The Condensed Consolidated Financial Statements of the Company required
to be filed with this Quarterly Report were prepared by management and commence below, together with related notes. In the opinion
of management, the Condensed Consolidated Financial Statements fairly present the financial condition of the Company and include
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the Company’s Condensed
Consolidated Financial Statements. The results from operations for the three and nine month periods ended December 31, 2016, are
not necessarily indicative of the results that may be expected for the fiscal year ended March 31, 2017. The unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the March 31, 2016, Consolidated Financial Statements and
footnotes thereto included in the Company’s Annual Report on Form10-K for the fiscal year ended March 31, 2016, which was
filed with the SEC on June 14, 2016.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The
accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) ORGANIZATION AND BASIS OF PRESENTATION
The accompanying interim condensed consolidated
financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report
on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”)
and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial position,
results of operations and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”).
In the opinion of management, the unaudited
financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments,
necessary for a fair presentation of the Company’s consolidated financial position, results of operations, and cash flows.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included
in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016. Operating results for interim periods
are not necessarily indicative of operating results for an entire fiscal year.
The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent
amounts in the Company’s financial statements and the accompanying notes. Actual results could materially differ 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, 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” or “we”). The Company is engaged in the business of purchasing or acquiring
and selling 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.” 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 settlement. On settlement, the Company receives
the net insurance benefit after all borrowings, interest and expenses have been paid by the owners out of the settlement proceeds.
The owners of the Life Insurance Policies are variable interest entities (VIEs), for which the Company has a variable interest, but is not the primary beneficiary. The Company’s investment in NIBs (see Note 4) were issued by the owners (i.e. the VIEs). The Company’s maximum exposure
to loss in the variable interest entities is limited to the investment in NIBs balance. The Company does not have the power to
direct activities of the VIEs. Further, the Company does not have the contractual obligation to absorb losses of the VIE, beyond
the Company’s initial investment.
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.
NIBs are in the
form of participating debt certificates (“PDC”). According to the terms of the PDCs, the PDCs provide both variable
and fixed interest
return
to the Company from the owners of the policies
in
the form of accrued yield. The variable interest varies by individual PDC, and is calculated as 99% to 100% (depending on the PDC)
of the positive profits from the life insurance assets held by the owners of the policies. The fixed interest also
varies by individual PDC, and is either
1% or 2% per annum of the par value of the PDCs held by the Company. The par value of the PDCs held by the Company is approximately
$36.8 million. The NIBs agreements between the Company and the owners of the policies contain a provision that allows for the owners
to redeem the NIBs at any point, conditional upon paying to the Company the par value
of
the NIBs, as well as any unpaid accrued yield
relating
to fixed and variable interest
. The par value is
in excess of the Company’s initial investment. The Company holds between 72.2% and 100% in the NIBs relating to the underlying
life insurance policies as of December 31, 2016 and March 31, 2016. 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 accounts for its investment in NIBs
at the initial investment value increased for interest income and decreased for cash receipts received by the Company. At the time
of transfer or purchase of an investment in NIBs, we estimate the future expected cash flows and determine the effective interest
rate based on these estimated cash flows and our initial investment. Based on this effective interest rate, the Company calculates
accretable income, which is recorded as interest income on investment in NIBs in the statement of operations. 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 significantly adjusted, a revised effective yield is calculated prospectively based on
the current amortized cost of the investment, including accrued accretion. Our current projections are based off of various
assumptions including, but not limited to, the amount and timing of projected net cash receipts, expected maturity events, changes
in discount rates, life expectancy estimates and their relation to premiums, interest, and other costs incurred, among other items.
These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimates and
interest income. As a result, actual results could differ significantly from these projections. Therefore, subsequent to the purchase
and on a regular basis, these future estimated cash flows are evaluated for changes. If the determination is made that the future
estimated cash flows should be significantly adjusted, a revised effective yield is calculated prospectively based on the current
amortized cost of the investment, including accrued accretion. Any positive or adverse change in cash flows would result in a prospective increase or decrease in the effective
interest rate used to recognize interest income. Any significant adverse change in the cash flows may result in the recognition
of an “other-than-temporary impairment” (“OTTI”), and would be evaluated by the Company accordingly.
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), to the periods ended December 31, 2016.
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.
Correction of an Immaterial Error
During the
period
ended December 31, 2016, the Company
identified an error related to its Condensed 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 Condensed 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 nine months ended December 31, 2015.
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 period ending December 31, 2015.
(2)
NEW
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (“FASB”)
issued Accounting Standard Update (“ASU”) 2014-09, 2015-14 and 2016-8, 10,11 and 12 – Revenue from Contracts
with Customers, which provides a single, comprehensive revenue recognition model for all contracts with customers. The core principal
of the ASUs is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASUs also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
In July 2015, the FASB deferred the effective date of this standard. As a result, the standard and related amendments will be effective
for the Company for its fiscal year beginning April 1, 2018, including interim periods within that fiscal year. Early application
is permitted, but not before the original effective date of April 1, 2017. Entities are allowed to transition to the new standard
by either retrospective application or recognizing the cumulative effect. The ASUs are not applicable to securitized beneficial
interests that 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 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 is effective for fiscal years, and interim periods within those fiscal years, beginning after December
15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s
financial statements.
In December, 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes. The new standard is designed to simplify the presentation of deferred income
taxes, and requires all deferred tax liabilities and assets of the same tax jurisdiction or a tax filing group, as well as any
related valuation allowance, be offset and presented as a single noncurrent amount in a classified balance sheet. The amendments
are effective for fiscal years, and for interim periods within those fiscal years, beginning after March 31, 2016. The Company
does not believe the adoption of this guidance will have a material effect on the consolidated financial statements as the Company
already reports deferred tax liabilities as long term.
In January 2016, the FASB issued ASU 2016-01
regarding Financial Instruments, which amended guidance on the classification and measurement of financial instruments. Under the
new guidance, entities will be required to measure equity investments that are not consolidated or accounted for under the equity
method at fair value with any changes in fair value recorded in net income, unless the entity has elected the new practicability
exception. For financial liabilities measured using the fair value option, entities will be required to separately present in other
comprehensive income the portion of the changes in fair value attributable to instrument-specific credit risk. Additionally, the
guidance amends certain disclosure requirements associated with the fair value of financial instruments. The standard will be effective
for the Company’s fiscal year beginning April 1, 2018, including interim reporting periods within that fiscal year. The Company
is currently evaluating the effect of the adoption of this guidance on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02
related to the accounting for leases. This pronouncement requires lessees to record most leases on their balance sheet, while expense
recognition on the income statement remains similar to current lease accounting guidance. The guidance also eliminates real estate-specific
provisions and modifies certain aspects of lessor accounting. Under the new guidance, lease classification as either a finance
lease or an operating lease will determine how lease-related revenue and expense are recognized. The pronouncement is effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. The Company does not believe
the adoption of this guidance will have a material effect on the
consolidated financial statements because leases are month-to-month
and not material to the Company’s financial statements.
In March 2016, the FASB issued ASU 2016-06 related
to the embedded derivative analysis for debt instruments with contingent call or put options. This pronouncement clarifies that
an exercise contingency does not need to be evaluated to determine whether it relates only to interest rates or credit risk. Instead,
the contingent put or call option should be evaluated for possible bifurcation as a derivative in accordance with the four-step
decision sequence detailed in FASB ASC 815-15, without regard to the nature of the exercise contingency. The pronouncement is effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. The Company does not believe
the adoption of this guidance will have a material effect on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting. The new standard is designed to simplify the areas of share based payments
relating to income tax consequences. ASU 2016-09 is effective for the Company for its fiscal year beginning April 1, 2017. The
Company is currently evaluating the effect of the adoption of this guidance on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments - Credit Losses. ASU 2016-13 requires entities to report “expected” credit losses on financial instruments
and other commitments to extend credit rather than the current “incurred loss” model. These expected credit losses
for financial assets held at the reporting date are to be based on historical experience, current conditions, and reasonable and
supportable forecasts. This ASU will also require enhanced disclosures relating to significant estimates and judgments used in
estimating credit losses, as well as the credit quality. The amendments are effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of ASU
2016-13 will have on its consolidated financial statements and results of operations.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments. Historically, there has been a diversity in
practice in how certain cash receipts/payments are presented and classified in the statement of cash flows. To reduce the existing
diversity in practice, this update addresses the eight cash flow issues as listed in the pronouncement. The amendments in this
update are effective for fiscal years beginning April 1, 2018, and interim periods within that fiscal year. Early adoption is permitted.
The adoption of this standard is not expected to have a material impact on the Company’s financial statements.
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 Company does not believe the adoption of this guidance
will 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.
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.
(3) 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”). 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 Del Mar ATA involved the purchase of certain
life settlement assets consisting 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. According to the Del Mar ATA, Del Mar, with the assistance of Europa, was obligated to convert the
NIBs and other newly acquired NIBs into “Qualified NIBS.” As soon as Del Mar met its obligation to provide Qualified
NIBs to the Company, any remaining NIBs and any other consideration and collateral would be returned or released to Del Mar. The
original due date for the conversion was December 31, 2013, which date was subsequently extended several times. On April 30, 2015,
the Company finalized an amendment to the Del Mar ATA and the related Europa Agreement to extend the deadline until August 31,
2015.
The remaining consideration and collateral under
the Del Mar ATA, as of September 1, 2015, primarily consisted of approximately 72.2% of the NIBs associated with a portfolio of
life settlement policies having a face value that originally totaled $94,000,000. The remaining 27.8% interest in the NIBs were
held by other parties. During June 2015, one of the life settlement policies matured for $10,000,000 (the “Matured Policy”),
lowering the remaining face value of such life settlement policies to $84,000,000. The premiums and expenses related to the maintenance
of these life insurance policies are financed by a loan from a lender.
As Del Mar was unable to provide the required
amount of Qualified NIBs by the extended due date of August 31, 2015, effective September 1, 2015, the agreements with Del Mar
and Europa were cancelled and the Company obtained full ownership and control of the collateral, which included the above mentioned
approximately 72.2% of the NIBs associated with the $84,000,000 face value of life settlement policies and certain rights to net
proceeds relating to the Matured Policy.
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
4).
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 the Matured Policy. These proceeds
were 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, $547,308 to reimburse the Company for expense payments made to or on behalf
of Del Mar and $307,612 as a refund of advance payments previously made to or on behalf of Del Mar as part of the Del Mar ATA.
The $547,308 and $307,612 proceeds, which together total $854,920, were applied to reduce Advance for Investment in NIBs.
(4) INVESTMENT IN NET INSURANCE BENEFITS
The balance in
Investment in NIBs at December 31, 2016 and March 31, 2016, and related activity for the periods then ended were as follows:
|
|
December 31, 2016
|
|
March 31, 2016
|
Beginning Balance
|
|
$
|
29,822,186
|
|
|
$
|
22,544,635
|
|
Transfers from Advance for Investment in NIBs
|
|
|
–
|
|
|
|
3,368,380
|
|
Accretion of interest income
|
|
|
4,145,036
|
|
|
|
3,909,171
|
|
Cash received
|
|
|
(1,417,870
|
)
|
|
|
–
|
|
Additional purchases
|
|
|
–
|
|
|
|
–
|
|
Distributions of investments
|
|
|
–
|
|
|
|
–
|
|
Impairment of investments
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
$
|
32,549,352
|
|
|
$
|
29,822,186
|
|
As explained in Note 3, the Company transferred
$3,368,380 from advance for investment in NIBs into investment in NIBs on September 30, 2015.
Our Investment
in NIBs are classified as held-to-maturity investments
and
are included in the Long-Term Assets on the Company’s balance sheet. The amortized cost, aggregate fair value and gross unrecognized
holding gains and losses at December 31, 2016 and March 31, 2016 were as follows:
|
|
December 31, 2016
|
|
March 31, 2016
|
|
|
|
|
|
Amortized Cost Basis/Net Carrying Amount
|
|
$
|
32,549,352
|
|
|
$
|
29,822,186
|
|
Aggregate Fair Value (Note 5)
|
|
|
37,013,797
|
|
|
|
29,432,917
|
|
Gross Unrecognized Holding Gains/(Losses)
|
|
|
4,464,445
|
|
|
|
(389,269
|
)
|
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.
During the quarter
ended June 30, 2016, and in conjunction with the $1,417,870 cash received in April 2016, the Company received updated information
from the policy owners regarding reduced management fees relating to maintaining the underlying policies, and favorable changes
in the senior debt balances and related loan-to-value ratios. These changes prompted the Company to reevaluate and make appropriate
adjustments to the cash flow models used to calculate accretable income, which resulted in an increase to the effective interest
rate used to recognize income on the NIBs. The resulting increase on the Interest Income on Investment in NIBs for the nine months
ending December 31, 2016 was $265,920 over the accretable income that would have been recognized under the prior models. This increase
had no significant effect on the Company’s earnings per share.
(5) FAIR VALUE MEASUREMENTS
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.
Those levels of input are summarized as follows:
• Level 1: Quoted prices in active markets for identical assets
and liabilities.
• Level 2: Observable inputs other than Level 1 quoted prices,
such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
• 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.
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.
Financial Instruments Not Required To Be Carried at Fair Value
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 financial instruments that 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 December 31, 2016 and March 31, 2016:
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Investment in Net
Insurance Benefits
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,013,797
|
|
|
$
|
37,013,797
|
|
|
|
Fair Value Measurements at March 31, 2016
|
Description
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Investment in Net
Insurance Benefits
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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, 2016 and the nine months ended
December 31, 2016.
Other Financial Instruments
The Company’s recorded values
of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair values based on their short-term
nature. The recorded values of the notes payable and convertible debenture approximates the fair values as the interest rate approximates
market interest rates.
(6) NOTES PAYABLE, RELATED PARTY
As of December
31, 2016 and March 31, 2016, the Company had borrowed $4,799,753 and $3,820,178, respectively, excluding accrued interest, from
related parties under notes payable agreements that allow for borrowings of up to $5,730,000, exclusive of accrued interest. Of
the $4,799,753 of notes payable owed as of December 31, 2016, $3,299,753 is due August 31, 2018. The remaining $1,500,000 is due
November 30, 2018. In the event the Company completes a successful equity raise, principal and interest on notes payable totaling
$5,039,544 are due in full at that time. The notes payable incur interest at 7.5%, allow for origination fees and are collateralized
by Investment in NIBs. During the nine months ended December 31, 2016 and year ended March 31, 2016 the Company borrowed under
these agreements an additional $1,129,576 and $2,520,178 respectively, and repaid $150,000 and $200,000, respectively. As of December
31, 2016, the Company had availability to borrow up to $1,930,247
.
The interest associated with these notes of $239,790 is recorded on the balance sheet as a Long Term Accrued Expense obligation
at December 31, 2016. The related parties include a person who is the Chairman of the Board of Directors and a stockholder, and
Radiant Life, LLC, an entity partially owned by the Chairman of the Board of Directors.
On February 1, 2017, the note payable, related
party agreement that allowed for borrowings of up to $2,130,000 at December 31, 2016, was amended to extend the due date from November
30, 2017 to November 30, 2018. Also on February 1, 2017, the note payable, related party agreement that allowed for borrowings
of up to $3,600,000 at December 31, 2016, was amended to increase the borrowings from $3,600,000 to $4,600,000.
(7) NOTES PAYABLE TRANSFERRED TO REDEEMED COMMON STOCK PAYABLE
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 incurred interest at 4%, was collateralized by NIBs and was due in April 2015. During June 2015, the note
payable and related accrued interest were converted to equity through the issuance of 187,500 shares of common stock and the holder
was granted the right to require the Company to redeem the common stock for $8.00 per share. On June 9,
2015, the holder exercised a portion of the redemption right relating
to 93,750 shares and, as a result, the Company paid the holder $750,000 to redeem the shares. On March 25, 2016, the holder exercised
the redemption right in relation to the remaining shares and on April 12, 2016, the Company paid the holder an additional $750,000
to redeem the remaining shares. At March 31, 2016, the $750,000 associated with the redemption had been classified on the balance
sheet as Mandatorily Redeemable Common Stock.
(8) CONVERTIBLE DEBENTURE AGREEMENT
The Company
has entered into an 8% convertible debenture agreement with Satco International, Ltd., that allows for borrowings of up to $3,000,000.
The holder originally had the option to convert the outstanding principal and accrued interest to unregistered, restricted common
stock of the Company on June 2, 2016. Per the agreement, the number of shares issuable at conversion shall be determined by the
quotient obtained by dividing the outstanding principal and accrued and unpaid interest by 90% of the 90 day average closing price
of the Company’s common stock from the date the notice of conversion is received; and the price at which the Debenture may
be converted will be no lower than $1.00 per share. The original maturity date was June 2, 2016, but was later extended to August
31, 2017. On October 25, 2016, the Company agreed to amend the 8% Convertible Debenture Agreement that extended the due date and
conversion rights to February 28, 2018. As of December 31 and March 31, 2016 the Company owed $700,000 under the agreement, excluding
accrued interest. The associated interest of $88,679 at December 31, 2016 and $46,488 at March 31, 2016 is recorded on the balance
sheet as a Long Term Accrued Expense obligation. As of February 9, 2017, the Company is still able to borrow up to $2,300,000 on
this agreement.
On March 15, 2017, the Company agreed to amend
the 8% Convertible Debenture Agreement to extend the due date and conversion rights to August 31, 2018.
(9) LIQUIDITY REQUIREMENTS
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 December 31, 2016, the Company had $30,087 of cash assets, compared to $24,717
as of March 31, 2016. As of April 13, 2017, the Company had access to draw an additional $1,515,247 on the notes payable, related
party (see Note 6) and $2,300,000 on the Convertible Debenture Agreement (See Note 8). The Company’s average monthly expenses
are expected to be approximately $180,000, which includes salaries of our employees, consulting agreements and contract labor,
general and administrative expenses and estimated legal and accounting expenses. Outstanding Accounts Payable as of December 31,
2016 totaled $484,413, and other accrued liabilities totaled $316,666. Management has concluded that its existing capital resources,
future proceeds from Investment in NIBS, issuance of additional notes payable and convertible debentures and availability under
its existing debt agreements with related parties, will be sufficient to fund its operating working capital requirements for at
least the next 12 months, or through April 2018. The Company continues to evaluate other debt and equity financing opportunities
and in August 2016 paid a financing advance of $100,000 to a group for a potential line-of-credit offering.
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. In order to continue to purchase additional NIBs, the Company
will likely need to raise additional capital to fund operations.
(10) COMMITMENTS AND CONTINGENCIES
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 acquires 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 settlement. On
settlement, the Company receives the net insurance benefit after all borrowings, interest and expenses have been paid by the o
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 over the next five years 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 possible adverse impairment.
In addition, see Note 4 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 managers of the entities against third party claims for unpaid expenses. Neither
the purchase of these entities nor the Settlement Agreement resulted in any material change in the Company’s NIBs ownership
interest. The Company was supportive of the Purchasers acquiring the entities that owned the portfolios of life insurance contracts
underlying the Company’s NIBs and was willing to provide the indemnification because it believed this ownership change would
result in a reduction of costs and expenses associated with ownership of the NIBs, which would increase their intrinsic value.
The Company was made aware by the Purchasers that credit was presently no longer available to pay certain costs to maintain the
structure of the underlying life insurance policies. The Company’s obligations to provide liquidity under the Settlement
Agreement have now expired and the Company is not legally obligated for costs incurred by the entities underlying the NIBs. However,
if credit does not become available to Purchasers from the underlying loans to pay the costs as explained above, whether it be
by proceeds from a future maturity or other negotiations, the Company may provide such liquidity to protect its investment in the
NIBs. The total historical unpaid costs incurred prior to the ownership transition and potential unpaid cost incurred after the
ownership transition approximates $370,000 and $580,000, respectively, for an estimated total of $950,000. The Company believes
the probable amount it will ultimately pay is approximately $316,667 which relates to unpaid costs incurred prior to the transition.
Therefore, the Company accrued $316,667 during the three months ended September 30, 2016, to account for this uncertainty. The
Company anticipates that the total $316,667 will be paid by June 30, 2017, and therefore this amount has been recorded as current
accrued expense. During the three months ended December 31, 2016, the Company reassessed this uncertainty and determined that no
further adjustment was needed for the amount accrued. The Company will continue to assess this uncertainty and will adjust the
amount accrued as more information becomes available.
(11) EARNINGS (LOSS) PER COMMON
SHARE
Earnings (loss) per common share is computed
based on the weighted-average number of common shares outstanding and, when appropriate, dilutive common stock equivalents outstanding
during the period. Stock options and warrants are considered to be common stock equivalents. The computation of diluted earnings
(loss) per common share does not assume exercise or conversion of securities that would have an anti-dilutive effect.
Basic earnings (loss) per common share is the
amount of net income (loss) for the period available to each weighted-average share of common stock outstanding during the reporting
period. Diluted net earnings (loss) per common share is the amount of net income (loss) for the period available to each weighted-average
share of common stock outstanding during the reporting period and to each common stock equivalent outstanding during the period,
unless inclusion of common stock equivalents would have an anti-dilutive effect.
The reconciliations between the basic and diluted
weighted-average number of common shares outstanding for the three and nine months ended December 31, 2016 and 2015, are as follows:
|
|
Three Months Ended
December 31,
|
|
Nine Months Ended
December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Basic weighted-average number of common shares outstanding during the period
|
|
|
44,128,441
|
|
|
|
44,315,941
|
|
|
|
44,132,517
|
|
|
|
44,029,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of dilutive common stock equivalents outstanding during the period
|
|
|
1,380,751
|
|
|
|
–
|
|
|
|
1,380,751
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number of common and common equivalent shares outstanding during the period
|
|
|
45,509,192
|
|
|
|
44,315,941
|
|
|
|
45,513,268
|
|
|
|
44,029,347
|
|
In periods with
a net loss, outstanding options and warrants are not included in the computation of diluted net loss per common share, because
they were anti-dilutive, and for the three and nine months ended December 31, 2015 totaled 1,785,000 for each period. For
the three and nine months ended December 31, 2016, options to exercise 400,000 shares were excluded because they were anti-dilutive.
In addition, 263,265 shares related to the potential conversion of the convertible debenture were excluded because they were anti-dilutive.
(12) INCOME TAXES
At March 31,
2016 we placed a 100% valuation allowance, totaling approximately $275,000, on the amount our 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 nine months ended December 31, 2016, our deferred tax liabilities began to exceed our deferred
tax assets, which resulted in the recording of income tax expense and a deferred tax liability. As a result, during the nine months
ended December 31, 2016, the $275,000 valuation allowance was reversed. The deferred tax assets primarily relate to net operating
loss carryforwards and the deferred tax liabilities primarily relate to revenue recognized for financial reporting purposes, but
not for tax reporting purposes.
(13) SUBSEQUENT EVENTS
As explained in
Note
6, on February 1, 2017, the notes payable,
related party were amended to allow for additional borrowings and to extend a due date.
As explained in Note 8, on March 15, 2017, the
Company agreed to amend the 8% Convertible Debenture Agreement to extend the due date and conversion rights to August 31, 2018.