We began purchasing NIBs during our fiscal year ended March 31, 2013.
Due to the foreclosure agreement previously mentioned, no interest income was recorded for the fiscal year ended March 31, 2018. Interest income on investment in NIBs totaled $5,751,689 for the fiscal year ended March 31, 2017.
General and administrative expenses totaled $1,569,224 and $2,489,938 during fiscal year ended March 31, 2018, and 2017, respectively. As further explained in Footnote 10 of our audited consolidated financial statements that accompany this Annual Report, the Company had agreed, but was not contractually obligated, to pay for certain costs to maintain the structure of the underlying life insurance policies. As of March 31, 2017, the Company had accrued expenses of $316,667 relating to the costs to maintain the structure of the life insurance policies. Additionally, during the year ended March 31, 2017 we incurred $182,572 in expenses relating to stock based compensation for stock options. The amortization of these options was completed during the year ended March 31, 2017, and therefore no expenses were recognized for stock based compensation during the year ended March 31, 2018. The remainder of the General & Administrative expenses for both years were professional fees, payroll and travel expenses.
For the year ended March 31, 2018, other income and expenses primarily consist of the $22,950,126 expense related to the impairment of the NIBs, which was a result of the Company losing its position in the residual benefits of the policies. During the years ended March 31, 2018, and 2017, interest expense accrued in the amount of $257,181 and $390,625, respectively. The decreased interest expense from 2017 to 2018 was primarily due to higher principal balances during the year ended March 31, 2017. During the year ended March 31, 2018, the Company spent $470,775 to pursue potential financing alternatives. Included in Other Expenses for the year ended March 31, 2017 is a $100,000 as a financing advance, which we subsequently determined we would not be pursuing the opportunity related to the advance.
During the fiscal year ended March 31, 2018, the Company recorded a net loss before income taxes of $27,183,617 and recorded an income tax benefit of $758,972.
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 fiscal 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 recognized the effects of the Tax Reform Act for the re-measurement of the net deferred tax liabilities during the year ended March 31, 2018.
For the year ended March 31, 2018, we recorded net cash provided by operating activities of $6,017,783, compared to $564,928 used in operating activities during the year ended March 31, 2017. The increase in operating cash inflows was primarily due to the receipt of approximately $9,269,568, which represents approved distribution funds from the policy owners as a return on our interest in NIBs prior to the foreclosure.
At March 31, 2018, we owed $974,160, including accrued interest, for debt obligations. We owed $829,508 in principal pursuant to notes payable and lines-of-credits from related parties and had fully paid off the principal owing on the 8% Convertible Debenture. As of March 31, 2018, one note payable and line-of-credit had a principal balance of $829,508 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 no principal balance, and the line of credit is currently extended through November 30, 2020. The convertible debenture agreement, which has no principal balance due as of March 31, 2018 is open through August 31, 2019. As of October 16, 2019, there was $5,137,992 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.
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.
● 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.
We have audited the accompanying consolidated balance sheet of Sundance Strategies, Inc. (“the Company”) as of March 31, 2018, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for year ended March 31, 2018 and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2018, and the results of its operations and its cash flows for the year ended March 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have audited the accompanying consolidated balance sheet of Sundance Strategies, Inc. (the “Company”) as of March 31, 2017 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
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 consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
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. The Owners had available credit to pay forecasted premiums and expenses on the underlying policies until April 15, 2018, the renewal date of the loans on the life insurance policies. 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 5) 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 VIEs.
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 varies by individual PDC, and is either 1% or 2% per annum of the par value of the PDCs held by the Company. 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 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, the Company’s investment in NIBs is treated as a debt security, which is classified as a held-to-maturity asset. We evaluate the carrying value of our investment in NIBs for impairment on a regular basis and adjust our total basis in the NIBs using new or updated information that affects our assumptions. We recognized impairment on a NIB contract when the fair value of the beneficial interest was 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.
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 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 held between 72.2% and 100% in the NIBs relating to the underlying life insurance policies from September 1, 2015 to March 31, 2018. The Company’s Investment in NIBs are classified as held-to-maturity investments at March 31, 2017 and as available-for-sale investments at March 31, 2018. At March 31, 2018, we have determined our investment in NIBs to have no fair value, as all remaining benefits had been received and the underlying policies have been subject to foreclosure (see Note 1).
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 years ended March 31, 2018 and 2017.
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. The Company adopted the new standard for its fiscal year beginning April 1, 2017. The Company does not believe the adoption of this guidance has a material effect 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 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 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.
Cash and cash equivalents consists principally of currency on hand and demand deposits at commercial banks. The Company had $936,902 and $4,364 in cash and cash equivalents as of March 31, 2018, and 2017, 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 balance in Investment in NIBs at March 31, 2018 and 2017, and related activity for the periods then ended were as follows:
As of March 31, 2018 and 2017, the Company had borrowed $829,508 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. The remaining $829,508 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 $849,935 are due in full at that time. The notes payable incur interest at 7.5% per annum. During the years ended March 31, 2018 and 2017 the Company borrowed under these agreements an additional $400,000 and $1,544,576 respectively, and repaid $4,785,245 and $150,000, respectively. As of March 31, 2018, the Company had availability to borrow up to $5,900,492. The interest associated with these notes of $20,427 and $334,626 is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2018 and 2017, respectively. The related parties include 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.
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 to August 31, 2017. On October 25, 2016, the Company agreed to amend the 8% Convertible Debenture Agreement that extended the due date and conversion rights to February 28, 2018, and then on March 15, 2017, the Company agreed again to amend the agreement to extend the due date and conversion rights to August 31, 2018. As of March 31, 2018 and 2017, the Company owed $0 and $700,000 under the agreement, excluding accrued interest. The associated interest of $124,225 and $102,487 at March 31, 2018 and 2017, respectively, is recorded on the balance sheet as an Accrued Expense obligation.
Below is a summary of the stock option activity for the years ended March 31, 2018 and 2017 (including the 80,000 stock options granted to non-employees):
If all vested options as of March 31, 2018 were to be exercised, the Company could expect to receive $3,314,294.
Since the Company’s inception on January 31, 2013, 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 March 31, 2018, the Company had $936,902 of cash assets, compared to $4,364 as of March 31, 2017. As of March 31, 2018, the Company had access to draw an additional $5,900,492 on the notes payable, related party (see Note 6) and $3,000,000 on the Convertible Debenture Agreement (See Note 7). The Company’s average monthly expenses are expected to be approximately $60,000, 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, 2018 totaled $162,594, and other accrued liabilities totaled $144,652. 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 September 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.
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.
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, 2018 and 2017 due to the following:
The tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2018 and 2017 were as follows:
As of March 31, 2018, the Company has U.S. federal net operating loss carryforwards of $23,221,741. These carry forwards are available to offset future taxable income, if any, and begin to expire in 2022. The utilization of the net operating loss carry forwards is dependent upon the tax laws in effect at the time the net operating loss carry forwards can be utilized and may be significantly limited based on ownership changes within the meaning of section 382 of the Internal Revenue Code.
Under FASB ASC 740-10-05-6, tax benefits are recognized only for the tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the company’s tax return that do not meet these recognition and measurement standards.
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.
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 April 10, 2019, Mr. Dickman loaned the Company $535,000 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 $535,000 of principal is recorded as Notes Payable, Related Party, and the Company has accrued $18,909 of unpaid interest.
On February 8, 2019 the note payable, related party agreement that allowed for borrowings of up to $4,600,000 was extended from August 31, 2019 to November 30, 2020. Subsequent to March 31, 2018, the note payable, related party agreement that allowed for borrowings of up to $2,130,000 was amended to extend the due date from November 30, 2018 to November 30, 2020. 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.