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ABSOLUTE LIFE SOLUTIONS, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(Edgar Glimpses Via Acquire Media NewsEdge) CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements regarding
management's plans and objectives for future operations including plans and
objectives relating to our marketing efforts and future economic performance.
Any statement in this Annual Report and in the documents incorporated by
reference into this Annual Report that is not a statement of an historical fact
constitutes a "forward-looking statement." Further, when we use the words "may,"
"expect," "anticipate," "plan," "believe," "seek," "estimate," "intend," and
similar words, we intend to identify statements and expressions that may be
forward-looking statements. We believe it is important to communicate certain of
our expectations to our investors. The forward-looking statements and associated
risks set forth in this Annual Report include or relate to, among other things,
(a) our projected sales and profitability, (b) our growth strategies, (c)
anticipated trends in our industry, (d) our ability to obtain and retain
sufficient capital for future operations, (e) our anticipated needs for working
capital, and (f) the outcome of any litigation against us. Actual events or
results may differ materially from those discussed in forward-looking statements
as a result of various factors, including, without limitation, the Introductory
Note, the risks outlined under Item 1A," RISK FACTORS " and matters described in
this Annual Report generally.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes appearing elsewhere in this Report. This discussion and analysis
may contain forward-looking statements based on assumptions about our future
business. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including, but
not limited to, those set forth under "Risk Factors" and elsewhere in this
Report.
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Unless required by law, we undertake no obligation to publicly revise any
forward-looking statement to reflect circumstances or events after the date of
this Report or to reflect the occurrence of unanticipated events. Shareholders
and potential shareholders should, however, review the factors and risks we
describe in the reports we will file from time to time with the SEC after the
date of this Report. Management cautions that these statements are qualified by
their terms and/or important factors, many of which are outside of our control,
and involve a number of risks, uncertainties and other factors that could cause
actual results and events to differ materially from the statements made,
including, but not limited to, the following:
· actual or anticipated fluctuations in our quarterly and annual operating
results;
· actual or anticipated product constraints;
· decreased demand resulting from changes in laws;
· product and services announcements by us or our competitors;
· loss of any of our key executives;
· regulatory announcements, proceedings or changes;
· competitive product developments and legal developments;
· any business combination we may propose or complete;
· any financing transactions we may propose or complete; or
· broader industry and market trends unrelated to its performance.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements.
Results of Operations
Our results of operations for the year ended August 31, 2012, consisted of
change in fair value of life settlement contracts net of premiums paid (which
include unrealized gains on life settlement contracts and realized gains on
maturity and sale of life settlement contracts), and interest income from
reverse repurchase agreements less operating and administrative expenses for
personnel, leased office space and professional fees, interest incurred on loans
payable and income tax expense.
43
Fiscal year ended August 31, 2012 compared to fiscal year ended August 31, 2011
ABSOLUTE LIFE SOLUTIONS, INC.
Year ended Year ended
August 31, August 31,
2012 2011
Sales, general and administrative expenses $ (2,319,355 ) $ (3,102,642 )
Other income (expense)
Realized gain on life settlement contracts held under
investment method
319,843 -
Change in fair value of life settlement contracts net of
premiums paid
(36,460,974 ) 45,507,979
Interest income (expense) (626,710 ) 44,606
Income ( loss) before income tax (39,087,196 ) 42,449,943
Income tax benefit (provision) 16,640,912 (19,546,602 )
Net income (loss) (22,446,284 ) 22,903,341
Deemed dividend on issuance of Series A and Series B
Preferred Stock
(932,643 ) (37,300,000 )
Dividend on Convertible Preferred Stock (4,580,642 ) (6,658,262 )
Net loss applicable to common shareholders $ (27,959,569 ) $ (21,054,921 )
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Expenses. Operating and administrative expenses decreased from $3,102,642 for
the year ended August 31, 2011 to $2,319,355 for the year ended August 31, 2012.
The decrease in operating and administrative expenses of approximately $783,000
for the year ended August 31, 2012 is primarily attributable to a decrease in
spending on marketing budgets of approximately $720,000. Marketing expenses
related to the initial start-up of the Company were incurred in the prior year.
These were one time charges. The decrease is also attributable to a decrease in
provider fees of approximately $115,000 from the prior year, as we purchased
substantially more policies in the year ended August 31, 2011 as compared to the
year ended August 31, 2012. Additionally, in the year ended August 31, 2011, we
issued common stock as compensation to an officer, a board member and an
investor relations consultant, of which the fair value of that stock
compensation was approximately $420,000. We did not issue any stock compensation
in the year ended August 31, 2012. This was offset by an increase in NYS capital
tax of approximately $200,000 in the year ended August 31, 2012.
Other Income (Expense). Total other income decreased from $45,552,585 for the
year ended August 31, 2011 to a loss of $36,767,841 for the year ended August
31, 2012. Change in fair value net of premiums paid including a realized loss of
$510,853 was $36,460,974 for the year ended August 31, 2012, due to fair market
valuation of pool policies. We had a net realized loss of $510,853 from the sale
of two policies held at fair value for the year ended August 31, 2012 and net
realized gains of $319,843 from the sale of two policies held under investment
method for the year ended August 31, 2012. The decrease in fair value of our
life settlement portfolio is primarily attributable to the increase in discount
rate that the Company utilizes in valuing its investments. Additionally, the
Company made no new acquisitions of policies in the year ended August 31, 2012
as compared to acquisitions of 33 new policies in the year ended August 31,
2011. These were acquisitions of policies in distressed sales from
individuals/entities that did not have the ability to "hold" the policies. When
these policies were initially marked at fair value, there were significant
unrealized gains because of our intent and ability to hold these policies until
maturity. In subsequent periods, the gradual changes in fair value will result
in a decrease in the change in unrealized gains on policies already acquired.
Interest income (expense) decreased from interest income of $44,606 for the year
ended August 31, 2011 to interest expense of $626,710 for the year ended August
31, 2012. Interest expense for the year ended August 31, 2012 is a result of
interest due on our loans payable of $59,450,000 as compared to interest income
of $44,160 from reverse repurchase agreements for the year ended August 31,
2011.
Income Tax. Income tax expense decreased from $19,546,602 for the year ended
August 31, 2011 to a benefit of $16,640,912 for the year ended August 31, 2012.
A decrease of $16,828,116 to the previous year's deferred income tax liability
of $21,071,160 resulted in a deferred income tax liability of $4,243,044 which
is primarily attributable to the unrealized loss from a decrease in the fair
value of the Company's life settlement portfolio.
Net Income (Loss). We reported a net loss of $22,446,284 for the year ended
August 31, 2012 compared to net income of $22,903,341 for the year ended August
31, 2011. The decrease is primarily a result of a decrease in the fair value of
the Company's life settlement portfolio due to the increase in the discount rate
used to value our portfolio.
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Deemed Dividend. The Company recorded a deemed dividend for financial statement
purposes of $932,643 and $37,300,000 for the years ended August 31, 2012 and
2011 to holders of our Series A and Series B preferred shares in connection with
the appreciation of our common stock price. The deemed dividend reflects the
intrinsic value of conversion options embedded in preferred shares based upon
the differences between the fair value of the underlying common stock at the
commitment date of the transaction and the effective conversion price embedded
in the preferred shares.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended August 31, 2012 was
$11,329,062. Net cash provided by investing activities was $994,216 arising from
proceeds received from sale of life settlement contracts offset by investment in
life settlement contacts at investment method and investment in reverse
repurchase agreement. Net cash provided by financing activities was $8,650,000
primarily from the sales of Series A preferred stock and proceeds from a
revolver loan. This resulted in a decrease in cash of $1,684,846. Sources of
cash flow resulted primarily from capital raising activities of $6,350,000 and
$2,300,00 from a revolver loan.
Working Capital and Capital Availability: As of August 31, 2012, we had negative
working capital of $55,935,753, including $4,334,012 of policies held under the
investment method. The negative working capital is primarily a result of a term
loan of $57,150,000 that we entered into with the Lenders on July 31, 2012. On
that same date, we entered into a revolver loan with the Lenders of $10,000,000,
of which we drew down $2,300,000 as of August 31, 2012, in order to finance our
ongoing operations, including payment of premiums to maintain our portfolio.
Additionally, we had an interest payable balance of $626,710 on those loans as
of August 31, 2012. The term loan has a maturity date of October 31, 2012 and is
collaterized with the Company's life settlement portfolio. This agreement is
more fully discussed in Note 4 of these Financial Statements. On October 31,
2012, the term loan matured and was satisfied with forclosure of the Company's
life settlement portfolio. The Company will retain certain other assets
including certain working capital, furniture and fixtures, and its interest in
its subsidiary Infinity Augmented Reality, LLC which is actively enagaged in the
development of software applications which will utilize Augmented Reality.
Subsequent to August 31, 2012 and prior to November 15, 2012, a life settlement
contract matured resulting in cash proceeds of $10,000,000, a portion of these
proceeds were used to satisfy theTerm Interest of $2,123,281 and the Revolving
Total of $5,249,000. We currently have approximately $530,000 cash on hand, and
expect to receive additional cash proceeds of approximately $165,000 (from
interest income and refund of fees), which will sustain our operations for
approximately eight months. We expect to raise additional funds to continue our
augmented reality operations through debt or subsequent equity offerings. Such
issuance may dilute the interest of our existing shareholders. During the next
twelve months we anticipate that we will not generate significant cash from
operations.We are unable to estimate our working capital requirements and
capital availablility for Infinity for the next twelve months.
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Going Concern Qualification
The Company will require additional funds to finance its new augmented reality
operations. Effective November 15, 2012, we are a development stage company
dependent upon the expected demand for our software applications and our ability
to generate sufficient cash from our augmented reality business to meet our
obligations as they come due. We may not be able to obtain additional financing
on reasonable terms or at all. These conditions raise substantial doubt about
our ability to continue as a going concern. Since July 2010, we have raised in
excess of $50,000,000 in additional capital, a portion of which was available
for our working capital needs for our prior business. However, there can be no
assurance that the Company can successfully accomplish these steps and or
business plans, and it is uncertain that the Company will achieve a profitable
level of operations and be able to obtain additional financing. There can be no
assurance that any additional financings will be available to the Company on
satisfactory terms and conditions, if at all.
Application of Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are
based on our financial statements that were prepared in accordance with
accounting principles generally accepted in the United States of America. To
guide our preparation, we follow accounting policies, some of which represent
critical accounting policies as defined by the SEC. The SEC defines critical
accounting policies as those that are both most important to the portrayal of a
company's financial condition and results and require management's most
difficult, subjective, or complex judgment, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Certain accounting estimates involve significant
judgments, assumptions and estimates by management that may have a material
impact on the carrying value of certain assets and liabilities, disclosures of
contingent liabilities, and the reported amounts of income and expenses during
the reporting period that management considers critical accounting
estimates. The judgments, assumptions and estimates used by management are based
on historical experience, management's experience, knowledge of the accounts and
other factors that are believed to be reasonable. Because of the nature of the
judgments and assumptions made by management, actual results may differ
materially from these judgments and estimates, which could have a material
impact on the carrying values of assets and liabilities and the results of our
operations. Areas affected by our estimates and assumptions are identified
below.
ASC 325-30, Investments in Insurance Contracts, states that an investor may
elect to account for its investments in life settlement contracts using either
the investment method or the fair value method. The election is to be made on an
instrument-by instrument basis and is irrevocable. Under the investment method,
an investor is to recognize the initial investment at the purchase price plus
all initial direct costs. Continuing costs (e.g., policy premiums and direct
external costs, if any) to keep the policy in force are to be capitalized. Under
the fair value method, an investor recognizes the initial investment at the
purchase price. In subsequent periods, the investor re-measures the investment
at fair value in its entirety at each reporting period and recognizes change in
fair value earnings (or other performance indicators for entities that do not
report earnings) in the period in which the changes occur. We primarily value
our investments in life settlement contracts using the fair value method. As of
August 31, 2012 and August 31, 2011, the total of our investment in life
settlements held for our own account held at fair value was valued at
$64,667,124 and $92,708,076, respectively. As of August 31, 2012and August 31,
2011, the total of our investment in life settlements held for our own account
held at investment method was valued at $4,334,012 and $0, respectively.
47
The fair value of the investment in life settlement contracts is evaluated at
the end of each reporting period. Realized and unrealized changes in the fair
value of the investment are recognized each reporting period in the statements
of operations. The fair value is determined on a discounted cash flow basis that
incorporates current life expectancy assumptions. The discount rate incorporates
current information about market interest rates, the credit exposure to the
insurance company that issued the life insurance policy and our estimate of the
risk premium an investor in the policy would require.
The Company measures the fair value of financial assets and liabilities based on
the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. ASC 820 also establishes a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 - quoted prices in active markets for identical assets or liabilities
Level 2 - quoted prices for similar assets and liabilities in active markets or
inputs that are observable
Level 3 - inputs that are unobservable (for example cash flow modeling inputs
based on assumptions)
48
The following table provides an analysis of Level 3 financial instruments that
are re-measured subsequent to initial recognition at fair value. The Company
determined that its investment in life settlements is a Level 3 financial
instrument and that it has no Level 1 or Level 2 financial instruments:
Reconciliation of Level 3 fair value measurements of financial assets on a
recurring basis using unobservable inputs as of August 31, 2012 and 2011:
Unquoted Life Settlement Contracts: August 31, 2012 August 31, 2011
Beginning balance $ 92,708,076 $ 12,313,897
Transfers in:
Purchases of life settlement contracts - 29,791,549
Change in fair value of life settlement contracts (26,401,160 ) 53,102,630
Transfers out:
Proceeds from maturity of life settlement contract (1,639,792 ) (2,500,000 )
Ending balance $ 64,667,124 $ 92,708,076
We make estimates of the collectability of insurance proceeds receivable. The
accounts associated with these areas are critical to recognizing the correct
amount of revenue in the proper period. We have not experienced any material
changes in our estimates of collectability versus actual results in the current
or prior periods.
We review the carrying value of investment in life settlement contracts at
investment method for impairment at the end of each reporting period. The
carrying value of these life settlement contracts increases based on the premium
payments made to insurance companies. We confirm with the insurance companies
that they received the premium payments. We reconcile payments to our bank
statement on a monthly basis. Based on this assessment, there was no impairment
during the year ended August 31, 2012.
We review the carrying value of the property and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair value
of assets. The factors considered by management in performing this assessment
includes current operating results, trends and prospects, the manner in which
the property is used, and the effects of obsolescence, demand, competition and
other economic factors. Based on this assessment, there was no impairment during
the year ended August 31, 2012.
We evaluate the useful lives of our property and equipment to assure that an
adequate amount of depreciation is being charged to operations. Useful lives are
based generally on specific knowledge of an asset's life.
We are required to estimate our income taxes. This process involves estimating
our current tax exposure together with assessing temporary differences resulting
from differing treatment of items for tax and financial reporting
purposes. These differences result in deferred tax assets and liabilities. We
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income, and, to the extent we believe that recovery is not
likely, we establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we include a tax
provision or reduce our tax benefit in the statements of operations. We use our
judgment to determine our provision or benefit for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against our net
deferred tax assets.
We cannot predict what future laws and regulations might be passed that could
have a material effect on our results of operations. We assess the impact of
significant changes in laws and regulations on a regular basis and update the
assumptions and estimates used to prepare our financial statements when we deem
it necessary.
Except for increasing the discount rate we use to fair value our life settlement
contracts, as more fully discussed in Note 3 to these Financial Statements, we
have not made any material changes to our critical accounting estimates or
assumptions or the judgments affecting the application of those estimates or
assumptions.
49
New Accounting Pronouncements
The FASB has issued Accounting Standards Update (ASU) No. 2010-15, Financial
Services-Insurance (Topic 944): How Investments Held through Separate Accounts
Affect an Insurer's Consolidation Analysis of Those Investments. This ASU
codifies the consensus reached in EITF Issue No. 09-B, "Consideration of an
Insurer's Accounting for Majority-Owned Investments When the Ownership Is
through a Separate Account." The amendments clarify that an insurance entity
generally should not consider any separate account interests held for the
benefit of policy holders in an investment to be the insurer's interests and
should not combine those interests with its general account interest in the same
investment when assessing the investment for consolidation. The general guidance
does not apply in instances where the separate account interests are held for
the benefit of a related party policy holder as defined in the Variable Interest
Entities Subsections of Codification Topic 810, Consolidation, Subtopic 810-10,
as those Subsections require the consideration of related parties. ASU 2010-15
is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2010. Early adoption is permitted. The adoption of
this standard is not expected to have a material impact on the Company's
financial position and results of operations.
Other pronouncements issued by the FASB or other authoritative accounting
standards groups with future effective dates are either not applicable or are
not expected to be significant to the financial statements of the Company.
Off-Balance Sheet Arrangements
We did not engage in any off-balance sheet arrangements or transactions.
Outlook
On October 31, 2012, our term loan matured and was satisfied with transfer of
our life settlement portfolio. We will retain certain other assets including
certain working capital, furniture and fixtures, and our interest in our
subsidiary Infinity Augmented Reality, LLC which is actively enagaged in the
development of software applications which will utilize Augmented Reality. As a
result of the foregoing, we are no longer engaged in our prior primary activity
as a specialty financial services company primarily engaged in the acquisition
of life settlement transactions. Our Board of Directors has therefore determined
that it will be providential for us to research and commence other lines of
business. In furtherance thereof, we formed a wholly owned subsidiary, Infinity
Augmented Reality LLC. IAR began finalizing specifications for Infinity's
applications and engaged a third party to prepare the necessary programs and
related intellectual property. We believe our company and our industry are
fundamentally sound and well positioned to deal with the current uncertainty in
the financial and capital markets. We carry no operational debt and do not rely
on leverage in our capital structure. We do rely, however, upon the availability
of investment capital. While it is conceivable that a financial crisis could
diminish the supply of investment capital throughout the economy, we believe
that greater investment capital will be placed in the augmented reality
sector. We believe this is due to the fact that augmented reality is one of the
technologies of the future.
Our operating strategy is to increase cash flows generated from operations by
increasing revenues while controlling operating and administrative expenses. We
believe that domestic and international demand for augmented reality products
will continue to grow as the industry continues to mature.
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