The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017 and 2016
(1) ORGANIZATION AND BASIS OF PRESENTATION
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.
NIBs are in the form of participating debt
certificates (“PDC”), and although two terms are interchangeable, the Company typically refers to them as NIBs.. 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
(“Holders”) 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. In aggregate, the
sum of the par value plus unpaid accrued interest 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 March 31, 2017 and 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. Our current
projections are based off of various assumptions that are subject to uncertainties and contingencies including, but not limited
to, 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 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 adjusted to the point of a material change in revenue, a revised effective
yield is calculated prospectively based on the current amortized cost of the investment, including accrued accretion. 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.
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.
Correction of an Immaterial Error
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,
2016
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates,
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents,
For purposes
of reporting cash flows, the Company considers all highly-liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Income Recognition,
Interest income
on investment in NIBs represents the excess of all cash flows attributable to the investment in net insurance benefits greater
than the initial investment over the life of each pool of net insurance benefits using the effective yield method. Changes in the
estimate of expected cash flows from investments in NIBs are adjusted prospectively.
Basic and Diluted Net Income (Loss) Per
Common Share,
Basic net income (Loss) per common share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the periods presented using the treasury stock method. Diluted net income (loss) per common
share is computed by including common shares that may be issued subject to existing rights with dilutive potential, when applicable.
Dilutive common stock equivalents are primarily comprised of stock options and warrants. Potentially dilutive shares resulting
from convertible debt agreements are evaluated using the if-converted method, and such amounts were not dilutive.
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:
|
|
Year Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Basic weighted-average number of common shares
outstanding during the period
|
|
|
44,131,515
|
|
|
|
44,026,832
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of dilutive
common stock equivalents outstanding during the period
|
|
|
1,345,949
|
|
|
|
1,346,376
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average number
of common and common equivalent shares outstanding during the period
|
|
|
45,477,464
|
|
|
|
45,373,208
|
|
For the years ended March 31, 2017 and 2016,
options to exercise 400,000 shares were excluded because they were anti-dilutive. In addition, 235,345 and 255,215 shares related
to the potential conversion of the convertible debenture were excluded because they were anti-dilutive for the years ended March
31, 2017 and 2016, respectively.
Stock Based Compensation
, The Company
measures stock-based compensation expense related to employee stock-based awards based on the estimated fair value of the awards
as determined on the date of grant and is recognized as expense over the remaining requisite service period. The Company utilizes
the Black-Scholes option pricing model to estimate the fair value of stock options issued as compensation. The Black-Scholes model
requires the input of highly subjective and complex assumptions, including the estimated fair value of the Company’s common
stock on the date of grant, the expected term of the stock option, and the expected volatility of the Company’s common stock
over the period equal to the expected term of the grant. The Company estimates forfeitures at the date of grant and revises the
estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
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.
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.
Income Taxes,
The Company accounts
for income taxes under FASB ASC 740, “Income Taxes”. Deferred income tax assets and liabilities are determined based
upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration
of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the
benefits of deferred tax assets will not be realized.
The tax effects from an uncertain tax position
can be recognized in the financial statements only if the position is more likely than not of being sustained if the position were
to be challenged by a taxing authority. The Company has examined the tax positions taken in its tax returns and determined that
there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its balance sheet.
Interest and penalties for uncertain positions, when applicable, would be recognized as a component of income tax expense.
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.
Principles of Consolidation,
The consolidated
financial statements include the accounts of the Company and its subsidiary. The subsidiary is wholly owned. All intercompany accounts
and transactions are eliminated in consolidation.
Variable Interest Entities (“VIEs”),
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, as it does not have control over the significant activities affecting the economic performance
of the owners. The Company’s maximum exposure to loss in the variable interest entities is limited to the investment in NIBs
balance, which has a carrying value of $34,156,005 as of March 31, 2017. 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. As further explained in Note 14, the Company has agreed, but is not contractually obligated, to pay for certain
costs to maintain the structure of the underlying life insurance policies. 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 the estimated costs subsequent to year end).
Fair Value,
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.
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:
|
|
Fair Value Measurements at March 31, 2017
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,643,224
|
|
|
$
|
45,643,224
|
|
Insurance Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2016
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29,432,917
|
|
|
$
|
29,432,917
|
|
Insurance Benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value
of our investment in NIBs is determined by evaluating the sum of present value of the future cash flows expected from the NIBs. The key unobservable inputs used to arrive at the fair value estimates of the Company’s Investment in
NIBs at March 31, 2017 and 2016, included a market rate discount rate range of approximately 15% to 18%, with a weighted average
rate approximating 16%. The interest rate range and weighted average rate was obtained from the Market Rate – Life Insurance
Settlement Association Statistics (weighted 50%), Build-up Method (weighted 25%) and Historical Cost Method (weighted 25%). As
explained in Note 1, our current projections for the future cash flows are based off of various assumptions that are subject to
uncertainties and contingencies, which are difficult to predict and are subject to future events that may impact our estimates
and interest income. Therefore, subsequent to the purchase and on a regular basis, these future estimated cash flows are evaluated
for changes. If the determination is made that the future estimated cash flows should be adjusted to the point of a material change
in revenue, a revised effective yield is calculated prospectively based on the current amortized cost of the investment, including
accrued accretion. During the year ended March 31, 2017, certain maturities were realized sooner than originally projected. The
aggregate face value of these maturities was $14,500,000. In addition, there was a reduction of ongoing fees required to support
the underlying policies (See Note 14). These two factors contributed to an overall increase in the estimated cash flows expected
from the NIBs, which increased the estimated fair value from $29,432,917 as of March 31, 2016 to $45,643,224 as of March 31, 2017.
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.
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, Related Parties and Convertible Debenture approximates the fair values as the interest
rate approximates market interest rates.
During the year ended March 31, 2017,
the Company changed its Consolidated Balance Sheet presentation from “classified” (distinguishing between
short-term and long-term accounts) to “unclassified” (no such distinction) due to a desire to conform the
Company’s Consolidated Balance Sheet presentation to trends of other companies within the industry. Such a change is a
presentation election made by management; the March 31, 2016 Consolidated Balance Sheet has also been presented in an
unclassified format comparable to the March 31, 2017 presentation.
(3) NEW ACCOUNTING PRONOUNCEMENTS
Adopted During the Year Ended March 31, 2017
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.
Not Yet Adopted
The Financial Accounting Standards
Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, 2015-14, 2016-8, 10,11 and 12 and
2017-13 – 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 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 the Company’s fiscal year beginning April 1, 2017, and for 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 presents an unclassified balance sheet.
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 the Company’s fiscal year beginning April 1, 2019, and for 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 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 the Company’s fiscal year beginning April 1, 2017, and for 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.
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
April 1, 2017. The Company does not believe the adoption of this guidance will have
a material effect 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 the Company’s fiscal year beginning
April 1, 2020, including interim periods within that fiscal year. 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.
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.
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.
(4) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists principally
of currency on hand and demand deposits at commercial banks. The Company had $4,364 and $24,717 in cash and cash equivalents as
of March 31, 2017, and 2016, respectively. The Company maintains non-interest bearing accounts at one financial institution. The
accounts at this institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000.
(5) 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,
or 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
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.
(6) INVESTMENT IN NET INSURANCE BENEFITS
The balance in Investment in NIBs at March
31, 2017 and 2016, and related activity for the periods then ended were as follows:
|
|
March 31, 2017
|
|
|
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
|
|
|
5,751,689
|
|
|
|
3,909,171
|
|
Cash received
|
|
|
(1,417,870
|
)
|
|
|
-
|
|
Total
|
|
$
|
34,156,005
|
|
|
$
|
29,822,186
|
|
As explained in Note 5, the Company transferred
$3,368,380 from advance for investment in NIBs into investment in NIBs on September 30, 2015.
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:
Life
Expectancies*
(in years)
|
|
Number of Interests
in Life
Settlement Contracts
|
|
|
Face Value of
Underlying
Policies
|
|
|
|
|
|
|
|
|
|
|
0-1
|
|
|
9
|
|
|
$
|
34,586,111
|
|
1-2
|
|
|
6
|
|
|
|
31,611,111
|
|
2-3
|
|
|
7
|
|
|
|
37,444,444
|
|
3-4
|
|
|
11
|
|
|
|
49,444,444
|
|
4-5
|
|
|
6
|
|
|
|
35,444,444
|
|
Thereafter
|
|
|
30
|
|
|
|
184,813,147
|
|
Total of all policies
|
|
|
69
|
|
|
$
|
373,343,701
|
|
* The Life Expectancy (“LE”) input is the 70%/30%
weighted average of two LEs available at the time of the original creation of the NIB portfolio. The Adjusted Life Expectancy is
an unofficial calculation that simply reduces the original LE by the number of months since the last LE report. It should be noted
that the insured’s health, medical conditions and other considerations may have changed since the LE report, so that the
Adjusted LE is simply an estimate. These LEs were produced by third-party life expectancy companies and represent the actuarial
mean of how long an individual is expected to live. The number is a calculation done with the LE provider’s proprietary statistical
model that is typically based on individualized mortality curves for each life factoring in the insured’s gender, age, health
and family history, medical conditions, and other considerations. In purchasing, financing or insuring life insurance policies
or NIBs, we may use alternate life expectancy companies or may use weighted averages of two or more life expectancy companies,
depending on the facts and circumstances of the case and requirements of the various counterparties. The life expectancy report
is just an estimate, as the life expectancy of any individual cannot be known with absolute certainty.
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:
Fiscal Year
ended March 31,
|
|
|
Number of Maturities
|
|
|
Original Face Value
of Underlying
Policies
|
|
|
Company’s Portion of
Face Value
|
|
2013
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
2014
|
|
|
|
1
|
|
|
|
8,000,000
|
|
|
|
8,000,000
|
|
2015
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
2016
|
|
|
|
1
|
|
|
|
10,000,000
|
|
|
|
7,222,222
|
|
2017
|
|
|
|
3
|
|
|
|
24,500,000
|
|
|
|
24,500,000
|
|
|
|
|
|
5
|
|
|
$
|
42,500,000
|
|
|
$
|
39,722,222
|
|
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.
As of March 31, 2017, the policy Holders
had paid $120,696,149 on policy premiums. 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 through the policy
Holders or allow them to lapse. Senior loan agreements and MRI reinsurance are typically intended to cover these payments. As
of March 31, 2017, none of the underlying policies have lapsed and the required payments remain current.
The table below describes the future estimated
premium payments, other expenses and interest paid by external parties expected to be paid on the policies for the five years
subsequent to March 31, 2017, and thereafter. Significant estimates are made as part of the calculation of the premium payments,
other expenses and interest amounts identified in the table below. The following table only includes the percentage of the future
estimated premium payments, other expenses and interest relating to the portfolio of which the Company only has partially owned
NIBs. The following table does not include all of the estimation factors used by the Company in estimating expected net cash receipts
for interest income calculation purposes, and is intended to only provide the estimated premium payments, other expenses and interest
amounts related to the policies underlying the Company’s NIBs (totals do not include premiums, expenses and interest paid
for prior years):
Year
|
|
Premiums
|
|
|
Expenses + Interest
|
|
|
Total
|
|
Year 1
|
|
$
|
14,718,014
|
|
|
$
|
9,850,077
|
|
|
$
|
24,568,091
|
|
Year 2
|
|
|
15,066,981
|
|
|
|
8,071,797
|
|
|
|
23,138,778
|
|
Year 3
|
|
|
13,464,031
|
|
|
|
7,165,785
|
|
|
|
20,629,816
|
|
Year 4
|
|
|
13,597,127
|
|
|
|
7,651,955
|
|
|
|
21,249,082
|
|
Year 5
|
|
|
11,943,568
|
|
|
|
10,176,791
|
|
|
|
22,120,358
|
|
Thereafter
|
|
|
25,506,798
|
|
|
|
15,213,806
|
|
|
|
40,720,604
|
|
Total
|
|
$
|
94,296,519
|
|
|
$
|
58,130,211
|
|
|
$
|
152,426,730
|
|
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.
Our Investment in NIBs are classified as
held-to-maturity investments and are included on the Company’s balance sheet. The NIBs have a contractual maturity date of
25 years from inception, which ranged from December 2011 to January 2013. The amortized cost, aggregate fair value and gross unrecognized
holding gains and losses at March 31, 2017 and 2016, were as follows:
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis/Net Carrying Amount
|
|
$
|
34,156,005
|
|
|
$
|
29,822,186
|
|
Aggregate Fair Value (See Note 2)
|
|
|
45,643,224
|
|
|
|
29,432,917
|
|
Gross Unrecognized Holding Gains/(Losses)
|
|
$
|
11,487,219
|
|
|
$
|
(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.
(7) NOTES PAYABLE, RELATED PARTY
As of March 31, 2017 and 2016, the Company
had borrowed $5,214,753 and $3,820,178, respectively, excluding accrued interest, from related parties under notes payable agreements
that allow for borrowings of up to $6,730,000, exclusive of accrued interest. There are no covenants associated with these agreements.
Of the $5,214,753 of notes payable owed as of March 31, 2017, $3,714,753 was due August 31, 2018. The remaining $1,500,000 was
due November 30, 2018 (see Note 16 for subsequent due date extensions). In the event the Company completes a successful equity
raise, principal and interest on notes payable totaling $5,549,379 are due in full at that time. The notes payable incur interest
at 7.5%, and are collateralized by Investment in NIBs. During the years ended March 31, 2017 and 2016 the Company borrowed under
these agreements an additional $1,544,576 and $2,520,178 respectively, and repaid $150,000 and $200,000, respectively. As of March
31, 2017, the Company had availability to borrow up to $1,515,247. The interest associated with these notes of $334,626 and $145,669
is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2017 and 2016, respectively. 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 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. See Note 16 for a detail of activity on
the Notes Payable, Related Party subsequent to March 31, 2017.
(8) 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 recorded on
the balance sheet as Mandatorily Redeemable Common Stock.
(9) 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, and then on March 15, 2017, the Company agreed again to amend the agreement to extend the due date and conversion rights
to August 31, 2018. As of March 31, 2017 and 2016, the Company owed $700,000 under the agreement, excluding accrued interest. The
associated interest of $102,487 and $46,488 at March 31, 2017 and 2016, respectively, is recorded on the balance sheet as an Accrued
Expense obligation.
(10) STOCK OPTIONS
During the year ended March 31, 2014, the
Company issued common stock options to certain directors, officers, consultants and employees. The Company has recorded stock-based
compensation expense of $182,572 and $508,503 related to these options for year ended March 31, 2017 and 2016, respectively. At
March 31, 2017, all stock options had vested and all expenses relating to the outstanding options had been recognized as stock-based
compensation expense. On the date of grant, the contractual option terms were all 5 years, with all options have an expiration
date between April and October of 2018.
Below is a summary of the stock option activity
for the years ended March 31, 2017 and 2016 (including the 80,000 stock options granted to non-employees):
Date Issued
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Remaining
Contractual
Term
|
|
|
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2015
|
|
|
2,185,000
|
|
|
$
|
1.54
|
|
|
$
|
0.91
|
|
|
|
3.50
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Expired
|
|
|
(78,125
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of March 31, 2016
|
|
|
2,106,875
|
|
|
$
|
1.57
|
|
|
$
|
1.04
|
|
|
|
2.50
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding as of March 31, 2017
|
|
|
2,106,875
|
|
|
$
|
1.57
|
|
|
$
|
1.04
|
|
|
|
1.50
|
|
|
$
|
-
|
|
Vested and Expected to Vest as of March 31, 2017
|
|
|
2,106,875
|
|
|
$
|
1.57
|
|
|
$
|
1.04
|
|
|
|
1.50
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2016
|
|
|
1,865,205
|
|
|
$
|
1.57
|
|
|
$
|
1.04
|
|
|
|
2.50
|
|
|
$
|
1,227,109
|
|
Exercisable as of March 31, 2017
|
|
|
2,106,875
|
|
|
$
|
1.57
|
|
|
$
|
1.04
|
|
|
|
1.50
|
|
|
$
|
1,217,847
|
|
If all vested options as of March
31, 2017 were to be exercised, the Company could expect to receive $3,314,294.
(11) WARRANTS
On April 8, 2013, the Company approved a
private placement of its common stock that provided for the payment of introduction fees in the form of cash and warrants and later
amended. As a result of investments totaling $7,000,000 in this private offering by persons introduced to the Company, the Company
authorized the issuance of 70,000 warrants to purchase 70,000 shares of the Company’s common stock. The warrants have an
exercise price of $5.00 per share and have a contractual life of two years from the effective date of the funds invested in the
offering by the parties introduced to the Company, which was May 31, 2013. The Company recorded $139,251 in stock issuance costs
related to the warrants as of March 31, 2014, which represented the entirety of the related issuance costs.
As of March 31, 2016, all warrants had expired.
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Grant Date Fair
Value
|
|
Remaining
Contractual Term
|
|
Intrinsic Value
|
Outstanding as of April 1, 2015
|
|
|
70,000
|
|
|
$
|
5.00
|
|
$
|
1.92
|
|
|
0.17
|
|
|
-
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Cancelled/Expired
|
|
|
(70,000
|
)
|
|
|
5.00
|
|
|
1.92
|
|
|
-
|
|
|
-
|
Outstanding as of March 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
Outstanding as of March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
Exercisable as of March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
(12) STOCK TRANSACTIONS
During March 2015, we agreed to pay $150,000
in cash, issue 1,130,000 shares of common stock and forgive a note receivable with an outstanding amount of $150,000 in exchange
for relief of a $1,493,254 note payable and the receipt of NIBs. The net consideration given for the relief of the note payable
and receipt of NIBs totaled $1,493,254 and $7,846,746, respectively, for a total of $9,340,000. (See Note 8). Of the 1,130,000
common shares to be issued, 187,500 shares were subject to a redemption right that requires the Company to buy back the shares
for $8.00 per share at the option of the holder. The total common stock still subject to the redemption right at March 31, 2016,
was recorded as Mandatorily Redeemable Common Stock on the consolidated balance sheet (see Note 8).
On June 9, 2015 the remaining 942,500 common
shares were issued. In addition, as explained in Note 8, the 187,500 of redeemable common shares were issued and subsequently redeemed.
(13) 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 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
expenses are expected to be approximately
$132,000, 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 March 31, 2017 totaled $508,071, and other accrued
liabilities totaled $753,780. Management has concluded that its existing capital resources, and availability under
its existing convertible debentures and debt agreements with related parties will be sufficient to fund its operating working
capital requirements for at least the next 12 months, or through April 2019. Related parties have given assurance that their
continued support, by way of either extensions of due dates, or increases in lines-of-credit, can be relied on. The Company also
continues to evaluate other debt and equity financing opportunities.
The accompanying financial statements have
been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities
in the normal course of business. In order to continue to purchase additional NIBs, the Company will likely need to raise additional
capital.
(14) COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
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
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 year ended March 31, 2017 to account for this uncertainty,
which is included within the annual General and Administrative Expenses on the Company’s Statement of Income. As of March
31, 2017, the Company anticipated that the accrued amount would be paid by August 31, 2017, and therefore this amount was recorded
as accrued expense. See Note 16 for updates to the estimated costs subsequent to year end.
(15) INCOME TAXES
The Company provides for income taxes under ASC 740, Income
Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities
are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates
in effect when these differences are expected to reverse.
The provision for income taxes for the years ended March 31,
2017 and 2016 consists of the following:
|
|
2017
|
|
|
2016
|
|
Current Taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
|
|
Deferred Taxes
|
|
|
|
|
|
|
|
|
Federal
|
|
|
691,824
|
|
|
|
-
|
|
State
|
|
|
67,148
|
|
|
|
-
|
|
Total Provision
|
|
$
|
758,972
|
|
|
$
|
-
|
|
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal tax rate of 34% to pretax income from continuing operations for the years ended March 31,
2017 and 2016 due to the following:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit at U. S. federal statutory rates:
|
|
$
|
942,184
|
|
|
$
|
28,468
|
|
State tax, net of federal benefit
|
|
|
91,446
|
|
|
|
2,762
|
|
Permanent and other differences
|
|
|
153
|
|
|
|
52,076
|
|
Change in valuation allowance
|
|
|
(274,811
|
)
|
|
|
(83,306
|
)
|
|
|
$
|
758,972
|
|
|
$
|
-
|
|
The tax effects of significant items comprising the Company’s
net deferred taxes as of March 31, 2017 and 2016 were as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
3,326,228
|
|
|
$
|
2,811,596
|
|
Stock and warrant compensation
|
|
|
718,295
|
|
|
|
650,196
|
|
Valuation allowance
|
|
|
-
|
|
|
|
(274,811
|
)
|
Net deferred tax assets
|
|
$
|
4,044,523
|
|
|
$
|
3,186,981
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investment in net insurance benefits
|
|
$
|
(4,803,495
|
)
|
|
$
|
(3,186,981
|
)
|
Net deferred tax liabilities
|
|
$
|
(4,803,495
|
)
|
|
$
|
(3,186,981
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax assets/liabilities
|
|
$
|
(758,972
|
)
|
|
$
|
-
|
|
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. At March 31, 2016 management had recorded a 100% valuation allowance,
totaling approximately $275,000, on the amount the Company’s deferred tax assets exceeding the Company’s deferred
tax liabilities. As a result, no income tax expense (benefit) or deferred tax asset or liability was recorded on the financial
statement. As of the year ended March 31, 2017, our deferred tax liabilities began to exceed the Company’s 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 released 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 revenue recognized for financial reporting purposes, but not for tax reporting
purposes.
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.
Under FASB ASC 740-10-05-6, tax benefits are recognized only
for the tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized
is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized
tax benefits are tax benefits claimed in the company’s tax return that do not meet these recognition and measurement standards.
The Company had no liabilities for unrecognized tax benefits
and the Company has recorded no additional interest or penalties.
(16) SUBSEQUENT EVENTS
Subsequent to year end, the following events
transpired:
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.
Effective January 1, 2018, Matthew Pearson
resigned his position as the Company’s Chief Operations Officer to pursue other opportunities. As of the date of this filing,
no replacement has been designated to fill his position.
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.
During February 2018, management engaged
consultants to explore and analyze financing alternatives available to the Company. The approximately $362,000 paid to the consultants
was capitalized as a Financing Advance on the Company’s consolidated balance sheet prepared subsequent to March 31, 2017.
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.