Item 1. Financial Statements (Unaudited)
The Condensed Consolidated Financial Statements of the Company required
to be filed with this Quarterly Report were prepared by management and commence below, together with related notes. In the opinion
of management, the Condensed Consolidated Financial Statements fairly present the financial condition of the Company and include
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s Condensed
Consolidated Financial Statements. The results from operations for the three month period ended June 30, 2017, are not necessarily
indicative of the results that may be expected for the fiscal year ended March 31, 2018. The unaudited Condensed Consolidated Financial
Statements should be read in conjunction with the March 31, 2017, Consolidated Financial Statements and footnotes thereto included
in the Company’s Annual Report on Form10-K for the fiscal year ended March 31, 2017, which was filed with the SEC on April
12, 2018.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
June 30, 2017
(Unaudited) and March 31, 2017
|
|
June 30,
|
|
|
|
|
2017
|
|
March 31,
|
|
|
(Unaudited)
|
|
2017
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
Cash and Cash Equivalents
|
$
|
35,178
|
|
$
|
4,364
|
|
Prepaid Expenses and Other Assets
|
|
2,205
|
|
|
4,705
|
|
Investment in Net Insurance Benefits
|
|
7,769,568
|
|
|
34,156,005
|
|
|
|
|
|
|
|
Total Current Assets
|
$
|
7,806,951
|
|
$
|
34,165,074
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
Accounts Payable
|
$
|
540,820
|
|
$
|
508,071
|
|
|
|
|
|
|
|
|
Deferred Income Taxes
|
|
-
|
|
|
758,972
|
|
Notes Payable, Related Parties
|
|
4,718,484
|
|
|
5,214,753
|
|
Convertible Debenture
|
|
700,000
|
|
|
700,000
|
|
Accrued Expenses
|
|
402,625
|
|
|
753,780
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
6,361,929
|
|
|
7,935,576
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 8)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Stockholders' Equity
|
|
|
|
|
|
|
Preferred Stock, authorized 10,000,000 shares,
|
|
|
|
|
|
|
par value $0.001; -0- shares issued and outstanding
|
|
-
|
|
|
-
|
|
Common Stock, authorized 500,000,000 shares,
|
|
|
|
|
|
|
par value $0.001; 44,128,441 shares issued and outstanding
|
|
44,129
|
|
|
44,129
|
|
Additional Paid In Capital
|
|
24,547,014
|
|
|
24,547,014
|
|
Retained Earnings (Accumulated Deficit)
|
|
(23,146,121)
|
|
|
1,638,355
|
|
|
|
|
|
|
|
Total Stockholders' Equity
|
|
1,445,022
|
|
|
26,229,498
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders' Equity
|
$
|
7,806,951
|
|
$
|
34,165,074
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2017 and 2016
(Unaudited)
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
June 30,
|
|
|
June 30,
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Interest Income on Investment in Net Insurance Benefits
|
|
$
|
-
|
|
|
$
|
1,453,872
|
|
|
|
|
|
|
|
|
General and Administrative Expenses
|
|
|
547,581
|
|
|
|
727,443
|
Impairment of Accrued Interest Receivable
on Net Insurance Benefits
|
|
|
1,936,311
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
(2,483,892)
|
|
|
|
726,429
|
Other Expense
|
|
|
|
|
|
|
|
Impairment of Investment in Net Insurance Benefits
|
|
|
(22,950,126)
|
|
|
|
-
|
Interest Expense
|
|
|
(109,430)
|
|
|
|
(85,882)
|
Total Other Expense
|
|
|
(23,059,556)
|
|
|
|
(85,882)
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
(25,543,448)
|
|
|
|
640,547
|
Income Tax Provision
|
|
|
(758,972)
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
(24,784,476)
|
|
|
$
|
640,547
|
Basic and Diluted:
|
|
|
|
|
|
|
|
Basic Earnings (Loss) Per Share
|
|
$
|
(0.56)
|
|
|
$
|
0.01
|
Diluted Earnings (Loss) Per Share
|
|
$
|
(0.56)
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
Basic Weighted Average Number of Shares Outstanding
|
|
|
44,128,441
|
|
|
|
44,140,669
|
Diluted Weighted Average Number of Shares Outstanding
|
|
|
44,128,441
|
|
|
|
45,482,299
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended June 30, 2017 and 2016
(Unaudited
)
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
$
|
(24,784,476)
|
|
$
|
640,547
|
|
Adjustments to reconcile to net cash from operating activities:
|
|
|
|
|
|
|
|
Share Based Compensation - Options
|
|
-
|
|
|
103,843
|
|
|
Impairment of Net Insurance Benefits
|
|
24,886,437
|
|
|
|
|
|
Deferred Income Taxes
|
|
(758,972)
|
|
|
-
|
|
|
Accrued Interest on Net Insurance Benefits
|
|
-
|
|
|
(1,453,872)
|
|
|
Changes in Operating Assets and Liabilities
|
|
|
|
|
|
|
|
Accrued Interest Income
|
|
-
|
|
|
(2,204)
|
|
|
Cash Received on Net Insurance Benefits
|
|
1,500,000
|
|
|
1,417,870
|
|
|
Prepaid Expenses and Other Assets
|
|
2,500
|
|
|
(8,125)
|
|
|
Accounts Payable
|
|
32,749
|
|
|
38,265
|
|
|
Accrued Expenses
|
|
(351,155)
|
|
|
(59,787)
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash from Operating Activities
|
|
527,083
|
|
|
676,537
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Convertible Debenture
|
|
200,000
|
|
|
-
|
|
Repayment of Convertible Debenture
|
|
(200,000)
|
|
|
-
|
|
Proceeds from Issuance of Notes Payable, Related Party
|
|
-
|
|
|
205,000
|
|
Repayment of Notes Payable, Related Party
|
|
(496,269)
|
|
|
(150,000)
|
|
Redemption of Mandatorily Redeemable Common Stock
|
|
-
|
|
|
(750,000)
|
|
|
|
|
|
|
|
|
|
|
Net Cash from Financing Activities
|
|
(496,269)
|
|
|
(695,000)
|
Net Change in Cash and Cash Equivalents
|
|
30,814
|
|
|
(18,463)
|
Cash and Cash Equivalents at Beginning of Period
|
|
4,364
|
|
|
24,717
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period
|
$
|
35,178
|
|
$
|
6,254
|
|
|
|
|
|
|
|
|
|
Non Cash Financing & Investing Activities, and Other Disclosures
|
|
|
|
|
|
|
|
Cash Paid for Interest
|
$
|
415,519
|
|
$
|
-
|
|
|
Cash Paid for Income Taxes
|
$
|
-
|
|
$
|
-
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying interim condensed consolidated
financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report
on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”)
and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position,
results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the condensed
consolidated unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal
and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial position, results of
operations, and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
March 31, 2017. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal
year.
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent
amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ from those
estimates.
Sundance Strategies, Inc. (formerly known as
Java Express, Inc.) was organized under the laws of the State of Nevada on December 14, 2001, and engaged in the retail selling
of beverage products to the general public until these endeavors ceased in 2006; it had no material business operations from 2006,
until its acquisition of ANEW LIFE, INC. (“ANEW LIFE”), a subsidiary of Sundance Strategies, Inc. (“Sundance
Strategies”, “the Company”, “we” or “our”). The Company is engaged in the business of
purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies,
including notes, drafts, acceptances, open accounts receivable and other obligations representing part or all of the sales price
of insurance, life settlements and related insurance contracts being traded in the secondary marketplace, often referred to as
the “life settlements market.” Since the Company’s inception its operations have been primarily financed through
sales of equity, debt financing from related parties and the issuance of notes payable and convertible debentures. Currently, the
Company is focused on the purchase of net insurance benefit contracts (“NIBs”) based on life settlements or life insurance
policies. The Company does not take possession or control of the policies. The owners of the life settlements or life insurance
policies (the “Owners” or “the Holders”) acquire such policies at a discount to their face value. On settlement,
the Company receives the net insurance benefit after all borrowings, interest and expenses have been paid by the Owners out of
the settlement proceeds.
The Owners are variable interest entities (VIEs),
for which the Company has a variable interest, but is not the primary beneficiary. The Company’s investment in NIBs (see
Note 3) were issued by the Owners (i.e. the VIEs). The Company’s maximum exposure to loss in the variable interest entities
is limited to the investment in NIBs balance. The Company does not have the power to direct activities of the VIEs. Further, the
Company does not have the contractual obligation to absorb losses of the VIE.
The investment in NIBs is a residual economic
beneficial interest in a portfolio of life insurance contracts that have been financed by an independent third party via a loan
from a lender and, in certain cases, insured via a mortality risk insurance product or mortality re-insurance (“MRI”). Future
expected cash flow and positive profits are defined as the net insurance proceeds from death benefits after senior debt repayment,
mortality risk repayment, and service provider or other third-party payments.
NIBs are generally in the form of participating
debt certificates (“PDC”), and although the two terms are interchangeable, the Company typically refers to them as
NIBs. According to the terms of the PDCs, the PDCs provide both variable and fixed interest return to the Company from the Owners
of the policies in the form of accrued yield. The variable interest varies by individual PDC, and is calculated as 99% to 100%
(depending on the PDC) of the positive profits from the life insurance assets held by the Owners of the policies. The fixed interest
also
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
varies by individual PDC, and is either 1% or 2% per annum of the
par value of the PDCs held by the Company. The par value of the PDCs held by the Company is approximately $36.8 million. The NIBs
agreements between the Company and the Owners of the policies contain a provision that allows for the Owners to redeem the NIBs
at any point, conditional upon paying to the Company the par value of the NIBs, as well as any unpaid accrued yield relating to
fixed and variable interest. In aggregate, the sum of the par value plus unpaid accrued interest is in excess of the Company’s
initial investment. The Company holds between 72.2% and 100% in the NIBs relating to the underlying life insurance policies as
of June 30, 2017 and 2016. The Company is not responsible for maintaining premiums or other expenses related to maintaining the
underlying life insurance contracts. Therefore, the investment in NIBs balance on the Company’s balance sheet does not increase
when premiums or other expenses are paid.
At March 31, 2017, and during the three months
ended June 30, 2017, the Company accounted for its investment in NIBs at the initial investment value increased for interest income
and decreased for cash receipts received by the Company. At the time of transfer or purchase of an investment in NIBs, we estimated
the future expected cash flows and determine the effective interest rate based on these estimated cash flows and our initial investment.
Based on this effective interest rate, the Company calculated accretable income, which was recorded as interest income on investment
in NIBs in the statement of operations. Our projections were based on various assumptions that are subject to uncertainties and
contingencies including, but not limited to, the amount and timing of projected net cash receipts, expected maturity events, counter
party performance risk, changes to applicable regulation of the investment, shortage of funds needed to maintain the asset until
maturity, changes in discount rates, life expectancy estimates and their relation to premiums, interest, and other costs incurred,
among other items. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact
our estimates and interest income. As a result, actual results could differ significantly from these projections. Therefore, subsequent
to the purchase and on a regular basis, these future estimated cash flows were evaluated for changes. If the determination was
made that the future estimated cash flows should be adjusted to the point of a material change in revenue, a revised effective
yield was calculated prospectively based on the current amortized cost of the investment, including accrued accretion. Any positive
or adverse change in cash flows would result in a prospective increase or decrease in the effective interest rate used to recognize
interest income. Any significant adverse change in the cash flows that may have resulted in the recognition of an “other-than-temporary
impairment” (“OTTI”), and would be evaluated by the Company accordingly.
At March 31, 2017, and during the three months
ended June 30, 2017, the Company’s investment in NIBs was treated as a debt security, which was classified as a hold-to-maturity
asset.
We evaluate the carrying value of our investment
in NIBs for impairment on a regular basis and, if necessary, adjust our total basis in the NIBs using new or updated information
that affects our assumptions. We recognize impairment on a NIB contract if the fair value of the beneficial interest is less than
the carrying amount of the investment, plus anticipated undiscounted future premiums and direct external costs, if any, and if
there are adverse changes in cash flow. We had not recognized any impairment on our investment in NIBs from inception, through
the year ended March 31, 2017.
However, between May 2018 and July 2018, the
Owners entered into agreements that completed a strict foreclosure transaction that transferred these policies from the owners
to the lenders in full satisfaction of the loan obligation. As part of the original agreement, the Chairman of the Company helped
secure the loan by including a personal guarantee for a portion of the debt, if needed. The owners and other parties to the Agreements
are diligently working to secure alternative financing, although no such positive outcome can be assured. As a result of the foreclosure,
the Company has lost its position in the residual benefits of the policies and has reduced the carrying value of the NIBs at June
30, 2017 to $7,769,568, which is equal the actual cash received by the Company from distributions subsequent to June 30, 2017.
This carrying value is less than the accretion receivable as of March 31, 2017, and as such, is considered accretion receivable
and not part of the Company’s original investment.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
(2)
NEW
ACCOUNTING PRONOUNCEMENTS
Adopted During the Quarter Ended June
30, 2017
In December 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes. The new standard is designed to simplify the presentation of deferred income taxes,
and requires all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any related
valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The amendments are effective
for the Company’s fiscal year beginning April 1, 2017, and for interim periods within that fiscal year. The adoption of this
guidance did not have a material effect on the consolidated financial statements as the Company presents an unclassified balance
sheet.
In March 2016, the FASB issued ASU 2016-06 related
to the embedded derivative analysis for debt instruments with contingent call or put options. This pronouncement clarifies that
an exercise contingency does not need to be evaluated to determine whether it relates only to interest rates or credit risk. Instead,
the contingent put or call option should be evaluated for possible bifurcation as a derivative in accordance with the four-step
decision sequence detailed in FASB ASC 815-15, without regard to the nature of the exercise contingency. The pronouncement is effective
for the Company’s fiscal year beginning April 1, 2017, and for interim periods within that fiscal year. The adoption of this
guidance did not have a material effect on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting. The new standard simplifies certain aspects of the accounting for share-based
payment award transactions by allowing entities to continue to use current GAAP by estimating the number of awards that are expected
to vest or, alternatively, entities can elect to account for forfeitures as they occur. Another aspect of the standard requires
an entity to recognize all excess tax benefits and deficiencies associated with stock-based compensation as a reduction or increase
to tax expense in the income statement. Previously, such amounts were recognized in additional paid-in capital. ASU 2016-09 is
effective for the Company for its fiscal year beginning April 1, 2017. The adoption of this guidance did not have a material effect
on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17,
Consolidation - Interests held through Related Parties that are under Common Control, which alters how a decision maker needs to
consider indirect interests in a variable interest entity (VIE) held through an entity under common control. Under the new ASU,
if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate
indirect interest in the VIE held through a common control party. The amendments in this Update are effective for fiscal years
beginning April 1, 2017, including interim periods within that fiscal year. The adoption of this guidance did not have a material
effect on the consolidated financial statements, as the Company has no related parties under common control that have the characteristics
of a primary beneficiary of a variable interest entity.
Not Yet Adopted
The Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) 2014-09, 2015-14, 2016-8, 10,11 and 12 and 2017-13 – Revenue from Contracts
with Customers, which provides a single, comprehensive revenue recognition model for all contracts with customers. The core principal
of the ASUs is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASUs also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
In July 2015, the FASB deferred the effective date of this standard. As a result, the standard and related amendments will be effective
for the Company for its fiscal year beginning April 1, 2018, including interim periods within that fiscal year. Early application
is permitted, but not before the original effective date of April 1, 2017. Entities are allowed to transition to the new standard
by either retrospective application or recognizing the cumulative effect. The ASUs are not applicable to securitized beneficial
interests that derive accreted yields and, therefore the Company will continue to follow the guidance in ASC 325-40. The adoption
of this standard will not have an impact on the consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01
regarding Financial Instruments, which amended guidance on the classification and measurement of financial instruments. Under the
new guidance, entities will be required to measure equity investments that are not consolidated or accounted for under the equity
method at fair value with any
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
changes in fair value recorded in net income, unless the entity
has elected the new practicability exception. For financial liabilities measured using the fair value option, entities will be
required to separately present in other comprehensive income the portion of the changes in fair value attributable to instrument-specific
credit risk. Additionally, the guidance amends certain disclosure requirements associated with the fair value of financial instruments.
The standard will be effective for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods
within that fiscal year. The Company is currently evaluating the effect of the adoption of this guidance on the consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02
related to the accounting for leases. This pronouncement requires lessees to record most leases on their balance sheet, while expense
recognition on the income statement remains similar to current lease accounting guidance. The guidance also eliminates real estate-specific
provisions and modifies certain aspects of lessor accounting. Under the new guidance, lease classification as either a finance
lease or an operating lease will determine how lease-related revenue and expense are recognized. The pronouncement is effective
for the Company’s fiscal year beginning April 1, 2019, and for interim periods within that fiscal year. The Company does
not believe the adoption of this guidance will have a material effect on the consolidated financial statements because leases are
month-to-month and not material to the Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments
and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses
for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and
supportable forecasts. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in
estimating credit losses, as well as the credit quality. The amendments are effective for the Company’s fiscal year beginning
April 1, 2020, including interim periods within that fiscal year. The Company is currently evaluating the impact the adoption of
ASU 2016-13 will have on its consolidated financial statements and results of operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. Historically, there has been a diversity in
practice in how certain cash receipts/payments are presented and classified in the statement of cash flows. To reduce the existing
diversity in practice, this update addresses the eight cash flow issues as listed in the pronouncement. The amendments in this
update are effective for fiscal years beginning April 1, 2018, and interim periods within that fiscal year. Early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
On May 10, 2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements, provides
guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required
to apply modification accounting under ASC 718. For all entities, the ASU is effective for the Company’s fiscal year beginning
April 1, 2018, including interim periods within that annual reporting period. Early adoption is permitted, including adoption in
any interim period. The adoption of this standard is not expected to have material impact on the Company’s financial statements
as the Company does not expect to make future modifications to existing share based payment awards.
The Company has reviewed all other recently
issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial
position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect
on its financial statements.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
(3) INVESTMENT IN NET INSURANCE BENEFITS
The balance in Investment in NIBs at June 30,
2017 and March 31, 2017, and related activity for the periods then ended were as follows:
|
June 30, 2017
|
|
March 31, 2017
|
Beginning Balance
|
$ 34,156,005
|
|
$ 29,822,186
|
Accretion of interest income
|
-
|
|
5,751,689
|
Cash received
|
(1,500,000)
|
|
(1,417,870)
|
Impairment of investments
|
(24,886,437)
|
|
-
|
Ending Balance
|
$ 7,769,568
|
|
$ 34,156,005
|
As outlined in Note 1, between May 2018 and
July 2018, the Owners entered in agreements that completed a strict foreclosure transaction that transferred these policies to
the lenders in full satisfaction of the loan obligation. As a result of the foreclosure the Company reduced the carrying value
of the NIBs by $24,886,437 at June 30, 2017, to $7,769,568, which is the estimated fair value of the NIBs calculated as the actual
cash received subsequent to June 30, 2017, from distributions by the Owners to the Company.
The original face value of the underlying life
insurance policies was $412,820,622. This value takes into account the approximately 72.2% of the NIBs associated with a portfolio
of life settlement policies having a face value that originally totaled $94,000,000. One policy matured during March 2014, totaling
$8,000,000. A second policy with a face value of $10,000,000 matured during November 2016. Between February and March 2017, two
additional maturities occurred within one portfolio of policies, totaling $14,500,000 million in face value, both of which were
earlier than was forecasted based on the life expectancy reports obtained by the Owners. During April 2017, another policy with
a face value of $1,500,000 matured earlier than expected. As of June 30, 2017, the face value of the outstanding, underlying policies
totaled $365,454,812, adjusting for the approximately 72.2% mentioned above.
Our Investment in NIBs are classified as held-to-maturity
investments at March 31, 2017 and as available-for-sale investments at June 30, 2017. The NIBs have a contractual maturity date
of 25 years from inception, and the inception dates ranged from December 2011 to January 2013. The amortized cost, aggregate fair
value and gross unrecognized holding gains and losses at June 30, 2017 and March 31, 2017 were as follows:
|
June 30, 2017
|
|
March 31, 2017
|
|
|
|
|
Amortized Cost Basis/Net Carrying Amount
|
$ 7,769,568
|
|
$ 34,156,005
|
Aggregate Fair Value (See Note 4)
|
7,769,568
|
|
45,643,224
|
Gross Unrecognized Holding Gains
|
$ -
|
|
$ 11,487,219
|
During April 2016 and May 2017, the Company
received $1,417,870 and $1,500,000, respectively, in cash proceeds associated with maturities and miscellaneous adjustments to
the underlying policies. The cash proceeds reduced the carrying value of the Company’s Investment in NIBs.
(4) FAIR VALUE MEASUREMENTS
As defined by ASC Topic 820, "Fair Value
Measurements and Disclosures" ("ASC 820"), fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the
consideration of differing levels of inputs in the determination of fair values.
Those levels of input are summarized as follows:
• Level 1: Quoted prices in active markets for identical assets
and liabilities.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
• Level 2: Observable inputs other than Level 1 quoted prices,
such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
• Level 3: Unobservable inputs that are supported by little
or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models,
discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires
significant management judgment or estimation.
The level in the fair value hierarchy within
which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement
in its entirety.
In accordance with the disclosure requirements
of ASC Topic 825, “Financial Instruments” (“ASC 825”), the tables below summarize fair value estimates
for the Company’s Investment in NIBs, which both are (at June 30, 2017) are not (at March 31, 2017) required to be carried
at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent,
the underlying value of the Company. In estimating the fair value of the Company’s Investment in NIBs, the rate of return
that a market participant would be willing to pay for each portfolio is used to recalculate the discounted estimated future cash
flows. This present value is used to represent the fair value of the Investment in NIBs using level 3 inputs.
Financial Instruments Required To Be Carried at Fair Value
at June 30, 2017
|
|
|
|
|
|
|
|
Fair Value Measurements at June 30, 2017
|
Description
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Investment in Net Insurance Benefits
|
$ -
|
|
$ -
|
|
$ 7,769,568
|
|
$ 7,769,568
|
|
|
|
|
|
|
|
Financial Instruments Not Required To Be Carried at Fair Value
at March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2017
|
Description
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
Investment in Net Insurance Benefits
|
$ -
|
|
$ -
|
|
$ 45,643,224
|
|
$ 45,643,224
|
The Company did not have any transfers of assets
and liabilities between Levels 1, 2 and 3 of the fair value measurement hierarchy during the year ended March 31, 2017 and the
three months ended June 30, 2017.
At March 31, 2017, the
fair value of our investment in NIBs was determined by evaluating the sum of present value of the future cash flows expected from
the NIBs. Therefore, subsequent to the purchase and on a regular basis, these future estimated cash flows were evaluated for
changes. If the determination was made that the future estimated cash flows should be adjusted to the point of a material change
in revenue, a revised effective yield would be calculated prospectively based on the current amortized cost of the investment,
including accrued accretion.
At June 30, 2017, the
fair value of our investment in NIBs is calculated as the actual cash received (discounted) subsequent to June 30, 2017, from distributions
by the Owners to the Company.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
Other Financial Instruments
The Company’s recorded values of cash
and cash equivalents, accounts payable and accrued liabilities approximate their fair values based on their short-term nature.
The recorded values of the notes payable and convertible debenture approximates the fair values as the interest rate approximates
market interest rates.
(5) NOTES PAYABLE, RELATED PARTY
As of June 30, 2017 and March 31, 2017, the
Company had borrowed $4,718,484 and $5,214,753, respectively, excluding accrued interest, from related parties under notes payable
agreements that allow for borrowings of up to $6,730,000, exclusive of accrued interest. There are no covenants associated with
these agreements. Of the $4,718,484 of notes payable owed as of June 30, 2017, $3,238,628 was due August 31, 2018. The remaining
$1,479,856 was due November 30, 2018 (see Note 12 for subsequent due date extensions). In the event the Company completes a successful
equity raise, principal and interest on notes payable totaling $4,742,007 are due in full at that time. The notes payable incur
interest at 7.5%, and are collateralized by Investment in NIBs. During the three months ended June 30, 2017, the Company did not
borrow any additional funds under these agreements, and repaid $496,269. Additionally, $405,519 in accrued interest was paid out
during the three months ended June 30, 2017. As of June 30, 2017, the Company had availability to borrow up to $2,011,516 under
these agreements. The interest associated with these notes of $23,523 and $334,626 is recorded on the balance sheet as an Accrued
Expense obligation at June 30, 2017 and March 31, 2017, respectively. The related parties include a person who is the Chairman
of the Board of Directors and a stockholder, and Radiant Life, LLC, an entity partially owned by the Chairman of the Board of Directors.
See Note 12 for a detail of activity on the
Notes Payable, Related Party subsequent to June 30, 2017.
(6) CONVERTIBLE DEBENTURE AGREEMENT
The Company has entered into an 8% convertible
debenture agreement with Satco International, Ltd., that allows for borrowings of up to $3,000,000. The holder originally had the
option to convert the outstanding principal and accrued interest to unregistered, restricted common stock of the Company on June
2, 2016. Per the agreement, the number of shares issuable at conversion shall be determined by the quotient obtained by dividing
the outstanding principal and accrued and unpaid interest by 90% of the 90 day average closing price of the Company’s common
stock from the date the notice of conversion is received; and the price at which the Debenture may be converted will be no lower
than $1.00 per share. The original maturity date was June 2, 2016, but was later extended, through a series of extensions, to August
31, 2019. These extensions applied to both the due date and the conversion rights. See Note 12 for a detail of activity on the
Convertible Debenture subsequent to June 30, 2017.
As of June 30, 2017 and March 31, 2017, the
Company owed $700,000 under the agreement, excluding accrued interest. During the three months ending June 30, 2017, the company
borrowed $200,000 on the agreement and also repaid $200,000. In addition, the Company paid $10,000 toward accrued interest related
to the Convertible Debenture. The associated interest of $107,501 and $102,488 at June 30, 2017 and March 31, 2017, respectively,
is recorded on the balance sheet as an Accrued Expense obligation.
(7) LIQUIDITY REQUIREMENTS
Since the Company’s inception, its operations
have been primarily financed through sales of equity, debt financing from related parties and the issuance of notes payable and
convertible debentures. As of June 30, 2017, the Company had $35,178 of cash assets, compared to $4,364 as of March 31, 2017.
As of
April 5, 2019, the Company had access to draw an additional $5,507,991 on
the notes payable, related party (see Note 5 and Note 12) and $3,000,000 on the Convertible Debenture Agreement (See Note 6 and
Note 12). The Company’s average monthly expenses are expected to be approximately $100,000, which includes salaries of our
employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses.
Outstanding Accounts Payable as of June 30, 2017, totaled $540,820, and other accrued liabilities totaled $402,625.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
Management has concluded that its existing capital resources, and
availability under its existing convertible debentures and debt agreements with related parties will be sufficient to fund its
operating working capital requirements for at least the next 12 months, or through April 2020. Related parties have given assurance
that their continued support, by way of either extensions of due dates, or increases in lines-of-credit, can be relied on. The
Company also continues to evaluate other debt and equity financing opportunities.
The accompanying financial statements have been
prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities
in the normal course of business. Due to the foreclosure on the NIBs mentioned above, the company has no current source of future
revenues. In order to continue to purchase additional NIBs or remove the NIBs out of foreclosure, the Company will need to raise
additional capital. Management is currently engaged in obtaining long term financing and believes that it will secure the needed
additional capital within one year from the date of this filing. As management believes that additional capital is a probable outcome,
the Company has the ability to continue as a going concern for a period of one year from the date of issuance of these financial
statements.
(8) COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
As explained in Note 1, the Company is engaged
in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life
insurance policies, including notes, drafts, acceptances, open accounts receivable and other obligations representing part or all
of the sales price of insurance, life settlements and related insurance contracts being traded in the secondary marketplace, often
referred to as the “life settlements market”. The Company does not take possession or control of the policies. The
owners of the life settlements or life insurance policies acquired such policies at a discount to their face value. The life insurance
portfolios underlying our NIBs typically involve loans originated with 4-5 year terms. The Company has always assumed that the
Holders will be able to refinance their loans at the end of the respective loan terms. However, the Holders’ Lender’s
ability to offer replacement loans has always been governed by factors that are beyond the Company’s control or the control
of the Holders. At June 30, 2017, the entities that own the policies maintained a total of 13 separate loan agreements with the
senior lending facility, all with separate expiration dates. As of June 30, 2017, 9 of these loans had expiration dates that had
lapsed, with the remaining 4 loans having maturity dates ranging from July 2017 to January 2018. During October 2017, the entities
completed a refinancing of the loans that had matured and were about to mature. The agreements were with a new senior lending facility
who previously provided MRI for the underlying policies. During December 2017, these new loans were extended through April 15,
2018, and did not require MRI coverage. The Holders had available credit to pay forecasted premiums and expenses on a portion of
the policies until April 15, 2018, which was the renewal date of the loans on these life insurance policies. The Holders have worked
with the lender to extend the loans multiple times and now, after the last loan extension expired, between May 2018 and July 2018,
the lenders foreclosed on the loans associated with the underlying life insurance policies and the Company has recorded a $24,886,437
impairment on the NIBs.
As of June 30, 2017, the Company had remaining
accrued expenses of $271,601 relating to the costs to maintain the structure of the life insurance policies. From August 2017 to
October 2017, the Company paid an additional $82,438 of these accrued expenses. During October 2017 the Company received notification
from the Holders that the remaining $189,163 had been paid in full by the Holders. Subsequent to June 30, 2017, the Company has
reversed the effects of the remaining $189,163 accrued liability on its balance sheet.
(9) EARNINGS (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is
computed by dividing net income (loss) by the weighted average number of common shares outstanding during the periods. Diluted
net income per common share is computed by including common shares that may be issued subject to existing rights with dilutive
potential, when applicable. Dilutive common stock equivalents are primarily comprised of stock options and warrants. Potentially
dilutive shares resulting from convertible debt agreements are evaluated using the if-converted method, and such amounts were not
dilutive.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
(10) STOCK OPTIONS
During the year ended March 31, 2014, the Company
issued common stock options to certain directors, officers, consultants and employees. The Company has recorded stock-based compensation
expense of $182,572 and $508,503 related to these options for year ended March 31, 2017 and 2016, respectively. At March 31, 2017,
all stock options had vested and all expenses relating to the outstanding options had been recognized as stock-based compensation
expense. On the date of grant, the contractual option terms were all 5 years, with all options have an expiration date between
April and October of 2018. The number of options outstanding and exercisable at June 30, 2017 is 2,106,875.
If all vested options as of June 30, 2017 were
to be exercised, the Company could expect to receive $3,314,294.
(11) INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs
Act (“Tax Reform Act”) was signed into law by the President of the United States. The Tax Reform Act significantly
revised the U.S. corporate income tax regime by, among other things, lowering the U.S. federal corporate tax rate from 35% to 21%
effective for the Company’s fiscal year ended March 31, 2018. U.S. GAAP requires that the impact of tax legislation be recognized
in the period in which the law was enacted. The Company will recognize the effects of the Tax Reform Act for the re-measurement
of its net deferred tax liabilities during the third quarter ended December 31, 2017. This will be done in accordance with Staff
Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance for the application of ASC Topic 740,
Income
Taxes
, in the reporting period in which the 2017 Tax Reform Act was signed into law.
(12) SUBSEQUENT EVENTS
Subsequent to June 30, 2017, the following events
transpired:
As further explained in Note 8, during October
2017, the Holders completed a refinancing of the loans that had matured and were about to mature. The agreements are with a new
senior lending facility who previously provided MRI for the underlying policies. During December 2017, these new loans were extended
through April 15, 2018, and the Holders had available credit to pay forecasted premiums and expenses on a portion of the policies
until that date. Between May 2018 and July 2018, the Holders entered in agreements that completed a strict foreclosure transaction
that transferred the underlying life insurance policies relating to the Company’s NIBs to the lenders in full satisfaction of the
loan obligation. The Holders and other parties to the Agreements are diligently working to secure alternative financing, although
no such positive outcome can be assured. As of the date of this filing, the lenders continue to pay premiums and related fees on
the life insurance policies and have not yet liquidated the policies. As a result of the foreclosure, the Company has lost its
position in the residual benefits of the policies and has reduced the carrying value of the NIBs at June 30, 2017 to $7,769,568,
which is equal the actual cash received by the Company from distributions subsequent to June 30, 2017. This carrying value is less
than the accretion receivable as of March 31, 2017, and as such, is considered accretion receivable and not part of the Company’s
original investment.
As of June 30, 2017, the Company had remaining
accrued expenses of $271,601 relating to the costs to maintain the structure of the life insurance policies. From August 2017 to
October 2017, the Company paid an additional $82,438 of these accrued expenses. During October 2017 the Company received notification
from the Holders that the remaining $189,163 had been paid in full by the Holders. Subsequent to June 30, 2017, the Company has
reversed the effects of the remaining $189,163 accrued liability on its balance sheet.
On December 22, 2017, the Tax Cuts and Jobs
Act (“Tax Reform Act”) was signed into law by the President of the United States. The Tax Reform Act significantly
revised the U.S. corporate income tax regime by, among other things, lowering the U.S. federal corporate tax rate from 35% to 21%
effective for the Company’s
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
calendar year ending March 31, 2018. U.S. GAAP requires that the
impact of tax legislation be recognized in the period in which the law was enacted. The Company will recognize the effects of the
Tax Reform Act for the re-measurement of the net deferred tax liabilities during the third quarter ended December 31, 2017. This
will be done in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”), which provides SEC staff guidance for
the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Reform Act was signed into law.
Effective January 1, 2018, Matthew Pearson resigned
his position as the Company’s Chief Operations Officer to pursue other opportunities. As of the date of this filing, no replacement
has been designated to fill his position.
During February 2018, management engaged consultants
to explore and analyze financing alternatives available to the Company. From February 2018 through March 2019 approximately $1,320,581
has been paid to the consultants.
Effective December 5, 2018, Ty D. Mattingly
resigned his position on the Company’s Board of Directors. On December 6, 2018, Glenn S. Dickman and Stephen E. Quesenberry
were named to the Company’s Board of Directors.
Effective December 6, 2018, three existing stockholders
have contributed to the Company a portion of their common shares held at a repurchase price to the Company of USD$0.05 per share
The Company intends to cancel/retire the acquired shares, which will decrease the outstanding common shares on the books of the
Company. The total number of common shares canceled/retired is 8,000,000, reducing the amount of outstanding common shares from
approximately 44,128,441 to 36,128,441. The Company anticipates paying the $0.05 per share repurchase price and cancelling the
repurchased common shares upon a major financing event, as agreed upon between the Company and the stockholders. As of the date
of this filing, the shares have been cancelled, but have not yet been repurchased by the Company.
On December 6, 2018, the Company awarded three
of its directors 300,000 shares each of the Company’s stock, in lieu of director compensation. The shares granted include
a vesting period.
On July 11, 2018,
the Company issued 800,000
common shares
in return for obtaining the remaining 27.8% ownership of certain NIBs (see Note 3). The transaction was recorded at $40,000, the
estimated fair value of the common stock issued (which management believes approximated the fair value of the NIBs received on
the date of the transaction).
From July 25, 2018 to December 4, 2018, Mr.
Dickman loaned the Company $450,000 through an unsecured promissory note, which bears interest at a rate of 8% annually. To date,
the Company has not made any principal or interest payments under this note. As of the date hereof, the full $450,000 of principal
is recorded as Notes Payable, Related Party, and the Company has accrued $15,400 of unpaid interest.
From September 2017 to January 2018, the Company
received $7,769,568 in cash proceeds associated with maturities and miscellaneous adjustments to other underlying policies. The
cash proceeds reduced the carrying value of the Company’s Investment in NIBs.
Subsequent to
June 30, 2017, the Company has repaid $4,288,976
in
principal on the Notes Payable, Related Party and $700,000 on the Convertible Debenture. The Company has also paid out accrued
interest totaling $134,124 on the Notes Payable, Related Party and Convertible Debenture.
Subsequent to June 30, 2017, the Company has
borrowed an additional $1,242,500 on the Notes Payable, Related Party. As of
April
5, 2019, the outstanding principal balances of all Notes Payable, Related Party totaled $1,672,008 and the outstanding principal
balance of the Convertible Debenture is $0.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2017
|
On December 6, 2017, the note payable, related
party agreement that allowed for borrowings of up to $4,600,000 at June 30, 2017, was amended to extend the due date from August
31, 2018 to August 31, 2019. Then on February 8, 2019 the note was again extended to November 30, 2020. Subsequent to June 30,
2017, the note payable, related party agreement that allowed for borrowings of up to $2,130,000 was amended to extend the due dates
from November 30, 2018 to November 30, 2020, respectively. On December 7, 2017, the Company agreed to amend the agreement to extend
the due date and conversion rights on the Convertible Debenture from February 28, 2018 to August 31, 2019.
Item 2. Management’s Discussions and Analysis of Financial
Condition and Results of Operations.
This discussion summarizes the significant factors
affecting our consolidated operating results, financial condition, liquidity and capital resources at and during the three months
ended June 30, 2017 and 2016. For a complete understanding, this Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the Financial Statements and Notes to the Financial Statements
contained in this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended March 31, 2017.
Forward-looking Statements
This quarterly report
on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on management’s
beliefs and assumptions and on information currently available to management. For this purpose any statement contained
in this report that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to, statements
relating to our future actions, intentions, plans, strategies, objectives, results of operations, cash flows and the adequacy of
or need to seek additional capital resources and liquidity. Without limiting the foregoing, words such as “
may
”,
“
should
”, “
expect
”, “
project
”, “
plan
”, “
anticipate
”,
“
believe
”, “
estimate
”, “
intend
”, “
budget
”, “
forecast
”,
“
predict
”, “
potential
”, “
continue
”, “
should
”, “
could
”,
“
will
” or comparable terminology or the negative of such terms are intended to identify forward-looking statements,
however, the absence of these words does not necessarily mean that a statement is not forward-looking. These statements
by their nature involve known and unknown risks and uncertainties and other factors that may cause actual results and outcomes
to differ materially depending on a variety of factors, many of which are not within our control. Such factors include,
but are not limited to, economic conditions generally and
in the industry in which we and our customers
participate; competition within our industry; legislative requirements or changes which could render our products or services less
competitive or obsolete; our failure to successfully develop new products and/or services or to anticipate current or prospective
customers’ needs; price increases; employee limitations; or delays, reductions, or cancellations of contracts we have previously
entered into; sufficiency of working capital, capital resources and liquidity and other factors detailed herein and in our other
filings with the United States Securities and Exchange Commission (the “SEC” or “Commission”). Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may
vary materially from those indicated.
Forward-looking statements
are predictions and not guarantees of future performance or events. Forward-looking statements are based on current
industry, financial and economic information which we have assessed but which by its nature is dynamic and subject to rapid and
possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking
statements due to risks and uncertainties associated with our business. 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. Moreover,
neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements and
we hereby qualify all our forward-looking statements by these cautionary statements.
These forward-looking
statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to amend this
report or revise publicly these forward-looking statements (other than pursuant to reporting obligations imposed on registrants
pursuant to the Exchange Act) to reflect subsequent events or circumstances, whether as the result of new information, future events
or otherwise.
The following discussion should be read in conjunction
with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
Overview
We are currently focused
on the business of purchasing residual economic interests in a portfolio of life settlements. A life settlement is the sale of
an existing life insurance policy to a third party for more than the policy’s cash surrender value, but less than the face
value of the policy benefit. After the sale, the new policy holder will pay the premiums due on the policy until maturity and then
collect the settlement proceeds at maturity.
We currently do not purchase
or hold life settlement or life insurance policies but, rather, hold a contractual right to receive the net insurance benefits,
or NIBs, from a portfolio of life insurance policies held by a third party (“the Owners” or “the Holders”).
These NIBs represent an indirect, residual ownership interest in a portfolio of individual life insurance policies and they allow
us to receive a portion of the settlement proceeds from such policies, after expenses related to the acquisition, financing, insuring
and servicing of the policies underlying our NIBs have been paid.
We are not responsible
for maintaining premiums or other expenses related to maintaining the underlying life settlement or life insurance policies. Ownership
of the underlying life settlement or life insurance policies, and the related obligation to maintain such policies, remains with
the entity that holds such policies. However, in the event of default of the owner, the Company may choose to expend funds on premiums,
interest and servicing costs to protect its interest in NIBs, though the Company has no legal responsibility nor adequate funds
for these payments.
NIBs are generally sold by an entity that holds
the underlying life settlement or life insurance policies, either directly or indirectly through a subsidiary, such an entity being
referred to herein as a “Holder.” A Holder, either directly or through a wholly owned subsidiary, purchases life insurance
policies either from the insured or on the secondary market and aggregates them into a portfolio of policies. At the time of purchase,
the Holder also (i) contracts with a service provider to manage the servicing of the policies until maturity, (ii) consider purchasing
mortality re-insurance (“MRI”) coverage under which payments will be made to the Holder in the event the
insurance policies do not mature according to actuarial life expectancies,
and (iii) arranges financing to cover the initial purchase of the insurance policies, the servicing of the life insurance policies
until maturity and the payment of the MRI premiums. The financing obtained by the Holder for a portfolio of life settlement or
life insurance policies is secured by the insurance policies for which the financing was obtained. After a Holder purchases policies,
aggregates them into a portfolio and arranges for the servicing, MRI coverage and financing, the Holder contracts to sell NIBs
related to the policies, which gives the holder of the NIBs the right to receive the proceeds from the settlement of the insurance
policies after all of the expenses related to such policies have been paid. When an insurance policy underlying our NIBs comes
to maturity, the insurance proceeds are first used to pay expenses associated with such policy. Once all of the expenses have been
paid, the Holder will retain a small percentage of the proceeds and then will pay the remaining insurance proceeds to us.
We began purchasing NIBs during our fiscal year
ended March 31, 2013.
Plan of Operations
Life Settlements is not a market sector without
competition and, at present, we are a minor competitor. We will need substantial additional funds to effectively compete in this
industry and no assurance can be given that we will be able to adequately fund our current and intended operations, whether through
revenues generated from our current interest in our NIBs or through debt or equity financing. We may be required to expend funds
on premiums, interest and servicing costs to protect our interest in NIBs, though we have no legal responsibility nor adequate
funds for these payments. In the event that neither party fulfils the financial obligations pertaining to the premiums, interest
and servicing costs, we would be required to evaluate our investment in NIBs for possible adverse impairment. These payments are
currently being made through an unrelated senior lending facility. The entities that own the policies maintain a total of 13 separate
loan agreements with the senior lending facility, all with separate expiration dates. As of June 30, 2017, 9 of these loans had
expiration dates that have lapsed, with the remaining 4 loans having expiration dates ranging from June 2017 to January 2018. During
October 2017, the entities completed a refinancing of the loans that had matured. The agreements are with a new senior lending
facility who previously provided MRI for the underlying policies. During December 2017, these new loans were extended through April
15, 2018 and the Holders had available credit to pay forecasted premiums and expenses on a portion of the policies until that date.
Between May 2018 and July 2018, the Holders entered in agreements that completed a strict foreclosure transaction that transferred
the underlying life insurance policies relating to the Company’s NIBs to the lenders in full satisfaction of the loan obligation.
The Holders and other parties to the Agreements are diligently working to secure alternative financing, although no such positive
outcome can be assured. The lenders continue to pay premiums and related fees on and have not yet liquidated the life insurance
policies. As of the date of this filing, the lenders continue to pay premiums and related fees on the life insurance policies and
have not yet liquidated the policies. As a result of the foreclosure, the Company has lost its position in the residual benefits
of the policies and has reduced the carrying value of the NIBs at June 30, 2017 to $7,769,568, which is equal the actual cash received
by the Company from distributions subsequent to June 30, 2017. This carrying value is less than the accretion receivable as of
March 31, 2017, and as such, is considered accretion receivable and not part of the Company’s original investment.
We use an estimation methodology to project
cash flows and returns as presented. The estimation model requires many assumptions, including, but not limited to the following:
(i) an assumption that the distinct number of lives in our portfolio would exhibit similar experience to a statistically diverse
portfolio from which mortality tables have been created; (ii) an assumption that the life expectancies (the “LE” or
“LEs”) provided by LE providers represent the actuarial mean of the life expectancies of the insureds in our portfolio,
(iii) the weighted average of the LEs provided by the LE providers represents an appropriate method for adjusting for discrepancies
in the LEs; (iv) life expectancy tables and projections are accurate; (v) the minimum premiums calculated based on the in-force
illustrations provided by life insurance carriers are accurate and will not change over the course of the lifetime of our portfolio;
and (vi) the Holders’ Lender fees, MRI fees, and insurance, servicing and custodial fees will not change materially over
time. While this method of modeling cash flows is helpful in providing a theoretical expectation of potential returns that might
be produced from our NIBs portfolio, actual cash flows and returns inevitably will be different (possibly materially) due to the
fact that predicting the exact date of death of any individual is virtually impossible. The provision of a theoretical cash flow
model is by no means any guarantee of any results. The actual performance of these NIB interests (as well as our future expectations
as to what such performance might be) may
differ substantially from our expectations, especially if any of
the assumptions change or differ from our initial assumptions. As of June 30, 2017, these portfolios contain only 102 fractionalized
policies on 66 individual insureds, though insurance rating agencies have stated that at least 1,000 lives are required to achieve
actuarial stability. Many risk factors beyond these assumptions may result in our expectations being incorrect; therefore, no assurance
can be given that these estimated results will occur.
Results of Operations
Income Recognition
At the time of transfer or purchase of an investment
in NIBs, we estimate the future expected cash flows from such NIBs and determine the effective interest rate that, when applied
to our initial investment in such NIBs, would yield these estimated cash flows. The Company accrues income on a monthly basis by
applying this interest rate to our investment in the related NIBs, and such income is recorded as interest income on investment
in NIBs in the statement of operations. This accretable income is based on the effective yield method and effectively represents
the total amount of cash flows we expect to receive over the life of each pool of NIBs less the amount of our initial investment
in such NIBs. Subsequent to the purchase of a given pool of NIBs and on a regular basis, these future estimated cash flows are
evaluated for changes. If we determine that the future estimated cash flows should be significantly adjusted, a revised effective
yield is calculated and applied prospectively based on the current amortized cost of the investment, including accrued accretion.
Any positive or adverse change in cash flows would result in a prospective increase or decrease in the effective interest rate
used to recognize interest income. Any significant adverse change in the cash flows may result in the recognition of an “other-than-temporary
impairment” (“OTTI”), and would be evaluated by the Company accordingly.
We had not recognized any impairment on our
investment in NIBs from January 31, 2013 (inception), through the year ended March 31, 2017. However, between May 2018 and July
2018, the Owners entered into agreements that completed a strict foreclosure transaction that transferred these policies to the
lenders in full satisfaction of the loan obligation. The owners and other parties to the Agreements are diligently working to secure
alternative financing, although no such positive outcome can be assured. The lenders continue to pay premiums and related fees
on the life insurance policies and have not yet liquidated the policies. As of the date of this filing, the lenders continue to
pay premiums and related fees on the life insurance policies and have not yet liquidated the policies. As a result of the foreclosure,
the Company has lost its position in the residual benefits of the policies and has reduced the carrying value of the NIBs at June
30, 2017 to $7,769,568, which is equal the actual cash received by the Company from distributions subsequent to June 30, 2017.
This carrying value is less than the accretion receivable as of March 31, 2017, and as such, is considered accretion receivable
and not part of the Company’s original investment.
Interest Income
Due to the foreclosure agreement previously
mentioned, no interest income was recorded for the three months ended June 30, 2017. Interest income on investment in NIBs totaled
$1,453,872 for the three months ended June 30, 2016.
General & Administrative Expenses
General and administrative expenses totaled
$547,581 and $727,443 during the three months ended June 30, 2017, and 2016, respectively. A significant portion of these expenses
were professional fees, payroll and travel expenses. During the three months ended June 30, 2016, we incurred $103,843 relating
to stock based compensation for stock options. As the amortization of these options was completed during the year ended March 31,
2017, no expenses were incurred for stock based compensation during the three months ended June 30, 2017.
Impairment of Net Insurance Benefits
As indicated above, no impairment on our investment
in NIBs had been recognized from inception through the year ended March 31, 2017. Between May 2018 and July 2018, the Owners entered
into agreements that completed a strict foreclosure transaction that transferred these policies to the lenders in full satisfaction
of the loan obligation. As a result of the foreclosure, the Company recognized impairment totaling $24,886,437 at June 30, 2017,
reducing the carrying value of the NIBs to $7,769,568, which is the estimated fair value of the NIBs calculated as the actual cash
received (discounted) subsequent to June 30, 2018, from distributions by the Owners to the Company. Of the total impairment amount
recognized of $24,886,437, $1,936,311 was apportioned as an impairment on the accrued interest receivable that the Company previously
expected to receive and was classified on the Statement of Income as an operating expense. The remaining impairment amount of $22,950,126
was considered impairment on the Company’s original investment in NIBs, and is included in the Company’s Other Expenses
for the period.
Other Income and Expenses
As mentioned earlier, other income and expenses
consist primarily of the Company’s impairment of its original investment in NIBs, which totaled $22,950,126. Also included
in Other Expense is the Company’s interest expense on the notes payable and lines-of-credit due to related-parties and a
convertible debenture. During the three months ended June 30, 2017, and 2016, interest expense accrued in the amount of $109,430
and $85,882, respectively. The increase in interest expense was primarily due to higher principal balances during the three months
ended June 30, 2017.
Income Taxes
During the
three months ended June 30, 2016, the Company recorded a net loss before income taxes of $25,543,448 and had no income tax
expense or benefit as a result of a full valuation allowance on the net deferred tax asset.
During the three months
ended June 30, 2017, the Company recorded a net loss before income taxes of $25,543,447. As of March 31, 2017, the Company released
the aforementioned valuation allowance as a result of its deferred tax liabilities balance exceeding its deferred tax assets. Due
to material losses being recognized during the three months ended June 30, 2017, the Company’s deferred tax asset balance
surpassed its deferred tax liabilities resulting in a full valuation allowance being recorded against its net deferred tax assets.
Additionally, an income tax benefit was recorded for the reduction of the previously recorded net deferred tax liability balance
at March 31, 2017 equal to $758,972.
The Company assessed the need for a valuation
allowance against its deferred income tax assets at June 30, 2017. Factors considered in this assessment include recent and expected
future earnings and the Company’s liquidity and equity positions. As of March 31, 2016, management had placed a 100% valuation
allowance, totaling approximately $275,000, on the amount the Company’s deferred tax assets exceeding our deferred tax liabilities.
As a result, no income tax expense (benefit) or deferred tax asset or liability was recorded on the financial statement. During
the year ended March 31, 2017, the Company’s deferred tax liabilities began to exceed deferred tax assets, which resulted
in the recording of income tax expense and a deferred tax liability. As a result, during the year ended March 31, 2017, the $275,000
valuation allowance was reversed as the deferred tax liabilities exceeded the deferred tax liabilities and the expectation of cash
inflows from the actual and anticipated maturities of the underlying life insurance policies, which will create taxable income
to the Company. The deferred tax assets primarily relate to net operating loss carryforwards and the deferred tax liabilities primarily
relate to interest income recognized for financial reporting purposes, but not for tax reporting purposes. During the three months
ended June 30, 2017, the Company recognized an impairment on the Investment on NIBs totaling $24,886,437, resulting in a net loss
for the quarter of $25,543,447. For tax purposes, a net taxable loss was also recorded for the quarter and resulted in a deferred
tax asset balance in excess of the Company’s deferred tax liabilities. As a result, during the three months ended June 30,
2017, a valuation allowance was recorded against the net deferred tax assets balance for approximately $8,770,000 along with an
income tax benefit for the reduction of the previously recorded deferred tax liability balance as of March 31, 2017.
Recent Tax Legislation
On December 22, 2017,
the Tax Cuts and Jobs Act (“Tax Reform Act”) was signed into law by the President of the United States. The Tax Reform
Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. federal corporate tax
rate from 35% to 21% effective for our calendar year ending March 31, 2018. U.S. GAAP requires that the impact of tax legislation
be recognized in the period in which the law was enacted.
The Tax Reform Act reduces
the federal corporate tax rate to 21% effective for our calendar year ending March 31, 2018. We will recognize the effects of the
Tax Reform Act for the re-measurement of the net deferred tax liabilities during the third quarter ended December 31, 2017.
Liquidity and Capital Resources
Since our inception our operations have been
primarily financed through sales of equity instruments, debt financing, lines of credit and notes payable from related parties
and the issuance of convertible debentures. As of June 30, 2017, we had $35,178 of cash, compared to $4,364 as of March 31, 2017.
As of April 5, 2019, the Company had access to draw an additional $5,507,991 on
the notes payable, related party and $3,000,000 on the Convertible Debenture Agreement. Our monthly expenses are approximately
$90,000, which includes salaries of our employees, policy servicing expenses, consulting agreements and contract labor, general
and administrative expenses, estimated legal and accounting expenses. Outstanding Accounts Payable as of June 30, 2017 totaled
$540,820, and other accrued liabilities totaled $402,625. We believe that our availability under our existing lines of credit
with related parties, our existing capital resources, together with the issuance of additional notes payable and convertible debentures
and will be sufficient to fund our operating working capital requirements for at least the next 12 months, or through April 2020.
For the three months ended June 30, 2017, and
2016 respectively, we recorded net cash provided by operating activities of $527,083 and $676,537. The decrease in operating cash
provided was primarily due to payments totaling $351,155 of accrued interest on the Notes Payable, Related Party and Convertible
Debenture, partially offset by an approximately $261,000 increase in Accrued Interest on NIBs recognized during the period.
For the three months ended June 30, 2017, and
2016, no cash was used in or provided by investing activities
During the three months ended June 30, 2017
and 2016, net cash used in financing activities was $496,269 and $695,000, respectively. During the three months ended June 30,
2017, we repaid $496,269 under the Notes Payable, Related Party agreements. During the three months ended June 30, 2016, we borrowed
$205,000 and repaid $150,000 under the Notes Payable, Related Party agreements. In addition, during the three months ended June
30, 2017, we paid out the $750,000 Mandatorily Redeemable Common Stock Payable recorded on the balance sheet as of March 31, 2016.
At June 30, 2017, we owed $4,718,484, excluding accrued interest, pursuant to notes payable and lines-of-credits from related parties
and $700,000, excluding accrued interest, pursuant to an 8% Convertible Debenture.
During the three months ended June 30, 2017,
we paid $415,519 in accrued interest on the Note Payable, Related Party agreements, and accrued an additional $109,429 of interest
payable on the Note Payable, Related Party agreements and the Convertible Debenture. As further explained in Footnote 8 of our
audited consolidated financial statements that accompany this Annual Report, the Company has agreed, but is not contractually obligated,
to pay for certain costs to maintain the structure of the underlying life insurance policies. As of June 30, 2017, the Company
determined that the probable amount of these costs is $316,667 and is recorded as accrued expense (See Note 12 for updates to these
estimated costs subsequent to year end).
The accompanying
financial statements have been prepared on a going concern basis under which we are expected to be able to realize our assets and
satisfy our liabilities in the normal course of business. To continue as a going concern through April
2020,
removing the NIBs out of foreclosure, and to continue to acquire NIBs, we will be heavily dependent on completing securities and
debt offerings or obtaining alternative sources of financing. Absent additional financing, we will not have the necessary resources
to execute our business plan.
Debt
At June 30, 2017, we owed $5,549,508, including
accrued interest, for debt obligations. At June 30, 2017, we owed $4,718,484, excluding accrued interest, pursuant to notes payable
and lines-of-credits from related parties and $700,000, excluding accrued interest, pursuant to an 8% Convertible Debenture. One
note payable and line-of-credit had a principal balance of $3,238,628 and is due on November 30, 2020, or when the Company completes
a successful equity raise, at which time principal and interest is due in full. The second note payable and line-of-credit had
a principal balance of $1,479,856 and is also due on November 30, 2020, or when the Company completes a successful equity raise,
at which time principal and interest is due in full. The convertible debenture is due August 31, 2019. As of April 5, 2019, there
was $5,507,991 available under the lines-of-credit we currently have with related parties and $3,000,000 available under the 8%
convertible debenture agreement. We may borrow money in the future to finance our operations, but can make no guarantees that
such credit will be made available to us. Any such borrowing will increase the risk of loss to the debt holder in the event we
are unsuccessful in repaying such loans.
Critical Accounting Policies and Estimates
The preparation of our financial statements
requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe
to be reasonable.
Income Taxes
, The
Company accounts for income taxes under FASB ASC 740, “Income Taxes”. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require
the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component
or all of the benefits of deferred tax assets will not be realized. The primary factor management considers when evaluating the
realization of the deferred tax assets is the amount of cash flows (which represents taxable income) to be received from the Company’s
NIBs prior the expiration of the tax net loss carryforwards.
The tax effects from an
uncertain tax position can be recognized in the financial statements only if the position is more likely than not of being sustained
if the position were to be challenged by a taxing authority. The Company has examined the tax positions taken in its tax returns
and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in
its balance sheet. Interest and penalties for uncertain positions, when applicable, would be recognized as a component of income
tax expense.
Investment in NIBs
, The Company accounts
for its investment in NIBs at the initial investment value increased for interest income and decreased for cash receipts received
by the Company. At the time of transfer or purchase of an investment in NIBs, we estimate the future expected cash flows and determine
the effective interest rate based on these estimated cash flows and our initial investment. Based on this effective interest rate,
the Company calculates accretable income, which is recorded as interest income on investment in NIBs in the statement of operations.
Our current projections are based off of various assumptions that are subject to uncertainties and contingencies including, but
not limited to, the amount and timing of projected net cash receipts, expected maturity events, counter party performance risk,
changes to applicable regulation of the investment, shortage of funds needed to maintain the asset until maturity, changes in discount
rates, life expectancy estimates and their relation to premiums, interest, and other costs incurred, among other items. These uncertainties
and contingencies are difficult to predict and are subject to future events that may impact our estimates and interest income.
As a result, actual results could differ significantly from these projections. Therefore, subsequent to the purchase and on a regular
basis, these future estimated cash flows are evaluated for changes. If the determination is made that the future estimated cash
flows should be adjusted to the point of a material change in revenue, a revised effective yield is calculated prospectively based
on the current amortized cost of the investment, including accrued accretion
.
As defined by ASC Topic
820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. ASC
820 also requires the consideration of differing levels of inputs in the determination of fair values.
Those levels of input
are summarized as follows:
• Level 1: Quoted
prices in active markets for identical assets and liabilities.
• Level 2: Observable
inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions
are observable in the market.
• Level 3: Unobservable
inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value
is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which
the determination of fair value requires significant management judgment or estimation.
The level in the fair
value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant
to the fair value measurement in its entirety.
In accordance with the
disclosure requirements of ASC Topic 825, “Financial Instruments” (“ASC 825”), the NIBs are not required
to be carried at fair value, but only required to be disclosed in the footnotes to the financial statements. The total of the fair
value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
In estimating the fair value of the Company’s Investment in NIBs, the rate of return that a market participant would be willing
to pay for each portfolio is used to recalculate the discounted estimated future cash flows. This present value is used to represent
the fair value of the Investment in NIBs using level 3 inputs.
The fair value of our investment in NIBs is
determined by evaluating the sum of present value of the future cash flows expected from the NIBs. Our current projections for
the future cash flows are based off of various assumptions that are subject to uncertainties and contingencies, which are difficult
to predict and are subject to future events that may impact our estimates and interest income. Therefore, subsequent to the purchase
and on a regular basis, these future estimated cash flows are evaluated for changes. If the determination is made that the future
estimated cash flows should be adjusted to the point of a material change in revenue, a revised effective yield is calculated prospectively
based on the current amortized cost of the investment, including accrued accretion.
Our Investment in NIBs
are classified as held-to-maturity investments at March 31, 2017 and as available-for-sale investments at June 30, 2017. At June
30, 2017, the fair value of our investment in NIBs is calculated as the actual cash received (discounted) subsequent to June 30,
2017, from distributions by the Owners to the Company.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.