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) purchases 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.
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
General and administrative expenses totaled $2,489,938 and $3,597,439 during the years ended March 31, 2017, and 2016, respectively. A significant portion of these expenses were professional fees, payroll and travel expenses. Included in the general and administrative expenses for the fiscal year ended March 31, 2016 is a one-time $826,665 obligation which was a result of a restructuring with the prior owners of the life insurance portfolios underlying our NIBs. This obligation, consisting primarily of legal and accounting fees related to the restructuring process, constituted the majority of the period decrease in general and administrative expenses. Additionally, we incurred $182,572 and $508,503 in expenses during the years ended March 31, 2017 and 2016, respectively, relating to stock based compensation for stock options. The decrease in this expense is due to the amortization of these options being completed during the year ended March 31, 2017.
During the year ended March 31, 2017, the Company recorded net income before income taxes of $2,771,126, and also recorded an income tax expense of $758,972.
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 year ended March 31, 2018.
We will recognize the income tax effects of the Tax Reform Act in our 2018 financial statements 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. The guidance addresses how a company recognizes provision amounts when a company does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the effect of the changes in the Tax Reform Act. As such, the financial results reflect the income tax effects of the Tax Reform Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Reform Act for which the accounting under ASC 740 is incomplete, but a reasonable estimate could be determined. Pursuant to the SAB 118, we are allowed a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts.
For the year ended March 31, 2017, we recorded net cash used in operating activities of $564,928, compared to $3,020,837 used in operating activities during the year ended March 31, 2016. The decrease in operating cash outflows was primarily due to the receipt of approximately $1,400,000, which was an approved distribution from the policy owners as a return on our interest in NIBs.
For the year ended March 31, 2017, no cash was used in or provided by investing activities, compared to $439,006 provided by investing activities during the year ended March 31, 2016. During the year ended March 31, 2016, we paid $626,914 in cash to Del Mar as Advances for Investment in NIBs (see footnote 5 to our financials). During September 2015, we obtained ownership and control of a portfolio of policies due to the cancellation of the Del Mar ATA. On September 10, 2015, the Company received $1,094,335 as a result of the rights associated with a matured policy within the portfolio serving as collateral under the Del Mar ATA. The maturity occurred prior to the Company taking possession of the NIBs portfolio. As such, the Company agreed the proceeds were to be allocated $211,000 to pay off a note receivable, $16,428 to pay off accrued interest receivable from prior periods, $11,987 to pay off interest accrued within the current period, and $854,920 as a refund of advance payments previously made to or on behalf of Del Mar as part of the Del Mar ATA.
During the year ended March 31, 2017 and 2016, net cash provided by financing activities was $544,575 and $2,270,178, respectively. During the year ended March 31, 2017, we borrowed an additional $1,544,575 under the Notes Payable, Related Party agreements. We also repaid $150,000 during the year ended March 31, 2017. In addition, during the year ended March 31, 2017, we paid out the $750,000 Mandatorily Redeemable Common Stock Payable recorded on the balance sheet as of March 31, 2016, and we also paid $100,000 as a financing advance. We subsequently determined that we would not be pursuing the opportunity related to the $100,000 advance, and therefore expensed the $100,000 as a Financing Expense during the year ended March 31, 2017. At March 31, 2016, we owed $5,462,335, including accrued interest, for debt obligations and Mandatorily Redeemable Common Stock. At March 31, 2016, we owed $3,820,178, 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 March 2015, we agreed to pay $150,000 in cash, issue 1,130,000 shares of common stock and forgive a note receivable with an outstanding amount of $150,000 in exchange for relief of a $1,493,254 note payable and the receipt of NIBs. The net consideration given for the relief of the note payable and receipt of NIBs totaled $1,493,254 and $7,846,746 respectively, for a total of $9,340,000. The holder of the shares issued pursuant to the transaction was given the right to require us to redeem 187,500 shares for $8.00 per share ($1,500,000 in total). On June 9, 2015, the holder exercised a portion of the redemption right relating to 93,750 shares and, as a result, we paid the holder $750,000 to redeem the shares. On March 25, 2016, the holder exercised the redemption right in relation to the remaining shares and on April 12, 2016, we paid the holder an additional $750,000 to redeem the remaining shares. At March 31, 2016, the $750,000 associated with the redemption had been classified on the balance sheet as Mandatorily Redeemable Common Stock.
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 2019, and to continue to acquire NIBs, we will be heavily dependent on the cash flow projected from our current NIBs. If these cash flows are delayed, due to either delayed
maturities or delays in disbursements, we will need to complete securities and debt offerings or obtain alternative sources of financing. Absent additional financing, we will not have the necessary resources to execute our business plan.
At March 31, 2017, we owed $6,351,866, including accrued interest, for debt obligations. At March 31, 2017, we owed $5,214,753, 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 has a principal balance of $3,714,753 and is due on August 31, 2019, 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 has a principal balance of $1,500,000 and is also due on August 31, 2019, 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 12, 2018, there was $5,900,492 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.
• 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.
Consolidated Statements of Cash Flows for the Years Ended March 31, 2017 and 2016
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at March 31, 2017, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2016 consolidated financial statements, before the effects of the adjustments described in the Correction of an Immaterial Error paragraph of Note 1 to the consolidated financial statements, present fairly, in all material respects, the consolidated financial position of Sundance Strategies, Inc. at March 31, 2016, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to audit, review, or apply any procedures to the adjustments more fully described in the Correction of an Immaterial Error paragraph of Note 1 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments are appropriate and have been properly applied. Those adjustments were audited by other auditors.
NIBs are in the form of participating debt certificates (“PDC”), and although 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 (“Holders”) 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 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 March 31, 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.
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. 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.
Income Recognition, 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.
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. Potentially dilutive shares resulting from convertible debt agreements are evaluated using the if-converted method, and such amounts were not dilutive.
For the years ended March 31, 2017 and 2016, options to exercise 400,000 shares were excluded because they were anti-dilutive. In addition, 235,345 and 255,215 shares related to the potential conversion of the convertible debenture were excluded because they were anti-dilutive for the years ended March 31, 2017 and 2016, respectively.
Stock Based Compensation, The Company measures stock-based compensation expense related to employee stock-based awards based on the estimated fair value of the awards as determined on the date of grant and is recognized as expense over the remaining requisite service period. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock options issued as compensation. The Black-Scholes model requires the input of highly subjective and complex assumptions, including the estimated fair value of the Company’s common stock on the date of grant, the expected term of the stock option, and the expected volatility of the Company’s common stock over the period equal to the expected term of the grant. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Variable Interest Entities (“VIEs”), The owners of the Life Insurance Policies are variable interest entities (VIEs), for which the Company has a variable interest, but is not the primary beneficiary, as it does not have control over the significant activities affecting the economic performance of the owners. The Company’s maximum exposure to loss in the variable interest entities is limited to the investment in NIBs balance, which has a carrying value of $34,156,005 as of March 31, 2017. 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 beyond the Company’s initial investment. As further explained in Note 14, the Company has agreed, but is not contractually obligated, to pay for certain costs to maintain the structure of the underlying life insurance policies. The probable amount of these costs are $316,667 and is recorded as accrued expense as of March 31, 2017 (See Note 16 for updates to the estimated costs subsequent to year end).
Investment in Net $ - $ - $ 45,643,224 $ 45,643,224
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. The key unobservable inputs used to arrive at the fair value estimates of the Company’s Investment in NIBs at March 31, 2017 and 2016, included a market rate discount rate range of approximately 15% to 18%, with a weighted average rate approximating 16%. The interest rate range and weighted average rate was obtained from the Market Rate - Life Insurance Settlement Association Statistics (weighted 50%), Build-up Method (weighted 25%) and Historical Cost Method (weighted 25%). As explained in Note 1, 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. During the year ended March 31, 2017, certain maturities were realized sooner than originally projected. The aggregate face value of these maturities was $14,500,000. In addition, there was a reduction of ongoing fees required to support the underlying policies (See Note 14). These two factors contributed to an overall increase in the estimated cash flows expected from the NIBs, which increased the estimated fair value from $29,432,917 as of March 31, 2016 to $45,643,224 as of March 31, 2017.
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
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 Company does not believe the adoption of this guidance will have a material effect on the consolidated financial statements.
April 1, 2017. The Company does not believe the adoption of this guidance will 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 Company does not believe the adoption of this guidance will 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.
Cash and cash equivalents consists principally of currency on hand and demand deposits at commercial banks. The Company had $4,364 and $24,717 in cash and cash equivalents as of March 31, 2017, and 2016, 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 Del Mar ATA involved the purchase of certain life settlement assets consisting of the legal and net beneficial ownership interest in a portfolio of life insurance policies, or NIBs, among other assets that are consideration and collateral for certain cash advances and expense payments made by the Company. According to the Del Mar ATA, Del Mar, with the assistance of Europa, was obligated to convert the NIBs and other newly acquired NIBs into “Qualified NIBS.” As soon as Del Mar met its obligation to provide Qualified NIBs to the Company, any remaining NIBs and any other consideration and collateral would be returned or released to Del Mar. The original due date for the conversion was December 31, 2013, which date was subsequently extended several times. On April 30, 2015, the Company finalized an amendment to the Del Mar ATA and the related Europa Agreement to extend the deadline until August 31, 2015.
The remaining consideration and collateral under the Del Mar ATA, as of September 1, 2015, primarily consisted of approximately 72.2% of the NIBs associated with a portfolio of life settlement policies having a face value that originally totaled $94,000,000. The remaining 27.8% interest in the NIBs were held by other parties. During June 2015, one of the life settlement policies matured for $10,000,000 (the “Matured Policy”), lowering the remaining face value of such life settlement policies to $84,000,000. The premiums and expenses related to the maintenance of these life insurance policies are financed by a loan from a lender.
The balance in Investment in NIBs at March 31, 2017 and 2016, and related activity for the periods then ended were as follows:
As explained in Note 5, the Company transferred $3,368,380 from advance for investment in NIBs into investment in NIBs on September 30, 2015.
* The Life Expectancy (“LE”) input is the 70%/30% weighted average of two LEs available at the time of the original creation of the NIB portfolio. The Adjusted Life Expectancy is an unofficial calculation that simply reduces the original LE by the number of months since the last LE report. It should be noted that the insured’s health, medical conditions and other considerations may have changed since the LE report, so that the Adjusted LE is simply an estimate. These LEs were produced by third-party life expectancy companies and represent the actuarial mean of how long an individual is expected to live. The number is a calculation done with the LE provider’s proprietary statistical model that is typically based on individualized mortality curves for each life factoring in the insured’s gender, age, health and family history, medical conditions, and other considerations. In purchasing, financing or insuring life insurance policies or NIBs, we may use alternate life expectancy companies or may use weighted averages of two or more life expectancy companies, depending on the facts and circumstances of the case and requirements of the various counterparties. The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known with absolute certainty.
As of March 31, 2017, the policy Holders had paid $120,696,149 on policy premiums. The policy Holders are independent of the Company, and as separate entities there is a risk that such entities might not continue to pay the policy premiums and other expenses as has been done historically. The Company monitors the policy Holders’ ability to maintain the underlying policies, and in the event the policy Holders are unable to make the required payments, the Company would evaluate whether to directly maintain the underlying policies through the policy Holders or allow them to lapse. Senior loan agreements and MRI reinsurance are typically intended to cover these payments. As of March 31, 2017, none of the underlying policies have lapsed and the required payments remain current.
The table below describes the future estimated premium payments, other expenses and interest paid by external parties expected to be paid on the policies for the five years subsequent to March 31, 2017, and thereafter. Significant estimates are made as part of the calculation of the premium payments, other expenses and interest amounts identified in the table below. The following table only includes the percentage of the future estimated premium payments, other expenses and interest relating to the portfolio of which the Company only has partially owned NIBs. The following table does not include all of the estimation factors used by the Company in estimating expected net cash receipts for interest income calculation purposes, and is intended to only provide the estimated premium payments, other expenses and interest amounts related to the policies underlying the Company’s NIBs (totals do not include premiums, expenses and interest paid for prior years):
Our Investment in NIBs are classified as held-to-maturity investments and are included on the Company’s balance sheet. The NIBs have a contractual maturity date of 25 years from inception, which ranged from December 2011 to January 2013. The amortized cost, aggregate fair value and gross unrecognized holding gains and losses at March 31, 2017 and 2016, were as follows:
As of March 31, 2017 and 2016, the Company had borrowed $5,214,753 and $3,820,178, 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 $5,214,753 of notes payable owed as of March 31, 2017, $3,714,753 was due August 31, 2018. The remaining $1,500,000 was due November 30, 2018 (see Note 16 for subsequent due date extensions). In the event the Company completes a successful equity raise, principal and interest on notes payable totaling $5,549,379 are due in full at that time. The notes payable incur interest at 7.5%, and are collateralized by Investment in NIBs. During the years ended March 31, 2017 and 2016 the Company borrowed under these agreements an additional $1,544,576 and $2,520,178 respectively, and repaid $150,000 and $200,000, respectively. As of March 31, 2017, the Company had availability to borrow up to $1,515,247. The interest associated with these notes of $334,626 and $145,669 is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2017 and 2016, 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.
At March 31, 2014, the Company owed $1,455,904, including accrued interest, for notes payable. During the year ended March 31, 2015, the Company had accrued an additional $37,350 in interest. The note incurred interest at 4%, was collateralized by NIBs and was due in April 2015. During June 2015, the note payable and
related accrued interest were converted to equity through the issuance of 187,500 shares of common stock and the holder was granted the right to require the Company to redeem the common stock for $8.00 per share. On June 9, 2015, the holder exercised a portion of the redemption right relating to 93,750 shares and, as a result, the Company paid the holder $750,000 to redeem the shares. On March 25, 2016, the holder exercised the redemption right in relation to the remaining shares and on April 12, 2016, the Company paid the holder an additional $750,000 to redeem the remaining shares. At March 31, 2016, the $750,000 associated with the redemption had been recorded on the balance sheet as Mandatorily Redeemable Common Stock.
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.
Below is a summary of the stock option activity for the years ended March 31, 2017 and 2016 (including the 80,000 stock options granted to non-employees):
If all vested options as of March 31, 2017 were to be exercised, the Company could expect to receive $3,314,294.
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, which represented the entirety of the related issuance costs.
During March 2015, we agreed to pay $150,000 in cash, issue 1,130,000 shares of common stock and forgive a note receivable with an outstanding amount of $150,000 in exchange for relief of a $1,493,254 note payable and the receipt of NIBs. The net consideration given for the relief of the note payable and receipt of NIBs totaled $1,493,254 and $7,846,746, respectively, for a total of $9,340,000. (See Note 8). Of the 1,130,000 common shares to be issued, 187,500 shares were subject to a redemption right that requires the Company to buy back the shares for $8.00 per share at the option of the holder. The total common stock still subject to the redemption right at March 31, 2016, was recorded as Mandatorily Redeemable Common Stock on the consolidated balance sheet (see Note 8).
On June 9, 2015 the remaining 942,500 common shares were issued. In addition, as explained in Note 8, the 187,500 of redeemable common shares were issued and subsequently redeemed.
expenses are expected to be approximately $132,000, 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 March 31, 2017 totaled $508,071, and other accrued liabilities totaled $753,780. 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 2019. 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. In order to continue to purchase additional NIBs, the Company will likely need to raise additional capital.
managers of the entities against third party claims for unpaid expenses. Neither the purchase of these entities nor the Settlement Agreement resulted in any material change in the Company’s NIBs ownership interest. The Company was supportive of the Purchasers acquiring the entities that owned the portfolios of life insurance contracts underlying the Company’s NIBs and was willing to provide the indemnification because it believed this ownership change would result in a reduction of costs and expenses associated with ownership of the NIBs, which would increase their intrinsic value. The Company was made aware by the Purchasers that credit was presently no longer available to pay certain costs to maintain the structure of the underlying life insurance policies. The Company’s obligations to provide liquidity under the Settlement Agreement have now expired and the Company is not legally obligated for costs incurred by the entities underlying the NIBs. However, if credit does not become available to Purchasers from the underlying loans to pay the costs as explained above, whether it be by proceeds from a future maturity or other negotiations, the Company may provide such liquidity to protect its investment in the NIBs. The total historical unpaid costs incurred prior to the ownership transition and potential unpaid cost incurred after the ownership transition approximates $370,000 and $580,000, respectively, for an estimated total of $950,000. The Company believes the probable amount it will ultimately pay is approximately $316,667 which relates to unpaid costs incurred prior to the transition. Therefore, the Company accrued $316,667 during the year ended March 31, 2017 to account for this uncertainty, which is included within the annual General and Administrative Expenses on the Company’s Statement of Income. As of March 31, 2017, the Company anticipated that the accrued amount would be paid by August 31, 2017, and therefore this amount was recorded as accrued expense. See Note 16 for updates to the estimated costs subsequent to year end.
The provision for income taxes for the years ended March 31, 2017 and 2016 consists of the following:
The income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate of 34% to pretax income from continuing operations for the years ended March 31, 2017 and 2016 due to the following:
The tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2017 and 2016 were as follows:
The Company assesses the need for a valuation allowance against its deferred income tax assets at March 31, 2017. Factors considered in this assessment include recent and expected future earnings and the Company’s liquidity and equity positions. At March 31, 2016 management had recorded a 100% valuation allowance, totaling approximately $275,000, on the amount the Company’s deferred tax assets exceeding the Company’s deferred tax liabilities. As a result, no income tax expense (benefit) or deferred tax asset or liability was recorded on the financial statement. As of the year ended March 31, 2017, our deferred tax liabilities began to exceed the Company’s 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 released 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 revenue recognized for financial reporting purposes, but not for tax reporting purposes.
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.