UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: August 31, 2012
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number: 000-53446
Absolute Life Solutions, Inc.
(Exact Name of Registrant as Specified in its Charter)
Nevada | 71-1013330 | |||
(State or Other Jurisdiction of Incorporation) | (I.R.S. Employer Identification No.) |
45 Broadway, 6 th Floor | ||||
New York, New York | 10006 | |||
(Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 201-4070
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, 0.00001 Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨. No x.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No ¨ ..
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x. No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | ¨. (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes ¨. No x.
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the average bid and asked price of such stock, as of February 29, 2012 (second quarter prior to the end of our fiscal year) was approximately $36,954,072 (for purposes of determination of the aggregate market value, only directors, executive officers and 10% or greater stockholders have been deemed affiliates.)
The number of shares outstanding of the registrant’s common stock, par value $0.00001 per share, as of December 24, 2012, was 92,229,599 shares.
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | Business | 5 |
Item 1A. | Risk Factors | 16 |
Item 1B. | Unresolved Staff Comments | 39 |
Item 2. | Properties | 40 |
Item 3. | Legal Proceedings | 40 |
Item 4. | Mine Safety Disclosures | 40 |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 40 |
Item 6. | Selected Financial Data | 41 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 42 |
Item 7A | Quantitative and Qualitative Disclosures about Market Risk | 50 |
Item 8. | Financial Statements and Supplementary Data | 50 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 50 |
Item 9A. | Controls and Procedures | 51 |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | 52 |
Item 11. | Executive Compensation | 55 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 56 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 57 |
Item 14. | Principal Accounting Fees and Services | 58 |
PART IV | ||
Item 15. | Exhibits, Financial Statement Schedules | 58 |
SIGNATURES | 60 | |
Index to Financial Statements | F-1 |
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INTRODUCTORY NOTE
As more fully discussed in our Current Reports on Form 8-K filed August 2, 2012, October 25, 2012, and November 20, 2012, and in Notes 4, 5, 6 and 10 to the annexed Financial Statements, on July 31, 2012, Absolute Life Solutions, Inc. (the “Company”) entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan and Security Agreement”) with certain parties, which were the holders of, in the aggregate, all of the Company’s Series A and Series B Preferred Stock (the “Lenders”). Platinum Partners Value Arbitrage Fund L.P., one of the Lenders, is serving as Agent for the Lenders. Pursuant to the Loan and Security Agreement, the Lenders agreed to lend to the Company, in the aggregate (i) a maximum of $10,000,000 on a revolving loan basis (the “Revolving Loan”), and (ii) $57,150,000 as a term loan (the “Term Loan”). Both the Revolving Loan and the Term Loan (collectively, the “Loans”) were due on October 31, 2012 (the “Maturity Date”), subject to acceleration upon the occurrence of certain specified events of default. Repayment of the Loans was secured by a security interest in all of the assets of the Company, including all of the life insurance policies owned by the Company as well as all other assets of the Company.
Simultaneously, on July 31, 2012, the Company entered into an agreement (the “Preferred Shares Agreement”) with the Lenders, as holders of the Company’s preferred stock, for the Company’s purchase from the Lenders of an aggregate of 48,300 shares of the Series A and 8,850 shares of Series B Preferred Stock, which represent all of the issued and outstanding shares of preferred stock and which have an aggregate stated value of $57,150,000, for a purchase price of $57,150,000. (The payment was made by the Company applying all of the proceeds of the Term Loan for such purpose.) As part of the purchase, the Lenders, who also held warrants to purchase 57,592,500 shares of the Company’s stock at exercise prices from $2 and $4 a share, agreed to cancel those warrants.
The Series A Preferred Stock and Series B Preferred Stock held by the Lenders included provisions allowing for the conversion of the preferred shares into shares of Common Stock of the Company. After the purchase of the Series A Preferred Stock and Series B Preferred Stock held by the Lenders, there are no shares of Preferred Stock currently outstanding and all of the warrants held by the Lenders have been canceled. As a result of the purchase of the Preferred Stock and cancellation of the warrants, the Company withdrew its registration statement on Form S-1, which proposed to cover the resale by the holders of the shares of common stock issuable on conversion of the Preferred Stock and the exercise of the warrants.
During the fiscal year ended August 31, 2012, the Board of Directors determined that it will be providential for the Company to research and commence other lines of business. In furtherance thereof, the Company formed a wholly owned subsidiary, Infinity Augmented Reality LLC (“IAR” or “Infinity”). IAR began finalizing specifications for Infinity’s applications and engaged a third party to prepare the necessary programs and related intellectual property. The third party has commenced development of augmented reality programs.
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Through IAR, the Company intends to develop a comprehensive augmented reality platform for consumers. IAR’s objective is to establish itself firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.
Effective November 15, 2012, the Company reached agreements with the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such Agreement resulted in the disposition of all of the life insurance policies (and proceeds thereof) currently held by the Company to the Lender or an affiliate of the Lender. As of November 15, 2012, the Company had outstanding Obligations of $64,522,281, including (i) $57,150,000 in aggregate principal amount of the Term Loan plus $2,123,281 (the “Term Interest”) in interest under the Term Loan, or a total of $59,273,281 due under the Term Loan, and (ii) $5,135,000 outstanding under the Revolving Loan, plus $114,000 in interest under the Revolving Loan, or a total of $5,249,000 (the “Revolving Total”) due under the Revolving Loan. The disposition of all of the Company’s life insurance policies was used to satisfy the $57,150,000 in aggregate principal amount of the Term Loan. 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 the Term Interest of $2,123,281 and the Revolving Total of $5,249,000.
The Company retained certain other assets including certain working capital, furniture and fixtures, and its interest in its subsidiary Infinity Augmented Reality, LLC.
As a result of the foregoing, the Company is no longer engaged in its prior primary activity as a specialty financial services company primarily engaged in the acquisition of life settlement transactions discussed in this Form 10-K. Furthermore, certain sections of this Form 10-K (“Business”, “Management’s Discussion and Analysis”, and “Financial Statements”) reflect historical operations and may not be descriptive of future operations or allow our investors to properly assess the future performance of the Company.
The foregoing summary of the terms of the Loan and Security Agreement, the Preferred Shares Agreement, and Loan Satisfaction Agreement are qualified in the entirety by reference to the terms of those agreements, copies of which are included as exhibits to our Current Reports filed on Form 8-K.
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PART I
ITEM 1. BUSINESS.
From June 1, 2010 to November 15, 2012, our primary operations consist of the business and operations of the acquisition of life settlement transactions. Therefore, we are disclosing information about the life settlement business, financial condition, and management in this Form 10-K. In this Form 10-K, references to the “Company” refer to the Company as constituted prior to November 15, 2012, unless the context indicates otherwise.
Our History
We were incorporated under the name of Shimmer Gold, Inc. on September 7, 2006 in the State of Nevada. In January 2010, we discontinued our business operations and transferred those operations and the assets relating thereto to Shawn Balaghi, our former president and director. In January 2010, our then existing shareholders sold 99% of their issued and outstanding common stock to YSY Enterprises, Inc. In May 2010, YSY Enterprises, Inc. sold its ownership interest to our current shareholders. Subsequently, a majority of our shareholders approved an amendment to our Articles of Incorporation changing our name to Absolute Life Solutions, Inc. On May 24, 2010, the board of directors and stockholders approved a 10-for-1 forward stock split (the “Stock Split”). Pursuant to the Stock Split, every one (1) share of issued and outstanding common stock was reclassified into 10 whole post-split shares of common stock. Simultaneous with the Stock Split, we changed our name to “Absolute Life Solutions, Inc.” We changed our trading symbol to ALSO.OB. Until November 15, 2012, we were a specialty financial services company engaged in the purchase of life settlements. Our offices are located at 45 Broadway, New York, NY 10006.
We previously sold an aggregate of (i) 48,300 shares of our Series A 12.5% Convertible Preferred Stock (the “Series A Preferred Stock”), which shares of Series A Preferred Stock have a stated value of $1,000 per share and are convertible into shares of our Common Stock at an initial conversion price of $1.00 per share, subject to standard anti-dilution provisions, (ii) 2,850 shares of our Series B 12.5% Convertible Preferred Stock (the “Series B Preferred Stock”), which shares of Series B Preferred Stock have a stated value of $1,000 per share and are convertible into shares of our Common Stock at an initial conversion price of $1.00 per share, and (iii) warrants to purchase an aggregate of 57,592,500 shares of common stock (the “Investor Warrants”), 28,575,000 of which are exercisable at an initial exercise price of $2.00 per share and 29,017,500 of which are exercisable at an initial exercise price of $4.00 per share, which Investor Warrants expire five (5) years after issuance. To date, we have received aggregate gross cash proceeds of $57,150,000 from these transactions (the “Private Placements”). In connection with the establishment of the Series B Preferred Stock, which is subordinate to the Series A Preferred Stock in respect of liquidation and redemption, the holders of 6,000 shares of Series A Preferred Stock agreed to exchange their Series A Preferred Stock for Series B Preferred Stock. Each exchanging Series A holder received an additional 50 Warrants exercisable at $4.00 for each share of Preferred Stock so exchanged. There were 48,300 shares of Series A Preferred Stock and 8,850 shares of Series B Preferred Stock outstanding as of July 30, 2012.
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On July 31, 2012, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan and Security Agreement”) with certain parties, which were the holders of, in the aggregate, all of the Company’s Series A and Series B Preferred Stock (the “Lenders”). Platinum Partners Value Arbitrage Fund L.P., one of the Lenders, is serving as Agent for the Lenders. Pursuant to the Loan and Security Agreement, the Lenders agreed to lend to the Company, in the aggregate (i) a maximum of $10,000,000 on a revolving loan basis (the “Revolving Loan”) from the one Lender who agreed to do so, and (ii) $57,150,000 as a term loan (the “Term Loan”). Both the Revolving Loan and the Term Loan (collectively, the “Loans”) were due on October 31, 2012 (the “Maturity Date”), subject to acceleration upon the occurrence of certain specified events of default. The Loans bear interest at the rate of 12.5% per annum, due on the Maturity Date. Repayment of the Loans was secured by a security interest in all of the assets of the Company, including all of the life insurance policies owned by the Company as well as all other assets of the Company.
The Company was entitled to request a draw on the Revolving Loan when needed to pay premiums on the life insurance policies owned by the Company as or before they came due and for working capital purposes, subject to certain other conditions being satisfied and the Revolving Loan lender’s agreement to make the advance at that time. Proceeds of any draw down on the Revolving Loan will be used to pay such premiums and other applications provided in the Loan and Security Agreement or approved by the Agent. As of August 31, 2012 and November 15, 2012, the Company had a revolver loan payable balance of $2,300,000 and $5,135,000 respectively.
Simultaneously, the Company entered into an agreement (the “Preferred Shares Agreement”) with the Lenders, as holders of the Company’s preferred stock, for the Company’s purchase from the Lenders of an aggregate of 48,300 shares of the Series A and 8,850 shares of Series B Preferred Stock, which represent all of the issued and outstanding shares of preferred stock and which have an aggregate stated value of $57,150,000, for a purchase price of $57,150,000. (The payment was made by the Company applying all of the proceeds of the Term Loan for such purpose.) As part of the purchase, the Lenders, who also held warrants to purchase 57,592,500 shares of the Company’s stock at exercise prices from $2 and $4 a share, agreed to cancel those warrants. Accordingly, no Preferred Stock is currently outstanding.
Effective November 15, 2012, the Company reached agreements with the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such Agreement resulted in the disposition of all of the life insurance policies (and proceeds thereof) held by the Company to the Lender or an affiliate of the Lender. As of November 15, 2012, the Company had outstanding Obligations of $64,522,281, including (i) $57,150,000 in aggregate principal amount of the Term Loan plus $2,123,281 (the “Term Interest”) in interest under the Term Loan, or a total of $59,273,281 due under the Term Loan, and (ii) $5,135,000 outstanding under the Revolving Loan, plus $114,000 in interest under the Revolving Loan, or a total of $5,249,000 (the “Revolving Total”) due under the Revolving Loan. The disposition of all of the Company’s life insurance policies was used to satisfy the $57,150,000 in aggregate principal amount of the Term Loan. 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 the Term Interest of $2,123,281 and the Revolving Total of $5,249,000.
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The Series A Preferred Stock and Series B Preferred Stock held by the Lenders included provisions allowing for the conversion of the preferred shares into shares of Common Stock of the Company. After the purchase of the Series A Preferred Stock and Series B Preferred Stock held by the Lenders, there are no shares of Preferred Stock currently outstanding and all of the warrants held by the Lenders have been canceled. As a result of the repurchase of the Preferred Stock and cancellation of the warrants, the Company withdrew its registration statement on Form S-1, which proposed to cover the resale by the holders of the shares of common stock issuable on conversion of the Preferred Stock and the exercise of the warrants.
In connection with the issuance of the Series A and Series B Preferred Stock, we entered into Registration Rights Agreements with the purchasers, pursuant to which we agreed to use our best efforts to register the shares of common stock underlying the Preferred Stock. In connection with the Preferred Shares Agreement, on August 2, 2012, the Company formally requested that the SEC enter an order granting the immediate withdrawal of the Company’s Registration Statement on Form S-1 (Registration No. 333-175256) together with all exhibits.
During the fiscal year ended August 31, 2012, the Board of Directors determined that it will be providential for the Company to research and commence other lines of business. In furtherance thereof, the Company formed a wholly owned subsidiary, Infinity Augmented Reality LLC (“IAR” or “Infinity”). IAR began finalizing specifications for Infinity’s applications and engaged a third party to prepare the necessary programs and related intellectual property. The third party has commenced development of augmented reality programs.
Through IAR, the Company intends to develop a comprehensive augmented reality platform for consumers. IAR’s objective is to establish itself firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.
Augmented reality is a medium in which real sensory inputs are enhanced, or augmented, with relevant digital information from the Internet. Using specially equipped eyewear, virtual images, video, and sound are superimposed for the user over what is actually seen and heard, heightening the real-life experience with additional information that is pertinent, informative, practical, and/or entertaining. The individual user may also be fully immersed in a virtual world, temporarily blocking out real surroundings. With augmented reality, sensory inputs are no longer limited to what is within eyeshot or earshot, but may incorporate, in real-time, all that the network has to offer.
Augmented reality requires an interface, such as digitally-enhanced eyewear, that can instantaneously overlay virtual images and video on top of what is actually experienced. Companies like Google, Vuforia and Lumus are in the process of developing augmented reality glasses that will change the way users see and interact with the world. IAR will utilize their augmented reality applications through these glasses and/or through other mobile devices such as smart phones. As the individual turns his or her head in various directions and looks at different people or objects through the eyewear, the sights that are overlaid change accordingly. The eyewear incorporates speakers that add virtual sounds to the overall experience, as well as microphones that capture and interpret the user’s spoken commands through speech recognition technology in order to summon desired information and actions.
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As at August 31, 2012, there were issued and outstanding securities of the Company on a fully diluted basis as follows:
· 92,229,599 shares of our common stock held by the present stockholders;
· 315,148 shares of our common stock held in treasury;
· 9,000,000 shares of our common stock reserved under our equity incentive plan; and
· 6,000,000 shares of our common stock reserved for issuance pursuant to warrants issued under Consulting Agreements.
Introduction
A life settlement is the sale of an existing life insurance policy by a policy owner (frequently, but not always the insured) to a third-party investor for more than the policy’s cash surrender value but less than its net death benefit. Most life insurance policies contain assignment clauses and change of ownership clauses that the courts have recognized provide the owner with a right of resale of its personal property. This practice has become a common component in financial management over the last 15 years.
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After purchasing a policy, an investor can hold it until the death of the insured and collect the net death benefit or may resell the policy. The purchase of life insurance policies in this manner can represent an investment opportunity when the transactions are based on sound underwriting and analysis, including a thorough review of the health and life expectancy of the insured, the expected premiums due and the time value of money.
Historically, policy owners including those with pressing financial problems and those who no longer needed death benefit coverage, frequently allowed policies to lapse for failure to pay premiums. Other policy owners, who did not need the relevant policy protection and were seeking liquidity, surrendered their policy to the insurance carrier and received the policy’s cash surrender value (CSV) in a lump sum payment. Cash surrender values are typically far less than the face amount of the policy or the death benefit payable thereunder, and are sometimes significantly less than the policy’s life settlement market value (LSV). With the increased issuance of universal life contracts designed to minimize early year premiums through optimization of cost of insurance, especially for benefit of tax, estate and business risk planning, the number of policies issued containing very low cash surrender values has increased. The life settlement industry has developed over the past decade in response to the supply of high face-low cash value (hence higher market value) policies. In addition, as a practical matter, as people age health issues surface. Healthy people tend to show a high propensity to let their insurance lapse, while unhealthy people tend to persist with their insurance. Since the life settlement market focuses on seniors 70+ with their increasing health impairments that come with age, more and more of them want to keep their insurance, but can no longer afford the premiums.
Taking advantage of these two significant trends (the value gap between CSV and LSV, and the affordability issues of an aging, health-impaired population) investors have raised pools of capital to purchase life insurance contracts policy-owners would have otherwise surrendered or allowed to lapse.
Typically, an owner of a policy will discuss a potential sale with a broker, who will make the arrangements for sale with a life settlement provider that may either purchase the policy to hold or to resell it to investors. Investors in life settlements competitively bid on the purchase of a policy the owner or broker is seeking to sell, taking into account the overall health and life expectancy of the insured as well as the then-current economic environment. Policies that represent sound risks to investors can generate one or more bids in a competitive marketplace. The life settlement transaction can be beneficial to both buyer and seller, because the seller is able to receive a higher price than the cash surrender value offered by his or her insurer for the policy, and the buyer is able to purchase an investment with a high potential rate of return.
Once the transaction is complete, the purchaser becomes the legal and registered owner of the policy and succeeds to all legal rights and responsibilities of the policy contract, including the right to designate the beneficiary of the death benefit payable under the policy and the obligation to pay premiums. Investors in life policies may hold the policies for resale individually or in blocks, or may attempt to bundle them into a new vehicle and sell securities issued by that entity in a securitized transaction.
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Absolute Life Solutions, Inc. would purchase ownership of the life insurance policy at a discount to its face value and receive the face amount of the death benefit under the policy when the insured person dies. In an Absolute Life Solutions, Inc. transaction, the insured was typically 70 years of age or older and had a life expectancy of five to ten years. The Company evaluated each policy on a case by case basis. Each case was evaluated on the basis of its optimized premium stream, age and indicated health of the individual. The results of pricing typically excluded policies held by individuals less than 70 years old. Our established policy was not to purchase policies that produce a negative value when evaluated by the Model Actuarial Pricing Systems (“MAPS”) program.
The Company utilized the MAPS system for pricing policies. MAPS is a generally accepted third party pricing system utilized by funds and investors engaged in the purchase and sale of life settlements.
Life expectancy reports were generated by third party medical underwriting firms, such as AVS, 21 st Century, EMSI and Fasano. These firms review medical data for an individual and grade using a series of debits and credits. The resulting values are used to generate a life expectancy value. The MAPS system utilizes this life expectancy data to calibrate underlying mortality curves generated for each individual case.
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MAPS utilizes the appendixes to the VBT2008 report as a base for mortality projections. This chart established 25 unique values corresponding to 25 statistical values indicative of the next 25 years of a persons life. The value is the statistical probability that the individual will meet an untimely end in that given year. When a life expectancy provider produces a report, it indicates a value at which point a certain individual will achieve a 50% chance, statistically, of dying. This is calculated by randomly making 1000 simulations and calculating an exact point of death for each simulation. The point at which the cumulative deaths equal 500 is the median point or the life expectancy.
In order to calibrate this curve, a multiplier is formulated to cause the median mark to equal the life expectancy value provided by the life expectancy provider. For every case, 1000 simulations are run, each simulation resulting in a unique death month. For example, if a life expectancy equals 50 months, the underlying data would show 500 deaths prior to the 50th month and 500 deaths after the 50th month.
The MAPS system takes the results of the modified life expectancy curve and applies it to the premium and death benefit projections stream. For the 500 deaths prior to the 50th month, utilizing our previous example, it would apply the percentage of the simulated runs that died in each 12 month period to the death benefit and premium schedules to form estimated cash flows. The net present value, using a discount rate defined by the user, of the streams of values created by this method form the indicated value of the policy.
The Company received submissions from licensed providers, typically consisting of policy illustrations, life expectancy reports from major life expectancy data providers, such as, but not limited to, AVS, 21 st Century, EMSI and Fasano, and information pertaining to the original issuance of the policy. These were evaluated actuarially and financially to determine the intrinsic value of the policy. The Company performed due diligence on each life insurance policy submitted to it. As part of the due diligence, the Company received complete policy files to be analyzed in order to ascertain whether the life insurance policy met thresholds regarding prospective return on equity. Due diligence was performed with respect to certain legal issues related to the policy including whether the initial owner of the policies had the requisite insurable interest in the life of the insured at the time of the original issuance of the policy. In addition, as a condition precedent to the purchase of any policy, the prospective seller was required to certify, among other things, that prior to the execution of the relevant purchase agreement, it had verified with the applicable issuing insurance company that the owner of, and beneficiary under, such policy, as recorded by the applicable issuing insurance company, was consistent with that which was reflected in the policy file. The seller, if applicable, also confirmed with the applicable issuing insurance company that the carrier either had not received a collateral assignment granting a lien on the policy or that the only collateral assignment that had been filed is the same as that reflected in the policy file. The Company then made an offer to purchase. If the offer was accepted the Company proceeded to close the purchase and make all legal changes necessary to make the Company the owner of record and the beneficiary of the policy. In the last 12 months the Company had evaluated over 500 policies resulting in 57 purchases to date, including policies held under a reverse repurchase agreement.
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The Company sought opportunities to earn above market returns using funds destined for use as premium payments, these investments are short term in nature. The Company purchased policies under a reverse repurchase agreement as a short term investment vehicle. This investment was priced to yield either a 20% return in a ninety day period or a projected 40% return over six months.
At August 31, 2012 and August 31, 2011 the Company held zero and thirteen life settlement contracts as collateral in the amount of $0 and $3,368,593 respectively, which are reflected as a receivable under reverse repurchase agreement on the Balance Sheets. The counterparty did not exercise its rights under the repurchase agreements and upon expiration of the repurchase agreements, the Company recognized these assets as an investment in life settlement contract at investment method in the aggregate amount of $3,503,260.
As of August 31, 2012 and August 31, 2011, the Company has the following investments in life settlement contracts:
Number of Contracts | Estimated Fair Value | Face Value | ||||||||||
August 31, 2011 | 39 | $ | 92,708,076 | $ | 274,750,633 | |||||||
August 31, 2012 | 37 | $ | 64,667,124 | $ | 265,143,373 |
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Coverage Types
The largest share of life settlements are individual insurance policies, predominantly policies known as permanent whole or universal life contracts, and less frequently convertible term policies. In many cases, the insurance policy is purchased for investment protection and in others it is used to financially protect a spouse or other beneficiaries of the insured upon death. Sometimes however, beneficiaries such as a spouse are outlived by the insured, and in that case, a life settlement is a much more logical decision than holding onto a policy.
Other sources for life settlements are business insurance policies for funding of buy-sell or cross-purchase agreements that may no longer be needed if one or more members have exited the firm; key man policies if insured persons leave the firm or retire. Executive benefit plans of small and midsized businesses often include life insurance policies and are a target market for life settlement transactions in cases where cash needs are pressing. Policies purchased for the purposes of fulfilling estate taxes would be excellent sources for life settlements in times when the tax hedging mechanism is no longer required. Many of the policies in these cases are held in trust, which require a settlement provider with unique insight and skills.
The charitable giving component of estate planning frequently utilizes life insurance, such as in Grantor Remainder Annuitized Trusts (GRATs), wherein a trust is set up for a specific term, and insurance is purchased as a funding or tax anticipation mechanism to avoid trust assets becoming part of the estate of the owner. At the end of the term, or in certain cases where the GRAT fails (outsized asset performance, etc.), the insurance is no longer necessary or must be re-characterized. In these cases, and in others affected by plan termination, employment termination or estate re-engineering, especially as taxation and other regulations change, life settlement is becoming an ever-more considered financial option. Our job is to be ready to respond to these market dynamics, and take advantage of the increasing availability of settled policies.
The Company planned to primarily hold the purchased policies until maturity earning a return.
The Company purchased primarily universal and whole life insurance policies. To date, we have purchased one variable life insurance policy under a private placement exemption, including Section 3(a)(8) of the Securities Act of 1933.
The Market for Life Settlements
The Company believes that with awareness, the market for life settlements will grow as it offers owners of life insurance policies, aged 70 or older, or those with a life expectancy of 5 to 10 years or less, a liquid cash conversion and exit strategy from life insurance policies that have become available for reasons more fully described above. Clearly, this innovative wealth management tool becomes even more valuable in economic circumstances wherein income moves from current to fixed, especially during the latest worldwide negative cycle. The industry has developed partially as a result of these individuals who can no longer afford premium payments, and who wish a life settlement rather than letting their policy lapse or taking the cash-surrender value (or in some cases no cash value).
Demographic trends indicate future growth of the population that comprises the life settlement market. The “baby boomer generation,” which consists of persons born between 1946 and 1964, currently numbers around 78 million. The oldest members of this group are now reaching 64 years of age and are still a few years shy of the age of 70, the age that most life settlement providers currently focus on. However, the baby boomer generation will provide a large target market for the life settlement industry in the years to come, leading to possible significant refinement in the business model of the industry.
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Currently the number of persons above the age of 70 in the US is over 27.1 million. In addition to providing a large addition to the target market for life settlements in the years to come, baby boomers may also become more open to the idea of life settlements as current advertising campaigns make them more acquainted with the concept. Further, hybrid products are becoming available, such as those with a smaller settlement up-front and the opportunity to retain a percentage of death benefit, and one where a percentage of the settlement proceeds is used to provide long term care coverage. Suffice to say, as the over 70 population moves from the approximated 27 million to an estimated over 75 million during the next 18 years, the unit volume of life contracts that can be settled will be enormous.
Life settlements are an attractive opportunity for both the insured party and provider where Minimally Funded Universal Life (“UL”) contracts are involved. The minimal funding is designed to pay only for current COI (cost of insurance that increases with age) and results in low early year cash surrender values. Settlement offers for these policies are often materially higher than the cash value, making them an attractive incentive to exit an insurance contract. The providers benefit due to the flexibility of funding the contract and ability to adjust premium-payment plans, which, for those armed with the appropriate analytics and modeling tools (such as the Company), maximizes return. Aggressively priced UL contracts provide even higher possible gains because of lower mortality and higher lapses being assumed when determining the price of the policy. However, minimally funded UL contracts provide little cash for paying ongoing charges, which increase with the age of the insured party.
Another market for life settlements are convertible group insurance policies that can be converted into individual policies, assuming that the individual has the right to convert the policy and sell it to a third party. Considerations that providers make for convertible group policies are similar to considerations made in the purchase of convertible term policies.
Income Sources
Current income was derived from a managed pool of life settlements proprietary to the Company. The Company’s current income source was primarily derived from its life settlement portfolio.
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The management of life settlements entails measuring and management of multiple aspects of financial and operational risk. In order to maximize the return and reduce the risk profile of a group of policies, several defining attributes need to be constantly monitored. Policy groups need to be built initially by balancing a broad range of risk variables and then adjusted to keep risk metrics in acceptable limits. The Company utilized only major life expectancy data providers, such as, but not limited to, AVS, 21 st Century, EMSI and Fasano, in structuring its portfolio.
The Company serviced its own portfolio.
Government and Industry Regulation
When the life settlement market was first established, it was sparsely regulated. Due in part to abuses within the industry, which were well-publicized, the federal government and various states moved to regulate the market in the mid-1990’s. These regulations generally took two forms. One sought to apply consumer protection-type regulations to the market. This application was designed to protect policyholders and purchasers. Another sought to apply securities regulations to the market, which was designed to protect purchasers. Various states have also used their insurance regulations to attack instances of insurance fraud within the industry.
Consumer Protection Licensing . The consumer protection-type regulations arose largely from the draft of a model law and regulations promulgated by the National Association of Insurance Commissioners (NAIC). Approximately 45 states have now adopted some version of this model law or another form of regulation governing life settlement companies in some way. These laws generally require the licensing of providers and brokers, require the filing and approval of settlement agreements and disclosure statements, describe the content of disclosures that must be made to insureds and sellers, describe various periodic reporting requirements for settlement companies, and prohibit certain business practices which are deemed to be abusive. The Company is currently not a life settlements broker or provider, therefore we are not required currently, in any jurisdiction, to have a license or approval from any state or federal body, in order to effectuate our business. There have been regulations placed by Federal and State organizations on the brokers and providers of life settlements. The Company only transacts with providers, such as Progressive Capital Solutions, LLC, who are licensed and whose licenses are in good standing.
Securities Regulations . Some states and the Securities and Exchange Commission (“SEC”) have attempted to regulate life settlements as securities under federal or state securities laws. On July 22, 2010, the SEC issued a Staff Report of its Life Settlement Task Force. The Staff recommended that certain types of interests in life settlement be classified as securities. The Commission has not taken any position on the Staff Report, and there is no indication if the Commission will take any action to implement the recommendations of the Staff Report. The Company believes that the matters discussed in the Staff Report do not impact on the Company’s current business model. With respect to state securities laws, 48 states treat life settlements as securities under state laws, although some states exclude from the definition of security the original sale from the insured or the policy owner to the provider. A majority of states include life settlements in their statutory definition of security, either directly in that definition, or as part of the definition of investment contract. We have endeavored to structure our activities to reduce the risk that our activities would be treated as securities under state or federal law, and, to date, no state or federal regulatory body or private litigant has asserted that our settlements are securities.
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Insurance Regulation . As a life settlement company, we facilitate the transfer of ownership in life insurance policies, but do not participate in the issuance of policies. As such, we are not required to be licensed as an insurance company or insurance broker. We do deal, however, with insurance companies and professionals in our business and are affected by the regulations covering them. The insurance industry is highly regulated, and these regulations affect us in numerous ways. We must understand the regulations as they apply to policy terms and provisions and the entitlement to, and collectability of, policy benefits. We rely upon the protections against fraudulent conduct that these regulations offer and we rely upon the licensing of companies and individuals with whom we do business. We do not intend to apply to be licensed as a life settlement broker in New York but we may apply to be licensed as a life settlement provider in New York.
The Company has structured itself as a secondary buyer of life settlements. As a secondary buyer we are not required to have any license to transact business. We only purchase policies from licensed providers who are compliant with all Federal and State regulatory bodies. The Company reviewed the licensure of the providers it uses to make sure there was continued compliance with all regulations.
Competition
Limited access to capital, the insurance industry’s addition of pre-death cash benefits, law enforcement pressure on companies operating illegally, and increasing government regulation have contributed to a stabilization in the number and sophistication of life settlement companies, both those purchasing for their own accounts and those, who act as agents for clients. While major financial institutions that previously were active in the market, have withdrawn or curtailed their activities in life settlements, there are other institutions (including hedge funds), with greater resources, such as Fortress Investment Group LLC, Credit Suisse, AmTrust Financial Services, Inc., Silver Point Capital L.P. and Vida Capital Inc., which remain active in the market.
Intellectual Property
Our trademarks, trade secrets, copyrights and other intellectual property rights are important assets for us. We have filed with the United States Patent and Trademark Office an application for registration of the trademark “Absolute Life Solutions” and “Infinity Augmented Reality”. We intend to possibly register other trademarks and service marks, both domestically and in foreign jurisdictions. We hold the Internet domain name www.absolutels.com and www.infinityar.com. Under current domain name registration practices, no one else can obtain an identical domain name, but someone might obtain a similar name, or the identical name with a different suffix, such as “.org,” or with a country designation.
Employees
At August 31, 2012, we had four employees, of which two are executive officers of the Company. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.
ITEM 1A. RISK FACTORS.
Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before making a decision to invest in shares of our common stock. If any of the following risks occur, our business, financial conditions or results of operations may be materially and adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. Investing in our common shares are highly speculative in nature, involve a high degree of risk and should be undertaken only by person who can afford to lose their entire investment. Accordingly, investors should carefully consider, along with other matters referred to herein, the following risk factors in evaluation our business. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the owing risk factors and elsewhere in this Prospectus.
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Risks Relating to Our Business
We have a limited operating history of our own and as such an investor cannot assess the Company’s profitability or performance. We will be classified as a development stage company commencing in November 2012. Our earnings may be volatile, resulting in future losses and uncertainty about our ability to continue operations.
The Company has a limited operating history in its past business model, commencing its financial services operations on June 1, 2010 -which have since been discontinued- and its current augmented reality operations in November 2012. We will be classified as a development stage company commencing in November 2012. We have sustained operating losses to date in our financial services operation and will likely continue to sustain losses as we seek to develop our augmented reality products. We expect these losses to be substantial because our product development and other costs, including significant amounts we expect to spend on development activities, cannot be offset by our limited revenues when we enter our development stage. Accordingly and as discussed in the Introductory Note, it may be difficult for an investor to assess the performance of the Company or to determine whether the Company will meet its projected business plan. The Company has limited financial results upon which an investor may judge its potential. For the year ended August 31, 2012, the Company had a net loss of $22,446,284 and a net loss applicable to common shareholders of $27,959,569 as compared to net income of $22,903,341 and a net loss applicable to common shareholders of $21,054,921 for the year ended August 31, 2011. As of August 31, 2012, we have an accumulated deficit of $46,881,885. To date, we have generated limited revenues, and a large portion of our expenses are fixed, including expenses related to facilities, equipment, contractual commitments and personnel. As a result, we expect our net losses from operations could continue for the next few years. Our ability to generate additional revenues and potential to become profitable will depend largely on our ability, alone or with potential collaborators, to efficiently and successfully complete the development of our augmented reality products and market our products. There can be no assurance that any such events will occur or that we will ever become profitable. Even if we do achieve profitability, we cannot predict the level of such profitability. If we sustain losses over an extended period of time, we may be unable to continue our business. The Company may in the future experience some or all of the following: under-capitalization, shortages, setbacks and the customary problems, delays and expenses encountered by any early stage business. An investor will be required to make an investment decision based solely on the Company’s management’s history and its projected operations in light of the risks, expenses and uncertainties that may be encountered by engaging in the augmented reality sector of the technology industry.
Our business prospects will be difficult to evaluate because we will be classified as a development stage company commencing in November 2012 and are developing novel augmented reality products.
Since we have a limited operating history and our augmented reality products will rely on complex technologies, it may be difficult for you to assess our growth, monetization and earnings potential. We will face many of the difficulties new technology companies often face. These include, among others: limited financial resources; developing, testing and marketing new products for which a market is not yet established and may never become established; challenges related to the development, approval and acceptance of a new product; delays in reaching our goals; lack of substantial revenues and cash flow; high product development costs; competition from larger, more established companies; and difficulty recruiting qualified employees for management and other positions. We have only limited experience and resources to apply to the marketing, distribution and commercialization of any products we develop. If we are unable to successfully address these difficulties as they arise, our future growth and earnings will be negatively affected. We cannot be certain that our business strategies will be successful or that we will successfully address any problems that may arise.
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Being a public company will result in additional expenses and divert management’s attention. Being a public company could also adversely affect our ability to attract and retain qualified directors.
As a public issuer, the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. The requirements of these laws and the rules and regulations promulgated thereunder entail significant accounting, legal and financial compliance costs, and have made, and will continue to make, some activities more difficult, time consuming or costly and may place significant strain on the Company's personnel, systems and resources.
The Securities Exchange Act requires, among other things, that the Company maintain effective disclosure controls and procedures and internal controls over financial reporting. In order to establish the requisite disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required. As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on the Company's business, financial condition and results of operations.
These rules and regulations may also make it difficult and expensive for the Company to obtain director and officer liability insurance. If the Company is unable to obtain adequate director and officer insurance, its ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent, will be significantly curtailed.
The Company will require additional capital in order to fully execute its business plan and may not be able to raise either additional debt or equity.
The Company will require additional capital in order to execute its current business plan. Any additional securities issued may dilute the interest of our existing shareholders. Failure to raise additional capital will result in the Company’s inability to successfully implement its business model. To date, the Company has financed its operations through capital raised from preferred equity financing.
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Certain shareholders beneficially own and will continue to own a substantial portion of the Company’s common stock and, as a result, can exercise control over shareholder and corporate actions.
Mr. Moshe Oratz, former President and CEO of the Company, is currently the beneficial owner of approximately 38% of the Company’s outstanding common stock, of which voting control is held by an independent Trustee under a Voting Trust Agreement. This concentration of ownership may also have the effect of delaying or preventing a change in control, which in turn could have a material adverse effect on the market price of the Company’s common stock or prevent shareholders from realizing a premium over the market price for their shares of common stock.
If the Company were to lose its senior management, it would encounter difficulties in implementing its business plan.
The Company's future success is dependent in large part upon its ability to develop the business plan. In particular, due to the relatively early stage of the Company's new business, its future success is highly dependent on its President, to provide the necessary experience and background to execute the Company's business plan. The loss of his services could impede, particularly initially as the Company builds a record and reputation, its ability to develop its objectives.
The success of the Company depends in large part upon the abilities and continued service of its executive officers, particularly Mr. Avrohom Oratz, President and Chief Executive Officer, and Mr. Joshua Yifat, Treasurer and Chief Financial Officer. There can be no assurance that the Company will be able to retain the services of such officers and employees. The failure of the Company to retain the services of Messrs. Avrohom Oratz, and/or Joshua Yifat, and other key personnel could have a material adverse effect on the Company. The Company at the present time has employment agreements with the above referenced individuals, along with non-compete agreements; however, the Company has not procured key person life insurance policies on these individuals.
There has been a limited prior public market for the Company’s shares and such limited market may make resale of the stock difficult.
An investor must be fully aware of the long-term nature of an investment in the Company. If for any reason the common stock does not continue to be listed on the OTC Bulletin Board or a significant public trading market does not otherwise develop, investors holding shares of the Company’s stock may have difficulty selling their common stock should they desire to do so.
We may not be able to effectively control and manage our growth, which would negatively impact our operations.
If our business and markets grow and develop it will be necessary for us to finance and manage expansion in an orderly fashion. We may face challenges in managing expanding product and service offerings. Such eventualities will increase demands on our existing management, workforce and facilities. Failure to satisfy increased demands could interrupt or adversely affect our operations and cause administrative inefficiencies.
We depend on growth in the augmented reality market; if that growth is limited then our business may not be able to grow as planned.
Growth of the augmented reality market and the Company’s entrance into and expansion within the market may be negatively affected by a variety of factors, including:
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· delays in the introduction of our technology;
· competition from other augmented reality companies;
· competition from improved technologies;
· negative publicity about the market; and
· the adoption of additional governmental regulation.
We may be unable to successfully execute any of our identified business opportunities or other business opportunities that we determine to pursue because we lack capital or resources .
We currently have a limited corporate infrastructure. In order to pursue business opportunities, we will need to continue to build our infrastructure and operational capabilities. Our ability to do any of these successfully could be affected by any one or more of the following factors:
· our ability to raise substantial additional capital to fund the implementation of our business plan;
· our ability to execute our business strategy;
· the ability of our services to achieve market acceptance;
· our ability to manage the expansion of our operations;
· our ability to attract and retain qualified personnel;
· our ability to manage our third party relationships effectively; and
· our ability to accurately predict and respond to the structural changes in our industry and the evolving demands of the markets we serve.
Our failure to adequately address any one or more of the above factors could have a significant impact on our ability to implement our business plan and our ability to pursue other opportunities that arise.
Because we are a development stage company as of November 15, 2012, dependent upon our ability to generate sufficient cash from our augmented reality business to meet our obligations as they become due and because the expected demand for our software applications may not meet cash flow requirements, there is a substantial doubt about our ability to continue as a going concern.
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.
If we were to become subject to lawsuits by former beneficiaries, the Company’s financial performance would be adversely affected.
There is the possibility that a former beneficiary may challenge the transaction pursuant to which a life policy was originally sold, claiming it is void because of undue influence, duress, or lack of capacity on the part of the insured. The Company’s requirements for the execution of a beneficiary waiver or the affidavit regarding the owner’s intent to dispossess the current beneficiary will be instrumental in avoiding such challenges.
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Risks Relating to Augmented Reality
If we are unable to maintain a good relationship with the mobile and computing platform providers that our software operates on, our business will suffer.
Any deterioration in our relationship with mobile and computing platform providers would harm our business and adversely affect our operating results. These include,
· | The mobile and computing platform providers might modify their terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or the mobile and computing platform providers change how the personal information of their users is made available to application developers on their platforms or shared by users; |
· | More favorable relationships with one or more of our competitors; or |
· | The mobile and computing platform providers develop their own competitive offerings. |
We will benefit from the various mobile and computing platform providers’ strong brand recognition and large user base. If they lose market position or otherwise fall out of favor with Internet users, we would need to identify alternative channels for marketing, promoting and distributing our applications (“apps”), which would consume substantial resources and may not be effective. In addition, the mobile and computing platform providers have broad discretion to change their terms of service and other policies with respect to us and other developers, and those changes may be unfavorable to us.
We will operate in a new and rapidly changing industry, which makes it difficult to evaluate our business and prospects.
Augmented reality, through which we expect to derive substantially all of our revenue, is a new and rapidly evolving technology. The growth of the augmented reality industry and the level of demand and market acceptance of our apps are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors affecting the augmented reality industry, many of which are beyond our control, including:
· | continued worldwide growth in the adoption and use of augmented reality products, Google and other social networks; |
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· | changes in consumer demographics and public tastes and preferences; |
· | the availability and popularity of other forms of entertainment; |
· | the worldwide growth of personal computer, broadband Internet and mobile device users, and the rate of any such growth; and |
· | general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending. |
Our ability to plan for augmented reality development, distribution and promotional activities will be significantly affected by our ability to anticipate and adapt to relatively rapid changes in the tastes and preferences of our current and potential consumers. New and different types of entertainment may increase in popularity at the expense of augmented reality. A decline in the popularity of augmented reality in general, or our apps in particular would harm our business and prospects.
A small number of apps will generate a majority of our revenue, and we must continue to launch and enhance augmented reality apps that attract and retain a significant number of consumers in order to grow our revenue and sustain our competitive position.
Our ability to successfully launch, sustain and expand apps and attract and retain consumers largely will depend on our ability to:
· | anticipate and effectively respond to changing consumer interests and preferences; |
· | anticipate or respond to changes in the competitive landscape; |
· | attract, retain and motivate talented designers, product managers and engineers |
· | develop, sustain and expand apps that are fun, interesting and compelling to use; |
· | effectively market new apps and enhancements to our existing consumers and new consumers; |
· | minimize launch delays and cost overruns on new apps and app expansions; |
· | minimize downtime and other technical difficulties; and |
· | acquire high quality assets, personnel and companies. |
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Any failure or significant interruption in our network could impact our operations and harm our business.
Our technology infrastructure is critical to the performance of our apps and to consumer satisfaction. Our apps will run on a complex distributed system, or what is commonly known as cloud computing. We anticipate that the primary elements of this system will be operated by third parties that we do not control and which would require significant time to replace. We may in the future experience, website disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors and capacity constraints. A failure or significant interruption in our apps service would harm our reputation and operations. We expect to continue to make significant investments to our technology infrastructure to maintain and improve all aspects of consumer experience and app performance. To the extent that our disaster recovery systems are not adequate, or we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate increasing traffic, our business and operating results may suffer. We do not maintain insurance policies covering losses relating to our systems and we do not have business interruption insurance.
Security breaches, computer viruses and computer hacking attacks could harm our business and results of operations.
Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry, have occurred on our systems in the past and may occur on our systems in the future. Any security breach caused by hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial condition and operating results. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction of our consumers may harm our reputation and our ability to retain existing consumers and attract new consumers.
If we fail to effectively manage our growth, our business and operating results could be harmed.
To effectively manage the growth of our business and operations, we will need to continue spending significant resources to improve our technology infrastructure, our operational, financial and management controls, and our reporting systems and procedures by, among other things:
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· | monitoring and updating our technology infrastructure to maintain high performance and minimize down time; |
· | enhancing information and communication systems to ensure that our employees and offices around the world are well-coordinated and can effectively communicate with each other; |
· | enhancing our internal controls to ensure timely and accurate reporting of all of our operations; and |
· | appropriately documenting our information technology systems and our business processes. |
Our growth prospects will suffer if we are unable to continue to develop successful apps for mobile platforms.
Developing apps for mobile platforms is an important component of our strategy. We have devoted and we expect to continue to devote substantial resources to the development of our mobile apps, and we cannot guarantee that we will continue to develop such apps that appeal to consumers or advertisers. The uncertainties we face include:
· | we have relatively limited experience working with wireless carriers, mobile platform providers and other partners whose cooperation we may need in order to be successful; |
· | we may encounter difficulty in integrating features on apps developed for mobile platforms that a sufficient number of consumers will pay for; and |
· | we will need to move beyond payment methods provided by social networks and successfully allow for a variety of payment methods and systems based on the mobile platform, geographies and other factors. |
These and other uncertainties make it difficult to know whether we will succeed in continuing to develop commercially viable apps for mobile. If we do not succeed in doing so, our growth prospects will suffer.
Expansion into international markets is important for our growth, and as we expand internationally, we will face additional business, political, regulatory, operational, financial and economic risks, any of which could increase our costs and hinder such growth.
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Continuing to expand our business to attract consumers in countries other than the United States is a critical element of our business strategy. An important part of targeting international markets is developing offerings that are localized and customized for the consumers in those markets. We have a no operating history as a company outside of the United States. We expect to continue to devote resources to international expansion through the establishment of additional offices and development studios, and increasing our foreign language offerings. Our ability to expand our business and to attract talented employees and consumers in an increasing number of international markets will require considerable management attention and resources and is subject to the particular challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal systems, alternative dispute systems, regulatory systems and commercial infrastructures. Expanding our international focus may subject us to risks that we have not faced before or increase risks that we currently face, including risks associated with:
· | recruiting and retaining talented and capable management and employees in foreign countries; |
· | challenges caused by distance, language and cultural differences; |
· | developing and customizing apps and other offerings that appeal to the tastes and preferences of consumers in international markets; |
· | competition from local augmented reality apps makers with significant market share in those markets and with a better understanding of user preferences; |
· | protecting and enforcing our intellectual property rights; |
· | negotiating agreements with local distribution platforms that are sufficiently economically beneficial to us and protective of our rights; |
· | the inability to extend proprietary rights in our brand, content or technology into new jurisdictions; |
· | implementing alternative payment methods for virtual goods in a manner that complies with local laws and practices and protects us from fraud; |
· | compliance with applicable foreign laws and regulations, including privacy laws and laws relating to content; |
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· | credit risk and higher levels of payment fraud; |
· | currency exchange rate fluctuations; |
· | protectionist laws and business practices that favor local businesses in some countries; |
· | foreign tax consequences; |
· | foreign exchange controls or U.S. tax restrictions that might restrict or prevent us from repatriating income earned in countries outside the United States; |
· | political, economic and social instability; |
· | higher costs associated with doing business internationally; |
· | export or import regulations; and |
· | trade and tariff restrictions. |
Entering international markets will be expensive, our ability to successfully gain market acceptance in any particular market is uncertain, and the distraction of our senior management team could harm our business.
Competition within the broader entertainment industry is intense and potential consumers may be attracted to competing forms of entertainment such as offline and traditional online apps, television, movies and sports, as well as other entertainment options on the Internet.
Our potential consumers face a vast array of entertainment choices. Other forms of entertainment, such as offline, traditional online, personal computer and console apps, television, movies, sports and the Internet, are much larger and more well-established markets and may be perceived by our potential consumers to offer greater variety, affordability, interactivity and enjoyment. These other forms of entertainment compete for the discretionary time and income of our potential consumers. If we are unable to sustain sufficient interest in our apps in comparison to other forms of entertainment, including new forms of entertainment, our business model may no longer be viable.
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There are low barriers to entry in the augmented reality industry, and competition is intense.
The augmented reality industry is highly competitive, with low barriers to entry and we expect more companies to enter the sector and a wider range of social apps to be introduced. Our competitors that develop social apps for social networks vary in size and include publicly-traded companies such as Google, Microsoft, Apple and Nokia and privately-held companies such as Layar, Metaio and Total Immersion. Some of these current and potential competitors have significant resources for developing or acquiring additional apps, may be able to incorporate their own strong brands and assets into their apps, have a more diversified set of revenue sources than we do and may be less severely affected by changes in consumer preferences, regulations or other developments that may impact the augmented reality industry. In addition, we have limited experience in developing apps for mobile and other platforms and our ability to succeed on those platforms is uncertain. As we continue to devote significant resources to developing apps for those platforms, we will face significant competition from established companies, including Google, Microsoft, Apple and Nokia. We expect new augmented reality competitors to enter the market and existing competitors to allocate more resources to develop and market competing apps and applications. The value of our virtual goods is highly dependent on how we manage the economies in our apps. If we fail to manage our apps economies properly, our business may suffer.
Failure to protect or enforce our intellectual property rights or the costs involved in such enforcement could harm our business and operating results.
We regard the protection of our trade secrets, copyrights, trademarks, trade dress, domain names and other product rights as critical to our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors and confidentiality agreements with parties with whom we conduct business in order to limit access to, and disclosure and use of, our proprietary information. However, these contractual arrangements and the other steps we have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent development of similar technologies by others.
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We will pursue the registration of our domain names, trademarks, and service marks in the United States and in certain locations outside the United States. We will seek to protect our trademarks, patents and domain names in an increasing number of jurisdictions, a process that is expensive and time-consuming and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our innovations through increased patent filings that are expensive and time-consuming and may not result in issued patents that can be effectively enforced. The Leahy-Smith America Invents Act (“the Leahy-Smith Act”), was adopted in September 2011. The Leahy-Smith Act includes a number of significant changes to United States patent law, including provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. The United States Patent and Trademark Office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until up to 18 months after its enactment. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could harm our business.
Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs, adverse publicity or diversion of management and technical resources, any of which could adversely affect our business and operating results. If we fail to maintain, protect and enhance our intellectual property rights, our business and operating results may be harmed.
From time to time, we may face in the future, allegations that we have infringed the trademarks, copyrights, patents and other intellectual property rights of third parties, including from our competitors and non-practicing entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict. As the result of any court judgment or settlement we may be obligated to cancel the launch of a new game, stop offering a game or certain features of a game, pay royalties or significant settlement costs, purchase licenses or modify our apps and features while we develop substitutes.
In addition, we use open source software in our apps and expect to continue to use open source software in the future. From time to time, we may face claims from companies that incorporate open source software into their products, claiming ownership of, or demanding release of, the source code, the open source software and/or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our apps, any of which would have a negative effect on our business and operating results.
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Programming errors or flaws in our apps could harm our reputation or decrease market acceptance of our apps, which would harm our operating results.
Our apps may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch, particularly as we launch new apps and rapidly release new features to existing apps under tight time constraints. We believe that if our consumers have a negative experience with our apps, they may be less inclined to continue or resume playing our apps or recommend our apps to other potential consumers. Undetected programming errors, game defects and data corruption can disrupt our operations, adversely affect the game experience of our consumers by allowing consumers to gain unfair advantage, harm our reputation, cause our consumers to stop playing our apps, divert our resources and delay market acceptance of our apps, any of which could result in legal liability to us or harm our operating results.
Evolving regulations concerning data privacy may result in increased regulation and different industry standards, which could prevent us from providing our current apps to our consumers, or require us to modify our apps, thereby harming our business.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet and mobile platforms have recently come under increased public scrutiny, and civil claims alleging liability for the breach of data privacy have been asserted against us. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation for the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. In addition, the European Union is in the process of proposing reforms to its existing data protection legal framework, which may result in a greater compliance burden for companies with users in Europe. Various government and consumer agencies have also called for new regulation and changes in industry practices. We began our new operations in 2012. In addition, our business, including our ability to operate and expand internationally, could be adversely affected if laws or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices, the design of our website, apps, features or our privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven by our ability to responsibly use the data that our consumers share with us. Therefore, our business could be harmed by any significant change to applicable laws, regulations or industry practices regarding the use or disclosure of data our consumers choose to share with us, or regarding the manner in which the express or implied consent of consumers for such use and disclosure is obtained. Such changes may require us to modify our apps and features, possibly in a material manner, and may limit our ability to develop new apps and features that make use of the data that our consumers voluntarily share with us.
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We will process, store and use personal information and other data, which subjects us to governmental regulation and other legal obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business.
We will receive, store and process personal information and other user data, and we enable our consumers to share their personal information with each other and with third parties, including on the Internet and mobile platforms. There are numerous federal, state and local laws around the world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other user data on the Internet and mobile platforms, the scope of which are changing, subject to differing interpretations, and may be inconsistent between countries or conflict with other rules. We generally comply with industry standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties (including voluntary third-party certification bodies such as TRUSTe). We will strive to comply with all applicable laws, policies, legal obligations and certain industry codes of conduct relating to privacy and data protection, to the extent reasonably attainable. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to consumers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our consumers to lose trust in us, which could have an adverse effect on our business. Additionally, if third parties that we may work with, such as consumers, vendors or developers, violate applicable laws or our policies, such violations may also put our consumers’ information at risk and could in turn have an adverse effect on our business. In the area of information security and data protection, many states have passed laws requiring notification to consumers when there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.
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Our business is subject to a variety of other U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business.
We are subject to a variety of laws in the United States and abroad, including laws regarding consumer protection, intellectual property, export and national security, that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting, particularly laws outside the United States. For example, laws relating to the liability of providers of online services for activities of their users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories based on the nature and content of the materials searched, the ads posted or the content provided by users. It is also likely that as our business grows and evolves and our apps are played in a greater number of countries, we will become subject to laws and regulations in additional jurisdictions. We are potentially subject to a number of foreign and domestic laws and regulations that affect the offering of certain types of content, such as that which depicts violence, many of which are ambiguous, still evolving and could be interpreted in ways that could harm our business or expose us to liability. It is difficult to predict how existing laws will be applied to our business and the new laws to which we may become subject. If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to modify our apps, which would harm our business, financial condition and results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business. Any costs incurred as a result of this potential liability could harm our business and operating results. It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States and elsewhere that could restrict the online and mobile industries, including player privacy, advertising, taxation, content suitability, copyright, distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and we will be required to devote legal and other resources to addressing such regulation. For example, existing laws or new laws regarding the regulation of currency and banking institutions may be interpreted to cover virtual currency or goods. If that were to occur we may be required to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding these activities may lessen the growth of social game services and impair our business. Furthermore, companies and governmental agencies may restrict access to Google, our website or the Internet generally, which could lead to the loss or slower growth of our consumer base.
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Risks Related to Ownership of our Common Stock
There is a significant risk that our stock price may fluctuate dramatically which could negatively impact a shareholder’s investment in our common stock.
Although there is currently a limited market for our common stock, if a market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control including:
· variations in our quarterly operating results;
· announcements that our revenue or income are below or that costs or losses are greater than analysts’ expectations;
· general economic slowdowns;
· sales of large blocks of our common stock;
· announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
· fluctuations in stock market prices and volumes; concern by potential investors that the sale of large number of shares of common stock may have a downward effect upon the market price of the stock ;
· any financing transactions we may propose or complete.
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We did not maintain effective financial reporting processes due to lack of personnel and technological resources, and may encounter difficulties in timely assessing business performance and identifying incipient strategic and oversight issues.
We have a few employees dealing with general administrative and financial matters as well as with matters relating to the reporting requirements of the Securities Exchange Act of 1934. This constitutes a material weakness in our internal controls over financial reporting.
At present, our ability to rectify the weakness relating to our internal controls over financial reporting is constrained by our limited staff. If we cannot rectify this material weakness through remedial measures and improvements to our systems and procedures, management may encounter difficulties in timely assessing business performance and identifying incipient strategic and oversight issues. Management is implementing possible improvements to internal controls, and compensating controls, and this focus will require management from time to time to devote its attention away from other planning, oversight and performance functions. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
The Company does not intend to pay cash dividends to its common stockholders in the near future, so investors will not receive any return on investment in the Company prior to selling their interest in it.
The Company does not anticipate paying cash dividends to its common stock shareholders, but anticipates that it will retain future earnings for funding the Company’s growth and development. Therefore, investors in the Company’s securities should not expect to receive dividends in the foreseeable future. As a result, investors will not receive any return on their investment prior to selling their shares in the Company. Furthermore, even if a significant market for the Company’s securities does develop, there is no guarantee that the market price for the shares would be equal to or more than the initial per share investment price paid by any investor. There is a possibility that the shares could lose all or a significant portion of their value from the initial price paid by an investor.
The potential sale of a significant number of shares could encourage short sales by third parties and could depress our common stock and could have a dilutive effect.
Because there is a limited public market for our stock, there may be significant downward pressure on our stock price caused by the sale or potential sale of a significant number of shares, which could allow short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock. If stockholders sell a significant number of shares of our common stock, the market price of our common stock may decline.
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Sales of our shares relying upon Rule 144 may depress prices in that market by a material amount.
The majority of the outstanding shares of our common stock held by current stockholders are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended. When permitted by Rule 144, sales under Rule 144 may be limited by the availability of current public information about us and, for selling shareholders who are affiliates, by limits on the number of shares which may be sold over certain periods of time, as well as by certain manner of sale provisions and notice requirements. In general, under Rule 144, unaffiliated stockholders (or stockholders whose shares are aggregated) who have satisfied a six month holding period may sell shares of our common stock, so long as we have filed all required reports under Section 13 or 15(d) of the Exchange Act during the 12-month period preceding such sale. Once a period of six months has elapsed since the date the common stock was acquired from us or from an affiliate of ours, unaffiliated stockholders can freely sell shares of our common stock. 12 months after acquiring shares from us or an affiliate, unaffiliated stockholders can freely sell their shares without any restriction or requirement that we are current in our SEC filings.
Historically, the SEC has taken the position that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies, to their promoters or affiliates despite technical compliance with the requirements of Rule 144. The SEC has codified and expanded this position by prohibiting the use of Rule 144 for resale of securities issued by shell companies (other than business transaction related shell companies) or issuers, like us, that have been at any time previously a shell company. Because we were a shell company, our stockholders holding unregistered shares of common stock are initially subject to a 12 month holding period, instead of a six month holding period, which began to run on July 26, 2010, the date we filed a “super” Form 8-K with the SEC. If a market develops for our shares, sales of our shares relying upon Rule 144 may depress prices in that market by a material amount.
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Our stock is thinly traded, so shares may be unable to be sold at or near the quoted bid prices if a significant number of shares need to be sold.
We cannot give any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.
Although the shares of our common stock are quoted on the OTC Bulletin Board, there has been very limited trading in our shares, meaning that the number of persons interested in purchasing our common shares at any given time has been relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a new company, our business is still in the development stage, and that we are small company which is unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume. Even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.
The market price and trading volume of shares of our common stock may be volatile, and investors may sustain losses.
The market price of our common stock could fluctuate significantly for many reasons, including for reasons unrelated to our specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by customers, or competitors regarding their own performance, as well as general economic and industry conditions. In addition, when the market price of a company’s shares drops significantly, stockholders could institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.
If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.
As a public reporting company, we are required to establish and maintain appropriate internal controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. Any failure of these controls could also prevent us from maintaining accurate accounting records and discovering accounting errors and financial frauds.
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Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. In addition, management’s assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. For example, as reported in our periodic reports filed with the SEC and in this report, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of August 31, 2011 and August 31, 2012. Based on those evaluations, we concluded that, as of each of the foregoing dates, our disclosure controls and procedures were not effective because, among other things, we do not have sufficient segregation of duties within accounting functions (primarily due to the size of our Company). Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting (including those weaknesses identified in our periodic reports), disclosure of management’s assessment of our internal controls over financial reporting, or disclosure of our public accounting firm’s attestation to or report on management’s assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.
Compliance with changing regulation of corporate governance and public disclosure will result in additional expenses not related to our operations.
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Dodd Frank Act of 2010, and related SEC regulations, have significantly increased the costs and risks associated with accessing the public markets and public reporting. Additional regulations have been proposed or may be proposed in the future. Our management team will need to invest significant management time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.
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Our common stock is considered a “penny stock,” and thereby subject to additional sale and trading regulations that may make it more difficult to sell our stock.
Our common stock is currently a “low-priced” security, or a penny stock, under rules promulgated under the Exchange Act. A stock is considered to be a "penny stock" if it meets one or more of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g) of the Exchange Act. These include but are not limited to the following: (i) the stock trades at a price less than $5.00 per share; (ii) it is not traded on a "recognized" national exchange; (iii) it is not quoted on The NASDAQ Stock Market, or even if so, has a price less than $5.00 per share; or (iv) is issued by a company with net tangible assets less than $2.0 million, if in business more than a continuous three years, or with average revenues of less than $6.0 million for the past three years. The principal result or effect of being designated a "penny stock" is that securities broker-dealers cannot recommend the stock but must trade in it on an unsolicited basis.
The principal result or effect of being designated a “penny stock” is that securities broker-dealers participating in sales of our common stock will be subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9 promulgated under the Securities Exchange Act of 1934. For example, Rule 15g-2 requires broker-dealers dealing in penny stocks to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document at least two business days before effecting any transaction in a penny stock for the investor’s account. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult and time consuming for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
As an issuer of “penny stock”, the protection provided by the federal securities laws relating to forward looking statements does not apply to us.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
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If securities or industry analysts do not publish research or reports or publish unfavorable research about our business, the price and trading volume of our common stock could decline.
The future trading market for our common stock will be influenced in part by any research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of us the trading price for our common stock and other securities would be negatively affected. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our securities, the price of our securities would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, interest in the purchase of our securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.
Financial Industry Regulatory Authority (FINRA) sales practice requirements may also limit a stockholder’s ability to buy and sell our common stock.
FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit investors’ and shareholders’ ability to buy and sell our stock and have an adverse effect on the market for our shares.
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Past activities of our Company and its affiliates may lead to future liability for our Company.
Prior to November 2012, we engaged in businesses unrelated to our current operations. Although certain previously controlling stockholders of our Company are providing certain indemnifications against any loss, liability, claim, damage or expense arising out of or based on any breach of or inaccuracy in any of their representations and warranties made in connection with our prior activities, any liabilities relating to such prior business against which we are not completely indemnified may have a material adverse effect on our Company. To date there have been no claims nor indication that any claim exists.
Shares eligible for future sale may adversely affect the market price for our common stock.
We presently have 6,000,000 options to purchase 6,000,000 shares of our common stock outstanding. If and when these securities are converted and/or exercised into shares of our common stock, the number of our shares of common stock outstanding will increase. Such increase in our outstanding shares, and any sales of such shares, could have a material adverse effect on the market for our common stock and the market price of our common stock.
In addition, commencing July 27, 2011, certain of our existing shareholders became eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended, subject to certain limitations. In general, pursuant to Rule 144, after satisfying a six month (or one year) holding period: (i) affiliated shareholders (or shareholders whose shares are aggregated) may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale and (ii) non-affiliated shareholders may sell without such limitations, provided we are current in our public reporting obligations. Rule 144 also permits the sale of securities by non-affiliates that have satisfied a one year holding period without any limitation or restriction. Any substantial sale of our common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of our securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
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ITEM 2. PROPERTIES.
Our executive offices are located at 45 Broadway, 6 th Floor, New York, New York 10006, and consist of 2,450 square feet. We believe that our property is adequate for our current and immediately foreseeable operating needs. Our rent obligation for the twelve months ending August 31, 2013 is $80,169.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of our business, we may periodically become subject to various lawsuits. However, to our knowledge, we are not a party to any pending or threatened material legal proceedings. To our knowledge, no governmental authority is contemplating commencing a legal proceeding in which we would be named as a party.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Shares of our common stock became quoted on the OTC Bulletin Board under the symbol "SMGN" on May 18, 2009. From May 18, 2009 through September 26, 2010, our trading symbol was SMGN.OB and since September 26, 2010 our trading symbol has been ALSO.OB. To date, there has not been an active market for our common stock. The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
High | Low | |||||||
Fiscal Year Ended August 31, 2011 | ||||||||
First Quarter | $ | 2.25 | $ | 1.90 | ||||
Second Quarter | 2.35 | 1.75 | ||||||
Third Quarter | 2.22 | 1.90 | ||||||
Fourth Quarter | 2.05 | 1.50 | ||||||
Fiscal Year Ended August 31, 2012 | ||||||||
First Quarter | 1.60 | 1.00 | ||||||
Second Quarter | 1.01 | 0.84 | ||||||
Third Quarter | 1.01 | 0.40 | ||||||
Fourth Quarter | 0.48 | 0.31 |
As of August 31, 2012, there were 92,544,747 shares of common stock issued and 92,229,599 shares of common stock held of record by approximately 332 holders (inclusive of those brokerage firms, clearing houses, banks and other nominee holders, holding common stock for clients, with each such nominee being considered as one holder).
We have not paid cash dividends on our common stock. We currently intend to retain future earnings, if any, to finance operations and expand our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
Pursuant to Board of Directors approval, the Company adopted its 2010 Equity Incentive Plan on June 1, 2010 whereby it reserved for issuance up to 10,000,000 shares of its common stock. The purpose of the Plan is to provide directors, officers and employees of, and consultants, to the Company with additional incentives by increasing their ownership in the Company. Directors, officers, Employees and consultants of the Company are eligible to participate in the Plan. Options in the form of Incentive Stock Options (“ISO”) and Non-Statutory Stock Options (“NSO”) may be granted under the Plan. Restricted Stock may also be granted under the Plan. As of August 31, 2012, grants of 1,000,000 shares of Restricted Stock have been made to our officers and directors.
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The following table sets forth information as of August 31, 2012, with respect to compensation plans under which shares of our common stock may be issued.
Number of Securities Issued as Restricted Stock or to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | ||||||||||
EEquity Compensation Plans Approved by Security Holders 2010 Equity Incentive Plan | 1,000,000 | 9,000,000 | ||||||||||
EEquity Compensation Plans Not Approved by Security Holders | - | - |
Our Purchases of Our Equity Securities
During the year ended August 31, 2012, the Company received 315,148 shares of common stock from the Company’s CEO and former CEO as reimbursement for $44,121 of taxes paid on their behalf. Those shares were returned to the Company’s treasury.
Recent Issuances Involving Unregistered Securities
During the year ended August 31, 2012, we sold an aggregate of (i) 6,350 shares of our Series A 12.5% Convertible Preferred Stock (the “Series A Preferred Stock”), which shares of Series A Preferred Stock have a stated value of $1,000 per share and were convertible into shares of our Common Stock at an initial conversion price of $1.00 per share, and (ii) warrants to purchase an aggregate of 6,350,000 shares of common stock (the “Investor Warrants”), 3,175,000 of which were exercisable at an initial exercise price of $2.00 per share and 3,175,000 of which were exercisable at an initial exercise price of $4.00 per share. The securities were not registered under the Securities Act, or the securities laws of any state, and were offered and sold in reliance on the exemption from registration afforded by Section 4(2) and Regulation D under the Securities Act.
During the year ended August 31, 2012 the Company issued 7,120,150 shares of common stock as payment for the 12.5% dividend on the Series A and Series B Preferred Stock. These shares were valued at $4,580,642.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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.
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Fiscal year ended August 31, 2012 compared to fiscal year ended August 31, 2011
ABSOLUTE LIFE SOLUTIONS, INC.
Year ended August 31, 2012 | Year ended August 31, 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 the Term 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, 2012 and 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.
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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)
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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.
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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management does not believe that there is any material market risk exposure with respect to derivative or other financial instruments that would require disclosure under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our financial statements beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
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ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure controls and procedures (as defined in Rule 13(a) – 15(e) of the Exchange Act) are controls and other procedures that are designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a public company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures include many aspects of internal controls over financial reporting.
Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective at August 31, 2012.
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for the Company. The Company maintains processes designed by, or under the supervision of the Company's management, including but not limited to the Company's Chief Executive Officer and Chief Financial Officer or persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles including policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles (“GAAP”), and that receipts and expenditures of the issuer are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has conducted an evaluation of the Company’s internal control over financial reporting using the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as a basis to evaluate effectiveness and determined that internal control over financial reporting was effective as of the end of the fiscal year ended August 31, 2012. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's internal control over financial reporting is not effective due to the material weakness noted below. A material weakness is a control deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified:
· Due to the small size of its staff, the Company did not have sufficient segregation of duties to support its internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended August 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following individuals constitute our Board of Directors and executive officers as of November 30, 2012:
Name | Age | Position(s) | ||
Avrohom Oratz | 29 | President, Chief Executive Officer and Director, served as our Treasurer and Chief Financial Officer from July 2010 until his election as President in April 2011. From 2007 to 2010, he was employed by Platinum Human Resource Management, a privately owned company with $250M of revenue, as Corporate Controller. Platinum is a full service human resource services firm with offices in New York, Florida, Alabama and California. As Controller, Mr. Oratz designed and implemented a comprehensive fraud protection program, with processes and procedures that protect clients' financial integrity. Mr. Oratz played a key role in the establishment of Normandy Harbor Insurance Company, specializing in Workers' Compensation coverage and comprehensive Risk Management Programs. | ||
Joshua Yifat | 40 | Treasurer, Chief Financial Officer and Secretary, commencing on April 15, 2011. Prior to joining the Company, Mr. Yifat was a Vice President of the Managed Futures Group at Morgan Stanley Smith Barney from December 2007 – April 2011, where he supervised 40 managed futures funds with assets under management in excess of $6.5 billion. Prior to Morgan Stanley Smith Barney, he spent 8 years with various major accounting firms (including KPMG, LLP from December 2002 – November 2007) as senior auditor within the financial services group. He is a graduate of Touro College. | ||
Directors | ||||
Chaim Loeb | 43 | Director, joined our Board in May 2010. Mr. Loeb has been an insurance broker since 1994. He serves as the President of Loeb Insurance Brokerage, Inc. since 2006 and Cornell Insurance Services since 2009. He is licensed in Life and Health Insurance from the State of New York. He is a graduate of the Rabbinical College Zichron Moshe of New York. Mr. Loeb’s experience in the insurance industry led to the conclusion that he should be nominated to serve as director of the Company. | ||
Abraham Lowy | 32 | Director, joined our Board in May 2010. For the last five years, Mr. Lowy has been a partner with Treff and Lowy PLLC. Mr. Lowy is an attorney who has an extensive practice representing corporate real estate investors in the acquisition, development, financing, and leasing of commercial and retail properties, including office buildings, condominium developments, shopping centers, nursing homes and warehouses. Mr. Lowy received his Juris Doctorate degree from Brooklyn Law School, and is admitted to the bars of the states of New York and New Jersey. Mr. Lowy’s experience representing early-stage and small businesses and in insurance litigation led to the conclusion that he should be nominated to serve as a director of the Company. | ||
Sy Stern | 40 | Director, joined our Board in December 2010. Mr. Stern is currently a Tax Manager at AIG since January 2011, and a partner in the law firm of Stern and Stern LLP. Prior to AIG, he was a Managing Member of the Stern Professional Group LLC, a consulting group focused on complex tax and legal matters, from July 2007 – December 2010. He also functioned as interim CFO for a real estate development joint venture from July 2007 – April 2008 and as interim controller for a large staffing company from June 2010 – September 2010. He previously was a tax manager with Ernst & Young, LLP from January 2006 – June 2007. Mr. Stern earned his J.D. at New York Law School in May of 1998, and his MBA in Accounting at the Pace University, Lubin School of Business in September of 1999. Mr. Stern is currently a member of good standing in the New York State Bar Association and the New Jersey State Bar Association. He is also a Certified Public Accountant licensed in the State of New York. Mr. Stern’s prior experience, his financial training and his business-focused educational background led to the conclusion that he should be nominated to serve as a director of the Company. | ||
Moshe Hogeg | 31 | Director, joined our Board in October 2012. Mr. Hogeg is currently Chief Executive Officer of Mobli Media, Inc. (“Mobli”) since 2010. Mobli is a thirty-five employee photo and video sharing platform. Mobli recently announced the completion of a $22,000,000 round of financing bringing their total funds raised to $28,500,000. From 2007 to 2009, Mr. Hogeg served as founder and Chief Executive Officer of Web2Sport, a sports oriented social network in Israel, and increased the average viewership from 50 viewers per game to 12,000 viewers per game. From 2000 to 2007, Mr. Hogeg served as a Captain in the Israel Defense Forces. Mr. Hogeg’s prior experience in the technology industry led to the conclusion that he should be nominated to serve as a director of the Company. |
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We expect that we may add additional directors to the Board of Directors in the next twelve months but have not entered into any discussions with any prospective directors .
We are not currently subject to any standards regarding the “independence” of directors on our Board, or otherwise subject to any requirements of any national securities exchange or an inter-dealer quotation system with respect to the need to have a majority of our directors be independent. Although we are not required to comply with these requirements, we have elected to use the definition for “director independence” under the AMEX LLC Stock Market listing standards. Our Board has determined that each of Messrs. Loeb, Lowy, Stern and Hogeg are independent directors under The AMEX LLC Stock Market rules relating to director independence because each is a non-employee director, and none of them has any relationship with the Company or other person, which in the opinion of our Board, would interfere with his exercise of independent judgment in carrying out the responsibilities of a director.
Director Compensation
Our directors currently do not receive any cash compensation for service on the Board of Directors or any committee thereof, but directors may be reimbursed for certain expenses in connection with attendance at Board and Committee meetings. We may compensate independent directors for their service on the Board and any Committee at rates that are comparable to the compensation paid to independent directors of other similarly situated companies. In connection with his election to our Board, Mr. Hogeg was granted 100,000 Non Qualified Stock Options at an exercise price of $0.31 vesting on October 24, 2013 and expiring on October 23, 2017. Except for Mr. Hogeg, each of our other directors received 50,000 shares of Common Stock upon joining the Board.
Officer and Director Qualifications
We have not formally established any specific, minimum qualifications that must be met by each of our officers or directors or specific qualities or skills that are necessary for one or more of our officers or members of the board of directors to possess. However, we generally evaluate the following qualities: educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and ability to represent the best interests of our shareholders.
Our officers and board of directors are composed of a diverse group of leaders. In their prior positions they have gained experience in core management skills, such as strategic and financial planning, public company financial reporting, compliance, risk management, and leadership development. Some of our officers and directors also have experience serving on boards of directors and board committees of private companies, and have an understanding of corporate governance practices and trends, which provides an understanding of different business processes, challenges, and strategies.
We, along with our officers and directors, believe that the above-mentioned attributes, along with the leadership skills and other experiences of our officers and board members, provide us with a diverse range of perspectives and judgment necessary to facilitate our goals of consummating a business transaction.
Meetings and Attendance
During the fiscal year ended August 31, 2012, there were three meetings of the Board of Directors.
Each director attended or participated in at least 3/4 of the meetings of the Board of Directors held during our fiscal year ended August 31, 2012 and during his term of service.
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Board Committees
We constituted an Audit Committee, Nominating and Corporate Governance Committee, and Compensation Committee on April 4, 2011. Each Committee operates under a charter that has been approved by our board of directors.
Audit Committee
We have a separately designated standing Audit Committee established in accordance with Section 3(a) (58) (A) of the Securities Exchange Act of 1934 (the “Exchange Act”). Our Audit Committee is currently composed of Mr. Stern (Chairman) and Messrs. Lowy and Loeb. Each individual is involved in discussions with management and our independent registered public accounting firm with respect to financial reporting and our internal accounting controls. The board of directors has determined that Mr. Stern is an “audit committee financial expert” as defined in Item 407(d) (5) (ii) of Regulation S-K. The Audit Committee has the sole authority and responsibility to select, evaluate and replace our independent registered public accounting firm or nominate the independent auditors for shareholder approval. The Audit Committee must pre-approve all audit engagement fees and terms and all non-audit engagements with the independent auditors. The Audit Committee consults with management but does not delegate these responsibilities. The Audit Committee will also review all “related party” transactions.
Compensation Committee
Our Compensation Committee was formed in April 2011 and consists of Mr. Loeb (Chairman) and Messrs. Lowy and Stern. Our Compensation Committee will award stock options to officers and employees. The Compensation Committee has overall responsibility for approving and evaluating the employment agreements, severance agreements, and executive officer compensation plans, policies and programs of the company.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee was formed in April 2011 and consists of Mr. Lowy (Chairman) and Messrs. Loeb and Stern and Hogeg. The Nominating and Corporate Governance Committee is responsible for (1) reviewing suggestions of candidates for director made by directors and others; (2) identifying individuals qualified to become Board members, and recommending to the Board the director nominees for the next annual meeting of shareholders; (3) recommending to the Board director nominees for each committee of the Board; (4) recommending to the Board the corporate governance principles applicable to the company; and (5) overseeing the annual evaluation of the Board and management. Pursuant to the Nominating and Corporate Governance Committee charter, there is no difference in the manner in which a nominee is evaluated based on whether the nominee is recommended by a shareholder or otherwise.
Code of Business Ethics and Conduct
Our board of directors has adopted a Code of Business Ethics and Conduct Guidelines to which adherence is full commitment. The Code of Business Ethics and Conduct Guidelines may be found on our website at www.absolutels.com. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code by posting such information on our website, at the address specified above.
2010 Equity Incentive Plan
Pursuant to Board of Directors and stockholder approval, the Company adopted its 2010 Equity Incentive Plan on June 1, 2010 (the “Plan”) whereby it reserved for issuance up to 10,000,000 shares of its common stock. The purpose of the Plan is to provide directors, officers and employees of, and consultants, to the Company with additional incentives by increasing their ownership interest in the Company. Directors, officers, employees and consultants of the Company are eligible to participate in the Plan. Options in the form of Incentive Stock Options (“ISO”) and Non-Statutory Stock Options (“NSO”) may be granted under the Plan. Restricted Stock may also be granted under the Plan. At August 31, 2012, grants of 1,000,000 shares of Restricted Stock have been made to our officers and directors.
The Board of Directors of the Company or a Compensation Committee will administer the Plan with the discretion generally to determine the terms of any option grant, including the number of option shares, exercise price, term, vesting schedule and the post-termination exercise period.
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Incentive stock options may be granted under the Equity Plan only to employees of the Company and its affiliates. Employees, directors and consultants of the Company and its affiliates are eligible to receive all other types of awards under the Equity Plan. No incentive stock option may be granted under the Equity Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant.
Directors’ and Officers’ Indemnity
We have entered into indemnification agreements with key officers and directors and such persons shall also have indemnification rights under applicable laws, and our certificate of incorporation and bylaws.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the annual compensation and long-term compensation awards for the fiscal years ended August 31, 2012 and 2011 for Moshe Oratz, our former Chief Executive Officer, Avrohom Oratz, our current Chief Executive Officer and former Chief Financial Officer and Joshua Yifat, our current Chief Financial Officer during the fiscal years ended August 31, 2012 and 2011.
Name and Principal Position (in dollars) | Fiscal Year | Salary ($)(1) | Bonus ($)(2) | Restricted Stock Awards ($)(3) | All Other Compensation ($)(4) | Total ($) | ||||||||||||||||||
Moshe Oratz | ||||||||||||||||||||||||
Former President, Chief Executive | 2012 | - | - | - | - | |||||||||||||||||||
Officer | 2011 | 161,806 | - | - | - | 161,806 | ||||||||||||||||||
Avrohom Oratz | ||||||||||||||||||||||||
President, Chief Executive Officer | ||||||||||||||||||||||||
Formerly Treasurer, Chief Financial | 2012 | 165,000 | - | - | 12,000 | 177,000 | ||||||||||||||||||
Officer | 2011 | 162,042 | - | - | 7,510 | 169,552 | ||||||||||||||||||
Joshua Yifat | 2012 | 160,000 | - | 12,000 | 172,000 | |||||||||||||||||||
Treasurer, Chief Financial Officer | 2011 | 60,000 | - | 210,000 | 3,375 | 273,375 |
On an annual basis, for the fiscal years ended August 31, 2012 and 2011, the salaries included above would accrue at the rate of $250,000 per annum for Moshe Oratz, $165,000 per annum and $150,000 respectively for Avrohom Oratz and $160,000 per annum for Joshua Yifat.
(1) The dollar value of base salary (cash and non-cash) earned.
(2) The dollar value of bonus (cash and non-cash) earned.
(3) The fair value at grant date for the shares of restricted stock issued as compensation for services to the persons listed in the table.
(4) All other compensation received that we could not properly report in any other column of the table.
Mr. Moshe Oratz resigned as our President and Chief Executive Officer effective April 8, 2011 to pursue other business interests. The Company has entered into two formal written employment agreements with our executive officers. Employment agreements dated June 1, 2010 (and amended April 8, 2011), and April 15, 2011 respectively have been entered with each of Avrohom Oratz and Joshua Yifat (collectively, the “Executives”).
Pursuant to their respective employment agreements, Mr. Avrohom Oratz serves as our President and Chief Executive Officer at an annual salary of $165,000 and Mr. Joshua Yifat serves as our Treasurer and Chief Financial Officer at an annual salary of $160,000, which agreements run through June 1, 2013 and April 15, 2014 respectively. The agreements entitle these executives to receive a net year-end performance bonus, based on performance measurements approved by the independent Directors, as well as certain other benefits. These executives are also subject to non-competition and confidentiality requirements. We may terminate these agreements at any time for cause.
55 |
Upon being appointed as Chief Financial Officer, Mr. Joshua Yifat was granted 100,000 shares of common stock under our Equity Plan. Messrs. Oratz and Yifat may also participate in any and all benefits and perquisites as are generally provided for the benefit of executive employees.
Pursuant to the terms of each of the Agreements, upon a change of control of the Company, and upon a fundamental adverse change occurring in the employment of the particular Executive without the agreement of that Executive, the Executive has the option to terminate his employment and the Agreement, triggering the payment of a termination package consisting of an amount equal to the Executive’s base salary for the balance of the term, subject to any withholdings or deductions required by law.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
This table sets forth certain information regarding the ownership of our common stock as of November 30, 2012 by: (i) each director; (ii) each of our current executive officers; (iii) all of our directors and executive officers as a group; and (iv) all those known by us to be beneficial owners of at least five percent of our common stock. Information relating to beneficial ownership of common stock by our principal stockholders and management is based upon information furnished by each person using "beneficial ownership" concepts under the rules of the Securities and Exchange Commission. Under those rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of the date hereof, through the exercise or conversion of any stock option, convertible security, warrant or other right. Inclusion of shares in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person’s spouse) with respect to all shares of capital stock listed as owned by that person or entity.
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class (1) | ||||||
Moshe Oratz (2) (3) (4) | 35,323,527 | 38 | % | |||||
Avrohom Oratz (2) | 148,825 | (6 | ) | |||||
Joshua Yifat (2) | 100,000 | (6 | ) | |||||
Abraham Lowy 1255 East 35th St Brooklyn, New York 11210 | 50,000 | (6 | ) | |||||
Chaim Loeb 1334 East 32 Street Brooklyn, New York 11210 | 50,000 | (6 | ) | |||||
Sy Stern 1556 East 29 th Street Brooklyn, New York 11210 | 50,000 | (6 | ) | |||||
Moshe Hogeg 22 Laurie Dr. Englewood Cliffs, New Jersey 07632 | 100,000 | (6 | ) | |||||
Credit Strategies, LLC | ||||||||
405 Lexington Avenue New York, New York 10174 | 4,896,169 | (4) (5 | ) | |||||
All Directors and Officers as a Group | 498,825 | (6 | ) |
56 |
(1) Based on 92,229,599 shares of common stock outstanding
(2) The address for each of these persons is 45 Broadway, New York, New York 10006
(3) Mr. Oratz is the sole member of CS Master Holdings LLC, which owns 35,037,500 shares of Common Stock. Mr. Oratz disclaims ownership in 16,000,000 shares held by trusts for the benefit of his children, and administered by trustees.
(4) In April 2011, CS Master Holding LLC granted to Platinum Partners Value Arbitrage Fund, L.P. (“Value”) and Credit Strategies LLC (“Credit Strategies”) transferable options to acquire an aggregate of 20,000,000 shares of our Common Stock at an exercise price of $0.005 per share. The options, exercisable in whole or in part, expire in April 2016. Pursuant to the terms of the Option Agreement, CS Master Holding LLC is restricted from selling or otherwise transferring the underlying shares of Common Stock without Value or Credit Strategies’ consent prior to the expiration of the option. The Option Agreements contain provisions prohibiting exercise of the options that would result in the stockholder owning beneficially more than 4.99% of the outstanding shares of our common stock as determined under Section 13(d) of the Securities Exchange Act of 1934.
(5) The Holder listed below beneficially owns shares of our Common Stock as follows:
Name of Beneficial Owner | Shares Currently Owned | Shares Underlying Convertible Preferred Stock | Warrants | |||||||||
Credit Strategies, LLC | 4,896,169 | - | - |
The options granted by CS Master Holding LLC to Credit Strategies and Value each contain provisions prohibiting any conversions of the options that would result in the stockholder (or its affiliates) owning beneficially more than 4.99% of the outstanding shares of our common stock as determined under Section 13(d) of the Securities Exchange Act of 1934. The shares transferable to Credit Strategies and Value are not including the foregoing table. Mark Nordlicht has voting and investment control over the securities held by Credit Strategies and Value.
(6) Less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Mr. Moshe Oratz beneficially owns approximately 38% of the outstanding common stock of the Company. Mr. Moshe Oratz is the brother of Mr. Avrohom M. Oratz.
57 |
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
On January 10, 2011, the Company’s Board of Directors appointed Marcum LLP (“Marcum”) as our new independent registered public accounting firm to perform auditing services commencing with the fiscal year ending August 31, 2011. Aggregate fees for professional services rendered to us by our auditors are set forth below:
Year Ended August 31, 2012 | Year Ended August 31, 2011 | |||||||
Audit Fees | $ | 165,500 | $ | 187,000 | ||||
Audit-Related Fees | 24,500 | - | ||||||
Tax Fees | 18,000 | - | ||||||
All Other Fees | - | - | ||||||
Total | $ | 208,000 | $ | 187,000 |
Audit Fees
Audit fees are the aggregate fees billed for professional services rendered by our independent auditors for the audit of our annual financial statements, the review of the financial statements included in each of our quarterly reports and services provided in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Audit related fees are the aggregate fees billed by our independent auditors for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not described in the preceding category.
Tax Fees
Tax fees are billed by our independent auditors for tax compliance, tax advice and tax planning.
All Other Fees
All other fees include fees billed by our independent auditors for products or services other than as described in the immediately preceding three categories.
Policy on Pre-Approval of Services Performed by Independent Auditors
It is our Board of Directors' policy to pre-approve all audit and permissible non-audit services performed by the independent auditors. We approved all services that our independent accountants provided to us in the past two fiscal years.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
We have filed the following documents as part of this report on Form 10-K:
1. Financial Statements . The audited consolidated financial statements of Absolute Life Solutions, Inc. required by Part II, Item 8, of this report on Form 10-K, which are listed on page F-1 of this annual report on Form 10-K, including the notes thereto and the report of our independent registered public accounting firm.
2. Financial Statement Schedules . We have not filed any financial statement schedules as part of this report on Form 10-K because these schedules are not required or because the information required to be included in these schedules has been included in our audited consolidated financial statements or the notes thereto.
58 |
3. Exhibits . The following exhibits have been filed as part of or incorporated by reference in this annual report on Form 10-K:
Exhibit Number |
Description | |
3.2A | By-Laws (1) | |
3.3 | Restated and Amended Articles of Incorporation (2) | |
3.4 | Form of Certificate of Designation for Series A Convertible Preferred Stock (2) | |
3.5 | Form of Certificate of Designation for Series B Convertible Preferred Stock (5) | |
10.3 | Form of Securities Purchase Agreement (3) | |
10.4 | Form of Warrant (3) | |
10.5 | Form of Registration Rights Agreement (3) | |
10.7 | Employment Agreement with Avrohom Oratz, dated June 1, 2010 (3) | |
10.8 | 2010 Equity Incentive Plan (3) | |
10.9 | Consulting Agreement with Coventry Consulting Group, LLC (4) | |
10.10 | Form of Securities Exchange Agreement with certain Series A Preferred Stockholders (5) | |
10.11 | Amendment to Employment Agreement of Avrohom Oratz (5) | |
10.12 | Employment Agreement with Joshua Yifat, dated April 15, 2011 (5) | |
10.14 | Voting Trust Agreement (6) | |
10.15 | Loan and Security Agreement (7) | |
10.16 | Preferred Shares Agreement (7) | |
10.17 | Loan Satisfaction Agreement (8) | |
31.1 | Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002 (9) | |
31.2 | Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002 (9) | |
32.1 | Certificate of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 (9) | |
32.1 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (9) |
(1) Filed as an Exhibit to our Registration Statement on Form SB-2 filed on December 24, 2007.
(2) Filed as an Exhibit to our Form 10-Q filed on July 15, 2010.
(3) Filed as an Exhibit to our Form 8-K filed on July 26, 2010.
(4) Filed as an Exhibit to our Form 10-K/A filed on January 7, 2011.
(5) Filed as an Exhibit to our Form 8-K filed on April 11, 2011.
(6) Filed as an Exhibit to our Form 8-K filed on April 14, 2011.
(7) Filed as an Exhibit to our Form 8-K filed on August 2, 2012.
(8) Filed as an Exhibit to our Form 8-K filed on November 20, 2012.
(9) Filed herewith.
59 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
ABSOLUTE LIFE SOLUTIONS, INC. | |
January 2, 2013 | /s/ Avrohom Oratz |
Avrohom Oratz, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates as in
Signature | Capacity in which Signed | Date | ||
/s/ Avrohom Oratz | ||||
Avrohom Oratz |
President, Director and Chief Executive Officer (Principal Executive Officer) |
January 2, 2013 | ||
/s/ Joshua Yifat | ||||
Joshua Yifat |
Treasurer and Chief Financial Officer (Principal Financial Officer) |
January 2, 2013 | ||
/s/ Chaim Loeb | ||||
Chaim Loeb | Director | January 2, 2013 | ||
/s/ Abraham Lowy | ||||
Abraham Lowy | Director | January 2, 2013 | ||
/s/ Sy Stern | ||||
Sy Stern | Director | January 2, 2013 | ||
/s/ Moshe Hogeg | ||||
Moshe Hogeg | Director | January 2, 2013 |
60 |
ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY
FINANCIAL STATEMENTS
AUGUST 31, 2012
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 |
CONSOLIDATED BALANCE SHEETS | F-3 |
CONSOLIDATED STATEMENTS OF OPERATIONS | F-4 |
CONSOLIDATED STATEMENTS OF CASH FLOWS | F-5 |
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY | F-6 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | F-7 |
F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Shareholders of
Absolute Life Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Absolute Life Solutions, Inc. and its subsidiary (the “Company”) as of August 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Absolute Life Solutions, Inc. and its subsidiary, as of August 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements as of November 15, 2012 the Company is in the development stage, and the continued existence of the Company is dependent upon its ability to generate sufficient cash from its augmented reality business and to meet its obligations as they come due. The expected demand for and selling prices of the Company’s software applications, may not be sufficient to meet cash flow requirements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP
Marcum LLP
New York, NY
January 2, 2013
F-2 |
ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
August 31, 2012 | August 31, 2011 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 233,050 | $ | 1,917,896 | ||||
Accounts receivable | - | 1,263,000 | ||||||
Insurance purchase escrow | - | 128,750 | ||||||
Receivable under reverse repurchase agreement | - | 3,368,593 | ||||||
Investment in life settlement contracts at investment method | 4,334,012 | - | ||||||
Prepaid expenses | 15,192 | 45,044 | ||||||
Total current assets | 4,582,254 | 6,723,283 | ||||||
Equipment, net | 66,129 | 90,082 | ||||||
Security deposit | 56,688 | 56,688 | ||||||
Investment in life settlement contracts at fair value | 64,667,124 | 92,708,076 | ||||||
TOTAL ASSETS | $ | 69,372,195 | $ | 99,578,129 | ||||
LIABILITIES | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 441,297 | $ | 44,607 | ||||
Interest payable | 626,710 | - | ||||||
Loans payable | 59,450,000 | - | ||||||
Due to provider | - | 568,000 | ||||||
Total current liabilities | 60,518,007 | 612,607 | ||||||
Deferred rent | 49,335 | 42,148 | ||||||
Deferred income taxes | 4,243,044 | 21,071,160 | ||||||
TOTAL LIABILITIES | 64,810,386 | 21,725,915 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock ($0.00001 par value; 100,000,000 authorized; of which 60,000 are designated as Series A 12.5% convertible preferred stock; No Series A issued and outstanding ( August 31, 2011 - 41,950 issued and outstanding) | - | - | ||||||
of which 25,000 are designated as Series B 12.5% convertible preferred stock; No Series B issued and outstanding ( August 31, 2011 – 8,850 issued and outstanding) | - | - | ||||||
Common stock ($0.00001 par value; 500,000,000 authorized; 92,544,747 issued and 92,229,599 outstanding) (August 31, 2011 - 85,424,597 issued and outstanding) | 925 | 854 | ||||||
Additional paid in capital | 51,486,890 | 96,773,677 | ||||||
Treasury stock, at cost (315,148 shares of common stock) (August 31, 2011- No shares of common stock) | (44,121 | ) | - | |||||
Retained earnings (accumulated deficit) | (46,881,885 | ) | (18,922,317 | ) | ||||
Total Stockholders' Equity | 4,561,809 | 77,852,214 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 69,372,195 | $ | 99,578,129 |
The accompanying notes are an integral part of these consolidated financial statements.
F-3 |
ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended August 31, 2012 | Year ended August 31, 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 | ) | ||
Basic loss per common share | $ | (0.30 | ) | $ | (0.24 | ) | ||
Diluted loss per common share | $ | (0.30 | ) | $ | (0.24 | ) | ||
Basic weighted average shares outstanding | 93,997,860 | 88,796,687 | ||||||
Diluted weighted average shares outstanding | 93,997,860 | 88,796,687 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4 |
ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended August 31, 2012 | Year ended August 31, 2011 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (22,446,284 | ) | $ | 22,903,341 | |||
Adjustments to reconcile net income to net cash (used in) operations | ||||||||
Issuances of common stock for services | - | 1,265,530 | ||||||
Unrealized changes in fair value of life settlement contracts | 25,890,307 | (50,865,130 | ) | |||||
Realized gain on maturity of life settlement contract | - | (2,237,500 | ) | |||||
Realized gain on sale of life settlement contracts at fair value | 510,853 | - | ||||||
Realized gain on sale of life settlement contracts at investment method | (319,843 | ) | (138,846 | ) | ||||
Stock forfeited by stockholders to settle payment of withholding tax on behalf of such stockholders | (44,121 | ) | - | |||||
Depreciation | 23,953 | 23,954 | ||||||
Deferred rent | 7,187 | 42,148 | ||||||
Deferred income taxes | (16,828,116 | ) | 19,546,602 | |||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 1,263,000 | (1,263,000 | ) | |||||
Insurance purchase escrow | 128,750 | 2,071,250 | ||||||
Prepaid expenses | 29,852 | 42,607 | ||||||
Accounts payable and accrued expenses | 396,690 | (318,289 | ) | |||||
Interest payable | 626,710 | - | ||||||
Due to provider | (568,000 | ) | 568,000 | |||||
Net cash used in operating activities | (11,329,062 | ) | (8,359,333 | ) | ||||
INVESTING ACTIVITIES | ||||||||
Purchases of life settlement contracts | - | (30,347,703 | ) | |||||
Proceeds from maturity of life settlement contract | - | 2,500,000 | ||||||
Proceeds from sale of life settlement contracts at fair value | 1,639,792 | - | ||||||
Proceeds from sale of life settlement contracts at investment method | 897,234 | 695,000 | ||||||
Investment in life settlement contracts at investment method | (1,408,143 | ) | - | |||||
Investment in reverse repurchase agreement | (134,667 | ) | (3,568,593 | ) | ||||
Maturity of reverse repurchase agreement | - | 200,000 | ||||||
Net cash provided by (used in) investing activities | 994,216 | (30,521,296 | ) | |||||
FINANCING ACTIVITIES | ||||||||
Proceeds from issuance of preferred stock | 6,350,000 | 37,300,000 | ||||||
Proceeds from revolver loan payable | 2,300,000 | - | ||||||
Proceeds from shareholder loan | 975,000 | - | ||||||
Payment of shareholder loan | (975,000 | ) | - | |||||
Net cash provided by financing activities | 8,650,000 | 37,300,000 | ||||||
Change in cash and cash equivalents | (1,684,846 | ) | (1,580,629 | ) | ||||
Cash and cash equivalents, beginning | 1,917,896 | 3,498,525 | ||||||
Cash and cash equivalents, ending | $ | 233,050 | $ | 1,917,896 | ||||
Supplemental disclosure of non-cash investing activity: | ||||||||
Transfer of receivable under reverse repurchase to investment in life settlement contracts at investment method | $ | 3,503,260 | $ | - | ||||
Term loan issued for repurchase of preferred stock | $ | 57,150,000 | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
F-5 |
ABSOLUTE LIFE SOLUTIONS, INC. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Retained | ||||||||||||||||||||||||||||||||||||||||
Preferred stock | Additional | earnings | ||||||||||||||||||||||||||||||||||||||
Series A | Series B | Common stock | paid-in | Treasury | (accumulated | |||||||||||||||||||||||||||||||||||
Number | Amount | Number | Amount | Number | Amount | capital | Stock | deficit) | Total | |||||||||||||||||||||||||||||||
Balance, September 1, 2010 | 13,500 | $ | - | - | $ | - | 80,060,000 | $ | 801 | $ | 14,249,938 | $ | - | $ | 2,132,604 | $ | 16,383,343 | |||||||||||||||||||||||
Preferred stock and warrants issued for cash at $1,000 per share | 34,450 | - | 2,850 | - | - | - | 37,300,000 | - | - | 37,300,000 | ||||||||||||||||||||||||||||||
Exchange of Series A preferred stock for Series B preferred stock and warrants | (6,000 | ) | - | 6,000 | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||
Common stock issued under employee stock plan | - | - | - | - | 1,000,000 | 10 | 314,999 | - | 315,009 | |||||||||||||||||||||||||||||||
Common stock issued for consulting and legal services | - | - | - | - | 1,020,007 | 10 | 950,511 | - | 950,521 | |||||||||||||||||||||||||||||||
Stock dividends paid on preferred stock | - | - | - | - | 3,344,590 | 33 | 6,658,229 | (6,658,262 | ) | - | ||||||||||||||||||||||||||||||
Deemed dividends on preferred stock | - | - | - | - | - | - | 37,300,000 | (37,300,000 | ) | - | ||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | 22,903,341 | 22,903,341 | |||||||||||||||||||||||||||||||
Balance, August 31, 2011 | 41,950 | - | 8,850 | - | 85,424,597 | 854 | 96,773,677 | (18,922,317 | ) | 77,852,214 | ||||||||||||||||||||||||||||||
Preferred stock and warrants issued for cash at $1,000 per share | 6,350 | - | - | - | - | - | 6,350,000 | - | 6,350,000 | |||||||||||||||||||||||||||||||
Stock dividends paid on preferred stock | - | - | - | - | 7,120,150 | 71 | 4,580,570 | (4,580,641 | ) | - | ||||||||||||||||||||||||||||||
Deemed dividends on preferred stock | - | - | - | - | - | - | 932,643 | (932,643 | ) | - | ||||||||||||||||||||||||||||||
Repurchase of preferred stock | (48,300 | ) | - | (8,850 | ) | - | - | - | (57,150,000 | ) | - | (57,150,000 | ) | |||||||||||||||||||||||||||
Purchase of treasury stock | - | - | - | - | (315,148 | ) | - | - | (44,121 | ) | - | (44,121 | ) | |||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | (22,446,284 | ) | (22,446,284 | ) | |||||||||||||||||||||||||||||
Balance, August 31, 2012 | - | $ | - | - | $ | - | 92,229,599 | $ | 925 | $ | 51,486,890 | $ | (44,121 | ) | $ | (46,881,885 | ) | $ | 4,561,809 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6 |
1. NATURE AND CONTINUANCE OF OPERATIONS
Absolute Life Solutions, Inc. (the “Company”) was originally incorporated as Shimmer Gold, Inc. in the State of Nevada on September 7, 2006. The Company was an Exploration Stage company as defined by Accounting Standards Codification (“ASC”) 915, Development Stage Entities, and was in the business of the acquisition and exploration of mineral resources during the period from September 7, 2006 to May 21, 2010. Subsequently, a majority of our shareholders approved an amendment to our Articles of Incorporation changing our name to Absolute Life Solutions, Inc. During the fiscal year ended August 31, 2010, the Company commenced operations as a specialty financial services company engaged in the business of purchasing life settlement contracts for long-term investment purposes and is no longer classified as a development stage company.
During the year ended August 31, 2012, the Company formed a wholly-owned subsidiary Infinity Augmented Reality, LLC (“IAR or “Infinity”) which is actively enagaged in the development of software applications which will utilize a technology known as Augmented Reality. Through IAR, the Company intends to develop a comprehensive augmented reality platform for consumers. IAR’s objective is to establish itself firmly as a preeminent source for state-of-the-art augmented reality experiences, forging a strong association, early on, between the Infinity brand and the burgeoning medium.
Effective November 15, 2012, the Company reached an agreement with the agent of the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such agreement resulted in the disposition of all of the life insurance policies currently held by the Company to the Lender or an affiliate of the Lender. As a result of the foregoing, the Company is no longer engaged in its prior primary activity as a specialty financial services company primarily engaged in the purchase of life settlement contracts. As a result of the foregoing, the Company will be classified as a development stage company on November 15, 2012.
The continued existence of the Company is dependent upon its ability to generate profit from its augmented reality business and to meet its obligations as they become due. If additional cash is needed, the Company intends to finance the future capital required for continued operations from a combination of traditional debt and equity markets. However, there is no assurance that (a) traditional debt and equity markets may be accessible as required, or if so, on acceptable terms and, or (b) the demand for and selling prices of the Company’s augmented reality products, may not be sufficient to meet cash flow expectation. The outcome of these matters cannot be predicted with certainty and therefore the Company may not be able to continue or expand operations as planned. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These audited financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.
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2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of the Company as of August 31, 2012 and 2011 and for the years then ended have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of the Company and our wholly-owned subsidiary. All significant intercompany accounts and transactions are eliminated in the consolidation process.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these financial statements relate to deferred income tax amounts and rates and timing of the reversal of income tax differences, the fair value of financial instruments and the determination of the variables used in the calculation of the fair value of life settlement contracts.
Cash and Cash Equivalents
The Company considers all short term investments with an original maturity of three months or less to be cash equivalents. The Company maintains cash balances that may be uninsured or in deposit accounts that exceed Federal Deposit Insurance Corporation limits. The Company maintains its cash deposits with major financial institutions.
Receivable Under Reverse Repurchase Agreement
Transactions involving purchases of life settlement contracts under agreements to resell (reverse repurchase agreements or reverse repos) are accounted for as collateralized financings except where the Company does not have an agreement to sell the same or substantially the same life settlement contracts before maturity at a fixed or determinable price. The Company's policy is to obtain possession of collateral with a fair value equal to or in excess of the principal amount loaned under resale agreements.
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At August 31, 2012 and August 31, 2011 the Company held zero and thirteen life settlement contracts as collateral in the amount of $0 and $3,368,593 respectively, which are reflected as a receivable under reverse repurchase agreement on the Balance Sheets. The counterparty did not exercise its rights under the repurchase agreements and upon expiration of the repurchase agreements, the Company recognized these assets as an investment in life settlement contract at investment method in the aggregate amount of $3,503,260.
The Company follows the provisions of ASC 860, Transfers and Servicing which requires an initial transfer of a financial asset and a repurchase financing that was entered into contemporaneously or in contemplation of the initial transfer to be evaluated as a linked transaction unless certain criteria are met, including that the transferred asset must be readily obtainable in the marketplace.
Life Settlement Contracts
ASC 325-30, Investments in Insurance Contracts allows an investor to elect to account for its investments in life settlement contracts using either the investment method or the fair value method. The election shall be made on an instrument-by instrument basis and is irrevocable. Under the investment method, an investor shall recognize the initial investment at the purchase price plus all initial direct costs. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force shall be capitalized. Under the fair value method, an investor shall recognize the initial investment at the purchase price. In subsequent periods, the investor shall re-measure the investment at fair value in its entirety at each reporting period and shall recognize the change in fair value in the current period net of premiums paid. The Company primarily uses the fair value method to account for life settlement contracts. For those life settlement contracts held as a receivable under reverse repurchase agreement in the prior year, the Company elected to account for them under the investment method upon expiration of the repurchase agreement. The Company purchased these policies under a reverse repurchase agreement as a short-term investment for the purpose of reselling them to other investors.
Life settlement contracts are inherently long term investments. The individuals upon which the life insurance is underwritten are normally healthy with indications of continuing life spans in excess of 5 years. Accounting for the value of these policies using the fair value method provides a more accurate indication of the present value of these policies as it takes into account the net effect of holding the policy over an extended period during which the investment into the asset is increased, by virtue of continuing premium payments. When life settlement contracts are purchased for the purpose of short term gain, typically in a distressed sale, where the life settlement contracts are sold below market, the fair value method would give an inaccurate valuation as it would price in the distressed opportunity as if this was a normal occurrence in the market. Additionally, the concept of holding the policy for a period of less than one year would create a situation where the asset would be best recorded under the investment method.
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.
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For life settlement contracts accounted under the investment method, the Company will recognize the difference between the death benefits and the carrying value of the policy when the Company determines that settlement and ultimate collection is realizable and reasonably assured. Income from a transaction must meet both criteria in order to be recognized. Income is generally considered realized when cash is received for the sale of a product or performance of a service. Income generally becomes realizable when a promise to pay is received in exchange for the sale of a product or performance of a service. The promise to pay could be verbal (account receivable) or written (note receivable). Income is generally earned when a legally enforceable exchange takes place (e.g., consideration has been tendered and the buyer takes possession of the product or benefits from the performance of a service). The Company recognizes gains from these life settlement contracts that the company owns upon one of the two following events:
1) Receipt of death notice or verified obituary of insured.
2) Signed sale agreement and/or filing of change of ownership forms and funds transferred to escrow.
Financial Instruments
The fair value of certain of the Company's financial instruments, consisting of cash and cash equivalents, accounts receivable, receivable under reverse repurchase agreement, accounts payable and accrued expenses, interest payable, loans payable and due to provider are estimated to be equal to their carrying value due to the short-term nature of these instruments. Investments in life settlement contracts are classified as held-for-trading and measured at fair value, with the realized and unrealized changes in fair value recognized each reporting period in the statements of operations.
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)
It is management's opinion that the Company is not exposed to significant interest, currency and credit risks arising from these financial instruments. (See Note 8).
Equipment
Equipment consists of computer hardware and furniture and is recorded at cost. Computer hardware and furniture are depreciated on a straight-line basis over their estimated lives of five years.
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Deferred Rent Liability
The Company’s operating lease provides for minimum annual payments that adjust over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis over the minimum lease term. The Company recognizes a deferred rent liability for rent escalations when the amount of straight-line rent exceeds the lease payments, and reduces the deferred rent liability when the lease payments exceed the straight-line rent expense.
Income Taxes
Deferred income taxes are provided for tax effects of temporary differences between the tax basis of asset and liabilities and their reported amounts in the financial statements. The Company uses the liability method to account for income taxes, which requires deferred taxes to be recorded at the statutory rate expected to be in effect when the taxes are paid. Valuation allowances are provided for a deferred tax asset when it is more likely than not that such asset will not be realized.
Management evaluates tax positions taken or expected to be taken in a tax return. The evaluation of a tax position includes a determination of whether a tax position should be recognized in the financial statements, and such a position should only be recognized if the Company determines that it is more likely than not that the tax position will be sustained upon examination by the tax authorities, based upon the technical merits of the position. For those tax positions that should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.
Earnings (Loss) per Share
Basic earnings (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. Included in basic loss per share calculations are the effects of 6,000,000 warrants exercisable at $.01. Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method.
Stock-Based Compensation
The Company accounts for stock based compensation arrangements using a fair value method and records such expense on a straight-line basis over the vesting period.
As of August 31, 2012, the Company has not granted any stock options.
Recent 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.
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3. INVESTMENT IN LIFE SETTLEMENT CONTRACTS
The Company purchases life settlement contracts for long-term investment purposes and uses the fair value method to calculate its life settlement portfolio. For those life settlement contracts held as a receivable under reverse repurchase agreement in the prior year, the Company elected to account for them under the investment method upon expiration of the repurchase agreement. The Company purchased these policies under a reverse repurchase agreement as a short-term investment for the purpose of reselling them to other investors.
When using fair value to measure assets and liabilities that are not actively trading, the Company follows the principles that clarify methods for measuring fair value when pricing these assets and liabilities. Further, the Company follows standards for the fair value option, which permits all entities to choose to measure eligible items at fair value at specified election dates. These standards state that a business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.
As of August 31, 2012 and August 31, 2011, the Company had the following investments in life settlement contracts:
Number of Contracts | Estimated Fair Value | Face Value | ||||||||||
August 31, 2011 | 39 | $ | 92,708,076 | $ | 274,750,633 | |||||||
August 31, 2012 | 37 | $ | 64,667,124 | $ | 265,143,373 |
The following tables represent the remaining life expectancies for each of the first five succeeding years as of August 31, 2012 and August 31, 2011 for life settlement contracts at fair value:
Remaining Life Expectancies as of August 31, 2012
Number of Contracts | Life Expectancies | Face Value | Carrying Value | |||||||||
- | 0-1 years | $ | - | $ | - | |||||||
1 | 1-2 years | 10,000,000 | 5,658,201 | |||||||||
5 | 2-3 years | 71,400,000 | 29,088,908 | |||||||||
2 | 3-4 years | 17,200,000 | 5,413,865 | |||||||||
2 | 4-5 years | 15,500,000 | 4,319,836 | |||||||||
27 | Thereafter | 151,043,373 | 20,186,314 | |||||||||
$ | 265,143,373 | $ | 64,667,124 |
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Remaining Life Expectancies as of August 31, 2011
Number of Contracts | Life Expectancies | Face Value | Carrying Value | |||||||||
- | 0-1 years | $ | - | $ | - | |||||||
1 | 1-2 years | 10,000,000 | 5,885,531 | |||||||||
- | 2-3 years | - | - | |||||||||
6 | 3-4 years | 74,000,000 | 36,136,627 | |||||||||
2 | 4-5 years | 17,200,000 | 6,379,423 | |||||||||
30 | Thereafter | 173,550,633 | 44,306,495 | |||||||||
$ | 274,750,633 | $ | 92,708,076 |
The following table represents the remaining life expectancies for each of the first five succeeding years as of August 31, 2012 for life settlement contracts under the investment method:
Remaining Life Expectancies as of August 31, 2012
Number of Contracts | Life Expectancies | Face Value | Carrying Value | |||||||||
- | 0-1 years | $ | - | $ | - | |||||||
- | 1-2 years | - | - | |||||||||
- | 2-3 years | - | - | |||||||||
- | 3-4 years | - | - | |||||||||
3 | 4-5 years | 8,000,000 | 1,309,745 | |||||||||
8 | Thereafter | 42,500,000 | 3,024,267 | |||||||||
$ | 50,500,000 | $ | 4,334,012 |
For the years ended August 31, 2012 and 2011, the investments experienced an unrealized loss of $35,329,432 and an unrealized gain of $43,131,633 respectively and the Company paid policy premiums of $9,903,638 and $7,733,497 respectively.
The fair value of life settlement contracts is based on information available to the Company at period end. The Company considers the following factors in its fair value estimates: cost at date of purchase; recent purchases and sales of similar investments, financial standing of the issuer, changes in economic conditions affecting the issuer; standard actuarially developed mortality tables and industry life expectancy reports. The Company uses life expectancy reports that have been issued no later than 24 months from the ending date of the year being reported. Life expectancy reports are currently ordered from any two of the following life expectancy providers; AVS, 21st Century, EMSI, ISC and Fasano. The Company considers that the underlying methodology of the life expectancy providers is an adequate gauge for calculating health status of the individual insured. Life expectancy data is used to simulate random possibilities of maturity, which form the basis for a statistical calculation that underlies our market valuations.
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The fair value of the life settlement contracts are estimated using present value calculations. The following assumptions were used at August 31, 2012 and 2011:
August 31, 2012 | August 31, 2011 | ||||||
Dataset | VBT ALB Mortality Table | VBT ALB Mortality Table | |||||
Expected premium growth | 5% | 5% | |||||
Mortality rates | Standard life expectancy | Standard life expectancy | |||||
Discount rate | 20%/25% | 14% |
The discount rate used to calculate the present value of the life settlement contracts was determined based on the following at August 31, 2012:
The Company utilizes actuarial pricing methodologies and software tools that are built and supported by leading independent actuarial service firms such as Milliman USA and Modeling Actuarial Pricing Systems, Inc. (“MAPS”) for calculating expected returns. The MAPS (formerly Milliman) system is the most widely used platform for generating mortality reports. The Company uses life expectancy data from major non-related third-party life expectancy data providers. MAPS uses the life expectancy data and calculates a multiplier to the VBT data to reflect the current state of health of the insured. MAPS generates a report encompassing three individual valuations, two valuations based on two separate life expectancy reports and one valuation based on the weighted average of the two life expectancy values. The Company utilizes the valuation generated from the larger life expectancy value. The next step in the valuation process is determining the appropriate discount rate for the asset type. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life settlement contracts and the Company’s estimate of the risk premium an investor in the policy would require. The Company believes that investors in alternative investments typically target yields averaging between 13 - 16% for investments of more than a 5 year duration. A 16% rate of return over a five year duration is a reasonable target for investments that are highly illiquid, relatively new and more volatile (i.e. life settlement contracts) than standard investments. In recent months, there have been a number of government investigations of several life settlement companies. These investigations, and subsequent Securities and Exchange Commision Inforcement Actions, in one instance, have caused a temporary dislocation in the life settlement market. Liquidity has tightened even further. The current market is still in a state of flux brought on by economic circumstances in Europe (traditionally the largest investors in the life settlement markets). These factors have caused investors in life settlements to demand a higher yield (averaging between 20 – 25%) because of the perceived risk in life settlements. Additionally, in the past 6 months, the Company, in the normal course of business, sold two fair value policies (each with face amounts below $15 million) to another investor, for a discount rate of between 19% and 22%. Additionally, in discussions with investors for potential debt offerings, and in discussions with other investors for potential sales of policies, the discount rate, for policies with face amounts below $15 million, indicated a rate of between 18% and 22%. For policies with face amounts above $15 million, of which there are fewer purchasers present, investors indicated a rate of between 25% and 28%. In light of all of these factors, the Company believes the perceived risk or uncertainty over these assets has changed and therefore the risk premium an investor would require has changed, therefore, in the third quarter ending May 31, 2012, management made a change in accounting estimate and adjusted its discount rate from 16% to 20%, for policies with face amounts below $15 million, and to 25%, for policies with face amounts above $15 million. Additionally, management has elected to report the more conservative of the values generated by the MAPS system, by utilizing the values linked to the longer life expectancy report. Management believes that a more conservative discount rate is appropriate due to the recent sales of policies and in discussions with other investors in the life settlements market.
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At August 31, 2011, the discount rate was determined based on the following:
In the process of developing a benchmark from which to measure valuation, the Company uses the average redemption yield on the FINRA/Bloomberg High Yield US Corporate Bond Index as a starting point. This index measures the average yield on the highest risk debt obligations traded in the market and serves as a strong indicator of the yield that professional investors would require for similar types of assets. Traditionally, this index yields between 10 – 12%, therefore we added 250 - 350 basis points to the current index yield to account for the current uncharacteristically depressed high yield corporate bond market plus an additional 250 - 350 basis points for the highly illiquid and relatively new life settlements asset class. Our assumption is that short term US Treasuries typically trade in the 250 - 350 BP range. Given the current depressed market rates we have added 250 - 350 BP and will adjust this inversely to the short term Treasuries. As Treasuries rise the spread rate will diminish keeping the discount rate in line with the market. As the life settlement market continues to mature and the investment pools will become better managed the risk will diminish and the asset class will become more liquid. Current market players are better capitalized and understand the asset characteristics at a higher level. As such the discount rate should reflect a maturing market.
The Company believes that investors in alternative investments typically target yields averaging between 13 - 16% for investments of more than a 5 year duration. A 14% rate of return over a five year duration is a reasonable target for investments that are highly illiquid, relatively new and more volatile (i.e. life settlement contracts) than standard investments. Management made a change in accounting estimate and adjusted its discount rate from 11.85% to 14% in the third quarter ending May 31, 2011, since management believes that a more conservative discount rate is appropriate due to the continued credit crunch in the market and in discussions with potential deals with other investors in the life settlements market.
The result of applying these assumptions and using Monte Carlo simulations for the years ended August 31, 2012 and 2011 is as follows:
August 31, 2012 | August 31, 2011 | |||||||
Total Pool Benefit | $ | 265,143,373 | $ | 274,750,633 | ||||
Average predicted period until final pool maturity | 7.90 yrs | 9.03 yrs | ||||||
Average simulated maturities over age 90 | 54 | % | 54 | % | ||||
Average age at August 31, 2012 | 83 | 82 | ||||||
Average age at maturity | 91 | 91 |
The assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. The fair value measurements used in estimating the present value calculations are derived from valuation techniques that include inputs for the asset that are not based on observable market data. The risks associated with the investments in life settlement contracts arise from the unknown remaining life expectancy, a change in credit worthiness of the policy issuer, funds needed to maintain the asset, and changes in the discount rate (See Note 8).
All of the Company’s life settlement contracts were forfeited and transferred to the agent of the Lenders on November 15, 2012.
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4. LOANS PAYABLE
On July 31, 2012, the Company entered into a Revolving Credit, Term Loan and Security Agreement (the “Loan and Security Agreement”) with certain parties, which were the holders of, in the aggregate, all of the Company’s Series A and Series B Preferred Stock (the “Lenders”). Platinum Partners Value Arbitrage Fund L.P., one of the Lenders, is serving as Agent for the Lenders. Pursuant to the Loan and Security Agreement, the Lenders agreed to lend to the Company, in the aggregate (i) a maximum of $10,000,000 on a revolving loan basis (the “Revolving Loan”) from the one Lender who agreed to do so, and (ii) $57,150,000 as a term loan (the “Term Loan”). Both the Revolving Loan and the Term Loan (collectively, the “Loans”) were due on October 31, 2012 (the “Maturity Date”), subject to acceleration upon the occurrence of certain specified events of default. The Loans bear interest at the rate of 12.5% per annum due on the Maturity Date. Repayment of the Loans is secured by a security interest in all of the assets of the Company, including all of the life insurance policies owned by the Company as well as all other assets of the Company. As of August 31, 2012, the Company had a term and revolver loan payable balance of $57,150,000 and $2,300,000 respectively. As of August 31, 2012, the Company had interest payable of $626,710 on these loans.
The Company was entitled to request a draw on the Revolving Loan if needed to pay premiums on the life insurance policies owned by the Company and for working capital purposes, subject to certain other conditions being satisfied and the Revolving Loan lender’s agreement to make the advance at that time. Proceeds of any draw down on the Revolving Loan were used to pay such premiums and other applications provided in the Loan and Security Agreement or approved by the Agent.
If the Company cannot arrange for a sale, joint venture or additional financing of the life insurance policies owned by the Company by the Maturity Date, the Company will likely not be able to satisfy the Loans at the Maturity Date. In that event, the Lenders have the right to foreclose on the collateral, including all of the life insurance policies owned by the Company and any beneficial interest the Company may have in other assets, including any ownership interest in any subsidiaries. The Company was unable to satisfy the Loans at the Maturity Date. On November 15, 2012, the Company reached an agreement with the agent of the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such agreement resulted in the disposition of all of the life insurance policies (and proceeds thereof) currently held by the Company to the Lender or an affiliate of the Lender. As of November 15, 2012, the Company had outstanding Obligations of $64,522,281, including (i) $57,150,000 in aggregate principal amount of the Term Loan plus $2,123,281 (the “Term Interest”) in interest under the Term Loan, or a total of $59,273,281 due under the Term Loan, and (ii) $5,135,000 outstanding under the Revolving Loan, plus $114,000 in interest under the Revolving Loan, or a total of $5,249,000 (the “Revolving Total”) due under the Revolving Loan. The disposition of all of the Company’s life insurance policies was used to satisfy the $57,150,000 in aggregate principal amount of the Term Loan. 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 the Term Interest of $2,123,281 and the Revolving Total of $5,249,000.
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The proceeds of the Term Loan were used to purchase all of the Company’s Series A and Series B Preferred Stock.
5. PREFERRED STOCK
The total number of preferred shares authorized and that may be issued by the Company is 100,000,000 preferred shares with a par value of $0.00001. These preferred shares have no rights to voting, profit sharing or liquidation.
Of the total preferred shares authorized, pursuant to a Certificate of Designation dated July 22, 2010, 60,000 preferred shares have been designated as Series A 12.5% convertible preferred stock (the “Series A Preferred Stock”), with a par value of $0.00001. Effective April 7, 2011, an additional 25,000 preferred shares have been designated as Series B 12.5% convertible preferred stock (the “Series B Preferred Stock”), with a par value of $0.00001. In connection with the establishment of the Series B Preferred Stock, which is subordinate to the Series A Preferred Stock in respect of liquidation and redemption, the holders of 6,000 shares of Series A Preferred Stock agreed to exchange their Series A Preferred Stock for Series B Preferred Stock. As a result, each exchanging Series A holder becomes a Series B holder and is entitled to receive an additional 50 Series B warrants exercisable at $4.00 for each share of preferred stock so exchanged. During the year ended August 31, 2012, the Company issued 6,350 (2011 – 41,950) shares of Series A Preferred Stock and issued 0 (2011- 2,850) shares of Series B Preferred Stock. In connection with the issuance of each Series A Preferred Stock, the Company issued 1,000 warrants (500 exercisable at $2.00 per share and 500 exercisable at $4.00 per share of common stock). In connection with the issuance of each share of Series B Preferred Stock, the Company issued 1,050 warrants (500 exercisable at $2.00 per share and 550 exercisable at $4.00 per share of common stock).
The Series A convertible preferred shares were issued at $1,000 per share and each Series A convertible share was convertible into 1,000 shares of common stock at an initial conversion price of $1.00 per share subject to standard anti-dilution provisions. The Series A convertible preferred shares were convertible at the election of the holder. The conversion right was effective beginning on the earlier of 65 days after the initial issuance of the shares to the holder or the effective date of a registration statement filed by the Company covering the holder’s resale of the conversion shares. The earlier of the two dates is the Conversion Date.
The holders of the shares of Series A Preferred Stock had the right to redeem the Series A Preferred Stock only upon existence of a Redemption Event. A Redemption Event is within control of the Company. A Redemption Event is described as:
(a) Failure of the Company to deliver certificates of conversion to the holders for any reason within 15 days after the Conversion Date and the holder has given 5 days’ notice thereof;
(b) A change in beneficial ownership of more than 50% of the common stock of the Company within a period of 40 trading days or involuntary change in a majority of the members of the Board of Directors of the Company within a period of 40 days; or
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(c) Bankruptcy, reorganization, insolvency or liquidation proceedings which are not dismissed within 60 days.
If the holder redeems the Series A preferred shares, the Company would have been obligated to pay the holder a redemption amount equal to the sum of (i) the stated value of the redeemed shares multiplied by 102%, if the redemption occurs within 5 years from the initial issuance; (ii) or by 100% if the redemption occurs after the 5 years. In addition, upon redemption, the Company must pay unpaid dividends through the date of such payment.
Dividends were payable at the rate of 12.5% per annum, in cash or in common stock, at the option of the Company. Dividends were payable semi-annually on the last day of June and December.
The Series A Preferred Stock did not have a maturity or mandatory redemption date, except upon certain limited acts of default. The Series A Preferred Stock had a cash settlement provision upon certain limited acts of default.
The Series B convertible preferred shares were issued at $1,000 per share and each Series B convertible share was convertible into 1,000 shares of common stock at an initial conversion price of $1.00 per share subject to standard anti-dilution provisions,. The Series B convertible preferred shares were convertible at the election of the holder. The conversion right was effective beginning on the earlier of 65 days after the initial issuance of the shares to the holder or the effective date of a registration statement filed by the Company covering the holder’s resale of the conversion shares. The earlier of the two dates is the Conversion Date.
The holders of the shares of Series B Preferred Stock had the right to redeem the Series B Preferred Stock only upon existence of a Redemption Event. A Redemption Event is within control of the Company. A Redemption Event is described as:
(a) Failure of the Company to deliver certificates of conversion to the holders for any reason within 15 days after the Conversion Date and the holder has given 5 days’ notice thereof;
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(b) A change in beneficial ownership of more than 50% of the common stock of the Company within a period of 40 trading days or involuntary change in a majority of the members of the Board of Directors of the Company within a period of 40 days; or
(c) Bankruptcy, reorganization, insolvency or liquidation proceedings which are not dismissed within 60 days.
If the holder redeems the Series B preferred shares, the Company would have been obligated to pay the holder a redemption amount equal to the sum of (i) the stated value of the redeemed shares multiplied by 102%, if the redemption occurs within 5 years from the initial issuance; (ii) or by 100% if the redemption occurs after the 5 years. In addition, upon redemption, the Company must pay unpaid dividends through the date of such payment.
Dividends were payable at the rate of 12.5% per annum, in cash or in common stock, at the option of the Company. Dividends are payable semi-annually on the last day of June and December.
The Series B Preferred Stock did not have a maturity or mandatory redemption date, except upon certain limited acts of default. The Series B Preferred Stock does have a cash settlement provision upon certain limited acts of default.
On January 18, 2011 the Company paid dividends due on December 31, 2010 with the issuance of 993,921 shares of common stock valued at $2,286,018.
On August 12, 2011 the Company paid dividends due on June 30, 2011 with the issuance of 2,350,669 shares of common stock valued at $4,372,244.
On July 25, 2012, the Company paid dividends due December 31, 2011with the issuance of 3,201,093 shares of common stock valued at $3,233,104.
On July 25, 2012, the Company paid dividends due June 30, 2012 with the issuance of 3,315,754 shares of common stock valued at $1,160,514.
On July 31, 2012, the Company paid dividends due July 31, 2012 with the issuance of 603,303 shares of common stock valued at $187,024.
During the year ended August 31, 2012, the issuance of the Series A and Series B Preferred Stock with a contractual conversion price of $1.00 resulted in an effective conversion price lower than the fair market value of the Company’s Common Stock at each issuance after allocating the proceeds received to the preferred shares and the detachable warrants included with the preferred shares. Accordingly, pursuant to GAAP, the Company recorded deemed dividends in the aggregate amount of $932,643 attributable to the beneficial conversion feature in connection with the private placement of the 2,500 Series A preferred shares issued in the quarter ending February 29, 2012.
F-19 |
On July 31, 2012, the Company entered into an agreement (the “Preferred Shares Agreement”) with the Lenders, as holders of the Company’s preferred stock, for the Company’s purchase from the Lenders of an aggregate of 48,300 shares of the Series A and 8,850 shares of Series B Preferred Stock, which represent all of the issued and outstanding shares of preferred stock and which have an aggregate stated value of $57,150,000, for a purchase price of $57,150,000. (The payment will be made by the Company applying all of the proceeds of the Term Loan for such purpose.) As part of the purchase, the Lenders, who also held warrants to purchase 57,592,500 shares of the Company’s stock at exercise prices from $2 and $4 a share, agreed to cancel those warrants.
The Series A Preferred Stock and Series B Preferred Stock held by the Lenders included provisions allowing for the conversion of the preferred shares into shares of Common Stock of the Company. After the purchase of the Series A Preferred Stock and Series B Preferred Stock held by the Lenders, there are no shares of Preferred Stock currently outstanding and all of the warrants held by the Lenders have been canceled.
6. COMMON STOCK AND WARRANTS
A. Effective June 1, 2010, the Company adopted an Equity Incentive Plan (the “Plan”), whereby the Company has reserved for issuance up to 10,000,000 shares of its common stock. The purpose of the Plan is to provide directors, officers and employees of, and consultants, to the Company with additional incentives by increasing their ownership in the Company. Directors, officers, Employees and consultants of the Company are eligible to participate in the Plan. Options in the form of Incentive Stock Options and Non-Statutory Stock Options may be granted under the Plan. Restricted Stock may also be granted under the Plan. The Company issued on September 7, 2010 850,000 shares of restricted stock which were granted on July 9, 2010 to officers and directors with a grant date fair value of approximately $85,000.
In connection with the Common Stock Purchase Agreement dated January 15, 2010 between Belmont Partners, LLC, the then principal stockholder of the Company, and YSY Enterprises, Inc., on September 7, 2010 the Company issued an additional 565,000 (post-split) shares of common stock to an assignee of Belmont in settlement of shares to be issued at closing for the achievement of certain conditions at the time of closing.
During the year ended August 31, 2012 the Company issued 7,120,150 shares of common stock as payment for the 12.5% dividend on the Series A and Series B Preferred Stock. These shares were valued at $4,580,642.
During the year ended August 31, 2012, the Company received 315,148 shares of common stock from the Company’s CEO and former CEO as reimbursement for $44,121 of taxes paid on their behalf. Those shares were returned to the Company’s treasury.
F-20 |
B. During the year ended August 31, 2011, the Company also issued 37,742,500 warrants pursuant to the issuance of 28,450 Series A and 8,850 Series B Preferred Stock.
During the year ended August 31, 2012, the Company also issued 6,350,000 warrants pursuant to the issuance of 6,350 Series A Preferred Stock.
Warrant transactions are summarized as follows:
Number of warrants | Weighted average exercise price | Weighted average life remaining (in years) | ||||||||
Balance as at September 1, 2010 | 19,500,000 | 2.08 | 5 years | |||||||
Issued | 37,742,500 | - | ||||||||
Balance as at August 31, 2011 | 57,242,500 | 2.69 | 4.33 years | |||||||
Issued | 6,350,000 | |||||||||
Cancelled | (57,592,500 | ) | - | |||||||
Balance as at August 31, 2012 | 6,000,000 | 0.01 | 2.75 years |
On July 31, 2012, the Company entered into an agreement (the “Preferred Shares Agreement”) with the Lenders, as holders of the Company’s preferred stock, for the Company’s purchase from the Lenders of an aggregate of 48,300 shares of the Series A and 8,850 shares of Series B Preferred Stock, which represent all of the issued and outstanding shares of preferred stock and which have an aggregate stated value of $57,150,000, for a purchase price of $57,150,000. (The payment will be made by the Company applying all of the proceeds of the Term Loan for such purpose.) As part of the purchase, the Lenders, who also held warrants to purchase 57,592,500 shares of the Company’s stock at exercise prices from $2 and $4 a share, agreed to cancel those warrants.
As of August 31, 2012, there were 6,000,000 warrants outstanding and exercisable with expiration dates commencing June 2015.
Except as set forth, under limited circumstances the warrants do not permit net cash settlement.
7. COMMITMENTS
Life insurance premiums are future payments required to keep the insurance policies, comprising the Company’s investment in life settlement contracts, intact. As of November 15, 2012, the Company is no longer responsible to make future premium payments required to keep the insurance policies intact. The following tables represent the future premium payments required for each of the five years succeeding August 31, 2012.
F-21 |
At August 31, 2012, the premiums to be paid for each of the five succeeding years for investment in life settlement contracts at fair value are as follows:
Year | Amount | |||||
2013 | $ | 15,796,621 | ||||
2014 | 15,685,559 | |||||
2015 | 15,685,559 | |||||
2016 | 15,685,559 | |||||
2017 | 15,685,559 | |||||
Thereafter | 165,026,585 | |||||
$ | 243,565,442 |
At August 31, 2012, the premiums to be paid for each of the five succeeding years for investment in life settlement contracts at investment method are as follows:
Year | Amount | |||||
2013 | $ | 2,776,971 | ||||
2014 | 2,776,971 | |||||
2015 | 2,776,971 | |||||
2016 | 2,776,971 | |||||
2017 | 2,776,971 | |||||
Thereafter | 32,006,728 | |||||
$ | 45,891,583 |
F-22 |
The Company entered into an office lease agreement for a period of 10 years and 6 months commencing on June 1, 2010. Future annual lease commitments are as follows:
Year | Amount | |||||
2013 | 80,169 | |||||
2014 | 100,652 | |||||
2015 | 102,917 | |||||
2016 | 105,233 | |||||
2017 | 108,456 | |||||
Thereafter | 378,266 | |||||
$ | 875,693 |
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
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 |
The extent to which the fair value could reasonably vary in the near term has been quantified by evaluating the effect of changes in significant underlying assumptions used to estimate the amount. If the discount factors were increased or decreased by 2% while all other variables are held constant, the carrying value of the investment in life settlement policies would be:
Discount Rate as of August 31, 2012 | Discount rate as of August 31, 2011 | |||||||||||||||
+2% | (2%) | +2% | (2%) | |||||||||||||
Investment in Life Settlement Contracts | $ | 71,374,173 | $ | 62,434,702 | $ | 85,215,603 | $ | 101,271,273 |
The Company utilizes the MAPS system for valuations. MAPS is a generally accepted third party pricing system utilized by funds and investors engaged in the purchase and sale of life settlements.
Life expectancy reports are generated by third party medical underwriting firms, such as AVS, 21 st Century, EMSI and Fasano. These firms review medical data for an individual and grade using a series of debits and credits. The resulting values are used to generate a life expectancy value. The MAPS system utilizes this life expectancy data to calibrate underlying mortality curves generated for each individual case.
MAPS utilizes the appendixes to the VBT2008 report as a base for mortality projections. This chart established 25 unique values corresponding to 25 statistical values indicative of the next 25 years of a persons life. The value is the statistical probability that the individual will meet an untimely end in that given year. When a life expectancy provider produces a report, it indicates a value at which point a certain individual will achieve a 50% chance, statistically, of dying. This is calculated by randomly making 1000 simulations and calculating an exact point of death for each simulation. The point at which the cumulative deaths equal 500 is the median point or the life expectancy.
F-23 |
In order to calibrate this curve, a multiplier is formulated to cause the median mark to equal the life expectancy value provided by the life expectancy provider. For every case, 1000 simulations are run, each simulation resulting in a unique death month. For example, if a life expectancy equals 50 months, the underlying data would show 500 deaths prior to the 50th month and 500 deaths after the 50th month.
The MAPS system takes the results of the modified life expectancy curve and applies it to the premium and death benefit projections stream. For the 500 deaths prior to the 50th month, utilizing our previous example, it would apply the percentage of the simulated runs that died in each 12 month period to the death benefit and premium schedules to form estimated cash flows. The net present value, using a discount rate defined by the user, of the streams of values created by this method form the indicated value of the policy.
9. INCOME TAXES
Income tax expense consists of the following components at August 31, 2012 and 2011:
2012 | 2011 | |||||||
Current tax expense | $ | - | $ | - | ||||
Deferred tax expense (benefit) | (16,640,912 | ) | 19,546,602 | |||||
Total income tax expense (benefit) | $ | (16,640,912 | ) | $ | 19,546,602 |
Income tax expense differed from amounts computed by applying the Federal income tax rate to pre-tax earnings for the years ended August 31, 2012 and 2011, as a result of the following:
2012 | 2011 | |||||||
United States statutory rate | (35 | )% | 35 | % | ||||
State income taxes | (10 | )% | 10 | % | ||||
Increase in valuation allowance and other | 2 | % | 1 | % | ||||
Combined effective tax rate | (43 | )% | 46 | % |
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities were as follows:
August 31, 2012 | August 31, 2011 | |||||||
Deferred tax assets: | ||||||||
Equipment | $ | 6,648 | $ | 2,579 | ||||
Provider fees | 51,750 | - | ||||||
Premiums paid | 8,355,876 | 3,599,077 | ||||||
Capitalized interest expense | 10,911 | - | ||||||
Deferred rent | 22,201 | - | ||||||
Stock issuances to officers, directors and consultant | 103,950 | 358,007 | ||||||
Start-up expenses | 64,689 | - | ||||||
Net operating loss carryforward | 1,096,256 | - | ||||||
Gross deferred tax assets | 9,712,281 | 3,959,663 | ||||||
Valuation allowance | (438,254 | ) | - | |||||
Net deferred tax assets | 9,274,027 | 3,959,663 | ||||||
Deferred tax liabilities: | ||||||||
Prepaid insurance | (6,836 | ) | - | |||||
Unrealized gains on life settlement contracts | (13,510,235 | ) | (25,030,823 | ) | ||||
Net deferred tax liabilities | (13,517,071 | ) | (25,030,823 | ) | ||||
Total deferred tax liabilities, net | $ | (4,243,044 | ) | $ | (21,071,160 | ) | ||
Summary of net deferred tax liabilities: | ||||||||
Current | $ | - | $ | - | ||||
Non-current | 4,243,044 | 21,071,160 | ||||||
Total deferred tax liabilities, net | $ | 4,243,044 | $ | 21,071,160 |
Accounting for Uncertainty in Income Taxes. In June 2006, the FASB issued guidance contained in ASC 740, Income Taxes (formerly FIN 48). The guidance is intended to clarify the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes the recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
F-24 |
Under ASC 740, evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
As of August 31, 2012 and 2011, the Company had approximately $1,096,256 and $0 of federal and state net operating losses (“NOL”), respectively, available for income tax purposes that may be carried forward to offset future taxable income, if any. The federal carryforwards expire in fiscal year ending August 31, 2015. The Company recorded a valuation allowance of $438,254 against its deferred tax asset resulting from its NOL since management concluded that it was more likely than not that the Company would not realize the benefit of this portion of its deferred tax assets by generating sufficient taxable income in future years.
As of August 31, 2012, the Company has filed income tax returns through the fiscal 2010 tax year. The Company is required to file income tax returns in the United States (federal) and in New York State and City. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s financial statements. The evaluation was performed for the August 31, 2007 – August 31, 2011 tax years, which remain subject to examination. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.
The Company’s policy for recording interest and penalties associated with audits is to record such expense as a component of income tax expense. There are no significant amounts accrued for penalties or interest as of or during the years ended August 31, 2012 and 2011. Management is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from its position.
10. SUBSEQUENT EVENTS
Subsequent to August 31, 2012, a life settlement contract held at fair value of $5,658,201 matured resulting in cash proceeds of $10,000,000 and a realized gain of $4,341,799.
The Company granted 100,000 Non Qualified Stock Options at an exercise price of $0.31 vesting on October 24, 2013 and expiring on October 23, 2017 to a director.
F-25 |
As discussed in Note 4, effective November 15, 2012, the Company reached an agreement with the agent of the Lenders regarding the satisfaction of the outstanding balance of the Loans, under the terms of a Loan Satisfaction Agreement. Such agreement resulted in the disposition of all of the life insurance policies currently held by the Company to the Lender or an affiliate of the Lender. On that date, life settlement contracts with a total value of $65,588,584 were forfeited to the Lender as satisfaction of the outstanding loans balance of $57,150,000 resulting in a loss on extinguishment of debt of $8,438,584. As of November 15, 2012, the Company had outstanding Obligations of $64,522,281, including (i) $57,150,000 in aggregate principal amount of the Term Loan plus $2,123,281 (the “Term Interest”) in interest under the Term Loan, or a total of $59,273,281 due under the Term Loan, and (ii) $5,135,000 outstanding under the Revolving Loan, plus $114,000 in interest under the Revolving Loan, or a total of $5,249,000 (the “Revolving Total”) due under the Revolving Loan. The disposition of all of the Company’s life insurance policies was used to satisfy the $57,150,000 in aggregate principal amount of the Term Loan. 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 the Term Interest of $2,123,281 and the Revolving Total of $5,249,000.
The Company evaluates events that have occurred after the balance sheet date through the date the financial statements were publicly available. Based upon the evaluation, the Company did not identify any other recognized or non-recognized subsequent events that would have required adjustment to or disclosure in the financial statements.
11. UNAUDITED PROFORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet has been presented to reflect the forfeiture of all of the Company’s life settlement contracts as satisfaction of the Term Loan on November 15, 2012, as discussed in Note 4.
The Unaudited Pro Forma Consolidated Balance Sheet as of August 31, 2012 is based on the Company’s historical balance sheet at that date, and gives effect to the loan satisfaction transaction as if it had occurred on August 31, 2012.
The Unaudited Pro Forma Consolidated Balance Sheet includes specific assumptions and adjustments related to the satisfaction of the Term Loan. The adjustments are based upon presently available information and assumptions that management believes are reasonable under the circumstances as of the date of this filing. Accordingly, the actual effect of the loan satisfaction could differ significantly from the pro forma adjustments presented herein.
The Unaudited Pro Forma Consolidated Balance Sheet is presented for informational purposes only. It is not intended to represent or be indicative of the consolidated financial position that would have occurred had the loan satisfaction been completed as of August 31, 2012, nor is it intended to be indicative of future results of operations or financial position.
August 31, 2012 | ||||
ASSETS | ||||
Current Assets | ||||
Cash and cash equivalents | $ | 233,050 | ||
Investment in life settlement contracts at investment method | - | |||
Prepaid expenses | 15,192 | |||
Total current assets | 248,242 | |||
Equipment, net | 66,129 | |||
Security deposit | 56,688 | |||
Investment in life settlement contracts at fair value | - | |||
Deferred income taxes | 911,314 | |||
TOTAL ASSETS | $ | 1,282,373 | ||
LIABILITIES | ||||
Current Liabilities | ||||
Accounts payable and accrued expenses | $ | 441,297 | ||
Interest payable | 626,710 | |||
Loan payable | 2,300,000 | |||
Total current liabilities | 3,368,007 | |||
Deferred rent | 49,335 | |||
TOTAL LIABILITIES | 3,417,342 | |||
STOCKHOLDERS’ EQUITY | ||||
Preferred stock ($0.00001 par value; 100,000,000 authorized; of which 60,000 are designated as Series A 12.5% convertible preferred stock; No Series A issued and outstanding ( August 31, 2011 - 41,950 issued and outstanding) | - | |||
of which 25,000 are designated as Series B 12.5% convertible preferred stock; No Series B issued and outstanding ( August 31, 2011 – 8,850 issued and outstanding) | - | |||
Common stock ($0.00001 par value; 500,000,000 authorized; 92,544,747 issued and 92,229,599 outstanding) (August 31, 2011 - 85,424,597 issued and outstanding) | 925 | |||
Additional paid in capital | 51,486,890 | |||
Treasury stock, at cost (315,148 shares of common stock) (August 31, 2011- No shares of common stock) | (44,121 | ) | ||
Accumulated deficit | (53,578,663 | ) | ||
Total Stockholders' Deficit | (2,134,969 | ) | ||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 1,282,373 |
F-26 |
Exhibit 31.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, Avrohom Oratz, certify that:
1. | I have reviewed this Form 10-K of Absolute Life Solutions , Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods present in this report; |
4. | The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the small business issuer and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; | |
c) | Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) | Disclosed in this report any change in the small business issuer’s internal control over financing reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and |
5. | The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involved management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Date: December 31, 2012 | |
/s/ Avrohom Oratz | |
Avrohom Oratz President and Chief Executive Officer (principal executive officer and duly authorized officer) |
Exhibit 31.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
I, Joshua Yifat, certify that:
1. | I have reviewed this Form 10-K of Absolute Life Solutions, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods present in this report; |
4. | The small business issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the small business issuer and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; | |
c) | Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
d) | Disclosed in this report any change in the small business issuer’s internal control over financing reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and |
5. | The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and | |
b) | Any fraud, whether or not material, that involved management or other employees who have a significant role in the small business issuer’s internal control over financial reporting. |
Date: December 31, 2012 | |
/s/ Joshua Yifat | |
Joshua Yifat Treasurer and Chief Financial Officer (principal financial officer and duly authorized officer) |
Exhibit 32.1
CERTIFICATION OF
CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Absolute Life Solutions, Inc., for the year ending August 31, 2012, I, Avrohom Oratz, President and Chief Executive Officer of the Company, Inc. hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
1. Such yearly Report on Form 10-K for the year ending August 31, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such yearly Report on Form 10-K for the year ended August 31, 2012, fairly represents in all material respects, the financial condition and results of operations of Absolute Life Solutions , Inc.
Date: December 31, 2012 | |
/s/ Avrohom Oratz | |
Avrohom Oratz President and Chief Executive Officer (principal executive officer and duly authorized officer) |
Exhibit 32.2
CERTIFICATION OF
CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the accompanying Annual Report on Form 10-K of Absolute Life Solutions, Inc., for the year ending August 31, 2012, I, Joshua Yifat, Treasurer and Chief Financial Officer of the Company, Inc. hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:
1. Such yearly Report on Form 10-K for the year ending August 31, 2012, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in such yearly Report on Form 10-K for the year ended August 31, 2012, fairly represents in all material respects, the financial condition and results of operations of Absolute Life Solutions , Inc.
Date: December 31, 2012 | |
/s/ Joshua Yifat | |
Joshua Yifat Treasurer and Chief Financial Officer (principal financial officer and duly authorized officer) |