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 through debt or equity financing. In addition, due to the foreclosure on the NIBs described below, the company has no current source of operating revenues. 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. 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. Between May 2018 and July 2018, the Holders entered into 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. 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 March 31, 2018 to zero. The Company held no NIBs during the fiscal year ended March 31, 2019.
Due to the foreclosure agreement previously mentioned, no interest income was recorded for the fiscal years ended March 31, 2019 and 2018.
General and administrative expenses totaled $1,094,917 and $1,569,224 during the years ended March 31, 2019, and 2018, respectively. A significant portion of these expenses were professional fees, payroll and travel expenses. Reduced operational needs from the year ended March 31, 2018 to March 31, 2019 resulted in decreases in each of the areas previously mentioned.
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 from the owners to the lenders in full satisfaction of the loan obligation. As a result of the foreclosure, the Company lost its position in the residual benefits of the policies and recognized a $1,936,311 impairment of related interest receivable during the year ended March 31, 2018. In addition, we also recognized a $22,950,126 impairment on the NIBs, which is recorded in Other Expenses during the year ended March 31, 2018. Management concluded that the foreclosure event represented the culmination of conditions that provided indications affecting the realization of the Company’s investment in NIBs assets during the fiscal year ended March 31, 2018. As a result, the Company recorded the impairment of the NIBs during the fiscal year ended March 31, 2018 and changed the classification of the Investment in NIBs from Held to Maturity to Available for Sale.
During the year ended March 31, 2018, the Company recorded a net loss before income taxes of $27,183,617. Due to material losses being recognized during the year ended March 31, 2018, 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, 2018 equal to $758,972.
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 March 31, 2019, we had $579 of cash, compared to $936,902 as of March 31, 2018. As of March 31, 2019, the Company had access to draw an additional $5,507,992 on the notes payable, related party and $3,000,000 on the Convertible Debenture Agreement. Our monthly expenses are approximately $60,000, 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 March 31, 2019 totaled $306,871, and other accrued liabilities totaled $240,163. 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 December 2020.
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.
We have audited the accompanying consolidated balance sheets of Sundance Strategies, Inc. (“the Company”) as of March 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended March 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits 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 audits 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 audits provide a reasonable basis for our opinion.
At March 31, 2019, the Company had fully impaired the Investment in NIBs, and the value of those assets were zero.
Basic and Diluted Net Loss Per Common Share, Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the periods presented using the treasury stock method. Diluted net loss per common share is computed by including common shares that may be issued subject to existing rights with dilutive potential, when applicable. Potential dilutive common stock equivalents are primarily comprised of potential dilutive shares resulting from convertible debt agreements. Potentially dilutive shares resulting from convertible debt agreements are evaluated using the if-converted method.
As of March 31, 2019, no stock options were outstanding. As of March 31, 2018, 2,106,875 stock options were outstanding but were excluded because their effect would have been antidilutive.
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.
● Level 1: Quoted prices in active markets for identical assets and liabilities.
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.
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, 2019 and 2018, 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.
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, 2019 and 2018.
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 is effective for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year. The adoption of this standard did not have an impact 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.
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 did not 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.
On July 11, 2018, the Company issued 800,000 common shares in return for obtaining the remaining 27.8% ownership of certain NIBs. As stated in Note 1, the transaction resulted in the recording of an impairment expense of $17,840, 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).
As of March 31, 2019, the Company owes $392,500 (March 31, 2018 - $0), exclusive of accrued interest, under the note payable and line of credit agreement with the Chairman of the Board of Directors and a stockholder. The agreement allows for borrowings of up to $4,600,000. On February 8, 2019, the note and the line of credit was extended from August 31, 2019 to November 30, 2020, and subsequent to March 31, 2019, was extended again to August 31, 2021 (see Note 11 for detail on the due date extension). The note payable incurs interest at 7.5% per annum. During the year ended March 31, 2019 the Company borrowed $392,500 of principal under this agreement and made no repayments. As of March 31, 2019, accrued interest on this agreement totaled $16,596. In the event the Company completes a successful equity raise, all principal and interest on this note are due in full at that time
As of March 31, 2019, the Company owes $829,508 (March 31, 2018 - $829,508), exclusive of accrued interest, under the note payable and lines of credit agreement with Radiant Life, LLC, an entity partially owned by the Chairman of the Board of Directors. The agreement allows for borrowings of up to $2,130,000. On December 19, 2019, the note and the line of credit was extended from November 30, 2020 to August 31, 2021 (see Note 11 for detail on the due date extensions). The note payable incurs interest at 7.5% per annum. During the year ended March 31, 2019 the Company neither borrowed nor repaid any principal under this agreement. As of March 31, 2019, accrued interest on this agreement totaled $80,350. In the event the Company completes a successful equity raise, all principal and interest on this note are due in full at that time
The interest associated with the Notes Payable, Related Party of $113,981 and $20,427 is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2019 and March 31, 2018, respectively. There are no covenants associated with any of these three agreements.
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. Subsequent to March 31, 2019, the Company agreed to amend the 8% Convertible Debenture Agreement and extended the due date and conversion rights to December 1, 2020 (see Note 11 for detail on the due date extension). As of March 31, 2019 and 2018, the Company owed $0 under the agreement, excluding accrued interest. The associated interest of $124,225 at March 31, 2019 ($124,225 at March 31, 2018) is recorded on the balance sheet as an Accrued Expense obligation.
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, 2019, the Company had $579 of cash assets, compared to $936,902 as of March 31, 2018. As of March 31, 2019, the Company had access to draw an additional $5,507,992 on the notes payable, related party (see Note 6) and $3,000,000 on the Convertible Debenture Agreement (See Note 7). For the year ended March 31, 2019, the Company’s average monthly operating expenses were approximately $92,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and legal and accounting expenses. The Company anticipates the average monthly expenses of $92,000 to decrease by approximately $32,000 over the next 12 months, resulting in ongoing, average monthly expenses of approximately $60,000. In addition to the monthly operating expenses, the Company continues to pursue other debt and equity financing opportunities, and as a result, financing expenses of $849,806 and $470,775 were incurred during the years ended March 31, 2019, and 2018, respectively. As management continues to explore additional financing alternatives, beginning April 1, 2019 the Company is expected to spend an additional $150,000 to $450,000. Outstanding Accounts Payable as of March 31, 2019 totaled $306,871. 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 December 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. As mentioned above, 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 operating revenues. In order to purchase NIBs, the Company will need to raise additional capital or secure alternative sources of debt financing.
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 during the year ended March 31, 2018. As mentioned in Note 1, an additional impairment of $17,840 was recognized during July 2018, in connection with the Company’s acquisition of the remaining 27.8% ownership of certain NIBs, which were also foreclosed upon.
As mentioned in Note 5, 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 $0.05 per share. The Company has cancelled the acquired shares, which decreased the outstanding common shares on the books of the Company. The total number of common shares canceled/retired was 8,000,000. The total liability related to the repurchase of these shares is $400,000, with repayment contingent on a major financing event.
The provision for income taxes for the years ended March 31, 2019 and 2018 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, 2019 and 2018 due to the following:
The Company had no liabilities for unrecognized tax benefits and the Company has recorded no additional interest or penalties.
On January 8, 2020, the Company agreed to amend the agreement to extend the due date on the note payable and line of credit agreement with the Chairman of the Board of Directors and a stockholder. The due date was extended from November 30, 2020 to August 31, 2021 or at the immediate time when alternative financing or other proceeds are received. In addition, the Company agreed to provide the Chairman with warrants for 500,000 shares of common stock at an exercise price of $0.05 per share. The warrants have a 5-year exercise window from the date of the extension agreement.