Item
1. Business
Organizational
Background
Java
Express, Inc., was organized under the laws of the State of Nevada on December 14, 2001, for the purpose of selling coffee and
other related items to the general public from retail coffee shop locations. These endeavors ceased in 2006, and it had no material
business operations from 2006 until March of 2013. On March 29, 2013, the Company, its newly formed and wholly-owned subsidiary,
Anew Acquisition Corp., a Utah corporation (“Merger Sub”), and ANEW LIFE, INC., a Utah corporation (“ANEW LIFE”),
executed and delivered an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub merged
with and into ANEW LIFE, ANEW LIFE was the surviving company under the merger and became a wholly-owned subsidiary of the Company
on the closing of the merger (the “Merger”). On April 17, 2013, the Company filed a Certificate of Amendment with
the Secretary of State of the State of Nevada to change its name from “Java Express, Inc.” to “Sundance Strategies,
Inc.” Sundance Strategies, Inc. is referred to as the Company, us or we.
Our
Business
We
are currently focused on the business of purchasing residual economic interests in a portfolio of life settlements. A life settlement
is the sale of an existing life insurance policy to a third party for more than the policy’s cash surrender value, but less
than the face value of the policy benefit. After the sale, the new policy holder will pay the premiums due on the policy until
maturity and then collect the settlement proceeds at maturity.
We
currently do not purchase or hold life settlement or life insurance policies but, rather, previously held a contractual right
to receive the net insurance benefits, or NIBs, from a portfolio of life insurance policies held by a third party. These NIBs
represented an indirect, residual ownership interest in a portfolio of individual life insurance policies and they allowed us
to receive a portion of the settlement proceeds from such policies, after expenses related to the acquisition, financing, insuring
and servicing of the policies underlying our NIBs have been paid.
We
were not responsible for maintaining premiums or other expenses related to maintaining the underlying life settlement or life
insurance policies. Ownership of the underlying life settlement or life insurance policies, and the related obligation to maintain
such policies, remains with the entity that holds such policies. However, in the event of default of the owner, the Company may
choose to expend funds on premiums, interest and servicing costs to protect its interest in NIBs, though the Company has no legal
responsibility nor adequate funds for these payments.
NIBs
are generally sold by an entity that holds the underlying life settlement or life insurance policies, either directly or indirectly
through a subsidiary, such an entity being referred to herein as a “Holder.” A Holder, either directly or through
a wholly owned subsidiary, purchases life insurance policies either from the insured or on the secondary market and aggregates
them into a portfolio of policies. At the time of purchase, the Holder also (i) contracts with a service provider to manage the
servicing of the policies until maturity, (ii) consider purchasing mortality re-insurance (“MRI”) coverage under which
payments will be made to the Holder in the event the insurance policies do not mature according to actuarial life expectancies,
and (iii) arranges financing to cover the initial purchase of the insurance policies, the servicing of the life insurance policies
until maturity and the payment of the MRI premiums. The financing obtained by the Holder for a portfolio of life settlement or
life insurance policies is secured by the insurance policies for which the financing was obtained. After a Holder purchases policies,
aggregates them into a portfolio and arranges for the servicing, MRI coverage and financing, the Holder contracts to sell NIBs
related to the policies, which gives the holder of the NIBs the right to receive the proceeds from the settlement of the insurance
policies after all of the expenses related to such policies have been paid. When an insurance policy underlying our NIBs comes
to maturity, the insurance proceeds are first used to pay expenses associated with such policy. Once all of the expenses have
been paid, the Holder will retain a small percentage of the proceeds and then will pay the remaining insurance proceeds to us.
We
began purchasing NIBs during our fiscal year ended March 31, 2013.
Life
Settlements Market
There
are a number of reasons a policy owner may choose to sell his or her life insurance policy. The policy owner may no longer need
or want his or her policy, he or she may wish to purchase a different kind of insurance policy, premium payments may no longer
be affordable or the policy owner may need cash to fund healthcare or other expenses. In particular, policy holders 65 years of
age and older and their families are faced with a variety of challenges as they seek to address their post-retirement financial
needs and selling one’s life insurance policy may provide a unique and valuable financial solution to such challenges. From
the early 2000s through 2008, the market for newly originated life settlements grew from virtually no activity to a peak of an
estimated $12 billion of face value of U.S. life settlement policies settled annually in 2007 and 2008. Economic factors slowed
the growth in 2009, when an estimated $8 billion of face value of U.S. life insurance was settled and growth has continued to
decline since that time. According to a 2015 study done by the insurance research group Conning & Co., investors purchased
$1.7 billion worth of U.S. life insurance face value in 2014, bringing its estimate of the total face value of life settlements
held at year end to just over $32 billion. Looking ahead, however, Conning & Co. projected steady growth in the amount of
face value available for life settlements, though it may take years to re-attract capital to pre-2009 levels to meet that supply.
Regardless, we believe that the supply of policies has the potential to increase over time due to the aging population and increased
awareness of the life settlement market as an alternative to allowing a policy to lapse for little or no value. A report from
the AAP Life Settlement Market Update indicated that internal rates of return for life settlement transactions conducted in 2013
were in the high-teens. Participants in the secondary life settlement market have included major insurance companies which have
purchased available pools of policies for their own investment, portfolio aggregators, private equity funds, and independent third-party
investors.
Our
Business Model
Predictability
of Future Cash Flows. Predictability of future cash flows is one of the biggest challenges facing companies engaged in
the life settlements industry. If a Holder is not able to adequately predict future cash flows and does not continually have enough
cash to make a policy portfolio’s premium payments, the policies in the portfolio may lapse and we may lose our right to
receive the proceeds from the settlement of the policies at maturity. Prediction of future cash flow requires the use of financial
models, which rely on various assumptions. These assumptions include the amount and timing of projected net cash receipts, expected
maturity events, counter party performance risk, changes to applicable regulation of the investment, shortage of funds needed
to maintain the asset until maturity, changes in discount rates, life expectancy estimates and their relation to premiums, interest,
and other costs incurred, among other items. These uncertainties and contingencies are difficult to predict and are subject to
future events that may impact our estimates and interest income. As a result, actual results could differ significantly from those
estimates. If projections of life expectancies are wrong, Holders may be obligated to service the related insurance policies for
longer than expected, thereby increasing their costs and reducing the net insurance benefit available to us.
Financing
a portion of the purchase price. Financing a portion of the purchase price of a policy portfolio allows the Holder to
leverage its investment and create a larger and diversified policy portfolio. When making an investment in a portfolio of life
insurance policies, a Holder utilizes actuarial tables to determine when the policies in the portfolio can be expected to come
to maturity. However, the Holder assumes the risk that the policies in the portfolio will come to maturity later than was predicted
by the actuarial tables used at the time of purchase. The life expectancies provided by the actuarial tables are based on actual
death rates in large populations of individuals with similar demographic characteristics. Thus, the more policies underlying a
policy portfolio, the more reliable the use of actuarial tables becomes. In other words, the larger the policy portfolio, the
more closely the underlying insureds would be expected to, on average, follow actuarial predictions and the lower the risk associated
with future cash flows will be. Because we want predictability and stability in the cash flows generated by our NIBs, we have
only purchased NIBs where the Holder of the underlying policy portfolio has maximized its investment in the policy portfolios
by financing a portion of the purchase price.
Financing
premium payments. Holding NIBs where the Holder of the policy portfolio has ensured its ability to pay policy premiums
by financing such premium payments and ensured the predictability of future cash flows by obtaining MRI provides us with a more
stable cash position and enables us to focus on long term growth.
Mortality
Re-Insurance (MRI) Coverage. Because of the uncertainty of maturity of insurance policies, the Holders had, on occassion
previously contracted with an insurance provider for MRI coverage. We do not have a contract with the MRI provider and the MRI
provider has not provided any insurance to us but, rather, provided MRI coverage to the various Holders of life insurance policies
underlying our NIBs. MRI coverage typically provides guaranteed cash flow based on the expected death benefits of the pool of
policies being insured calculated at the issuance of the coverage and thereby provides credit enhancement to any bank providing
financing to a Holder. The term of the MRI policies is usually 15 years. Any claims paid by the MRI to the Holder must be paid
back to the MRI provider out of death benefit proceeds from the pool of policies being insured when such death benefit proceeds
are eventually received. This enables the Holder to receive a smoother cash flow from a pool of policies over time and avoid “lumpiness”
in the cash flows that would otherwise be more pronounced in the absence of the MRI coverage. Any claim payment balances would
accrue interest, typically at a spread of 250 basis points over LIBOR, to the extent they remain outstanding. The MRI coverage
is obtained by paying an MRI premium, typically at equal to 2% of the cumulative death benefit of the covered life insurance policies,
at the outset of the coverage and, depending on the specific terms of the MRI policy, possibly an additional premium amount at
a predetermined time during the effective coverage period (the “Commitment Fee”), which is typically 1% of the cumulative
death benefits of the covered policies. The insurer under the MRI policy typically must approve the sale of any life insurance
policies covered by the MRI policy if such sale does not result in the full repayment of any outstanding recovery amounts. It
is our understanding that there is only one MRI Provider. While the MRI coverage is relatively expensive, we believe that insurance
policies underlying NIBs that are covered by MRI have less volatility, are more liquid and should achieve higher values for purposes
of financing and secondary market sales.
Financing
a policy portfolio’s premium payments gives a Holder additional cash needed to satisfy the premium obligations of its portfolio.
In addition, obtaining MRI increases the probability that the Holder will receive future cash flows in the event the underlying
insureds live longer than expected. This combination provides the Holder with sufficient liquidity to stabilize its cash position
and, in turn, increases the likelihood that we will receive the NIB we have purchased related to the Holder’s portfolio.
Life
Settlement Financing Market
Because
of the uncertainty of maturity of life insurance policies, financing for the purchase and servicing of life insurance policies
has historically been difficult to secure. The lender (the “Holders’ Lender”) has provided financing to the
Holders to finance the purchase of the insurance policies underlying our NIBs. To be clear, the Holders’ Lender does not
provide any financing to us but, rather, provides financing to the various Holders of life insurance policies underlying our NIBs.
We have no contract, arrangement or understanding with the Holders’ Lender. The Holders’ Lender contracts with the
Holders for financing to purchase the insurance policies underlying our NIBs. We believe there are few lenders within this market.
The failure of the Holders’ Lender or other lenders to make loans to Holders may result in Holders’ inability to provide
NIBs to us for purchase and our business model of purchasing and holding NIBs will suffer substantially. We do not have a direct
contractual relationship with the Holders’ Lender.
The
loans from the original Holders’ Lender had a term of 4 to 5 years at an interest rate between 4.5% and 8% compounded quarterly
(12.1% in the event of default) and was secured by the life insurance policies owned by the Holder. During October 2017, the entities
completed a refinancing of the loans that had matured. The agreements were with a new senior lending facility who previously provided
MRI for the underlying policies. Between May 2018 and July 2018, the Holders entered into agreements that completed a strict foreclosure
transaction that transferred the underlying life insurance policies relating to the Company’s NIBs to the lenders in full
satisfaction of the loan obligation.
Our
NIB Purchasing Guidelines
Our
objective is to acquire NIBs based on insurance policy portfolios that will produce returns in excess of the purchase, financing,
servicing and insuring costs incurred by the Holder and hold those NIBs to maturity. The guidelines we generally follow regarding
the purchase of NIBs include:
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the
insured is 75 years old or older;
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all
NIBs relate to U.S. Universal Life Insurance policies;
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all
underlying insurance policies have qualified for financing that will cover at least four years of premiums following the date
on which we acquire the NIBs;
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each
policy must first be reviewed by the legal due diligence team of the lender providing financing for the acquisition and servicing
of the life insurance policies, second by the MRI company’s due diligence team and then finally approved by our due
diligence processes;
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all
policies must qualify for MRI; and
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the
projected proceeds payable on each life insurance policy upon the death of the underlying insured are projected to exceed
the costs to service the life insurance policies, amounts due to creditors secured by such life insurance policy, such as
the Holders’ Lender or the MRI provider, other costs and fees incurred by the Holder and the percentage of the remaining
insurance benefit retained by the Holder before payment is made to us in satisfaction of our NIBs.
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Competition
We
are not aware of any other company engaged in the business of buying NIBs. However, we encounter significant competition in the
life settlements industry generally from numerous companies, including hedge funds, investment banks, secured lenders, specialty
life insurance finance companies and life insurance companies themselves who purchase life settlements. Many of these competitors
have greater financial and other resources than we do and may have significantly lower cost of funds because they have greater
access to insured deposits or the capital markets. Moreover, some of these competitors have significant cash reserves and can
better fund shortfalls in collections that might have a more pronounced impact on companies such as ours. They also have greater
market share. For example, Berkshire Hathaway purchased a portfolio of $300 million (face value) in life insurance policies in
2013. According to The Deal Pipeline, total life settlement transactions grew to $2.57 billion (face value) in 2013. In 2014 transaction
volumes were reported higher by market participants in all major segments of the industry and Conning & Co. forecast an average
annual gross market potential for life settlements of $180 billion from 2014-2023, with an average volume of approximately $3
billion per year in life settlement transactions.
A
report from the AAP Life Settlement Market Update indicated that internal rates of return for life settlement transactions conducted
in 2013 were in the high-teens, an attractive return at a time when fixed income and other hedge positions were delivering minimal
rates of return. In the event that certain better-financed companies make a significant effort to compete against our business
or the secondary market in general, prices paid for existing portfolios of life insurance policies may rise and our ability to
purchase NIBs or realize a return on NIBs may decline. In addition, recent shrinking of the market for life settlements has resulted
in fewer available pools of insurance policies. As a result, price competition for the remaining pools has increased. Our limited
resources prohibit us from competing for larger pools. These factors could adversely affect our profitability by reducing our
return on investment or increasing our risk.
Our
Current NIB Portfolio
During
October 2017, the Holders of the life settlements completed a refinancing of the loans that had matured. The agreements are with
a new senior lending facility who previously provided MRI for the underlying policies. Between May 2018 and July 2018, the Holders
entered into agreements that completed a strict foreclosure transaction that transferred the underlying life insurance policies
relating to the Company’s NIBs to the lenders in full satisfaction of the loan obligation. As a result of the foreclosure,
the Company has lost its position in the residual benefits of the policies and reduced the carrying value of the NIBs at March
31, 2018 to zero.
Employees
On
March 31, 2018, we had two full-time employees: Randall F. Pearson, our President; and Lisa L. Fuller, Esq., our general legal
counsel. Effective January 1, 2018, Matthew Pearson resigned his position as the Company’s Chief Operations Officer to pursue
other opportunities. As of the date of this filing, no replacement has been designated to fill his position.
Available
Information
Our
website address is www.sundancestrategies.com. We make available free of charge on the Investor Relations portion of our website,
our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Item
1A. Risk Factors
We
have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition,
results of operations and future growth prospects. Our business could be harmed by any of these risks. The risks and uncertainties
described below are not the only ones we face. The trading price of our common stock could decline due to any of these risks,
and you may lose all or part of your investment. In assessing these risks, you should also refer to other information contained
in this Form 10-K, including our consolidated financial statements and related notes.
Risk
Factors relating to Our Company
We
have historically used significant amounts of cash in operating activities since our inception and may continue to use significant
amounts of cash for operating activities in the foreseeable future.
We
have historically used substantial amounts of cash in operating activities. We are not responsible for maintaining any premiums
or other expenses related to maintaining the underlying life settlement or life insurance policies. Ownership of the underlying
life settlement or life insurance policies, and the related obligation to maintain such policies, remains with the entity that
holds such policies. However, in the event of default of the owner, the Company may be required to expend funds on premiums, interest
and servicing costs to protect its interest in NIBs, though the Company has no legal responsibility nor adequate funds for these
payments.
Our
inability to access capital may limit our ability to adequately fund our operations. In order to continue to purchase NIBs, we
will need to raise substantial amounts of capital. Absent additional financing, we will not have the resources to execute our
business plan.
In
the past, we have relied on cash provided by financing activities, including amounts received under notes payable and lines-of-credit
with related parties or the 8% convertible debenture agreement entered into on June 2, 2015. If we fail to make timely repayments,
our repayment obligations may be accelerated, which may force us to liquidate some or all of our NIBs in circumstances unfavorable
to us. Our default under these obligations may also limit our ability to obtain future financing from related or third parties.
Historically,
99% of our total assets are interests in life settlement policies, resulting in a lack of diversification of assets and concentration
in assets that are subject to significant fluctuations in value.
Although
we currently have no interest in life settlement policies, generally speaking, our investment in NIBs is usually the primary asset
on our balance sheet. Life settlement products like NIBs are subject to substantial fluctuations in value, primarily based upon
matters that are not within our control, such as the current health and life expectancy of the insureds underlying our NIBs, the
solvency of the Holders of the policies and the Holders’ Lender, the Holders’ financing costs and ability to acquire
policies and the solvency of the insurance companies. Each of these factors can result in significant fluctuations of the value
of the life insurance policies underlying the NIBs, thereby affecting our interests. As demonstrated by the foreclosure on our
NIBs occurring from May to July 2018, if the Holders fail to pay the costs of maintaining the insurance policies underlying our
NIBs, the value of our NIB portfolio can be reduced to zero.
Limitations
to the financial model we use may result in inaccurate or incomplete projections of future cash flow from the insurance policies
underlying our NIBs.
Our
financial model used to project our future cash flows from potential NIBs was chosen because of its straight-forward approach
in calculating expected cash flows. We believe the methodology used in the model is particularly desirable because it has parameters
that are easily verifiable and does not require complex calculations or mathematic simulations to confirm results. However, with
every financial model, there are limitations. Most require assumptions to be made. Our model is no exception. Our assumptions
may prove to be incorrect and, therefore, our model may be incorrect. Our model relies on actuarial life-expectancy reports prepared
by third parties from which the estimated date of maturity is calculated. It is assumed that these reports were accurately made
and properly reflect real life expectancies. Our model then uses minimum premiums generated by the industry-standard MAPS model
as the assumed premium payments up until the date of maturity. We assume that such results are accurate and capture all the terms
of a given policy. Our model also requires other inputs including but not limited to the following: (i) a 15-year period for projections;
(ii) a distinct number of lives; (iii) a distinct number of policies; (iv) life expectancy tables and projections; (v) premiums;
(vi) senior lending fees; (vii) MRI fees; and (viii) insurance, servicing and custodial fees. While this method of modeling cash
flows is helpful in setting general expectations of potential returns that might be produced from a given portfolio, there is
no way such results can be guaranteed. In addition to our assumptions, there are many factors that may affect the selection of
inputs for the model.
The
individuals insured by the life insurance policies underlying our NIBs may live longer than their actuarial life expectancies
and thereby, our cash flows from life insurance policies underlying our NIBs coming to maturity may be delayed.
The
actual date of death of an insured with respect to a life insurance policy is uncertain. Life expectancies are projected from
the medical records of the insured and actuarial data based upon the historical experience of similarly situated persons. However,
it is impossible to predict with certainty any insured’s life expectancy. We have and will continue to base our longevity
assumptions on the reports of third-party life expectancy providers, among whom there is no uniformity of assumptions, approach
or procedure. There are also significant disputes among third-party life expectancy providers regarding the mortality rate relating
to certain disease states and the efficacy of certain treatments. Some factors that may affect the accuracy of a life expectancy
report or other calculation of the estimated length of an individual’s life are:
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the
experience and qualifications of the medical professional or life expectancy company providing the life expectancy estimate;
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the
completeness and accuracy of medical records received by the life expectancy company;
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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;
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the
nature of any illness or health conditions of the insured disclosed or undisclosed;
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changes
in living habits and lifestyle of an insured and medical treatments, medications and therapies available to and used by an
insured; and
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future
improvements in medical treatments and cures, and the quality of medical care the insured receives.
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We
rely primarily on four different life expectancy providers, 21st Services LLC, American Viatical Services LLC, Fasano
Associates and EMSI. A life expectancy, or LE, can be considered the life expectancy provider’s “best estimate”
as to how long a person would live. We assume that the life expectancies were accurately calculated and properly assessed for
purposes of our model. To introduce some “checks and balances” into our cash flow projections, we use at least two
LE reports from different third-party LE providers for each policy. We do this to try to avoid any systemic bias introduced by
dependency on life expectancies produced by a single source. In addition, our model gives greater weight to the longer (and more
conservative) of the two LEs. By using such a long/short weighted average, our model attempts to hedge against unexpected longevities
in a portfolio.
Changes
in actuarial based life expectancy methodologies (which are determined by the Society of Actuaries and are amended every three
to five years) could have the effect of reducing the internal rate of return on the life insurance policies underlying our NIBs
and could cause increased difficulty in financing premiums. If changes are significant, they could lower prices for future NIBs
(to our benefit), but could also lower the value of the life insurance policies underlying our NIBs due to the lower resulting
present value of the death benefits forecasted to be paid at later dates. Holders’ senior loans require that certain loan
to value ratios be maintained and decreases in policy values could result in violations of these provisions. Default by Holders
on their senior loans may impair their ability to obtain financing necessary to maintain the life insurance policies underlying
our NIBs, which could reduce the value of our NIBs. If Holders are unable to make premium payments and the insurance policies
lapse, our NIBs related to such policies would be worthless.
In
addition, because our cash flow is usually dependent on the life insurance policies underlying our NIBs coming to maturity, if
life expectancies prove wrong we may not receive cash as projected. 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 and financing and other related expenses
incurred in order to keep the related policy in force. If the insureds with respect to too many life insurance policies underlying
our NIBs live longer than their respective life expectancies, then Holders may have to liquidate such life insurance policies.
The market value of such Policies will necessarily be significantly less than the related death benefits, which could result in
the NIBs held by us losing some or all of their value.
Having
relatively few insureds underlying our NIBs could cause the overall performance of our NIBs to be unduly influenced by a relatively
small number of underlying policies that perform better or worse than expected.
Our
life expectancy actuarial results related to our portfolios may not be as reliable as they would be if the underlying portfolios
were larger. We understand that Standard & Poors has stated that at least 1,000 lives are required to achieve actuarial stability,
while A.M. Best concluded that at least 300 lives are necessary. Having fewer lives in a policy portfolio can cause the overall
performance of such portfolio to be unduly influenced by a relatively small number of “outliers” where the assets
perform better or worse than expected. We have sought to mitigate this risk by obtaining MRI coverage, which has the effect of
accelerating cash flows in cases where the assets underperform and reducing the volatility normally associated with a portfolio
with fewer lives.
Increased
general market interests rates could increase the carrying costs of the life insurance policies underlying our NIBs and correspondingly
reduce the cash flows from our NIBs.
If
general market interest rates increase, the value of any NIBs we might hold would likely decrease. Some of the Holder’s
carrying costs associated with the life insurance policy portfolios underlying our NIBs (specifically interest payments on the
MRI coverage outstanding balance) are tied to interest rates. If interest rates increase, the Holder’s carrying costs will
increase and the return on our investment will decrease. Because the Holders pay all of the costs associated with the life insurance
policy portfolios underlying our NIBs before they pay us, an increase in the Holder’s carrying costs will correspondingly
decrease the amount we receive from any NIBs we might hold.
In
addition, if the interest rates used to determine the market value of a life insurance policy change, the present value of the
policy may also change. Generally, as interest rates increase, the present value of a life insurance policy decreases. If a Holder
is forced to sell a policy in a higher interest rate environment, the market price for the policies underlying our NIBs may be
less than the price at which such policy was acquired. Furthermore, Holders are generally obligated under the senior loans financing
the purchase of life insurance policies to maintain certain loan to value ratios. If the present value of the life insurance policies
decreases significantly, the Holder may be in breach of such obligations, which could impair the Holder’s ability to obtain
financing necessary to service existing life insurance policies or acquire new policies. As a result, any NIBs we might hold may
decline in value or become worthless.
The
Holders may not be able to refinance the loans related to the life insurance policies underlying our NIBs.
The
life insurance portfolios underlying NIBs typically involve loans originated with 4-5 year terms. We assume that the Holders will
be able to refinance their loans at the end of the respective loan terms. However, the Holders’ Lender’s ability to
offer replacement loans is governed by factors that are beyond our control or the control of the Holders. If the Holders are unable
to refinance their loans with the Holders’ Lender, the Holders may not be able to continue to pay the premiums on the life
insurance policies they hold and such life insurance policies may need to be liquidated, thereby potentially reducing the return
on our NIBs. During October 2017, the entities completed a refinancing of the loans that had matured and were about to mature.
The agreements were with a new senior lending facility who previously provided MRI for the underlying policies. Between May 2018
and July 2018, the lenders foreclosed on the loans associated with the underlying life insurance policies and the Company has
recorded a $22,950,126 impairment on the NIBs.
The
Holders may be unable to service their obligations under their loans and may default on such obligations, which could reduce the
amount we realize on our investment in our NIBs.
The
financing obtained by Holders to fund the purchase and premium payments of life insurance policies underlying our NIBs is secured
by such insurance policies. These financing agreements allow the Holders’ Lender, in response to certain events, to refuse
to advance additional funds, demand that the life insurance policies securing the loans be liquidated to repay outstanding balances
or foreclose on the policies. Because we are not party to the financing agreements between the Holders and the Holders’
Lender, we have no right to receive notice of the Holders’ Lender’s intent to take action in response to a Holder’s
default. If the Holders’ Lender refuses to advance additional funds and a Holder is unable to find alternative funds with
which to pay premiums on the life insurance policies, such policies will lapse. As demonstrated in the May 2018 and July 2018
foreclosures, when the Holders’ Lender demands that the life insurance policies be foreclosed, the net insurance benefit
of such policies payable to us could be materially impaired and possibly reduced to zero. Although we do have full rights, through
agreements with the Holders, to the par value and fixed interest on that par value, our rights to payment on our NIBs is unsecured
and is not guaranteed.
The
Holders’ Lender is believed to be one of only one or two current sources for financing the Senior Loans.
We
currently believe there are only one or two current sources of financing for senior loans. One of these is the Holders’
Lender, which has provided the senior loans for the acquisition and servicing of the life insurance policies underlying our prior
NIBs portfolio. The Holders’ Lender is currently unrated. The Holders’ Lender has ceased making loans to Holders at
any time and for any reason, including strategic, regulatory and other reasons. Since the Holders’ Lender ceased making
loans to Holders to finance purchases of life settlement policies we are unable to purchase NIBs in the manner we have historically,
unless another lender or financing source can be located by Holders on terms that make NIBs a valuable asset. Without financing
from the Holders’ Lender or other sources, Holders may not be able to purchase policies and sell us NIBs. Our business of
purchasing and holding NIBs has been materially and adversely harmed.
Changes
to foreign banking laws and regulations or decreased lending capacity for life settlements could have a negative impact on ability
of Holders to obtain loans with respect to purchases of life settlements and, thereby, limit our ability to acquire additional
NIBs.
Our
current business model relies on the availability to the Holders of senior loans from the Holders’ Lender or any other lender.
In the event of adverse regulatory changes or reduced capacity for life settlement lending, the Holders could experience the same
liquidity issues that have plagued other market participants. Changes to the Holders’ Lender’s loan to value requirements,
compliance with regulatory large exposure limits and changes to regulatory large exposure limits could also result in liquidity
issues for the Holders and corresponding 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 a need to provide liquidity to pay down the loan balances, which could result in the liquidation of the life insurance
policies underlying our NIBs and a corresponding loss of the value of our NIBs.
We
may be required to obtain MRI coverage as a condition of our business model, which, if unavailable, could potentially increase
our risk of failure.
The
MRI is a relatively new product and there are no guarantees that the MRI provider will be able to meet the Holders’ coverage
needs. In addition, it is our understanding that there is only one MRI provider. The MRI provider has refused to provide future
coverage to the Holders. Without the MRI coverage, the Holders have limited options when the senior loans mature. The Holders’
Lender has demanded repayment of all outstanding amounts under the senior loans, which resulted in the complete loss of the value
of our NIBs.
The
lapse of life insurance policies underlying our NIBs will result in the entire loss of our interest in the death benefits from
those particular policies.
The
Holders are required to make premium payments on the life insurance policies underlying our NIBs in order to keep such policies
in force. These payments generally will be made from amounts available to the Holders pursuant to the senior loans, death benefits,
and MRI payments. There has been insufficient funds available and the policy has been foreclosed and the value of the asset has
been lost, decreasing the value of our NIBs to zero.
The
Holders we contract with for the ownership of our NIBs and their related business partners and service providers may not have
financial strength, be solvent or have integrity.
The
value of our NIBs is based on our contracts with the Holders and is dependent on the financial strength, solvency and integrity
of the Holders and their various business partners and service providers. We have been exposed to financial risk as the Holders
have defaulted on their obligations to lenders.
Our
management team relies on outside consultants and others in our industry to make informed business decisions; potential conflicts
of interest involving those parties who are relied upon could adversely affect the value of our NIBs.
Our
management team has relied and will continue to rely on consultants and service providers in our industry, in evaluating life
insurance products for purchase. Many of these consultants or service providers 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 our industry, will
be able to engage these consultants. In addition, our inability to retain such consultants would negatively affect our ability
to identify and evaluate life insurance products for purchase. Even as our management accumulates expertise in this industry,
we will still rely on the expertise of outside consultants for a variety of information, including valuation, life expectancies,
actuarials and other matters specific to life insurance policies. If we cannot obtain such services at an affordable price, our
business will be harmed.
Actual
results from our NIBs and similar life settlement products may not match our expected results, which could reduce our return on
investment in our NIBs and also adversely affect our ability to service and grow our NIB portfolio for actuarial stability.
Our
business model relies on achieving actual results that are in line with the results we expect to attain from our investments in
NIBs. We believe that the larger the portfolio of policies underlying the NIBs we own, the more reliable our actuarial estimates
will be and, likewise, the greater the likelihood that we will achieve our expected results.
In
a study published in 2012, A.M. Best concluded that at least 300 lives are necessary to narrow the band of cash flow volatility
and achieve actuarial stability, while Standard & Poor’s has indicated that actuarial stability is unlikely to be achieved
with a pool of less than 1,000 lives. While there is a risk with a portfolio of any size that actual yield may be less than expected,
we believe that the risk we face is presently more significant given the relatively low number of insureds underlying our potential
NIBs as compared to rating agency recommendations.
Even
if our portfolio reaches the size that is actuarially stable according to the rating agencies, we still may experience differences
between the actuarial models we use and actual mortalities. Differences between our expectations and actuarial models, and actual
mortality results, could have a materially adverse effect on our operating results and cash flow. In such a case, we would face
liquidity problems, including difficulties acquiring new NIBs and other life settlement products. Continued or material failures
to meet our expected results could decrease the attractiveness of our securities in the eyes of potential investors, thereby making
it even more difficult to obtain capital needed to acquire additional NIBs and obtain desired diversification and expansion of
the underlying insureds.
The
limited number of sellers of NIBs and similar life settlement products in the secondary market may limit our ability to negotiate
favorable prices in the acquisition of such life settlement interests.
To
our knowledge, Del Mar, PCH and HFII, the three sellers from whom we have acquired all of our prior interests in NIBs are the
only sellers of NIBs. Because we are not currently licensed to purchase life insurance policies directly from the insureds, we
rely on re-sellers like Del Mar, PCH and HFII for such products.
Unless
other sources become available or we are able to create our own NIBs, our ability to purchase the life settlement products desired
under our business model may be limited. In addition, the limited number of sellers could limit our ability to negotiate favorable
prices to purchase NIBs and similar life settlement products, which could reduce the profitability of the NIBs and other products
we purchase. Furthermore, recent declines in the secondary market for life settlements have limited the availability of pools
of life insurance policies, resulting in increased price competition. Holders facing increased prices may in turn demand higher
prices for the NIBs we purchase under our business model, which would reduce the profitability of any future acquisition of NIBs.
We
do not track concentrations of pre-existing medical conditions of insureds in our guidelines for purchasing NIBs.
Concentrations
of pre-existing medical conditions in insureds could affect the valuation of the portfolios and NIBs that such policies underlie.
We do not track concentrations of pre-existing medical conditions in our purchases of NIBs and similar life settlement products.
Thus, the valuation of such interests and our estimates of cash flows therefrom could be inaccurate.
Current
and future federal regulation under the Dodd-Frank Act’s consumer protection provisions may have an adverse effect on our
business and our planned business operations.
On
July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
“Dodd-Frank Act”). 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 insurance policies underlying our NIBs and the value of our NIBs. In addition, the Dodd-Frank
Act also limits the ability of federal laws to preempt state and local consumer laws. 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 and
the entities from which we acquire NIBs and similar life settlement products.
On
February 3, 2017, President Donald Trump signed an executive order pursuant to which he ordered the Secretary of the Treasury
to consult with the heads of the member agencies of the Financial Stability Oversight Council on the extent to which existing
laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other government policies promote certain
core principles laid out in the executive order. This may result in repeals of or amendments to existing laws, treaties, regulations,
guidance, reporting and recordkeeping requirements and other government policies, including regulations implementing the Dodd-Frank
Act. In addition, President Trump’s new administration has discussed the possibility of repealing or amending the Dodd-Frank
Act and the February 3, 2017 executive order could lead to such repeals or amendments. The changes resulting from this executive
order and the continuing implementation of the Dodd-Frank Act may impact the profitability of our business activities or otherwise
adversely affect our business. Failure to comply with the requirements may negatively impact our results of operations and financial
condition. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their
interpretations would have on us, these changes could be materially adverse to investors in our common stock.
If
NIBs and related life settlement products we purchase are determined to be “securities,” we may be required to register
as an investment company under the Investment Company Act, which would substantially increase our SEC reporting costs and oversight
of our business operations.
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 as securities. One U.S. Congressman has sought to introduce a bill to make such amendment. 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 regulatory requirements under the Securities Act, the Exchange Act and the Investment Company Act.
Such
requirements could, among other things, limit our ability to change investment policies without stockholder approval, prohibit
our acquisition of assets from an affiliate without SEC approval, limit leveraging of our assets to one-third of our total asset
value, require accounting 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 and require 40% of our directors to be independent
directors. In addition, intermediaries with whom we work to purchase NIBs and similar life settlement products 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. Such regulations could substantially
increase our compliance and reporting costs, which would negatively affect our profitability.
There
is poor liquidity in the secondary market for life insurance and life settlements.
The
secondary market for life insurance policies and life settlements is relatively illiquid, and it is often difficult to sell life
insurance policies or interests in life insurance policies at attractive prices, if at all. The ability to sell life insurance
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, creating an increased risk associated with holding such policies. Holders
may be limited in their ability to liquidate assets if they need to do so in order to raise funds to pay premiums, or otherwise.
We may experience a loss of the value of our potential NIBs (including a total loss) if the life insurance policies underlying
our NIBs must be liquidated under adverse circumstances.
Our
NIBs, and therefore our common stock, are highly speculative and may lose all of their value.
Life
settlements are highly speculative investments. It is not possible with respect to the life insurance policies underlying our
NIBs, 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. Our NIBs are net interest benefits in life
insurance policies that will mature at uncertain times and bear associated premium and other costs. The longer the period between
our purchase of the NIBs and the payout on the underlying policy at maturity, the lower our return will be on our NIBs because
of the cost to maintain the underlying policies. This renders our NIBs, and therefore our common stock, highly speculative investments.
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 highly 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.
General
economic conditions could have an adverse effect on our business.
Changes
in general economic conditions, including, for example, interest rates, investor sentiment, market and regulatory changes specifically
affecting the insurance industry, competition, technological developments, political and diplomatic events, tax laws, and other
factors not known to us today, can substantially and adversely affect our business and prospects. There continues to be uncertainty
about the prospects for growth in the U.S. economy as well as economies of other countries, driven by factors such as high current
unemployment, rising government debt levels, prospective Federal Reserve (and similar foreign bodies) policy shifts, the withdrawal
of government interventions in 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. Such
uncertainties and general economic trends can affect our ability to obtain funds to finance our purchase of NIBs and similar life
settlement products and the ability of the Holders we rely on for such products to acquire and market them. None of these risks
are or will be within our control.
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 on Form 10-K, quarterly
reports on Form 10-Q and current reports respecting certain events on 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 generating and compiling significant accounting, legal and financial information, including audited year-end
financial statements and reviewed quarterly financial statements. The preparation of these reports, their review by management
and professionals and the auditing and review process of such financial statements consumes significant resources, in terms of
management time and focus, as well as expenses related to legal, accounting and audit fees. It is difficult to quantify these
costs, but we believe them to be not less than between approximately $175,000 and $250,000 annually. As our business grows, these
costs can only increase.
Inadequate
funding will impede our planned purchase of NIBs.
We
began purchasing NIBs during our fiscal year ended March 31, 2013. At present, we are a minor participant in this market and face
significant competition from much larger competitors. 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 interests in the NIBs or through debt or equity financing. We expect to finance NIB purchases,
as well as our operating working capital requirements, with proceeds from planned public and/or private offerings of our securities
and debt financing. There can be no assurance that we will be successful in raising debt or equity capital or that we will be
successful in raising additional capital in the future on terms acceptable to us, or at all.
We
may be unable to access capital on a timely basis to fund our operations, which would adversely affect our ability to continue
as a going concern.
Our
inability to access capital may limit our ability to adequately fund our operations and continue as a going concern. To continue
as a going concern and in order to continue to purchase NIBs, we will need to raise substantial amounts of capital. Absent additional
financing, we will not have the resources to execute our business plan and continue as a going concern.
We
may default on our obligations under various debt arrangements, which may accelerate our repayment obligations or otherwise limit
our access to future financing.
If
we fail to make timely repayments of amounts received under notes payable and lines-of-credit with related parties or the 8% convertible
debenture agreement we will be in default of such obligations. In an event of default our repayment obligations may be accelerated,
which may force us to liquidate some or all of our NIBs in circumstances unfavorable to us. Our default under these obligations
may also limit our ability to obtain future financing from related or third parties.
Risks
Related to the Life Insurance Policies underlying our NIBs
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 insured’s spouse and children, and in some states, other close relatives. In some
jurisdictions, however, this could also include entities such as the insured’s 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 insured’s 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 state’s 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 in
relation to the policies underlying our NIBs, we may lose some or all of the amounts we have invested in our NIBs, although in
some states the issuing insurance company may be required to repay the premiums if it rescinds the policy. Some states, such as
New Jersey, allow the carrier to retain all the premiums in the event the policy is rescinded, and some states, such as Delaware,
require premiums to be returned in cases where the policy is successfully challenged by the carrier. 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 applicable 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 life insurance policies underlying our NIBs were originated pursuant to 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, New York and Florida 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), 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 has case law that is also favorable (see PrucoLife
Insurance Company v. Wells Fargo (Florida Supreme Court, which held that a policy may not be contested after the expiration
of the policy’s contestability period). Delaware has laws which benefit the insurance carrier and others that are more favorable
to the policy owner (see PHL Variable Insurance Co. vs. Price Dawe, (Supreme Court of Delaware) and Principal
Life Insurance Company v. Lawrence Rucker 2007 Insurance Trust (District Court of Delaware)). These courts have 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. However, the Rucker case did provide that
premium financing could qualify as an insured procuring a policy and satisfy requirements related to insurable interest. There
is also legislation in most states regulating premium financing that must be complied with for policies originated after the legislation
was enacted.
Also,
in every state that has addressed the question other than New York and Michigan, the expiration of an insurance policy’s
contestability period may not cut off the insurer’s 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. Neither us nor the Holders will 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 NIBs purchased prior to the enactment of such legislation and our NIBs
would be worthless.
Additional
insurable interest concerns regarding life insurance policies originated pursuant to premium finance transactions may also result
in adverse decisions that could affect our NIBS.
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 Counsel’s 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 York’s
insurable interest statute and may also constitute a violation of New York State’s 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 decisions issued over the past few years may also increase concerns
with premium financed policies. In 2011, the Delaware Supreme Court stated in PHL Variable Insurance Company v. Price Dawe
2006 Insurance Trust 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, investors were concerned with how the court would apply such reasoning to premium
financed policies. This concern was alleviated in the 2012 Delaware District Court case of Principal Life Insurance Company
v. Lawrence Rucker 2007 Insurance Trust that concluded that “an insured’s ability to procure a policy is not limited
to paying the premiums with his own funds; borrowing money with an obligation to repay would also qualify as an insured procuring
a policy.”
We
cannot predict whether a state regulator, insurance carrier or other party will assert that any of the policies underlying our
NIBs 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. Decisions in Florida have increased the risk that challenges to premium financed policies may be decided
in favor of the issuing insurance company. Moreover, because the life insurance policies underlying our NIBs 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 on 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 net death benefit related to the policies underlying or NIBs. Concerns of such nature could also negatively affect the market
value and/or liquidity of the life insurance policies underlying our NIBs. In the event of such adverse legal or regulatory developments,
our NIBs would be worthless.
Fraud
in the application for life insurance can also affect our assets and our interest in our NIBs.
There
are risks that the policies underlying our potential NIBs may be procured on the basis of fraud or misrepresentation in connection
with the application for the policy. Types of fraud that have enabled carriers to successfully rescind or void the related policies
include, among others, misrepresentations concerning an insured’s financial net worth and/or income, need for and purpose
of the life insurance protection, medical history and current physical condition, including age and whether the insured 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. There has been significant litigation regarding whether or not a policy can be contested for fraud
after the expiration of the contestability period. Florida, California and New York have concluded that a carrier may not contest
a policy after the contestability period. New Jersey and Delaware have allowed such contests by the carriers. Each of the policies
underlying our NIBs 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. Furthermore, such misrepresentations can adversely affect the actuarial value of the death benefit under the
related life insurance policies underlying our NIBs.
The
risk of litigation with issuing insurance companies could substantially raise our costs of operation and increase our risk of
loss.
Some
of the programs relating to the premium finance transactions through which the underlying insurance 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 involving us was to occur, we would bear the costs of such litigation,
and would be unable to predict its outcome, which could include losing our right to receive (or retain) the proceeds otherwise
payable under one or more of the underlying policies.
The
contestation of the life insurance policies underlying our NIBs by the applicable issuing insurance companies could result in
the loss of the benefits from such life insurance policies and materially and adversely affect our business and the results of
our operations.
The
ability of an issuing insurance company to seek to rescind one or more of the life insurance policies underlying our potential
NIBs depends on whether such issuing insurance company is barred from bringing a rescission action by operation of an incontestability
clause contained in the life insurance policies 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, as stated above, 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. The successful contestation of the life
insurance policies underlying our potential NIBs by the applicable issuing insurance companies could materially and adversely
affect our business and the results of our operations.
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 the charges to a life insurance policy are materially increased, additional premium payments may be required to maintain
enforceability of such policy.
AXA
Equitable has issued cost-of-insurance, referred to herein as “COI,” increases on eleven (11) of the life insurance
policies underlying our potential NIBs. In addition, one Transamerica and one Lincoln policy have recently been subject to increased
COI’s. Other carriers have been issuing COI increases that impact life insurance policies held by large settlement funds.
Multiple lawsuits, including class actions, against Phoenix Life, Lincoln National Insurance Company, AXA Equitable, Banner Life,
and Transamerica Life Insurance Company are currently ongoing and we are hopeful that we will be able to avoid any COI increases
impacting our life insurance policies. However, most of these lawsuits are in the very early stages.
No
assurance can be given that the Holders will have sufficient funds available to pay all the premiums on the life insurance policies
underlying our NIBs if policy premiums increase. If the potential Holders do not have sufficient funds available to pay all the
premiums on the life insurance policies underlying our potential NIBs, our potential NIBs would lose all of their value.
Carrier
and service partner credit risk can adversely affect our interest in our NIBs or other life settlements.
We
are subject to the credit risk associated with the viability of the various insurance companies that issued the life insurance
policies underlying our potential NIBs. 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 underlying our NIBs issued by such issuing
insurance company, the collectability of the related death benefits and the ability of such 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 such insurance
company, the ability of the Holder to pay the premiums due on other insurance policies and the Holders ability to pay any required
policy premiums, fees and expenses of the service providers and our other expenses, which could materially and adversely affect
the value of our potential NIBs.
The
inability to keep track of the insureds could keep us from updating the medical records of the insured.
It
is important for the Holder of the life insurance policies underlying our potential NIBs 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 insured’s 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 underlying our potential NIBs, especially
with regard to obtaining current information from an insured’s physician.
Under
the Health Insurance Portability and Accountability Act or 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 Holder unable to receive additional medical records.
The
Holder may have to rely on a third party servicer 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 contact 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 to the Social Security Administration’s 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 insured’s death. On average, it now takes longer to learn about an insured’s 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 Holder 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 Holder will learn of an insured’s
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 insured’s 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 interest rate under 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 policy’s 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 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 potential 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 the Holders’
ability to liquidate any policies we or they 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, administrative and civil sanctions and, in some instances, 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 life insurance 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 life insurance policies underlying our potential NIBs, 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 life insurance
policies underlying our NIBs issued by an issuing insurance company if such issuing insurance company becomes insolvent. Even
if such guaranty funds are sufficient, the obligation of a state guaranty fund to make payments may not be triggered in certain
circumstances.
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. In addition, in the event of an issuing insurance company’s
insolvency, courts and receivers may impose moratoriums or delays on payments of cash surrender values and/or death benefits.
We
may incur liability for failing to comply with U.S. privacy safeguards.
Both
federal and state statutes safeguard an insured’s 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 entities providing services related to the life
insurance policies underlying our NIBs properly obtains and uses otherwise private health information, but fails to maintain the
confidentiality of such information, such service provider may receive 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 receives 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, life insurance 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
life insurance policies. Each of the foregoing factors may delay or reduce the return on the life insurance policies underlying
our NIBs, and we may suffer a loss (including a total loss) on our investment in our NIBs or other life settlement interests.
Cyber-attacks
or other security breaches could have a material adverse effect on our business.
In
the normal course of business, we have access to sensitive and confidential information regarding the insureds underlying our
NIBs. Although we devote significant resources and management focus to ensuring the integrity of our systems through information
security and business continuity programs, our facilities and systems, and those of third party service providers, are vulnerable
to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors
or other similar events.
Information
security risks have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies
(including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities
of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches
involving the theft of sensitive and confidential information, hackers recently have engaged in attacks designed to disrupt key
business services, such as customer-facing websites. We are not able to anticipate or implement effective preventive measures
against all security breaches of these types, especially because the techniques used change frequently and because attacks can
originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security
incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
The
access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding the insureds underlying
our potential NIBs could result in significant legal and financial exposure, supervisory liability, damage to our reputation or
a loss of confidence in our business, which could have a material adverse effect on our business, financial condition or results
of operations.
U.S.
privacy concerns may affect the access to accurate and current medical information regarding the insured under the life insurance
policies underlying or NIBs.
The
value of a life insurance policy underlying our potential 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 granted a general consent that gave the owner of the policy the right to subsequently request
and receive medical information from the insured’s health providers, it is possible for the insured to subsequently 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 cooperation of the insured, it may be difficult to convince the insured’s health care
providers of the consent’s efficacy and such health providers 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 policy’s purchase or sale.
Risk
Factors Related To Our Common Stock
There
is a limited public market for our common stock, and any market that may develop could be volatile.
The
market for our common stock has been limited due to, among other factors, low public float of our common stock, low trading volume
and the small number of brokerage firms acting as market makers. There were approximately 14,614,577 shares of our common stock
held by non-affiliates as of March 31, 2018. Thus, our common stock will be less liquid than the stock of companies with broader
public ownership, and, as a result, the trading price for shares of our common stock may be more volatile. Among other things,
trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would
be the case if our public float were larger. In addition, because our common stock is thinly traded, its market price may fluctuate
significantly more than the stock market in general or the stock prices of other companies listed on major stock exchanges. The
average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading
volume often varies widely from day to day. Because of the limitations of our market and volatility of the market price of our
stock, investors may face difficulties in selling shares at attractive prices when they want to.
An
active trading market for shares of our common stock may never develop or be sustained. If no trading market develops, securities
analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common
stock. As a result, investors may not be able to sell their shares of our common stock at the time that they would like to sell.
The limited market for our shares may also impair our ability to raise capital by selling additional shares and our ability to
acquire other companies or technologies by using our common stock as consideration. The following may result in short-term or
long-term negative pressure on the trading price of our shares, among other factors:
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Conditions
and publicity regarding the life settlement market and related regulations generally;
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Regulatory
developments in the life settlement market;
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Lack
of listing for our common stock;
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Lack
of shares of our common stock in public float;
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Lack
of market makers with respect to our common stock;
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Inability
to raise needed capital;
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Low
volume of trading of our common stock;
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Price
and volume fluctuations in the stock market at large, which do not relate to our operating performance; and
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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.
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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 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies
will make our common stock less attractive to investors.
We
are an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue
to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are
applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation
in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote
on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor
attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be
adopted by the Public Company Accounting Oversight Board. If we do, the information that we provide stockholders may be different
than what is available with respect to other public companies. We cannot predict if investors will find our common stock less
attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there
may be a less active trading market for our common stock and our stock price may be more volatile.
We
will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our common
stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (2) the end of the fiscal
year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (3) the date on which we issue
more than $1 billion in non-convertible debt in a three-year period or (4) the end of the fiscal year following the fifth anniversary
of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act.
Decreased disclosures in our SEC filings due to our status as an “emerging growth company” may make it harder for
investors to analyze our results of operations and financial prospects.
Our
management and two stockholders beneficially own approximately 67% of our outstanding common stock and therefore can exert control
over our business.
Members
of our management team and two stockholders together beneficially own approximately 67 % of our outstanding common stock. 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 appoint all officers. As a result, these persons control the Company, regardless
of the vote of other stockholders. As a result, other stockholders may not have an effective voice in our affairs.
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 44,128,441 shares of our common stock that were outstanding as of March 31, 2018, 225,000
of such shares are subject to leak-out agreements. Pursuant to such agreements, each of these stockholder’s common stock
can only 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 four quarterly periods beginning on January 1,
2017; 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, is allowed to sell such stockholder’s common stock. Our remaining outstanding shares are mostly freely
tradable under Rule 144 and certain limitations on the number of shares that can be sold quarterly by “affiliates”
of the Company 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 for further information. 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 additional shares would dilute the value of our outstanding shares of common stock.
We
are not current on our filings with the SEC, which may impact our stock listing.
We
have been delayed in filing this 10-K, as well as the March 31, 2019 10-K. We are also late filing the three encompassed 10-Qs
and two additional 10-Qs. Potential consequences of delayed or late filings can include a negative effect on share value and negative
market reactions. Our shares were traded on the OTCQB exchange and have since been delisted to the OTC Pink Sheets. The OTC Pink
Sheets is the lowest tier of the three marketplaces for trading over-the-counter stocks provided and operated by the OTC Markets.
The pink sheets system, unlike companies on a stock exchange, do not need to meet minimum requirements or file with the SEC. The
Company is working to resolve the delayed filings issues.
Risk
Factors Related To Our Internal Controls
We
have identified a material weakness in our internal control over financial reporting. Although no material misstatements occurred
due to this material weakness, we have concluded that our disclosure controls and procedures were not effective as of March 31,
2018. Our ability to remediate the material weakness, our discovery of additional weaknesses, and our inability to achieve and
maintain effective disclosure controls and procedures and internal control over financial reporting, could adversely affect our
results of operations, our stock price and investor confidence in our Company.
Section
404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and report on their systems of internal control over financial
reporting. As disclosed in more detail under Item 9 “Controls and Procedures” of this annual report on Form 10-K,
we have concluded that our internal control over financial reporting was ineffective as of March 31, 2018 due to material weakness
in the processes and controls over review of information with sufficient precision included proper documentation to support accounting
conclusions and communication and dissemination of information relevant to financial reporting.
Failure
to have effective internal control over financial reporting could impair our ability to produce accurate financial statements
on a timely basis and could lead to a restatement of our financial statements. If, as a result of deficiencies in our internal
control over financial reporting, we cannot provide reliable financial statements, our business decision processes may be adversely
affected, our business and results of operations could be harmed, investors could lose confidence in our reported financial information
and our ability to obtain additional financing, or additional financing on favorable terms, could be adversely affected. In addition,
failure to maintain effective internal control over financial reporting could result in investigations or sanctions by regulatory
authorities.
Our
President is currently evaluating options to remediate these material weaknesses, however, remedial actions have only recently
been undertaken, and while we expect to implement our remediation plan through 2019, we cannot be certain as to when remediation
will be fully completed. The material weaknesses will not be considered remediated until the remediated controls operate for a
sufficient period of time and management has concluded, through testing, that these controls are operating effectively. Additional
details regarding the remediation efforts are disclosed in more detail under Item 9 “Controls and Procedures” of this
annual report on Form 10-K. In addition, we may in the future identify additional internal control deficiencies that could rise
to the level of a material weakness or uncover errors in financial reporting.