy, often referred to as a premium finance transaction. A substantial number of the Policies were originated pursuant to premium finance transactions. Neither the Collateral manager nor any other party makes any representations or warranties with respect to the premium finance programs relating to such premium finance transactions or any other documentation relating to such premium finance transactions. While it is generally accepted by state law that an individual has an insurable interest in his or her own life, it is possible that a court might construe a premium finance transaction as an attempt to evade the requirement that an insurable interest exist at the time an insurance policy is issued. If the borrower in such a transaction is found to be acting, in fact, on behalf of a premium finance company to procure an
insurance policy, it is possible that a court might find that the real party in interest is the premium finance company, which by itself would not have an insurable interest sufficient to support the insurance policy. As a result, the insurance policy may be void or subject to attack, which could diminish the value of the policy. States have varying precedent on this subject. California and New York have case law that is very favorable to the policy owner (see Lincoln v. Jack Teren and Jonathan S. Berck, as trustee of the Jack Teren Insurance Trust (Superior Court of the State of California, San Diego) and Alice Kramer v. Lockwood Pension Services, Inc., et al., (United States District Court Southern District of New York)). These courts have held life insurance policies to be enforceable even where the policies were clearly purchased with an intent to sell the policies in the future. Florida and Delaware have case law that is more favorable to the insurance carrier (see PrucoLife Insurance Company v. Steven M. Brasner, et. al. (US District Court Southern District of Florida) and PHL Variable Insurance Co. vs. Price Dawe, (Supreme Court of Delaware)). These courts of invalidated policies where the original policy owners financed the policies and did not intend to purchase the policies with their own money and further intended to ultimately sell the policies in the life settlement markets.
Also, in every state that has addressed the question other than New York and Michigan, the expiration of an insurance policys contestability period may not cut off the insurers ability to raise the insurable interest issue as a defense to the payment of the policy proceeds.
One or more states could adopt legislation that would require a holder of an insurance policy to have an insurable interest in the insured at the time a policy is purchased and at the time of death of the insured. We will not have an insurable interest in the insureds polices acquired by or on our behalf. If such legislation were to be adopted without a grandfathering provision (i.e., so as not to be applicable to insurance policies then in force), then we may be unable to collect the proceeds on the death benefits of the insured persons under our Policies purchased prior to the enactment of such legislation.
Additional insurable interest concerns regarding Policies originated pursuant to premium finance transactions may also result in adverse decisions that could affect our Policies.
The legality and merit of investor-initiated or stranger-originated life insurance products have been questioned by members of the insurance industry, including by many life insurance companies and insurance regulators. For example, the New York Department of Insurance issued a General Counsels opinion in 2005 concluding that a premium finance program that was coupled with the right of the policy owner to put the financed insurance policy to a third party violated New Yorks insurable interest statute and may also constitute a violation of New York States prohibition against premium rebates/free insurance. More recently, many states have enacted laws expressly defining and prohibiting stranger-originated life insurance (STOLI) practices, which in general involve the issuance of life insurance policies as part of or in connection with a practice or plan to initiate life insurance policies for the benefit of a third-party investor who, at the time of the policy issuance, lacks a valid insurable interest in the life of the insured. Under these laws, certain premium finance loan structures are treated as life settlements and, accordingly, may not be entered into at the time of policy issuance and for a two or five year period thereafter, depending on the state. Certain court decision issued over the past few years may also increase concerns with premium financed policies. In one recent decision, the Delaware Supreme Court stated that that the key focus in insurable interest cases is who paid the premiums. While the decision was not issued in connection with a premium financed policy, no assurance can be given that a court would not apply such reasoning to premium financed policies. We cannot predict whether a state regulator, insurance carrier or other party will assert that any of the Policies should be treated as having been issued as part of a STOLI transaction or otherwise were issued in contravention of applicable insurable interest laws. This risk is greater where the insured materially misstated his or her income and/or net worth in the life insurance application. Recent decisions in Florida and Delaware have increased the risk that challenges to premium financed policies may be decided in favor of the issuing insurance company. Moreover, because the Collateral consists of s portfolio of Policies that were originated in the same or a similar manner and in a limited number of states (generally, California and Wisconsin, although the insured may reside in other states), there is a heightened risk that an adverse court decision or other challenge or determination by a regulatory or other interested party with respect to a policy could have a material adverse effect with respect to a significant number of other Policies, including the rescission of Policies or the occurrence of other actions that prevent us from being entitled to receive or retain the death benefit under the related Policies upon the death of the related insured persons. Concerns of such nature could also negatively affect the market value and/or liquidity of the Policies.
Fraud in the application for life insurance can also affect our assets and our interest in our NIBs.
There are risks that the Policies were procured on the basis of fraud or misrepresentation in connection with the application for the policy. Types of fraud that have occurred in applications where carriers have successfully rescinded or voided the policies include, among others, misrepresentations concerning an insureds financial net worth and/or income, need for and purpose of the life insurance protection, health or age and whether he or she is a smoker. Such risk of fraud and misrepresentation is heightened in connection with life insurance policies for which the premiums are financed through premium finance loans or other structured programs. In particular, there is a significant risk that applicants and potential insureds may not answer truthfully or completely questions related to whether the life insurance policy premiums will be financed through a premium finance loan or otherwise, the applicants purpose for purchasing the policy or the applicants intention regarding the future sale or transfer of the life insurance policy. Such risk may be further increased to the extent life insurance agents communicate to applicants and potential insureds regarding potential premium finance arrangements or profits to be made on policies that will be sold after the contestability period. If an insured has made any material misrepresentation on his/her application for life insurance, there is a heightened risk that the insurance company will contest or successfully rescind or void the related policy, although an issuing insurance company may not be able to raise such claims after the expiration of the contestability period. Each of the Policies is beyond the contestability period. Even if such fraud in the application could not serve as a basis to challenge a policy because the contestability period has expired, it may be raised as evidence that the policy was provided as part of a STOLI arrangement.
The risk of litigation with issuing insurance companies could substantially raise our costs of operation and increase or our risk of loss.
Some of the programs relating to the premium finance transactions through which the Policies were originated, or other programs having similar characteristics, may be objectionable to certain life insurance companies and other parties, including certain regulators, on the basis of constituting a means of originating stranger-originated life insurance. Additionally, as described above, life insurance policies that are originated through the use of premium finance programs often present a greater risk of there having been fraud and/or misrepresentations in connection with the issuance of the policies. For these reasons, among others, it is possible that we may become subject to, or may otherwise become affected by, litigation involving one or more Issuing Insurance Companies (either as a plaintiff or a defendant), including claims by an issuing insurance company seeking to rescind a policy prior to or after the death of the related insured. Moreover, such risk may be enhanced with respect to an issuing insurance company that is experiencing financial difficulty, since a successful claim by an issuing insurance company could reduce its financial liabilities. In the event any litigation was to occur, we would bear the costs of defending against the litigation, and would be unable to predict its outcome, which could include our losing our right to receive (or retain) the proceeds otherwise payable under one or more of the Policies.
Contestability of life insurance Policies is a further risk that can result in the loss of the benefits on Policies and have adverse consequences on our results of operation.
The significance of the risk that an issuing insurance company may seek to rescind one or more Policies depends on whether the issuing insurance company is barred from bringing a rescission action by operation of an incontestability clause contained therein or contestability limitations applicable as a matter of state law. Each life insurance policy, in accordance with laws adopted in virtually every state in the United States, contains a provision that provides that, absent a failure to pay premiums, a policy shall be incontestable after it has been in force during the lifetime of the insured for a period of not more than two years after its date of issue. However, some states recognize an exception to incontestability where there was actual fraud in the procurement of the policy. A new contestability period may also arise in connection with information provided on any application for reinstatement of a life insurance policy following lapse of a policy due to non-payment of premiums, or an application for an increase in policy benefits. These events could prove to be adverse to us and our life settlement interests if the Policies are contested and the issuing insurance company is successful in any such claim.
Our longevity assumptions may prove to be inaccurate, and our interests in our NIBs and any other life settlement interests could lose value or be lost because we may not have the funds to pay required premiums beyond what was anticipated in these assumptions.
In addition to risks in the manner in which the Policies were originated, another principal risk related to ownership of the Policies, and consequently to us and investors in our common stock, is the uncertainty regarding the date of death of an insured with respect to a policy. Life expectancies are projected from the medical records of the insured and actuarial data based upon the historical experience of similarly situated persons. It is impossible to predict with certainty any insureds life expectancy. We have and will base our longevity assumptions on the reports of third-party life expectancy providers, among whom there is no uniformity of assumptions, approach or procedure. Also, there are significant disputes among third-party life expectancy providers regarding the mortality rate relating to certain disease states and the efficacy of certain treatments. Many of these life expectancy providers have revised their methodologies resulting in increased longevity estimates. On January 22, 2013, 21st Services LLC announced a significant revision in their methodologies. These changes in methodologies may have reduced the internal rate of return on the Policies and could cause increased difficulty in financing premiums. The Loan Facility requires that certain loan to value ratios be maintained and decreases in policy values could result in violations of these provisions. There can be no assurance that additional revisions extending predicted life expectancies will not be forthcoming, exacerbating these risks.
We rely primarily on four different life expectancy providers, 21st Services LLC, American Viatical Services LLC, Fasano Associates and EMSI. It is somewhat unclear how the changes in the 21st Services methodology will impact our current or future portfolio purchases. If the changes are significant, it should lower prices for future NIBs (to our benefit), but could also lower the value of our current NIBs portfolio due to the lower resulting present value of the death benefits forecasted to be paid at later dates due to the life expectancy changes. The existing NIBs portfolio should not be materially impacted by the changes in the 21st Services methodology in the short term because the financing is locked in for four to five years. Further, the remaining three life expectancy providers have not made changes that would impact the value of the Policies, which provides stability. Life expectancy changes are hard to predict. This is one of the factors we considered when utilizing the MRI, which lessens the impact of life expectancy variances by guaranteeing certain minimum levels of payments when the Policies do not mature as expected.
Some factors that may affect the accuracy of a life expectancy report or other calculation of the estimated length of an individuals life are:
the experience and qualifications of the medical professional or life expectancy company providing the life expectancy estimate;
the completeness and accuracy of medical records received by the life expectancy company;
the reliability of, and revisions to, actuarial tables or other mortality data published by public and private organizations or developed by a life expectancy company and utilized by its medical professionals;
the nature of any illness or health conditions of the insured disclosed or undisclosed;
changes in living habits and lifestyle of an insured and medical treatments, medications and therapies available to and used by an insured; and
future improvements in medical treatments and cures, and the quality of medical care the insured receives.
If the insured lives longer than any or all of the life expectancy appraisals predict, then the amounts available to us on our NIBs or other life settlement interests could be diminished, perhaps significantly, due to the additional time during which premiums will have to be paid in order to keep the related policy in force, the longer period that will elapse before any death benefits are paid on the related policy and the longer the time in which our ancillary operating, financing and servicing costs will be incurred. If the period for too many Policies exceeds beyond the maturity date for our Policies, then our interests in the Policies may have to be liquidated instead of receiving the related death benefits, and the market value of such Policies will necessarily be significantly less than the related death benefits.
Increases in cost of insurance could reduce our estimated returns and lower our revenues.
Insurers pass on a portion of their expenses to operate their business and administer their life insurance policies in the form of policy charges borne by each policyholder. In the event an insurer experiences significantly higher than anticipated expenses associated with operation and/or policy administration, the insurer has the right to increase the charges to each of its policy owners. In the event of material increases to the policy charges, it is possible that additional premium payments will be required to maintain the policy in force. While the increased cost of maintaining the affected Policies has been taken into account in our Servicers projection of premiums on the portfolio, there can be no assurance that there will not be additional increases nor can there be any assurance that premiums on other Policies will not be increased. No assurance can be given that we will have sufficient funds available to pay all premiums on the Policies if policy premiums increase.
The lapse of Policies will result in the entire loss of our interest in those particular Policies.
We will be required to make premium payments on the Policies in order to keep them in force. These payments generally will be made from amounts available to the Lux Sarls pursuant to the Loan Facility, Death Benefits, and MRI Payments. If there are insufficient funds available for this purpose or if we (or the Servicer of the Policies) does not pay premiums on a policy in a timely manner, the policy could lapse and the value of the asset could be lost.
There is poor liquidity in the secondary market for life insurance and life settlements.
The secondary market for life insurance and life settlements is relatively illiquid, and it is often difficult to sell Policies or interests in Policies at attractive prices, if at all. The ability to sell Policies may be made even more difficult due to the nature in which the Policies were originated, especially with respect to policies where the premiums were financed by the original owner, and the increased risk associated with holding such Policies. The Collateral manager may be limited in its ability to liquidate assets if it needs to do so in order to raise funds to pay premiums or otherwise. We may experience a loss (including a total loss) if Policies must be liquidated under less than optimal circumstances.
Inflation and interest rate risk and their effect on the Policies.
If interest rates increase, the value of the Policies is likely to decrease. The market value of a policy is based, in large part, on the estimated discounted value of future cash flows from the policy, including death benefits, minus the estimated discounted value of future premiums due on, and other costs of maintenance of, the policy. Also, if the interest rates used to determine the market value of a policy change, the present value of the policy may also change. Generally, if interest rates increase, the present value of a life insurance policy decreases. If a policy holder is forced to sell a policy in a higher interest rate environment, the market price for the Policies may be less than the price at which such policy was acquired.
Carrier credit risk can adversely affect our interest in our NIBs or other life settlements.
We will be subject to the credit risk associated with viability of the issuing insurance company. The insolvency of an issuing insurance company or a downgrade in the ratings of an issuing insurance company could have a material adverse impact on the value of the Policies issued by the issuing insurance company, the collectability of the related death benefits and the ability of the issuing insurance company to pay the cash surrender value or other amounts agreed to be paid by the issuing insurance company. Any such impairment of the claims-paying ability of the issuing insurance company could materially and adversely affect the value of the Policies issued by the issuing insurance company, the ability of the policy holder to pay the premiums due on other Policies and our ability to pay any required policy premiums, fees and expenses of the service providers and our other expenses.
The inability to keep track of the insureds could keep us from updating the medical records of the insured.
It is important for the servicer to track the health status of an insured and keep information current, which is done by contacting the insured and/or other designated persons and obtaining updated medical records from an insureds physician. There are significant U.S. federal and state laws relating to privacy of personal information that affect the operations of the servicer and its ability to properly service the Policies, especially with regard to obtaining current information from an insureds physician.
Under the Health Insurance Portability and Accountability Act (HIPAA), the federal law that governs the release of medical records from medical record custodians, an insured may revoke his or her authorization for previously authorized third parties to receive medical records at any time, leaving the servicer unable to receive additional medical records.
The servicer may have to rely on a third party to track an insured, especially if states continue to adopt laws that would limit the ability of person other than a licensed life settlement provider or its authorized representative to control insureds for tracking purposes, and the servicer may lose contact with such insured. For example, the insured may move and not notify the servicer or any other third party that has authority to contact the insured. The servicer attempts to maintain contact information for the insured and/or one or more close family friends or relatives whenever possible so it can maintain contact with the insured. Additionally, the servicer subscribes to various databases that use public records and other information to track individuals. The servicer also subscribes to death notification services which use Social Security and public records information to notify the servicer if an insured has passed away so that it can begin the process of obtaining a death certificate and arranging for the payout of the policy. Changes adopted last year to the Social Security Administrations Death Master File have resulted in the elimination of many state records that were previously included in the Death Master File. The number of new records being added to the Death Master File has been reduced by approximately 40%. Thus, it has become necessary to enhance alternative methods for learning of an insureds death. On average, it now takes longer to learn about an insureds death as compared to periods prior to the changes in the Death Master File.
Despite these various tracking methods, it is still possible for the servicer to lose contact with an insured, making any additional updates of medical condition for the insured impossible. There can also be no assurance that the servicer will learn of an insureds death on a timely basis. Delays in receiving insurance proceeds result in a decrease in the death benefit.
Lost insureds can result in a delay or a loss of an insurance benefit that would have a negative effect on our revenues and prospects.
Occasionally, the issuing insurance company may encounter (or assert) situations where the body of the insured or reasonable other evidence of death cannot be located and/or identified. For example, the insured may have been lost at sea and there may not be proof of death available for several years or at all. Alternatively, the fact that the original beneficiaries no longer have any financial interest in a claim under the policy may mean that the issuing insurance company faces practical obstructions to recording accurately and in a timely manner the death of the insured. In the event of a lost insured, the death claim may be delayed for up to seven years by the issuing insurance company. Under these circumstances, typically, the claim will then be paid with interest from the date that the insured was originally presumed lost. Nonetheless, it remains possible that it will be difficult or impossible to locate and/or identify an insured to establish proof of death and, as a result, the related issuing insurance company may significantly delay (but not ultimately avoid) payment of the underlying death benefit. This delay could result in a longer than anticipated holding period for a policy which, in turn, could result in a loss to us.
The death of an insured must have occurred to permit the servicer to file a claim with the issuing insurance company for the death benefit. Obtaining actual knowledge of death of an insured, as discussed above, may prove difficult and time-consuming due to the need to comply with applicable law regarding the contacting of the insureds family to ascertain the fact of death and to obtain a copy of the death certificate or other necessary documents in order to file the claim. The death benefit typically increases subsequent to death by an interest rate that is less than the Senior Loan; thus, the policy proceeds become less valuable as time passes.
U.S. life settlement and viatical regulations may result in our being determined to have violated applicable law.
The purchase and sale of insurance policies in the secondary market from the policys original owner and among secondary market participants is subject to regulation in approximately 45 states and Puerto Rico. The scope of the regulations and the consequences of their violation vary from state to state. In addition, within a given state, the regulations may vary based upon the life expectancy of the insured at the time of sale or purchase. In many states, a policy on an insured with a life expectancy of two years or less is referred to as a viatical settlement or a
viatical. A policy on an insured with a life expectancy of more than two years is referred to as a life settlement. The policy holders have not, and do not intend to, purchase viatical settlements and should not be subject to the regulatory regimes that govern these policies. However, the states vary in their technical definitions of viatical settlements and life settlements, and state insurance regulators, who are charged with interpretation and administration of insurance laws and regulations, vary in their interpretations. Therefore, despite our expectations, it may be possible that under the rules of a particular state a policy underlying our NIBs that is not commonly thought of as a viatical settlement may meet the technical definition thereof. Engaging in the purchase or sale of life settlements or viatical settlements in violation of applicable regulatory regimes could result in fines, administrative and civil sanctions and, in some instances, criminal sanctions. United States and state securities laws could have an adverse effect on our ability to liquidate any Policies we believe should be sold.
It is possible that, depending on the facts and circumstances attending a particular sale of a life insurance policy, a sale could implicate state and federal securities laws. The failure to comply with applicable securities laws in connection with dealings in life settlement transactions could result in fines, and administrative and civil sanctions and, in some instances, to criminal sanctions. In addition, parties may be entitled to a remedy of rescission regarding such transactions. State guaranteed funds give some protection for payments under Policies, but no assurance can be given that we will benefit from them.
State protections for the insolvency of an insurance company are limited
With respect to the Policies, the payment of death benefits by issuing insurance companies is supported by state regulated reserves held by the issuing insurance companies and, under certain circumstances and in limited amounts that vary from state to state, state supported life and health insurance guaranty associations or funds. However, such reserves and guaranty funds, to the extent in existence, may be insufficient to pay all death benefits under the Policies issued by an issuing insurance company if such issuing insurance company becomes insolvent. The obligation of a state guaranty fund to make payments may not be triggered in certain circumstances. In addition, in the event of an issuing insurance company insolvency, courts and receivers may impose moratoriums or delays on payments of cash surrender values and/or death benefits. In addition, the benefits of most or all of such state supported guaranty funds are capped per insured life (irrespective of the number of policies issued and outstanding on the life of such individual), which caps are generally less than the net death benefits of the insurance policies. Guaranty fund laws often include aggregate limits payable with respect to any one life across different types of insurance policies, generally $300,000 to $500,000 depending on the state. Most state guaranty funds are statutorily created and the legislatures may amend or repeal the laws that govern them. In addition, most state guaranty fund laws were enacted with the stated goal of assisting policyholders resident in such states. Therefore, non-resident policyholders, beneficiaries, and claimants may not be covered or may be covered only in limited circumstances. As a result, state guaranty funds will likely provide little protection to us in the event of the insolvency of an issuing insurance company.
We may incur liability for failing to comply with U.S. privacy safeguards.
Both federal and state statutes safeguard an insureds private health information. In addition, insureds frequently have an expectation of confidentiality even if they are not legally entitled to it. If any of the Collateral manager, the Administrator, the Trustee, the Servicer, the Securities Intermediary, or the Custodian (each, a service provider) properly obtains and uses otherwise private health information, but fails to maintain the confidentiality of such information, such service provider may find itself the recipient of complaints from the affected individuals, their families and relatives and, potentially, interested regulatory authorities. Because of the uncertainty of applicable law, it is not possible to predict the outcome of such disputes. Additionally, it is possible that, due to a misunderstanding regarding the scope of consents that a service provider possesses, such service provider may request and receive from health care providers information that it in fact did not have a right to request or receive. Once again, if a service provider finds itself to be the recipient of complaints for these acts, it is not possible to predict what the results will be. This uncertainty also increases the likelihood that a service provider may sell, or cause to be sold, Policies in violation of applicable law, which could potentially result in additional costs related to defending claims or enduring regulatory inquiries, rescinding such transactions, possible legal damages and penalties and probable reduced market value of the affected Policies. Each of the foregoing factors may delay or reduce our return on Policies, and we may suffer a loss (including a total loss) on our investment in our NIBs or Policies or other life settlement interests.
Access to accurate and current medical information regarding the insured is necessary to evaluate Policies, but is affected by U.S. privacy concerns.
The value of a life insurance policy underlying our NIBs is inherently tied to the remaining life expectancy of the insured and information necessary to perform this valuation may not be available at the time of purchase or sale. For example, if a policy is being purchased in the secondary market from an entity that had earlier purchased the policy directly from the insured, it is likely that the insured made his or her medical records available at the time of his or her sale of the policy to the initial purchaser. However, if necessary consents were not obtained from the insured it is possible that this information cannot legally be made available at the time of the subsequent purchase of the policy. If it is legally available to the subsequent purchaser, it is possible that such information is outdated and of little utility for a current evaluation of the remaining life expectancy of the insured. Even if the insured made available to the then owner of the policy a general consent that purports to give the owner of the policy the right to subsequently request and receive medical information from the insureds health providers, it is possible for the insured, in the interim, to have revoked such consent. Likewise, it is possible that under applicable law, the consent expires after a certain period of time. Even if the consent is effective, without the then cooperation of the insured it may be difficult to convince the insureds health care providers of the consents efficacy and as such they may be reluctant to release medical information. These impediments to accessing current medical information can prove to be a significant obstacle to the proper valuation of a policy at the time of either the policys purchase or sale.
Changes to foreign banking laws and regulations or decreased lending capacity for life settlements could have a negative impact on our ability to obtain loans with respect to our life insurance products and limit our ability to acquire additional life insurance products.
Our current business model relies on the availability of the Loan Facility. In the event of adverse regulatory changes or reduced capacity for life settlement lending, we could experience the same liquidity issues that have plagued other market participants. Changes to the Senior Lenders loan to value requirements and changes to regulatory large exposure limits could also result in liquidity issues for us. As mentioned above, changes in life expectancies could cause decreases in policy values, which could result in loan to value violations and violations of large exposure limits. Either violation could result in need to provide liquidity to pay down the loan balances.
The availability of MRI coverage is a condition of our business model and assumptions, which, if unavailable, will substantially increase our risk of failure.
The MRI is a relatively new product, and there are no guarantees that the MRI Providers will be able to meet our coverage needs. Without the MRI coverage, we will have limited options when the Senior Loans mature (in four to five years) because we will have lost the reinsurance coverage to be provided by the MRI Providers. The Senior Lender could demand repayment and all future premiums, which could result in our loss of all of our investment in the NIBs. We may be unable to find alternate financing. See the risk factor A demand for payment of the Senior Loans and a foreclosure by the Senior Lender on the Policies could result in the loss of our entire investment in the NIBs, above.
ITEM 2: PROPERTIES
We currently lease a small space of approximately 200 square feet located at 4626 North 300 West, Suite 365, Provo, Utah 84604, on a month to month arrangement for $1,000 per month; and we also lease approximately 6,000 square feet of office space located at 20 Pacifica, Suite 1010, Irvine, California 92618, for $12,000, on a month to month basis, $6,000 of which is billed to Del Mar and Europa and is added to the Cash Payment and expenses due under the Del Mar ATA. See Part I, Item 1. The Provo, Utah, facilities are presently our principal executive offices and our current place of business; and the Irvine facilities are located near the Servicer of the Policies underlying our NIBs. We are considering various factors about our intended industry of business to determine if moving our principal executive offices to another location would be beneficial to us and our business and business relationships. These factors presently include proximity and convenience of access to the services provided by the Servicer, the servicers of the life insurance policies underlying our net insurance benefits, and our general counsel. The Servicer of the current portfolio of policies underlying the Companys NIBs is based in Irvine, California, and Lisa Fuller, Esq., our in-house general counsel, resides in Irvine, California.
ITEM 3: LEGAL PROCEEDINGS
Except as indicated below, and to the best of our knowledge, there are no legal proceedings pending or threatened against us; and there are no actions pending or threatened against any of our directors or officers that are adverse to us.
On May 13, 2014, we served with a summons and complaint filed in the Third Judicial District Court in Salt Lake County, State of Utah, Case No. 140405819, wherein the plaintiff named us and another unrelated stockholder as defendants, seeking to void the replacement of a stock certificate alleged to be owned by the plaintiff and acquired for value and that was held of record in the name of the unrelated stockholder defendant. The unrelated stockholder defendant had filed a lost certificate affidavit with our transfer agent claiming that he had lost the stock certificate alleged to be owned by the plaintiff and had the stock certificate replaced with a new stock certificate, also in his name. The plaintiffs complaint seeks damages of $74,255 or the estimated market value of the shares represented by the stock certificate or the re-issuance of the shares to the plaintiff, together with other unspecified damages against us, by reason of the replacement of the stock certificate that was in her possession, claiming that she is a protected purchaser under Utah law, meaning that she acquired the shares for value and without notice of an adverse claim and obtained control of the security. The plaintiff also seeks similar damages against the unrelated stockholder defendant. The parties are currently in negotiations to resolve this matter; however, no assurance can be given that a resolution will be reached without further litigation and expense. We believe that its maximum liability under this action is the value of the shares sought to be replaced or the amount claimed by the plaintiff, together with costs of court and interest. If the value of the shares increases before the action is resolved, we could also be liable for the additional increased value of the shares. The replaced shares issued to the unrelated stockholder defendant were issued by our transfer agent without our consent and a surety bond was provided by the unrelated stockholder defendant at the time of the replacement of the stock certificate that was in the possession of the plaintiff. We have filed and answer and counterclaim in this matter, and we are presently attempting to resolve the dispute between the parties and settle this matter.
ITEM 4: MINE SAFETY DISCLOSURES
We had 93 stockholders of record as of July 9, 2014, and an indeterminate number of stockholders who hold shares in street name.
We do not have any securities authorized for issuance under any equity compensation plans. The stock options described below under the heading Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities were granted subject to such terms and conditions as the Board of Directors may set, in conjunction with a planned adoption of a stock option or similar plan in the near future for the benefit of employees, officers and directors and to maintain and attract key personnel.
The follow table and related footnotes contains information about all sales of unregistered securities by us during the fiscal years ended March 31, 2014, and 2013. All of these securities were issued pursuant to exemptions from registration under the Securities Act under Sections 4(a)(2) thereof and SEC Regulation D and Rule 506(b) promulgated under Regulation D.
37,037,369 shares of our common stock were issued under the ANEW LIFE Merger, 33,275,000 of which were subscribed to by founders of ANEW LIFE for $0.001 per share; and 3,762,369 shares of which were purchased in a private placement of ANEW LIFE shares at a purchase price of $1.0294 per share. Founding ANEW LIFE stockholders owning approximately 33,152,500 of these shares have executed Lock-Up/Leak-Out Agreements that provide for an 18 month Lock-Up Period and an 18 month Leak-Out Period where each stockholder subject to a Lock-Up/Leak-Out Agreement will be allowed to sell an amount of such stockholders common stock equal to 0.0025% (1/4%) of our outstanding securities (to be defined for all purposes thereof as the amount indicated in our most recent filing with the SEC) during each of the next four successive quarterly periods following the Lock-Up Period; 0.005% (1/2%) of our outstanding securities during each of the next four successive quarterly periods; and 0.01% (1%) of our outstanding securities during each of the next four successive quarterly periods, all on a non-cumulative basis, meaning that if no common stock was sold during any quarterly period while common stock was qualified to be sold, such shares of common stock cannot be sold in the next successive quarterly period (the Leak-Out Period). Notwithstanding the foregoing, any founding stockholder subject to a Lock-Up/Leak-Out Agreement that owns less than 100,000 shares of common stock shall only be subject to the 18 month Lock-Up Period., which provision relates to holders of 377,500 of the shares. The Lock-Up/Leak-Out Agreements were a condition of the Merger. The provisions of the Lock-Up/Leak-Out Agreement can be waived or modified by the Board of Directors.
The stockholders who purchased shares of ANEW LIFE in its private placement were accorded piggy-back registration rights on 25% of their respective shares. We assumed these obligations under the Merger.
We granted 2,185,000 stock options to directors, officers, consultants and employees, the terms and conditions of which are to be consistent with a yet to be adopted equity stock option or similar plan. For additional information on these stock options, see Footnote (12) of our audited consolidated financial statements that accompany this Annual Report.
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, we raised $11,792,500 in the sale of 2,358,000 shares of our common stock at $5.00 per share. We paid $841,651 in introduction fees; and we issued two year warrants to acquire 70,000 shares of our common stock at an exercise price of $5.00 per share.
There were no proceeds received by us during the fiscal years ended March 31, 2014, and 2013, from the sale of registered securities.
During the fiscal years ended March 31, 2014, and 2013, there were no purchases of equity securities by us; or by our affiliates, except for purchases from us.
ITEM 6: SELECTED FINANCIAL DATA
Not required of smaller reporting companies.
ITEM 7: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
When used in this Annual Report, the words may, will, expect, anticipate, continue, estimate, project, intend, and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Annual Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below under Trends and Uncertainties, and also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations. Reference is also made to the caption Forward-Looking Statements at the forepart of this Annual Report, which information is incorporated herein by reference.
Plan of Operations
We are engaged in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies, including notes, drafts, acceptances, open accounts receivable and other obligations representing part or all of the sales price of insurance, life settlements and related insurance contracts being traded in the secondary marketplace, often referred to as the life settlements market. These life insurance interests are anticipated to be held to maturity. Our plan of operation for the next 12 months is to continue the acquisition of these life insurance interests whereby we will acquire the interests in life insurance policies at a discount to their face value for investment purposes. We began purchasing the net insurance benefits in life insurance policies (NIBs) during our fiscal year ended March 31, 2013. This 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, whether through revenues generated from our current interest in the Qualified NIBs we recently acquired in fiscal 2014 or through debt or equity financing. We may be required to expend not less than approximately $33,891,765 over premiums and servicing costs over the next five years to protect our interest in our NIBs, though we have no legal responsibility for these payments.
We currently estimate proceeds of approximately $74,546,743 on the net insurance benefits owned as of March 31, 2014, and acquired from PCH Financial and Del Mar Financial. This amount is based on the estimated proceeds from polices of $211,638,933; less the senior debt outstanding of $31,867,216; including the reductions for the $8,000,000 policy maturity; expected premium payments of
$66,341,026 over the life expectancies; the estimated increase in the net proceeds from premiums on those policies that contain a return of premium provision in the amount of $384,801; and estimated expenses and interest of $39,268,749 over the term of the Senior Loans.
We use an estimation methodology to project cash flows and returns as presented. The estimation model required many assumptions, including, but not limited to the following: (i) an assumption that the distinct number of lives in the portfolio would exhibit similar experience to a statistically diverse portfolio based upon which the 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 the 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 the portfolio; and the senior lending fees, MRI fees, and insurance, servicing and custodial fees do 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 Sundances initial assumptions. These portfolios contains only 62 policies and 32 individual insureds, though insurance rating agencies have stated that at least 1,000 lives are required to achieve any actuarial stability. Many risk factors beyond these assumptions may result in our expectations being incorrect, as outlined under Part I, Item 1A Risk Factors, above; therefore, no assurance can be given that these estimated results will occur.
We advanced payments to purchase future additional life settlement products during the year ended March 31, 2014, and if these life settlement products become Qualified NIBs as defined in our acquisition documents and as discussed in below, we will also utilize the estimation methodology to estimate what our proceeds from these Qualified NIBs may be, all subject to the same assumptions, qualifications and risks referenced above. These life settlement products are included in the estimates above because to the extent that we have been delivered $90.6 million in Qualified NIBs from which such calculations would be made as of the fiscal year ended March 31, 2014.
Results of Operations
Income and Cost 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 are adjusted prospectively.
During the period from April 1, 2013, through December 31, 2013, our investment in net insurance benefits was on non-accrual status. This decision was primarily based on the initial incremental uncertainty experienced by us during our first three quarters of 2014, after closing of the acquisition on the first pool of qualified NIBS. Management concluded these uncertainties were significantly mitigated in the fourth quarter 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. Non-accrual status was removed effective January 1, 2014.
Operating and General & Administrative Expenses
During the years ended March 31, 2014, and 2013, 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 were $2,278,009 and $98,074 during the years ended March 31, 2014, and 2013, respectively. Most of these expenses were professional fees, payroll and travel expenses. Most all of the professional fees were legal and accounting fees related to the preparation and filing of reports with the SEC under the Exchange Act during fiscal 2014, which did not occur in the prior year. Payroll is made up of payroll fees and equity issuances to management, directors and others in the current year.
Other Income and Other Expenses
Other income and expenses consist of interest accrued on the note payable used to purchase the investment in our NIBs. During the years ended March 31, 2014, and 2013, interest expenses have accrued in the amount of $122,452 and $6,577, respectively. We deemed the amendment to the 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 in the year ended March 31, 2014. We had interest income in the amount of $13,788 and $0, respectively.
At March 31, 2014, we had no taxable income.
Liquidity and Capital Resources
From our inception on January 31, 2013 through March 31, 2013, and as of the fiscal years ended March 31, 2014, we incurred net loss of $104,651 and $206,138, respectively. Management has expressed its belief that we need to raise approximately $40 million to $50 million in additional funds through equity or debt financing to continue our business model and to effectively compete in the life settlement industry during fiscal 2015 and beyond. We raised $11,792,500 in our private placement that commenced in April, 2013, with the receipt of a final subscription payment of $700,000 in March, 2014, and the cancellation of two subscriptions for non-payment at June 30, 2014. Our monthly expenses are between approximately $95,000 and $140,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. As of June 30, 2014, we were current in all of our payables, and we had approximately $116,000 in cash, along with a Subscription Agreement executed on June 24, 2014, for $3.3 million to purchase 660,000 shares of our common stock, payable on or before August 15, 2014. We believe we will have adequate cash resources for our estimated monthly expenses through the end of our fiscal year of March 31, 2015, excluding any other acquisitions of additional NIBs and other life settlement products, and assuming payment of this Subscription Agreement.
We have cash assets at March 31, 2014, and 2013, of $375,212 and $545,417, respectively. We have $12,243,411 in investment in NIBs and have advanced $3,584,862 for investment in net insurance benefits. We also had a Secured Promissory Note payable for $2,999,000 related to the $6,299,000 in investment in NIBs, which was amended and determined to be an extinguishment of debt and issuance of new debt. We recorded a gain on extinguishment of $1,672,124. We have only common stock as our capital resource. We will be reliant upon stockholder loans or private placements of equity or debt to fund any future of operations. We have secured no sources of loans. There is no assurance that we will be able to raise any required debt or equity financing.
On April 8, 2013, we approved a private offering of up to 3,000,000 common shares of our common stock, also comprised of restricted securities under SEC Rule 144 to accredited investors only at $5.00 per share. The purpose of the offering was to acquire additional NIBs or other life settlement products. During the year ended March 31, 2014, we had received $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 were issued for cash of $700,000 on July 10, 2014; paid $845,886 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.
For the years ended March 31, 2014 and 2013, we had net cash used in operating activities of $10,471,080 and $3,323,323, respectively. We used $3,584,862 as an advancement to purchase the investment in NIBs under the Del Mar ATA for the year ended March 31, 2014 and used $5,944,411 and $3,300,000 to invest in net insurance benefits and accrued $508,411 and $0 in interest income on investment in net insurance benefits to invest in insurance benefits during the years ended March 31, 2014 and 2013, respectively. Net cash used in investing activities totaled $861,000 and $0 for the years ended March 31, 2014, and 2013, respectively, which represents the issuance of two note receivables to unrelated parties in the amounts of $211,000 and $650,000. Net cash provided by financing activities totaled $11,161,875 and $3,868,740 for the years ended March 31, 2014 and 2013, respectively, which represents the net funds we received from the private placement through March 31, 2014.
At March 31, 2014, we had a long term debt balance of $1,455,904 and a short term related party note balance of $90,000. We may borrow money in the future to finance our future operations. Any such borrowing will increase the risk of loss to the investor in the event we are unsuccessful in repaying such loans.
We may issue additional shares to finance our future operations. Any such issuance will reduce the control of previous investors and may result in substantial additional dilution to investors purchasing shares in any such offering.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements for the two fiscal years ended March 31, 2014, and 2013.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.