Pursuant to a lease agreement, we currently occupy a suite of offices located at 4626 North 300 West, Suite 365, Provo, Utah 84604. The total lease expense is approximately $2,600 per month, payable in cash; and we also lease approximately 6,000 square feet of office space located at 20 Pacifica, Suite 1010, Irvine, California 92618, for $12,000, on a month to month basis, $6,000 of which is billed to Del Mar and Europa and is added to the Cash Payment and expenses due under the Del Mar ATA. See Part I, Item 1. The Provo, Utah, facilities are presently our principal executive offices and our current place of business; and the Irvine facilities are located near the Servicer of the Policies underlying our NIBs. The Servicer of the current portfolio of policies underlying the Company’s NIBs is based in Irvine, California, and Lisa Fuller, Esq., our in-house general counsel, resides in Irvine, California.
Not applicable until the end of our 10-Q Quarterly Report for the quarter ended June 30, 2015. See the heading “Effect of Existing or Probable Governmental Regulations on the Business.”
We use an estimation methodology to project cash flows and returns as presented. The estimation model required many assumptions, including, but not limited to the following: (i) an assumption that the distinct number of lives in our portfolio would exhibit similar experience to a statistically diverse portfolio based upon which the mortality tables have been created; (ii) an assumption that the life expectancies (the “LE” or “LE’s”) provided by LE providers represent the actuarial mean of the life expectancies of the insureds in our portfolio, (iii) the weighted average of the LEs provided by the LE providers represents an appropriate method for adjusting for discrepancies in the LE’s; (iv) life expectancy tables and projections are accurate; (v) the minimum premiums calculated based on the in-force illustrations provided by life insurance carriers are accurate and will not change over the course of the lifetime of our portfolio; and the Senior Lender fees, MRI fees, and insurance, servicing and custodial fees do not change materially over time. While this method of modeling cash flows is helpful in providing a theoretical expectation of potential returns that might be produced from our NIBs portfolio, actual cash flows and returns inevitably will be different (possibly materially) due to the fact that predicting the exact date of death of any individual is virtually impossible. The provision of a theoretical cash flow model is by no means any guarantee of any results. The actual performance of these NIB interests (as well as our future expectations as to what such performance might be) may differ substantially from our expectations, especially if any of the assumptions change or differ from our initial assumptions. These portfolios currently contain only 106 fractionalized policies on 60 individual insureds, though insurance rating agencies have stated that at least 1,000 lives are required to achieve actuarial stability. Many risk factors beyond these assumptions may result in our expectations being incorrect, as outlined under Part I, Item 1A. Risk Factors, above; therefore, no assurance can be given that these estimated results will occur.
Net cash provided by financing activities totaled $1,560,000 and $11,161,875 for the fiscal years ended March 31, 2015, and 2014, respectively. The decrease in cash from financing activities was also the result of the Del Mar delay, as funds were not needed to purchase the Del Mar NIBs.
Under the current business plan, we purchase NIBs only when they fit our model and our cash flows are sufficient to fund those purchases (with exception of the Del Mar ATA wherein we committed to purchase a certain number of Qualified NIBs as Del Mar made them available -- (See “Business Developments Subsequent to Year Ended March 31, 2015” for extension of the Del Mar ATA”). We expect to finance our NIBs purchases, as well as our operating working capital requirements, with proceeds from planned public and/or private offerings of our securities and debt financing. There can be no assurance that we will be successful in the anticipated equity and debt offerings or that we will be successful in raising additional capital in the future on terms acceptable to us, or at all.
At March 31, 2014, we owed $1,455,904, including accrued interest, for notes payable. During the year ended March 31, 2015, we had accrued an additional $37,350 in interest. On June 9, 2015, we converted the note payable and accrued interest to equity through the issuance of the 187,500 shares of common stock containing the redemption feature (as explained in Liquidity and Capital Resources, above). At March 31, 2015, we also held a note payable-related party of $1,500,000, excluding accrued interest. We may borrow money in the future to finance our operations. Any such borrowing will increase the risk of loss to the debt holder in the event we are unsuccessful in repaying such loans.
The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable.
Consolidated Statements of Operations for the Years Ended March 31, 2015 and 2014
Consolidated Statement of Stockholders’ Equity for the Years Ended March 31, 2015 and 2014
We have audited the accompanying consolidated balance sheets of Sundance Strategies, Inc. and subsidiary (the “Company”) as of March 31, 2015 and 2014 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements
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.
We evaluate the carrying value of our investment in NIBs for impairment on a regular basis and, if necessary, adjust our total basis in the NIBs using new or updated information that affects our assumptions. We recognize impairment on a NIB contract if the expected discounted cash flows are less than the carrying amount of the investment, plus anticipated undiscounted future premiums and direct external costs, if any. We have not recognized any impairment on our investment in NIBs from January 31, 2013 (inception), to the periods ended March 31, 2015.
In estimating these cash flows for purposes of interest income and impairment calculations, there are a number of assumptions that are subject to uncertainties and contingencies. These include 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 those estimates.
Fair Value, The Company defines fair value as the price that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Accounting standards establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
In April, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). This update requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. Under current standards, debt issuance costs are generally recorded as an asset and amortization of these deferred financing costs is recorded in interest expense. Under the new standard, debt issuance costs will continue to be amortized over the life of the debt instrument and amortization will continue to be recorded in interest expense. ASU 2015-03 is effective for the Company on January 1, 2016, and will be applied on a retrospective basis. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.
The Company has reviewed all other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.
As of March 31, 2015 and 2014, investments in NIBs were as follows:
During March 2015, the Company agreed to pay cash, issue common stock and forgive a note receivable in exchange for relief of a note payable (which relief occurred subsequent to March 31, 2015-see Note 16) and the receipts of NIBs. The net consideration given for the NIBs totaled $7,846,746 (see Notes 11 and 14). In January 2014, the Company acquired NIBs for $5,436,000 (see Note 6). The estimated fair value of the Company’s investment in NIBs approximated carrying value at March 31, 2015, with fair value calculated using level 3 inputs.
The table below describes the underlying life insurance policies relating to our investment in NIBs at March 31, 2015:
The table below describes the future estimated premiums payments, other expenses and interest paid by external parties expected to be paid on the policies for the five years subsequent to March 31, 2015. 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 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):
On June 7, 2013, the Company entered into an Asset Transfer Agreement (the “Del Mar ATA”) with Del Mar Financial, S.a.r.l. (“Del Mar”). The Del Mar ATA involved the purchase of certain life settlement assets consisting of 100% of the legal and net beneficial ownership interest in a portfolio of life insurance policies (the “NIBs”), among other assets that are consideration and collateral for certain cash advances and expense payments made by the Company. The original end result of the Del Mar ATA and the advance was not to purchase the NIBs provided as collateral, but instead to provide sufficient capital to Del Mar for the conversion of a portion of the NIBs and other potential NIBs into “Qualified NIBs.” The original due date for the conversion was December 31, 2013, which date has subsequently been extended several times, with the most recent to August 31, 2015. The conversion can be accepted by the Company upon receipt of a combined face amount of $400,000,000 of “Qualified NIBs”; meaning that the NIBs would have premium financing secured for up to five years; that any grouping of NIBs would have not less than 10 policies; that the average age of the insureds under the life insurance policies would be approximately 81 years; and that the NIBs would have mortality re-insurance coverage. All remaining NIBs that are not converted to “Qualified NIBs” and all other assets conveyed to the Company as collateral to assure delivery of the Qualified NIBs are to be re-conveyed to Del Mar upon receipt of combined Qualified NIBs having a face amount equal to $400,000,000.
At March 31, 2015, the Company held collateral against the cash advances and expense payments made by the Company to Del Mar. The collateral includes NIBs associated with life settlement policies with a face value that totaled $94,000,000 at March 31, 2015. The premiums and expenses related to the maintenance of these life insurance policies are financed from a loan from a senior lender. The table below describes the underlying life insurance policies relating to these life settlement policies held as collateral by the Company at March 31, 2015:
The table below describes the future estimated premiums payments, other expenses and interest expected to be paid on the policies held by the Company as collateral for the five years and thereafter subsequent to March 31, 2015.
As part of the Del Mar ATA, the Company entered into a Structuring and Consulting Agreement with Europa Settlement Advisors Ltd. (respectively, the “Europa Agreement” and “Europa”). The Company is required to pay a structuring fee of 1% of the face amount of the life insurance policies underlying all NIBs introduced by Europa and acquired by the Company, payable as follows: 50% of the fee on the delivery of the NIBs; and the remaining 50% being payable on the conversion of the NIBs to Qualified NIBs as defined in the Del Mar ATA. The total restructuring fee will be up to $4,000,000. In the event that any cash consideration by the Company under the Del Mar ATA exceeds the defined $8,000,000 cash threshold, the amount payable under the Europa Agreement will be reduced on a dollar for dollar basis for any such overage. The total purchase price will not exceed $24,000,000 under the Del Mar ATA, which is comprised of $12,000,000 in cash consideration and $12,000,000 in promissory notes.
On December 9, 2013, the Company made a loan totaling $211,000 in the form of a note receivable to Majestic Ventures S.a.r.l. The note bears an 8% interest rate, compounding annually, with a maturity date of December 18, 2016. Payment of principal and interest are due in full on maturity date. At March 31, 2015, Majestic had not paid any of the original principal and $23,174 in accrued interest income. The Company has a secondary security interest in certain assets of Majestic, which are participating life settlements.
On December 4, 2014, the Company made a loan totaling $150,000 in the form of a note receivable to an entity. On March 2, 2015, the face value of the note receivable was credited toward the purchase price of NIBs acquired from this entity.
On May 13, 2014, the Company was served with a summons and complaint filed in the Third Judicial District Court in Salt Lake County, State of Utah, where an unrelated party is seeking to void the replacement of a stock certificate alleged to be owned by the plaintiff and acquired for value or damages of $74,255. As of March 31, 2015, a settlement of this action has been negotiated and is in the process of being finalized. The ultimate resolution of this matter is not expected to have a significant impact on the operating results or financial position of the Company, and therefore management has concluded that no accrual is necessary as of March 31, 2015.
We also entered into a lease agreement on November 2013 to lease 6,000 square feet of office space on a month-to-month basis in Irvine, California. The total lease expense is approximately $12,000 per month, payable in cash, 50% of which is invoiced to Del Mar Financial and Europa, which is subsequently applied as Advances on Investments in NIBs.
Rent expense for the year ended March 31, 2015, was $91,529.
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 period ended March 31, 2015, and 2014 due to the following:
The Company has no tax positions at March 31, 2015 and 2014, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.
The tax years 2010 through 2015 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.
As of March 31, 2015, the Company has borrowed $1,500,000 from an entity which is a stockholder in the Company. Prior to November 20, 2014, the various outstanding notes payable totaling $1,110,000 did not accrue interest and were payable on demand. On November 20, 2014, the Company consolidated the various obligations into a single master loan agreement which brought the Related Party-Note Payable balance to $1,362,000, which included fees and accrued interest. On February 20, 2015, the agreement was consolidated again with the acceptance of an additional $138,000 in cash, bringing the Related Party-Note Payable balance to $1,500,000, excluding accrued but unpaid interest. The new note incurs interest at 7.5 percent, requires origination fees, has a due date of September 30, 2016 or at the immediate time when the anticipated raise in equity funds is successful, and is collateralized by Advance for Investment in NIBs. During the year ended March 31, 2015, the Company recorded approximately $180,000 of origination fees and other related expenses associated with the notes, which are included in interest expense on the statement of operations.
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 incurs interest at 4%, is collateralized by NIBs and was due April 2015. Subsequent to March 31, 2015, the note payable and related accrued interest was converted to temporary equity through the issuance of 187,500 shares of common stock with a redemption feature (see Notes 5, 14 and 16).
On April 1, 2013, the Company granted a 5,000 share stock option to a former director, Jini Suttner. Ms. Suttner was a founder and a director of ANEW LIFE and was designated as a director of Sundance Strategies on the closing of the ANEW LIFE Merger on March 29, 2013, but resigned on April 1, 2013. The stock option was granted
Of the 1,700,000 stock options, 1,500,000 stock options vest in several tranches, wherein 937,500 vested on the grant date, and the remaining 562,500 stock options vest in equal tranches of 187,500 stock options on the grant date anniversary for the following three years. The Company valued the 1,500,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $1.0294 market price, $0.77 exercise price, 3.5 years expected life, 68% volatility, 0.51% risk free rate.
On October 11, 2013, the Company issued 400,000 stock options to an employee in conjunction with its planned adoption of a stock option or similar plan to be adopted in the future for the benefit of employees, officers and directors The stock options have an exercise price of $5.00 per share. The options have a contractual term of five years.
Under the current business plan, the Company purchases life insurance policies and residual interests in or financial products tied to life insurance policies when they fit its model and its cash flows are sufficient to fund those purchases (with exception of the Del Mar ATA wherein the Company committed to purchase a certain number
of Qualified NIBs as Del Mar made them available (see Note 16 below for a description of events subsequent to year end relating to the Del Mar ATA). The Company expects to finance NIB purchases, as well as its operating working capital requirements, with proceeds from planned public and/or private offerings of its securities and debt financing. There can be no assurance that the Company will be successful in the anticipated equity and debt offerings or that it will be successful in raising additional capital in the future on terms acceptable to the Company, or at all.
The 70,000 warrants issued in connection with the Company’s private placement that are described in Note 13 expired on May 31, 2015.