The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 31, 2013
(1) ORGANIZATION AND BASIS OF PRESENTATION
The condensed consolidated unaudited interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The condensed consolidated financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Companys annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the March 31, 2013 audited consolidated financial statements and the accompanying notes thereto. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Companys consolidated condensed financial statements and accompanying notes. Actual results could differ materially from those estimates.
These condensed consolidated unaudited financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.
Sundance Strategies, Inc. (formerly known as Java Express, Inc.) was organized under the laws of the State of Nevada on December 14, 2001, for the purpose of selling coffee and other related items to the general public from retail coffee shop locations. These endeavors ceased in 2006, and 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 or we). The Company is a specialty financial services company which is engaged in the secondary market for life insurance known generally as life settlements. The Company purchases the net insurance benefit contracts (NIB) on life insurance policies between the sellers and purchasers, but does not take possession or control of the policies other than the policies held as collateral for the advances, of which the Company does take temporary possession until collateral is returned for qualified NIBs. The purchasers acquire the life insurance policies at a discount to their face value for investment purposes. The purchasers have available credit to pay premiums and expenses on the underlying policies until settlement. On settlement, the Company receives the NIB after all borrowings, interest, and expenses have been paid out of the settlement proceeds.
(2) NEW ACCOUNTING PRONOUNCEMENTS
The Company has reviewed 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.
(3) INVESTMENT IN NET INSURANCE BENEFITS
From time to time, we purchase interests in the NIB on life insurance policies to hold for investment purposes. ASC 325-30, Investments in Insurance Contracts, provides that a purchaser may elect to account for its investments in net insurance settlement contracts based on the initial investment at the purchase price plus all initial direct costs. Typically, continuing costs (e.g., policy premiums, statutory interest and direct external costs, if any) to keep the underlying insurance policy in force are capitalized within the carrying value. The Company is not responsible for maintaining premiums or other expenses related to maintaining the net insurance settlement contracts. Instead, the NIB is reduced by policy premium payments and expenses and the capitalized carrying value remains unchanged. We hold a 100% interest on the NIBs on the life insurance policies as of December 31, 2013. The potential proceeds the Company receives from this interest will be net of the policy premium payments, interest and other expenses incurred by the policy holders. We have elected to use the investment method and refer to the recorded amount as the carrying value of the investment in net insurance benefits.
9
The carrying value of the investment in NIB contracts totaled $6,299,000 as of December 31, 2013. The table below describes the Investment in Net Insurance Benefit Contracts and the underlying policies at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
| |
Policies With Remaining Life
Expectancy
(in years)
|
|
Number of Interests
in Life
Settlement Contracts
|
|
|
|
|
Face Value of
Underlying
Policies
|
|
0-1
|
|
|
0
|
|
|
|
|
$
|
-
|
|
|
1-2
|
|
|
0
|
|
|
|
|
|
-
|
|
|
2-3
|
|
|
0
|
|
|
|
|
|
-
|
|
|
3-4
|
|
|
1
|
|
|
|
|
|
10,000,000
|
|
|
4-5
|
|
|
3
|
|
|
|
|
|
6,000,000
|
|
|
Thereafter
|
|
|
18
|
|
|
|
|
|
113,423,734
|
|
|
Total of all policies
|
|
|
22
|
|
|
|
|
$
|
129,423,734
|
|
|
The face value of the underlying policies of $129,423,734 represents the total insurance settlement on the life insurance policies as of December 31, 2013, including the increase for certain policies that have return of premium provisions of $384,801. Effectively, as of December 31, 2013, the policy holders had paid and accrued $23,786,079 on policy premiums, interest, and other expenses on the insurance contracts. The policy holders are independent of the Company, and as separate entities, there is a risk that such entities might not continue to pay the policy premiums and other expenses as has been done historically. The Company monitors the policy holders ability to maintain the underlying policies, and in the event the policy holders are unable to make the required payments, the Company would evaluate whether to directly maintain the underlying policies or allow them to elapse. The policy holders currently have senior loan agreements and mortality protection insurance coverage (MPIC) reinsurance to cover these payments. As of December 31, 2013, none of the underlying policies have elapsed and the required payments remain current
.
We evaluate the carrying value of our investment in policies on a regular basis and adjust our total basis in the policies using new or updated information that affects our assumptions about remaining life expectancy, credit worthiness of the policy issuer, funds needed to maintain the asset until maturity, discount rates and potential return. We recognize impairment on the NIB contracts if the expected undiscounted cash flows are less than the carrying amount of the investment, plus anticipated undiscounted future premiums and direct external costs, if any. Impairment of the NIB contracts is generally caused by the insured significantly exceeding the estimate of the original life expectancy, which causes the original policy costs and projected future premiums to exceed the estimated maturity value. We have not recognized an impairment from January 31, 2013 (inception) to the period ended December 31, 2013. The risks that we might experience as a result of investing in policies are an unknown remaining life expectancy, a change in credit worthiness of the policy issuer, increased or changes to applicable regulation of the investment, shortage of funds needed to maintain the asset until maturity and changes in discount rates. The policy holder is currently financing the premiums. There are also risks associated with the policy holders ability to repay such financing and the occurrence of events of default under such financing.
Beyond the investment and initial direct costs incurred at the acquisition of the NIB contracts, which are capitalized and reported on the financial statements, the Company is not liable or directly responsible for the historical or future premiums or other expenses and interest because they are maintained by the policy holders or other external parties. Therefore, the investment balance on the Companys balance sheet does not increase when premiums or other expenses are paid. The table below describes the future estimated premiums payments, other expenses and interest paid by external parties expected to be paid on the policies through the estimated life settlement date as of December 31, 2013:
|
|
|
|
|
|
|
|
| |
Year
|
|
Premiums
|
|
Expenses + Interest
|
|
Total
|
Year 1
|
|
$
|
(4,153,400)
|
|
$
|
(2,138,350)
|
|
$
|
(6,291,750)
|
Year 2
|
|
|
(4,495,300)
|
|
|
(3,846,568)
|
|
|
(8,341,868)
|
Year 3
|
|
|
(4,283,548)
|
|
|
(3,102,811)
|
|
|
(7,386,359)
|
Year 4
|
|
|
(3,747,491)
|
|
|
(2,578,870)
|
|
|
(6,326,361)
|
Year 5
|
|
|
(4,134,611)
|
|
|
(2,757,670)
|
|
|
(6,892,281)
|
Thereafter
|
|
|
(18,439,016)
|
|
|
(11,093,150)
|
|
|
(29,532,166)
|
Total
|
|
$
|
(39,253,366)
|
|
$
|
(25,517,419)
|
|
$
|
(64,770,785)
|
10
The projected premiums, interest and expenses were created using the expected remaining life expectancies on the policies and other key assumptions. The expenses and interest calculations were based on current senior lender interest rates, current reinsurance interest rates, origination fees, servicing fees and other custodial fees expected during the life of the investment. The senior lender provides the loans at a high rate of interest and loan payments are guaranteed by the MPIC or reinsurance coverage. The policy holders receive ongoing fees and a small percentage of death benefits when a policy matures, which we included in the estimated expenses. The NIBs are received after all other costs and expenses are paid.
The majority of our Investment in Net Insurance Benefits was purchased as part of a transfer agreement that was purchased for $5,999,000, with a portion paid in cash of $3,000,000 and the remainder covered by a secured note in the amount of $2,999,000. The note is secured by 50% of the NIBs, which will be reduced as future payments are made on the note. The Company paid $300,000 to consultants for arranging the purchase of the NIBs. The Company has capitalized this cost as an initial direct external cost in acquiring the investment.
(4) ADVANCE FOR INVESTMENT IN NET INSURANCE BENEFITS
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 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 before the original due date of December 31, 2013, which has been extended to April 1, 2014, having a combined face amount of $400,000,000, with 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 protection insurance coverage (MPIC). 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 will be re-conveyed to Del Mar upon receipt of combined Qualified NIBs having a face amount equal to $400,000,000. In the event Del Mar is unable to provide the Qualified NIBs by the original date of December 31, 2013, which was extended to April 1, 2014, the Company will have the option of selling any of the assets acquired up to a liquidated damages settlement payment equal to 100% of any cash payments made under the Del Mar ATA. If the full balance of Qualified NIBs is provided by Del Mar, the Company will have paid $20,000,000 of consideration, $8,000,000 of which would be in cash and the remaining $12,000,000 in promissory notes. Promissory notes may be issued, pro rata, as Qualified NIBs are received. The promissory notes have a two year term from the effective date and bear an interest rate of 4.0% per annum. Total interest and principal amounts are due upon maturity. Del Mar is continuing its efforts in delivering the Qualified NIBs. The Company has received $90,000,000 in Qualified NIBs under the Del Mar ATA. See Footnote 13 below.
As part of the Del Mar ATA, the Company entered into a Structuring and Consulting Agreement with Europa Settlement Advisors Ltd. (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 and acquired, 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 October 29, 2013, the Company and Europa, with the agreement of Del Mar, amended the Europa Agreement and the Del Mar ATA to acknowledge that the total up front cash payment due from the Company under the Del Mar ATA and Europa Agreement shall not exceed $12,000,000; that the Company would receive a credit on a dollar for dollar basis of the cash payment and all costs and expenses paid under the Del Mar ATA over $8,000,000, against all fees due Europa under the Europa Agreement or the Del Mar ATA. In the event the Qualified NIBs delivered are less than $300,000,000 in face value under the DMF Agreement, Del Mar and Europa shall be jointly and severally liable for liquidated damages equal to the aggregate of the cash payment under the Del Mar ATA and all of the costs advanced, reduced by the pro rata percentage of the Qualified NIBs delivered and accepted by SSI, multiplied by two; and if at least $300,000,000 in Qualified NIBs are delivered and accepted, then the cash payment and all costs will not be doubled if they are paid within 90 days.
11
On October 29, 2013, the Company also entered into an Exclusivity Agreement with the consultant to Europa under the Europa Agreement under which the Company advanced $25,000 to such consultant for services related to the purchase of Qualified NIBs associated with the $400,000,000 in life insurance policies under the Del Mar ATA.
As of December 31, 2013, the Company had advanced $8,572,972 in payments and covered expenses under the Del Mar ATA and Europa Agreement, and no tranches of Qualified NIBs had been delivered to the Company.
(5) NOTE RECEIVABLE
On October 23, 2013, the Company made a loan totaling $650,000 in the form of a note receivable to Del Mar. The note bears a 3% interest rate, compounding annually, with a maturity date of November 30, 2013. Payment of principal and interest was due in full on maturity date. At December 31, 2013, Del Mar owed the full amount of the original principal and $3,692 in accrued interest income and is currently in default. The note is expected to be applied toward the cash portion of the Del Mar ATA or a reduction to the $12,000,000 note on closing of the Del Mar ATA if not paid in full.
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 December 31, 2013, Majestic has not paid any of the original principal and $1,018 in accrued interest income. The Company has a secondary security interest in certain assets of Majestic, which are participating life settlements.
(6) COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
Lease Agreements
Pursuant to a verbal lease agreement, we currently occupy approximately 275 square feet of office space located in Provo, Utah on a month-to-month basis. The total lease expense is approximately $1,000 per month, payable in cash.
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.
Rent expense for the nine months ended December 31, 2013, was $18,938.
Management of the Company has conducted a diligent search and concluded that there were no other commitments, contingencies, or legal matters pending at the balance sheet dates that have not been disclosed.
(7) RELATED PARTY PAYABLES
At December 31, 2013, the Company owed $3,441 to related parties (officers and directors) for expenses paid on behalf of the Company. The Company made no payments in the current period on these related party transactions as of December 31, 2013.
(8) NOTES PAYABLE
On March 11, 2013, the Company purchased an interest in NIBs totaling $5,999,000, with a portion paid in cash of $3,000,000 and the remainder covered by a secured note in the amount of $2,999,000. The note bears a compounding per annum interest rate of 4% with an original maturity date of December 31, 2013, which was amended to April 11, 2015. Payment of principal and interest are due in full on maturity date. The note is secured by 50% of the NIBs. The lender has first priority status on benefits paid and the percentage secured decreases as payments are made on the note. At December 31, 2013, the Company owed the full amount of the original principal and $98,379 in accrued interest.
On November 5, 2013, the Company entered into an Amended and Restated Promissory Note (the Amended Note) that amended the $2,999,999 secured note from the Companys initial purchase of NIBs. The Amended Note was payable to Del Mar rather than its initial payee and provided that notwithstanding anything therein or in any agreement referenced therein to the contrary, once accrued interest and $1,500,000 has been paid, the Amended Note shall be deemed to be paid in full, and all collateral shall be the sole and separate property of the Company, without exception. The
12
Company may set off any claim it has against holder in payment of the Amended Note, without qualification. Any net death benefit or bond proceeds paid to maker or the Company in connection with the assets purchased under its PCH NIBs Transfer Agreement dated March 11, 2013, shall be used to prepay the Amended Note; provided, however, no such death benefits or bond proceeds paid to the maker or the Company shall be accounted for in any manner that would cause the Company to not receive the full benefit of the reductions of the principal balance of the Amended Note.
The Company assessed the impact of the amendment of the $2,999,000 secured note and whether it should be accounted for as an extinguishment of debt and the issuance of new debt or a modification of the existing debt under ASC 470-50. The present value of the remaining payments on the new promissory note was substantially different than the present value of the original note. Therefore the Company reported the transaction as an extinguishment of debt. Since the exchange was accounted for as an extinguishment of debt, the decrease in fair value of the Companys liabilities was reported as a gain on extinguishment of debt on the consolidated statement of operations.
On November 5, 2013, the Amended Note was assigned by the Company to Del Mar; Del Mar assigned it to another party for $1,000,000 retaining a buyback option (the Buyback Option) for a period of 12 months from the date of the assignment of the Amended Note to buy back the Amended Note at a price equal to the $1,000,000, plus an additional 2.0% for each month (whole or partial) that had elapsed from the date of the assignment to the date that the Buyback Option is exercised (the Buyback Price). Further, notwithstanding the foregoing, the Buyback Price shall in no circumstances be less than an amount equal to $1,120,000 (the Minimum Buyback Price). The Company acquired this Buyback Option from Del Mar on the same date, with the provision that it would revert to Del Mar if it had delivered and the Company had accepted $400,000,000 of Qualified NIBs under the Del Mar ATA.
(9) STOCK OPTIONS
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 as compensation for her service, in conjunction with its planned adoption of a stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors that will outline the terms and conditions of the stock option which will not have any effect on the grant date, the exercise price or vesting that have been approved. The stock option has an exercise price of $0.77 per share, which vested immediately, and a contractual term of five years.
The Company valued these options using the Black-Scholes option pricing model applying the simplified method for the expected term under the following assumptions: $1.0294 market price, $0.77 exercise price, 2.5 years expected life, 73% expected volatility, 0.30% risk free rate.
On April 5, 2013, the Company issued 1,700,000 stock options to certain officers, employees, members of the Board of Directors of the Company and in conjunction with its planned adoption of a stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors, not, however, to have any effect on the grant date, the exercise price or vesting that have been approved. The stock options have an exercise price of $0.77 per share. All options have a contractual term of five years.
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, .51% risk free rate.
The remaining 200,000 stock options granted vest in several tranches, wherein 50,000 vested as of the grant date, and the remaining 150,000 stock options vesting in equal tranches on the grant date anniversary for the following three years. The Company valued the 200,000 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, .51% risk free rate.
On April 5, 2013, the Company also issued 80,000 stock options to non-employees which vest immediately. The Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC
13
505-50-30. The Company valued the 80,000 options using the Black-Scholes option pricing model under the following assumptions: $1.0294 market price, $0.77 exercise price, 5 years expected life, 79% volatility, .68% 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 near 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.
The 400,000 stock options vest in several tranches, wherein 10% of the options vesting six months after the date of issuance and the remaining options to vest monthly over the next 36 months subject to continuing employment with the Company. The Company valued the 400,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $5.00 market price, $5.00 exercise price, 3.40 years expected life, 68% volatility, .76% risk free rate.
The Company has recorded stock-based compensation expense of $735,999 related to these options for the nine months ended December 31, 2013.