: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
We are 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.” These life insurance interests are anticipated to be held to maturity. Our plan of operation for the next 12 months is to continue the acquisition of these life insurance interests whereby we will acquire the interests in life insurance policies at a discount to their face value for investment purposes. We began purchasing the net insurance benefits in life insurance policies (“NIBs”) during our fiscal year ended March 31, 2013. This 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 the Qualified NIBs or through debt or equity financing. We may be required to expend not less than approximately $96.2 million on premiums, interest and servicing costs over the next five years to protect our interest in our NIBs, though we have no legal
We currently estimate proceeds of approximately $96.5 million on the NIBs owned as of March 31, 2015, and acquired from PCH Financial, Del Mar Financial and HFII. This amount is based on the estimated proceeds from polices of approximately $341.2 million in face value, which includes estimated return of premiums; less the Senior Loans debt or MRI repayments outstanding of approximately $71.8 million, expected premium payments of approximately $104.2 million over the life expectancies and estimated expenses and interest of approximately $68.7 million over the term of the Senior Loans.
We advanced payments to purchase future additional life settlement products during the year ended March 31, 2015, and if these life settlement products become “Qualified NIBs” as defined in the acquisition documents, we will also utilize the estimation methodology to estimate what our proceeds from these “Qualified NIBs” may be, all subject to the same assumptions, qualifications and risks referenced above.
Interest income on investment in NIBs represents the excess of all cash flows attributable to the investment in net insurance benefits greater than the initial investment over the life of each pool of net insurance benefits using the effective yield method. Changes in the estimate of expected cash flows from investments in NIBs are adjusted prospectively.
During the fiscal years ended March 31, 2015, and 2014, we engaged in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies. General and administrative expenses totaled $2,338,266 and $2,278,009 during the fiscal years ended March 31, 2015, and 2014, respectively. A significant portion of these expenses were professional fees, payroll and travel expenses. Approximately $363,000 of the professional fees were legal and accounting fees related to the preparation and filing of reports with the SEC under the Exchange Act. Payroll is made up of cash payroll costs and non-cash equity issuances to management, directors and others.
From our inception on January 31, 2013, through the fiscal year ended March 31, 2015, we incurred cumulative net losses of $457,528. Management has expressed its belief that we need to raise approximately $40 million to $50 million in additional funds through equity or debt financing to continue our business model and to effectively compete in the life settlement industry during fiscal 2016 and beyond. We raised $11,942,500 (gross) in our private placement that commenced in April 2013. Our monthly expenses are between approximately $140,000 and $290,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. We believe we will have adequate cash resources for our estimated monthly expenses through June 30, 2016, excluding any other acquisitions of additional NIBs and other life settlement products.
We had cash assets at March 31, 2015, and 2014, of $336,370 and $375,212, respectively. We have only common stock as our capital resource. We will be reliant upon stockholder loans or private placements of equity or debt to fund any future operations. Although management is actively pursuing opportunities to raise additional equity and debt capital, we have secured no sources of loans, and there is no assurance that we will be able to raise any required debt or equity financing. We do not anticipate having adequate revenues from operations for three to four years, and until a revenue stream has been established, we will require debt or equity funding to fund our current and intended business. If management is unsuccessful in these efforts, discontinuance of operations is a possibility.
If we are unable to raise sufficient capital through the planned securities and debt offerings or other alternative sources of financing, management will curtail NIB purchases. We believe that we will be able to fund our operating working capital requirements with existing line-of-credit and debentures agreements, which totaled $5.1 million, of which $2,900,000 is available at June 12, 2015.
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 beyond the year ended March 31, 2016, and in order to continue to acquire life insurance policies and residual interests in or financial products tied to life insurance policies we will need to complete the planned securities and debt offerings or obtain alternative sources of financing. Absent additional financing, we will not have the resources to execute our business plan.
Common Stock to be Issued and Note Receivable settled for Investment in Net Insurance Benefits
Sundance Strategies, Inc. (formerly known as Java Express, Inc.) was organized under the laws of the State of Nevada on December 14, 2001, for the purpose of selling coffee and other related items to the general public from retail coffee shop locations. These endeavors ceased in 2006, and it had no material business operations from 2006, until its acquisition of ANEW LIFE, INC. (“ANEW LIFE”), a subsidiary of Sundance Strategies, Inc. (“Sundance Strategies,” the “Company” or “we”). The Company is a specialty financial services company which is engaged in the secondary market for life insurance known generally as “life settlements.” The Company purchases the net insurance benefit contracts (“NIB”) on life insurance policies between the sellers and purchasers, but does not take possession or control of the policies. The purchasers acquire the life insurance policies at a discount to their face value for investment purposes. The purchasers have available credit to pay premiums and expenses on the underlying policies until settlement. On settlement, the Company receives the NIB after all borrowings, interest and expenses have been paid out of the settlement proceeds.
Basic and Diluted Net Income (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 presented using the treasury stock method. Diluted net income (loss) 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. For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position. Potentially dilutive securities, which total 1,766,374 as of March 31, 2015, are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive.
Investment in Net Insurance Benefits, 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 senior lender and insured via a mortality risk insurance product or mortality re-insurance (“MRI”). Future expected cash flow is defined as the net insurance proceeds from death benefits after senior debt repayment, mortality risk repayment, and service provider or other third-party payments. 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. The Company holds a 100% interest in the NIBs relating to the underlying life insurance policies as of March 31, 2015, and 2014.
Level 3: Unobservable inputs that are not corroborated by market data.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09 - Revenue from Contracts with Customers, which provides a single, comprehensive revenue recognition model for all contracts with customers. The core principal of this ASU 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. This ASU 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. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted and companies can transition to the new standard under the full retrospective method or the modified retrospective method. The Company does not believe adoption of this ASU will have a material impact on its financial statements.
Cash and cash equivalents consists principally of currency on hand and demand deposits at commercial banks. The Company had $336,370 and $375,212 in cash and cash equivalents as of March 31, 2015, and 2014, respectively. The Company maintains non-interest bearing accounts at one financial institution. The accounts at this institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. The Company does not have FDIC coverage on the entire amount of bank deposits. The Company believes this risk is minimal.
The projected premiums, interest and expenses were created using the expected remaining life expectancies on the policies and other key assumptions. The expenses and interest calculations were based on current senior lender interest rates, current reinsurance interest rates, origination fees, servicing fees and other custodial fees expected during the life of the investment. The senior lender provides the loans at a high rate of interest and loan payments are guaranteed by the MRI or reinsurance coverage. The policy holders receive ongoing fees and a percentage of death benefits when a policy matures which we included in the estimated expenses. The Company receives cash flows from its investments in NIBs after all other loan balances, costs and expenses are paid.
During January 2014, as mentioned in Note 5, the Company completed with Del Mar the closing of Qualified NIBs with associated death benefits of $90.6 million for $5,436,000. These Qualified NIBs are part of the $400 million commitment.
During December 2014, Del Mar refunded $904,274 advanced from the Company because of Del Mar’s delay in delivering the remaining portions of the $400 million commitment. The refund is recorded as a reduction of Advance for Investment in Net Insurance Benefits.
a dollar for dollar basis of the cash payment and all costs and expenses paid under the Del Mar ATA over $8,000,000, against all fees due Europa under the Europa Agreement or the Del Mar ATA. In the event the Qualified NIBs delivered are less than $300,000,000 in face value under the Del Mar ATA Agreement, Del Mar and Europa shall be jointly and severally liable for liquidated damages equal to the aggregate of the cash payment under the Del Mar ATA and all of the costs advanced, reduced by the pro rata percentage of the Qualified NIBs delivered and accepted by the Company, multiplied by two; and if at least $300,000,000 in Qualified NIBs are delivered and accepted, then the cash payment and all costs will not be doubled if they are paid within 90 days.
On October 23, 2013, the Company made a loan totaling $650,000 in the form of a note receivable to Del Mar. At March 31, 2014, Del Mar owed the full amount of the original principal and $8,540 in accrued interest income and was in default. As of March 31, 2015, the entire balance of the note receivable was collected, with $550,000 received in cash, and the remaining $100,000 applied toward the cash portion of the Del Mar ATA.
Pursuant to a month to month lease agreement, we currently occupy office space located in Provo, Utah. The total lease expense is approximately $2,600 per month, payable in cash.
The Company recognizes the tax effects of transactions in the year in which such transactions enter into the determination of net income regardless of when reported for tax purposes. Deferred taxes are provided in the financial statements to give effect to the temporary differences which may arise from differences in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to be payable in future years. Minimal development stage deferred tax assets arising as a result of net operating loss carry-forwards have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. In the Company’s opinion, it is uncertain whether we will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a full valuation allowance equal to the deferred tax asset has been recorded.
The tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2015 and 2014, were as follows:
The cumulative Net Operating Loss (“NOL”) totaled $4,221,212 and $2,038,201 at March 31, 2015 and 2014, respectively, and will begin to expire in 2021. The total valuation allowance is equal to the total deferred tax asset less any associated deferred tax liabilities. The valuation allowance was $358,117 and $303,518 for the years ended March 31, 2015, and 2014, respectively.
The Company recognizes interest accrued relative to unrecognized tax benefits in interest expense and penalties in operating expense. During the period from January 31, 2013 (date of inception), through March 31, 2015, the Company recognized no income tax related interest and penalties. The Company had no accruals for income tax related interest and penalties at March 31, 2015 and 2014.
On April 5, 2013, the Company also issued 80,000 stock options to non-employees which vested immediately. The Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC 505-50-30. The Company valued the 80,000 options using the Black-Scholes option pricing model under the following assumptions: $1.0294 market price, $0.77 exercise price, 5 years expected life, 79% volatility, 0.68% risk free rate.
The 400,000 stock options vest in several tranches, wherein 10% of the options vesting six months after the date of issuance and the remaining options to vest monthly over the next 36 months subject to continuing employment with the Company. The Company valued the 400,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $5.00 market price, $5.00 exercise price, 3.40 years expected life, 68% volatility, 0.76% risk free rate.
The Company has recorded stock-based compensation expense of $417,846 related to these options for year ended March 31, 2015.
The remaining $691,084 will be recognized as stock based compensation expense ratably over the weighted average service period of 3.09 years.
On April 8, 2013, the Company approved a private placement of its common stock that provided for the payment of introduction fees in the form of cash and warrants and later amended. As a result of investments totaling $7,000,000 in this private offering by persons introduced to the Company, the Company authorized the issuance of 70,000 warrants to purchase 70,000 shares of the Company’s common stock. The warrants have an exercise price of $5.00 per share and have a contractual life of two years from the effective date of the funds invested in the offering by the parties introduced to the Company, which was May 31, 2013. The Company recorded $139,251 in stock issuance costs related to the warrants as of March 31, 2014.
If the Company is unable to raise sufficient capital through the planned securities and debt offerings or other alternative sources of financing, management will curtail NIB purchases. Under this plan, expenditures for NIBs will be curtailed. The Company believes that it will be able to fund its operating working capital requirements with existing line-of-credit and debentures agreements.
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. To continue as a going concern beyond the year ended March 31, 2016, and in order to continue to purchase NIBs, the Company will need to complete planned securities and debt offerings or obtain alternative sources of financing. Absent additional financing, the Company will not have the resources to execute its current business plan.
On April 30, 2015, the Company drafted an amendment to the Del Mar ATA and the Europa Agreement to extend the deadline until August 31, 2015. The extension is intended to give the Company time to work towards a settlement agreement with Del Mar, as it appears unlikely that Del Mar will be able to fulfill its obligation to deliver the remaining $309,400,000 in Qualified NIBs. During this extension period management will work toward a dissolution and resolution of the Del Mar ATA.
On June 2, 2015, the Company entered into an 8% convertible debenture agreement that allows for borrowings of up to $3,000,000 through September 30, 2016, at which time principal and interest is due in full. During the term of the debenture, the holder can elect to convert the outstanding principal and accrued interest to unregistered, restricted common stock of the Company. 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. During June 2015 the Company drew $700,000 under the agreement.
On June 9, 2015, the common stock to be issued of 1,130,000 shares was officially issued, with 187,500 of those shares containing a redemption feature (see Notes 5, 11 and 14). Immediately upon issuance, the holder of the redemption feature, exercised a portion of the redemption right relating to 93,750 shares and, as a result, the holder accepted the Company’s redemption payment of $750,000. The redemption feature on the remaining 93,750 shares was originally eligible to be exercised by the holders on October 31, 2015, and was subsequently extended to September 30, 2016.
On June 12, 2015, the Company entered into a line-of-credit agreement with a related party that allows for borrowings of up to $600,000 through September 30, 2016, at which time principal and interest is due in full. In addition, this same related party extended the due date of the $1,500,000 note-payable related party (see Note 10) outstanding at March 31, 2015, to September 30, 2016.