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
Business Developments during the Fiscal Year Ended March 31, 2013
On March 29, 2013, through our newly formed and wholly-owned subsidiary, Anew Acquisition Corp., a Utah corporation (“Merger Subsidiary”), we acquired ANEW LIFE under an Agreement and Plan of Merger (respectively, the “Merger Agreement” and the “Merger”), and ANEW LIFE became our wholly-owned subsidiary. We issued 37,037,369 shares of our common stock under the Merger, resulting in our then having 40,797,441 post-Merger outstanding shares of our common stock; and we succeeded to the business operations of ANEW LIFE. The Merger resulted in a change in control of the Company, which had been a “shell company” prior to the closing of the Merger.
Business Developments during the Fiscal Year Ended March 31, 2014
Effective April 17, 2013, we changed our name to “Sundance Strategies, Inc.”
On June 7, 2013, we entered into an Asset Transfer Agreement (the “Del Mar ATA”) with Del Mar Financial, S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg (“Del Mar Financial”). 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 having a face amount of approximately $284,270,924 (the “NIBs”), among other assets, and provided for the conversion of the NIBs into “Qualified NIBS” (as defined below) having a face amount of $400 million. These NIBs are collateral, with the other assets acquired, for the obligations of Del Mar under the Del Mar ATA. On receipt of the Qualified Nibs, such assets acquired as security for the obligations of Del Mar Financial under the Del Mar ATA, will be reconveyed to Del Mar, except for those NIBs converted to Qualified NIBs.
We also entered into a Structuring and Consulting Agreement on June 7, 2013, with Europa Settlement Advisers Ltd. (respectively, “Europa” and the “Europa Agreement”). Europa acted as our structuring consultant under the Del Mar ATA and it was agreed that Europa would exclusively provide us NIBs related structuring and consulting services for an initial cash advance of $340,000 and 1% of the face amount of the life insurance policies underlying all NIBs introduced to and acquired by us as a result of these structuring and consulting services (the “Structuring Fee”).
On November 12, 2013, we announced the closing of a private placement of our common stock, which resulted in our receipt of an aggregate of $11,792,500 from paid subscriptions for the sale of 2,358,500 shares of our common stock at an offering price of $5.00 per share, through March 31, 2014.
On November 14, 2013, we amended our Del Mar ATA and our Europa Agreement: (i) to clarify that we will receive a dollar for dollar credit against the $12,000,000 aggregate Compensation payable under these agreements to the extent that our Cash Payment of $8,000,000 and related expenses exceeded that amount; (ii) to confirm the satisfaction of the first lien of PCH Financial (as defined below) on all assets of Del Mar Financial acquired by us under the Del Mar ATA; (iii) to outline our payment of $425,000 to Europa for its structuring and consulting services related to the Del Mar ATA; (iv); to confirm that $8,241,319 had been expended by us in Cash Payment and related expenses to that date; (v) to confirm that any excess of Cash Payment and expenses that exceeds $12,000,000 shall be a liability of Del Mar due on demand; (vi) to clarify that our Liquidated Damages in the event Del Mar failed to deliver $400 million in Qualified NIBs would be 100% of the Cash Payment and related expenses or two times these expenditures, provided, however, if at least $300,000,000 in Qualified NIBs are delivered and accepted, then the Cash Payment and all expenses will not be doubled if they are paid within 90 days; and (vii) to extend the delivery date obligation of Del Mar Financial regarding the Qualified NIBs from December 31, 2013, to April 1, 2014.
On January 14, 2014, we announced the receipt and acceptance of $90.6 million of Qualified NIBs under the Del Mar ATA.
Business Developments subsequent to the Fiscal Year Ended March 31, 2014
On April 23, 2014, 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.
On May 8, 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 (the “Secured Promissory Note”) and the reduction of the 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.
On May 8, 2014, we also announced the remaining payments due under our private placement that was completed in November, 2013, had been extended to June 30, 2014.
On July 10, 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 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.
We also announced on such date that our total proceeds received under our private placement was $11,792,500.
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 was 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, during fiscal 2014, we will be primarily be 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 six 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 (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 are essentially interchangeable with other references to NIBs in this Annual Report, meaning “net insurance benefits”; however, under the Del Mar ATA discussed and referenced in this Annual Report under the headings “Business Development” “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 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”). We believe 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 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 it owns, 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 S.a.r.l., a société à responsabilité limitée incorporated and existing under the laws of the Grand Duchy of Luxembourg (“PCH Financial”), whom we believe to be the only current sellers of NIBs.
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 expectances. 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 and Del Mar Financial were negotiated by others prior to our purchase of these NIBs through a European financial institution (the “Senior Lender”), which we believe 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 7.00% 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.
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 six portfolios, with an aggregate original face amount of $219,638,933 (including NIBs acquired from PCH Financial and Qualified NIBs acquired from Del Mar Financial), with 32 individual insureds spread over 62 underlying life insurance policies. There are only 32 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.
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 amount 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. We are not party to any of the 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.
* 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%
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.
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 (15th) 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.
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
NIBs Acquired from PCH Financial
The following tables contain information about the NIBs or Qualified NIBs, as of the date of their respective acquisitions, or March 11, 2013, and January 14, 2014, 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.
Face Amount
Policy Type
Gender
Current Age1
Life Expectancy2
Carrier
Carrier Rating
S&P
$5,000,000
Universal Life
Male
91 months
American General
A+
$1,000,000
Universal Life
Male
65 months
AXA
AA-
$8,000,000
Universal Life
Male
91 months
Lincoln
AA-
$3,000,000
Universal Life
Male
137.5 months
Jefferson Pilot
AA-
$10,000,000
Universal Life
Male
78 months
New York Life
AA+
$5,000,000
Universal Life
Male
70.5 months
Jefferson Pilot
AA-
$8,000,000
Universal Life
Female
126 months
John Hancock
O
$2,500,000
Universal Life
Male
106 months
Lincoln
AA-
$10,000,000
Universal Life
Male
51.5 months
American General
A+
$4,000,000
Universal Life
Male
81 months
Lincoln
AA-
$5,000,000
Universal Life
Male
139.5 months
John Hancock
O
$5,000,000
Universal Life
Male
129.5 months
Lincoln
AA-
$10,000,000
Universal Life
Male
153.5 months
Lincoln
AA-
$10,000,000
Universal Life
Male
122 months
ReliaStar
O
$10,000,000
Universal Life
Male
147.5 months
AXA
AA-
$3,000,000
Universal Life
Male
133.5 months
Protective
AA-
$1,000,000
Universal Life
Male
118 months
LBL
A+
$1,600,000
Universal Life
Male
147 months
Transamerica
AA-
$10,938,933
Universal Life
Male
149 months
New York Life
AA+
$10,000,000
Universal Life
Female
135.5 months
AXA
AA-
$3,000,000
Universal Life
Male
158 months
AXA
AA-
$3,000,000
Universal Life
Male
145 months
LBL
A+
$129,038,933
On March 11, 2013, pursuant to an Asset Transfer Agreement between PCH Financial and ANEW LIFE (the “Transfer Agreement”), we acquired NIBs related Policies with an aggregate original face amount equal to $129,038,933, for $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 due on or before December 31, 2013, along with a Pledge Agreement under which 50% of our interest in the NIBs was pledged (the “NIBs Collateral”) as security for payment of the Secured
______________________
1 Age at nearest birthday
2 The LE input is the straight average of the AVS and 21st 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.
Promissory Note. We also paid Europa a $300,000 Structuring Fee. Under the Transfer Agreement, PCH Financial represented and warranted, as of the effective date of such Transfer Agreement, among other customary representations and warranties, that it was the sole beneficial and legal owner of the NIBs; that it was not aware of any document that would preclude it from consummating the sale of the NIBs being sold; that it owned the NIBs being sold, free and clear of any liens or other encumbrances of any kind; and that each portfolio of Policies was valid, in-force and in good standing and had not lapsed, nor were any in any grace period. The Transfer Agreement also provided that if we failed to pay the Secured Promissory Note when due, that we may reconvey the NIBs Collateral to PCH Financial under the Transfer Agreement, as full payment under the Secured Promissory Note, excluding only accrued interest at 4.0% per annum; and that regardless of such reconveyance, we could reacquire the NIBs Collateral on or before April 11, 2014, by paying the balance due under the Secured Promissory Note. The Pledge Agreement also provided that there was no recourse against us in the event of the sale of the NIBs Collateral after default, with PCH Financial only having recourse against the NIBs Collateral. The Transfer Agreement, the Secured Promissory Note and the Pledge Agreement otherwise contained customary representations and warranties and provisions regarding due authorization, default, governing law, completeness and amendments provisions, among others. 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, 2014, are as follows:
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. As of March 31, 2014, the return of premium amount on Policies with these provisions was $384,801.
Since the execution and delivery of the 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 Financial under the 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 Financial; 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 Financial to a third party, subject to a minimum Buyback Price of $1,120,000, which Buyback Rights became ours by reason of Del Mar Financial’s failure to deliver the $400 million in Qualified NIBs to us by the date of our first extension to them of such obligation to April 1, 2014. Also, see the heading “Qualified NIBs acquired under the Del Mar ATA,” below.
Qualified NIBs acquired under the Del Mar ATA
Face Amount
Policy Type
Gender
Current Age1
Life Expectancy2
Carrier
Carrier Rating S&P
8,000,000
Universal Life
Male
43.5 months
American National
A
4,000,000
Universal Life
Male
65.2 months
Hancock
AA-
10,000,000
Universal Life
Male
152.8 months
Lincoln
AA-
10,000,000
Universal Life
Female
143.5 months
Natl. Western
A
4,000,000
Universal Life
Female
141.9 months
AXA
AA-
10,000,000
Universal Life
Female
136.8 months
Sun Life
AA-
10,000,000
Universal Life
Female
46.4 months
ReliaStar
A-w-
9,600,000
Universal Life
Female
124.9 months
Lincoln
AA-
5,000,000
Universal Life
Male
90.6 months
AXA
AA-
10,000,000
Universal Life
Male
93.8 months
Beneficial Life
A
10,000,000
Universal Life
Female
105.4 months
AXA
AA-
$90,600,000
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, with “Qualified NIBs meaning that: (i) the NIBs would have premium financing secured for up to five years; (ii) that any grouping of NIBs would have not less than 10 policies; (iii) that the average age of the insureds under the life insurance policies would be approximately 81 years; and (iv) that the NIBs would have mortality re-insurance coverage or what we formerly referred to as “MRI” and which is referred to in this Annual Report as mortality re-insurance or “MRI,” as discussed below. 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 with respect to 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 Financial and $4,000,000 to Europa) would be reduced on a dollar for dollar basis for any cash payments or
_______________________
1 Age at nearest birthday
2 The LE input is the straight average of the AVS and 21st 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.
expenses paid by us in excess of $8,000,000 under the Del Mar ATA. As of March 31, 2014, such cash payments and expenses were $9,020,862.
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) announce that our March 11, 2013, $2,999,999 promissory note to PCH Financial issued as partial payment by us to acquire our first $129 million in NIBs (acquired by ANEW LIFE) had been amended and restated to reduce the principal amount to $1,500,000 and to extend the due date to April 11, 2015 (the “Amended and Restated Promissory Note”), and that such Amended and Restated Promissory Note had been assigned to Del Mar Financial; and (x) our acquisition of certain buyback rights (the “Buyback Rights”) to 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 Financial to a third party, subject to a minimum buyback price of $1,120,000 (the “Buyback Price”), which Buyback Rights became ours by reason of Del Mar Financial’s failure to deliver the $400 million in Qualified NIBs to us by the date of our first extension to them of such obligation to April 1, 2014. 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 September 30, 2014, as discussed above under the heading “Business Developments subsequent to the Fiscal Year Ended March 31, 2014. 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, 2014, are as follows:
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 two providers of NIBs, Del Mar Financial and PCH Financial, 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 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.
We believe 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 original face amount equal to $129,038,933, and we are in negotiations to purchase additional NIBs related Policies. To date, we have received Qualified NIBs under the 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 $202 million. These $202 million of non-Qualified NIBs are divided into three portfolios of policies of face amounts of approximately $55.5 million, $52.5 million and $94 million, respectively. We also hold, as collateral, additional non-Qualified NIBs in a face amount of approximately $100 million that are being evaluated for possible conversion into Qualified NIBs. 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. We are in preliminary discussions to acquire additional NIBs with a party whose notes we acquired under the Del Mar ATA and that were to be pledged to Del Mar Financial in the event all $400 million in Qualified NIBs are delivered. It is planned that the notes acquired will be exchanged for such NIBs, and the NIBs acquired will then become part of the collateral that would be subject to pledge in the event of Del Mar Financial’s full compliance under the Del Mar ATA. We have granted an additional extension to Del Mar Financial under the Del Mar ATA to September 30, 2014, to allow Del Mar Financial further time to process and finance certain of the non-Qualified NIBs to Qualified NIBs and to assist existing policy owners in the creation of new Qualified NIBs for delivery to us as required under the Del Mar ATA. 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 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 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 are also in the process of hiring an independent pricing consultant either as a full time employee or on a contract basis with years of experience in pricing life insurance policies. We have spoken to multiple candidates and hope to have a pricing consultant in the next 60 days. 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 most 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. Europa advised us with respect to our initial purchase of NIBs related Policies with an aggregate original face amount equal to $129,038,933, which we purchased on March 11, 2013, for $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 (see the heading “Current NIBs Contracts” above). $300,000 in compensation was paid to Europa in connection with this transaction, which was capitalized within the carrying value of the investment. The 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.
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 DMF Financial 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 DMF 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.
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-reports.pdf
, 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.
Smaller Reporting Company
We are subject to the reporting requirements of Section 13 of the Exchange Act, and subject to the disclosure requirements of Regulation S-K of the SEC, as a “smaller reporting company.” That designation will relieve us of some of the informational requirements of Regulation S-K.
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,” like those applicable to a “smaller reporting company,” including, but not limited to, a scaled down description of our business in SEC filings; no requirements to include risk factors in Exchange Act filings; no requirement to include certain selected financial data and supplementary financial information in SEC filings; not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements that we file under the Exchange 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 two fiscal years when filing registration statements, together with reviewed financial statements of any applicable subsequent quarter.
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 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, 2014, and 2013.
Number of Total Employees and Number of Full-Time Employees
We have four full-time employees, Randall F. Pearson, our President; Glenn S. Dickman, our Secretary; 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.
ITEM 1A.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to provide risk factors; however, we have included risk factors that we believe are applicable to our Company and our business.
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
We are newly formed, and our auditors have added a “going concern” qualification to their Independent Auditor’s Report issued for our financial statements.
Our Independent Auditor’s Report dated July 15, 2014, expresses a “going concern” reservation in connection with our audited consolidated financial statements for the year ended March 31, 2014. Note (16) of our audited consolidated financial statements states that “At March 31, 2014, the Company had accumulated deficits of $310,789 and a working capital of $234,297, but has yet to receive cash payments on revenues. In addition, the Company has negative operating cash flows from inception through March 31, 2014. These factors raise substantial doubt about the Company’s ability to continue as a going concern.” See the caption “Financial Statements and Supplementary Data,” Part II, Item 8, below.
One member of our management has up to approximately five years (Matthew G. Pearson, our Chief Operating Officer) and our directors and President and Secretary have at least approximately 20 months (Messrs. Randall F. Pearson, Glenn S. Dickman 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 limited 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 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 six portfolios, with an aggregate original face amount of $219,638,933 (including NIBs acquired from PCH Financial and Qualified NIBs acquired from Del Mar Financial), with 32 individual insureds spread over 62 underlying life insurance policies. There are only 32 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.
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.
The limited number of sellers of NIBs and similar life settlement products may have an adverse affect 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 and PCH Financial, the two 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, 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 affect 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 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 and Del Mar Financial. We have no 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.
93% 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 93% 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.
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 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.
Risk Factors Relating Our Common Stock
There is no established public market for our common stock, and any market that may develop could be volatile.
There is currently no established 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 this Item 501 above.
Our Management and two stockholders own approximately 64.6% 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 43,155,941 shares of our common stock that are currently outstanding, 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, 2014 (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 one-fourth (1/4) of such stockholder’s common stock in each successive quarterly period following the Lock-Up Period, also on a non-cumulative basis. Our remaining outstanding shares are freely tradable under Rule 144, 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 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 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 s 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.
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, 21st Services LLC, American Viatical Services LLC, Fasano Associates and EMSI. It is somewhat unclear how the changes in the 21st 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 should not be materially impacted by the changes in the 21st 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.
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.
Carrier 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.
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 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 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 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:
ITEM 2: PROPERTIES
We currently lease a small space of approximately 200 square feet located at 4626 North 300 West, Suite 365, Provo, Utah 84604, on a month to month arrangement for $1,000 per month; 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. We are considering various factors about our intended industry of business to determine if moving our principal executive offices to another location would be beneficial to us and our business and business relationships. These factors presently include proximity and convenience of access to the services provided by the Servicer, the servicers of the life insurance policies underlying our net insurance benefits, and our general counsel. 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:
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 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 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 are currently in negotiations to resolve this matter; however, no assurance can be given that a resolution will be reached without further litigation and expense. We believe that its maximum liability under this action is the value of the shares sought to be replaced or the amount claimed by the plaintiff, together with costs of court and interest. If the value of the shares increases before the action is resolved, we could also be liable for the additional increased value of the shares. The replaced shares issued to the unrelated stockholder defendant were issued by our transfer agent without our consent and a surety bond was provided by the unrelated stockholder defendant at the time of the replacement of the stock certificate that was in the possession of the plaintiff. We have filed and answer and counterclaim in this matter, and we are presently attempting to resolve the dispute between the parties and settle this matter.
ITEM 4:
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5:
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 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, 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, 2014, and 2013. These bid prices were obtained from the FINRA composite feed 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.
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 93 stockholders of record as of July 9, 2014, and an indeterminate number of stockholders who hold shares in “street name.”
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 follow table and related footnotes contains information about all sales of unregistered securities by us during the fiscal years ended March 31, 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
2,358,500(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 33,152,500 of these shares have executed Lock-Up/Leak-Out Agreements that provide for an 18 month Lock-Up Period and an 18 month Leak-Out Period 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 shall only be subject to the 18 month Lock-Up Period., which provision relates to holders of 377,500 of the shares. The Lock-Up/Leak-Out Agreements were a condition of the Merger. 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 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, 2014, we raised $11,792,500 in the sale of 2,358,000 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.
Use of Proceeds of Registered Securities
There were no proceeds received by us during the fiscal years ended March 31, 2014, and 2013, from the sale of registered securities.
Purchases of Equity Securities by Us and Affiliated Purchasers
During the fiscal years ended March 31, 2014, and 2013, there were no purchases of equity securities by us; or by our “affiliates,” except for purchases from us.
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
Not required of smaller reporting companies.
ITEM 7:
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 we recently acquired in fiscal 2014 or through debt or equity financing. We may be required to expend not less than approximately $33,891,765 over premiums and servicing costs over the next five years to protect our interest in our NIBs, though we have no legal responsibility for these payments.
We currently estimate proceeds of approximately $74,546,743 on the net insurance benefits owned as of March 31, 2014, and acquired from PCH Financial and Del Mar Financial. This amount is based on the estimated proceeds from polices of $211,638,933; less the senior debt outstanding of $31,867,216; including the reductions for the $8,000,000 policy maturity; expected premium payments of
$66,341,026 over the life expectancies; the estimated increase in the net proceeds from premiums on those policies that contain a return of premium provision in the amount of $384,801; and estimated expenses and interest of $39,268,749 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 the 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 the 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 the portfolio; and the senior lending 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 Sundance’s initial assumptions. These portfolios contains only 62 policies and 32 individual insureds, though insurance rating agencies have stated that at least 1,000 lives are required to achieve any 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, 2014, and if these life settlement products become “Qualified NIBs” as defined in our acquisition documents and as discussed in below, 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. These life settlement products are included in the estimates above because to the extent that we have been delivered $90.6 million in “Qualified NIBs” from which such calculations would be made as of the fiscal year ended March 31, 2014.
Results of Operations
Income and Cost 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 non-accrual status. This decision was primarily based on the initial incremental uncertainty experienced by us during our first three quarters of 2014, after closing of the acquisition on the first pool of qualified NIBS. Management concluded these uncertainties were significantly mitigated in the fourth quarter 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.
Operating and General & Administrative Expenses
Operating Expenses
During the years ended March 31, 2014, and 2013, 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 were $2,278,009 and $98,074 during the years ended March 31, 2014, and 2013, respectively. Most of these expenses were professional fees, payroll and travel expenses. Most all of the professional fees were legal and accounting fees related to the preparation and filing of reports with the SEC under the Exchange Act during fiscal 2014, which did not occur in the prior year. Payroll is made up of payroll fees and equity issuances to management, directors and others in the current year.
Other Income and Other Expenses
Other income and expenses consist of interest accrued on the note payable used to purchase the investment in our NIBs. During the years ended March 31, 2014, and 2013, interest expenses have accrued in the amount of $122,452 and $6,577, respectively. We deemed the amendment to the 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 in the year ended March 31, 2014. We had interest income in the amount of $13,788 and $0, respectively.
Income Taxes
At March 31, 2014, we had no taxable income.
Liquidity and Capital Resources
From our inception on January 31, 2013 through March 31, 2013, and as of the fiscal years ended March 31, 2014, we incurred net loss of $104,651 and $206,138, respectively. 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 2015 and beyond. We raised $11,792,500 in our private placement that commenced in April, 2013, with the receipt of a final subscription payment of $700,000 in March, 2014, and the cancellation of two subscriptions for non-payment at June 30, 2014. Our monthly expenses are between approximately $95,000 and $140,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. As of June 30, 2014, we were current in all of our payables, and we had approximately $116,000 in cash, along with a Subscription Agreement executed on June 24, 2014, for $3.3 million to purchase 660,000 shares of our common stock, payable on or before August 15, 2014. We believe we will have adequate cash resources for our estimated monthly expenses through the end of our fiscal year of March 31, 2015, excluding any other acquisitions of additional NIBs and other life settlement products, and assuming payment of this Subscription Agreement.
We have cash assets at March 31, 2014, and 2013, of $375,212 and $545,417, respectively. We have $12,243,411 in investment in NIBs and have advanced $3,584,862 for investment in net insurance benefits. We also had a Secured Promissory Note payable for $2,999,000 related to the $6,299,000 in investment in NIBs, which was amended and determined to be an extinguishment of debt and issuance of new debt. We recorded a gain on extinguishment of $1,672,124. 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 of operations. We have secured no sources of loans. There is no assurance that we will be able to raise any required debt or equity financing.
On April 8, 2013, we approved a private offering of up to 3,000,000 common shares of our common stock, also comprised of “restricted securities” under SEC Rule 144 to “accredited investors” only at $5.00 per share. The purpose of the offering was to acquire additional NIBs or other life settlement products. During the year ended March 31, 2014, we had received $11,792,500 for 2,358,500 common shares at $5.00 per share of which 2,218,500 shares were issued for cash of $11,092,500 and 140,000 shares were issued for cash of $700,000 on July 10, 2014; paid $845,886 in introduction fees; and issued two year warrants to acquire 70,000 shares of our common stock at an exercise price of $5.00 per share.
For the years ended March 31, 2014 and 2013, we had net cash used in operating activities of $10,471,080 and $3,323,323, respectively. We used $3,584,862 as an advancement to purchase the investment in NIBs under the Del Mar ATA for the year ended March 31, 2014 and used $5,944,411 and $3,300,000 to invest in net insurance benefits and accrued $508,411 and $0 in interest income on investment in net insurance benefits to invest in insurance benefits during the years ended March 31, 2014 and 2013, respectively. Net cash used in investing activities totaled $861,000 and $0 for the years ended March 31, 2014, and 2013, respectively, which represents the issuance of two note receivables to unrelated parties in the amounts of $211,000 and $650,000. Net cash provided by financing activities totaled $11,161,875 and $3,868,740 for the years ended March 31, 2014 and 2013, respectively, which represents the net funds we received from the private placement through March 31, 2014.
Long-Term Debt
At March 31, 2014, we had a long term debt balance of $1,455,904 and a short term related party note balance of $90,000. We may borrow money in the future to finance our future operations. Any such borrowing will increase the risk of loss to the investor in the event we are unsuccessful in repaying such loans.
We may issue additional shares to finance our future operations. Any such issuance will reduce the control of previous investors and may result in substantial additional dilution to investors purchasing shares in any such offering.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements for the two fiscal years ended March 31, 2014, and 2013.
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of March 31, 2014 and 2013
Consolidated Statements of Operations
for the Years Ended of March 31, 2014 and the period from January 31, 2013 (inception)
through March 31, 2013
Consolidated Statement of Stockholders’ Equity
for the Year Ended March 31, 2014 and the period from January 31, 2013 (inception)
through March 31, 2013
Consolidated Statements of Cash Flows
for the Year Ended March 31, 2014 and the period from January ( inception)
through March 31, 2013
Notes to the Consolidated Financial Statements
50 - 60
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. as of March 31, 2014 and 2013 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended March 31, 2014 and for the period from inception [January 31, 2013] through March 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 has determined that it 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 financial position of Sundance Strategies, Inc. at March 31, 2014 and 2013, and the results of its operations and its cash flows for the year ended March 31, 2014 and for the period from inception [January 31, 2013] through March 31, 2013, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 16 to the consolidated financial statements, the Company has incurred losses since inception and negative operating cash flows that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 16. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Mantyla McReynolds, LLC
Mantyla McReynolds, LLC
Salt Lake City, Utah
July 15, 2014
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
The accompanying notes are an integral part of these audited consolidated financial statements.
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2014
(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.
Merger
On March 29, 2013, Sundance Strategies, Inc., a Nevada corporation (“Sundance Strategies”), its newly formed and wholly-owned subsidiary, Anew Acquisition Corp., a Utah corporation (“Merger Subsidiary”), and ANEW LIFE, INC., a Utah corporation (“ANEW LIFE”), completed an Agreement and Plan of Merger (the “Merger Agreement”), whereby the Merger Subsidiary merged with and into ANEW LIFE, and ANEW LIFE was the surviving company under the merger and became a wholly-owned subsidiary of Sundance Strategies on the closing of the merger (the “Merger”). Accordingly, Sundance Strategies issued 37,037,369 shares of its common stock in exchange for all of the outstanding shares of common stock of ANEW LIFE. ANEW LIFE had no other outstanding stock options, warrants, preferred stock or securities on the closing of the Merger. As of March 31, 2013, there were 40,797,441 shares of Sundance Strategies common stock outstanding, of which approximately 90.7% was held by the former shareholders of ANEW LIFE. The Merger has been treated as a reverse acquisition and a recapitalization of a public company. Accordingly, the historic financial statements of the Company are the historic financial statements of ANEW LIFE, which was incorporated on January 31, 2013.
(2) CORRECTION OF AN ERROR RELATED TO THE ADOPTION OF AN ACCOUNTING PRINCIPLE
On January 1, 2014, the Company changed its method of accounting for investment in NIBs, including the basis of recognizing income in investment in NIBs. Prior to January 1, 2014, the Company utilized ASC 325-30 (Insurance Contracts), which allows for the investment in NIBs to be carried at cost and recognition of income at the time of death of the insured in the underlying life insurance contract. Prior to January 1, 2014, no death of an insured had occurred and, therefore, no income had been recognized since inception of the Company. On January 1, 2014, the Company adopted ASC 325-40 (Beneficial Interests in Securitized Financial Assets), which allows for the investment in NIBs to be carried at the initial investment value increased for interest income and decreased for cash receipts received by the Company and income recognized as accretable yield on investment in NIBs over the life of the underlying pools of life insurance contracts. The adoption of ASC 325-40, which is the correction of an error, had no impact on the financial statements of the Company for the year ended March 31, 2014, and the period from January 1, 2013 (inception) through March 31, 2013.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates, The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. Specifically, interest income on investment in NIBs is recognized in accordance with ASC 325-40. Under ASC 325-40, at the time of purchase, the Company estimates the future expected cash flows and determines the effective interest rate based on these estimated cash flows and our initial investment. Subsequent to the purchase and on a quarterly basis, these estimated cash flows are updated and
a revised yield is calculated prospectively based on the current amortized cost of the investment. In estimating these cash flows, 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, life expectancy estimates and their relation to premiums, interest, and other costs incurred, among other items. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimates and interest income. As a result, actual results could differ significantly from those estimates.
Cash and Cash Equivalents, For purposes of reporting cash flows, the Company considers all highly-liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Income Recognition, Interest income on investment in NIBs represents the excess of all cash flows attributable to the investment in net insurance benefits greater than the initial investment over the life of each pool of net insurance benefits using the effective yield method. Changes in the estimate of expected cash flows from investments in NIBs are adjusted prospectively.
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 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.
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. 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.
Investment in Net Insurance Benefits, 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. 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”). Profit 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, 2014, and 2013.
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 about remaining life expectancy, credit worthiness of the policy issuer, funds needed to maintain the asset until maturity, discount rates and potential return. We recognize impairment on 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. Impairment of the NIBs could be generally caused by the insured significantly exceeding the estimate of the original life expectancy, which causes the original policy costs and projected future premiums to exceed the estimated maturity value, a change in credit worthiness of the policy issuer, increased or changes to applicable regulation of the investment, shortage of funds needed to maintain the asset until maturity and changes in discount rates. There are also risks associated with the policy holder’s ability to repay such financing and the occurrence of events of default under such financing. We have not recognized any impairment from January 31, 2013 (inception), to the periods ended March 31, 2014.
Income Taxes, The Company accounts for income taxes under FASB ASC 740, “Income Taxes”. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for
deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.
The tax effects from an uncertain tax position can be recognized in the financial statements only if the position is more likely than not of being sustained if the position were to be challenged by a taxing authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its balance sheet.
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.
(4) NEW ACCOUNTING PRONOUNCEMENTS
The Company has reviewed recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.
(5) INVESTMENT IN NET INSURANCE BENEFITS
The carrying value of the investment in NIBs totaled $12,243,411 as of March 31, 2014. The table below describes the underlying life insurance policies relating to our investment in NIBs at March 31, 2014:
The face value of the underlying life insurance policies of $220,023,734, of which one policy matured on March 11, 2014, totaling $8,000,000, with a remaining $212,023,734, represents the total insurance settlement on the life insurance policies as of March 31, 2014, including the increase for certain policies that have return of premium provisions of $384,801. Effectively, as of March 31, 2014, the policy holders had paid $39,837,216 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 currently have senior loan agreements and MRI reinsurance to cover these payments. As of March 31, 2014, 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 through the estimated death date as of March 31, 2014. As noted above, there are significant estimates involved in 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:
Year
Premiums
Expenses + Interest
Total
Year 1
$ (6,523,872)
$ (4,247,938)
$ (10,771,810)
Year 2
(7,083,417)
(5,339,068)
(12,422,486)
Year 3
(6,876,304)
(4,735,870)
(11,612,174)
Year 4
(6,370,450)
(4,468,117)
(10,838,567)
Year 5
(7,044,696)
(4,470,945)
(11,515,641)
Thereafter
(32,442,287)
(16,006,811)
(48,449,097)
Total
$ (66,341,026)
$ (39,268,749)
$ (105,609,775)
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.
A portion of our investment in net insurance benefits was purchased as part of a transfer agreement that was purchased for $5,999,000, with a portion paid in cash of $3,000,000 and the remainder covered by a secured note in the amount of $2,999,000. The note is secured by 50% of the NIBs, which will be reduced as future payments are made on the note. The Company paid $300,000 to consultants for arranging the purchase of the NIBs. In January 2014, the Company acquired $90.6 million net insurance benefits mentioned in Note 7 below totaling $5,436,000. As of March 31, 2014 and 2013, investments in Net Insurance benefits were as follows.
Beginning Balance
$ 6,299,000
$ -
Additional investments
5,436,000
6,299,000
Accretion of interest income
508,411
-
Distributions of investments
-
-
Impairment of investments
-
-
Total
$ 12,243,411
$ 6,299,000
(6) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists principally of currency on hand and demand deposits at commercial banks. The Company had $375,212 and $545,417 in cash and cash equivalents as of March 31, 2014, and 2013, 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.
(7) ADVANCE FOR INVESTMENT IN NET INSURANCE BENEFITS
On June 7, 2013, the Company entered into an Asset Transfer Agreement (the “Del Mar ATA”) with Del Mar Financial, S.a.r.l. (“Del Mar”). The Del Mar ATA involved the purchase of certain life settlement assets consisting of 100% of the legal and net beneficial ownership interest in a portfolio of life insurance policies (the “NIBs”), among other assets that are consideration and collateral for certain cash advances and expense payments made by the Company. The end result of the Del Mar ATA and the advance was not to purchase the NIBs provided as collateral, but instead to provide sufficient capital to Del Mar for the conversion of a portion of the NIBs and other potential NIBs into “Qualified NIBs” before the original due date of December 31, 2013, which has been extended to April 1, 2014, and then subsequently extended to September 30, 2014, having a combined face amount
of $400,000,000, with “Qualified NIBs” meaning that the NIBs would have premium financing secured for up to five years; that any grouping of NIBs would have not less than 10 policies; that the average age of the insureds under the life insurance policies would be approximately 81 years; and that the NIBs would have mortality 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 will be re-conveyed to Del Mar upon receipt of combined Qualified NIBs having a face amount equal to $400,000,000. In the event Del Mar is unable to provide the Qualified NIBs by the original date of December 31, 2013, which was extended to April 1, 2014, and then subsequently extended to September 30, 2014, the Company will have the option of selling any of the assets acquired up to a liquidated damages settlement payment equal to 100% of any cash payments made under the Del Mar ATA. If the full balance of Qualified NIBs is provided by Del Mar, the Company will have paid $20,000,000 of consideration, $8,000,000 of which would be in cash and the remaining $12,000,000 in promissory notes. Promissory notes may be issued, pro rata, as Qualified NIBs are received. The promissory notes have a two year term from the effective date and bear an interest rate of 4.0% per annum. Total interest and principal amounts are due upon maturity. Del Mar is continuing its efforts in delivering the Qualified NIBs. The Company has received $90,000,000 in Qualified NIBs under the Del Mar ATA.
As part of the Del Mar ATA, the Company entered into a Structuring and Consulting Agreement with Europa Settlement Advisors Ltd. (“Europa Agreement” and “Europa”). The Company is required to pay a structuring fee of 1% of the face amount of the life insurance policies underlying all NIBs introduced and acquired, payable as follows: 50% of the fee on the delivery of the NIBs; and the remaining 50% being payable on the conversion of the NIBs to Qualified NIBs as defined in the Del Mar ATA. The total restructuring fee will be up to $4,000,000. In the event that any cash consideration by the Company under the Del Mar ATA exceeds the defined $8,000,000 cash threshold, the amount payable under the Europa Agreement will be reduced on a dollar for dollar basis for any such overage. The total purchase price will not exceed $24,000,000 under the Del Mar ATA, which is comprised of $12,000,000 in cash consideration and $12,000,000 in promissory notes.
On October 29, 2013, the Company and Europa, with the agreement of Del Mar, amended the Europa Agreement and the Del Mar ATA to acknowledge that the total up front cash payment due from the Company under the Del Mar ATA and Europa Agreement shall not exceed $12,000,000; that the Company would receive a credit on a dollar for dollar basis of the cash payment and all costs and expenses paid under the Del Mar ATA over $8,000,000, against all fees due Europa under the Europa Agreement or the Del Mar ATA. In the event the Qualified NIBs delivered are less than $300,000,000 in face value under the DMF Agreement, Del Mar and Europa shall be jointly and severally liable for liquidated damages equal to the aggregate of the cash payment under the Del Mar ATA and all of the costs advanced, reduced by the pro rata percentage of the Qualified NIBs delivered and accepted by SSI, multiplied by two; and if at least $300,000,000 in Qualified NIBs are delivered and accepted, then the cash payment and all costs will not be doubled if they are paid within 90 days.
On October 29, 2013, the Company also entered into an Exclusivity Agreement with the consultant to Europa under the Europa Agreement under which the Company advanced $25,000 to such consultant for services related to the purchase of Qualified NIBs associated with the $400,000,000 in life insurance policies under the Del Mar ATA.
On January 14, 2014, the Company completed the closing of $90.6 million of Qualified NIBs. These Qualified NIBs are part of the $400 million transaction of additional NIBs in portfolios from the Company’s second acquisition in June 7, 2013, related to the Del Mar ATA.
As of March 31, 2014, the Company had advanced $9,020,862 in payments and covered expenses under the Del Mar ATA and Europa Agreement. The Company reclassified $5,436,000 of these advances as investments in net insurance benefits as part of the $90,600,000 NIBs becoming qualified and accepted by the Company in January 2014. As of March 31, 2014, the remaining balance in advances totaled $3,584,862.
(8) NOTE RECEIVABLE
On October 23, 2013, the Company made a loan totaling $650,000 in the form of a note receivable to Del Mar. The note bears a 3% interest rate, compounding annually, with a maturity date of November 30, 2013. Payment of principal and interest was due in full on maturity date. At March 31, 2014, Del Mar owed the full amount of the
original principal and $8,540 in accrued interest income and was in default. Subsequent to year end, the entire balance of the note receivable was collected. The note is expected to be applied toward the cash portion of the Del Mar ATA or a reduction to the $12,000,000 note on closing of the Del Mar ATA if not paid in full.
On December 9, 2013, the Company made a loan totaling $211,000 in the form of a note receivable to Majestic Ventures S.a.r.l. The note bears an 8% interest rate, compounding annually, with a maturity date of December 18, 2016. Payment of principal and interest are due in full on maturity date. At March 31, 2014, Majestic had not paid any of the original principal and $5,227 in accrued interest income. The Company has a secondary security interest in certain assets of Majestic, which are participating life settlements.
(9) 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.
Lease Agreements
Pursuant to a verbal lease agreement, we currently occupy approximately 275 square feet of office space located in Provo, Utah on a month-to-month basis. The total lease expense is approximately $1,000 per month, payable in cash.
We also entered into a lease agreement on November 2013 to lease 6,000 square feet of office space on a month-to-month basis in Irvine, California. The total lease expense is approximately $12,000 per month, payable in cash, 50% of which is invoiced to Del Mar Financial and Europa.
Rent expense for the year ended March 31, 2014, was $41,333.
(10) 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:
The total deferred tax asset is calculated by multiplying a 37.3% marginal tax rate by the cumulative Net Operating Loss (“NOL”) of $2,038,201, which 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 tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2014 and 2013 were as follows:
Deferred Tax assets:
Net operating loss carry forwards
$ 760,250
$ 40,814
Stock and warrant compensation 356,608
-
Valuation allowance
(303,518)
(40,814)
Net deferred tax asset 813,340
-
Deferred tax liability
-
-
Investment in net insurance benefits
(813,340)
-
Net deferred taxes
$ -
$ -
The valuation allowance was $303,518 and $40,814 for the years ended March 31, 2014, and 2013, 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, 2014, and 2013 due to the following:
Income tax benefit at U. S. federal statutory rates:
$ (70,087)
$ (35,581)
State tax, net of federal benefit
(6,803)
(5,233)
Permanent and other differences
2,395
-
Net operating losses (188,209)
-
Change in valuation allowance
262,704
40,814
$ -
$ -
The Company has no tax positions at March 31, 2014, and 2013, 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, 2014, 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, 2014, and 2013.
The tax years 2011 through 2014 remain open to examination for federal income tax purposes and by other major taxing jurisdictions to which we are subject.
(11) RELATED PARTY PAYABLES
At March 31, 2014, and 2013, the Company owed $90,000 and $3,441 to related parties (officers and directors) for expenses paid on behalf of the Company. The Company paid the entire $3,441 balance of these related party transactions as of March 31, 2014.
During the month of January 2014, the Company borrowed two short-term notes from two related parties bearing no interest and are payable on demand. The first note was entered into on January 8, 2014, in the amount of $50,000. The second note was entered into on January 13, 2014, in the amount of $40,000. At March 31, 2014, the Company owed the full $90,000 of the original principal.
(12) NOTES PAYABLE
On March 11, 2013, the Company purchased an interest in NIBs totaling $5,999,000, with a portion paid in cash of $3,000,000 and the remainder covered by a secured note in the amount of $2,999,000. The note bears a compounding per annum interest rate of 4% with an original maturity date of December 31, 2013, which was amended to April 11, 2015. Payment of principal and interest are due in full on maturity date. The note is secured by 50% of the NIBs. The lender has first priority status on benefits paid and the percentage secured decreases as payments are made on the note. At March 31, 2014, the Company owed the full amount of the original principal and $129,028 in accrued interest.
On November 5, 2013, the Company entered into an Amended and Restated Promissory Note (the “Amended Note”) that amended the $2,999,999 secured note from the Company’s initial purchase of NIBs. The Amended Note was payable to Del Mar rather than its initial payee and provided that notwithstanding anything therein or in any agreement referenced therein to the contrary, once accrued interest and $1,500,000 has been paid, the Amended Note shall be deemed to be paid in full, and all collateral shall be the sole and separate property of the Company, without exception. The Company may set off any claim it has against holder in payment of the Amended Note, without qualification. Any net death benefit or bond proceeds paid to maker or the Company in connection with the assets purchased under its PCH NIBs Transfer Agreement dated March 11, 2013, shall be used to prepay the Amended Note; provided, however, no such death benefits or bond proceeds paid to the maker or the Company shall be accounted for in any manner that would cause the Company to not receive the full benefit of the reductions of the principal balance of the Amended Note.
The Company assessed the impact of the amendment of the $2,999,000 secured note and whether it should be accounted for as an extinguishment of debt and the issuance of new debt or a modification of the existing debt under ASC 470-50. The present value of the remaining payments on the new promissory note was substantially different than the present value of the original note. Therefore the Company reported the transaction as an extinguishment of debt. Since the exchange was accounted for as an extinguishment of debt, the decrease in fair value of the Company’s liabilities was reported as a gain on extinguishment of debt on the consolidated statement of operations.
On November 5, 2013, the Amended Note was assigned by the Company to Del Mar; Del Mar assigned it to another party for $1,000,000 retaining a buyback option (the “Buyback Option”) for a period of 12 months from the date of the assignment of the Amended Note to buy back the Amended Note at a price equal to the $1,000,000, plus an additional 2.0% for each month (whole or partial) that had elapsed from the date of the assignment to the date that the Buyback Option is exercised (the “Buyback Price”). Further, notwithstanding the foregoing, the Buyback Price shall in no circumstances be less than an amount equal to $1,120,000 (the “Minimum Buyback Price”). The Company acquired this Buyback Option from Del Mar on the same date, with the provision that it would revert to Del Mar if it had delivered and the Company had accepted $400,000,000 of Qualified NIBs under the Del Mar ATA.
(13) 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.
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 near future for the benefit of employees, officers and directors The stock options have an exercise price of $5.00 per share. The options have a contractual term of five years.
The 400,000 stock options vest in several tranches, wherein 10% of the options vesting six months after the date of issuance and the remaining options to vest monthly over the next 36 months subject to continuing employment with the Company. The Company valued the 400,000 options using the Black-Scholes option pricing model applying the simplified method under the following assumptions: $5.00 market price, $5.00 exercise price, 3.40 years expected life, 68% volatility, 0.76% risk free rate.
The Company has recorded stock-based compensation expense of $816,802 related to these options for year ended March 31, 2014.
The remaining $1,162,745 will be recognized ratably over the weighted average service period of 2.38 years.
(14) 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.
The Company recognized the full $139,251 as stock issuance costs during the year ended March 31, 2014.
(15) STOCK TRANSACTIONS
Preferred Stock
The Company has authorized 10,000,000 shares of its common stock at a par value of $0.001 per share. As of March 31, 2014, there were no preferred shares issued and outstanding.
Common Stock
As of March 31, 2014, the Company has 500,000,000 shares of common stock authorized with a par value of $0.001 per share and 43,015,941 shares of common stock issued and outstanding.
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, 2014, the Company has collected $11,792,500 for 2,358,500 common shares at $5.00 per share of which 2,218,500 shares were issued for cash of $11,092,500 and 140,000 shares are to be issued for cash of $700,000; paid $841,651 in introduction fees; and issued two year warrants to acquire 70,000 shares of our common stock at an exercise price of $5.00 per share.
(16) GOING CONCERN
The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At March 31, 2014, the Company had accumulated losses of $310,789 and a working capital of $234,297, but has yet to receive cash payments on revenues. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
The Company’s continued existence is dependent on its ability to generate sufficient cash flow to cover operating expenses and to invest in future operations. Management is actively pursuing opportunities to expand existing operations. The Company does not anticipate having adequate revenues from operations until three to four years, and until a revenue stream has been established, the Company will require debt or equity funding to fund its current and intended business. If management is unsuccessful in these efforts, discontinuance of operations is possible.
(17) SUBSEQUENT EVENTS
On April 28, 2014, the Company received full payment of the $650,000 Del Mar note receivable entered into on October 23, 2013. Of the $650,000 the Company received cash payments totaling $550,000 and moved $100,000 applied to advances for investment in net insurance benefits.
On June 24, 2014, the Company issued a private stock offering as part of the August 1, 2013 agreement to issue 660,000 shares at $5 per share for a total of $3,300,000.
Effective June 26, 2014, the Company extended Del Mar’s obligation to deliver Qualified NIBs under the Del Mar ATA to September 30, 2014, from April 1, 2014.
On July, 2014, the Company issued the remaining 140,000 shares mentioned in footnote 14 that were paid for cash as advance subscriptions for $700,000.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Madsen & Associates CPAs, Inc.:
(i) On October 15, 2012, we formally informed Madsen & Associates CPAs, Inc. (“Madsen & Associates”) of their dismissal as our independent registered public accounting firm.
(ii) The reports of Madsen & Associates on our financial statements as of and for the fiscal years ended March 31, 2012, and 2011, contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except to indicate that there was substantial doubt about our ability to continue as a going concern.
(iii) Our Board of Directors participated in and approved the decision to change our independent registered public accounting firm.
(iv) During the fiscal years ended March 31, 2012, and 2011, and through October 15, 2012, there were no disagreements with Madsen & Associates on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Madsen & Associates, would have caused them to make reference to them in connection with their reports on our financial statements for such years.
(v) We requested that Madsen & Associates furnish us with a letter addressed to the SEC stating whether or not they agreed with the foregoing statements.
(a)(2) New (now former [see below]) independent registered public accounting firm:
Sadler, Gibb & Associates, L.L.C.
(1) On October 15, 2012, we engaged Sadler, Gibb & Associates, L.L.C. (“Sadler Gibb”) as our new independent registered public accounting firm. During the fiscal years ended March 31, 2012, and 2011, and through October 15, 2012, we had not consulted with Sadler Gibb regarding any of the following:
(i) The application of accounting principles to a specific transaction, either completed or proposed;
(ii) The type of audit opinion that might be rendered on our consolidated financial statements, and none of the following was provided to us: (a) a written report, or (b) oral advice that Sadler Gibb concluded was an important factor considered by us in reaching a decision as to accounting, auditing or financial reporting issue; or
(iii) Any matter that was the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K.
See our 8-K Current Report dated October 15, 2012, and filed with the SEC on October 17, 2012, which is incorporated herein by reference, for additional information regarding this change in our independent registered public accounting firm, and for a copy of the letter of Madsen & Associates addressed to the SEC regarding their dismissal and agreement with the information contained in such 8-K Current Report, which is also referenced above. See Part IV, Item 15.
(a)(1) Previous independent registered public accounting firm:
Dismissal of Sadler Gibb:
(i) On March 29, 2013, we formally informed Sadler Gibb of their dismissal as our independent registered public accounting firm.
(ii) The review of Sadler Gibb of our financial statements as of and for the fiscal quarters ended September 30, 2012, and 2011, and December 31, 2012, and 2011, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles.
(iii) Our Board of Directors participated in and approved the decision to change our independent registered public accounting firm.
(iv) During the period commencing on the engagement of Sadler Gibb, or October 15, 2012, and through the date of their dismissal, March 29, 2013, there were no disagreements with Sadler Gibb on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Sadler Gibb, would have caused them to make reference to them in connection with their review of our financial statements for such quarters or any subsequent report.
(v) We requested that Sadler Gibb furnish us with a letter addressed to the SEC stating whether or not they agreed with the foregoing statements, a copy of which was attached to our 8-K Current Report dated March 29, 2013, and filed with the SEC on April 5, 2013, See Part IV, Item 15.
(a)(2) New independent registered public accounting firm:
Mantyla McReynolds, LLC:
(1) On March 29, 2013, we engaged Mantyla McReynolds, LLC (“Mantyla McReynolds”) as our new independent registered public accounting firm. During the fiscal years ended March 31, 2012, and 2011, and through March 29, 2013, we had not consulted with Mantyla McReynolds regarding any of the following:
(i) The application of accounting principles to a specific transaction, either completed or proposed;
(ii) The type of audit opinion that might be rendered on our consolidated financial statements, and none of the following was provided to us: (a) a written report, or (b) oral advice that Mantyla McReynolds concluded was an important factor considered by us in reaching a decision as to accounting, auditing or financial reporting issue; or
(iii) Any matter that was the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K.
See our 8-K Current Report dated March 29, 2013, and filed with the SEC on April 5, 2013, See Part IV, Item 15.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on that evaluation, our President who is also deemed to be our acting CFO, concluded that our disclosure controls and procedures as of the end of the period covered by the Annual Report were not effective and that the information required to be disclosed by us in reports filed under the Exchange Act is not (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our President and our acting CFO, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of the President, who is our acting CFO, evaluated the effectiveness of our internal controls over financial reporting as of March 31, 2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 version). Based on this evaluation, our management, with the participation of the President and acting CFO, concluded that, as of March 31, 2014, our internal controls over financial reporting were not effective based upon present Company activity. We are in the process of adopting specific internal control mechanisms with our Board of Directors’ and our officers’ collaboration to ensure effectiveness as we grow our business. We are presently engaging an outside consultant to assist in adopting new measures to improve upon our internal controls. Future controls, among other things, will include more checks and balances and communication strategies between management and all members of the Board of Directors to ensure efficient and effective oversight over company activities as well as more stringent accounting policies to track and update our financial reporting and disclosure of information. We also plan to hire additional personnel.
This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal controls over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal control over financial reporting.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
On April 28, 2014, we received full payment of the $650,000 Del Mar Financial promissory note receivable entered into on October 23, 2013. Of the $650,000, we received cash payments totaling $550,000 and paid $100,000 into advances for investment in net insurance benefits by a payment of $100,000 to Europa.
Our Board of Directors approved Amendment No. 3 to the Europa Agreement on June 26, 2014, whereby we granted Del Mar Financial an extension to September 30, 2014, to deliver the remaining $309.4 million Qualified NIBs due us under the Del Mar ATA.
On July 10, 2014, we announced that we had raised a total of $11,700,000 through the private placement of shares of our common stock and that we had cancelled certain subscriptions for non-payment on June 30, 2014.
We also announced on such date that we are in preliminary discussions to acquire additional NIBs with a party whose notes we acquired under the Del Mar ATA and that were to be pledged to Del Mar Financial in the event all $400 million in Qualified NIBs are delivered. It is planned that the notes acquired will be exchanged for such NIBs, and the NIBs acquired will then become part of the collateral that would be subject to pledge in the event of Del Mar Financial’s full compliance under the Del Mar ATA. We have granted the additional extension of the delivery due under the Del Mar ATA to September 30, 2014, to allow Del Mar further time to process and finance certain of the non-Qualified NIBs to Qualified NIBs and to assist existing policy owners in the creation of new Qualified NIBs for delivery to us as required under the Del Mar ATA.
PART III
ITEM 10:
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
Our executive officers and directors and their respective ages, positions and biographical information are set forth below.
Identification of Our Directors and Executive Officers
Name
Positions Held
Date of Election or Designation
Date of Termination or Resignation
Glenn S. Dickman
Director
03/29/13
*
Secretary
03/29/13
*
Ty Mattingly
Director
03/29/13
*
Randall F. Pearson
President
03/29/13
*
Acting CFO
03/29/13
*
Director
04/01/13
*
Matthew G. Pearson
Chief Operating Officer
10/21/13
*
Jini Suttner
Director
03/29/13
04/01/13
*
Presently serves in the capacities indicated opposite his name.
Director Qualifications
In evaluating members for services on the Board of Directors, emphasis was placed on the following factors: (i) the appropriate size of our Board of Directors; (ii) our needs with respect to the particular talents and experience of our directors; (iii) the knowledge, skills and experience of the directors, including experience in development stage companies and new enterprises and innovations, finance, administration and management skills; and (iv) the dedication of the directors to familiarize themselves with the our selected business industry.
Our goal was to assemble a Board of Directors that brings together a variety of perspectives and skills derived from high quality business and professional experience. We believe each of the members of our Board of Directors possesses these qualities.
Background and Business Experience
Mr. Glenn S. Dickman is 64 years of age. In 1984, Mr. Dickman started a “sales rack” jobbing operation supplying grocery stores with movies for rent and purchase. As founder and CEO of Video II, the business grew from servicing one store to over 1,400 located in 38 states. Video II had over 400 employees at one time, with Mr. Dickman overseeing all facets of the business as its CEO. In 2005, Mr. Dickman sold his interest in Video II, and has since concentrated his efforts on a variety of investments, including stocks and real estate.
Mr. Ty Mattingly is 51 years old. He has been a successful and active private equity and angel investor since 2004. He co-founded SBI-Razorfish in 1998, and led its growth to become a major independent interactive marketing firm in the country. This was accomplished by acquiring many of the largest publicly and privately held interactive marketing firms in the world. He sold the firm to Aquantive, which was later acquired by Microsoft. Prior to co-founding SBI-Razorfish, Mr. Mattingly was the co-founder and Senior Vice President of Sales and Business Development for Novonyx, a joint venture between Novell and Netscape, which was later acquired by Novell. Prior to his accomplishments at Novonyx, he worked at Novell and IBM in a variety of senior executive, management and marketing roles. Mr. Mattingly graduated from the College of Engineering at Brigham Young University, where he was a member of the 1984 NCAA National Championship Football Team and an Academic All-American.
Mr. Randall F. Pearson is 60 years old. Mr. Pearson was employed by JWD Management Corp., dba, Video II for 26 years, resigning in May, 2011. He became the President of ANEW LIFE in February, 2013. While working at JWD, he served in various positions, including National Sales Manager, Vice President of Operations, Vice President, President and CEO. Video II has provided movie and DVD rental and other related services for grocery chains nationwide. Mr. Pearson managed the video rental program in 900 different grocery store locations. He has also fully managed the program that included videos and DVDs for sale, as well as other products in over 1,400 locations. He oversaw a full service merchandising program with representatives that serviced the products Video II supplied to the grocery stores, supervising over 70 employees at Video II’s corporate offices and over 450 employees in 33 states. Video II was one of the larger video “rackers” in the U.S. During this same time frame, Mr. Pearson also owned and managed his own residential and commercial investment properties, and has focused on those activities since leaving JWD in 2011. Mr. Pearson attended Brigham Young University from 1972 to 1977, in Business Management, obtained a real estate brokers license in 1977; and received Series 7 Securities License in 1978.
Mr. Matthew G. Pearson is 47 years of age. There are no family relationships between Mr. Pearson and any director or executive officer of the Company. Mr. Pearson has 25 years experience in corporate finance, real estate brokerage and development. He was a cofounding partner with EHI, LLC, which was established in August of 2009. EHI, LLC is a Life Settlement Securitization Company, which worked through an almost $1,000,000,000 securitization of a pool of life settlement policies. During his tenure at the company, Mr. Pearson managed every aspect of the company’s business since inception, including transaction design and implementation, policy selection, ownership structure for the corporate entities to ensure appropriate tax treatment, to creation and consummation of agreements with 20 vendors required to structure and complete the bond offering tied to the securitization. From July, 2011, to his employment as COO with the Company, he was also a partner in Evolution Capital Partners, a company in the business of providing loans to small cap publicly-traded companies.
Significant Employees
Lisa L. Fuller, Esq. is 47 years of age and is our general legal counsel. She is licensed in California, Texas and Oklahoma, with 12 years of law firm experience and seven years of in house counsel experience, in the areas of tax, contracts, corporations and partnerships, estate planning, insurance and exempt organizations. From 2009 to the beginning of April 2013, she was general legal counsel for NorthStar Life Services, LLC, of Irvine, California, the Servicer, of the current portfolio of policies underlying the Company’s NIBs, where she managed a four person legal department; Structured international and domestic companies and transactions, reviewed and negotiated contracts; Managed all company litigation; tax planning (U.S. and internationally, with a focus in Luxembourg, Germany and the Cayman Islands); and oversaw purchase of a European financial institution and assisted with obtaining various approvals from regulators related to business plans and deposits. She also served as general legal counsel for Pacifica Group, LLC, of Irvine, California, a predecessor of NorthStar, from 2006 until 2009, where, in addition to other services similar to those performed for NorthStar, she lobbied for the passage of regulations related to life settlements. She graduated from New York University, New York, NY, with an LL.M. Degree in Taxation, 1993; the University of Oklahoma, Norman, OK, receiving a J.D. Degree, 1992; and Trinity University, San Antonio, TX, receiving a B.A. Degree in Finance, 1988. Lisa is a member of the Bar Associations of Oklahoma and Texas.
Directorships Held in Other Reporting Companies
None of our directors or executive officers is a director of a company that is required to file reports under Sections 15 or 13(d) of the Exchange Act.
Involvement in Certain Legal Proceedings
During the past 10 years, no director, person nominated to become a director or executive officer:
·
has filed a petition under federal bankruptcy laws or any state insolvency laws, nor had a receiver, fiscal agent or similar officer appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
·
was convicted in a criminal proceeding or named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
·
was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him or her from or otherwise limiting the following activities:
Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
Engaging in any type of business practice; or
Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
·
was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in the preceding bullet point, or to be associated with persons engaged in any such activity;
·
was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;
·
was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
·
was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
any Federal or State securities or commodities law or regulation; or
any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
any law or regulation prohibiting mail or wire fraud or fraud in connection with any business
entity; or
·
was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Promoters and control person.
To the best of our management’s knowledge, and except as indicated below, no person who may be deemed to have
been a promoter or founder of our Company was the subject of any of the legal proceedings listed under the heading “Involvement in Certain Legal Proceedings” above; however, Kraig T. Higginson, who was the incorporator and one of the founding directors of ANEW LIFE, resigned as a director of Raser Technologies, Inc., a Delaware corporation, on February 11, 2011. Raser Technologies, Inc. filed bankruptcy proceedings on April 29, 2011.
Compliance with Section 16(a) of the Exchange Act
Our shares of common stock are registered under the Exchange Act, and therefore the officers, directors and holders of more than 10% of our outstanding shares are subject to the provisions of Section 16(a), which requires them to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and our other equity securities. Officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon review of the copies of such forms furnished to us during the fiscal year ended March 31, 2014, and to the date of this Annual Report, all filings were timely filed.
Code of Ethics
We have adopted a code of ethics for our principal executive and financial officers. Our code of ethics was filed as an exhibit to our 10-KSB for December 31, 2004. See Part IV, Item 15.
Corporate Governance
Nominating Committee
We have not established a Nominating Committee because we have only three directors and two executive officers, and we believe that we are able to effectively manage the issues normally considered by a Nominating Committee.
If we do establish a Nominating Committee, we will disclose this change to our procedures in recommending nominees to our Board of Directors.
Audit Committee
We have not established an Audit Committee because we have only three directors and two executive officers and our business operations are conducted in one facility. We believe that we are able to effectively manage the issues normally considered by an Audit Committee.
If we do establish an Audit Committee, we will disclose this change to our procedures in recommending nominees to our Board of Directors.
Compensation Committee.
We have not established a Compensation Committee because we have only three employees, our two executive officers and our in-house legal counsel. We believe that our Board of Directors able to effectively manage the issues normally considered by a Compensation Committee.
If we do establish a Compensation Committee, we will disclose the compensation of such Compensation Committee.
Independence of Directors.
None of our directors are deemed to be independent directors.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
All Compensation
The following table sets forth the aggregate compensation (or lack thereof) paid by us to our former officers for services rendered during the periods indicated:
Summary Compensation Table
Name and Principal Position
(a)
Year
(b)
Salary
($)
(c)
Bonus
($)
(d)
Stock Awards
($)
(e)
Option Awards
($)
(f)
Non-Equity Incentive Plan Compensation
($)
(g)
Nonqualified Deferred Compensation
($)
(h)
All Other Compensation
($)
(i)
Total
Earnings
($)
(j)
Glenn S. Dickman,
Director
Secretary
03/31/14
03/31/13
120,000
Ty Mattingly,
Director
03/31/14
03/31/13
Randall F. Pearson, President,
Acting CFO
Director
03/31/14
03/31/13
120,000
Matthew G. Pearson,
COO
03/31/14
03/31/13
62,500
We have agreed to pay Messrs. R. F. Pearson and Dickman each $120,000 annually commencing on April 1, 2013. Lisa L. Fuller, Esq. our in-house general counsel, is paid $240,000 annually.
We have an Employment Agreement with Matthew G. Pearson, whereby he received $12,500 a month. Mr. Pearson also received stock options to purchase 400,000 shares of our common stock at a price per share equal to the fair market value on the date of the grant, with vesting over a 36 month period, to be determined by the Board of Directors, and with vesting to be subject to continued employment.
On April 23, 2014, we approved an increase of Matthew G. Pearson’s monthly salary to $17,500, $210,000 annually beginning in April 2014. We also approved a $2,500 bonus to Mr. Pearson, payable during the fourth week of April, 2014, and an increase in Mr. Pearson’s salary to $258,000 once additional funding has been raised.
Outstanding Equity Awards
We have no outstanding equity or similar awards to members of management, with the exception of the stock options listed below under tables entitled “Officer Stock Awards” and “Director Stock Awards.” These stock options were granted subject to such terms and conditions as the Board of Directors may set, in conjunction with its planned adoption of a equity stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors and are five year options.
Officer Stock Awards
Name
Date of Grant
Exercise Price
Term
Amount Granted
Randall F. Pearson
4/5/2013
$0.77
Five Years
250,000
Glenn S. Dickman
4/5/2013
$0.77
Five Years
250,000
Ty Mattingly
4/5/2013
$0.77
Five Years
250,000
Matthew G. Pearson
10/21/13
(1)
Three Years
400,000
(1)
Fair market value on the date of the grant ($5.00).
Compensation of Directors
No compensation was paid to any of our directors during the fiscal years ended March 31, 2014, and 2013.
Director Compensation
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings ($)
All Other Compensation ($)
Total ($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Glenn S. Dickman
None
None
None
None
None
None
None
Ty Mattingly
None
None
None
None
None
None
None
Randall F. Pearson
None
None
None
None
None
None
None
Director Stock Awards
Name
Date of Grant
Exercise Price
Term
Amount Granted
Randall F. Pearson
4/5/2013
$0.77
Five Years
250,000
Glenn Dickman
4/5/2013
$0.77
Five Years
250,000
Ty Mattingly
4/5/2013
$0.77
Five Years
250,000
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following tables set forth the share holdings of those persons who were principal stockholders owning 5% of more of our common stock as of the date of this Annual Report, based upon 44,180,192 shares being beneficially owned, which includes 140,000 shares subscribed and paid prior to March 31, 2014, but not issued until July 10, 2014, and 1,024,251 shares underlying outstanding stock options and warrants that could have been exercised at March 31, 2014:
Ownership of Principal Stockholders
Title Of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner (1)
Percent of Class(1)
Common Stock
ZOE, LLC(2)
16,100,000
36.4%
Common Stock
Primary Colors, LLC(3)
4,000,000
9.1%
Common Stock
Radiant Life, LLC(2)
3,952,000
9.0%
Common Stock
Smartrade Consulting, Inc.(4)
4,000,000
8.9%
Total:
28,052,000
63.5%
(1)
Unless indicated otherwise, all share ownership is direct.
(2)
ZOE, LLC and Radiant Life, LLC are beneficially owned by Mitchell D. Burton, for an aggregate percentage of ownership of approximately 45.3%.
(3)
Primary Colors, LLC is beneficially owned by Ty Mattingly, a director of the Company; also see the table “Ownership of Officers and Directors” below.
(4)
Smartrade Consulting, Inc. is held by Summit Trustees PLLC for the beneficial owner, Lam Ping of Hong Kong.
SEC Rule 13d-3 generally provides that beneficial owners of securities include any person who, directly or indirectly, has or shares voting power and/or investment power with respect to such securities, and any person who has the right to acquire beneficial ownership of such security within 60 days. Any securities not outstanding which are subject to such options, warrants or conversion privileges exercisable within 60 days are treated as outstanding for the purpose of computing the percentage of outstanding securities owned by that person. Such securities are not treated as outstanding for the purpose of computing the percentage of the class owned by any other person. The present outstanding stock options of management are subject to adoption of a equity stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors prior to exercise and are not included in the computations. See Part III, Item 11.
Security Ownership of Management
The following table sets forth the share holdings of our directors and executive officers as of the date of this Annual Report, based upon 44,180,192 shares being beneficially owned, which includes 140,000 shares subscribed and paid prior to March 31, 2014, but not issued until July 10, 2014, and 1,024,251 shares underlying outstanding stock options and warrants that could have been exercised at March 31, 2014:
Ownership of Officers and Directors
Title Of Class
Name and Address of Beneficial Owner
Amount and Nature of Beneficial Owner(1)
Percent of Class(1)
Common Stock
Glenn S. Dickman(2)
2,193,381
4.9%
Common Stock
Randall F. Pearson(2)
541,432
1.2%
Matthew G. Pearson
Common Stock
Ty Mattingly(3)
5,738,000
12.9%
Common Stock
Officers and Directors as a group (three persons)
8,472,813
19.2%
(1)
Unless indicated otherwise, all share ownership is direct.
(2)
Includes 250,000 shares underlying exercisable and vested stock options issued to Messrs. Pearson and Dickman.
(3)
Mr. Mattingly ownership includes 4,000,000 shares owned in the name of Primary Colors, LLC; 1,500,000 shares owned in the name of North Shore Foundation, LLP; and 250,000 shares underlying exercisable and vested stock options. Mr. Mattingly is the beneficial owner of Primary Colors, LLC and North Shore Foundation, LLP.
SEC Rule 13d-3 generally provides that beneficial owners of securities include any person who, directly or indirectly, has or shares voting power and/or investment power with respect to such securities, and any person who
has the right to acquire beneficial ownership of such security within 60 days. Any securities not outstanding which are subject to such options, warrants or conversion privileges exercisable within 60 days are treated as outstanding for the purpose of computing the percentage of outstanding securities owned by that person. Such securities are not treated as outstanding for the purpose of computing the percentage of the class owned by any other person. The present outstanding stock options of management are subject to adoption of a equity stock option or similar plan to be adopted in the near future for the benefit of employees, officers and directors prior to exercise and are not included in these computations. See Part III, Item 11.
Changes in Control
See the heading “Business Development” of Part I, Item 1. To the knowledge of management, there are no arrangements or understandings that may result in a change in control of the Company.
Securities Authorized for Issuance under Equity Compensation Plans
We do not have any securities authorized for issuance under any equity compensation plans; however, the stock options that have been granted by the Board of Directors and outlined in Part I, Item 5, and Part III, Item 11, 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.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
Transactions with Related Persons
There were no material transactions, or series of similar transactions, during our last two fiscal years, or any currently proposed transactions, or series of similar transactions, to which we or any of our subsidiaries was or is to be a party, in which the amount involved exceeded the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years and in which any director, executive officer or any security holder who is known to us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, had an interest.
Promoters and Certain Control Persons
There were no material transactions, or series of similar transactions, during our last two fiscal years, or any currently proposed transactions, or series of similar transactions, to which we or any of our subsidiaries was or is to be a party, in which the amount involved exceeded the lesser of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years and in which any director, executive officer or any security holder who is known to us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, had an interest.
Parents of the Smaller Reporting Company
We have no parents.
Director Independence
We do not have any independent directors serving on our Board of Directors.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
The following is a summary of the fees billed to us by our principal accountants during fiscal years ended March 31, 2014, and 2013:
Audit Fees - Consists of fees for professional services rendered by our principal accountants for the audit of our annual financial statements and review of the financial statements included in our Forms 10-Q or services that are normally provided by our principal accountants in connection with statutory and regulatory filings or engagements.
Audit-related Fees - Consists of fees for assurance and related services by our principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit fees.”
Tax Fees - Consists of fees for professional services rendered by our principal accountants for tax compliance, tax advice and tax planning.
All Other Fees - Consists of fees for products and services provided by our principal accountants, other than the services reported under “Audit fees,” “Audit-related fees,” and “Tax fees” above.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors
We have not adopted an Audit Committee; therefore, there is no Audit Committee policy in this regard. However, we do require approval in advance of the performance of professional services to be provided to us by our principal accountant. Additionally, all services rendered by our principal accountant are performed pursuant to a written engagement letter between us and the principal accountant.
PART IV
ITEM 15:
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)(2) Financial Statements. See the audited financial statements for the years ended March 31, 2014 and 2013, contained in Part II, Item 8, which are incorporated herein by this reference.
(a)(3) Exhibits. The following Exhibits are filed as part of this Annual Report:
No. Description
31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Randall F. Pearson, President and Director.
31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act provided by Randall F. Pearson, acting CFO.
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 proved by Randall F. Pearson, President and acting CFO.
99.1
Temporary Hardship Exemption (XBRL)
101.INS
XBRL Instance Document(1)(2)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase(1)(2)
101.LAB
XBRL Taxonomy Extension Label Linkbase(1)(2)
101.DEF
XBRL Taxonomy Extension Definition Linkbase(1)(2)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase(1)(2)
101.SCH
XBRL Taxonomy Extension Schema(1)(2)
(1) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed “furnished” and not “filed” or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, or deemed “furnished” and not “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under these sections.
(2) To be furnished by amendment pursuant to the Temporary Hardship Exemption provided by Rule 201 of Regulation S-T.
Where Incorporated In This Transition Report(1), (2)
Current Report on Form 8-K dated March 29, 2013, and filed with the SEC on April 5, 2013.
3(i) Amended and Restated Articles of Incorporation
3(i)(a) Certificate of Amendment regarding an increase in authorized shares
3(ii) Amended Bylaws
10.1 Agreement and Plan of Merger
ANEW LIFE Disclosure Schedule
Java Express Disclosure Schedule
Founders Representations (Exhibit 5.4(c))
10.2 Form of Lock-Up/Leak-Out Agreement
10.3 NIBs Asset Transfer Agreement
NIBs Secured Promissory Note
NIBs Pledge Agreement
10.4 Form of Senior Loan Agreement
10.5 Form of MRI Agreement
10.6 Europa Settlement Advisors Ltd. Structuring and Consulting Agreement
14 Code of Ethics
16.1 Letter regarding change in certifying public accountants
Parts I, II, III and IV
Current Report on Form 8-KA-1 dated March 29, 2013, and filed with the SEC on May 24, 2013.
3(i)(b) Certificate of Amendment to change name
10.3 NIBs Asset Transfer Agreement
NIBs Secured Promissory Note
NIBs Pledge Agreement
Parts I, II, III and IV
Current Report on Form 8-KA-2 dated March 29, 2013, and filed with the SEC on July 11, 2013.
Parts I, II, III and IV
Current Report on Form 8-K/A-3 dated March 29, 2013, and filed with the SEC on September 12, 2013
Parts I, II, III and IV
Current Report on Form 8-K/A-4 dated March 29, 2013 and filed with the SEC on November 27, 2013
Parts I, II, III and IV
Current Report on Form 8-K dated April 17, 2013, and filed with the SEC on April 17, 2013.
99.1 Press Release dated April 17, 2013
Part I, Item I
Current Report on Form 8-K dated June 7, 2013, and filed with the SEC on June 20, 2013.
10.1 Del Mar Financial, S.a.r.l. Asset Transfer Agreement
Exhibit A-1 (Schedule of NIBs)
Exhibit A-2 (Schedule of Salt Creek Bonds)
Exhibit B (Life Insurance Policies)
Exhibit C (Wire Instructions [to be provided])
Exhibit D (Expenses)
Exhibit E (Form of Promissory Note)
Exhibit F (Form of Pledge Agreement)
Exhibit G (DMF Pledged Assets and Sub Debt)
Exhibit H (DMF Pledge Agreement)
Exhibit I (Company Pledge Agreement)
Exhibit J (DMF Assignment Agreement)
Exhibit K (Form of PCH Bill of Sale and Assignment)
Exhibit L (DMF Transfer Agreement to Company
10.2 Europa Structuring and Consulting Agreement
Part I, Item 1
Current Report on Form 8-KA-1 dated June 7, 2013, and filed September 19, 2013
10.1 Del Mar Financial, S.a.r.l. Asset Transfer Agreement
Exhibit A-1 (Schedule of NIBs)
Exhibit A-2 (Schedule of Salt Creek Bonds)
Exhibit B (Life Insurance Policies)
Exhibit C (Wire Instructions [to be provided])
Exhibit D (Expenses)
Exhibit E (Form of Promissory Note)
Exhibit F (Form of Pledge Agreement)
Exhibit G (DMF Pledged Assets and Sub Debt)
Exhibit H (DMF Pledge Agreement)
Exhibit I (Company Pledge Agreement)
Exhibit J (DMF Assignment Agreement)
Exhibit K (Form of PCH Bill of Sale and Assignment)
Exhibit L (DMF Transfer Agreement to Company
Part I, Item 1
Current Report on Form 8-KA-2 dated June 7, 2013, and filed November 14, 2013
10.3 Europa Structuring and Consulting Agreement (Amendment No. 1)
10.4 Collateral Release Agreement from PCH to the Company
Exhibit A - PCH Loan Repayment and Asset Transfer Agreement
Exhibit D - Note (See Exhibit 10.7 below)
10.5 Europa Structuring and Consulting Agreement (Amendment No. 2)
10.6 Brown Exclusivity Agreement
10.7 Amended and Restated Secured Promissory Note of ANEW LIFE, INC. to DMF
10.8 Assignment Agreement of Amended and Restated Secured Promissory Note from the Company to DMF
Exhibit A-1 Note (See Exhibit 10.7 above)
10.9 Amended and Restated Assignment Agreement from DMF to Hyperion
Exhibit A-1 Note (See Exhibit 10.7 above)
10.10 Assignment of Buyback Rights of Amended and Restated Secured Promissory Note by DMF to the Company
Exhibit A-1 Note (See Exhibit 10.7 above)
Exhibit A-2 Assignment Agreement (See Exhibit 10.9 above)
Part I, Item 1
Current Report on Form 8-K/A-3 dated June 7, 2013, and filed May 8, 2014
Part I, Item 1
Current Report on Form 8-K/A-4 dated June 7, 2013, and filed May 27, 2014
Part I, Item 1
Current Report on Form 8-K/A-4 dated June 7, 2013, and filed July 10, 2014
10.11 Europa Structuring and Consulting Agreement
Amendment No. 3
Current Report on Form 8-K dated October 21, 2013, and filed October 24, 2013
99 Press Release
Part III, Item 11
Current Report on Form 8-K dated November 12, 2013, and filed on November 12, 2013
99 Press Release
Part I, Item 1
Current Report on Form 8-K dated January 14, 2014, and filed on January 14, 2014
99 Press Release
Part I, Item 1
8-K Current Report dated October 15, 2012, and filed with the SEC on October 17, 2012.
16 Letter of Madsen & Associates CPA’s, Inc.
Part I, Item 9
(1) Summaries of all Exhibits are modified in their entirety by reference to the actual Exhibit.
(2) These documents and related Exhibits have previously been filed with the SEC and are referenced for additional information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Transition Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUNDANCE STRATEGIES, INC.
Date:
July 15, 2014
By:
/s/Randall F. Pearson
Randall F. Pearson, President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934 this Transition Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SUNDANCE STRATEGIES, INC.
Date:
July 15, 2014
By:
/s/Randall F. Pearson
Randall F. Pearson, President and Director
Date:
July 15, 2014
By:
/s/Glenn S. Dickman
Glenn S. Dickman, Secretary and Director
Date:
July 15, 2014
By:
/s/Ty Mattingly
Ty Mattingly, Director