NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
(1)
BASIS OF PRESENTATION, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 condensed consolidated 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 for the periods presented. 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, 2017. 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.
Organization
and Nature of Operations
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 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 (the “Owners” or “the Holders”) acquire such policies at a discount to their
face value. 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 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 3) 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.
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, in certain cases, 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.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
NIBs
are generally in the form of participating debt certificates (“PDC”), and although the 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 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 September 30, 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.
At
March 31, 2017, and during the six months ended September 30, 2017, the Company accounted 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 estimated 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 calculated accretable
income, which was recorded as interest income on investment in NIBs in the statement of operations. Our projections were based
on 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 were evaluated for changes. If the determination was made that the future estimated cash flows should be
adjusted to the point of a material change in revenue, a revised effective yield was 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 that may have resulted in the recognition of an “other-than-temporary impairment” (“OTTI”),
and would be evaluated by the Company accordingly.
At
March 31, 2017, and during the six months ended September 30, 2017, the Company’s investment in NIBs was treated as a debt
security, which was 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 is 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 had not recognized any impairment on our
investment in NIBs from inception, through the year ended March 31, 2017.
However,
between May 2018 and July 2018, the Owners entered into agreements that completed a strict foreclosure transaction that transferred
these policies from the owners to the lenders in full satisfaction of the loan obligation. As part of the original agreement,
the Chairman of the Company helped secure the loan by including a personal guarantee for a portion of the debt, if needed. The
owners and other parties to the Agreements are diligently working to secure alternative financing, although no such positive outcome
can be assured. As a result of the foreclosure, the Company has lost its position in the residual benefits of the policies and
has reduced the carrying value of the NIBs as of September 30, 2017 to $5,269,568, which is equal to the actual cash received
by the Company from distributions subsequent to September 30, 2017. This carrying value is less than the accretion receivable
as of March 31, 2017, and as such, is considered accretion receivable and not part of the Company’s original investment.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
Significant
Accounting Policies
There
have been no changes to the significant accounting policies of the Company from the information provided in Note 2 of the Notes
to Consolidated Financial Statements in the Company’s most recent Form 10-K, except as discussed in the remaining Notes
below.
(2)
NEW ACCOUNTING PRONOUNCEMENTS
Adopted
During the Six-Months Ended September 30, 2017
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 adoption of this guidance did not have a material effect on the consolidated 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 adoption of this guidance did not 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 adoption of this guidance did not have a material effect on the consolidated 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
adoption of this guidance did not 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.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
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
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
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.
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.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
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)
INVESTMENT IN NET INSURANCE BENEFITS
The
balance in Investment in NIBs at September 30, 2017 and March 31, 2017, and related activity for the periods then ended were as
follows:
|
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
|
Beginning Balance
|
|
$
|
34,156,005
|
|
|
$
|
29,822,186
|
|
|
Accretion of interest income
|
|
|
-
|
|
|
|
5,751,689
|
|
|
Cash received
|
|
|
(4,000,000
|
)
|
|
|
(1,417,870
|
)
|
|
Impairment of investments
|
|
|
(24,886,437
|
)
|
|
|
-
|
|
|
Ending Balance
|
|
$
|
5,269,568
|
|
|
$
|
34,156,005
|
|
As
outlined in Note 1, between May 2018 and July 2018, the Owners entered in agreements that completed a strict foreclosure transaction
that transferred these policies to the lenders in full satisfaction of the loan obligation. As a result of the foreclosure, the
Company reduced the carrying value of the NIBs by $24,886,437 at June 30, 2017, to $7,769,568, which is the estimated fair value
of the NIBs calculated as the actual cash received subsequent to June 30, 2017, from distributions by the Owners to the Company.
During the period ended September 30, 2017, the Company received $4,000,000 from maturities and miscellaneous other adjustments
to the underlying policies($1,500,000 in May 2017 and $2,500,000 in September 2017), thus reducing the carrying value of the NIBs
at September 30, 2017 to $5,269,568.
Our
Investment in NIBs are classified as held-to-maturity investments at March 31, 2017 and as available-for-sale investments at September
30, 2017. The NIBs have a contractual maturity date of 25 years from inception, and the inception dates ranged from December 2011
to January 2013. The amortized cost, aggregate fair value and gross unrecognized holding gains and losses at September 30, 2017
and March 31, 2017 were as follows:
|
|
|
September 30, 2017
|
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost Basis/Net Carrying Amount
|
|
$
|
5,269,568
|
|
|
$
|
34,156,005
|
|
|
Aggregate Fair Value (See Note 4)
|
|
|
5,269,568
|
|
|
|
45,643,224
|
|
|
Gross Unrecognized Holding Gains
|
|
$
|
-
|
|
|
$
|
11,487,219
|
|
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
(4)
LIQUIDITY REQUIREMENTS
Since
the Company’s inception, 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 September 30, 2017, the Company had $343,945 of cash
assets, compared to $4,364 as of March 31, 2017. As of April 25, 2019, the Company had access to draw an additional $5,507,991
on the notes payable, related party (see Note 6 and Note 12) and $3,000,000 on the Convertible Debenture Agreement (See Note 7
and Note 12). The Company’s average monthly expenses are expected to be approximately $90,000, 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 September 30, 2017, totaled $587,470, and other accrued liabilities totaled $396,535.
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 2020. 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. Due to the foreclosure on the NIBs mentioned
above, the company has no current source of future revenues. In order to continue to purchase additional NIBs or remove the NIBs
out of foreclosure, the Company will need to raise additional capital. Management is currently engaged in obtaining long term
financing and believes that it will secure the needed additional capital within one year from the date of this filing. As management
believes that additional capital is a probable outcome, the Company has the ability to continue as a going concern for a period
of one year from the date of issuance of these financial statements.
(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.
In
accordance with the disclosure requirements of ASC Topic 825, “Financial Instruments” (“ASC 825”), the
tables below summarize fair value estimates for the Company’s Investment in NIBs, which both are (at September 30, 2017)
and are not (at March 31, 2017) 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.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
Financial
Instruments Required To Be Carried at Fair Value at September 30, 2017
|
|
|
Fair Value Measurements at
September 30, 2017
|
|
|
Description
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Net Insurance Benefits
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,269,568
|
|
|
$
|
5,269,568
|
|
Financial
Instruments Not Required To Be Carried at Fair Value at March 31, 2017
|
|
|
Fair Value Measurements at
March 31, 2017
|
|
|
Description
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Net Insurance Benefits
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
45,643,224
|
|
|
$
|
45,643,224
|
|
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 year ended March 31, 2017 and the six months ended September 30, 2017.
At
March 31, 2017, the fair value of our investment in NIBs was determined by evaluating the sum of present value of the future cash
flows expected from the NIBs. Therefore, subsequent to the purchase and on a regular basis, these future estimated cash flows
were evaluated for changes. If the determination was made that the future estimated cash flows should be adjusted to the point
of a material change in revenue, a revised effective yield would be calculated prospectively based on the current amortized cost
of the investment, including accrued accretion.
At
September 30, 2017, the fair value of our investment in NIBs is calculated as the actual cash received (discounted) subsequent
to September 30, 2017, from distributions by the Owners to the Company.
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 September 30, 2017 and March 31, 2017, the Company had borrowed $3,011,982 and $5,214,753, 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 $3,011,982 of notes payable owed as of September 30,
2017, $1,588,628 was due August 31, 2018 (as of September 30, 2017), but was later extended, through a series of extensions, to
November 30, 2020. The remaining $1,423.354 was due November 30, 2018 (as of September 30, 2017), but was later extended, through
a series of extensions, to November 30, 2020). In the event the Company completes a successful equity raise, principal and interest
on notes payable totaling $3,011,982 are due in full at that time. The notes payable incur interest at 7.5%, and are collateralized
by Investment in NIBs. During the three months ended September 30, 2017, the Company borrowed $400,000 under these agreements,
and repaid $2,106,502 in principal. Additionally, $59,681 in accrued interest was paid out during the three months ended September
30, 2017. As of September 30, 2017, the Company had availability to borrow up to $3,718,018 under these agreements. The interest
associated with these notes of $54,318 and $334,626 is recorded on the balance sheet as an Accrued Expense obligation at September
30, 2017 and March 31, 2017, 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.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
Also
as of September 30, 2017 the Company owed $52,427 to the Chairman of the Board of Directors and a stockholder, which is included
in accounts payable on the balance sheet.
See
Note 12 for a detail of activity on the Notes Payable, Related Party subsequent to September 30, 2017.
(7)
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, through a series of extensions, to August 31, 2019. These extensions applied to both the due date and the conversion
rights. See Note 12 for a detail of activity on the Convertible Debenture subsequent to September 30, 2017.
As
of September 30, 2017 and March 31, 2017, the Company owed $700,000 under the agreement, excluding accrued interest. During the
three months ending September 30, 2017, the Company did not borrow on the agreement, nor did the Company repay any principal or
interest. The associated interest of $121,616 and $102,488 at September 30, 2017 and March 31, 2017, respectively, is recorded
on the balance sheet as an Accrued Expense obligation.
(8)
COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS
As
explained in Note 1, 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”. 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 has always assumed 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 has always been governed by factors that are beyond
the Company’s control or the control of the Holders. At September 30, 2017, the entities that own the policies maintained
a total of 13 separate loan agreements with the senior lending facility, all with separate expiration dates. As of September 30,
2017, 11 of these loans had expiration dates that had lapsed, with the remaining 2 loans having maturity dates ranging from July
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 were 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 did not require MRI coverage. The Holders had available
credit to pay forecasted premiums and expenses on a portion of the policies until April 15, 2018, which was the renewal date of
the loans on these life insurance policies. The Holders have worked with the lender to extend the loans multiple times and now,
after the last loan extension expired, between May 2018 and July 2018, the lenders foreclosed on the loans associated with the
underlying life insurance policies and the Company has recorded a $24,886,437 impairment on the NIBs.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
As
of June 30, 2017, the Company had remaining accrued expenses of $271,601 relating to the costs to maintain the structure of the
life insurance policies. During August 2017, the Company paid an additional $51,000 of these accrued expenses. During October
2017, the Company made a final payment of $31,438, after which the Company received notification from the Holders that the remaining
$189,163 had been paid in full by the Holders. Subsequent to September 30, 2017, the Company has reversed the effects of the remaining
$189,163 accrued liability on its balance sheet.
(9)
EARNINGS (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. Diluted net income 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. As of September 30, 2017 there were 2,451,368 potentially dilutive common stock equivalents.
(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 having an expiration date between April and October of 2018. The number of options outstanding and exercisable
at September 30, 2017 is 2,106,875.
If
all vested options as of September 30, 2017 were to be exercised, the Company could expect to receive $3,314,294.
(11)
INCOME TAXES
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 fiscal year ended 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 its net deferred tax liabilities during the third quarter ended December 31, 2017.
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.
At
March 31, 2017, the Company had recorded a net deferred tax liability totaling $758,972. Due to net losses being recognized during
the three months ended June 30, 2017, the Company’s deferred tax asset balance surpassed the deferred tax liability balance,
resulting in the recording of an income tax benefit for the reduction of the previously recorded net deferred tax liability balance
at March 31, 2017, of $758,972. For the period ended September 30, 2017, the Company continues to record net losses resulting
in the accumulation of deferred tax assets relating to the net operating loss carryforwards. At September 30, 2018, management
had recorded a 100% valuation allowance on the amount the Company’s deferred tax assets exceeding the Company’s deferred
tax liabilities.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
(12)
SUBSEQUENT EVENTS
Subsequent
to September 30, 2017, the following events transpired:
As
further explained in Note 8, 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, and the Holders had available credit to pay forecasted premiums
and expenses on a portion of the policies until that date. Between May 2018 and July 2018, the Holders entered in agreements that
completed a strict foreclosure transaction that transferred the underlying life insurance policies relating to the Company’s
NIBs to the lenders in full satisfaction of the loan obligation. The Holders and other parties to the Agreements are diligently
working to secure alternative financing, although no such positive outcome can be assured. As of the date of this filing, the
lenders continue to pay premiums and related fees on the life insurance policies and have not yet liquidated the policies. As
a result of the foreclosure, the Company has lost its position in the residual benefits of the policies and has reduced the carrying
value of the NIBs at September 30, 2017 to $5,269,568, which is equal to the actual cash received by the Company from distributions
subsequent to September 30, 2017. This carrying value is less than the accretion receivable as of March 31, 2017, and as such,
is considered accretion receivable and not part of the Company’s original investment.
As
of September 30, 2017, the Company had remaining accrued expenses of $220,601 relating to the costs to maintain the structure
of the life insurance policies. During October 2017, the Company made a final payment of $31,438, after which the Company received
notification from the Holders that the remaining $189,163 had been paid in full by the Holders. Subsequent to September 30, 2017,
the Company has reversed the effects of the remaining $189,163 accrued liability on its balance sheet.
On
December 22, 2017, the Tax Cuts and Jobs Act (“Tax Reform Act”) was signed into law by the President of the United
States. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S.
federal corporate tax rate from 35% to 21% effective for the Company’s calendar year ending March 31, 2018. U.S. GAAP requires
that the impact of tax legislation be recognized in the period in which the law was enacted. The Company will recognize the effects
of the Tax Reform Act for the re-measurement of the net deferred tax liabilities during the third quarter ended December 31, 2017.
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.
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
February 2018, management engaged consultants to explore and analyze financing alternatives available to the Company. From February
2018 through March 2019 approximately $1,320,581 has been paid to the consultants.
Effective
December 5, 2018, Ty D. Mattingly resigned his position on the Company’s Board of Directors. On December 6, 2018, Glenn
S. Dickman and Stephen E. Quesenberry were named to the Company’s Board of Directors.
Effective
December 6, 2018, three existing stockholders have contributed to the Company a portion of their common shares held at a repurchase
price to the Company of USD $0.05 per share The Company has cancelled the acquired shares, which decreased the outstanding
common shares on the books of the Company. The total number of common shares canceled/retired was 8,000,000, reducing the
amount of outstanding common shares from approximately 44,128,441 to 36,128,441. The Company anticipates paying the $0.05 per
share repurchase price upon a major financing event, as agreed upon between the Company
and the stockholders. As of the date of this filing, the shares have been cancelled, but have not yet been repurchased by the
Company.
SUNDANCE
STRATEGIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September
30, 2017
On
December 6, 2018, the Company awarded three of its directors 300,000 shares each of the Company’s stock, in lieu of director
compensation. The shares granted include a vesting period.
On
July 11, 2018, the Company issued 800,000 common shares in return for obtaining the remaining 27.8% ownership of certain NIBs
(see Note 3). The transaction was recorded at $40,000, the estimated fair value of the common stock issued (which management believes
approximated the fair value of the NIBs received on the date of the transaction).
From
July 25, 2018 to April 10, 2019, Mr. Dickman loaned the Company $535,000 through an unsecured promissory note, which bears interest
at a rate of 8% annually. To date, the Company has not made any principal or interest payments under this note. As of the date
hereof, the full $535,000 of principal is recorded as Notes Payable, Related Party, and the Company has accrued $18,909 of unpaid
interest.
From
October 2017 to January 2018, the Company received $5,269,568 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.
Subsequent
to September 30, 2017, the Company has repaid $2,182,474 in principal on the Notes Payable, Related Party and $700,000 on the
Convertible Debenture. The Company has also paid out accrued interest totaling $74,443 on the Notes Payable, Related Party and
Convertible Debenture.
Subsequent
to September 30, 2017, the Company has borrowed an additional $392,500 on the Notes Payable, Related Party (exclusive of the $435,000
loaned by Mr. Dickman). As of April 25, 2019, the outstanding principal balances of all Notes Payable, Related Party totaled
$1,672,008 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 $4,600,000 at September 30, 2017,
was amended to extend the due date from August 31, 2018 to August 31, 2019. Then on February 8, 2019 the note was again extended
to November 30, 2020. Subsequent to September 30, 2017, the note payable, related party agreement that allowed for borrowings
of up to $2,130,000 was amended to extend the due dates from November 30, 2018 to November 30, 2020, respectively. 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.