UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended:  March 31, 2015


or


[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



Commission File Number: 000-50547

SUNDANCE STRATEGIES, INC.

(Exact Name of Registrant as specified in its Charter)


Nevada

88-0515333

(State or other Jurisdiction of Incorporation or organization)

(I.R.S. Employer Identification No.)


4626 North 300 West, Suite No. 365

Provo, Utah 84604

 (Address of Principal Executive Offices)


(801) 705-8968

(Registrant’s Telephone Number, including area code)


Securities registered pursuant to Section 12(b) of the Act: None


Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001.


Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [  ] No [X]


Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [  ]   No [X]


Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

(1) Yes [X] No [  ]     (2) Yes [X] No [  ]


Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes [X] No [  ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained



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herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]


Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company:


 

 

Large accelerated filer       [   ]

Accelerated filed                     [X]

Non-accelerated filer         [   ]

Smaller reporting company     [  ]


Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes [  ] No [X]


Market Value of Non-Affiliate Holdings


State the aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold, or the average bid and asked price of such common stock, as of the last business day of the Registrant’s most recently completed second quarter.


The aggregate market value of the voting and non-voting common stock of the Registrant owned by non-affiliate holders was approximately $89,225,317, based on 11,896,709 shares being held by non-affiliates and the closing bid price for the Registrant’s common stock on the OTCQB as of September 30, 2014, or the end of the Registrant’s second fiscal quarter, being $7.50 per share, though there was a “limited trading market” for such shares on that date.


Applicable only to Registrants Involved in Bankruptcy Proceedings during the Preceding Five Years


Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities and Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes [  ]   No [  ]


Not Applicable.


Outstanding Shares


As of June 11, 2015, the Registrant had 44,222,191 shares of common stock outstanding.


Documents Incorporated by Reference


All material agreements and other documents or announcements referenced herein, including our charter documents and Code of Ethics, are described under our Current Reports on Form 8-K referenced in Part IV, Item 15, below, and each of which can be accessed in the Edgar Archives of the Securities and Exchange Commission (the “SEC”) at www.sec.gov for further information about such agreements, documents or announcements.  You are encouraged to consider these referenced agreements, documents or announcement in reviewing our Annual Report on Form 10-K (the “Annual Report”).  Capitalized terms not defined herein shall have the meanings ascribed to them in the referenced agreements or documents.




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PART I


FORWARD-LOOKING STATEMENTS


This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this Annual Report. We cannot assure you that the forward-looking statements in this Annual Report will prove to be accurate, and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. You should read this Annual Report with all other reports or registration statements we have filed with the SEC during the past 12 months. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.


JUMPSTART OUR BUSINESS STARTUPS ACT DISCLOSURE

We qualify as an “emerging growth company,” as defined in Section 2(a)(19) of the Securities Act by the Jumpstart Our Business Startups Act (the “JOBS Act”). An issuer qualifies as an “emerging growth company” if it has total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year, and will continue to be deemed an emerging growth company until the earliest of:


 

the last day of the fiscal year of the issuer during which it had total annual gross revenues of $1.0 billion or more;


 

the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement;


 

the date on which the issuer has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or


 

the date on which the issuer is deemed to be a “large accelerated filer,” as defined in Section 240.12b-2 of the Exchange Act.


As an emerging growth company, we are exempt from various reporting requirements. Specifically, we are exempt from the following provisions:


 

Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires evaluations and reporting related to an issuer’s internal controls;


 

Section 14A(a) of the Exchange Act, which requires an issuer to seek stockholder approval of the compensation of its executives not less frequently than once every three years; and


 

Section 14A(b) of the Exchange Act, which requires an issuer to seek stockholder approval of its so-called “golden parachute” compensation, or compensation upon termination of an employee’s employment.


Under the JOBS Act, emerging growth companies may delay adopting new or revised accounting standards that have different effective dates for public and private companies until such time as those standards apply to private companies.  We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

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References


In this Annual Report, references to “Sundance,” the “Company,” “we,” “us,” “our” and words of similar import refer to Sundance Strategies, Inc., a Nevada corporation and its wholly-owned subsidiary, ANEW LIFE, INC., a Utah corporation (“ANEW LIFE”), unless the context requires otherwise.


For clarity and reference to those parties with whom we have conducted our primary business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies, we provide the following additional references, in which neither the Company nor any “affiliate” of the Company has any direct or beneficial ownership interest:


References to “Del Mar” or “Del Mar Financial” and the “Del Mar ATA” refer, respectively, to Del Mar Financial, S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg, and the Del Mar Asset Transfer Agreement executed and delivered by us and Del Mar on June 7, 2013, as amended, under which we acquired an interest in certain net insurance benefits (“NIBs” or “Qualified NIBs” [as defined below]).


References to “PCH” or “PCH Financial” and the “PCH Transfer Agreement” refer, respectively, to PCH Financial S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg, and the PCH Transfer Agreement executed and delivered by us and PCH on March 11, 2013, under which we also acquired an interest in certain NIBs.


References to “HFII” and the “HFII Asset Transfer Agreement” refer, respectively, to HFII Assets Solutions, LLC, a Delaware limited liability company, and the HFII Asset Transfer Agreement executed and delivered by us and HFII, and amended, respectively, on March 2, 2015, and March 31, 2015, and under which we also acquired an interest in certain NIBs.


References to “Europa” or “ESA” refer to Europa Settlement Advisors, Ltd., a corporation organized under the laws of the Republic of The Marshall Islands, and our consultant regarding our purchase of certain NIBs under a Structuring and Consulting Agreement (the “Europa Agreement”) executed and delivered by us and Europa on June 7, 2013, as amended.


ITEM 1.  BUSINESS


Business


We were organized under the laws of the State of Nevada on December 14, 2001, for the purpose of selling coffee and other related items to the general public from retail coffee shop locations.  These endeavors ceased in 2006, and we had no material business operations from 2006, until our acquisition by Merger (as defined below) of ANEW LIFE, which was engaged in our current business operations to which we succeeded on the closing of the Merger.


Business Development


The following business developments have been reported in our reports filed with the SEC, which are referenced in Part IV, Item 15, of this Annual Report:


Business Developments subsequent to the Fiscal Year Ended March 31, 2015


-

We signed an amendment to the Del Mar ATA and the Europa Agreement to extend the deadline until August 31, 2015.  The extension is intended to give us time to work towards a settlement agreement with Del Mar, as it appears unlikely that Del Mar will be able to fulfill their obligation to deliver the remaining $309,400,000 in Qualified NIBs.  During this extension period we will work toward a dissolution and resolution of the Del Mar ATA.(April 30 2015)



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-

We issued the 1,130,000 shares of our common stock to HFII, in accordance with the HFII Asset Purchase Agreement, which included the 187,500 common shares that were part of the First Put Option thereunder (as defined below). (June 9, 2015)

-

We advanced $375,000 to HFII on April 2, 2015, relating to the First Put Option under the HFII Asset Transfer Agreement payment and paid the remaining $375,000 amount due under the First Put Option payment on June 9, 2015.  As a result, 93,750 common shares associated with the First Put Option were reacquired by us.  We were to have had until October 31, 2015 (the due date of the Second Put Option associated with 93,750 shares of our common stock, and was subsequently extended to September 30, 2016), to pay any balance due on the Amended and Restated Promissory Note (as defined below), after deduction of all payments made by us under the HFII Asset Purchase Agreement, together with such additional costs and expenses as we and HFII may agree. (April 2, 2015, and June 9, 2015, respectively)

-

We entered into an 8% Convertible Debenture Agreement that allows us to borrow up to $3,000,000 through September 30, 2016, at which time principal and interest is due in full. During the term of the debenture, the holder can elect to convert the outstanding principal and accrued interest to shares of our common stock, comprised of “restricted securities” as defined in SEC Rule 144.  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.  During June 2015, we drew $700,000 under the Debenture Agreement. (June 2, 2015)

-

We entered into a line-of-credit agreement with a related party that allows for borrowings of up to $600,000 through September 30, 2016, at which time principal and interest is due in full.  In addition, this same related party extended the due date of the $1,500,000 note-payable related party outstanding at March 31, 2015, to September 30, 2016. (June 12, 2015)


Business Developments during the Fiscal Year Ended March 31, 2015


-

We approved an increase in the monthly salary of our Chief Operating Officer, Matthew G. Pearson, to $17,500 or $210,000 annually, beginning in April, 2014, along with a $2,500 bonus.  A further increase in Mr. Pearson’s salary to $258,000 will coincide with our receipt of additional funding. (April 23, 2014)

-

We further amended our Del Mar ATA and our Europa Agreement to update our disclosure about: (i) our acquisition of the Buyback Rights (as defined below) to our Amended and Restated Promissory Note that was initially issued to PCH Financial in the amount of $2,999,999 (formerly, the “Secured Promissory Note”) and the reduction of its principal amount to $1,500,000; (ii) the receipt of our payment of our promissory note receivable due from Del Mar Financial in the amount of $650,000 and our payment of the $100,000 balance of the $425,000 due to Europa from these proceeds; and (iii) the status of our collateral, plans and potential expectation of receipt of the remaining Qualified NIBs from Del Mar Financial under the Del Mar ATA.  As the Secured Promissory Note was considered collateral for the obligations of Del Mar under the Del Mar ATA, the assignment of the Amended and Restated Promissory Note and our acquisition of the Buyback Rights amounted to a release of this collateral under the Del Mar ATA.  (May 8, 2014)

-

We also amended the Del Mar ATA and the Europa Agreement: (i) to allow Del Mar Financial until September 30, 2014, to deliver the remaining $309.4 million in Qualified NIBs due to us under the Del Mar ATA; and (ii) to confirm our ownership of the Buyback Rights with respect to the Amended and Restated Promissory Note for $1,000,000, together with an additional 2% for each month (whole or partial) that had elapsed from the time of the assignment (November 5, 2014) of such Amended and Restated Promissory Note by Del Mar Financial to a third party, subject to a minimum Buyback Price of $1,120,000.  (July 10, 2014)

-

We also further announced that our total proceeds received under our private placement was $11,792,500. (July 10, 2014)

-

We sent a letter to our shareholders that updated our business development progress.  (July 21, 2014)

-

We extended our Lock-Up/Leak-Out Agreements with certain of our founding shareholders and others, collectively owning approximately 32,952,000 shares of our common stock, from October 5, 2014, to October 5, 2015.  (October 14, 2014)



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-

We entered into a binding Letter of Intent (“LOI”) with HFII, whereby we agreed to exchange the balance due under our Amended and Restated Promissory Note to Hyperion Life Fund II-A (“Hyperion”) for equity and to purchase and HFII agreed to sell four portfolios of life insurance policies with a face value of approximately $124,375,000 and which policies met our investment criteria, having already been processed into our NIBs structure of premium financing, mortality re-insurance (“MRI”), the number of policies desired in the portfolios and with an acceptable average age range of the insureds, among other factors. The NIB is the amount remaining after payment of the face amount when a policy matures, less the total of premium payments, financing costs, MRI costs and all other expenses.  (December 5, 2014)

-

Our Amended and Restated Promissory Note that was subsequently acquired by Del Mar, was included in the assets to be acquired by us under the HFII Asset Transfer Agreement (as explained above).  The due date of the Amended and Restated Promissory Note had been extended from December 31, 2014, to April 11, 2015, when it was amended. The Amended and Restated Promissory Note was assigned by Del Mar to Hyperion  on November 5, 2013, subject to a one year Buyback Option at $1,000,000, plus two percent of the principal per month (not however, to be for less than the sum of $1,120,000 [the “Minimum Buyback Price”]); and the Buyback Option was assigned to us on the same date, subject to reassignment to Del Mar if it delivered $400,000,000 in Qualified NIBs to us by April 1, 2014, under the Del Mar ATA.  We have only received $90,600,000 in Qualified NIBs under the Del Mar ATA, and accordingly, we became the owner of the Buyback Option regarding our Amended and Restated Promissory Note, effective April 1, 2014; the Buyback Option expired on November 5, 2014.  (December 5, 2014)

-

Kraig T. Higginson was appointed to our Board of Directors and as Chairman.  (January 12, 2015)

-

We announced that we are in the process of determining whether to extend the Del Mar ATA and the Europa Agreement delivery requirements of Qualified NIBs is in our best interest, and advising that we believed any extension would require us to advance Del Mar additional funds to complete the delivery of the balance of the $309,400,000 Qualified NIBs under the Del Mar ATA, as well as acquiring other NIBs moving forward, with or without the assistance of Del Mar or Europa.  (See “Business Developments Subsequent to Year Ended March 31, 2015” for extension of the Del Mar ATA”) (February 17, 2015)

-

We executed and delivered the HFII Asset Transfer Agreement on March 2, 2015, and as amended on March 31, 2015, under which we agreed to acquire, and HFII agreed to sell, certain NIBs and exchanged certain debt for equity as outlined in the LOI of December 5, 2014, referenced above, in consideration of our agreement to issue HFII 1,130,000 shares of our common stock, with such shares being subject to a 12 month Lock-Up Agreement and with 187,500 of the shares containing a redemption feature (the First and Second Put Options) that may require the Company to buy back the shares for $8 per share on the option of the holder.  Under the HFII Asset Transfer Agreement, we granted HFII a Put Option to put to us 187,500 of our shares that we agreed to issue to HFII, at a purchase price of $8.00 per share or an aggregate total of $1,500,000, in two puts: (i) 93,750 shares for $8.00 per share or a total of $750,000 (the “First Put Option”), which amount has been paid by us as indicated above and (ii) 93,750 shares on October 31, 2015, for $8.00 per share or a total of $750,000 (the “Second Put Option”).  If the holder elects to exercise the second redemption agreement relating to the remaining 93,750 shares and if we do not have the liquidity to pay the Second Put Option, the Clawback Rights of HFII provide that the Asset Purchase Agreement shall be terminated; we shall return all of HFII’s assets; HFII shall repay the Consideration and any other costs and expenses paid by us in connection with its assets (including, but not limited to any Put Option payments made); and HFII shall offset amounts owed by us under the Amended and Restated Promissory Note by such Consideration any Put Option payments made; and any other costs and expenses paid by us in connection with HFII’s assets, which additional costs and expenses shall be agreed upon by us and HFII in one or more separate writings. We have a 45 day Cure Period on the Second Put Option.  (March 2, 2015, and as amended on March 31, 2015)




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Description of Our Business


We are 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, often referred to as the “life settlements market.”  These interests are acquired in the secondary market, and we have no relationships with the insured or the insured’s insurance company. It is our intent to acquire interests in life settlements in which the insured is 75 years or older.  We established initial guidelines for purchasing such interests in early February, 2013, prior to our first acquisition of any such interests, which included: (a) all interests relate to universal life insurance policies; (b) all policies have qualified for financing that will cover at least four years of premiums following the date we acquire our interest in any policies; (c) all policies have qualified for mortality re-insurance (“MRI” [as defined below]); and (d) based upon the life expectancy reports from at least two industry respected life expectancy companies, upon the death of the underlying insured, the projected proceeds, payable on each life insurance policy, will exceed the cost and other amounts required to repay all creditors secured by such life insurance policy. Until such time as we have hired an in-house pricing and analytics team, we rely on a combination of (a) the servicing and policy approval processes of the financing entities and MRI Provider (as defined below); (b) the services and diligence conducted by the policy service provider, which is NorthStar Life Services, LLC, of Irvine, California, in our initial and subsequent purchases of life insurance based products ([“Servicer”], as discussed in more detail below), on behalf of the financing entities, the MRI Provider or Sundance; (c) the legal review by our general counsel, though this review was limited to non-insurance contractual issues related to the acquisition of our initial purchase of life insurance based products; (d) the due diligence of the parties from whom we acquire these interests; and (e) ESA, our structuring consultant, which is discussed below under the heading  “Dependence on One or a Few Major Providers.”  Our objective is to acquire interests in life insurance policies and products that will produce returns in excess of the costs to purchase, finance, service and insure those policies to their maturity.  While we intend to hold a variety of life insurance based products, we will be primarily focused on purchasing net insurance benefits comprising the net beneficial ownership of such life insurance policies or “NIBs,” as described below.  It is our intention to hold these life insurance policies and products to maturity.  


We currently own one life insurance product, comprising 100% of the net beneficial ownership interest in 10 portfolios of life insurance policies, which are discussed below under the heading “Current NIBs Contracts.”  When policy payments are received at maturity, the funds will be used to pay any (1) outstanding Senior Loans associated with each policy; (2) repayments under the MRI, if any; and (3) costs and expenses, before we will receive any payment on our NIBs.  The net insurance benefits will be paid to the policy owner, which will retain a small percentage of the death benefits when a policy matures. The policy owner will pay such net insurance benefits to the Company, which, in accordance with the NIBs agreements, is paid to the policy owner from an escrow by a U.S. bank intermediary, leaving only a small fraction of such benefits with the policy owner, amounting to about 1% of the net proceeds.  Upon a death, the mortality re-insurance company is only involved with the registered owner/beneficiary of the policy. The U.S. bank is the intermediary for the registered owner/beneficiary of the policy under the NIBs agreements, and on the death of an insured, the mortality re-insurance company pays the U.S. bank intermediary. Because we receive the majority of the net insurance benefits, we refer to the Company’s NIBs as representing the net beneficial ownership of the life insurance policies (i.e. substantially all of the beneficial interest in these life insurance policies will be paid to us after the repayment of all outstanding obligations).


NIBs represent an indirect or the beneficial ownership interest in a portfolio of individual universal life policies (the “Policies”), and with respect to these Policies, the net interest in the related death benefits payable on the Policies after the repayment of debt and other costs associated with the Policies.  References to “Qualified NIBs” we have acquired and may acquire under the Del Mar ATA and HFII Asset Transfer Agreement are essentially interchangeable with other references to NIBs in this Annual Report, meaning “net insurance benefits”; however, under the Del Mar ATA that is discussed and referenced in this Annual Report under the headings “Business Development,” above, “Current NIBs Contracts,” below, the NIBs that we acquired were required to be refinanced and to meet certain other criteria prior to our acceptance of them, and hence, those NIBs were deemed not to be “Qualified NIBs” for the purpose of delivery by Del Mar Financial and acceptance by us under the Del Mar ATA until those criteria have been met.  


The NIBs are issued by one or more entities, each of which is organized as a Luxembourg société à responsabilité limitée (S.a.r.l.).  A Luxembourg S.a.r.l. is a business entity formed under Luxembourg law that operates in a way



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similar to a limited liability partnership in the United States in terms of ownership and management, but is subject to entity taxation (i.e. profits are not taxed at the level of the partners) (the “Lux Sarls”).  It is our understanding that the Lux Sarls directly or indirectly own the general and limited partnership interests in one or more entities organized as limited partnerships in a state of the United States, which are the policy holders or policy owners (respectively, the “Policy Holder” or the “Policy Owner”).  We are not presently party to any of the contracts between the Lux Sarls or their related parties or subsidiaries, nor any of their contracts with the Senior Lender or the MRI Provider, regarding the structuring or creation of the NIBs or otherwise.  While we are not involved during the policy acquisition stage or in securing the Senior Loan or MRI, we believe the Lux Sarls, once the Policies to be acquired have been identified for acquisition through the general and limited partnerships that they own, negotiate and complete the Senior Loan, the acquisition of the Policies and the mortality re-insurance coverage, simultaneously . To date, we have only purchased NIBs from Del Mar Financial, under the Del Mar ATA, and PCH Financial and HFII, respectively, under the PCH Transfer Agreement and the HFII Asset Transfer Agreement, and which we believe are the only current sellers of NIBs. We intend that in the future, subject to available financing and MRI coverage, that we will be directly involved in the creation of NIBs for our ownership.


Through the NIBs structure, the risks associated with the uncertain timing of the maturity of the Policies  is reduced by financing ongoing premiums for the Policies (the “Senior Loans”) and purchasing mortality re-insurance coverage or MRI to insure against the risk that the Policies do not mature on death according to applicable life expectancies. Payments are made under the MRI in the event that the underlying insureds outlive their projected life expectancies. These payments provide liquidity to keep the loans in good standing and the premiums paid. See the heading “Summary of Mortality Re-Insurance Policy (“MRI”)” below .   Through the Senior Loans generated by the Lux Sarls or their related and other parties, we believe we are able to leverage our investment and purchase NIBs involving a much larger underlying pool of Policies.  As with any asset class, the use of leverage allows for a larger pool of ownership because there is more capital available for acquisitions.  Leverage also creates additional costs, particularly related to interest accrual.  In the case of mortality based investments, the more lives underlying the investment, the more reliable the use of actuarial tables become.  Thus, the use of leverage is of particular importance in the purchase of mortality based investments because the larger the portfolio, the more stable the actuarial predictions will become. Through the MRI, we are able to reduce the risks associated with lengthening life expectancies, though our portfolios have a significantly smaller number of Policies than are used in determining life expectancies and other contingencies in life insurance actuarial tables.


The Senior Loans on our existing NIBs acquired from PCH Financial, Del Mar Financial and HFII were negotiated by others prior to our purchase of these NIBs through a European financial institution (the “Senior Lender”), which is a member of the Federal Association of German Banks; that it has been granted a license in accordance with the German Banking Act; and that it is registered and supervised by the German Federal Financial Supervisory Authority.  The Qualified NIBs we have received to date under the Del Mar ATA were negotiated in the same or a similar manner following the effective date of the Del Mar ATA in June 2013.  We believe each of the Lux Sarls (the “Borrowers”) has, directly or indirectly, through subsidiaries or contracts like those under which we have acquired our NIBs, with Policy Holders or others with interests in life settlements, entered into certain loan agreements related to the Senior Loans with the Senior Lender (the “Loan Facility”), of a certain maximum amount (the “Maximum Facility Amount”), the proceeds of which have been used or may be used to acquire the Policies in whole or in part, pay premiums on the Policies and to pay the servicing fees and other costs and expenses relating to the Policies or the structure used to hold the Policies (collectively, the “Fees”).  The Policies related to the existing NIBs are pledged as collateral for the Senior Loans (the “Collateral”).  Any amounts due and payable to the Senior Lender pursuant to the Senior Loans shall be senior to payments on the NIBs and shall accrue interest at the rate of approximately 4.5% to 8.00% per annum and be compounded quarterly.  Some of the existing Senior Loans are anticipated to be restructured with longer terms (the “Restructured Loans”), and in the case of such Restructured Loans or any new loans, the Senior Lender may be entitled to origination fees or other additional costs, which amounts may or may not be included in the Senior Loans. The Senior Lender will have a senior lien on all partnership interests in the Policy Holders.  After an event of default under the Loan Facility, the Senior Lender will have the right to exercise remedies with respect to such partnership interests, including disposition thereof, and will be entitled to receive proceeds of any such disposition to the extent of the obligations outstanding under the Senior Loans prior to any such proceeds from the Policies being available to the Lux Sarls, the Policy Holders and the MRI, or us, under our NIBs.




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Each of the existing Policy Holders has obtained a mortality re-insurance policy issued by one or more insurance companies with a financial strength rating of no less than A- (each, an “MRI Provider”), and each such policy collectively with all certificates delivered in connection therewith and any exhibits, schedules endorsements and other documents thereto or incorporated therein by reference (an “MRI” and collectively, the “MRI’s”). The MRI Providers have a lien on all assets of the Policy Holders, junior only to the lien of the Senior Lender under certain circumstances.  If the Senior Loan has been paid in full, and a default shall have occurred and be continuing under an MRI, the applicable MRI Provider will have the right to exercise remedies with respect to the assets of the Policy Holder that obtained such MRI, including disposition thereof, and will be entitled to receive proceeds of any such disposition to the extent of the obligations (the “MRI Obligations”) outstanding under such MRI prior to any such proceeds being available to us under our NIBs. The MRI Obligations with respect to any MRI include the related Commitment Fee (if any), Recovery Amount, Post Term Recovery Payment (each term as defined in the applicable MRI), and interest and fees and other amounts payable by the applicable Policy Holder (without duplication) under such MRI.  Any amounts paid by the MRI Provider are referred to herein as “MRI Payments.” Each MRI obtained by a Policy Holder entitles the Senior Lender to receive certain payments if the expected death benefits of the related Policies falls below an agreed upon level based upon Life Expectancy actuarial tables (typically, 75% of the expected death benefit based upon the life expectancy reports), and the Senior Lender is required to make certain payments in return to the MRI Provider if the death benefits exceed expected benefits as agreed upon again by the same Life Expectancy tables, as a death benefit evening up process.  This mechanism will make expected cash flows more predictable because it provides a minimum level of liquidity, regardless of whether proceeds are received in connection with the Policies death benefits in a given period.  We may not be able to directly own the Policies or purchase the related MRI coverage.  


We currently own NIBs with life insurance policies in 10 portfolios, with an aggregate face amount of $341,196,882 (including NIBs acquired from PCH Financial and HFII, and Qualified NIBs acquired from Del Mar Financial), with individual insureds spread over 61 underlying life insurance policies. There are only 60 individual insureds in these life insurance policies, which increases our risk that our actual yield may be less than expected as our portfolios may not be sufficiently diversified.  See Part I, Item 1A. Risk Factors, below.


We may also be interested in owning Policies directly and purchasing MRI coverage for such Policies, without any Senior Loan, or providing financing in certain cases where we would act as the Senior Lender, subject to available cash resources or credit.  We may also enter into purchases of interests in Policies in partnership with other parties, particularly in cases with significant death benefits where the costs are higher.  However, we do not intend to spend significant time on these ancillary products until our NIBs portfolio has underlying Policies with a combined face amount in excess of $500 million, as opposed to the net insurance benefit or NIBs, which is the amount estimated to be paid after deduction of premiums payable under the Policies, along with other costs and expenses and repayments under the MRI, if any, and including any amounts payable on Policies with a return of premium provision.  For an estimate of the amounts we anticipate receiving on our NIBs over the next 15 years, see the heading “Plan of Operation” of the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 5, below.  We will not receive the face amount of the Policies, but only the net insurance benefit.


We cannot assure that we will be successful in obtaining any additional NIBs, and we will require substantial additional funding or sufficient unrestricted revenues from our current portfolio of NIBs or other life insurance products to acquire additional NIBs or other life insurance products.  To the extent that we directly purchase Policies, we will focus on purchasing Policies in the tertiary market and not from original policy owners.  We will be working with licensed brokers and providers in the purchase of Policies.  In the event a broker presents us with a policy that is still owned by the original purchaser, such policy would be acquired only by a licensed provider and in compliance with state law.  We will only purchase such Policies from licensed providers.  Again, however, our focus will be on purchasing pools of policies in the tertiary market where no license is required and where the requirements are highly regulated.


If we find that the Senior Loans and MRI do not provide adequate cash flow for our use, we may seek debt or equity financing, and we may also attempt to raise funding secured by our NIBs through the sale of bonds.


The following chart summarizes the structure of our operations that is discussed above, and does not take into account our future goal to be directly involved in the creation of NIBs for our ownership.  We are not party to any of



9




the current contracts between the Lux Sarls or their related parties or subsidiaries (indicated below as “Limited Partnerships), nor any of their contracts with the Senior Lender or the MRI Provider, regarding the structuring or creation of the NIBs or otherwise.


[SUNDANCESTRATEGIES10KANNU001.JPG]


* The Lux Sarls acquire the Policies in the secondary market following evaluation and selection simultaneously with the closing of the Senior Loan and the MRI, at which time the U.S. bank intermediary updates the insurance companies regarding ownership of the Policies.


Principal Products or Services and their Markets


Summary of Senior Loans


The following is a current summary of terms customarily contained in Senior Loans that have been made to the Policy Holders and Lux Sarls related to our NIBs.  Capitalized terms used are usually specifically defined in the Senior Loans.


Lender

German Financial Institution

Borrowers

Borrower and/or its Luxembourg S.a.r.l. subsidiary

Credit Facility

Lender will advance funds, no more frequently than once per month, to Borrower for “Permitted Purposes.”

Permitted Purposes

Loan proceeds shall be used solely for the payment of Transaction Fees, the repayment of certain indebtedness relating to the Life Policies approved by the Lender, the payment of servicing fees, to pay premiums due and payable on the Life Policies, the payment of MRI Premium and the Commitment Fee, the payment of Administration Cost, or for reimbursement of premiums previously paid on the Life Policies, in each case in accordance with the terms set forth in the Disbursement Schedule, and to pay other amounts set forth on the Disbursement Schedule and approved by the Lender in writing, in its sole and absolute discretion.

LTV Limit Trigger Event

No advances shall be required if the loan amount exceeds the product of (a) initially, seventy-five percent (75%), subject to certain increases, and (b) (i) the sum of the Aggregate Collateral Value of all the Life Policies on such date and (ii) any cash pledged to the Lender on such date (the “LTV Limit”) and borrower shall be required to pay down the loan so that no such violation exists.

LED Limitations on Credit Facility

No advances shall be required if the loan amount exceeds the applicable regulatory large exposure limits applicable to the loan and the lender (the “LED Limit” ) and borrower shall be required to pay down the loan so that no such violation exists.

Aggregate Collateral Value

The Aggregate Collateral Value shall be recalculated if the life expectancy of the Insured increases by 25% or more, the insurer is downgraded below “Baa3” by Moody’s or “BBB-” by S&P, or any suit, action or legal proceeding is filed.

Interest

Interest will accrue at an annual rate of approximately 4.5% to 8%, compounded quarterly

Default Interest

The Default rate of interest shall be approximately 12.1%




10







Indemnity

Borrowers (jointly and severally) agree to indemnify and hold Lender and its affiliates harmless

Fees

The loan includes the following fees:

1.

Origination Fee equal to the face amount of the underlying policies times 0.25%

2.

A quarterly Servicing Fee equal to the product of (i) 0.25 (ii) the face amount of the underlying policies and (iii) fifteen basis points (.15%) and any other amounts due and payable under the servicing agreement.

3.

Structuring Costs.

4.

Transaction Fees.

Collateral

Collectively, the Life Policies, and any and all proceeds therefrom, and all proceeds payable to the accounts required to be set up and controlled pursuant to the Intercreditor Agreement.

Repayment Priority

As proceeds are received in connection with the collateral, such proceeds shall be applied as follows:

First, (1) if such amounts represent proceeds in respect of a Life Policy, and on such date, the LTV Limit is less than fifty percent (50%), all such amounts to an account designated in writing by the Borrowers, otherwise, to the Lender, in an amount equal to the Collateral Value of such Life Policy, to the payment of accrued and unpaid interest and then to the payment of the outstanding principal balance of the Loan and (2) if such amounts represent other funds, including, without limitation, payments made by MRI Provider under the MRI, only to the payment of accrued and unpaid interest in respect of the Loan;

Second, to the Servicer, to the payment of earned and unpaid Servicing Fees;

Third, if such amounts represent proceeds in respect of a Life Policy, to the Lender, to the payment of accrued and unpaid interest in respect of the Loan to the extent not paid pursuant to clause (i) above;

Fourth, to the Lender, to the payment of the outstanding principal balance of the Loan; and

Fifth, to an account previously designated in writing by the Borrowers, any remaining amounts.

Prepayment Penalty

“Prepayment Penalty Amount” means the amount (if any) by which (a) the interest which the Lender should have received for the period from the date of receipt of the prepayment amount to the Final Maturity Date in respect of such prepayment amount, had such prepayment amount received been paid on the Final Maturity Date exceeds (b) the amount of interest the Lender would have received if it deposited such prepaid amount with a leading institution in the London interbank market for a period starting on the Business Day following receipt of such prepaid amount and ending on the Final Maturity Date.

Other Borrower Costs

Borrower shall be responsible for paying additional costs associated with regulatory changes or violations as provided in the loan agreement.

MRI

Prior to any advance under the credit facility, borrower must provide confirmation of mortality re-insurance coverage (MRI).

Final Maturity Date

The earlier of (i) 4th anniversary of the First Advance, unless on such date, the Servicer is entitled to submit a Proof of Claim (as defined in the MRI) under the MRI with respect to the period ending on such 4th anniversary of the First Advance, then on the related Payment Date (as defined in the MRI) and (ii) the date that is six months prior to the expiration of the Term (as defined in the MRI).

Advance Maturity Date

All advances are due upon the earlier to occur of (i) a Permissible Sale of such Life Policy, (ii) the Final Maturity Date and (iii) the date of deposit of the related death benefit into (A) if and as long as the Intercreditor Agreement remains in full force and effect, the Policy Account and (B) otherwise, the Borrower Account.


Summary of Mortality Re-Insurance (“MRI”)


The following is a current summary of terms customarily contained in mortality re-insurance policies issued on Senior Loans that have been made to the Policy Holders and Lux Sarls related to our NIBs.  Capitalized terms used are usually specifically defined in the MRI’s.

 



11







Insurer

One or more insurance companies with a financial strength rating of no less than A-.

Insured

Luxembourg S.a.r.l. that directly or indirectly through subsidiaries, owns the life insurance policies.

Term of Coverage

The fifteenth (15 th ) anniversary of the effective date of any coverage certificate.  The Policy may be cancelled by any party with 10 days written notice, but such termination shall not affect any coverage under an outstanding coverage certificate.

Payment of Claim Amount by Insurer

During the Term, if on any Anniversary Date, beginning on the second Anniversary Date, the sum of the Gross Cash Flows and the Recovery Principal are less than the sum of the Attachment Point and the Cumulative Recovery Premium Paid then the Insurer shall pay to the applicable Covered Entity the Claim Amount on or before the related Payment Date; provided, however that, in the event a Claim Amount is payable in connection with the second Anniversary Date in excess of the product of (x) six percent (6.0%) and (y) the cumulative Death Benefits of all Covered Policies, the Claim Amount payable on such Payment Date shall be reduced by the amount of such excess and such excess shall not be due and payable until the third Anniversary Date of the Policy.  

Claim Amount

The Claim Amount is the amount equal to the difference between (i)  the sum of the related Attachment Point and the Cumulative Recovery Premium Paid and (ii) the sum of the Gross Cash Flows payable through such Anniversary Date, and the related unpaid Recovery Principal.

Repayment of Claim Amount / Recovery Amounts

If any Claim Amount has been paid by the Insurer at any time hereunder, the Covered Entities shall pay a Recovery Amount to the Insurer in one or more installments, as more fully specified herein.  Upon receipt by a Covered Entity of any Death Benefit or other proceeds of any Covered Policy or related property such that, as of the date of the receipt thereof, the sum of the Gross Cash Flows and the Recovery Principal exceeds the sum of the Attachment Point and the Cumulative Recovery Premium Paid, the Covered Entities shall pay to the Insurer the applicable Recovery Amount.  The Covered Entities shall have the right to prepay any Recovery Principal or Recovery Premium with their own funds if Gross Cash Flows are not sufficient to cover such repayment at any time, without penalty.  Each payment of a Recovery Amount shall first be applied to the Recovery Principal and then shall be applied to Recovery Premium.




12







Material Definitions

Attachment Point : The cumulative forecasted death benefits payable through each Anniversary Date of the Covered Portfolio that occurs during the Term, multiplied by (i) 85% for each of the first three Anniversary Dates and (ii) 75% for each succeeding Anniversary Date but (iii) $0 for each Anniversary Date after the Term


Cumulative Recovery Premium Paid: The cumulative amount of Recovery Premiums paid to the insurer during the Term


Gross Cash Flows : The cumulative Death Benefits paid or payable in relation to all Covered Policies in the Covered Portfolio because of the confirmed maturity of such Covered Policies since the Effective Date, which amount shall be no less than 40% of the cumulative forecasted death benefits payable for any date that is on or after the eighth Anniversary Date (the “Gross Cash Flows Floor”)


Recovery Principal: The aggregate cumulative amount of the Claim Amounts paid and reduced, but not below zero, by any payments of any Recovery Amounts received by the Insurer prior to such date (and not paid or applied in reduction of any Recovery Premium); provided that such amount shall never exceed the product of (x) 25% and (y) the cumulative Death Benefits of all Covered Policies in the Covered Portfolio.


Recovery Premium: The aggregate balance, from time to time, of the interest accrued on the Recovery Principal at the rates and compounded as described in the Coverage Certificate (rates are labor based and vary depending on outstanding balances), together with interest accrued on all accrued and unpaid Recovery Premium at the same rates and following the same compounding methodologies from the start date specified in such applicable Coverage Certificate; provided that no interest shall accrue on any portion of the Recovery Principal that is payable based on the implementation of the Gross Cash Flows Floor on and after the eighth Anniversary Date due to the Gross Cash Flows at such time being lower than the Gross Cash Flows Floor.

Permitted Policy Sales and Substitutions

The Insurer must approve any Policy sale that does not result in the full repayment of any outstanding Recovery Amounts.  The Insurer may, in its sole discretion, permit a substitution of new Policies to replace any sold Policies.

MRI Premium

MRI Premium = 2% of the cumulative Death Benefits of the Covered Policies is due on or before the issuance of any Coverage Certificate.

Commitment Fee

Commitment Fee = 1% of the cumulative Death Benefits of the Covered Policies is due if there is a Payment Date related to the third Anniversary Date, on such Payment Date otherwise on the date that is 90 days after the third Anniversary Date.

Exclusions

The Policy is subject to multiple exclusions as set forth in the Policy.

Subrogation

Payments under the Policy are subordinate to any Senior Loans as described more fully in the Intercreditor Agreement.


Current NIBs Contracts


The following tables contain information about the NIBs or Qualified NIBs, as of the date of their respective acquisitions, or March 11, 2013, January 14, 2014, and March 2, 2015, respectively: face amount; policy type; gender of the insured; current age of the insured; life expectancy of the insured; life insurance carrier; and current carrier S&P rating. The average annual cost of premiums are excluded because the premium costs vary (sometimes greatly) from year to year; typically, the premiums increase as the underlying insured individuals age; neither an average premium cost nor an estimated per Policy premium cost would give an accurate or reliable estimate of the yearly costs.  The actual estimated premiums for the next five years are provided below.  We will not receive the face amount of the Policies, but only the net insurance benefit.  See the heading “Plan of Operation” of the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 5, below.




13




NIBs Acquired from PCH Financial

 

Face Amount

Policy Type

Gender

Current Age 1

Life Expectancy 2

Months Elapsed since latest LE 3

Carrier

Carrier Rating

 

 

 

 

 

 

 

 

S&P

1

$5,000,000

Universal Life

Male

85

91 mos.

36.2 mos.

American General

A+

2

$1,000,000

Universal Life

Male

87

70 mos.

35.4 mos.

AXA

AA-

3

$8,000,000

Universal Life

Male

85

93 mos.

41.4 mos.

Lincoln

AA-

4

$3,000,000

Universal Life

Male

79

134 mos.

42.9 mos.

Jefferson Pilot

AA-

5

$10,000,000

Universal Life

Male

85

85 mos.

37.6 mos.

New York Life

AA+

6

$5,000,000

Universal Life

Male

87

77 mos.

34.5 mos.

Jefferson Pilot

AA-

7

$8,000,000

Universal Life

Female

85

116 mos.

44.2 mos.

John Hancock

O

8

$2,500,000

Universal Life

Male

82

104 mos.

37.5 mos.

Lincoln

AA-

9

$10,000,000

Universal Life

Male

89

52 mos.

34.9 mos.

American General

A+

10

$4,000,000

Universal Life

Male

88

81 mos.

34.7 mos.

Lincoln

AA-

11

$5,000,000

Universal Life

Male

81

138 mos.

37.9 mos.

John Hancock

O

12

$5,000,000

Universal Life

Male

83

131 mos.

41.5 mos.

Lincoln

AA-

13

$10,000,000

Universal Life

Male

78

139 mos.

37.8 mos.

Lincoln

AA-

14

$10,000,000

Universal Life

Male

79

137 mos.

36 mos.

ReliaStar

A

15

$10,000,000

Universal Life

Male

82

148 mos.

41.1 mos.

AXA

AA-

16

$3,000,000

Universal Life

Male

77

138 mos.

35.1 mos.

Protective

AA-

17

$1,000,000

Universal Life

Male

83

122 mos.

42.8 mos.

LBL

A+

18

$1,600,000

Universal Life

Male

80

151 mos.

34.7 mos.

Transamerica

AA-

19

$11,535,434

Universal Life

Male

79

153 mos.

37.4 mos.

New York Life

AA+

20

$10,000,000

Universal Life

Female

84

140 mos.

38 mos.

AXA

AA-

21

$3,000,000

Universal Life

Male

74

164 mos.

38.5 mos.

AXA

AA-

22

$3,000,000

Universal Life

Male

78

147 mos.

36.2 mos.

LBL

A+

 

$129,635,434

 

 

 

 

 

 

 


On March 11, 2013, pursuant to the PCH Transfer Agreement between PCH Financial and ANEW LIFE, our wholly-owned subsidiary, we acquired NIBs related Policies with an aggregate original face amount equal to $129,038,933, for cash and Promissory notes totaling $5,999,000, $3,000,000 of which was paid in cash and $2,999,000 of which was paid by the issuance of a Secured Promissory Note. Also see the heading “Business Developments During the Fiscal Year Ended March 31, 2015” and “Business Developments Subsequent to the Fiscal Year Ended March 31, 2015” above regarding the current status of what was formerly the “Secured Promissory Note” and is now the Amended and Restated Promissory Note, with a current principal balance of $1,493,255, and due and payable on October 31, 2015, with a 45 day Cure Period.

__________________

1 Age at nearest birthday (as of March 31, 2015)

2 The LE input is the straight average of the AVS and 21 st Services life expectancies available at the time of the purchase of the NIBs.  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 reports may have been updated since the time of purchase and are not reflected here.  The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known with certainty.

3 The months elapsed since latest LE represents the difference between March 31, 2015 and the blended LE report date divided by 30.5 days to arrive at a number expressed in months.



14





Although paid by the Policy Holder, the estimated premiums to be paid on the underlying policies for each of the five succeeding fiscal years to keep the Policies in force as of March 31, 2015, are as follows:


Year

 

Premiums

 

Expenses + Interest

 

Total

Year 1

 

$

4,581,600

 

 $

    3,735,396

 

 $

      8,316,996

Year 2

 

 

4,192,662

 

 

    3,083,919

 

 

7,276,581

Year 3

 

 

3,631,218

 

 

2,821,920

 

 

      6,453,138

Year 4

 

 

4,193,023

 

 

    3,068,422

 

 

      7,261,445

Year 5

 

 

3,452,998

 

 

1,766,955

 

 

5,219,953

Thereafter

 

 

13,970,564

 

 

8,411,815

 

 

22,382,379

Total

 

$

34,022,065

 

 $

  22,888,427

 

 $

    56,910,492


These premiums will reduce the net insurance benefits payable under the Policies, along with other costs and expenses and repayments under the MRI, if any, as outlined above.  Certain policies contain a return of premium provision, which will increase the net insured benefit as premium payments are made.


Since the execution and delivery of the PCH Transfer Agreement, the Secured Promissory Note was: (i) acquired by us under the Del Mar ATA, subject to pledge to secure our non-cash obligations under the Del Mar ATA in the event we received and accepted $400 million in Qualified NIBs from Del Mar under the Del Mar ATA; (ii) we signed an Amended and Restated Promissory Note effective November 5, 2013, with a provision that would reduce the principal from $2,999,999 to $1,500,000, and assigned the Amended and Restated Promissory Note to Del Mar;  and (iii) we acquired the Buyback Rights to re-acquire such Amended and Restated Promissory Note for $1,000,000 plus an additional 2% for each month (whole or partial) that elapsed from the time of the assignment of such Amended and Restated Promissory Note by Del Mar to a third party, subject to a minimum Buyback Price of $1,120,000, which Buyback Rights became ours by reason of Del Mar’s failure to deliver the $400 million in Qualified NIBs to us by the date of our first extension to them of such obligation, or by April 1, 2014. However, these Buyback Rights expired on November 5, 2014.  Also, see the headings “Business Development,” above, and “Qualified NIBs acquired under the Del Mar ATA,” below.  




15




Qualified NIBs acquired under the Del Mar ATA


 

Face Amount

Policy Type

Gender

Current Age 1

Life Expectancy 2

Months Elapsed since latest LE 3

Carrier

Carrier Rating S&P

1

$4,000,000

Universal Life

Male

85

65 mos.

22 mos.

Hancock

AA-

2

$10,000,000

Universal Life

Male

81

153 mos.

23 mos.

Lincoln

AA-

3

$10,000,000

Universal Life

Female

84

144 mos.

22.7 mos.

Natl. Western

A

4

$4,000,000

Universal Life

Female

81

142 mos.

21.4 mos.

AXA

AA-

5

$10,000,000

Universal Life

Female

84

137 mos.

21.3 mos.

Sun Life

AA-

6

$10,000,000

Universal Life

Female

84

46 mos.

22.2 mos.

ReliaStar

A

7

$9,600,000

Universal Life

Female

84

125 mos.

22.6 mos.

Lincoln

AA-

8

$5,000,000

Universal Life

Male

80

91 mos.

22.9 mos.

AXA

AA-

9

$10,000,000

Universal Life

Male

83

94 mos.

22.5 mos.

Beneficial Life

A

10

$10,000,000

Universal Life

Female

86

105 mos.

22.7 mos.

AXA

AA-

 

$82,600,000

 

 

 

 

 

 

 


The following are the initial terms of the Del Mar ATA and the related Europa Agreement as amended:


Effective June 7, 2013, we entered into the Del Mar ATA, which involved the purchase of certain life settlement assets consisting of 100% of the legal and net beneficial ownership interest or NIBs in two portfolios of life insurance policies having a face amount of approximately $284,270,924, among other assets, and provided for the conversion of the NIBs into “Qualified NIBs” having a face amount of $400 million (See Note 6 to the Consolidated Financial Statements for requisites of “Qualified NIBs”).  The additional assets that were conveyed to us under the Del Mar ATA were further consideration to ensure that any cash advances required of us on the anticipated receipt of Qualified NIBs would be secured until such Qualified NIBs were received.  The purchase price of the assets was $20,000,000, $8,000,000 in cash and $12,000,000 represented by a promissory note or notes, to be executed and delivered on a pro rata portion of the $12,000,000, based upon the percentage of Qualified NIBs as provided.  In the event Del Mar Financial was unable to provide the Qualified NIBs by December 31, 2013, we would have the option of selling any of these additional assets acquired up to a liquidated damages settlement payment equal to 100% of any cash payments made by us under the Del Mar ATA.  These NIBs are collateral, with the other assets acquired, for the obligations of Del Mar under the Del Mar ATA.


We also entered into the Europa Agreement on June 7, 2013, in connection with the Del Mar ATA, whereby it was agreed that Europa would exclusively provide its NIBs related structuring and consulting services to us, with the understanding that we had no obligation to purchase any NIBs that Europa presented to us.  Europa received an initial cash advance of $340,000 for its services (the “Structuring Fee”) related to its structuring and consulting services regarding the Del Mar ATA.  Europa will also receive a Structuring Fee of 1% of the face amount of the life insurance policies underlying all NIBs introduced and acquired, payable as follows: 50% of the fee on the delivery of the NIBs; and the remaining 50% being payable on the conversion of the NIBs to Qualified NIBs as defined in the Del Mar ATA.  If all NIBs are “Qualified NIBs,” all fees will be due on closing.  Del Mar Financial and Europa subsequently agreed that the total cash payment due from us under the Del Mar ATA ($8,000,000 to Del Mar

__________________

1 Age at nearest birthday (as of March 31, 2015)

2 The LE input is the straight average of the AVS and 21 st Services life expectancies available at the time of the purchase of the NIBs.  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 reports may have been updated since the time of purchase and are not reflected here.  The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known with certainty.

3 The months elapsed since latest LE represents the difference between March 31, 2015 and the blended LE report date divided by 30.5 days to arrive at a number expressed in months.




16




Financial and $4,000,000 to Europa) would be reduced on a dollar for dollar basis for any cash payments or expenses paid by us in excess of $8,000,000 under the Del Mar ATA.  As of March 31, 2015, such cash payments and expenses were $9,032,386.


On November 14, 2013, we amended the Del Mar ATA and the Europa Agreement and other related agreements: (i) to reflect the dollar for dollar reduction in fees due to Del Mar Financial and Europa under the Del Mar ATA and the Europa Agreement to the extent that our cash payments and other expenses under the Del Mar ATA exceed $8,000,000 (ii); to announce a Collateral Release Agreement with PCH Financial, whereby PCH Financial released any lien it had on any assets we had purchased under the Del Mar ATA; (iii) set payment dates for certain payments due Europa under the Europa Agreement; (iv) to confirm that $8,241,319 had been expended by us in the Cash Payment and related expenses to that date; (v) to confirm that any excess of the Cash Payment and expenses that exceeds $12,000,000 shall be a liability of Del Mar due on demand; (vii) to confirm that liquidated damages under the Del Mar ATA were 100% or two times the cash payment and our expenses under the Del Mar ATA; (viii) to confirm payment to Michael Brown of $25,000 as a consultant under the Europa Agreement and that such payment was part of our expenses for all purposes under the Del Mar ATA; (ix)  and to announce the execution and delivery of the Amended and Restated Promissory Note, the reduction of its principal to $1,500,000, its assignment to Del Mar and Del Mar’s assignment to a third party; and our Buyback Rights with respect to the Amended and Restated Promissory Note, which have expired, and all of which is discussed above under the heading “Business Developments During the Fiscal Year Ended March 31, 2015.”  


To date, we have received $90.6 million in Qualified NIBs and we have extended the due date of the delivery of the remaining Qualified NIBs until August 31, 2015. However, it appears unlikely that Del Mar will be able to deliver the remaining Qualified NIBs as discussed above under the heading “Business Developments Subsequent to the Fiscal Year Ended March 31, 2015.”  Although paid by the Policy Holder, the estimated premiums to be paid on the underlying policies for each of the five succeeding fiscal years to keep the Policies in force as of March 31, 2015, are as follows:


Year

 

Premiums

 

Expenses + Interest

 

Total

Year 1

 

$

         2,501,817

 

 $

1,603,673

 

 $

    4,105,490

Year 2

 

 

         2,683,642

 

 

1,651,951

 

 

    4,335,593

Year 3

 

 

         2,739,232

 

 

1,646,197

 

 

    4,385,429

Year 4

 

 

         2,851,673

 

 

1,402,523

 

 

    4,254,196

Year 5

 

 

2,607,937

 

 

1,317,230

 

 

3,925,167

Thereafter

 

 

12,410,787

 

 

4,510,811

 

 

16,921,598

Total

 

$

25,795,088

 

$

12,132,385

 

$

37,927,473




17




Qualified NIBs acquired under the HFII Asset Transfer Agreement


 

Face Amount

Policy Type

Gender

Current Age 1

Life Expectancy 2

Months Elapsed since latest LE 3

Carrier

Carrier Rating S&P

1

$2,500,000

Universal Life

Male

85

107 mos.

40.6 mos.

National Western

A

2

$1,500,000

Universal Life

Male

81

97 mos.

42.4 mos.

Hancock

AA-

3

$5,000,000

Universal Life

Male

84

110 mos.

41.6 mos.

West Coast

AA-

4

$5,000,000

Universal Life

Male

84

109 mos.

41.8 mos.

Lincoln Benefit Life

A+

5

$5,000,000

Universal Life

Female

86

129 mos.

42.2 mos.

Columbus

AA+

6

$7,000,000

Universal Life

Male

80

148 mos.

34.8 mos.

Lincoln

AA-

7

$5,000,000

Universal Life

Female

88

92 mos.

31.7 mos.

AXA

AA-

8

$4,000,000

Universal Life

Female

86

124 mos.

37 mos.

Security Life of Denver

A

9

$2,400,000

Universal Life

Male

82

134 mos.

41.6 mos.

Lincoln

AA-

10

$5,000,000

Universal Life

Male

88

80 mos.

33.5 mos.

AXA

AA-

11

$4,500,000

Universal Life

Male

84

81 mos.

34.5 mos.

Columbus

AA+

12

$3,000,000

Universal Life

Male

89

67 mos.

42.4 mos.

AXA

AA-

13

$2,000,000

Universal Life

Male

82

124 mos.

35.8 mos.

Hancock

AA-

14

$5,000,000

Universal Life

Female

85

116 mos.

41.3 mos.

Security Life of Denver

A

15

$2,000,000

Universal Life

Male

79

130 mos.

41.4 mos.

Security Life of Denver

A

16

$5,000,000

Universal Life

Male

85

111 mos.

36 mos.

Prudential

AA-

17

$1,500,000

Universal Life

Male

92

63 mos.

30.7 mos.

AXA

AA-

18

$1,500,000

Universal Life

Male

84

92 mos.

32.1 mos.

AXA

AA-

19

$7,000,000

Universal Life

Female

82

94 mos.

37.2 mos.

Jefferson Pilot

AA-

20

$10,000,000

Universal Life

Male

80

135 mos.

36.7 mos.

AXA

AA-

21

$1,500,000

Universal Life

Male

88

66 mos.

34.9 mos.

Protective

AA-

22

$2,000,000

Universal Life

Male

78

96 mos.

35.8 mos.

National Western

A

23

$10,000,000

Universal Life

Male

77

145 mos.

33.7 mos.

Hartford

A

24

$5,000,000

Universal Life

Male

77

152 mos.

34.5 mos.

AXA

AA-

25

$5,000,000

Universal Life

Male

77

152 mos.

34.5 mos.

AXA

AA-

26

$3,000,000

Universal Life

Female

84

119 months

34.2 mos.

ReliaStar

A

27

$10,000,000

Universal Life

Female

84

110 months

35.9 mos.

AXA

AA-

28

$3,000,000

Universal Life

Male

90

55 months

36.8 mos.

Hancock

AA-

29

$975,000

Universal Life

Male

93

53 months

27.6 mos.

Columbus

AA+

 

$124,375,000

 

 

 

 

 

 

 


On December 5, 2014, we entered into a binding Letter of Intent with HFII, which resulted in our execution and delivery of an Asset Purchase Agreement on March 2, 2015, as amended on March 31, 2015, whereby we agreed to

__________________

1 Age at nearest birthday (as of March 31, 2015)

2 The LE input is the straight average of the AVS and 21 st Services life expectancies available at the time of the purchase of the NIBs.  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 reports may have been updated since the time of purchase and are not reflected here.  The life expectancy report is just an estimate, as the life expectancy of any individual cannot be known with certainty.

3 The months elapsed since latest LE represents the difference between March 31, 2015 and the blended LE report date divided by 30.5 days to arrive at a number expressed in months .




18




purchase and HFII agreed to sell four portfolios of life insurance policies in the form of NIBs, with a face value of approximately $124,375,000 and which meet our investment criteria.


For additional information on the HFII Asset Transfer Agreement and the Amended and Restated Promissory Note, see the heading “Business Developments During the Fiscal Year Ended March 31, 2015,” and “Business Developments Subsequent to the Fiscal Year Ended March 31, 2015,” above.

Year

 

Premiums

 

Expenses + Interest

 

 

Total

Year 1

 

$

4,654,300

 

 $

3,543,540

 

 

 $

8,197,840

Year 2

 

 

4,291,467

 

 

2,715,684

 

 

 

7,007,151

Year 3

 

 

4,624,064

 

 

3,586,905

 

 

 

8,210,969

Year 4

 

 

5,504,914

 

 

2,955,384

 

 

 

8,460,298

Year 5

 

 

5,716,779

 

 

3,051,706

 

 

 

8,768,485

Thereafter

 

 

19,632,960

 

 

17,840,201

 

 

 

37,473,161

Total

 

$

44,424,484

 

$

33,693,420

 

 

$

78,117,904


Distribution Methods of the Products or Services


Presently, it is anticipated that all NIBs we acquire will be held until maturity.  Through the combination of the Senior Loans, MRI coverage and debt or equity financing by us, management believes we should be well positioned to hold the NIBs until maturity.  However, we will continuously analyze the Senior Loan amounts, MRI payments, NIBs and underlying Policies to determine, in conjunction with the Lux Sarls, whether any such assets should be liquidated. Further, in the event of any events of default under the Senior Loans or MRI’s, we plan to attempt, in conjunction with the Policy Holders and Lux Sarls, to sell the affected assets, in conjunction with the Lux Sarls, if necessary or advisable; absent that, we may lose our interest in the affected NIBs.  There is an active secondary market for Policies that we can access if it is determined that any of the Policies or NIBs should be liquidated.  However, prices in the secondary market are relatively volatile, and our goal is to avoid the early sale of NIBs or Policies so that we can realize maximum net amount on maturity of the Policies.  Through strategic alliances with well-known Policies’ servicers and market participants, we believe we have substantial lines of communications with the potential participants active in the life settlement secondary market; however, no assurance can be given that if we are required to sell any of our NIBs or other insurance related products prior to maturity, that we will be able to do so without incurring a loss.


Status of any Publicly Announced New Product or Service


We have not had any recent public announcement of any new product or service.


Competitive Business Conditions and Smaller Reporting

Company’s Competitive Position in the Industry and Methods of Competition


Life Settlement Market Generally .  Life settlements are secondary market sales of life insurance policies that consumers no longer want or are unable to keep because of personal financial conditions.  The market provides consumers an option of selling their policies for significantly more than the cash surrender value that would be paid by the insurance carrier upon the surrender of the policy.  From the early 2000s through 2007, the market for life settlements grew substantially from both the demand and the supply sides of the transactions.  However, growth slowed in 2008 and has been declining since that time.  The insurance research group, Conning & Co., issued a study predicting that growth in the life settlement market will remain flat or decline from 2012 and beyond due to lingering distress in the credit and investment markets and investor concerns regarding liquidity requirements of life settlements.  Regardless, we believe that the supply of policies should steadily increase due to the aging population and increased awareness of the life settlement market as an alternative to allowing a policy to lapse for little or no value.  Participants in the secondary life settlement market include major insurance companies and many funds.


NIB Secondary Market .  To date, we are only aware of three providers of NIBs, Del Mar Financial, PCH Financial and HFII, and we plan to attempt to find others and create additional relationships with any such NIBs providers.  We have also considered creating the NIBs internally to further reduce the cost of the NIBs; this process would require additional funding and various third party relationships similar to those described above, and no assurance



19




can be given that we will have either the resources or that the required third party relationships will be available.  To create NIBs internally, we would have to purchase life settlement policies in the secondary market and attempt to obtain the necessary loans and MRI coverage and structure the transactions in a manner that would be as favorable as our present NIBs.  This process would require material research related to structuring and tax planning.  No assurance can be given that we could create our own NIBs.


Senior Loan Market .  Because of the uncertainty of maturity of the Policies, financing is relatively difficult to secure. The current Senior Lender on the NIBS we have acquired is presently believed to be the only lender providing financing for the Policies securing the NIBs.  We believe there may be additional lenders available in the coming years; however, we have no arrangements or understandings with any such lending sources, nor the Senior Lender, and no assurance can be given that any such lending sources will become available to us in the future.  At present, the NIBs will each be subject to loans from the Senior Lender, which may be used to pay premiums on the Policies, and to pay the servicing fees, the securities intermediary fee, the administrator fees and certain other costs and expenses of the Lux Sarls (collectively, the “Fees”) under certain circumstances.  Any amounts due and payable to the Senior Lender shall be senior to payments on the NIBs and shall accrue interest at the rate of approximately 4.5% to 8.00% per annum and be compounded quarterly.  The Senior Lender will have a lien senior to the partnership interests of the Policy Holders.  After an event of default under the Senior Loans, the Senior Lender will have the right to exercise remedies with respect to such partnership interests, including disposition thereof, and will be entitled to receive proceeds of any such disposition to the extent of the obligations outstanding under the Senior Loans prior to any such proceeds being available to us.


The Senior Loans typically have a term of approximately five years and can be drawn upon during such term.  The Senior Loan can be prepaid subject to certain pre-payment penalties.  We intend to request that the Lux Sarls or their related parties or subsidiaries who are parties to the Senior Loans renegotiate the Senior Loans, or we intend to have alternate financing available, prior to the end of the Senior Loans’ terms; presently, we have no alternative sources of Senior Loans available to us.  The Senior Lender is committed to the issuance of Senior Loans on life settlement products like NIBs, and we believe it has the capacity to continue to make such loans. The ongoing availability of these Senior Loans will allow for the creation of products like NIBs, and which are currently only sold by PCH Financial and Del Mar Financial; however, being “committed” and actually making the loans are entirely different matters.  The failure of the Senior Lender to continue making these loans to PCH Financial and Del Mar Financial may result in their inability to provide NIBs to us for purchase and our business model may suffer substantially.  It should be noted that we do not have a direct contractual relationship with the Senior Lender and no written agreement in this regard has been provided.


It is our understanding that the Senior Lender is a member of the Federal Association of German Banks; has been granted a license in accordance with the German Banking Act; and is registered and supervised by the German Federal Supervisory Authority.  The Senior Lender is not rated.  


MRI Market .  There are a limited number of MRI Providers.  While the MRI coverage is relatively expensive, management believes that Policies that are covered by MRI have less volatility, have lower liquidity issues and should be given higher values for purposes of financing and secondary market sales.  


Sources and Availability of Policies and NIBs


Existing Policies and NIBs .  We are currently the owner of NIBs related to Policies with an aggregate face amount equal to $341,196,882, and we are in negotiations to purchase additional NIBs related Policies.  To date, we have received Qualified NIBs under the Del Mar ATA related to life insurance policies with a cumulative face amount of $90.6 million and we hold, as collateral, non-Qualified NIBs related to life insurance policies with a cumulative face amount of approximately $94 million. These $94 million of non-Qualified NIBs are divided between three portfolios of policies of face amounts that total approximately $94 million.  While the analysis is ongoing and a final determination has not yet been made, it appears that newly created Qualified NIBs from unrelated policy owners may be acquired at a lower cost than the conversion of some existing non-Qualified NIBs portfolios.  Management believes there is an adequate supply of life settlement insurance interests available for purchase through current contacts or the secondary market for life settlement insurance policies, though its ability to acquire further interests in NIBs will be subject to the availability of a Loan Facility, or self-financing, for which we presently do not have the available resources, and the MRI Provider, as to which no assurance can be given.  We



20




will not receive the face amount of the Policies, but only the net insurance benefit.  See the heading “Plan of Operation” of the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations, Part II, Item 5, below.


Additional Availability of Policies and NIBs .  While the life settlement market as a whole has slowed in growth in recent years, there is still an adequate supply to meet our objectives. We intend to continue to work with prior vendors of our NIBs and our current contacts in the life settlement industry who have been active in the market for years and have well established relationships with owners and sellers of qualifying Policies, along with Europa, our structuring consultant, Europa (see the heading “Dependence on One or a Few Major Providers” below), which is engaged in the business of structuring pooled life insurance purchases, sales and financing in Luxemburg, Ireland and Germany.


Purchasing Analysis and Process .  We currently review NIBs and Policies from vendors of our NIBs, Europa and the secondary market.  We also work with licensed life settlement providers; however, we do not contact insured parties or consumers.  The Servicer has four roles (in timeline order): First, it provides advisory or pre-financing services to assist in the construction of portfolios that might ultimately be financed by the Senior Lender and covered by the MRI Provider.  These services are provided either directly to the initial NIBs owner (i.e., the Lux Sarls) or to prior policy holders or structuring consultants (i.e., like Del Mar Financial or PCH Financial).  Second, it provides policy due diligence services to the Senior Lender in connection with the loan underwriting process. Third, it provides ongoing policy servicing to the Policy Owner once the Policies are owned and the NIBs structure is in place.  Fourth, it provides assistance to initial NIB purchasers (such as PCH Financial, Del Mar Financial or other entities that acquire, market and sell the NIBs) or secondary NIB purchasers (such as Sundance), in their analysis and ongoing ownership of the NIBs. The Servicer does not provide advice regarding the economics or profitability of the NIBs.  Europa provides us with financial analysis of the NIBs as our structuring consultant.  We directly benefit from these services by our ownership of the NIBs, though we have no contractual arrangements with the Servicer.   We also rely on our general counsel for due diligence related to non-insurance contractual matters, and have relied on our general counsel for certain chain of title issues relating to the Policies since April 1, 2013.  As NIBs are submitted to us, the Servicer or other servicing company will provide due diligence and valuation summaries.  These summaries will then be reviewed by our general counsel and management team.  We will perform a review of the Policies and NIBs, including a detailed review of the financing and MRI coverage, and, if our criteria are met, we will purchase the NIBs, subject to having available resources.  Our general counsel was formerly general counsel to our current Servicer and has 10 years of experience in providing due diligence services and financing review for life insurance policies.  See the heading “Significant Employees” of the caption “Directors and Executive Officers” of this Item below.  We do not track concentrations of the same pre-existing medical conditions among insured individuals.  While the policy servicer does have detailed health records related to the insureds under the Policies, they have not engaged in such a comparison to our knowledge because mos.t people in the 75 years of age and older category have multiple and ever changing health conditions.  Some have had conditions in the past that are no longer present and vice versa. Accordingly, it would be difficult to separate and track them in this manner.


Dependence on One or a Few Major Providers


Policy Providers .  We believe we have access to multiple policy sellers and supply does not currently appear to be an issue.  However, the other components of the NIBs structure have limited sources.


NIB Providers .  For the NIBs to be fully marketable and ready for purchase, the Lux Sarls must also secure Senior Loans and MRI coverage.  While we and consultants for the Lux Sarls are seeking additional financing sources and MRI Providers, there is currently believed to be only one source of financing for the Senior Loans and two historic MRI Providers and one continuing MRI Provider.  Del Mar Financial and PCH Financial are the only NIBs providers known to us; however, we are continuing to seek additional providers and sources for the components of the NIBs to ensure that our demand for these types of life settlement products will be met.


Europa Agreement .  On March 14, 2013, we entered into a Structuring and Consulting Agreement with Europa, our structuring consultant to advise and assist us in the acquisition and structuring of NIBs and life insurance benefits and other products tied to life insurance policies on insured’s aged 75 or older.  Europa is engaged in the business of structuring pooled life insurance purchases, sales and financing in Luxembourg, Ireland and Germany The



21




Consulting Agreement may be terminated by either party at any time; requires each party to pay its own expenses; contains confidentiality provisions for the protection of the parties; and other customary provisions regarding due authorization, counterparts, governing law, the completeness of the agreement, amendments and severance.  A copy of the Europa Consulting Agreement was filed as an Exhibit to our Current Report dated March 29, 2013, which was filed with the SEC on July 12, 2013.  See Part IV, Item 15.  Also see the headings “Business Developments During the Fiscal Year Ended March 31, 2015” and “Business Developments Subsequent to the Fiscal Year Ended March 31, 2015” above regarding the current status of what was formerly the “Secured Promissory Note” and is now the Amended and Restated Promissory Note, with a current principal balance of $1,500,000, and due and payable on October 31, 2015, with a 45 day Cure Period.


Need for any Governmental Approval of Principal Products or Services


We do not purchase life insurance policies or life settlement products directly from any insured, accordingly, we are not required to have any special licenses to conduct our current and intended business operations; however, see the heading “Effect of Existing or Probable Governmental Regulations on the Business” directly below for additional information on the effect of existing or probable government regulations on our business.


Effect of Existing or Probable Governmental Regulations on the Business


Life Settlement Licensing and Regulation  


Life Settlements are heavily regulated on the state and federal levels.  The regulations are focused on licensing market participants and disclosure to policy owners.  We support such regulations and believe such regulations will help to stop abuses in the life settlement industry and improve the negative connotations associated with the industry.  The regulations primarily apply to purchasers of policies directly from the original policy owner.  We are not licensed to engage in such purchases and will not engage in such purchases.  All of the Policies subject to our existing NIBs will have been purchased prior to our involvement through licensed providers, if necessary; and any future interests in any life settlement policies will have been purchased from the insured prior to our purchase of any interest in any such policies.  We exercise care, primarily relying on the due diligence of third-parties, to ensure that all policies were initially purchased in compliance with applicable law and review the laws of the applicable states prior to any purchase of NIBs or any life settlement policies by us.  Our Servicer conducted this review for the Senior Lender prior to the Senior Lender’s provision of financing for our current portfolio of NIBs.  Going forward, our general counsel will oversee such acquisitions, and we will continue to rely on the due diligence conducted by the servicers for the NIBs sellers, the Senior Lender and MRI Provider.  Additionally, any sales of NIBs or life settlement policies will be made in the secondary market for these products, in transactions with mutual funds, hedge funds, insurance companies and other non-consumer market purchasers.


Specifically, upon acquiring the NIBs, PCH Financial or Del Mar will provide a due diligence package that includes medical/underwriting files, policy analyses and chain of title information.  We will be relying on our consultant, Europa, to work with PCH or Del Mar to compile this information.  Our general counsel will review the chain of title information and the information related to policy origination.  This includes a review of the original applicant of each policy and relationship of such applicant to the insured.  We will then trace the ownership of the policy via change of ownership forms filed with the applicable insurance carrier from that original applicant to the current owner of the policy to ensure there are no breaks in the chain of title.  It should be noted that prior to our involvement, the policy files will have passed the due diligence requirements of the Senior Lender and the MRI Provider.  While we are not involved in these reviews and will perform our own separate review of the files, these reviews do provide some additional comfort.  Until we engaged in-house counsel, the due diligence conducted by our legal counsel consisted of non-insurance based due diligence and due diligence related to contractual issues only.




22




Foreign Licensing and Regulation


We have and expect to engage in business with multiple foreign counterparts in Luxembourg, Ireland, Germany and other countries.  We rely on representations from such counterparties that they are in compliance with all applicable laws, rules and regulations.  


SEC’s Life Settlement Task Force


An SEC Staff Report on life settlements was released by the SEC on July 22, 2010, and can be accessed at www.sec.gov/news/studies/2010/lifesettlements-reportpdf, that discusses various issues in the life settlements market.  In this Report, the SEC recommends that the Securities Act and the Exchange Act be amended to define life settlements as a “security,” so that persons involved in the life settlement markets would be afforded the protections of applicable federal securities laws, rules and regulations, along the probability of regulation under the Investment Company Act of 1940, as amended (the “Investment Company Act”); and that the SEC should continue to monitor the legal standards of conduct of participants in the life settlements market, the development of a life settlements securitization market, encourage Congress and state regulators to consider more significant and consistent regulation of the life expectancy underwriters and to consider instructing the SEC Staff to issue an investor bulletin regarding investments in life settlements.  The adoption of these regulations could substantially increase the costs of our filings with the SEC, especially if we were determined to be subject to the provisions of the Investment Company Act, including further oversight of our business model that could limit our ability to change investment policies without stockholder approval, prohibit acquiring assets from an affiliate without an approved exemptive application from the SEC, limit our leveraging of assets to one-third of our total asset value and account for all derivatives as a leverage of assets to the extent that they create an obligation on our part to pay out assets to a counterparty ahead of our stockholders and generally, require 40% of our directors to be independent directors, along with other requirements that may impact operations, like recordkeeping requirements, reporting requirements and privacy requirements. All of these potential regulations could have a substantial negative affect on our business model and revenues and greatly increase our expense of regulatory compliance.


Exchange Act


We are subject to the following regulations of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and applicable securities laws, rules and regulations promulgated under the Exchange Act by the SEC.  Compliance with these requirements of the Exchange Act increases our legal and accounting costs.


Accelerated Filer


We are subject to the reporting requirements of Section 13 of the Exchange Act, and subject to the disclosure requirements of Regulation S-K.  We were a “smaller reporting company” until our determination that we have become an “accelerated filer,” which we made, based upon the market value of our common stock owned by our non-affiliate stockholders at September 30, 2014, or the end of our second fiscal quarter.  We will be required to indicate our status as an “accelerated filer” in our Quarterly Report for our quarter ended June 30, 2015, and provide appropriate information in that Quarterly Report as required of an “accelerated filer.”


Emerging Growth Company


We are also an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or “JOBS Act.”  As long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not an “emerging growth company,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; and exemptions from the requirements of holding an annual nonbinding advisory vote on executive compensation and seeking nonbinding stockholder approval of any golden parachute payments not previously approved.  We are also only required to file audited consolidated financial statements for the previous three fiscal years in our Exchange Act filings.


We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”  We can remain an “emerging growth company” for up to five years.  We would cease to be an “emerging growth



23




company” prior to such time if we have total annual gross revenues of $1 billion or more and when we become a “large accelerated filer,” have a public float of $700 million or more or we issue more than $1 billion of non-convertible debt over a three-year period.


Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.


Sarbanes/Oxley Act


Except for the limitations excluded by the JOBS Act discussed under the preceding heading “Emerging Growth Company,” we are also subject to the Sarbanes-Oxley Act of 2002.  The Sarbanes/Oxley Act created a strong and independent accounting oversight board to oversee the conduct of auditors of public companies and strengthens auditor independence.  It also requires steps to enhance the direct responsibility of senior members of management for financial reporting and for the quality of financial disclosures made by public companies; establishes clear statutory rules to limit, and to expose to public view, possible conflicts of interest affecting securities analysts; creates guidelines for audit committee members’ appointment, compensation and oversight of the work of public companies’ auditors; management assessment of our internal controls; prohibits certain insider trading during pension fund blackout periods; requires companies and auditors to evaluate internal controls and procedures; and establishes a federal crime of securities fraud, among other provisions. Compliance with the requirements of the Sarbanes/Oxley Act will substantially increase our legal and accounting costs.


Exchange Act Reporting Requirements


Section 14(a) of the Exchange Act requires all companies with securities registered pursuant to Section 12(g) of the Exchange Act like we are to comply with the rules and regulations of the SEC regarding proxy solicitations, as outlined in Regulation 14A.  Matters submitted to stockholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A (where proxies are solicited) or 14C (where consents in writing to the action have already been received or anticipated to be received) of Regulation 14, as applicable; and preliminary copies of this information must be submitted to the SEC at least 10 days prior to the date that definitive copies of this information are forwarded to our stockholders.


We are also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the SEC on a regular basis, and will be required to timely disclose certain material events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.


Research and Development Costs during the Last Two Fiscal Years


We had no research and development costs during our last two fiscal years ended March 31, 2015, and 2014.


Number of Total Employees and Number of Full-Time Employees


We have three full-time employees, Randall F. Pearson, our President; Matthew G. Pearson, our Chief Operating Officer; and Lisa L. Fuller, Esq., our general legal counsel.


Additional Information


You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You may also find all of the reports or registration statements that we have filed electronically with the SEC at its Internet site at www.sec.gov.  Please call the SEC at 1-202-551-8090 for further information on this or other Public Reference Rooms.  Our SEC reports and registration statements are also available from commercial document retrieval services, such as CCH Washington Service Bureau, whose telephone number is 1-800-955-0219.




24




ITEM 1A.  RISK FACTORS


You should carefully consider each of the following risks and uncertainties associated with our Company or the purchase or ownership of our common stock, as well as all of the other information contained in this Annual Report, including our financial statements.


Generally


The occurrence of any of the risks or uncertainties described below could significantly and adversely affect our business, prospects, financial condition and operating results.   The following are representative of those risks.


AN INVESTMENT IN OUR SECURITIES IS VERY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.   ANY PROSPECTIVE INVESTOR IN OUR COMMON STOCK SHOULD CAREFULLY READ THIS ANNUAL REPORT AND CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS.  EACH OF THESE RISK FACTORS COULD ADVERSELY AFFECT THE VALUE OF AN INVESTMENT IN OUR COMMON STOCK.  


Risk Factors relating to Our Company


One member of our management has up to approximately six years (Matthew G. Pearson, our Chief Operating Officer) and our directors and President have at least approximately three years (Messrs. Randall F. Pearson, Kraig T. Higginson and Ty Mattingly) experience in our chosen industry of operations, and they rely on our general legal counsel and outside consultants and others in this industry to make informed business decisions; and potential conflicts of interest involving those parties who are relied upon could adversely affect the value of our life insurance products.


Members of our management have had a reasonable exposure to the life settlement industry.  They have and will continue to rely on consultants and servicers in this industry, along with our general legal counsel, in evaluating life insurance products for purchase.  Many of these consultants or servicers represent or provide services to others in this industry, and no assurance can be given that we, as a small competitor competing with larger competitors in this industry, will not be treated less favorably by these consultants than our competitors.  Even as management accumulates expertise in this industry, we will still being relying on the expertise of outside consultants for various factors, including valuation, life expectancies, actuarials and other matters specific to life insurance policies, most of which are outlined below under this caption under the heading “Risks related to Policies.”


Proposed securities regulations and other governmental regulations may increase our costs of doing business substantially, and our results of operations will suffer.


The SEC and Congress, along with various states, have proposed various regulations of the life settlement industry, any of which could substantially increase our costs and limit our business operations, even though we intend to acquire life insurance products and hold them to maturity.  Also, compliance with these regulations will be costly, and may hinder our ability to successfully implement our business model, and we may fail.


Our Projections, Forecasts and Estimates may be incorrect, which may subject us to liability or cause us to fail.  


Any projections, forecasts and estimates contained herein are forward-looking statements and are based upon certain assumptions that we consider reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. Accordingly, any such projection is only an estimate. Actual results may vary from a projection, and such variations may be material. Our present business and revenues are dependent upon our reliance on others.


We are substantially dependent upon information provided by consultants and servicers of the life insurance policies underlying the NIBs for evaluating life settlements or NIBs for purchase.  The success of our business largely depends on the skills, experience and efforts of servicers and consultants such as Europa, their management teams and other key personnel. The loss of the services of one or more members of such senior management teams



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or other employees with critical skills needed to operate their businesses could have a negative effect on our business. Competition for these types of personnel can be intense, and we and our consultants may not be successful in attracting, assimilating and retaining the personnel required to replace any of its senior management team and other key employees.  This could substantially adversely affect our business.


Our projections are based on our ability to purchase NIBs related to Policies with combined face amounts in excess of $500,000,000 and at least 100 underlying insureds (we will not receive the face amount of the Policies, but only the net insurance benefit).  The more underlying insureds we have related to our NIBs, the more reliable the actuarial results will be.  We understand that rating agencies have stated that at least 1,000 lives are required to achieve actuarial stability.  It will take years for us to reach such levels, if ever.  The relative low number of insureds makes our models and projections less reliable.  We currently own NIBs with life insurance policies in ten portfolios, with an aggregate original face amount of $341,196,882 (including NIBs acquired from PCH Financial, Qualified NIBs acquired from Del Mar Financial and Qualified NIBs acquired from HFII), with  individual insureds spread over 61 underlying life insurance policies. There are only 60 individual insureds in these life insurance policies, which increases our risk that our actual yield may be less than expected as our portfolios may not be sufficiently diversified.


Our portfolios contain a distinct number of lives. The risks associated with having fewer lives is that the overall performance of the portfolio can be unduly influenced by a relatively small number of “outliers” where the assets perform better or worse than expected. The purpose of obtaining mortality re-insurance protection coverage (“MRI”), which has the effect of accelerating cash flows in cases where the assets underperform, is to reduce the volatility normally associated with a portfolio with fewer lives.  In short, by the presence of MRI, a portfolio with fewer lives can perform in a manner consistent with a portfolio with a greater number of lives. As such the MRI itself mitigates the concentration risk within the Sundance Model. It should also be noted that each individual portfolio contains a minimum of ten lives that are financed as a group and not as individual policies.


The Lux Sarls may not be able to pay fees and costs of the Senior Lender, and we may lose the interest in our NIBs, which could cause our business to fail.


The Senior Lender has entered into the Loan Facility, the proceeds from which will be available in certain circumstances for the payment of premiums in respect of the Policies and the Fees.  No assurance can be given that amounts available under the Loan Facility will at all times be sufficient to pay all the premiums and fees due and payable.  In addition, the Loan Facility generally has an initial term of five years, and no assurance can be given that the Loan Facility will be renewed.  Furthermore, if an event of default occurs under the Loan Facility (which, among other things, includes an Event of Default), no assurance can be given that we will be able to cure such event of default, in which case the Senior Lender will have the right to exercise remedies against the Policies, and will be entitled to cause a disposition of Policies and receive proceeds of such disposition in priority to us.  The Senior Lender is not rated, and although it currently anticipates having sufficient capital to honor its funding obligations under the Loan Facility, no assurance can be given that it will continue to have sufficient capital for the entire term of the Loan Facility. Our business activities are highly regulated and new or proposed government regulation or legislative reforms could increase our cost of doing business, reduce our revenues and liquidity, increase our losses or subject us to additional liability.


A demand for payment of the Senior Loans and a foreclosure by the Senior Lender on the policies could result in the loss of our entire investment in the NIBs.


The Senior Lender could demand repayment of the Senior Loans.  Though we have no liability for the Senior Loans because we are not party to them, we could lose our entire investment in our NIBs.  Since we are not party to the Senior Loans, we are not entitled to any notice of the Senior Lender’s demand for the payment of the Senior Loans or any notice of any foreclosure of the Senior Lender on the policies.  In the event of a foreclosure, we could only appear and bid at the foreclosure sale on the policies securing the Senior Loans in the same manner as any other unrelated party.  Even if we had the ability to arrange other financing prior to any foreclosure sale, we would have to make arrangements with the Lux Sarls or their related parties or subsidiaries, who are the only parties to the Senior Loans, to pay off the Senior Loans for our benefit and then acquire their underlying interests in the policies for the Company.  If the Senior Loans could not be renegotiated and foreclosure occurred, we would lose our entire interest in the NIBs.  



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The limited number of sellers of NIBs and similar life settlement products may have an adverse effect on our planned business model and may limit our ability to negotiate favorable prices in the acquisition of these life settlement interests.


To our knowledge, Del Mar Financial, PCH Financial and HFII, the three sellers from whom we have acquired all of our present interests in NIBs and similar life settlement products, are the only sources for these life settlement products.  Unless other sources become available or we are able to create our own NIBs, our ability to purchase the life settlement products desired under our business model may be limited, and our ability to seek competitive pricing will be limited.  These factors could have an adverse effect on our business, growth potential and our success.  We are currently seeking other sources of providers of these life settlement products.  Further, our business model includes acquiring life settlements directly and obtaining loans for premium payments and MRI or similar insurance arrangements to those associated with our NIBs, though no assurance can be given that we will be successful in these endeavors, or that the lack of competitors in providing NIBs and related life settlement products will not have an adverse effect on our business model and the quality and price of life settlement products we purchase.


We do not track concentrations of pre-existing medical conditions of insureds in our guidelines for purchasing NIBs.


Our guidelines for purchasing NIBs do not track concentrations of pre-existing medical conditions, and this could have an adverse effect on our estimates of life expectancies, which would in turn have an adverse effect on our anticipated revenues or projections.


We are not licensed in any state to engage in the purchase of life insurance policies from original policy owners.


Because we are not licensed in any state to allow us to purchase life insurance policies directly from insureds, our purchases of life insurance policies must be made in the secondary market where the prices are often higher and include fees to agents or providers.  Accordingly, those with adequate licensing could obtain life insurance policies at prices that are less than we can acquire them.  Although this lack of licensing for direct purchases may be a competitive disadvantage, we do not intend to purchase life insurance policies directly from insureds under our business model, and accordingly, the lack of such licensing is not otherwise material to our operations.


Current and future federal regulation may have an adverse effect on our business and our planned business operations.

 

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law.  The Dodd-Frank Act contains significant changes to the regulation of financial institutions including the creation of new federal regulatory agencies, and the granting of additional authorities and responsibilities to existing regulatory agencies to identify and address emerging systemic risks posed by the activities of financial services firms.  The Dodd-Frank Act also provides for enhanced regulation of derivatives and asset-backed securities offerings, restrictions on executive compensation and enhanced oversight of credit rating agencies.  The provisions include a new independent Bureau of Consumer Financial Protection to regulate consumer financial services and products, and life settlement transactions may be within the scope of its jurisdiction. Actions taken by the Bureau of Consumer Financial Protection may have material adverse effects on the life settlement industry and could affect the value of the Collateral securing our NIBs and the value of our NIBs or life settlements in general.  In addition, the Dodd-Frank Act also limits the ability of federal laws to preempt state and local consumer laws.  While it is too early to assess the full impact of the Dodd-Frank Act generally on our business and prospects, the Collateral manager and the Servicers, prospective investors should be aware that the changes in the regulatory and business landscape as a result of the Dodd-Frank Act could have an adverse impact on us, the Collateral managers, the Servicers and/or on the value of the Collateral and the NIBs. Greater oversight of the life settlement industry may have a substantial adverse impact on how we conduct our business and may substantially increase our costs of operation.


In August 2009, the SEC established a Life Settlements Task Force to investigate the life settlements market.  On July 22, 2010, the SEC released a Staff Report by the Life Settlements Task Force that recommended the SEC



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consider recommending to Congress that it amend the definition of “security” under the federal securities laws to include life settlement policies, such as the Policies, as securities.  Prior to our fiscal year ended March 31, 2013, one U.S. Congressman sought to introduce a bill to amend the definition of “security” as recommended by the SEC.  While that attempt did not result in any action, there can be no assurance that such a bill will not be passed at some future date.  If federal securities laws are indeed amended to include such policies within the definition of “security,” or if courts with relevant jurisdiction interpret existing securities laws to that effect, our ability to operate our business under our current business model may be constrained by additional registration and securities compliance requirements under the Securities Act, the Exchange Act and the Investment Company Act.  Intermediaries may be required to register as broker-dealers or registered investment advisers, and would otherwise be subject to oversight by the SEC and the Financial Industry Regulatory Authority, which require adherence to numerous rules and regulations.


The Senior Lender is believed to be one of only one or two current sources for financing the Senior Loans.


There is currently believed to be only one or two current sources of financing for the Senior Loans, one of which is the European financial institution that has provided the Senior Loans for our present NIBs portfolio.  This European financial institution is unrated. The Senior Lender has confirmed that it is committed to the issuance of Senior Loans on life settlement products like NIBs, and we believe that it will have the capacity to meet our demands for financing related to NIBs we may desire to purchase from parties like PCH Financial, Del Mar Financial and HFII. We have no contractual or formal relationship with this institution; and we have no binding agreements or understandings pursuant to which this Senior Lender has agreed to finance other life settlement products for us.  Our inability to finance life settlement products in the future with the Senior Lender or through some other source, could have a substantial adverse impact on our business, and the fact that our Senior Lender is unrated, raises questions about the stability of the Senior Lender and our Senior Loans.  These factors can negatively affect the value of our NIBs portfolio and may make it difficult to use our present NIBs portfolio as a source of debt financing, if desired, and may also result in a decreased valuation in the event we are required to dispose of these assets.


If our NIBs are determined to be “securities,” we may be required to register as an investment company under the Investment Company Act, which would increase our SEC reporting costs and oversight of our business operations.


The SEC has recommended that the Securities Act and the Exchange Act be amended to define life settlements as a “security,” so that persons involved in the life settlement markets would be afforded the protections of applicable federal securities laws, rules and regulations, along the probability of regulation under the Investment Company Act. The adoption of these regulations could substantially increase the costs of our filings with the SEC, including further oversight of our business model that could limit our ability to change investment policies without stockholder approval, prohibit acquiring assets from an affiliate without an approved exemptive application from the SEC, limit our leveraging of assets to one-third of our total asset value and account for all derivatives as a leverage of assets to the extent that they create an obligation on our part to pay out assets to a counterparty ahead of our stockholders and generally, require 40% of our directors to be independent directors, along with other requirements that may impact operations, like recordkeeping requirements, reporting requirements and privacy requirements. All of these potential regulations could have a substantial negative affect on our business model and anticipated revenues and greatly increase our expense of regulatory compliance.


98% of our total assets are interests in life settlement policies, resulting in a lack of diversification of assets that are subject to significant fluctuations in fair value.


Our currently owned NIBs comprise approximately 98% of our assets, resulting in no diversification of our risks of business.  Life settlement products like our NIBs and planned future purchases of life settlement products are subject to substantial fluctuations in value, primarily based upon matters that are not within our control, including financing costs, the solvency of our lenders and MRI Providers, the health and life expectancy of the insureds under our Policies and the costs of maintaining the Policies, along with continually updating information about the health of the insured.  This lack of diversification increases our risk of loss, and there can be no assurance the effect of any of these factors will not result in a substantial adverse impact on our business.




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The life settlement industry has overall transaction risks and involves a very speculative investment.


Despite a party’s best efforts in design and implementation of a life settlement investment product, there can be no assurance that the transactions contemplated in our business model will perform as anticipated. It is a desirable goal to minimize, to the extent reasonably possible, risks relating to investments related to life settlements with the understanding that it is not possible with respect to the Policies, to determine in advance either the exact time that a life insurance policy will reach maturity (i.e., at the death of the insured) or the profit, loss or return on an investment in a life insurance policy.  


In addition, no assurance can be given that any life insurance policy will perform in accordance with projections, and any such life insurance policy may decline in value. Consequently, there can be no assurance that we will realize a positive return on our investment and these types of investments should be considered to be speculative in nature. This, in turn, may directly affect the amount and timing of funding sought or received by us, which in turn will affect our ability to conduct our business.  Thus, an investment in our Company is suitable only for investors having substantial financial resources, a clear understanding of the risk factors associated with such investments and the ability to withstand the potential loss of their entire investment.


Recent Economic Events could have an adverse effect on our business.


Recent market and economic conditions have caused significant disruption in the credit markets. Continued concerns about the availability and cost of credit, the mortgage market, declining real estate values and the systemic impact of inflation or deflation, energy costs and geopolitical issues have contributed to increased market volatility and diminished expectations for the U.S. economy as well as economies of other countries. Beginning in 2008, concerns fueled by events such as the federal government’s conservatorships of Freddie Mac and Fannie Mae, and the failure of Lehman Brothers Holdings, Inc., led to increased market uncertainty and instability in both U.S. and international capital and credit markets. These conditions, combined with declines in business and consumer confidence and increased unemployment, have contributed to volatility in domestic and international markets.


As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets and the strength of counterparties has led many lenders and institutional investors to reduce, and in some cases cease, lending to borrowers.


There continues to be uncertainty about the prospects for growth in the U.S. economy as well as economies of other countries. A number of factors influence the potential uncertainty, including, but not limited to, high current unemployment, rising government debt levels, prospective Federal Reserve (and similar foreign bodies) policy shifts, the withdrawal of government interventions into the financial markets, changing consumer spending patterns, and changing expectations for inflation and deflation.  These factors have adversely affected the financial markets and the claims-paying ability of many insurers.  Moreover, there is a risk that economic activity could be weaker and financial volatility and uncertainty could be greater than anticipated.


These factors and general market conditions could adversely affect the performance and market value of our NIBs and our future prospects. There can be no assurance that governmental or other actions will improve these conditions in the near future.


The costs in time and expense of being a publicly-held company are substantial and will only increase if our business model is successful.


We are a “reporting issuer” under Section 13 of the Exchange Act, required to file annual reports (SEC Form 10-K), quarterly reports (SEC Form 10-Q) and current reports respecting certain events (SEC Form 8-K), along with proxy or information statements for any meeting of stockholders or written consents of stockholders holding sufficient securities to effect corporate actions.  Most of these reports require financial information, including the annual report, which requires year end audited consolidated financial statements by an independent public accountant that is PCAOB registered, like our auditors, and the quarterly reports, which require reviewed quarterly financial statements by such auditors.  The preparation of these reports, their review by management and professionals, and the preparation of these financial statements by our in-house accountants and management, as well as the auditing



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and review process of such financial statements is time consuming in terms of management resources and costly in terms of professional fees for lawyers, accountants and auditors.  It is difficult to quantify these costs, but they are expected to be not less than between approximately $150,000 and $250,000 annually.  As our business grows, these costs can only increase.  


Inadequate funding will impede our planned purchase of NIBs and ability to continue as a going concern


We began purchasing the net insurance benefits in life insurance policies (“NIBs”) during our fiscal year ended March 31, 2013. This is not a market sector without competition, and at present, we are a minor competitor. We will need substantial additional funds to effectively compete in this industry, and no assurance can be given that we will be able to adequately fund our current and intended operations, whether through revenues generated from our current interest in the NIBs or through debt or equity financing.   We expect to finance NIB purchases, as well as our operating working capital requirements, with proceeds from planned public and/or private offerings of its securities and debt financing. There can be no assurance that we will be successful in the anticipated equity and debt offerings or that we will be successful in raising additional capital in the future on terms acceptable to us, or at all.


The accompanying financial statements have been prepared on a going concern basis under which we are expected to be able to realize our assets and satisfy our liabilities in the normal course of business. To continue as a going concern and in order to continue to purchase NIBs, we will need to complete planned securities and debt offerings or obtain alternative sources of financing. Absent additional financing, we will not have the resources to execute our business plan.


Risk Factors Related To Our Common Stock


There is a limited public market for our common stock, and any market that may develop could be volatile.


There is currently a limited public market for our common stock, and no assurance can be given that any established public market for our shares will commence, or if one does commence, that it will continue, in any respect.  Interest in our common stock may not lead to a liquid trading market, and the market price of our common stock may be volatile. The following may result in short-term or long-term negative pressure on the trading price of our shares, among other factors:


·

Conditions and publicity regarding the life settlement market and related regulations generally;

·

Price and volume fluctuations in the stock market at large, which do not relate to our operating performance; and

·

Comments by securities analysts or government officials, including those with regard to the viability or profitability of the life settlement industry generally or with regard to our ability to meet market expectations.


The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies.


We are an “emerging growth company,” subject to less stringent reporting and regulatory requirements of other publicly-held companies, and this status may have an adverse effect on our ability to attract interest in our common stock.


We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or “JOBS Act.”  As long as we remain an “emerging growth company,” we may take advantage of certain exemptions from various reporting and regulatory requirements that are applicable to other public companies that are not an “emerging growth company.”  We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions.  If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.  See the heading “Emerging Growth Company” of Part I, Item 1, above.




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Our Management and two stockholders own approximately 63% of our outstanding common stock and could elect all of our directors who in turn elect all of our officers.


This percentage of stock ownership is significant in that it could carry any vote on any matter requiring stockholder approval, including the subsequent election of directors, who in turn elect all officers.  As a result, these persons effectively control the Company, regardless of the vote of other stockholders. As a result, other stockholders may not have an effective voice in our affairs. See the caption “Security Ownership of Certain Beneficial Owners and Management,” Part III, Item 12, below.  This percentage does not include shares underlying outstanding options or warrants that can be exercised within 60 days.


Future sales of our common stock could adversely affect our stock price and our ability to raise capital in the future, resulting in our inability to raise required funding for our operations.

 

Sales of substantial amounts of our common stock could harm the market price of our common stock. This also could harm our ability to raise capital in the future. Of the 43,185,941 shares of our common stock that are outstanding at March 31, 2015, 37,275,000 of such shares are subject to Lock-Up/Leak-Out Agreements, and no public resale of any of these securities can be made until on or after October 6, 2015 (the “Lock-Up Period”); thereafter, each of these stockholder’s common stock can be sold in an amount equal to 0.0025% (1/4%) of our outstanding securities  (to be defined for all purposes thereof as the amount indicated in our most recent filing with the SEC) during each of the next four successive quarterly periods following the Lock-Up Period; 0.005% (1/2%) of our outstanding securities during each of the next four successive quarterly periods; and 0.01% (1%) of our outstanding securities during each of the next four successive quarterly periods, all on a non-cumulative basis, meaning that if no common stock was sold during any quarterly period while common stock was qualified to be sold, such shares of common stock cannot be sold in the next successive quarterly period (the “Leak-Out Period”).  Notwithstanding the foregoing, any stockholder subject to a Lock-Up/Leak-Out Agreement that owns less than 100,000 shares of common stock that are covered thereby, shall be allowed to sell such stockholder’s common stock following the Lock-Up Period.  Our remaining outstanding shares are mostly freely tradable under Rule 144, except for the 12 month Lock-Up Period beginning on March 2, 2015, respecting the remaining 1,036,250 shares of HFII following its exercise of its first Put Option to us (which first Put was exercised by HFII on June 9, 2015), and subject to limitations on the number of shares that can be sold quarterly by “affiliates” as defined under the Securities Act.  Any sales of substantial amounts of our common stock in the public market, or the perception that those sales might occur, could harm the market price of our common stock.  See the captions “Market Price of Common Stock and Related Matters” and “Security Ownership of Certain Beneficial Owners and Management” of Part II, Item 5, below.  Further, certain stockholders have “piggy-back” registration rights afforded to them if we file a registration statement with the SEC; these shares or any registered securities we may register can also have an adverse effect on any market for our common stock.  


We will not solicit the approval of our stockholders for the issuance of authorized but unissued shares of our common stock unless this approval is deemed advisable by our Board of Directors or is required by applicable law, regulation or any applicable stock exchange listing requirements. The issuance of those shares could dilute the value of our outstanding shares of common stock.


Risks Related to the Policies.


Our Policies may be determined to have been issued without an “insurable interest” and could be void or voidable.


State insurance laws in the United States require that an insurance policy may only be initially procured by a person that has an insurable interest in the continuance of the life of the insured. Whether an owner has an insurable interest in the insured is a question of applicable state law. The general concept is that a person with an insurable interest is a person that has a continuing interest in the insured remaining alive, whether through the bonds of love and affection or due to certain recognized economic relationships. Typically this includes the insured, the insured’s spouse and children, and in some states, other close relatives. In some jurisdictions, however, this could also include entities such as the insured’s business partners, creditors, employer, business partners or certain charitable institutions.  It also typically includes a trust that owns a life insurance policy insuring the life of the grantor or



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settlor of the trust where the beneficiaries of the trust are persons, who, by virtue of certain familial relationships with the grantor or settlor, also have an insurable interest in the life of the insured.  

 

A policy purchased by a person without an insurable interest may, depending on relevant state insurance law, be (i) void, (ii) voidable by the insurer that issued the policy and/or (iii) subject to the claims of the insured’s presumptive beneficiaries, such as his or her spouse or other family members. In some states, the insured must consent to the purchase of a policy by a person other than the insured.   


Generally, state insurance law is clear that an individual has an insurable interest in his or her own life and may procure life insurance on his or her own life and may name any person as beneficiary. However, if a person purchases insurance on his or her own life for the benefit of a party who does not have an insurable interest in the life of the insured for the purpose of evading the insurable interest laws, the purchase may be viewed under applicable state law as a violation of the state’s insurable interest laws. Should the Issuer own an interest in a policy that was originally issued to an owner or for the benefit of a beneficiary (if required) that did not have an insurable interest, it is possible that the Issuer may not have a valid claim for the death benefits on such policy, and upon the death of the insured, the issuing insurance company may refuse to pay the death benefits on the policy to us or may be required to pay the death benefit to other beneficiaries of the insured.  Should any such claims be successful, we may lose some or all of the amounts we have invested in our Policies, although in some states the issuing insurance company may be required to repay the premiums if it rescinds the policy.  Some states, such as Florida, allow the carrier to retain all the premiums and some states that require premiums to be returned permit the carrier to maintain an action for damages.  Even if such claims are unsuccessful, significant amounts may need to be expended in defending such claims, thereby reducing the amounts we may receive from our NIBs and other life settlement interests we may purchase.


Concern also exists regarding the applicability of state insurable interest requirements to the purchase of a policy by an insured or a person with an insurable interest in the life of the insured in circumstances in which the owner of the policy obtains a loan secured by the policy to finance the payment of premiums on the policy, often referred to as a premium finance transaction. A substantial number of the Policies were originated pursuant to premium finance transactions.  Neither the Collateral manager nor any other party makes any representations or warranties with respect to the premium finance programs relating to such premium finance transactions or any other documentation relating to such premium finance transactions.  While it is generally accepted by state law that an individual has an insurable interest in his or her own life, it is possible that a court might construe a premium finance transaction as an attempt to evade the requirement that an insurable interest exist at the time an insurance policy is issued. If the borrower in such a transaction is found to be acting, in fact, on behalf of a premium finance company to procure an insurance policy, it is possible that a court might find that the real party in interest is the premium finance company, which by itself would not have an insurable interest sufficient to support the insurance policy. As a result, the insurance policy may be void or subject to attack, which could diminish the value of the policy. States have varying precedent on this subject.  California and New York have case law that is very favorable to the policy owner ( see Lincoln v. Jack Teren and Jonathan S. Berck, as trustee of the Jack Teren Insurance Trust (Superior Court of the State of California, San Diego) and Alice Kramer v. Lockwood Pension Services, Inc., et al. , (United States District Court – Southern District of New York)).  These courts have held life insurance policies to be enforceable even where the policies were clearly purchased with an intent to sell the policies in the future.  Florida and Delaware have case law that is more favorable to the insurance carrier ( see PrucoLife Insurance Company v. Steven M. Brasner, et. al. (US District Court Southern District of Florida) and PHL Variable Insurance Co. vs. Price Dawe , (Supreme Court of Delaware)).  These courts of invalidated policies where the original policy owners financed the policies and did not intend to purchase the policies with their own money and further intended to ultimately sell the policies in the life settlement markets.


Also, in every state that has addressed the question other than New York and Michigan, the expiration of an insurance policy’s contestability period may not cut off the insurer’s ability to raise the insurable interest issue as a defense to the payment of the policy proceeds.


One or more states could adopt legislation that would require a holder of an insurance policy to have an insurable interest in the insured at the time a policy is purchased and at the time of death of the insured. We will not have an insurable interest in the insureds polices acquired by or on our behalf. If such legislation were to be adopted without a ‘grandfathering’ provision (i.e., so as not to be applicable to insurance policies then in force), then we may be



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unable to collect the proceeds on the death benefits of the insured persons under our Policies purchased prior to the enactment of such legislation.


Additional insurable interest concerns regarding Policies originated pursuant to premium finance transactions may also result in adverse decisions that could affect our Policies.  


The legality and merit of “investor-initiated” or “stranger-originated” life insurance products have been questioned by members of the insurance industry, including by many life insurance companies and insurance regulators.  For example, the New York Department of Insurance issued a General Counsel’s opinion in 2005 concluding that a premium finance program that was coupled with the right of the policy owner to put the financed insurance policy to a third party violated New York’s insurable interest statute and may also constitute a violation of New York State’s prohibition against premium rebates/free insurance.  More recently, many states have enacted laws expressly defining and prohibiting stranger-originated life insurance (“STOLI”) practices, which in general involve the issuance of life insurance policies as part of or in connection with a practice or plan to initiate life insurance policies for the benefit of a third-party investor who, at the time of the policy issuance, lacks a valid insurable interest in the life of the insured.  Under these laws, certain premium finance loan structures are treated as life settlements and, accordingly, may not be entered into at the time of policy issuance and for a two or five year period thereafter, depending on the state.  Certain court decision issued over the past few years may also increase concerns with premium financed policies.  In one recent decision, the Delaware Supreme Court stated that that the key focus in insurable interest cases is who paid the premiums.  While the decision was not issued in connection with a premium financed policy, no assurance can be given that a court would not apply such reasoning to premium financed policies.  We cannot predict whether a state regulator, insurance carrier or other party will assert that any of the Policies should be treated as having been issued as part of a STOLI transaction or otherwise were issued in contravention of applicable insurable interest laws.  This risk is greater where the insured materially misstated his or her income and/or net worth in the life insurance application.  Recent decisions in Florida and Delaware have increased the risk that challenges to premium financed policies may be decided in favor of the issuing insurance company.  Moreover, because the Collateral consists of a portfolio of Policies that were originated in the same or a similar manner and in a limited number of states (generally, California and Wisconsin, although the insured may reside in other states), there is a heightened risk that an adverse court decision or other challenge or determination by a regulatory or other interested party with respect to a policy could have a material adverse effect with respect to a significant number of other Policies, including the rescission of Policies or the occurrence of other actions that prevent us from being entitled to receive or retain the death benefit under the related Policies upon the death of the related insured persons.  Concerns of such nature could also negatively affect the market value and/or liquidity of the Policies.


Fraud in the application for life insurance can also affect our assets and our interest in our NIBs.  


There are risks that the Policies were procured on the basis of fraud or misrepresentation in connection with the application for the policy.  Types of fraud that have occurred in applications where carriers have successfully rescinded or voided the policies include, among others, misrepresentations concerning an insured’s financial net worth and/or income, need for and purpose of the life insurance protection, health or age and whether he or she is a smoker.  Such risk of fraud and misrepresentation is heightened in connection with life insurance policies for which the premiums are financed through premium finance loans or other structured programs.  In particular, there is a significant risk that applicants and potential insureds may not answer truthfully or completely questions related to whether the life insurance policy premiums will be financed through a premium finance loan or otherwise, the applicants’ purpose for purchasing the policy or the applicants’ intention regarding the future sale or transfer of the life insurance policy. Such risk may be further increased to the extent life insurance agents communicate to applicants and potential insureds regarding potential premium finance arrangements or profits to be made on policies that will be sold after the contestability period.  If an insured has made any material misrepresentation on his/her application for life insurance, there is a heightened risk that the insurance company will contest or successfully rescind or void the related policy, although an issuing insurance company may not be able to raise such claims after the expiration of the contestability period.  Each of the Policies is beyond the contestability period.  Even if such fraud in the application could not serve as a basis to challenge a policy because the contestability period has expired, it may be raised as evidence that the policy was provided as part of a STOLI arrangement.




33




The risk of litigation with issuing insurance companies could substantially raise our costs of operation and increase or our risk of loss.

  

Some of the programs relating to the premium finance transactions through which the Policies were originated, or other programs having similar characteristics, may be objectionable to certain life insurance companies and other parties, including certain regulators, on the basis of constituting a means of originating stranger-originated life insurance.  Additionally, as described above, life insurance policies that are originated through the use of premium finance programs often present a greater risk of there having been fraud and/or misrepresentations in connection with the issuance of the policies.  For these reasons, among others, it is possible that we may become subject to, or may otherwise become affected by, litigation involving one or more Issuing Insurance Companies (either as a plaintiff or a defendant), including claims by an issuing insurance company seeking to rescind a policy prior to or after the death of the related insured.  Moreover, such risk may be enhanced with respect to an issuing insurance company that is experiencing financial difficulty, since a successful claim by an issuing insurance company could reduce its financial liabilities.  In the event any litigation was to occur, we would bear the costs of defending against the litigation, and would be unable to predict its outcome, which could include our losing our right to receive (or retain) the proceeds otherwise payable under one or more of the Policies.


Contestability of life insurance Policies is a further risk that can result in the loss of the benefits on Policies and have adverse consequences on our results of operation.  


The significance of the risk that an issuing insurance company may seek to rescind one or more Policies depends on whether the issuing insurance company is barred from bringing a rescission action by operation of an incontestability clause contained therein or contestability limitations applicable as a matter of state law.  Each life insurance policy, in accordance with laws adopted in virtually every state in the United States, contains a provision that provides that, absent a failure to pay premiums, a policy shall be incontestable after it has been in force during the lifetime of the insured for a period of not more than two years after its date of issue.  However, some states recognize an exception to incontestability where there was actual fraud in the procurement of the policy.  A new contestability period may also arise in connection with information provided on any application for reinstatement of a life insurance policy following lapse of a policy due to non-payment of premiums, or an application for an increase in policy benefits.  These events could prove to be adverse to us and our life settlement interests if the Policies are contested and the issuing insurance company is successful in any such claim.


Our longevity assumptions may prove to be inaccurate, and our interests in our NIBs and any other life settlement interests could lose value or be lost because we may not have the funds to pay required premiums beyond what was anticipated in these assumptions.


In addition to risks in the manner in which the Policies were originated, another principal risk related to ownership of the Policies, and consequently to us and investors in our common stock, is the uncertainty regarding the date of death of an insured with respect to a policy.  Life expectancies are projected from the medical records of the insured and actuarial data based upon the historical experience of similarly situated persons.  It is impossible to predict with certainty any insured’s life expectancy.  We have and will base our longevity assumptions on the reports of third-party life expectancy providers, among whom there is no uniformity of assumptions, approach or procedure.  Also, there are significant disputes among third-party life expectancy providers regarding the mortality rate relating to certain disease states and the efficacy of certain treatments.  Many of these life expectancy providers have revised their methodologies resulting in increased longevity estimates. On January 22, 2013, 21st Services LLC announced a significant revision in their methodologies.  These changes in methodologies may have reduced the internal rate of return on the Policies and could cause increased difficulty in financing premiums.  The Loan Facility requires that certain loan to value ratios be maintained and decreases in policy values could result in violations of these provisions. There can be no assurance that additional revisions extending predicted life expectancies will not be forthcoming, exacerbating these risks.


We rely primarily on four different life expectancy providers, 21 st Services LLC, American Viatical Services LLC, Fasano Associates and EMSI.  It is somewhat unclear how the changes in the 21 st Services methodology will impact our current or future portfolio purchases.  If the changes are significant, it should lower prices for future NIBs (to our benefit), but could also lower the value of our current NIBs portfolio due to the lower resulting present value of the death benefits forecasted to be paid at later dates due to the life expectancy changes.  The existing NIBs portfolio



34




should not be materially impacted by the changes in the 21 st Services methodology in the short term because the financing is locked in for four to five years.  Further, the remaining three life expectancy providers have not made changes that would impact the value of the Policies, which provides stability.  Life expectancy changes are hard to predict.  This is one of the factors we considered when utilizing the MRI, which lessens the impact of life expectancy variances by guaranteeing certain minimum levels of payments when the Policies do not mature as expected.  


Some factors that may affect the accuracy of a life expectancy report or other calculation of the estimated length of an individual’s life are:


·

the experience and qualifications of the medical professional or life expectancy company providing the life expectancy estimate;

·

the completeness and accuracy of medical records received by the life expectancy company;

·

the reliability of, and revisions to, actuarial tables or other mortality data published by public and private organizations or developed by a life expectancy company and utilized by its medical professionals;

·

the nature of any illness or health conditions of the insured disclosed or undisclosed;

·

changes in living habits and lifestyle of an insured and medical treatments, medications and therapies available to and used by an insured; and

·

future improvements in medical treatments and cures, and the quality of medical care the insured receives.


If the insured lives longer than any or all of the life expectancy appraisals predict, then the amounts available to us on our NIBs or other life settlement interests could be diminished, perhaps significantly, due to the additional time during which premiums will have to be paid in order to keep the related policy in force, the longer period that will elapse before any death benefits are paid on the related policy and the longer the time in which our ancillary operating, financing and servicing costs will be incurred.  If the period for too many Policies exceeds beyond the maturity date for our Policies, then our interests in the Policies may have to be liquidated instead of receiving the related death benefits, and the market value of such Policies will necessarily be significantly less than the related death benefits.


Increases in cost of insurance could reduce our estimated returns and lower our revenues.  


Insurers pass on a portion of their expenses to operate their business and administer their life insurance policies in the form of policy charges borne by each policyholder.  In the event an insurer experiences significantly higher than anticipated expenses associated with operation and/or policy administration, the insurer has the right to increase the charges to each of its policy owners.  In the event of material increases to the policy charges, it is possible that additional premium payments will be required to maintain the policy in force.  While the increased cost of maintaining the affected Policies has been taken into account in our Servicer’s projection of premiums on the portfolio, there can be no assurance that there will not be additional increases nor can there be any assurance that premiums on other Policies will not be increased.  No assurance can be given that we will have sufficient funds available to pay all premiums on the Policies if policy premiums increase.


The lapse of Policies will result in the entire loss of our interest in those particular Policies.


We will be required to make premium payments on the Policies in order to keep them in force.  These payments generally will be made from amounts available to the Lux Sarls pursuant to the Loan Facility, Death Benefits, and MRI Payments.  If there are insufficient funds available for this purpose or if we (or the Servicer of the Policies) does not pay premiums on a policy in a timely manner, the policy could lapse and the value of the asset could be lost.




35




There is poor liquidity in the secondary market for life insurance and life settlements.


The secondary market for life insurance and life settlements is relatively illiquid, and it is often difficult to sell Policies or interests in Policies at attractive prices, if at all.  The ability to sell Policies may be made even more difficult due to the nature in which the Policies were originated, especially with respect to policies where the premiums were financed by the original owner, and the increased risk associated with holding such Policies.  The Collateral manager may be limited in its ability to liquidate assets if it needs to do so in order to raise funds to pay premiums or otherwise.  We may experience a loss (including a total loss) if Policies must be liquidated under less than optimal circumstances.


Inflation and interest rate risk and their effect on the Policies.  


If interest rates increase, the value of the Policies is likely to decrease.  The market value of a policy is based, in large part, on the estimated discounted value of future cash flows from the policy, including death benefits, minus the estimated discounted value of future premiums due on, and other costs of maintenance of, the policy.  Also, if the interest rates used to determine the market value of a policy change, the present value of the policy may also change. Generally, if interest rates increase, the present value of a life insurance policy decreases.  If a policy holder is forced to sell a policy in a higher interest rate environment, the market price for the Policies may be less than the price at which such policy was acquired. In order to compensate for the possibility of increased interest rates in the future, our projections utilize an interest rate that is almost twice as much as the current interest rate.


Carrier and service partner credit risk can adversely affect our interest in our NIBs or other life settlements.  


We will be subject to the credit risk associated with viability of the issuing insurance company.  The insolvency of an issuing insurance company or a downgrade in the ratings of an issuing insurance company could have a material adverse impact on the value of the Policies issued by the issuing insurance company, the collectability of the related death benefits and the ability of the issuing insurance company to pay the cash surrender value or other amounts agreed to be paid by the issuing insurance company.  Any such impairment of the claims-paying ability of the issuing insurance company could materially and adversely affect the value of the Policies issued by the issuing insurance company, the ability of the policy holder to pay the premiums due on other Policies and our ability to pay any required policy premiums, fees and expenses of the service providers and our other expenses.


Another type of risk includes the financial strength, solvency and integrity of the various structures and service partners through which we own our beneficial interest in the cash flows of the net insurance benefits.  The various structures may be exposed to financial risk if the service partners do not properly manage the liquidity within the structures or if any of the service partners, who may have discretionary authority over the management of the structures, determine to unilaterally take action to the detriment of the ultimate beneficial interest holders like us. While liquidity and mismanagement risks always exists and are currently being assessed, we have not made any adjustments to our projections, but will do so when enough facts are known to make an informed and quantifiable adjustment.

  

The inability to keep track of the insureds could keep us from updating the medical records of the insured.  


It is important for the servicer to track the health status of an insured and keep information current, which is done by contacting the insured and/or other designated persons and obtaining updated medical records from an insured’s physician.  There are significant U.S. federal and state laws relating to privacy of personal information that affect the operations of the servicer and its ability to properly service the Policies, especially with regard to obtaining current information from an insured’s physician.


Under the Health Insurance Portability and Accountability Act (“HIPAA”), the federal law that governs the release of medical records from medical record custodians, an insured may revoke his or her authorization for previously authorized third parties to receive medical records at any time, leaving the servicer unable to receive additional medical records.  


The servicer may have to rely on a third party to track an insured, especially if states continue to adopt laws that would limit the ability of person other than a licensed life settlement provider or its authorized representative to



36




control insureds for tracking purposes, and the servicer may lose contact with such insured.  For example, the insured may move and not notify the servicer or any other third party that has authority to contact the insured.  The servicer attempts to maintain contact information for the insured and/or one or more close family friends or relatives whenever possible so it can maintain contact with the insured.  Additionally, the servicer subscribes to various databases that use public records and other information to track individuals.  The servicer also subscribes to death notification services which use Social Security and public records information to notify the servicer if an insured has passed away so that it can begin the process of obtaining a death certificate and arranging for the payout of the policy.  Changes adopted last year to the Social Security Administration’s Death Master File have resulted in the elimination of many state records that were previously included in the Death Master File.  The number of new records being added to the Death Master File has been reduced by approximately 40%. Thus, it has become necessary to enhance alternative methods for learning of an insured’s death. On average, it now takes longer to learn about an insured’s death as compared to periods prior to the changes in the Death Master File.


Despite these various tracking methods, it is still possible for the servicer to lose contact with an insured, making any additional updates of medical condition for the insured impossible.  There can also be no assurance that the servicer will learn of an insured’s death on a timely basis.  Delays in receiving insurance proceeds result in a decrease in the death benefit.


Lost insureds can result in a delay or a loss of an insurance benefit that would have a negative effect on our revenues and prospects.  


Occasionally, the issuing insurance company may encounter (or assert) situations where the body of the insured or reasonable other evidence of death cannot be located and/or identified. For example, the insured may have been lost at sea and there may not be proof of death available for several years or at all. Alternatively, the fact that the original beneficiaries no longer have any financial interest in a claim under the policy may mean that the issuing insurance company faces practical obstructions to recording accurately and in a timely manner the death of the insured. In the event of a “lost” insured, the death claim may be delayed for up to seven years by the issuing insurance company. Under these circumstances, typically, the claim will then be paid with interest from the date that the insured was originally presumed lost.  Nonetheless, it remains possible that it will be difficult or impossible to locate and/or identify an insured to establish proof of death and, as a result, the related issuing insurance company may significantly delay (but not ultimately avoid) payment of the underlying death benefit.  This delay could result in a longer than anticipated holding period for a policy which, in turn, could result in a loss to us.


The death of an insured must have occurred to permit the servicer to file a claim with the issuing insurance company for the death benefit.  Obtaining actual knowledge of death of an insured, as discussed above, may prove difficult and time-consuming due to the need to comply with applicable law regarding the contacting of the insured’s family to ascertain the fact of death and to obtain a copy of the death certificate or other necessary documents in order to file the claim.  The death benefit typically increases subsequent to death by an interest rate that is less than the Senior Loan; thus, the policy proceeds become less valuable as time passes.


U.S. life settlement and viatical regulations may result in our being determined to have violated applicable law.  


The purchase and sale of insurance policies in the secondary market from the policy’s original owner and among secondary market participants is subject to regulation in approximately 45 states and Puerto Rico. The scope of the regulations and the consequences of their violation vary from state to state. In addition, within a given state, the regulations may vary based upon the life expectancy of the insured at the time of sale or purchase. In many states, a policy on an insured with a life expectancy of two years or less is referred to as a “viatical settlement” or a “viatical.” A policy on an insured with a life expectancy of more than two years is referred to as a “life settlement.” The policy holders have not, and do not intend to, purchase viatical settlements and should not be subject to the regulatory regimes that govern these policies. However, the states vary in their technical definitions of viatical settlements and life settlements, and state insurance regulators, who are charged with interpretation and administration of insurance laws and regulations, vary in their interpretations. Therefore, despite our expectations, it may be possible that under the rules of a particular state a policy underlying our NIBs that is not commonly thought of as a viatical settlement may meet the technical definition thereof. Engaging in the purchase or sale of life settlements or viatical settlements in violation of applicable regulatory regimes could result in fines, administrative and civil sanctions and, in some



37




instances, criminal sanctions. United States and state securities laws could have an adverse effect on our ability to liquidate any Policies we believe should be sold.  


It is possible that, depending on the facts and circumstances attending a particular sale of a life insurance policy, a sale could implicate state and federal securities laws. The failure to comply with applicable securities laws in connection with dealings in life settlement transactions could result in fines, and administrative and civil sanctions and, in some instances, to criminal sanctions. In addition, parties may be entitled to a remedy of rescission regarding such transactions.  State guaranteed funds give some protection for payments under Policies, but no assurance can be given that we will benefit from them.  


State protections for the insolvency of an insurance company are limited


With respect to the Policies, the payment of death benefits by issuing insurance companies is supported by state regulated reserves held by the issuing insurance companies and, under certain circumstances and in limited amounts that vary from state to state, state supported life and health insurance guaranty associations or funds.  However, such reserves and guaranty funds, to the extent in existence, may be insufficient to pay all death benefits under the Policies issued by an issuing insurance company if such issuing insurance company becomes insolvent.  The obligation of a state guaranty fund to make payments may not be triggered in certain circumstances.  In addition, in the event of an issuing insurance company insolvency, courts and receivers may impose moratoriums or delays on payments of cash surrender values and/or death benefits.  In addition, the benefits of most or all of such state supported guaranty funds are capped per insured life (irrespective of the number of policies issued and outstanding on the life of such individual), which caps are generally less than the net death benefits of the insurance policies. Guaranty fund laws often include aggregate limits payable with respect to any one life across different types of insurance policies, generally $300,000 to $500,000 depending on the state.  Most state guaranty funds are statutorily created and the legislatures may amend or repeal the laws that govern them.  In addition, most state guaranty fund laws were enacted with the stated goal of assisting policyholders resident in such states.  Therefore, non-resident policyholders, beneficiaries, and claimants may not be covered or may be covered only in limited circumstances.  As a result, state guaranty funds will likely provide little protection to us in the event of the insolvency of an issuing insurance company.


We may incur liability for failing to comply with U.S. privacy safeguards.

 

Both federal and state statutes safeguard an insured’s private health information. In addition, insureds frequently have an expectation of confidentiality even if they are not legally entitled to it. If any of the Collateral manager, the Administrator, the Trustee, the Servicer, the Securities Intermediary, or the Custodian (each, a “service provider”) properly obtains and uses otherwise private health information, but fails to maintain the confidentiality of such information, such service provider may find itself the recipient of complaints from the affected individuals, their families and relatives and, potentially, interested regulatory authorities. Because of the uncertainty of applicable law, it is not possible to predict the outcome of such disputes.  Additionally, it is possible that, due to a misunderstanding regarding the scope of consents that a service provider possesses, such service provider may request and receive from health care providers information that it in fact did not have a right to request or receive. Once again, if a service provider finds itself to be the recipient of complaints for these acts, it is not possible to predict what the results will be.  This uncertainty also increases the likelihood that a service provider may sell, or cause to be sold, Policies in violation of applicable law, which could potentially result in additional costs related to defending claims or enduring regulatory inquiries, rescinding such transactions, possible legal damages and penalties and probable reduced market value of the affected Policies.  Each of the foregoing factors may delay or reduce our return on Policies, and we may suffer a loss (including a total loss) on our investment in our NIBs or Policies or other life settlement interests.


Access to accurate and current medical information regarding the insured is necessary to evaluate Policies, but is affected by U.S. privacy concerns.  


The value of a life insurance policy underlying our NIBs is inherently tied to the remaining life expectancy of the insured and information necessary to perform this valuation may not be available at the time of purchase or sale. For example, if a policy is being purchased in the secondary market from an entity that had earlier purchased the policy directly from the insured, it is likely that the insured made his or her medical records available at the time of his or



38




her sale of the policy to the initial purchaser. However, if necessary consents were not obtained from the insured it is possible that this information cannot legally be made available at the time of the subsequent purchase of the policy. If it is legally available to the subsequent purchaser, it is possible that such information is outdated and of little utility for a current evaluation of the remaining life expectancy of the insured. Even if the insured made available to the then owner of the policy a general consent that purports to give the owner of the policy the right to subsequently request and receive medical information from the insured’s health providers, it is possible for the insured, in the interim, to have revoked such consent. Likewise, it is possible that under applicable law, the consent expires after a certain period of time. Even if the consent is effective, without the then cooperation of the insured it may be difficult to convince the insured’s health care providers of the consent’s efficacy and as such they may be reluctant to release medical information. These impediments to accessing current medical information can prove to be a significant obstacle to the proper valuation of a policy at the time of either the policy’s purchase or sale.


Changes to foreign banking laws and regulations or decreased lending capacity for life settlements could have a negative impact on our ability to obtain loans with respect to our life insurance products and limit our ability to acquire additional life insurance products.


Our current business model relies on the availability of the Loan Facility.  In the event of adverse regulatory changes or reduced capacity for life settlement lending, we could experience the same liquidity issues that have plagued other market participants.  Changes to the Senior Lender’s loan to value requirements and changes to regulatory large exposure limits could also result in liquidity issues for us.  As mentioned above, changes in life expectancies could cause decreases in policy values, which could result in loan to value violations and violations of large exposure limits.  Either violation could result in need to provide liquidity to pay down the loan balances.


The availability of MRI coverage is a condition of our business model and assumptions, which, if unavailable, will substantially increase our risk of failure.


The MRI is a relatively new product, and there are no guarantees that the MRI Providers will be able to meet our coverage needs.  Without the MRI coverage, we will have limited options when the Senior Loans mature (in four to five years) because we will have lost the reinsurance coverage to be provided by the MRI Providers.  The Senior Lender could demand repayment and all future premiums, which could result in our loss of all of our investment in the NIBs.  We may be unable to find alternate financing.  See the risk factor “A demand for payment of the Senior Loans and a foreclosure by the Senior Lender on the Policies could result in the loss of our entire investment in the NIBs,” above.


ITEM 2:  PROPERTIES


Pursuant to a lease agreement, we currently occupy a suite of offices located at 4626 North 300 West, Suite 365, Provo, Utah  84604. The total lease expense is approximately $2,600 per month, payable in cash; and we also lease approximately 6,000 square feet of office space located at 20 Pacifica, Suite 1010, Irvine, California 92618, for $12,000, on a month to month basis, $6,000 of which is billed to Del Mar and Europa and is added to the Cash Payment and expenses due under the Del Mar ATA.  See Part I, Item 1.  The Provo, Utah, facilities are presently our principal executive offices and our current place of business; and the Irvine facilities are located near the Servicer of the Policies underlying our NIBs. The Servicer of the current portfolio of policies underlying the Company’s NIBs is based in Irvine, California, and Lisa Fuller, Esq., our in-house general counsel, resides in Irvine, California.


ITEM 3:  LEGAL PROCEEDINGS


Except as indicated below, and to the best of our knowledge, there are no legal proceedings pending or threatened against us; and there are no actions pending or threatened against any of our directors or officers that are adverse to us.


On May 13, 2014, we were served with a summons and complaint filed in the Third Judicial District Court in Salt Lake County, State of Utah, Case No. 140405819, wherein the plaintiff named us and another unrelated stockholder as defendants, seeking to void the replacement of a stock certificate alleged to be owned by the plaintiff and acquired for value and that was held of record in the name of the unrelated stockholder defendant.  The unrelated stockholder defendant had filed a lost certificate affidavit with our transfer agent claiming that he had lost the stock



39




certificate alleged to be owned by the plaintiff and had the stock certificate replaced with a new stock certificate, also in his name.  The plaintiff’s complaint seeks damages of $74,255 or the estimated market value of the shares represented by the stock certificate or the re-issuance of the shares to the plaintiff, together with other unspecified damages against us, by reason of the replacement of the stock certificate that was in her possession, claiming that she is a “protected purchaser” under Utah law, meaning that she acquired the shares for value and without notice of an adverse claim and obtained control of the security.  The plaintiff also seeks similar damages against the unrelated stockholder defendant.  The parties have agreed upon a settlement of this matter by agreeing to the cancellation of one of the party’s shares and a nominal leak-out of the shares being retained by the other party (750 shares per month); however, another party has generally expressed an ownership interest in the party’s shares that have been agreed to be cancelled in the settlement, though we are unable to determine whether any action will be brought on that claim; and the party who retained the shares in the settlement has agreed to appear in any such action, if instituted, and allow us to assert her claims upon which settlement was made for our benefit.  The settlement is in the process of being finalized.


ITEM 4:  MINE SAFETY DISCLOSURES


Not applicable.


PART II


ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information


Commencing on or about March 21, 2005, our shares of common stock were listed for quotations on the OTC Bulletin Board of the Financial Industry Regulatory Authority (“FINRA”), presently on the OTXQB under the symbol “SUND.”  There is no “established trading market” for our shares of common stock.  No assurance can be given that any established trading market for our common stock will develop or be maintained, and if an established trading market develops in the future, the sale of shares of our common stock that are deemed to be “restricted securities” or “control securities” pursuant to Rule 144 of the SEC by members of management or others may have a substantial adverse impact on any such market.  Because we were a “shell company” prior to the closing of the ANEW LIFE Merger on March 29, 2013, the shares issued under this Merger could not have been publicly sold under SEC Rule 144 until on or after one year from the filing of our 8-K Current Report respecting the Merger, which was dated March 29, 2013, and filed with the SEC on April 5, 2013.  Further, substantially all of the shares issued under the Merger are subject to Lock-Up/Leak-Out Agreements through October 6, 2015, with some non-founding stockholders of ANEW LIFE having certain “piggy-back” registration rights accorded to a portion of their respective shares, as discussed under the heading “Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities,” below.

 

Also, see the heading “Rule 144” directly below.


Set forth below are the high and low closing bid prices for our common stock for each quarter of fiscal years ended March 31, 2015, and 2014.  These bid prices were obtained from The OTC Markets Group, Inc. or other qualified interdealer quotation medium.  All prices listed herein reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions.



40





 

 

Closing Bid

Fiscal Year Ended

 

High

 

Low

March 31, 2015

 

 

 

 

April 1 through June 30, 2014

 

8.20

 

6.02

July 1 through September 30, 2014

 

7.75

 

3.00

October 1 through December 31, 2014

 

8.00

 

3.00

January 1 through March 31, 2015

 

8.20

 

3.80

March 31, 2014

 

 

 

 

April 1 through June 30, 2013

 

7.25

 

.77

July 1 through September 30, 2013

 

8.20

 

6.05

October 1 through December 31, 2013

 

8.25

 

7.50

January 1 through March 31, 2014

 

8.20

 

5.95


Rule 144


The following is a summary of the current requirements of Rule 144:


 

Affiliate or Person Selling on Behalf of an Affiliate

Non-Affiliate (and has not been an Affiliate During the Prior Three Months)

Restricted Securities of Reporting Issuers

During six-month holding period – no resales under Rule 144 Permitted.  


After Six-month holding period – may resell in accordance with all Rule 144 requirements including:

·

Current public information,

·

Volume limitations,

·

Manner of sale requirements for equity securities, and

·

Filing of Form 144.

During six- month holding period – no resales under Rule 144 permitted.


After six-month holding period but before one year – unlimited public resales under Rule 144 except that the current public information requirement still applies.


After one-year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

Restricted Securities of Non-Reporting Issuers

During one-year holding period – no resales under Rule 144 permitted.


After one-year holding period – may resell in accordance with all Rule 144 requirements including:

·

Current public information,

·

Volume limitations,

·

Manner of sale requirements for equity securities, and

·

Filing of Form 144.


During one-year holding period – no resales under Rule 144 permitted.


After one-year holding period – unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.


Holders


We had 73 stockholders of record as of May 31, 2015, and an indeterminate number of stockholders who hold shares in “street name.”




41




Dividends


There are no present material restrictions that limit our ability to pay dividends on our common or preferred stock. Presently, we have no plans to pay any dividends in the foreseeable future.  Our Board of Directors intends to pursue a policy of retaining earnings, if any, for use in our operations and to finance expansion of our business. Any declaration and payment of dividends in the future, of which there can be no assurance, will be determined by our Board of Directors in light of conditions then existing, including our earnings, financial condition, capital requirements and other factors. There are presently no dividends which are accrued or owing with respect to our outstanding common stock. No assurance can be given that dividends will ever be declared or paid on our common stock in the future.


Securities Authorized for Issuance under Equity Compensation Plans


We do not have any securities authorized for issuance under any equity compensation plans.  The stock options described below under the heading “Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities” were granted subject to such terms and conditions as the Board of Directors may set, in conjunction with a planned adoption of a stock option or similar plan in the near future for the benefit of employees, officers and directors and to maintain and attract key personnel.


Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities


The following table and related footnotes contains information about all sales of unregistered securities by us during the fiscal years ended March 31, 2015, 2014, and 2013.  All of these securities were issued pursuant to exemptions from registration under the Securities Act under Sections 4(a)(2) thereof and SEC Regulation D and Rule 506(b) promulgated under Regulation D.


Description of Securities Issued

Shares Issued

Price Per Share

ANEW LIFE Merger

37,037,369(1)

(1)

Stock Option Grants

2,185,000

(2)

Private Placement

2,388,500(3)

(3)


(1)

37,037,369 shares of our common stock were issued under the ANEW LIFE Merger, 33,275,000 of which were subscribed to by founders of ANEW LIFE for $0.001 per share; and 3,762,369 shares of which were purchased in a private placement of ANEW LIFE shares at a purchase price of $1.0294 per share.  Founding ANEW LIFE stockholders owning approximately 32,952,000 of these shares have executed and extended to October 6, 2015,  Lock-Up/Leak-Out Agreements that provide for an 18 month Lock-Up Period, with an 18 month Leak-Out Period for stockholders owning more than 100,000 shares, where each stockholder subject to a Lock-Up/Leak-Out Agreement will be allowed to sell an amount of such stockholder’s common stock equal to 0.0025% (1/4%) of our outstanding securities  (to be defined for all purposes thereof as the amount indicated in our most recent filing with the SEC) during each of the next four successive quarterly periods following the Lock-Up Period; 0.005% (1/2%) of our outstanding securities during each of the next four successive quarterly periods; and 0.01% (1%) of our outstanding securities during each of the next four successive quarterly periods, all on a non-cumulative basis, meaning that if no common stock was sold during any quarterly period while common stock was qualified to be sold, such shares of common stock cannot be sold in the next successive quarterly period (the “Leak-Out Period”).  Notwithstanding the foregoing, any founding stockholder subject to a Lock-Up/Leak-Out Agreement that owns less than 100,000 shares of common stock is only subject to the 18 month Lock-Up Period, which provision relates to holders of 225,000 of the shares covered by extended Lock-Up/Leak-Out Agreements.  The Lock-Up/Leak-Out Agreements were a condition of the Merger, and most were voluntarily extended from October 6, 2014, to October 6, 2015.  The provisions of the Lock-Up/Leak-Out Agreement can be waived or modified by the Board of Directors.


The stockholders who purchased shares of ANEW LIFE in its private placement were accorded “piggy-back” registration rights on 25% of their respective shares.  We assumed these obligations under the Merger.


(2)

We granted 2,185,000 stock options to directors, officers, consultants and employees, the terms and conditions of which are to be consistent with a yet to be adopted equity stock option or similar plan. For additional



42




information on these stock options, see Footnote (12) of our audited consolidated financial statements that accompany this Annual Report.


(3)

On April 8, 2013, the Company approved a private offering of up to 3,000,000 common shares of restricted stock to investors at $5.00 per share. The purpose of the offering was to acquire additional NIBs. As of the March 31, 2015, we raised $11,942,500 in the sale of 2,388,000 shares of our common stock at $5.00 per share.  We paid $841,651 in introduction fees; and we issued two year warrants to acquire 70,000 shares of our common stock at an exercise price of $5.00 per share.   The warrants expired on May 31, 2015.


Use of Proceeds of Registered Securities


There were no proceeds received by us during the fiscal years ended March 31, 2015, and 2014, from the sale of registered securities.


Purchases of Equity Securities by Us and Affiliated Purchasers


During the fiscal years ended March 31, 2015, and 2014, there were no purchases of equity securities by us or by our “affiliates.”


ITEM 6:  SELECTED FINANCIAL DATA


Not applicable until the end of our 10-Q Quarterly Report for the quarter ended June 30, 2015.  See the heading “Effect of Existing or Probable Governmental Regulations on the Business.”


ITEM 7:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION


Forward-looking Statements


When used in this Annual Report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions are intended to identify forward-looking statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, operating results, and financial position. Persons reviewing this Annual Report are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Such factors are discussed further below under “Trends and Uncertainties,” and also include general economic factors and conditions that may directly or indirectly impact our financial condition or results of operations.  Reference is also made to the caption “Forward-Looking Statements” at the forepart of this Annual Report, which information is incorporated herein by reference.


Plan of Operations


We are 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.” These life insurance interests are anticipated to be held to maturity. Our plan of operation for the next 12 months is to continue the acquisition of these life insurance interests whereby we will acquire the interests in life insurance policies at a discount to their face value for investment purposes. We began purchasing the net insurance benefits in life insurance policies (“NIBs”) during our fiscal year ended March 31, 2013. This is not a market sector without competition, and at present, we are a minor competitor. We will need substantial additional funds to effectively compete in this industry, and no assurance can be given that we will be able to adequately fund our current and intended operations, whether through revenues generated from our current interest in the Qualified NIBs or through debt or equity financing. We may be required to expend not less than approximately $96.2 million on premiums, interest and servicing costs over the next five years to protect our interest in our NIBs, though we have no legal



43




responsibility or adequate funds for these payments. These payments are currently being made by our senior lending facility.


We currently estimate proceeds of approximately $96.5 million on the NIBs owned as of March 31, 2015, and acquired from PCH Financial, Del Mar Financial and HFII. This amount is based on the estimated proceeds from polices of approximately $341.2 million in face value, which includes estimated return of premiums; less the Senior Loans debt or MRI repayments outstanding of approximately $71.8 million, expected premium payments of approximately $104.2 million over the life expectancies and estimated expenses and interest of approximately $68.7 million over the term of the Senior Loans.


We use an estimation methodology to project cash flows and returns as presented. The estimation model required many assumptions, including, but not limited to the following: (i) an assumption that the distinct number of lives in our portfolio would exhibit similar experience to a statistically diverse portfolio based upon which the mortality tables have been created; (ii) an assumption that the life expectancies (the “LE” or “LE’s”) provided by LE providers represent the actuarial mean of the life expectancies of the insureds in our portfolio, (iii) the weighted average of the LEs provided by the LE providers represents an appropriate method for adjusting for discrepancies in the LE’s; (iv) life expectancy tables and projections are accurate; (v) the minimum premiums calculated based on the in-force illustrations provided by life insurance carriers are accurate and will not change over the course of the lifetime of our portfolio; and the Senior Lender fees, MRI fees, and insurance, servicing and custodial fees do not change materially over time. While this method of modeling cash flows is helpful in providing a theoretical expectation of potential returns that might be produced from our NIBs portfolio, actual cash flows and returns inevitably will be different (possibly materially) due to the fact that predicting the exact date of death of any individual is virtually impossible. The provision of a theoretical cash flow model is by no means any guarantee of any results. The actual performance of these NIB interests (as well as our future expectations as to what such performance might be) may differ substantially from our expectations, especially if any of the assumptions change or differ from our initial assumptions. These portfolios currently contain only 106 fractionalized policies on 60 individual insureds, though insurance rating agencies have stated that at least 1,000 lives are required to achieve actuarial stability. Many risk factors beyond these assumptions may result in our expectations being incorrect, as outlined under Part I, Item 1A. Risk Factors, above; therefore, no assurance can be given that these estimated results will occur.


We advanced payments to purchase future additional life settlement products during the year ended March 31, 2015, and if these life settlement products become “Qualified NIBs” as defined in the acquisition documents, we will also utilize the estimation methodology to estimate what our proceeds from these “Qualified NIBs” may be, all subject to the same assumptions, qualifications and risks referenced above.


Results of Operations


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.     


During the period from April 1, 2013, through December 31, 2013, our investment in net insurance benefits was on a non-accrual status. This decision was primarily based on the initial incremental uncertainty experienced by us during the first three quarters of the fiscal year ended March 31, 2014, after closing of the acquisition on our first pool of qualified NIBs.  Management concluded these uncertainties were significantly mitigated in the fourth quarter of the year ended March 31, 2014, as additional experience and information was obtained, including the observation of the proper functioning of the entire system in response to the death of an insured in the fourth quarter.  Non-accrual status was removed effective January 1, 2014. Interest income on investment in NIBs totaled $2,454,478 and $508,411 for the years ended March 31, 2015, and 2014, respectively.  The increase is primarily due to recording four full quarters of accretion in 2015 compared to only one quarter in 2014.  In addition, a lesser portion of the 2015 increase in interest income is due to the acquisition of additional NIBs in March, 2015.




44




General & Administrative Expenses


During the fiscal years ended March 31, 2015, and 2014, we engaged in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies. General and administrative expenses totaled $2,338,266 and $2,278,009 during the fiscal years ended March 31, 2015, and 2014, respectively.  A significant portion of these expenses were professional fees, payroll and travel expenses. Approximately $363,000 of the professional fees were legal and accounting fees related to the preparation and filing of reports with the SEC under the Exchange Act. Payroll is made up of cash payroll costs and non-cash equity issuances to management, directors and others.


Other Income and Expenses


Other income and expenses primarily consist of interest on the note payable related-party and notes payable, gain on extinguishment of debt and interest income. During the fiscal years ended March 31, 2015, and 2014, interest expense has accrued in the amount of $287,203 and $122,452, respectively. The increase in interest expense in 2015 was primarily due to interest and fees resulting from the increase and consolidation of outstanding notes payable related-party.  


For the fiscal year ended March 31, 2014, we deemed the amendment to the PCH Secured Promissory Note payable, by which such note was amended and restated and reduced by $1,499,999, to be an extinguishment of debt and recorded a gain of $1,672,124. We had interest income in the amount of $17,947 and $13,788, respectively.


Income Taxes


During the fiscal years ended March 31, 2015, and 2014, we had no taxable income.


Liquidity and Capital Resources


From our inception on January 31, 2013, through the fiscal year ended March 31, 2015, we incurred cumulative net losses of $457,528.  Management has expressed its belief that we need to raise approximately $40 million to $50 million in additional funds through equity or debt financing to continue our business model and to effectively compete in the life settlement industry during fiscal 2016 and beyond.  We raised $11,942,500 (gross) in our private placement that commenced in April 2013. Our monthly expenses are between approximately $140,000 and $290,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses.  We believe we will have adequate cash resources for our estimated monthly expenses through June 30, 2016, excluding any other acquisitions of additional NIBs and other life settlement products.  


We had cash assets at March 31, 2015, and 2014, of $336,370 and $375,212, respectively.  We have only common stock as our capital resource. We will be reliant upon stockholder loans or private placements of equity or debt to fund any future operations. Although management is actively pursuing opportunities to raise additional equity and debt capital, we have secured no sources of loans, and there is no assurance that we will be able to raise any required debt or equity financing. We do not anticipate having adequate revenues from operations for three to four years, and until a revenue stream has been established, we will require debt or equity funding to fund our current and intended business. If management is unsuccessful in these efforts, discontinuance of operations is a possibility.


For the fiscal years ended March 31, 2015, and 2014, we recorded net cash used in operating activities of $1,998,842 and $10,471,080, respectively. The decrease in cash used from 2015 to 2014 is primarily due to the delay in Del Mar delivering the remaining portion of the $400 million in Qualified NIBs. In addition, the net cash used of $1,998,842 from 2015 includes a refund of advance for investment in NIBs from Del Mar totaling $904,274 because of the delay and our having advanced monies to Del Mar in the excess of the purchase price of the Qualified NIBs received by us. We used cash of $815,798 and $3,584,862 on advance for investments in NIBs under the Del Mar ATA and, with the refund included, we recorded a net cash inflow of $88,476 on advance for investment in NIBs during the year ended March 31, 2015.  




45




During March, 2015, we agreed to pay cash, issue common stock and forgive a note receivable in exchange for relief of a $1,493,254 note payable (explained in Debt, below) and the receipt of NIBs.  The net consideration given for the relief of note payable and receipt of NIBs totaled $1,493,254 and $7,846,746, respectively, for a total of $9,340,000 (of which $150,000 is cash, $150,000 is forgiveness of a note receivable and $9,040,000 is common stock to be issued consideration).  Of the 1,130,000 common shares to be issued, 187,500 shares contain a redemption feature that requires the Company to buy back the shares for $8 per share ($1,500,000 in total) at the option of the holder.  The 1,130,000 common shares, including the 187,500 shares containing a redemption feature, were issued on June 9, 2015.


Net cash provided by financing activities totaled $1,560,000 and $11,161,875 for the fiscal years ended March 31, 2015, and 2014, respectively.  The decrease in cash from financing activities was also the result of the Del Mar delay, as funds were not needed to purchase the Del Mar NIBs.


Under the current business plan, we purchase NIBs only when they fit our model and our cash flows are sufficient to fund those purchases (with exception of the Del Mar ATA wherein we committed to purchase a certain number of Qualified NIBs as Del Mar made them available -- (See “Business Developments Subsequent to Year Ended March 31, 2015” for extension of the Del Mar ATA”).   We expect to finance our NIBs purchases, as well as our operating working capital requirements, with proceeds from planned public and/or private offerings of our securities and debt financing. There can be no assurance that we will be successful in the anticipated equity and debt offerings or that we will be successful in raising additional capital in the future on terms acceptable to us, or at all.


If we are unable to raise sufficient capital through the planned securities and debt offerings or other alternative sources of financing, management will curtail NIB purchases.  We believe that we will be able to fund our operating working capital requirements with existing line-of-credit and debentures agreements, which totaled $5.1 million, of which $2,900,000 is available at June 12, 2015.


The accompanying financial statements have been prepared on a going concern basis under which we are expected to be able to realize our assets and satisfy our liabilities in the normal course of business. To continue as a going concern beyond the year ended March 31, 2016, and in order to continue to acquire life insurance policies and residual interests in or financial products tied to life insurance policies we will need to complete the planned securities and debt offerings or obtain alternative sources of financing. Absent additional financing, we will not have the resources to execute our business plan.


Debt


At March 31, 2014, we owed $1,455,904, including accrued interest, for notes payable.  During the year ended March 31, 2015, we had accrued an additional $37,350 in interest.  On June 9, 2015, we converted the note payable and accrued interest to equity through the issuance of the 187,500 shares of common stock containing the redemption feature (as explained in Liquidity and Capital Resources, above). At March 31, 2015, we also held a note payable-related party of $1,500,000, excluding accrued interest. We may borrow money in the future to finance our operations. Any such borrowing will increase the risk of loss to the debt holder in the event we are unsuccessful in repaying such loans.


Critical Accounting Policies and Estimates


The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable.


ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable until the end of our 10-Q Quarterly Report for the quarter ended June 30, 2015.  See the heading “Effect of Existing or Probable Governmental Regulations on the Business.”




46




ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


SUNDANCE STRATEGIES, INC. AND SUBSIDIARY

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

 

 

Page(s)

 

 

Report of Independent Registered Public Accounting Firm

48

 

 

Consolidated Balance Sheets as of March 31, 2015 and 2014

49

 

 

Consolidated Statements of Operations for the Years Ended March 31, 2015 and 2014

50

 

 

Consolidated Statement of Stockholders’ Equity for the Years Ended March 31, 2015 and 2014

51

 

 

Consolidated Statements of Cash Flows for the Years Ended March 31, 2015 and 2014

52

 

 

Notes to the Consolidated Financial Statements

53-64




47




Report of Independent Registered Public Accounting Firm



Board of Directors and Stockholders

Sundance Strategies, Inc.

Provo, Utah


We have audited the accompanying consolidated balance sheets of Sundance Strategies, Inc. and subsidiary (the “Company”) as of March 31, 2015 and 2014 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended.  These consolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.   Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sundance Strategies, Inc. at March 31, 2015 and 2014, and the results of its consolidated operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.




/s/ Mantyla McReynolds, LLC

Mantyla McReynolds, LLC

Salt Lake City, Utah

June 15, 2015




48






SUNDANCE STRATEGIES, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2015 and 2014

 

 

 

March 31,

 

March 31,

 

 

2015

 

2014

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and Cash Equivalents

$

   336,370

 

$

    375,212

 

Prepaid Expenses

 

        1,875

 

 

      2,000

 

 

 

 

 

 

 

Total Current Assets

 

   338,245

 

 

    377,212

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

Investment in Net Insurance Benefits

 

22,544,635

 

 

12,243,411

 

Advance for Investment in Net Insurance Benefits

 

 3,596,386

 

 

  3,584,862

 

Notes Receivable

 

 211,000

 

 

  861,000

 

Other

 

      16,428

 

 

13,767

 

 

 

 

 

 

 

Total Other Long-term Assets

 

26,368,449

 

 

16,703,040

 

 

 

 

 

 

 

Total Assets

$

26,706,694

 

$

17,080,252

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts Payable

$

  255,361

 

$

  52,915

 

Accrued Expenses

 

 181,917

 

 

             -

 

Notes Payable

 

1,326,876

 

 

             -

 

Note Payable-Related Party

 

 1,500,000

 

 

90,000

 

 

 

 

 

 

 

Total Current Liabilities

 

 3,264,154

 

 

   142,915

 

 

 

 

 

 

 

Notes Payable , including accrued interest

 

        -

 

 

 1,455,904

 

 

 

 

 

 

 

Total Liabilities

 

  3,264,154

 

 

 1,598,819

 

 

 

 

 

 

 

Stockholders’ Equity

 

 

 

 

 

 

Preferred Stock, authorized 10,000,000 shares,

 

 

 

 

 

 

par value $0.001; -0- shares issued and   

outstanding

 

          -

 

 

        -

 

Common Stock, authorized 500,000,000 shares,

 

 

 

 

 

 

par value $0.001; 43,185,941 and 43,015,941

shares issued and outstanding, respectively

 

   43,186

 

 

  43,017

 

Subscription Receivable

 

       -

 

 

       (1,500)

 

Additional Paid In Capital

 

16,316,882

 

 

15,050,705

 

Additional Paid In Capital- Stock to be Issued

 

 7,540,000

 

 

   700,000

 

Accumulated Deficit

 

 (457,528)

 

 

  (310,789)

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

23,442,540

 

 

15,481,433

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

$

26,706,694

 

$

17,080,252

 

The accompanying notes are an integral part of these audited consolidated financial statements.



49





SUNDANCE STRATEGIES, INC. AND SUBSIDIARY

Consolidated Statements of Operations

For the Years Ended March 31, 2015 and 2014

 

 

 

Year Ended

 

Year Ended

 

 

March 31,

 

March 31,

 

 

2015

 

2014

 

 

 

 

 

 

 

Interest Income on Investment in Net Insurance Benefits

 

$

  2,454,478

 

$

   508,411

 

 

 

 

 

 

 

General and Administrative Expenses

 

 

  2,338,265

 

 

     2,278,009

 

 

 

 

 

 

 

Income (Loss) from Operations

 

 

   116,213

 

 

   (1,769,598)

 

 

 

 

 

 

 

Other Income (Expense)

 

 

 

 

 

 

   Gain on Extinguishment of Debt

 

 

                -

 

 

    1,672,124

Interest Income

 

 

     17,947

 

 

    13,788

Interest Expense

 

 

   (287,203)

 

 

   (122,452)

   Other, net

 

 

           6,303

 

 

                 -

 

 

 

 

 

 

 

Total Other Income (Expense)

 

 

  (262,953)

 

 

    1,563,460

 

 

 

 

 

 

 

Loss Before Income Taxes

 

 

   (146,740)

 

 

(206,138)

Income Tax Provision

 

 

              -

 

 

              -

 

 

 

 

 

 

 

Net Loss

 

$

   (146,740)

 

$

   (206,138)

 

 

 

 

 

 

 

Basic and Diluted:

 

 

 

 

 

 

Loss Per Share

 

$

      (0.01)

 

$

      (0.01)

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

 

  43,137,990

 

 

  42,559,660


The accompanying notes are an integral part of these audited consolidated financial statements.




50







SUNDANCE STRATEGIES, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity

For the Years Ended March 31, 2015 and 2014

 

 

Common Stock

 

Additional Paid In

 

Receivable for Common Stock

 

Common Stock to

 

 

Accumulated

 

Total Stockholders’

 

Shares

 

Amount

 

Capital

 

be Issued

 

be Issued

 

 

Deficit

 

Equity

Balance, April 1, 2013

40,797,441

 

$

 40,798

 

$

   3,850,257

 

$

(37,510)

 

$

             -   

 

$

(104,650)

 

$

  3,748,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock issued for cash

 2,218,500

 

 

 2,218

 

 

 11,090,281

 

 

          -   

 

 

                  -   

 

 

             -   

 

 

11,092,499

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issuance costs

               -

 

 

         -

 

 

  (845,886)

 

 

 4,235

 

 

                  -   

 

 

             -   

 

 

 (841,651)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash for shares to be issued

          -

 

 

    -

 

 

         -   

 

 

     -   

 

 

  700,000    

 

 

             -   

 

 

    700,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash received for subscription receivable

              -

 

 

       -

 

 

             -   

 

 

  31,775

 

 

                  -   

 

 

             -   

 

 

      31,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of options issued for compensation

               -

 

 

         -

 

 

     816,802

 

 

     -   

 

 

                  -   

 

 

             -   

 

 

    816,802

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of warrants issued for services

          -

 

 

        -

 

 

    139,251

 

 

     -   

 

 

                  -   

 

 

             -   

 

 

    139,251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

            -

 

 

       -

 

 

         -   

 

 

     -   

 

 

             -

 

 

(206,138)   

 

 

  (206,138)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2014

43,015,941

 

 

43,016

 

 

 15,050,705

 

 

  (1,500)

 

 

  700,000

 

 

 (310,788)

 

 

15,481,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock issued for cash

   30,000

 

 

    30

 

 

    149,970

 

 

         -   

 

 

                  -   

 

 

             -   

 

 

    150,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Removal of Expired Subscription

             -

 

 

        -

 

 

   (1,500)

 

 

 1,500

 

 

                  -   

 

 

             -   

 

 

           -   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock to be Issued for Net Insurance Benefits

             -

 

 

     -

 

 

           -   

 

 

      -   

 

 

7,540,000

 

 

             -

 

 

  7,540,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock to be issued

     140,000

 

 

       140

 

 

      699,860

 

 

         -   

 

 

    (700,000)

 

 

             -

 

 

               -   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of options issued for compensation

             -

 

 

        -

 

 

    417,847

 

 

      -   

 

 

                  -   

 

 

             -   

 

 

      417,847

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year

           -

 

 

       -

 

 

            -   

 

 

      -   

 

 

             -   

 

 

(146,740)   

 

 

   (146,740)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2015

43,185,941

 

$

  43,186

 

$

  16,316,882

 

$

           -

 

$

  7,540,000

 

$

  (457,528)

 

$

  23,442,540


The accompanying notes are an integral part of these audited consolidated financial statements.



51





SUNDANCE STRATEGIES, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Years Ended March 31, 2015 and 2014

 

 

Year Ended

March 31,

2015

 

Year Ended

March 31,

2014

 

 

 

 

 

 

Operating Activities

 

 

 

 

 

 

Net Loss

$

     (146,740)

 

$

        (206,138)

 

Adjustments to reconcile to cash from operating activities:

 

 

 

 

 

 

 

Gain on Extinguishment of Debt

 

                           -

 

 

        (1,672,124)

 

 

Share Based Compensation - Options

 

                417,846

 

 

                816,802

 

 

Change in Asset/Liabilities

 

 

 

 

 

 

 

Advance for Investments in Net Insurance Benefits

 

       (815,798)

 

 

   (3,584,862)

 

 

Refund of Advance for Investments in Net                                   

 

 

 

 

 

 

 

     Insurance Benefits

 

                904,274

 

 

                           -

 

 

Accrued Interest Income

 

           (9,405)

 

 

          (13,767)

 

 

Prepaid Expenses

 

                       125

 

 

            (2,000)

 

 

Accounts Payable

 

                202,446

 

 

                135,420

 

 

Accrued Expenses

 

                  52,888

 

 

                           -

 

 

Investment in Net Insurance Benefits

 

      (2,604,478)

 

 

     (5,944,411)

 

 

        Net Cash from Operating Activities

 

       (1,998,842)

 

 

 (10,471,080)

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

Issuance of Note Receivable

 

      (150,000)

 

 

         (861,000)

 

Proceeds from Notes Receivable

 

                550,000

 

 

                           -

 

 

        Net Cash from Investing Activities

 

                400,000

 

 

     (861,000)

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

Proceeds from Issuance of Notes Payable-Related Party

 

              1,410,000

 

 

                           -

 

Common Stock Issued for Cash

 

                150,000

 

 

            10,461,875

 

Common Stock to be Issued

 

                           -

 

 

                700,000

 

 

        Net Cash from Financing Activities

 

              1,560,000

 

 

            11,161,875

 

 

 

 

 

 

 

 

Net Change in Cash

 

         (38,842)

 

 

       (170,205)

Cash at Beginning of Period

 

                375,212

 

 

                545,417

Cash at End of Period

$

                336,370

 

$

                375,212

 

 

 

 

 

 

 

 

 

Non Cash Financing Activities

 

 

 

 

 

 

 

Cash Paid for Interest

$

                117,471

 

$

                         -   

 

 

Notes Receivables Exchanged for Advance for Investment in NIBs

$

                100,000

 

$

                         -   

 

 

Fair Value of Warrants Issued as Stock Issuance Costs

$

                           -

 

$

                139,251

 

 

Gain on extinguishment of debt

$

                           -

 

$

              1,672,124

 

 

Common Stock to be Issued and Note Receivable settled for Investment in Net Insurance Benefits

$

              7,540,000

 

$

                         -   


The accompanying notes are an integral part of these audited consolidated financial statements



52




SUNDANCE STRATEGIES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015


(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, for the purpose of selling coffee and other related items to the general public from retail coffee shop locations. These endeavors ceased in 2006, and it had no material business operations from 2006, until its acquisition of ANEW LIFE, INC. (“ANEW LIFE”), a subsidiary of Sundance Strategies, Inc. (“Sundance Strategies,” the “Company” or “we”). The Company is a specialty financial services company which is engaged in the secondary market for life insurance known generally as “life settlements.” The Company purchases the net insurance benefit contracts (“NIB”) on life insurance policies between the sellers and purchasers, but does not take possession or control of the policies. The purchasers acquire the life insurance policies at a discount to their face value for investment purposes. The purchasers have available credit to pay premiums and expenses on the underlying policies until settlement. On settlement, the Company receives the NIB after all borrowings, interest and expenses have been paid out of the settlement proceeds.


(2) 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 would be adjusted prospectively.     


During the period from April 1, 2013 through December 31, 2013, the Company’s investment in NIBs was on non-accrual status. This decision was primarily based on the initial incremental uncertainty experienced by the Company during these first three quarters after closing on the first pool of NIBs.  Management concluded these uncertainties were significantly mitigated in the fourth quarter of 2014, as additional experience and information was obtained, including the observation of the proper functioning of the entire system in response to the death of an insured in the fourth quarter of 2014.  Non-accrual status was removed effective January 1, 2014.


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.  For all periods presented, there is no difference in the number of shares used to calculate basic and diluted shares outstanding due to the Company’s net loss position.  Potentially dilutive securities, which total 1,766,374 as of March 31, 2015, are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive.


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 employee stock options. 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,



53




(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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.


The Company accounts for stock options to purchase shares of stock that are issued to non-employees based on the estimated fair value of such instruments using the Black-Scholes option pricing model. The measurement of stock-based compensation expense for these instruments is variable and subject to periodic adjustments to the estimated fair value until the awards vest. Any resulting change in the estimated fair value is recognized in the Company’s consolidated statements of operations during the period in which the related services are rendered.


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 senior 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 holds a 100% interest in the NIBs relating to the underlying life insurance policies as of March 31, 2015, and 2014.     


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 purchase of an investment in NIBs, we estimate the future expected cash flows and determine the effective interest rate based on these estimated cash flows and our initial investment. Based on this effective interest rate, the Company calculates accretable income, which is recorded as interest income on investment in NIBs in the statement of operations.   Subsequent to the purchase and on a regular basis these future estimated cash flows are evaluated for changes. If the determination is made that the future estimated cash flows should be significantly adjusted, a revised effective yield is calculated prospectively based on the current amortized cost of the investment, including accrued accretion.  Any positive or adverse change in cash flows that does not result in the recognition of an “other-than-temporary impairment” (“OTTI”) results in a prospective increase or decrease in the effective interest rate used to recognize interest income.  We have not recognized any significant adverse change in future estimated cash flows relating to our investment in NIBs from January 31, 2013 (inception) to the periods ended March 31, 2015.


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 expected discounted cash flows are less than the carrying amount of the investment, plus anticipated undiscounted future premiums and direct external costs, if any. We have not recognized any impairment on our investment in NIBs from January 31, 2013 (inception), to the periods ended March 31, 2015.


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 resu lts 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.

54





(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


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.


Principles of Consolidation,  The consolidated financial statements include the accounts of the Company and its subsidiary. The subsidiary is wholly owned. All material intercompany accounts and transactions are eliminated in consolidation.


Fair Value, The Company defines fair value as the price that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Accounting standards establishes a fair value hierarchy used to prioritize the quality and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.


(3) NEW ACCOUNTING PRONOUNCEMENTS


In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09 – Revenue from Contracts with Customers, which provides a single, comprehensive revenue recognition model for all contracts with customers. The core principal of this ASU 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. This ASU 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. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2016. Early adoption is not permitted and companies can transition to the new standard under the full retrospective method or the modified retrospective method. The Company does not believe adoption of this ASU will have a material impact on its financial statements.


In August 2014, the FASB issued ASU 2014-15 Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance around management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.


In April, 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (Subtopic 835-30). This update requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. Under current standards, debt issuance costs are generally recorded as an asset and amortization of these deferred financing costs is recorded in interest expense. Under the new standard, debt issuance costs will continue to be amortized over the life of the debt instrument and amortization will continue to be recorded in interest expense. ASU 2015-03 is effective for the Company on January 1, 2016, and will be applied on a retrospective basis. The Company is currently evaluating the impact this guidance will have on our consolidated financial statements.




55




(3) NEW ACCOUNTING PRONOUNCEMENTS (continued)


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 $336,370 and $375,212 in cash and cash equivalents as of March 31, 2015, and 2014, 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. The Company does not have FDIC coverage on the entire amount of bank deposits. The Company believes this risk is minimal.


(5) INVESTMENT IN NET INSURANCE BENEFITS


As of March 31, 2015 and 2014, investments in NIBs were as follows:


 

March 31, 2015

 

March 31, 2014

Beginning Balance

 $                12,243,411

 

 $              6,299,000

Additional investments

                     7,846,746

 

                 5,436,000

Accretion of interest income

                     2,454,478

 

                    508,411

Distributions of investments

               -  

 

                             -   

Impairment of investments

              -

 

                             -   

Total

 $                22,544,635

 

 $            12,243,411


During March 2015, the Company agreed to pay cash, issue common stock and forgive a note receivable in exchange for relief of a note payable (which relief occurred subsequent to March 31, 2015—see Note 16) and the receipts of NIBs.  The net consideration given for the NIBs totaled $7,846,746 (see Notes 11 and 14).  In January 2014, the Company acquired NIBs for $5,436,000 (see Note 6).  The estimated fair value of the Company’s investment in NIBs approximated carrying value at March 31, 2015, with fair value calculated using level 3 inputs.  


The table below describes the underlying life insurance policies relating to our investment in NIBs at March 31, 2015:

 

Expected Maturities of Remaining Policies

(in years)

 

Number of Interests

in Life

Settlement Contracts

 

 

 

 

Face Value of

Underlying

Policies

 

0-1

 

 

-

 

 

 

 

$

-

 

 

1-2

 

 

1

 

 

 

 

 

10,000,000

 

 

2-3

 

 

4

 

 

 

 

 

16,975,000

 

 

3-4

 

 

4

 

 

 

 

 

25,500,000

 

 

4-5

 

 

3

 

 

 

 

 

14,500,000

 

 

Thereafter

 

 

49

 

 

 

 

 

274,221,882

 

 

Total of all policies

 

 

61

 

 

 

 

$

341,196,882

 

 

 

The face value of the underlying life insurance policies of $349,196,882, of which one policy matured on March 11, 2014, totaling $8,000,000, with a remaining $341,196,882, represents the total insurance settlement on the life insurance policies as of March 31, 2015, including the estimated future increase for certain policies that have return of premium provisions. Effectively, as of March 31, 2015, the policy holders had paid $71,855,560 on policy premiums and other expenses on the insurance contracts. The policy holders are independent of the Company, and as separate entities there is a risk that such entities might not continue to pay the policy premiums and other expenses as has been done historically. The Company monitors the policy holders’ ability to maintain the underlying policies, and in the event the policy holders are unable to make the required payments, the Company would evaluate whether to directly maintain the underlying policies through the policy holders or allow them to elapse. The policy holders



56




(5) INVESTMENT IN NET INSURANCE BENEFITS (continued)


currently have senior loan agreements and MRI reinsurance to cover these payments. As of March 31, 2015, none of the underlying policies have elapsed and the required payments remain current .


The table below describes the future estimated premiums payments, other expenses and interest paid by external parties expected to be paid on the policies for the five years subsequent to March 31, 2015.  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 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

 $     11,737,717

 $      8,882,609

 $    20,620,326

Year 2

11,167,772

7,451,554

18,619,326

Year 3

10,994,514

8,055,022

19,049,536

Year 4

12,549,610

7,426,329

19,975,939

Year 5

11,777,714

6,135,891

17,913,605

Thereafter

46,014,310

30,762,826

76,777,136

Total

 $ 104,241,637

 $ 68,714,231

 $ 172,955,868

 

The projected premiums, interest and expenses were created using the expected remaining life expectancies on the policies and other key assumptions. The expenses and interest calculations were based on current senior lender interest rates, current reinsurance interest rates, origination fees, servicing fees and other custodial fees expected during the life of the investment. The senior lender provides the loans at a high rate of interest and loan payments are guaranteed by the 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.  


(6) ADVANCE FOR INVESTMENT IN NET INSURANCE BENEFITS


On June 7, 2013, the Company entered into an Asset Transfer Agreement (the “Del Mar ATA”) with Del Mar Financial, S.a.r.l. (“Del Mar”). The Del Mar ATA involved the purchase of certain life settlement assets consisting of 100% of the legal and net beneficial ownership interest in a portfolio of life insurance policies (the “NIBs”), among other assets that are consideration and collateral for certain cash advances and expense payments made by the Company. The original end result of the Del Mar ATA and the advance was not to purchase the NIBs provided as collateral, but instead to provide sufficient capital to Del Mar for the conversion of a portion of the NIBs and other potential NIBs into “Qualified NIBs.”  The original due date for the conversion was December 31, 2013, which date has subsequently been extended several times, with the most recent to August 31, 2015.  The conversion can be accepted by the Company upon receipt of a combined face amount of $400,000,000 of “Qualified NIBs”; meaning that the NIBs would have premium financing secured for up to five years; that any grouping of NIBs would have not less than 10 policies; that the average age of the insureds under the life insurance policies would be approximately 81 years; and that the NIBs would have mortality re-insurance coverage. All remaining NIBs that are not converted to “Qualified NIBs” and all other assets conveyed to the Company as collateral to assure delivery of the Qualified NIBs are to be re-conveyed to Del Mar upon receipt of combined Qualified NIBs having a face amount equal to $400,000,000.  


During January 2014, as mentioned in Note 5, the Company completed with Del Mar the closing of Qualified NIBs with associated death benefits of $90.6 million for $5,436,000. These Qualified NIBs are part of the $400 million commitment.


During December 2014, Del Mar refunded $904,274 advanced from the Company because of Del Mar’s delay in delivering the remaining portions of the $400 million commitment.  The refund is recorded as a reduction of Advance for Investment in Net Insurance Benefits.



57




(6) ADVANCE FOR INVESTMENT IN NET INSURANCE BENEFITS (continued)


At March 31, 2015, the Company held collateral against the cash advances and expense payments made by the Company to Del Mar.  The collateral includes NIBs associated with life settlement policies with a face value that totaled $94,000,000 at March 31, 2015.  The premiums and expenses related to the maintenance of these life insurance policies are financed from a loan from a senior lender.  The table below describes the underlying life insurance policies relating to these life settlement policies held as collateral by the Company at March 31, 2015:


Policies With Remaining Life

Expectancy

(in years)

 

Number of Interests

in Life

Settlement Contracts

 

 

 

 

Face Value of

Underlying

Policies

 

0-1

 

 

-

 

 

 

 

$

-

 

 

1-2

 

 

-

 

 

 

 

 

-

 

 

2-3

 

 

2

 

 

 

 

 

15,000,000

 

 

3-4

 

 

-

 

 

 

 

 

-

 

 

4-5

 

 

-

 

 

 

 

 

-

 

 

Thereafter

 

 

10

 

 

 

 

 

79,000,000

 

 

Total of all policies

 

 

12

 

 

 

 

$

94,000,000

 

 


The table below describes the future estimated premiums payments, other expenses and interest expected to be paid on the policies held by the Company as collateral for the five years and thereafter subsequent to March 31, 2015.  


Year

 

Premiums

 

Expenses + Interest

 

Total

Year 1

 

$

2,555,383

 

 $

    1,072,007

 

 $

           3,627,390

Year 2

 

 

2,749,390

 

 

    1,452,308

 

 

           4,201,698

Year 3

 

 

2,859,707

 

 

1,197,036

 

 

           4,056,743

Year 4

 

 

2,939,673

 

 

    1,241,008

 

 

           4,180,681

Year 5

2,772,138   

1,199,873   

 3,972,011   

Thereafter

 

 

5,454,897

 

 

8,595,315

 

 

14,050,212

Total

 

$

19,331,188

 

$

14,757,547

 

$

34,088,735


In the likely event Del Mar is unable to provide the Qualified NIBs by the extended due date of August 31, 2015, the Company will have the option of selling collateral up to a liquidated damages settlement payment equal to 100% of any cash payments made under the Del Mar ATA. If the full balance of Qualified NIBs is provided by Del Mar, the Company will have paid $20,000,000 of consideration, $8,000,000 of which would be in cash and the remaining $12,000,000 in promissory notes. Promissory notes may be issued, pro rata, as Qualified NIBs are received. The promissory notes have a two year term from the effective date and bear an interest rate of 4.0% per annum. Total interest and principal amounts are due upon maturity.


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 Company is required to pay a structuring fee of 1% of the face amount of the life insurance policies underlying all NIBs introduced by Europa and acquired by the Company, payable as follows: 50% of the fee on the delivery of the NIBs; and the remaining 50% being payable on the conversion of the NIBs to Qualified NIBs as defined in the Del Mar ATA. The total restructuring fee will be up to $4,000,000. In the event that any cash consideration by the Company under the Del Mar ATA exceeds the defined $8,000,000 cash threshold, the amount payable under the Europa Agreement will be reduced on a dollar for dollar basis for any such overage. The total purchase price will not exceed $24,000,000 under the Del Mar ATA, which is comprised of $12,000,000 in cash consideration and $12,000,000 in promissory notes.


On October 29, 2013, the Company and Europa, with the agreement of Del Mar, amended the Europa Agreement and the Del Mar ATA to acknowledge that the total up-front cash payment due from the Company under the Del Mar ATA and Europa Agreement shall not exceed $12,000,000; that the Company would receive a credit on




58




(6) ADVANCE FOR INVESTMENT IN NET INSURANCE BENEFITS (continued)


a dollar for dollar basis of the cash payment and all costs and expenses paid under the Del Mar ATA over $8,000,000, against all fees due Europa under the Europa Agreement or the Del Mar ATA. In the event the Qualified NIBs delivered are less than $300,000,000 in face value under the Del Mar ATA Agreement, Del Mar and Europa shall be jointly and severally liable for liquidated damages equal to the aggregate of the cash payment under the Del Mar ATA and all of the costs advanced, reduced by the pro rata percentage of the Qualified NIBs delivered and accepted by the Company, multiplied by two; and if at least $300,000,000 in Qualified NIBs are delivered and accepted, then the cash payment and all costs will not be doubled if they are paid within 90 days.


Also on October 29, 2013, the Company entered into an Exclusivity Agreement with the consultant to Europa under the Europa Agreement under which the Company advanced $25,000 to such consultant for services related to the purchase of Qualified NIBs associated with the $400,000,000 in life insurance policies due under the Del Mar ATA.


(7) NOTE RECEIVABLE


On October 23, 2013, the Company made a loan totaling $650,000 in the form of a note receivable to Del Mar. At March 31, 2014, Del Mar owed the full amount of the original principal and $8,540 in accrued interest income and was in default. As of March 31, 2015, the entire balance of the note receivable was collected, with $550,000 received in cash, and the remaining $100,000 applied toward the cash portion of the Del Mar ATA.


On December 9, 2013, the Company made a loan totaling $211,000 in the form of a note receivable to Majestic Ventures S.a.r.l. The note bears an 8% interest rate, compounding annually, with a maturity date of December 18, 2016. Payment of principal and interest are due in full on maturity date. At March 31, 2015, Majestic had not paid any of the original principal and $23,174 in accrued interest income. The Company has a secondary security interest in certain assets of Majestic, which are participating life settlements.


On December 4, 2014, the Company made a loan totaling $150,000 in the form of a note receivable to an entity. On March 2, 2015, the face value of the note receivable was credited toward the purchase price of NIBs acquired from this entity.


(8) COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS


Legal Proceedings


On May 13, 2014, the Company was served with a summons and complaint filed in the Third Judicial District Court in Salt Lake County, State of Utah, where an unrelated party is seeking to void the replacement of a stock certificate alleged to be owned by the plaintiff and acquired for value or damages of $74,255.  As of March 31, 2015, a settlement of this action has been negotiated and is in the process of being finalized.  The ultimate resolution of this matter is not expected to have a significant impact on the operating results or financial position of the Company, and therefore management has concluded that no accrual is necessary as of March 31, 2015.


Lease Agreements


Pursuant to a month to month lease agreement, we currently occupy office space located in Provo, Utah. The total lease expense is approximately $2,600 per month, payable in cash.


We also entered into a lease agreement on November 2013 to lease 6,000 square feet of office space on a month-to-month basis in Irvine, California. The total lease expense is approximately $12,000 per month, payable in cash, 50% of which is invoiced to Del Mar Financial and Europa, which is subsequently applied as Advances on Investments in NIBs.


Rent expense for the year ended March 31, 2015, was $91,529.



59




(9) PROVISION FOR INCOME TAXES


The Company recognizes the tax effects of transactions in the year in which such transactions enter into the determination of net income regardless of when reported for tax purposes. Deferred taxes are provided in the financial statements to give effect to the temporary differences which may arise from differences in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to be payable in future years. Minimal development stage deferred tax assets arising as a result of net operating loss carry-forwards have been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods. In the Company’s opinion, it is uncertain whether we will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a full valuation allowance equal to the deferred tax asset has been recorded.


The provision for income taxes consists of the following:


 

 

2015

 

2014

Current Taxes

 

 

 

 

 

 

Federal

$

 -

 

$

-

 

State

 

 -

 

 

-

Deferred Taxes

 

 

 

 

 

 

Federal

$

(676,558)

 

$

(485,850)

 

Benefits of operating loss carryforwards

 

742,224

 

 

533,006

 

State

 

 (65,666)

 

 

47,156

Total Provisions

$

 -

 

$

-


 The tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2015 and 2014, were as follows:


 

2015

 

2014

Deferred Tax assets:

 

 

 

 

 

Net operating loss carryforwards

$

1,574,512

 

$

760,250

Stock and warrant compensation

 

512,465

 

 

356,608

Valuation allowance

 

(358,117)

 

 

(303,518)

Net deferred tax asset

 

1,728,860

 

 

813,340

 

 

 

 

 

 

Deferred tax liability:

 

 

 

 

 

Debt and Investment in net insurance benefits

 

(1,728,860)

 

 

(813,340)

Net deferred taxes

$

-

 

$

-


The cumulative Net Operating Loss (“NOL”) totaled $4,221,212 and $2,038,201 at March 31, 2015 and 2014, respectively, and will begin to expire in 2021. The total valuation allowance is equal to the total deferred tax asset less any associated deferred tax liabilities. The valuation allowance was $358,117 and $303,518 for the years ended March 31, 2015, and 2014, respectively.


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 period ended March 31, 2015, and 2014 due to the following:

 

 

2015

 

2014

 

 

 

 

 

 

Income tax benefit at U. S. federal statutory rates:

$

(49,892)

 

$

(70,087)

State tax, net of federal benefit

 

(4,842)

 

 

(6,803)

Permanent and other differences

 

135

 

 

2,395

Net operating losses

 

-

 

 

(188,209)

Change in valuation allowance

 

54,599

 

 

262,704

 

$

-

 

$

-

 

60


 

(9) PROVISION FOR INCOME TAXES (continued)


The Company has no tax positions at March 31, 2015 and 2014, for which the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility.


The Company recognizes interest accrued relative to unrecognized tax benefits in interest expense and penalties in operating expense. During the period from January 31, 2013 (date of inception), through March 31, 2015, the Company recognized no income tax related interest and penalties. The Company had no accruals for income tax related interest and penalties at March 31, 2015 and 2014.


The tax years 2010 through 2015 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.


(10) NOTES PAYABLE-RELATED PARTY


As of March 31, 2015, the Company has borrowed $1,500,000 from an entity which is a stockholder in the Company.  Prior to November 20, 2014, the various outstanding notes payable totaling $1,110,000 did not accrue interest and were payable on demand.  On November 20, 2014, the Company consolidated the various obligations into a single master loan agreement which brought the Related Party-Note Payable balance to $1,362,000, which included fees and accrued interest.  On February 20, 2015, the agreement was consolidated again with the acceptance of an additional $138,000 in cash, bringing the Related Party-Note Payable balance to $1,500,000, excluding accrued but unpaid interest.  The new note incurs interest at 7.5 percent, requires origination fees, has a due date of September 30, 2016 or at the immediate time when the anticipated raise in equity funds is successful, and is collateralized by Advance for Investment in NIBs.  During the year ended March 31, 2015, the Company recorded approximately $180,000 of origination fees and other related expenses associated with the notes, which are included in interest expense on the statement of operations.


(11) NOTES 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 incurs interest at 4%, is collateralized by NIBs and was due April 2015.   Subsequent to March 31, 2015, the note payable and related accrued interest was converted to temporary equity through the issuance of 187,500 shares of common stock with a redemption feature (see Notes 5, 14 and 16).  


(12) STOCK OPTIONS


On April 1, 2013, the Company granted a 5,000 share stock option to a former director, Jini Suttner. Ms. Suttner was a founder and a director of ANEW LIFE and was designated as a director of Sundance Strategies on the closing of the ANEW LIFE Merger on March 29, 2013, but resigned on April 1, 2013. The stock option was granted

as compensation for her service, in conjunction with its planned adoption of a stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors that will outline the terms and conditions of the stock option which will not have any effect on the grant date, the exercise price or vesting that have been approved. The stock option has an exercise price of $0.77 per share, which vested immediately, and a contractual term of five years.


The Company valued these options using the Black-Scholes option pricing model applying the simplified method for the expected term under the following assumptions: $1.0294 market price, $0.77 exercise price, 2.5 years expected life, 73% expected volatility, 0.30% risk free rate.


 On April 5, 2013, the Company issued 1,700,000 stock options to certain officers, employees and members of the Board of Directors of the Company and in conjunction with its planned adoption of a stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors, not, however, to have any effect on the grant date, the exercise price or vesting that have been approved. The stock options have an exercise price of $0.77 per share. All options have a contractual term of five years.




61




(12) STOCK OPTIONS (continued)


Of the 1,700,000 stock options, 1,500,000 stock options vest in several tranches, wherein 937,500 vested on the grant date, and the remaining 562,500 stock options vest in equal tranches of 187,500 stock options on the grant date anniversary for the following three years. The Company valued the 1,500,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $1.0294 market price, $0.77 exercise price, 3.5 years expected life, 68% volatility, 0.51% risk free rate.


The remaining 200,000 stock options granted vest in several tranches, wherein 50,000 vested as of the grant date, and the remaining 150,000 stock options vesting in equal tranches on the grant date anniversary for the following three years. The Company valued the 200,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $1.0294 market price, $0.77 exercise price, 3.5 years expected life, 68% volatility, 0.51% risk free rate.


On April 5, 2013, the Company also issued 80,000 stock options to non-employees which vested immediately. The Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC 505-50-30. The Company valued the 80,000 options using the Black-Scholes option pricing model under the following assumptions: $1.0294 market price, $0.77 exercise price, 5 years expected life, 79% volatility, 0.68% risk free rate.


On October 11, 2013, the Company issued 400,000 stock options to an employee in conjunction with its planned adoption of a stock option or similar plan to be adopted in the future for the benefit of employees, officers and directors The stock options have an exercise price of $5.00 per share. The options have a contractual term of five years.


The 400,000 stock options vest in several tranches, wherein 10% of the options vesting six months after the date of issuance and the remaining options to vest monthly over the next 36 months subject to continuing employment with the Company. The Company valued the 400,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $5.00 market price, $5.00 exercise price, 3.40 years expected life, 68% volatility, 0.76% risk free rate.


The Company has recorded stock-based compensation expense of $417,846 related to these options for year ended March 31, 2015.


Date Issued

 

Number of Options

 

Weighted Average Exercise Price

 

Weighted Average Grant Date Fair Value

 

Remaining Contractual Term

 

Intrinsic Value if Exercised

Balance March 31, 2013

 

-

 

$

-

 

$

-

 

-

 

$

-

Granted

 

2,185,000

 

 

1.54

 

 

1.85

 

4.50

 

 

3,374,450

Exercised

 

-

 

 

-

 

 

-

 

-

 

 

-

Cancelled/Expired

 

-

 

 

-

 

 

-

 

-

 

 

-

Outstanding as of March 31, 2014

 

2,185,000

 

$

1.54

 

$

1.85

 

4.50

 

$

3,374,450

Exercisable as of  March 31, 2014

 

1,072,500

 

$

1.54

 

$

1.85

 

4.50

 

$

1,656,338

Balance March 31, 2014

 

2,185,000

 

$

1.54

 

$

1.85

 

4.50

 

$

3,374,450

Granted

 

-

 

 

-

 

 

-

 

-

 

 

-

Exercised

 

-

 

 

-

 

 

-

 

-

 

 

-

Cancelled/Expired

 

-

 

 

-

 

 

-

 

-

 

 

-

Outstanding as of March 31, 2015

 

2,185,000

 

$

1.54

 

$

1.85

 

3.50

 

$

3,374,450

Vested and expected to vest as of March 31, 2015

 

2,185,000

 

$

1.54

 

$

1.85

 

3.50

 

$

3,374,450

Exercisable as of  March 31, 2015

 

1,506,875

 

$

1.54

 

$

1.85

 

3.50

 

$

2,327,174


The remaining $691,084 will be recognized as stock based compensation expense ratably over the weighted average service period of 3.09 years.



62




(13) 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.


The Company valued the 70,000 warrants using the Black-Scholes option pricing model under the following assumptions: $5.00 market price, $5.00 exercise price, 2 years expected life, 73% expected volatility, 0.30% risk free rate.

 

 

Number of Warrants

 

Weighted Average Exercise Price

 

Weighted Average Grant Date Fair Value

 

Remaining Contractual Term

 

Intrinsic Value

Outstanding as of March 31, 2013

 

-

 

$

-

 

$

-

 

-

 

$

-

Granted

 

70,000

 

 

5.00

 

 

1.92

 

1.17

 

 

-

Cancelled/Expired

 

-

 

 

-

 

 

-

 

-

 

 

-