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 a specialty financial services
company engaged in the secondary market for interests in life insurance policies known generally as “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 do not purchase or hold life insurance
policies but, rather, hold 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 represent an indirect, residual ownership interest in a portfolio of individual life
insurance policies and they allow 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, as more fully described
below.
NIBs are generally sold by an entity
that holds the underlying 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 generally also (i) contracts with a service provider to manage the servicing of the policies until maturity, (ii) purchases
mortality re-insurance, or MRI, coverage under which payments will be made to the Holder in the event the life insurance policies
do not mature according to actuarial life expectancies, and (iii) arranges financing to cover the initial purchase of the life
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 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. The NIBs grant the holder of the NIBs the right to receive
the proceeds from the settlement of the life insurance policies after all of the expenses related to such policies incurred by
the Holder have been paid. The Company is not responsible for maintaining premiums or other expenses related to maintaining the
life insurance policies underlying NIBs. Such obligations remain with the Holder.
When an insurance policy
underlying our NIBs comes to maturity, the insurance proceeds are first used by the Holder to pay related debt and 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 in satisfaction of our related NIB.
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. Other than the NIBs initially acquired from Del Mar Financial S.a.r.l.
as described below, we have mitigated some of this risk by only holding NIBs where the Holders of the insurance policies underlying
such NIBs have (i) financed a portion of the purchase price of the policy portfolio underlying the NIBs and (ii) financed the policy
portfolio’s premium payments and obtained MRI coverage for the policy portfolio.
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.
MRI Coverage
. Because of
the uncertainty of maturity of insurance policies, the Holders have contracted with an insurance provider for MRI coverage. We
do not have a contract with the MRI provider and the MRI provider does not provide any insurance to us but, rather, provides 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 the Holders’ Lender is presently the only lender currently
providing financing for insurance policy portfolios underlying NIBs. We believe other lenders may enter this market. No
assurance can be given that the Holders’ Lender will be able to continue to provide financing for policy portfolios or
that any such other lending sources will become available to participants in the life settlement 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.
We understand that a typical loan from
the Holders’ Lender has 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 is secured by the life insurance policies owned by the Holder. These loans also include a variety of covenants
agreed to by the Holder and/or one of its subsidiaries. The use of funds disbursed under the loan is restricted to servicing the
pledged portfolio of life insurance policies, including, among other uses, the policy premiums, MRI premiums, the payment of a
commitment fee to the MRI provider and administration costs. The Holder must provide confirmation of MRI coverage prior to receiving
any funds under the loan. In addition, if the outstanding loan amount exceeds 75% of the aggregate value of the life insurance
policies securing the loan or if the loan balance exceeds applicable regulatory large exposure limits, the Holders’ Lender
is not required to disburse funds under the loan.
We further understand that the Holders’
Lender also receives repayment priority as proceeds are received from the life insurance policies serving as collateral for the
loan. Life insurance policy proceeds must first be used to repay interest and principal owed under the loan (as long as the outstanding
loan amount exceeds 50% of the
aggregate value of the life insurance policies
securing the loan) including draws on the MRI, if applicable, next to pay the Holder’s servicing fees, then to repay
any additional amounts owed to the Holders’ Lender and finally to an account designated by the Holder. If it is
determined that the outstanding loan amount is less than 50%, and all other obligations have been paid in full, the Company
may be eligible to receive a distribution.
While the loan typically matures 4 to
5 years after the first disbursement of funds, maturity of loan amounts is accelerated if the related life insurance policy is
liquidated or at the time that the death benefit is received. Prepayment is subject to a prepayment fee equal to the difference
between the interest that would have been received by the Holders’ Lender at maturity of the loan and the interest the Holders’
Lender would have received if it deposited the prepayment amount in an institution in the London interbank market until the maturity
date.
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:
-
the insured is 75 years old or older;
-
all NIBs relate to U.S. Universal Life Insurance policies;
-
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;
-
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;
-
all policies must qualify for MRI; and
-
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.
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.
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
We purchased all of the NIBs we currently
own on the secondary market, not directly from a Holder. We currently own NIBs related to 13 portfolios of life insurance policies.
Our current NIB portfolio consists of NIBs purchased from PCH Financial S.a.r.l., or “PCH,” Del Mar Financial S.a.r.l.,
or “Del Mar,” and HFII Assets Solutions, LLC, or “HFII.” We currently estimate proceeds of approximately
$115 million on the NIBs owned by us as of March 31, 2016. This amount is based on the estimated proceeds from policies of approximately
$401 million in face value. The policy portfolios underlying our NIBs currently contain 130 fractionalized policies on 71 individual
insureds.
Through the combination of loans from
the Holders’ Lender to and MRI coverage held by the Holder of the portfolios of policies underlying our NIBs and debt or
equity financing by us, we currently believe we should be able to hold all the NIBs we acquired until maturity. However,
we will continuously analyze the senior loans, MRI payments, NIBs and underlying policies to determine, in conjunction with the
Holders, whether any such assets should be liquidated. Further, in the event of any events of default under the senior loans or
MRI, we plan to make a request to the relevant Holder, to sell the affected assets, if necessary or advisable. If we are not successful,
we may lose our interest in the affected NIBs. We believe there is an active secondary market for life insurance policies
that we can access if it is determined that any of the life insurance policies or NIBs should be liquidated. However, prices
in the secondary market are relatively volatile, and our goal is to avoid the early sale of NIBs or life insurance policies so
that we can realize the maximum net amount on maturity of the Policies. Through relationships with well-known market participants,
we believe we have substantial lines of communications with the potential participants active in the life settlement secondary
market; however, no assurance can be given that if we are required to sell any of our NIBs or other insurance related products
prior to maturity, that we will be able to do so without incurring a loss.
NIBs Acquired from PCH Financial
.
On March 11, 2013, pursuant to an agreement between PCH and ANEW LIFE, our wholly-owned subsidiary, ANEW LIFE acquired NIBs related
to policies with an aggregate original face amount equal to $129,038,933, for an aggregate of $5,999,000, $3,000,000 of which was
paid in cash and $2,999,000 of which was paid by the issuance of a secured promissory note by ANEW LIFE. Subsequent to the execution
of the transfer agreement between PCH and ANEW LIFE, the secured promissory note was assigned to Del Mar and the face value of
the note was reduced to $1,500,000. Ultimately the secured promissory note was assigned to Hyperion. In June 2015 the secured promissory
note was converted to temporary equity through the issuance of 187,500 shares of common stock and the grant of a redemption right
allowing Hyperion to require the Company to repurchase the shares. The redemption right was exercised with respect to 93,750 shares
on June 9, 2015, for which the Company paid $750,000. On March 25, 2016, Hyperion exercised the redemption right in relation to
the remaining 93,750 shares and on April 12, 2016, the Company paid $750,000 and the secured promissory note was settled. At March
31, 2016, the $750,000 with respect to the unexercised portion of the redemption right was classified on the balance sheet as Mandatorily
Redeemable Common Stock.
The following table contains detailed
information about the life insurance policies underlying the NIBs we acquired from PCH Financial.
|
Face Amount
|
Gender
|
Current Age
1
|
Life Expectancy
(months)
2
|
Age of
LE Report
(months)
3
|
Carrier
|
Carrier Rating
4
|
1
|
$10,000,000
|
Male
|
86
|
85
|
50
|
New York Life
|
AA+
|
2
|
$5,000,000
|
Male
|
88
|
77
|
46
|
Jefferson Pilot
|
AA-
|
3
|
$3,000,000
|
Male
|
80
|
134
|
55
|
Jefferson Pilot
|
AA-
|
4
|
$2,500,000
|
Male
|
83
|
104
|
49
|
Lincoln National
|
AA-
|
5
|
$8,000,000
|
Male
|
86
|
93
|
53
|
Lincoln National
|
AA-
|
6
|
$8,000,000
|
Female
|
86
|
116
|
56
|
Hancock
|
AA-
|
7
|
$10,000,000
|
Male
|
90
|
52
|
47
|
American General
|
A+
|
8
|
$5,000,000
|
Male
|
86
|
91
|
48
|
American General
|
A+
|
9
|
$5,000,000
|
Male
|
82
|
138
|
50
|
Hancock
|
AA-
|
10
|
$1,000,000
|
Male
|
88
|
70
|
47
|
AXA
|
A+
|
11
|
$4,000,000
|
Male
|
89
|
81
|
47
|
Lincoln National
|
AA-
|
12
|
$5,000,000
|
Male
|
84
|
131
|
54
|
Lincoln National
|
AA-
|
13
|
$10,000,000
|
Male
|
79
|
139
|
50
|
Lincoln National
|
AA-
|
14
|
$10,000,000
|
Male
|
80
|
137
|
48
|
ReliaStar NY
|
A
|
15
|
$10,000,000
|
Male
|
83
|
148
|
53
|
AXA
|
A+
|
16
|
$3,000,000
|
Male
|
78
|
138
|
47
|
Protective
|
AA-
|
17
|
$1,000,000
|
Male
|
84
|
122
|
55
|
Lincoln Benefit
|
BBB+
|
18
|
$1,600,000
|
Male
|
81
|
151
|
47
|
Transamerica
|
AA-
|
19
|
$11,856,734
|
Male
|
80
|
153
|
49
|
New York Life
|
AA+
|
20
|
$10,000,000
|
Female
|
85
|
140
|
50
|
AXA
|
A+
|
21
|
$3,000,000
|
Male
|
75
|
164
|
51
|
AXA
|
A+
|
22
|
$3,000,000
|
Male
|
79
|
147
|
48
|
Lincoln Benefit
|
BBB+
|
|
$129,956,734
|
|
|
|
|
|
|
__________________
-
Age at nearest birthday (as of March 31, 2016)
-
The Life Expectancy ("LE") input is the 70%/30% weighted average of two
LEs available at the time of the original creation of the NIB portfolio. In purchasing and financing NIBs, we may use alternate
life expectancy companies or may use weighted averages of two or more life expectancy companies, depending on the facts and circumstances
of the case and requirements of the various counterparties. The life expectancy report is just an estimate, as the life expectancy
of any individual cannot be known with absolute certainty.
-
The Age of LE report represents the difference between the average date of the reports
from which the Life Expectancy input were taken and of March 31, 2016 divided by 30.5 days to arrive at a number expressed in months.
The age of an LE report is relevant to the reliability or aging of the Life Expectancy provided in the previous column.
-
The carrier ratings are generally taken from S&P, but if a carrier is not rated
by S&P, then the ratings are taken from the following agencies (in order): Moody's, Fitch, or A.M. Best.
Based on the
original life expectancy report related to the life insurance portfolio underlying the NIBs we purchased from PCH Financial, with
an adjustment made to reduce the Life Expectancies by the number of months since the last Life Expectancy report, we could expect
9 underlying policies, representing an aggregate face amount of $53.5 million, to mature within 5 years of March 31, 2016, and
the remaining underlying policies, representing an aggregate face amount of approximately $76.5 million, to mature thereafter.
These life expectancies, or “LEs”,
are based on a 70%/30% weighted average of two LEs available at the time of the original creation of the NIB portfolio. It should
be noted that the insured’s health, medical conditions and other considerations may have changed since the initial LE report,
so the LE is simply an estimate. These LEs were produced by third-party life expectancy companies and represent the actuarial
mean of how long an individual is expected to live using the LE provider's proprietary statistical model, which is typically based
on individualized mortality curves for each life factoring in the insured's gender, age, health and family history, medical conditions,
and other considerations. The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known
with absolute certainty.
Although paid by the holder of the policy portfolio
underlying our NIBs, the estimated premiums and other expenses to be paid with respect to the underlying policies for each of the
five succeeding fiscal years to keep the policies in force as of March 31, 2016, are as follows:
Estimated Expenses to be Paid by Holder
|
Year
|
|
Premiums
|
|
Expenses + Interest
1
|
|
Total
|
Year 1
|
|
$
|
3,763,141
|
|
$
|
3,076,941
|
|
$
|
6,840,082
|
Year 2
|
|
|
3,506,932
|
|
|
2,823,386
|
|
|
6,330,318
|
Year 3
|
|
|
4,187,879
|
|
|
3,037,504
|
|
|
7,225,383
|
Year 4
|
|
|
3,428,312
|
|
|
1,707,077
|
|
|
5,135,389
|
Year 5
|
|
|
3,491,163
|
|
|
1,549,062
|
|
|
5,040,225
|
Thereafter
|
|
|
10,187,839
|
|
|
6,790,301
|
|
|
16,978,140
|
Total
|
|
$
|
28,565,266
|
|
$
|
18,984,271
|
|
$
|
47,549,537
|
__________________
|
1.
|
The amounts in this column represent what we expect the Holders expenses to be in relation to
interest accrued on the Senior Loans, servicing fees, custodial fees and other administrative expenses and fees.
|
These premiums, along with other costs and expenses
and repayments under the MRI, if any, will reduce the net insurance benefits payable to us under the policies underlying our NIBs.
Certain policies contain a return of premium provision, which will increase the net insured benefit as premium payments are
made. As of March 31, 2016, we have not received any proceeds from the NIBs we acquired from PCH Financial. Based on our current
projections, we expect to ultimately receive between 30% and 40% of the aggregate face amount of the life insurance policies underlying
the NIBs we acquired from PCH Financial. Our current projections are based off of various assumptions including, but not limited
to, 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 these projections. In addition, this expectation may not be realized
for a number of reasons, such as if the Holder defaults on premium payments and the related life insurance policies underlying
our NIBs lapse and the underlying insureds live longer than expected, thus increasing the length of time that the related life
insurance policies must be maintained and amounts that must be repaid to MRI providers and related expenses.
NIBs Acquired from Del Mar
.
Effective June 7, 2013, we entered into an asset transfer agreement with Del Mar (the “Del Mar ATA”) to purchase NIBs
based on two portfolios of life insurance policies having a face amount of approximately $284,270,924 as well as some additional
assets, consisting primarily of approximately 72.2% of the NIBs associated with a portfolio of life settlement policies having
a face value that originally totaled $94,000,000. These additional assets served as consideration and collateral for certain cash
advances and expense payments made by the Company on Del Mar’s behalf. During June 2015, one of these life settlement policies
matured for $10,000,000, lowering the remaining face value of such life settlement policies to $84,000,000.
A portion of the NIBs we initially acquired
pursuant to the Del Mar ATA did not meet all of our NIB purchasing guidelines described above; such NIBs are referred to herein
as the “Unqualified NIBs.” The Del Mar ATA provided that Del Mar would convert the Unqualified NIBs into NIBs that
generally meet our NIB purchasing guidelines, or “Qualified NIBs,” and that Del Mar would make available for purchase
by the Company an aggregate face amount of $400,000,000 of Qualified NIBs. The aggregate purchase price under the Del Mar ATA was
$20,000,000, $5,000,000 of which was paid in cash up front with an additional $3,000,000 in cash and $12,000,000 in promissory
notes to be paid or issued, as applicable, upon certain events described in the Del Mar ATA. In connection with entering into the
Del Mar ATA, we also entered into an agreement with Europa Settlement Advisors Ltd. (“Europa”), whereby it was agreed
that Europa would exclusively provide its NIBs related structuring and consulting services to us in relation to the NIBs acquired
by us under the Del Mar ATA, with the understanding that we had no obligation to purchase any NIBs, qualified or otherwise, that
Europa presented to us. Europa
received an initial cash advance of $340,000 for its services
related to its structuring and consulting services regarding the Del Mar ATA.
Under the Del Mar ATA, Del Mar, with
the assistance of Europa, was obligated to convert the Unqualified NIBs into Qualified NIBS. As soon as Del Mar met its obligation
to provide Qualified NIBs to the Company, any remaining NIBs and any other consideration and collateral transferred to us pursuant
to the Del Mar ATA would be returned or released to Del Mar. The original due date for the conversion was December 31, 2013.
As Del Mar was unable to provide the
required amount of Qualified NIBs by the extended due date of August 31, 2015, effective September 1, 2015, the agreements with
Del Mar and Europa were cancelled and the Company obtained full ownership and control of the collateral, which included the above
mentioned approximately 72.2% of the NIBs associated with $84,000,000 face value of life settlement policies and certain rights
to net proceeds relating to a policy that had matured prior to the due date.
The following table contains detailed information
about the life insurance policies underlying the NIBs we acquired pursuant to the Del Mar ATA and held as of March 31, 2016.
|
Face Amount
|
Policy Type
|
Gender
|
Current Age
1
|
Life Expectancy
2
|
Months Elapsed since latest LE
3
|
Carrier
|
Carrier Rating
4
|
1
|
$4,000,000
|
Universal Life
|
Male
|
86
|
65
|
34
|
Hancock
|
AA-
|
2
|
$10,000,000
|
Universal Life
|
Male
|
82
|
153
|
35
|
Lincoln National
|
AA-
|
3
|
$10,000,000
|
Universal Life
|
Female
|
85
|
144
|
35
|
Natl Western
|
A
|
4
|
$4,000,000
|
Universal Life
|
Female
|
82
|
142
|
33
|
AXA
|
A+
|
5
|
$10,000,000
|
Universal Life
|
Female
|
85
|
137
|
33
|
Sun Life
|
AA-
|
6
|
$10,000,000
|
Universal Life
|
Female
|
85
|
46
|
34
|
ReliaStar
|
A
|
7
|
$9,600,000
|
Universal Life
|
Female
|
85
|
125
|
35
|
Lincoln National
|
AA-
|
8
|
$5,000,000
|
Universal Life
|
Male
|
81
|
91
|
35
|
AXA
|
A+
|
9
|
$10,000,000
|
Universal Life
|
Male
|
84
|
94
|
35
|
Beneficial Life
|
A-
|
10
|
$10,000,000
|
Universal Life
|
Female
|
87
|
105
|
35
|
AXA
|
A+
|
11
|
$10,000,000
5
|
Universal Life
|
Male
|
84
|
103
|
58
|
AXA
|
A+
|
12
|
$10,000,000
5
|
Universal Life
|
Male
|
87
|
96
|
54
|
Jefferson Pilot
|
AA-
|
13
|
$9,000,000
5
|
Universal Life
|
Male
|
82
|
129
|
52
|
Transamerica
|
AA-
|
14
|
$10,000,000
5
|
Universal Life
|
Female
|
86
|
127
|
60
|
AXA
|
A+
|
15
|
$10,000,000
5
|
Universal Life
|
Male
|
85
|
108
|
54
|
AXA
|
A+
|
16
|
$10,000,000
5
|
Universal Life
|
Male
|
85
|
119
|
53
|
Lincoln National
|
AA-
|
17
|
$5,000,000
5
|
Universal Life
|
Female
|
85
|
138
|
55
|
Sun Life
|
AA-
|
18
|
$5,000,000
5
|
Universal Life
|
Male
|
85
|
90
|
61
|
Lincoln Benefit
|
BBB+
|
19
|
$5,000,000
5
|
Universal Life
|
Male
|
94
|
54
|
60
|
AXA
|
A+
|
20
|
$5,000,000
5
|
Universal Life
|
Female
|
86
|
115
|
60
|
AXA
|
A+
|
21
|
$5,000,000
5
|
Universal Life
|
Female
|
89
|
106
|
54
|
Jefferson Pilot
|
AA-
|
|
$166,600,000
|
|
|
|
|
|
|
|
__________________
|
1.
|
Age
at nearest birthday (as of March 31, 2016)
|
|
2.
|
The
Life Expectancy ("LE") input is the 70%/30% weighted average of two LEs available
at the time of the original creation of the NIB portfolio. In purchasing, financing
or insuring NIBs, we may use alternate life expectancy companies or may use weighted
averages of two or more life expectancy companies, depending on the facts and circumstances
of the case and requirements of the various counterparties. The life expectancy report
is just an estimate, as the life expectancy of any individual cannot be known with absolute
certainty.
|
|
3.
|
The
Age of LE report represents the difference between the average date of the reports from
which the Life Expectancy input were taken and of March 31, 2016 divided by 30.5 days
to arrive at a number expressed in months. The age of an LE report is relevant to the
reliability or aging of the Life Expectancy provided in the previous column.
|
|
4.
|
The
carrier ratings are generally taken from S&P, but if a carrier is not rated by S&P,
then the ratings are taken from the following agencies (in order): Moody's, Fitch, or
A.M. Best.
|
5. Company has ownership
and control of 72.2% of the NIBs associated with this policy.
Based on the original life expectancy report related to the life insurance
portfolio underlying the NIBs we purchased from Del Mar, with an adjustment made to reduce the Life Expectancies by the number
of months since the last Life Expectancy report, we could expect 11 underlying policies, representing an aggregate face amount,
of approximately $65.1 million, to mature within 5 years of
March 31,
2016, and the remaining underlying policies, representing an aggregate face amount of approximately $24.6 million,
to mature thereafter. These face values are after consideration is given to the Company’s 72.2% ownership of a portion of
the policies, and the life expectancies, or “LEs”, are based on a 70%/30% weighted average of two LEs available at
the time of the original creation of the NIB portfolio. It should be noted that the insured’s health, medical conditions
and other considerations may have changed since the initial LE report, so the LE is simply an estimate. These LEs were produced
by third-party life expectancy companies and represent the actuarial mean of how long an individual is expected to live using
the LE provider's proprietary statistical model, which is typically based on individualized mortality curves for each life factoring
in the insured's gender, age, health and family history, medical conditions, and other considerations. The life expectancy report
is just an estimate, as the life expectancy of any individual cannot be known with absolute certainty.
Although paid by the Holder, the estimated premiums
and other expenses to be paid with respect to the policies underlying the NIBs and Qualified NIBs purchased by us from Del Mar
for each of the five succeeding fiscal years to keep such policies in force as of March 31, 2016, are as follows:
Estimated Expenses to be Paid by Holder
|
Year
|
|
Premiums
|
|
Expenses + Interest
1
|
|
Total
|
Year 1
|
|
$
|
5,059,565
|
|
$
|
3,040,590
|
|
$
|
8,100,155
|
Year 2
|
|
|
5,120,554
|
|
|
2,771,385
|
|
|
7,891,939
|
Year 3
|
|
|
5,339,277
|
|
|
2,631,075
|
|
|
7,970,352
|
Year 4
|
|
|
5,466,646
|
|
|
2,575,767
|
|
|
8,042,413
|
Year 5
|
|
|
5,564,748
|
|
|
2,528,579
|
|
|
8,093,327
|
Thereafter
|
|
|
11,761,659
|
|
|
7,918,053
|
|
|
19,679,712
|
Total
|
|
$
|
38,312,449
|
|
$
|
21,465,449
|
|
$
|
59,777,898
|
__________________
|
1.
|
The amounts in this column represent what we expect the Holders expenses to be in relation to
interest accrued on the Senior Loans, servicing fees, custodial fees and other administrative expenses and fees. .
|
These premiums, along with other costs and expenses
and repayments under the MRI, if any, will reduce the net insurance benefits payable to us under the policies. As of March
31, 2016, we have not received any proceeds from the NIBs we acquired from Del Mar. Based on our current projections, we expect
to ultimately receive between 30% and 40% of the aggregate face amount of the life insurance policies underlying the NIBs we acquired
from Del Mar. Our current projections are based off of various assumptions including, but not limited to, 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 these projections. In addition, this expectation may not be realized for a number of reasons, such
as if the Holder defaults on premium payments and the related life insurance policies underlying our NIBs lapse and the underlying
insureds live longer than expected, thus increasing the length of time that the related life insurance policies must be maintained
and amounts that must be repaid to MRI providers and related expenses.
Qualified NIBs acquired under the HFII Asset Transfer Agreement
On March 31, 2015, we entered into an asset
purchase agreement with HFII, which was subsequently amended on March 31, 2015, pursuant to which we purchased NIBs related to
four portfolios of life insurance policies with an aggregate face value of approximately $124,375,000 and which meet our NIB purchasing
guidelines. The following table contains detailed information about the life insurance policies underlying the NIBs we acquired
from HFII Assets.
|
|
|
|
|
|
|
|
|
|
Face Amount
|
Policy Type
|
Gender
|
Current Age
1
|
Life Expectancy
2
|
Months Elapsed since latest LE
3
|
Carrier
|
Carrier Rating
4
|
1
|
$1,500,000
|
Universal Life
|
Male
|
93
|
63
|
43
|
AXA
|
A+
|
2
|
$1,500,000
|
Universal Life
|
Male
|
85
|
92
|
44
|
AXA
|
A+
|
3
|
$7,000,000
|
Universal Life
|
Female
|
83
|
94
|
49
|
Jefferson Pilot
|
AA-
|
4
|
$10,000,000
|
Universal Life
|
Male
|
81
|
135
|
49
|
AXA
|
A+
|
5
|
$1,500,000
|
Universal Life
|
Male
|
89
|
66
|
47
|
Protective
|
AA-
|
6
|
$2,000,000
|
Universal Life
|
Male
|
79
|
96
|
48
|
Natl Western
|
A
|
7
|
$10,000,000
|
Universal Life
|
Male
|
78
|
145
|
46
|
Hartford
|
BBB+
|
8
|
$5,000,000
|
Universal Life
|
Male
|
78
|
152
|
47
|
AXA
|
A+
|
9
|
$5,000,000
|
Universal Life
|
Male
|
78
|
152
|
47
|
AXA
|
A+
|
10
|
$3,000,000
|
Universal Life
|
Female
|
85
|
119
|
46
|
ReliaStar
|
A
|
11
|
$10,000,000
|
Universal Life
|
Female
|
85
|
110
|
48
|
AXA
|
A+
|
12
|
$3,000,000
|
Universal Life
|
Male
|
91
|
55
|
49
|
Hancock
|
AA-
|
13
|
$975,000
|
Universal Life
|
Male
|
94
|
53
|
40
|
Columbus
|
AA
|
14
|
$2,500,000
|
Universal Life
|
Male
|
86
|
107
|
53
|
Natl Western
|
A
|
15
|
$1,500,000
|
Universal Life
|
Male
|
82
|
97
|
54
|
Hancock
|
AA-
|
16
|
$5,000,000
|
Universal Life
|
Male
|
85
|
110
|
54
|
West Coast
|
AA-
|
17
|
$5,000,000
|
Universal Life
|
Male
|
85
|
109
|
54
|
Lincoln Benefit
|
BBB+
|
18
|
$5,000,000
|
Universal Life
|
Female
|
87
|
129
|
54
|
Columbus
|
AA
|
19
|
$7,000,000
|
Universal Life
|
Male
|
81
|
148
|
47
|
Lincoln National
|
AA-
|
20
|
$5,000,000
|
Universal Life
|
Female
|
89
|
92
|
44
|
AXA
|
A+
|
21
|
$4,000,000
|
Universal Life
|
Female
|
87
|
124
|
49
|
Security Life of Denver
|
A
|
22
|
$2,400,000
|
Universal Life
|
Male
|
83
|
134
|
54
|
Lincoln National
|
AA-
|
23
|
$5,000,000
|
Universal Life
|
Male
|
89
|
80
|
45
|
AXA
|
A+
|
24
|
$4,500,000
|
Universal Life
|
Male
|
85
|
81
|
46
|
Columbus
|
AA
|
25
|
$3,000,000
|
Universal Life
|
Male
|
90
|
67
|
54
|
AXA
|
A+
|
26
|
$2,000,000
|
Universal Life
|
Male
|
83
|
124
|
48
|
Hancock
|
AA-
|
27
|
$5,000,000
|
Universal Life
|
Female
|
86
|
116
|
53
|
Security Life of Denver
|
A
|
28
|
$2,000,000
|
Universal Life
|
Male
|
80
|
130
|
53
|
Security Life of Denver
|
A
|
29
|
$5,000,000
|
Universal Life
|
Male
|
86
|
111
|
48
|
Prudential
|
AA-
|
|
$124,375,000
|
|
|
|
|
|
|
|
__________________
-
Age at nearest birthday (as of March 31, 2016)
-
The Life Expectancy ("LE") input is the 70%/30%
weighted average of two LEs available at the time of the original creation of the NIB portfolio. In purchasing, financing
or insuring life insurance policies or NIBs, we may use alternate life expectancy companies or may use weighted averages of two
or more life expectancy companies, depending on the facts and circumstances of the case and requirements of the various counterparties.
The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known with absolute certainty.
-
The Age of LE report represents the difference between
the average date of the reports from which the Life Expectancy input were taken and of March 31, 2016 divided by 30.5 days to
arrive at a number expressed in months. The age of an LE report is relevant to the reliability or aging of the Life Expectancy
provided in the previous column.
-
The carrier ratings are generally taken from S&P,
but if a carrier is not rated by S&P, then the ratings are taken from the following agencies (in order): Moody's, Fitch, or
A.M. Best.
Based on the original life expectancy report
related to the life insurance portfolio underlying the NIBs we purchased from HFII, with an adjustment made to reduce the Life
Expectancies by the number of months since the last Life Expectancy report, we could expect 11 underlying policies, representing
an aggregate face amount, of approximately $65.1 million, to mature within 5 years of March 31, 2016, and the remaining underlying
policies, representing an aggregate face amount of approximately $24.6 million, to mature thereafter. These life expectancies,
or “LEs”, are based on a 70%/30% weighted average of two LEs available at the time of the original creation of the
NIB portfolio. It should be noted that the insured’s health, medical conditions and other considerations may have changed
since the initial LE report, so the LE is simply an estimate. These LEs were produced by third-party life expectancy companies
and represent the actuarial mean of how long an individual is expected to live using the LE provider's proprietary statistical
model, which is typically based on individualized mortality curves for each life factoring in the insured's gender, age, health
and family history, medical conditions, and other considerations. The life expectancy report is just an estimate, as the life expectancy
of any individual cannot be known with absolute certainty.
Although paid by the Holder, the estimated premiums
and other expenses to be paid with respect to the policies underlying the NIBs purchased by us from HFII for each of the five succeeding
fiscal years to keep such policies in force as of March 31, 2016, are as follows:
Estimated Expenses to be Paid by Holder
|
Year
|
|
Premiums
|
|
Expenses + Interest
1
|
|
|
Total
|
Year 1
|
|
$
|
4,411,072
|
|
$
|
2,736,063
|
|
|
$
|
7,147,135
|
Year 2
|
|
|
4,864,459
|
|
|
3,601,079
|
|
|
|
8,465,538
|
Year 3
|
|
|
5,536,981
|
|
|
2,970,498
|
|
|
|
8,507,479
|
Year 4
|
|
|
5,707,835
|
|
|
3,062,397
|
|
|
|
8,770,232
|
Year 5
|
|
|
5,208,199
|
|
|
3,364,619
|
|
|
|
8,572,818
|
Thereafter
|
|
|
13,958,338
|
|
|
14,241,447
|
|
|
|
28,199,786
|
Total
|
|
$
|
39,686,884
|
|
$
|
29,976,104
|
|
|
$
|
69,662,988
|
__________________
|
1.
|
The amounts in this column represent what we expect the Holders expenses to be in relation to
interest accrued on the Senior Loans, servicing fees, custodial fees and other administrative expenses and fees
.
|
These premiums, along with other costs and expenses
and repayments under the MRI, if any, will reduce the net insurance benefits payable to us under the policies. As of March
31, 2016, we have not received any proceeds from the NIBs we acquired from HFII. Based on our current projections, we expect to
ultimately receive between 10% and 20% of the aggregate face amount of the life insurance policies underlying the NIBs we acquired
from HFII. Our current projections are based off of various assumptions including, but not limited to, 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 these projections. In addition, this expectation may not be realized for a number of reasons, such
as if the Holder defaults on premium payments and the related life insurance policies underlying our NIBs lapse and the underlying
insureds live longer than expected, thus increasing the length of time that the related life insurance policies must be maintained
and amounts that must be repaid to MRI providers and related expenses.
Employees
We have three full-time
employees: Randall F. Pearson, our President, Chief Executive Officer and Chief Financial Officer; Matthew G. Pearson, our Chief
Operating Officer; and Lisa L. Fuller, Esq., our general legal counsel.
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 incurred net losses since our
inception and may continue to incur substantial net losses for the foreseeable future. We may never achieve sustained profitability.
We have historically incurred
substantial net losses. Though for the year ended March 31, 2016 we recognized net income of $83,729, for the years ended
March 31, 2015 and 2014 we incurred a net loss of $146,740 and $206,138, respectively. For the years ended March 31, 2016,
2015 and 2014, we used cash in operations of about $2.8 million, $2 million and $10.5 million, respectively. We have an
accumulated deficit of $373,799 million at March 31, 2016. Even if we are successful in acquiring additional NIBs supported
by larger pools of insurance policies, we may continue to incur substantial losses for the foreseeable future as we continue
to acquire NIBs.
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.
Our currently owned NIBs comprise approximately
99% of our assets as of March 31, 2016. Life settlement products like our 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. If Holders fail to pay the costs
of maintaining the insurance policies underlying our NIBs, the value of our NIB portfolio could 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 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 wrong and, therefore, our model may be wrong. 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:
-
the experience and qualifications of the medical professional or life expectancy company
providing the life expectancy estimate;
-
the completeness and accuracy of medical records received by the life expectancy company;
-
the reliability of, and revisions to, actuarial tables or other mortality data published
by public and private organizations or developed by a life expectancy company and utilized by its medical professionals;
-
the nature of any illness or health conditions of the insured disclosed or undisclosed;
-
changes in living habits and lifestyle of an insured and medical treatments, medications
and therapies available to and used by an insured; and
-
future improvements in medical treatments and cures, and the quality of medical care the
insured receives.
We rely primarily on four different life
expectancy providers, 21
st
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 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.
There are only 71 individual insureds
underlying the NIBs we currently hold. Therefore, 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 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 interest rates increase, the value
of our NIBs is likely to 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 the NIBs we 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, our NIBs may decline in value or become worthless.
In order to compensate for the possibility
of increased interest rates in the future, our projections utilize an interest rate that is almost twice as much as the current
interest rate. Nevertheless, if interest rates increase, the value of the life insurance policies underlying our NIBs and our NIBs
may be decreased.
The Holders may not be able to refinance the loans
related to the life insurance policies underlying our NIBs.
The life insurance portfolios underlying
our 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.
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. If the Holders’ Lender
demands that the life insurance policies be liquidated, the proceeds of such liquidation would be used to pay the Holders’
Lender and, therefore, the net insurance benefit of such policies payable to us could be materially impaired and possibly reduced
to zero. Our right 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 present NIBs portfolio. The Holders’ Lender
is currently unrated. We have no direct contractual or other arrangement or relationship with the Holders’ Lender, nor are
we party to any of the agreements between the Holders’ Lender and the Holders from whom we purchase NIBs and similar life
settlement products. No assurance can be given that the Holders’ Lender will continue to be able to fund portfolio purchases
by Holders. The Holders’ Lender may cease making loans to Holders at any time and for any reason, including strategic,
regulatory and other reasons. If the Holders’ Lender ceases making loans to Holders to finance purchases of life settlement
policies we will be 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 would be 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.
The availability of MRI coverage is a condition of our business
model and assumptions, which, if unavailable, will substantially increase our risk of failure.
The MRI is a relatively new product and there
are no guarantees that the MRI 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 may be unable to meet the Holders’ coverage needs or refuse to provide
future coverage to the Holders. Without the MRI coverage, the Holders will have limited options when the senior loans mature (in
four to five years). At such time, the Holders’ Lender could demand repayment of all outstanding amounts under the
senior loans, which could result 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. If there are
insufficient funds available for this purpose or if the Holders do not pay premiums on a policy in a timely manner, the policy
could lapse and the value of the asset could be lost, decreasing the value of our NIBs.
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 may be exposed to financial risk if the Holders and their business partners and service
providers default on their obligations to lenders, do not pay the expenses to maintain the policies, do not comply with the terms
of our contract or otherwise determine unilaterally to take action to our detriment.
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. Our projections
are based on our ability to purchase NIBs related to policies with combined face amounts in excess of $500,000,000 and at least
100 underlying insureds. We 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. As of March 31, 2016, we owned NIBs with life insurance policies in 13 portfolios with an aggregate original
face amount of $421 million covering 71 lives. The relatively low number of insureds underlying our NIBs makes our models and projections
less reliable. 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 or 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 may 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 present 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 our 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. While it is too early to assess the full impact of the Dodd-Frank
Act generally on our business and prospects, 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.
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 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 $150,000 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. The accompanying financial statements have been prepared
on a going concern basis under which we are expected to be able to realize our assets and satisfy our liabilities in the normal
course of business. 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 entered into on
June 2, 2015 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 Florida, allow the carrier
to retain all the premiums and some states that require premiums to be returned permit the carrier to maintain an action for damages.
Even if such claims are unsuccessful, significant amounts may need to be expended in defending such claims, thereby reducing
the amounts we may receive from our NIBs and other life settlement interests we may purchase.
Concern also exists regarding the applicability
of state insurable interest requirements 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
and New York have case law is very favorable to the policy owner (
see
Lincoln v. Jack Teren and Jonathan S. Berck, as
trustee of the Jack Teren Insurance Trust
(Superior Court of the State of California, San Diego) and
Alice Kramer
v. Lockwood Pension Services, Inc., et al.
, (United States District Court – Southern District of New York)). These
courts have held life insurance policies to be enforceable even where the policies were clearly purchased with an intent to sell
the policies in the future. Florida has case law that is more favorable to the insurance carrier (
see
PrucoLife
Insurance Company v. Steven M. Brasner, et. al.
(US District Court Southern District of Florida). 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. Lawence 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 NIBs were 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.
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 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, 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 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 twelve (12) of the life insurance policies underlying our NIBs. 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 Holders do not have sufficient funds available to pay all the premiums on the life insurance policies underlying our NIBs,
our NIBs may 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 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 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 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 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 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 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 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 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 16,443,553 shares of our common stock held by non-affiliates as of March 31, 2016. 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 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
63% 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 63% 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 44,222,191
shares of our common stock that were outstanding as of March 31, 2016, which amount includes 93,750 shares subject to mandatory redemption and thus not included in stockholders’
equity, 34,931,250 of such shares are subject to lock-up/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, 2016; 0.005 (1/2%) of our outstanding securities
during each of the next four successive quarterly periods; and 0.01 (1%) of our outstanding securities during each of the next
four successive quarterly periods, all on a non-cumulative basis, meaning that if no common stock was sold during any quarterly
period while common stock was qualified to be sold, such shares of common stock cannot be sold in the next successive quarterly
period (the “Leak-Out Period”). Notwithstanding the foregoing, any stockholder subject to a lock-up/leak-out
agreement that owns less than 100,000 shares of common stock that are covered thereby, is allowed to sell such stockholder’s
common stock. Our remaining outstanding shares are mostly freely tradable under Rule 144, except for 1,036,250 shares held
by HFII which are subject to 12 month lock-up period that began on March 2, 2015, 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.