When used in this Annual Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Annual Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ
We are currently focused on the business of purchasing residual economic interests in a portfolio of life settlements. A life settlement is the sale of an existing life insurance policy to a third party for more than the policy’s cash surrender value, but less than the face value of the policy benefit. After the sale, the new policy holder will pay the premiums due on the policy until maturity and then collect the settlement proceeds at maturity.
We currently do not purchase or hold life settlement or life insurance policies but, rather, hold a contractual right to receive the net insurance benefits, or NIBs, from a portfolio of life insurance policies held by a third party. These NIBs represent an indirect, residual ownership interest in a portfolio of individual life insurance policies and they allow us to receive a portion of the settlement proceeds from such policies, after expenses related to the acquisition, financing, insuring and servicing of the policies underlying our NIBs have been paid.
We are not responsible for maintaining premiums or other expenses related to maintaining the underlying life settlement or life insurance policies. Ownership of the underlying life settlement or life insurance policies, and the related obligation to maintain such policies, remains with the entity that holds such policies. However, in the event of default of the owner, the Company may choose to expend funds on premiums, interest and servicing costs to protect its interest in NIBs, though the Company has no legal responsibility nor adequate funds for these payments.
Our long term plan of operation is to continue the acquisition of NIBs. This is not a market sector without competition and, at present, we are a minor competitor. We will need substantial additional funds to effectively compete in this industry and no assurance can be given that we will be able to adequately fund our current and intended operations, whether through revenues generated from our current interest in our NIBs or through debt or equity financing. 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. These payments are currently being made through an unrelated senior lending facility. The entities that own the policies currently
maintain a total of 13 separate loan agreements with the senior lending facility, all with separate expiration dates. As of March 31, 2017, 7 of these loans had expiration dates that have lapsed, with the remaining 6 loans having expiration dates ranging from June 2017 to January 2018. 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. During December 2017, these new loans were extended through April 15, 2018 (See Footnote 16 in Notes to the Consolidated Financial Statements for more information regarding these new loans and extensions). Currently, the Holders are engaged in negotiating revised loan expiration dates and refinancing agreements, as well as exploring relationships with additional potential senior lenders.
As of March 31, 2017, we estimated proceeds of approximately $117.7 million on the NIBs we owned as of March 31, 2017, and acquired from PCH Financial S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg (“PCH”), Del Mar Financial S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg (“Del Mar”), and HFII Assets Solutions, LLC, a Delaware limited liability company (“HFII”). This amount is based on the estimated proceeds from polices of $392.5 million in face value, which includes estimated return of premiums; less the senior loan debt and MRI repayments outstanding of approximately $122.3 million, expected premium payments of $94.3 million over the life expectancies of the insured persons in these portfolios and estimated expenses and interest of approximately $58.2 million over the term of the senior loans.
We use an estimation methodology to project cash flows and returns as presented. The estimation model requires 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 from which mortality tables have been created; (ii) an assumption that the life expectancies (the “LE” or “LEs”) 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 LEs; (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 (vi) the Holders’ Lender fees, MRI fees, and insurance, servicing and custodial fees will 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. As of March 31, 2017, these portfolios contain only 126 fractionalized policies on 68 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; therefore, no assurance can be given that these estimated results will occur.
Interest income on investment in NIBs totaled $5,751,689 and $3,909,171 for the years ended March 31, 2017, and 2016, respectively. The increase is primarily due to the additional interest income generated by the additional NIBs we acquired in September of 2015. In addition, we learned of three maturities within one portfolio of policies, totaling $14.5 million in face value, that occurred between February 2017 and March 2017, all of which were earlier than was forecasted based on the LE reports. We also learned of another earlier than expected maturity in a second portfolio with a face value of $10 million. We predict that these early maturities, coupled with the reduced management costs related to the structures and favorable changes in the senior debt balances and related loan-to-value ratios, will have a positive effect on the future cash flows we expect to receive from these portfolios. As a result of these factors, a recalculation was made to the financial models used to calculate accretable income to reflect the resulting increased and accelerated cash flows. The resulting increase on the Interest Income on Investment in NIBs for the year ended March 31, 2017 was $393,920 over the accretable income that would have been recognized under the prior models during the same period. This increase had no significant effect on the Company’s earnings per share.
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. As of March 31, 2016 management had placed a 100% valuation allowance, totaling approximately $275,000, on the amount the Company’s deferred tax assets exceeding our deferred tax liabilities. As a result, no income tax expense (benefit) or deferred tax asset or liability was recorded on the financial statement. During the year ended March 31, 2017, the Company’s deferred tax liabilities began to exceed 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 reversed 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 interest income recognized for financial reporting purposes, but not for tax reporting purposes.
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, 2017, we had $4,364 of cash, compared to $24,717 as of March 31, 2016. As of March 31, 2018, the Company had access to draw an additional $5,900,492 on the notes payable, related party and $3,000,000 on the Convertible Debenture Agreement. Our monthly expenses are approximately $132,000, 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, 2017 totaled $508,071, and other accrued liabilities totaled $753,780. 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 June 2018. While we believe we have sufficient liquidity and capital resources to fund our projected operating requirements through April 2019.
During the year ended March 31, 2017, we paid $145,669 in accrued interest on the Note Payable, Related Party agreements, and accrued an additional $390,625 of interest payable on the Note Payable, Related Party agreements and the Convertible Debenture. As further explained in Footnote 14 of our audited consolidated financial statements that accompany this Annual Report, the Company has agreed, but is 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 determined that 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 these estimated costs subsequent to year end).
The following table sets forth payments due by period for fixed contractual obligations as of March 31, 2017:
As defined by ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values.
Consolidated Statements of Income for the Years Ended March 31, 2017 and 2016
Consolidated Statements of Stockholders’ Equity for the Years Ended March 31, 2017 and 2016
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 income, stockholders’ equity, 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 also have audited adjustments to the March 31, 2016 consolidated financial statements more fully described in the Correction of an Immaterial Error paragraph of Note 1 to the consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the March 31, 2016 consolidated financial statements of the Company other than with respect to these adjustments and, accordingly, we do not express an opinion or any other form of assurance on the March 31, 2016 consolidated financial statements taken as a whole.
We have audited, before the effects of the adjustments to the 2016 consolidated financial statements more fully described in the Correction of an Immaterial Error paragraph of Note 1 to the consolidated financial statements, the accompanying consolidated balance sheet of Sundance Strategies, Inc. (the “Company”) as of March 31, 2016 and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended (the 2016 consolidated financial statements before the effects of the adjustments discussed in the Correction of an Immaterial Error paragraph of Note 1 to the consolidated financial statements are not presented herein). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
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 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. 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 acquire such policies at a discount to their face value. The owners have 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 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 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.
The Company’s investment in NIBs is treated as a debt security, which is classified as a hold-to-maturity asset. 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 fair value of the beneficial interest are 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 have not recognized any impairment on our investment in NIBs from January 31, 2013 (inception), through the year ended March 31, 2017.
During the period ended December 31, 2016, the Company identified an error related to its Consolidated Statement of Cash Flows for both the cash used in Advance for Investment in NIBs, as well as proceeds from Refunds on Advance for Investment in NIBs. The Company determined that in the prior period reported, these amounts were improperly included in cash inflows and outflows as operating activities when they should have been classified as inflows and outflows from investing activities in the Consolidated Statement of Cash Flows. This error did not affect net income, assets, liabilities, stockholders’ equity, cash flows from financing activities or the net increase or decrease in cash and cash equivalents for the period. In accordance with the SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” we evaluated the materiality of the error from qualitative and quantitative perspectives and concluded that the error was immaterial to the current and prior periods mentioned above. Consequently, the Consolidated Statement of Cash Flows contained in these financial statements have been restated for the year ended March 31, 2016. The change resulted in a net decrease of $228,006 from cash flows used in operating activities and a corresponding increase to cash inflows from investing activities for the year ended March 31,
The reconciliation between the basic and diluted weighted-average number of common shares for the years ended March 31, 2017 and 2016, is summarized as follows:
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 has held between 72.2% and 100% in the NIBs relating to the underlying life insurance policies since September 1, 2015. The Company’s investment in NIBs is treated as a debt security, which is classified as a held-to-maturity asset.
The Company files United States Federal and State income tax returns. The income tax returns of the Company are subject to examination by taxing authorities for three to five years from the date they are filed. The Company has tax returns subject to examination for 2013-2017.
• Level 1: Quoted prices in active markets for identical assets and liabilities.
• 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.
In accordance with the disclosure requirements of ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s Investment in NIBs, which are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. In estimating the fair value of the Company’s Investment in NIBs, the rate of return that a market participant would be willing to pay for each portfolio is used to recalculate the discounted estimated future cash flows. This present value is used to represent the fair value of the Investment in NIBs using level 3 inputs. The carrying amounts in the table are recorded in the consolidated balance sheets at March 31, 2017 and 2016:
Investment in Net $ - $ - $ 29,432,917 $ 29,432,917
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, 2017 and 2016.
In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard was effective for the Company’s fiscal year beginning April 1, 2016, and interim periods within that fiscal year. The adoption of this standard did not have a material impact on the Company’s financial statements.
derive accreted yields and, therefore the Company will continue to follow the guidance in ASC 325-40. The adoption of this standard will not have an impact on the consolidated financial statements.
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. ASU 2016-09 is effective for the Company for its fiscal year beginning
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 is not expected to 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 September 30, 2015, the Company transferred to Investment in NIBs the remaining balance of advances and expense payments to Del Mar, totaling $3,368,380, which approximates fair value. This amount was residing in advance for investment in NIBs before being transferred to investment in NIBs (see Note 6).
The bulk of the $10,000,000 proceeds paid in connection with the Matured Policy were used to repay loans secured by such Matured Policy. However, 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 that 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. The $854,920 was applied to reduce Advance for Investment in NIBs.
The table below describes the underlying life insurance policies relating to our investment in NIBs at March 31, 2017, with an adjustment made to reduce the Life Expectancies by the number of months since the last Life Expectancy report:
The original face value of the underlying life insurance policies was $412,820,622. This value takes into account the approximately 72.2% of the NIBs associated with a portfolio of life settlement policies having a face value that originally totaled $94,000,000 (see Note 5). One policy matured during March 2014, totaling $8,000,000. A second policy with a face value of $10,000,000 matured during November 2016. Between February and March 2017, two additional maturities occurred within one portfolio of policies, totaling $14,500,000 million in face value, both of which were earlier than was forecasted based on the LE reports. The remaining $373,343,701 represents the total insurance settlement on the life insurance policies as of March 31, 2017, including the estimated future increase for certain policies that have return of premium provisions.
The table below shows all maturities that have occurred from the Company’s inception through March 31, 2017:
The Company utilizes senior lender loan to value ratios to estimate potential proceeds from future maturity distributions. As repayment priority belongs to the Holders’ lender and MRI providers upon proceeds being received from the life insurance policies serving as collateral for the loan, upon the realization of a maturity, the Company does not immediately know the amount of cash that it will receive, if any, from that maturity. At March 31, 2017, maturity proceeds were first to be used to repay interest and principal owed under the loan (as long as the
outstanding loan amount exceeds 50% of the aggregate value of the life insurance policies securing the loan) including draws on the MRI, if applicable, next to pay the Holder’s servicing fees, then to repay any additional amounts owed to the Holders’ lender and MRI provider and finally to an account designated by the Holder. If it was determined that the outstanding loan amount is less than 50%, and all other obligations have been paid in full, the Company may be eligible to receive a distribution. From the realization of a maturity to the time a determination was made about the availability of cash for distribution to the Company typically took 2 to 3 months.
The Company anticipates that the approximately $40 million in early maturities will have a positive effect on the future cash flows it expects to receive from these portfolios. In addition, the Company received updated information from the policy owners during the year ended March 31, 2017, regarding reduced management fees relating to maintaining the underlying policies, and favorable changes in the senior debt balances and related loan-to-value ratios. As a result of these factors, a recalculation was made to the financial models used to calculate accretable income to reflect the resulting increased and accelerated cash flows. The resulting increase on the Interest Income on Investment in NIBs for the year ended March 31, 2017 was $393,920 over the accretable income that would have been recognized under the prior models during the same period. This increase had no significant effect on the Company’s earnings per share.
The projected premiums, expenses and interest were created using the expected remaining life expectancies on the policies and other key assumptions. The expenses and interest calculations were based on the interest rates on the loans to the Holders of the policies, current reinsurance interest rates, origination fees, servicing fees and other custodial fees expected during the life of the investment. The lender for the Holders of the policies provides the loans at a high rate of interest and loan payments are guaranteed by the MRI or reinsurance coverage. The policy Holders receive ongoing fees and a percentage of death benefits when a policy matures which we included in the estimated expenses. The Company receives cash flows from its investments in NIBs after all other loan balances, costs and expenses are paid.
During April 2016, the Company received $1,417,870 in cash proceeds associated with maturities and miscellaneous adjustments to other underlying policies. The cash proceeds reduced the carrying value of the Company’s Investment in NIBs.
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, 2017, the Company had $4,364 of cash assets, compared to $24,717 as of March 31, 2016. As of March 31, 2018, the Company had access to draw an additional $5,900,492 on the notes payable, related party (see Note 7) and $3,000,000 on the Convertible Debenture Agreement (See Note 9). The Company’s average monthly
As explained in Note 1, the Company is focused on the purchase of NIB’s 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 acquired such policies at a discount to their face value. The life insurance portfolios underlying our NIBs typically involve loans originated with 4-5 year terms. The Company assumes that the Holders will be able to refinance their loans at the end of the respective loan terms. However, the Holders’ Lender’s ability to offer replacement loans is governed by factors that are beyond the Company’s control or the control of the Holders. If the Holders are unable to refinance their loans with the Holders’ Lender, the Holders may not be able to continue to pay the premiums on the life insurance policies they hold and such life insurance policies may need to be liquidated, thereby potentially reducing the return on our NIBs. At March 31, 2017, the entities that own the policies maintain a total of 13 separate loan agreements with the senior lending facility, all with separate expiration dates. As of March 31, 2017, 7 of these loans had expiration dates that had lapsed, with the remaining 6 loans having maturity dates ranging from June 2017 to January 2018. During October 2017, the entities completed a refinancing of the loans that had matured and were about to mature. The agreements are with a new senior lending facility who previously provided MRI for the underlying policies. During December 2017, these new loans were extended through April 15, 2018, and do not require MRI coverage. Under the new senior lending facility the Company has not projected distributions from its investment in NIBs until the facilities are paid in full. The Holders are engaged in negotiating revised loan expiration dates and refinancing agreements, as well as exploring relationships with additional potential senior lenders (under which MRI coverage may not be required). If they are not successful, we may lose our interest in the affected NIBs.
On settlement, the Company receives the net insurance benefit after all borrowings, interest and expenses have been paid by the Holders out of the settlement proceeds. However, in the event of default of the owner, the Company may be required to expend funds on premiums, interest and servicing costs to protect its interest in NIBs, though the Company has 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, the Company would be required to evaluate its investment in NIBs for other-than-temporary impairment. In addition, see Note 6 relating to associated commitments and contingencies affiliated with life settlements or life insurance policies.
During July 2015 a group of persons located in the United States (the “Purchasers”) acquired the entities that owned all of the portfolios of life insurance policies underlying the Company’s NIBs. In connection with this purchase, the Purchasers and the respective owners of these portfolios entered into a settlement agreement releasing such owners and their managers from liability related to their ownership and management of the entities that owned the respective portfolios of life insurance contracts. The Company and Purchasers agreed to indemnify the prior owners of such portfolios against future claims in connection with the issuance of the NIBs or their ownership or management of the entities sold, based on actions that occurred prior to this sale to the Purchasers. The Company and Purchasers further agreed to maintain certain liquidity requirements of the entities underlying the NIBs for a period of 15 months following the acquisition by the Purchasers, which 15 month period expired in October 2016. If such liquidity was not provided, the Company and Purchasers were obligated to indemnify the prior owners and
As of March 31, 2017, the Company has U.S. federal net operating loss carryforwards of $8,917,501. 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.
The Company received $9,269,568 in cash proceeds associated with maturities and miscellaneous adjustments to other underlying policies. The cash proceeds reduced the carrying value of the Company’s Investment in NIBs. With these proceeds, the Company subsequently paid down principal and accrued interest on the Notes Payable, Related Party and the Convertible Debenture. Subsequent to March 31, 2017, the Company drew an additional $600,000 on the Notes Payable, Related Party, and repaid $4,785,245 in principal on those notes. In addition, the Company paid $539,643 toward accrued interest related to Notes Payable, Related Party. During the same period, the Company drew an additional $200,000 on the Convertible Debenture, and also repaid $900,000 in principal. In addition, the Company paid $10,000 toward accrued interest related to the Convertible Debenture. As of April 12, 2018, the outstanding principal balances of the Notes Payable, Related Party totaled $829,508 and the outstanding principal balance of the Convertible Debenture is $0.
On December 6, 2017, the note payable, related party agreement that allowed for borrowings of up to $3,600,000 at December 31, 2016, was amended to extend the due date from August 31, 2018 to August 31, 2019. On March 20, 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 August 31, 2019. 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.
As further explained in Note 14, during October 2017, the Holders completed a refinancing of the loans that had matured and were about to mature. The agreements are with a new senior lending facility who previously provided MRI for the underlying policies. During December 2017, these new loans were extended through April 15, 2018. Under the new senior lending facility the Company has not projected distributions from its investment in NIBs until the facilities are paid in full. The Holders are engaged in negotiating revised loan expiration dates and refinancing agreements, as well as exploring relationships with additional potential senior lenders.
During October 2017 the Company received notification from the Holders that the $316,667 in certain unpaid costs to maintain the structure of the life insurance policies, which the Company had accrued at March 31, 2017 (see Note 14), had been paid in full by the Holders. Subsequent to March 31, 2017, the Company has reversed the effects of the $316,667 accrued liability on its balance sheet.
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 the Company’s calendar 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 Company 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. This will be done 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.