Exhibit 10.40
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
| OTCQB |
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company | ||
| Emerging
Growth Company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐
As
of June 29, 2023 the registrant had
shares of common stock, par value $0.001, issued and outstanding. The aggregate market value of common shares held by non-affiliates
as of September 30, 2022 (the most recent second quarter), was $
Documents incorporated by reference.
Table of Contents
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SUNDANCE STRATEGIES, INC.
In this Annual Report, references to “Sundance,” the “Company,” “we,” “us,” “our” and words of similar import refer to Sundance Strategies, Inc., a Nevada corporation and its wholly-owned subsidiary, ANEW LIFE, INC., a Utah corporation (“ANEW LIFE”), unless the context requires otherwise.
Information Concerning Forward-Looking Statements
This annual report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are based on management’s beliefs and assumptions and on information currently available to management. For this purpose any statement contained in this report that is not a statement of historical fact may be deemed to be forward-looking, including, but not limited to, statements relating to our future actions, intentions, plans, strategies, objectives, results of operations, cash flows and the adequacy of or need to seek additional capital resources and liquidity. Without limiting the foregoing, words such as “may”, “should”, “expect”, “project”, “plan”, “anticipate”, “believe”, “estimate”, “intend”, “budget”, “forecast”, “predict”, “potential”, “continue”, “should”, “could”, “will” or comparable terminology or the negative of such terms are intended to identify forward-looking statements, however, the absence of these words does not necessarily mean that a statement is not forward-looking. These statements by their nature involve known and unknown risks and uncertainties and other factors that may cause actual results and outcomes to differ materially depending on a variety of factors, many of which are not within our control. Such factors include, but are not limited to, economic conditions generally and in the industry in which we and our customers participate; competition within our industry; legislative requirements or changes which could render our products or services less competitive or obsolete; our failure to successfully develop new products and/or services or to anticipate current or prospective customers’ needs; price increases; employee limitations; or delays, reductions, or cancellations of contracts we have previously entered into; sufficiency of working capital, capital resources and liquidity and other factors detailed herein and in our other filings with the United States Securities and Exchange Commission (the “SEC” or “Commission”). Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.
Forward-looking statements are predictions and not guarantees of future performance or events. Forward-looking statements are based on current industry, financial and economic information which we have assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. Our actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements and we hereby qualify all our forward-looking statements by these cautionary statements.
These forward-looking statements speak only as of their dates and should not be unduly relied upon. We undertake no obligation to amend this report or revise publicly these forward-looking statements (other than pursuant to reporting obligations imposed on registrants pursuant to the Exchange Act) to reflect subsequent events or circumstances, whether as the result of new information, future events or otherwise.
The following discussion should be read in conjunction with our financial statements and the related notes contained elsewhere in this report and in our other filings with the Commission.
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PART I
Item 1. Business
Organizational Background
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 March of 2013. On March 29, 2013, the Company, its newly formed and wholly-owned subsidiary, Anew Acquisition Corp., a Utah corporation (“Merger Sub”), and ANEW LIFE, INC., a Utah corporation (“ANEW LIFE”), executed and delivered an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which Merger Sub merged with and into ANEW LIFE, ANEW LIFE was the surviving company under the merger and became a wholly-owned subsidiary of the Company on the closing of the merger (the “Merger”). On April 17, 2013, the Company filed a Certificate of Amendment with the Secretary of State of the State of Nevada to change its name from “Java Express, Inc.” to “Sundance Strategies, Inc.” Sundance Strategies, Inc. is referred to as the Company, us or we.
Our Business
Our historical business model has focused on 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.”
We currently do not hold life settlement or life insurance policies but, rather, previously held a contractual right to receive the net insurance benefits, or “NIBs”, from a portfolio of life insurance policies held by a third party (“the Owners” or “the Holders”). These NIBs represented an indirect, residual ownership interest in a portfolio of individual life insurance policies, and they allowed us to receive a portion of the settlement proceeds from such policies, after expenses related to the acquisition, financing, insuring and servicing of the policies underlying our NIBs have been paid.
NIBs are generally sold by an entity that holds the underlying life settlement or life insurance policies, either directly or indirectly through a subsidiary, such an entity being referred to herein as a “Holder.” A Holder, either directly or through a wholly owned subsidiary, purchases life insurance policies either from the insured or on the secondary market and aggregates them into a portfolio of policies. At the time of purchase, the Holder also (i) contracts with a service provider to manage the servicing of the policies until maturity, (ii) consider purchasing mortality re-insurance (“MRI”) coverage under which payments will be made to the Holder in the event the insurance policies do not mature according to actuarial life expectancies, and (iii) arranges financing to cover the initial purchase of the insurance policies, the servicing of the life insurance policies until maturity and the payment of the MRI premiums. The financing obtained by the Holder for a portfolio of life settlement or life insurance policies is secured by the insurance policies for which the financing was obtained. After a Holder purchases policies, aggregates them into a portfolio and arranges for the servicing, MRI coverage and financing, the Holder contracts to sell NIBs related to the policies, which gives the holder of the NIBs the right to receive the proceeds from the settlement of the insurance policies after all of the expenses related to such policies have been paid. When an insurance policy underlying our NIBs comes to maturity, the insurance proceeds are first used to pay expenses associated with such policy. Once all of the expenses have been paid, the Holder will retain a small percentage of the proceeds and then will pay the remaining insurance proceeds to us.
During the latter part of the fiscal year ended March 31, 2021, we began developing an additional business offering, providing professional services to specialty structured finance groups, bond issuers and life settlement aggregators. We have assembled an experienced team from the life settlement marketplace, as well as from other areas such as financial services and public financial markets. As a professional services provider, we apply industry best practices to advise on the selection of specific portfolios of life insurance policies that are tailored to meet the needs of its clients. Our clients may include bond issuers, bond investors, or other structured finance product issuers. We develop strategies and methodologies which include the acquisition of life insurance portfolios, then use common structured finance techniques and proprietary analytics to structure bonds for issuances, including principal protected bonds. Our goal is to deliver long-term value and profitability to shareholders by growing our professional services business and asset base, resulting in the ability to pay dividends to its shareholders.
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During the latter part of the year ended March 31, 2021, we began working closely with bond placement agents and aggregators to establish various aspects of a proprietary, investment grade bond offering. In this arrangement, we participate as the sole originator in the role of structuring and advising on the structure of the proprietary bond instrument. Included in the role of structuring financial assets, we use proprietary analytics to establish the makeup of the rated instrument, including but not limited to, life settlement assets (life insurance policies) and managed cash, and implements a process of selective assembly of the underlying assets and cash management that will meet the policy requirements and analytics. We provide current and ongoing resources for all analytics, as well as advisement support for the investment and non-investment grade ratings for the managed asset pool and the managed cash accounts. In our advisory role, we are reimbursed for all expenses associated with the structuring and preparation of any bond offering, will receive an advisory payment upon the closing of any bond offering, and then will hold residual rights on the balance of assets once the bond is retired.
On January 1, 2022, we entered into a marketing and consulting agreement with Tradability, LLC (“Consultant”) that required us to make an initial $100,000 payment and up to an additional $400,000 in the future (which will be financed by the Consultant via a promissory note). The $400,000 obligation is contingent upon the Consultant and us successfully reaching certain milestones. Further, the agreement requires us to issue between 1,000,000 and 10,000,000 stock options (which are exercisable into our common stock at prices between $1.00 to $2.50 per share) contingent upon the Consultant and us successfully reaching certain milestones. The milestones primarily relate to the Consultant finalizing the tokenization of 500 million non-fungible tokens (“NFTs”) and the successful placement of NFTs with proceeds of between $100 million and $500 million. The proceeds will be used to purchase Life Settlements for which we will be an advisor. As of the issuance of these financial statements, none of the milestones related to the potential issuance of equity have been met.
Life Settlements Market
There are a number of reasons a policy owner may choose to sell his or her life insurance policy. The policy owner may no longer need or want his or her policy, he or she may wish to purchase a different kind of insurance policy, premium payments may no longer be affordable or the policy owner may need cash to fund healthcare or other expenses. In particular, policy holders 65 years of age and older and their families are faced with a variety of challenges as they seek to address their post-retirement financial needs and selling one’s life insurance policy may provide a unique and valuable financial solution to such challenges. From the early 2000s through 2008, the market for newly originated life settlements grew from virtually no activity to a peak of an estimated $12 billion of face value of U.S. life settlement policies settled annually in 2007 and 2008. Economic factors slowed the growth in 2009, when an estimated $8 billion of face value of U.S. life insurance was settled and growth has continued to decline since that time. Participants in the secondary life settlement market have included major insurance companies which have purchased available pools of policies for their own investment, portfolio aggregators, private equity funds, and independent third-party investors.
Predictability of Future Cash Flows. Predictability of future cash flows is one of the biggest challenges facing companies engaged in the life settlements industry. If a Holder is not able to adequately predict future cash flows and does not continually have enough cash to make a policy portfolio’s premium payments, the policies in the portfolio may lapse and we may lose our right to receive the proceeds from the settlement of the policies at maturity. Prediction of future cash flow requires the use of financial models, which rely on various assumptions. These assumptions include the amount and timing of projected net cash receipts, expected maturity events, counter party performance risk, changes to applicable regulation of the investment, shortage of funds needed to maintain the asset until maturity, changes in discount rates, life expectancy estimates and their relation to premiums, interest, and other costs incurred, among other items. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimates and interest income. As a result, actual results could differ significantly from those estimates. If projections of life expectancies are wrong, Holders may be obligated to service the related insurance policies for longer than expected, thereby increasing their costs and reducing the net insurance benefit available.
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Financing a portion of the purchase price. Financing a portion of the purchase price of a policy portfolio allows the Holder to leverage its investment and create a larger and diversified policy portfolio. When making an investment in a portfolio of life insurance policies, a Holder utilizes actuarial tables to determine when the policies in the portfolio can be expected to come to maturity. However, the Holder assumes the risk that the policies in the portfolio will come to maturity later than was predicted by the actuarial tables used at the time of purchase. The life expectancies provided by the actuarial tables are based on actual death rates in large populations of individuals with similar demographic characteristics. Thus, the more policies underlying a policy portfolio, the more reliable the use of actuarial tables becomes. In other words, the larger the policy portfolio, the more closely the underlying insureds would be expected to, on average, follow actuarial predictions and the lower the risk associated with future cash flows will be. Because of the general uncertainty of maturity of life insurance policies, financing for their purchase and servicing has historically been difficult to secure. The lender (the “Holders’ Lender”) has provided financing to the Holders to finance the purchase of the insurance policies. We believe there are few lenders within this market.
Mortality Re-Insurance (MRI) Coverage. Because of the uncertainty of maturity of insurance policies the Holders had, on occasion, previously contracted with an insurance provider for MRI coverage. MRI coverage typically provides guaranteed cash flow based on the expected death benefits of the pool of policies being insured calculated at the issuance of the coverage and thereby provides credit enhancement to any bank providing financing to a Holder. The term of the MRI policies is usually 15 years. Any claims paid by the MRI to the Holder must be paid back to the MRI provider out of death benefit proceeds from the pool of policies being insured when such death benefit proceeds are eventually received. This enables the Holder to receive a smoother cash flow from a pool of policies over time and avoid “lumpiness” in the cash flows that would otherwise be more pronounced in the absence of the MRI coverage. Any claim payment balances would accrue interest, typically at a spread of 250 basis points over LIBOR, to the extent they remain outstanding. The MRI coverage is obtained by paying an MRI premium, typically at equal to 2% of the cumulative death benefit of the covered life insurance policies, at the outset of the coverage and, depending on the specific terms of the MRI policy, possibly an additional premium amount at a predetermined time during the effective coverage period (the “Commitment Fee”), which is typically 1% of the cumulative death benefits of the covered policies. The insurer under the MRI policy typically must approve the sale of any life insurance policies covered by the MRI policy if such sale does not result in the full repayment of any outstanding recovery amounts. It is our understanding that there is only one MRI Provider. While the MRI coverage is relatively expensive, we believe that insurance policies that are covered by MRI have less volatility, are more liquid and should achieve higher values for purposes of financing and secondary market sales.
Financing a policy portfolio’s premium payments gives a Holder additional cash needed to satisfy the premium obligations of its portfolio. In addition, obtaining MRI increases the probability that the Holder will receive future cash flows in the event the underlying insureds live longer than expected. This combination provides the Holder with sufficient liquidity to stabilize its cash position.
Life Settlement Purchasing Guidelines as an Advisor
Our objective is to advise and assist entities as they acquire Life Insurance policies and portfolios that will produce returns in excess of any and all purchase, financing, servicing and insuring costs incurred by the Holder. The guidelines we generally follow regarding the purchase of policies and portfolios include:
| ● | the insured is 75 years old or older; | |
| ● | all NIBs relate to U.S. Universal Life Insurance policies; | |
| ● | all underlying insurance policies have qualified for financing that will cover at least four years of premiums; | |
| ● | each policy must first be reviewed by the legal due diligence team of the lender providing financing for the acquisition and servicing of the life insurance policies, second by the MRI company’s due diligence team and then finally approved by our due diligence processes; | |
| ● | all policies must qualify for MRI; and | |
| ● | the projected proceeds payable on each life insurance policy upon the death of the underlying insured are projected to exceed the costs to service the life insurance policies, amounts due to creditors secured by such life insurance policy, such as the Holders’ Lender or the MRI provider, other costs and fees incurred by the Holder and the percentage of the remaining insurance benefit retained by the Holder |
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Competition
We encounter significant competition in the life settlements industry generally from numerous companies, including hedge funds, investment banks, secured lenders, specialty life insurance finance companies and life insurance companies themselves who purchase life settlements. Many of these competitors have greater financial and other resources than we do and may have a significantly lower cost of funds because they have greater access to insured deposits or the capital markets. Moreover, some of these competitors have significant cash reserves and can better fund shortfalls in collections that might have a more pronounced impact on companies such as ours. They also have greater market share. For example, Berkshire Hathaway purchased a portfolio of $300 million (face value) in life insurance policies in 2013. According to The Deal Pipeline, total life settlement transactions grew to $2.57 billion (face value) in 2013. In 2014 transaction volumes were reported higher by market participants in all major segments of the industry and Conning & Co. forecast an average annual gross market potential for life settlements of $180 billion from 2014-2023, with an average volume of approximately $3 billion per year in life settlement transactions.
A report from the AAP Life Settlement Market Update indicated that internal rates of return for life settlement transactions conducted in 2013 were in the high-teens, an attractive return at a time when fixed income and other hedge positions were delivering minimal rates of return. In the event that certain better-financed companies make a significant effort to compete against our business or the secondary market in general, prices paid for existing portfolios of life insurance policies may rise and our ability to purchase satisfactory assets may decline. In addition, recent shrinking of the market for life settlements has resulted in fewer available pools of insurance policies. As a result, price competition for the remaining pools has increased. Our limited resources prohibit us from competing for larger pools. These factors could adversely affect our profitability by reducing our return on investment or increasing our risk.
Employees
On March 31, 2023, we had one full-time employee: Randall F. Pearson, our President.
Available Information
Our website address is www.sundancestrategies.com. We make available free of charge on the Investor Relations portion of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.
Item 1A. Risk Factors
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, results of operations and future growth prospects. Our business could be harmed by any of these risks. The risks and uncertainties described below are not the only ones we face. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to other information contained in this Form 10-K, including our consolidated financial statements and related notes.
Summary of Risk Factors
Our business is subject to a number of risks and uncertainties including those described at length in the Risk Factors section below. We consider the following to be our most material risks:
Risks Relating to Our Business
| ● | We have historically used significant amounts of cash in operating activities since our inception and may continue to use significant amounts of cash for operating activities in the foreseeable future. |
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| ● | We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs and our failure to obtain additional financing when needed could force us to delay, reduce or eliminate our product development programs and commercialization efforts or cause us to become insolvent. | |
| ● | There may be substantial doubt about our ability to continue as a going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern. | |
| ● | We may default on our obligations under various debt arrangements, which may accelerate our repayment obligations or otherwise limit our access to future financing. | |
| ● | We are pursuing opportunities relating to the tokenization and sale of digital assets that are subject to volatile market prices, impairment and unique risks of loss. | |
| ● | Our management team relies on outside consultants and others in our industry to make informed business decisions; potential conflicts of interest involving those parties who are relied upon could adversely affect the execution of our business model. | |
| ● | Current and future federal regulation under the Dodd-Frank Act’s consumer protection provisions may have an adverse effect on our business and our planned business operations. | |
| ● | General economic conditions could have an adverse effect on our business. | |
| ● | The costs in time and expense of being a publicly-held company are substantial and will only increase if our business model is successful. | |
| ● | Inadequate funding will impede execution of our business model. | |
| ● | We are new to the bond, life settlement, and financial advisory industry and may not be able to successfully compete in this industry. | |
| ● | Historically, 99% of our total assets are interests in life settlement policies, resulting in a lack of diversification of assets and concentration in assets that are subject to significant fluctuations in value. | |
| ● | Limitations to the financial model we use may result in inaccurate or incomplete projections of future cash flow from the insurance policies. | |
| ● | The individuals insured by the life insurance policies may live longer than their actuarial life expectancies and thereby, cash flows from life insurance policies may be delayed. | |
| ● | Having relatively few insureds could cause the overall performance to be unduly influenced by a relatively small number of underlying policies that perform better or worse than expected. | |
| ● | Increased general market interest rates could increase the carrying costs of the life insurance policies and reduce the related cash flows. | |
| ● | Changes to foreign banking laws and regulations or decreased lending capacity for life settlements could have a negative impact on ability of Holders to obtain loans with respect to purchases of life settlements. | |
| ● | Holders may be required to obtain MRI coverage as a condition of our business model, which, if unavailable, could potentially increase our risk of failure. | |
| ● | The lapse of life insurance policies will result in the entire loss of our interest in the death benefits from those particular policies. | |
| ● | Actual results from life settlement products may not match expected results, which could reduce returns and also adversely affect the ability to service and grow a portfolio for actuarial stability. | |
| ● | The limited number of sellers of life settlement products in the secondary market may limit the ability to negotiate favorable prices in the acquisition of such life settlement interests. | |
| ● | We do not track concentrations of pre-existing medical conditions of insureds in our guidelines for purchasing life settlement products. | |
| ● | If life settlement products are determined to be “securities,” Holders may be required to register as an investment company under the Investment Company Act, which would substantially increase SEC reporting costs and oversight of a Holder’s business operations. | |
| ● | There is poor liquidity in the secondary market for life insurance and life settlements. |
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Risks Related to the Life Insurance Policies
| ● | Life settlements, and therefore our common stock, are highly speculative and may lose all of their value. | |
| ● | Policies may be determined to have been issued without an “insurable interest” and could be void or voidable. | |
| ● | Additional insurable interest concerns regarding life insurance policies originated pursuant to premium finance transactions may also result in adverse decisions that could effect policies. | |
| ● | Fraud in the application for life insurance can also affect assets and interest in policies. | |
| ● | The risk of litigation with issuing insurance companies could substantially raise our costs of operation and increase our risk of loss. | |
| ● | The contestation of the life insurance policies by the applicable issuing insurance companies could result in the loss of the benefits from such life insurance policies. | |
| ● | Increases in cost of insurance could reduce estimated returns and lower revenues. | |
| ● | Carrier and service partner credit risk can adversely affect life settlements. | |
| ● | The inability to keep track of the insureds could keep us from updating the medical records of the insured. | |
| ● | Lost insureds can result in a delay or a loss of an insurance benefit that would have a negative effect on revenues and prospects. | |
| ● | U.S. life settlement and viatical regulations may result in determination(s) of applicable law violations. | |
| ● | State protections for the insolvency of an insurance company are limited. | |
| ● | Liability for failing to comply with U.S. privacy safeguards. | |
| ● | Cyber-attacks or other security breaches could have a material adverse effect on our business. | |
| ● | U.S. privacy concerns may affect the access to accurate and current medical information regarding the insured under life insurance policies. |
Risk Factors Related to Our Common Stock
| ● | There is a limited public market for our common stock, and any market that may develop could be volatile. | |
| ● | We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors. | |
| ● | Our management and two stockholders beneficially own approximately 65% of our outstanding common stock and therefore can exert control over our business. | |
| ● | 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. |
Risk Factors relating to Our Business
We have historically used significant amounts of cash in operating activities since our inception and may continue to use significant amounts of cash for operating activities in the foreseeable future.
We have historically used substantial amounts of cash in operating activities. To date, our operations have not generated sufficient cash flow to fund our operations and we have relied on cash provided by financing activities, including amounts received under notes payable and lines-of-credit with related parties. Our default under these obligations may also limit our ability to obtain future financing from related or third parties.
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Our inability to access capital may limit our ability to adequately fund our operations. In order to continue to fund our operations, including the potential purchase of NIBs, we will need to raise substantial amounts of capital. Absent additional financing, we will not have the resources to execute our business plan.
We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs and our failure to obtain additional financing when needed could force us to delay, reduce or eliminate our product development programs and commercialization efforts or cause us to become insolvent.
We will need to raise additional funds through future equity or debt financings in the near future to meet our operational needs and capital requirements. We can provide no assurance that we will be successful in raising funds pursuant to additional equity or debt financings or that such funds will be raised at prices that do not create substantial dilution for our existing stockholders. Given the volatility of our stock price, any financing that we undertake could cause substantial dilution to our existing stockholders.
To date, we have financed our operations primarily through net proceeds from the issuance of capital stock and debt financings. We do not know when or if our operations will generate sufficient cash to fund our ongoing operations. We cannot be certain that additional capital will be available as needed on acceptable terms, or at all.
We may raise additional funds in equity or debt financings or enter into credit facilities in order to access funds for our capital needs. Any debt financing obtained by us in the future would cause us to incur additional debt service expenses and could include restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities. In addition, future equity investors may require that we convert all or a portion of our debt to equity, and our debtholders may not agree to such terms. If we raise additional funds through further issuances of equity or convertible debt securities, and/or if we convert all or a portion of our existing debt to equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, we may significantly scale back our operations or we may become insolvent. If this were to occur, our ability to continue to grow and support our business and to respond to business challenges could be significantly limited.
There may be substantial doubt about our ability to continue as a going concern, and we will need additional financing to execute our business plan, to fund our operations and to continue as a going concern.
Since inception, we have experienced recurring operating losses and negative cash flows and we expect to continue to generate operating losses and consume significant cash resources for the foreseeable future. There may be substantial doubt regarding our ability to continue as a going concern. We have prepared our financial statements on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our financial statements for the fiscal year ended March 31, 2023 do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty, with the exception that all borrowings are classified as current on the balance sheets.
Our inability to access capital may limit our ability to adequately fund our operations and continue as a going concern. To continue as a going concern we will need to raise substantial amounts of capital. Absent additional financing, we will not have the resources to execute our business plan and continue as a going concern.
Inadequate funding will impede execution of our business model.
At present, we are a minor participant in both the life settlement market and in the bond advisory industry. We face significant competition from much larger competitors. We will need substantial additional funds to effectively compete in these industries, and no assurance can be given that we will be able to adequately fund our current and intended operations. We expect to finance our operating working capital requirements, with proceeds from planned public and/or private offerings of our securities and debt financing. There can be no assurance that we will be successful in raising debt or equity capital or that we will be successful in raising additional capital in the future on terms acceptable to us, or at all. If we are not able to obtain sufficient funding to execute our business strategies, we may be required to scale back or discontinue our operations, which would materially adversely affect our financial condition and results of operations.
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We may default on our obligations under various debt arrangements, which may accelerate our repayment obligations or otherwise limit our access to future financing.
If we fail to make timely repayments of amounts received under notes payable and lines-of-credit with related parties or the 8% convertible debenture agreement we will be in default of such obligations, which could materially adversely affect our operations and financial condition. Our default under these obligations may also limit our ability to obtain future financing from related or third parties, which would materially adversely affect our operations and our ability to execute our business strategy.
We are pursuing opportunities relating to the tokenization and sale of digital assets that are subject to volatile market prices, impairment and unique risks of loss.
We are exploring opportunities to pursue the tokenization and sale of non-fungible tokens (“NFTs”). There is no guarantee that we will be able to successfully tokenize and sell such NFTs, and our use of NFTs exposes us to additional risks.
The prices of digital assets have been in the past and may continue to be highly volatile due to various associated risks and uncertainties. For example, the prevalence of such assets is a relatively recent trend, and their long-term adoption by investors, consumers, and businesses is unpredictable. Moreover, their lack of a physical form, their reliance on technology for their creation, existence and transactional validation and their decentralization may subject their integrity to the threat of malicious attacks and technological obsolescence. As a result, the value that we may realize, if any, from the sale of NFTs is uncertain.
Digital assets, as intangible assets without centralized issuers or governing bodies, have been, and may in the future be, subject to security breaches, cyberattacks or other malicious activities, as well as human errors or computer malfunctions that may result in the loss or destruction of private keys needed to access such assets. While we intend to take all reasonable measures to secure any digital assets, if such threats are realized or the measures or controls we create or implement to secure our digital assets fail, it could result in a partial or total misappropriation or loss of our digital assets, and our financial condition and operating results may be harmed.
At this time, the regulation of digital assets and NFTs remains in an early stage. The extent to which securities laws or other regulations apply or may apply in the future to such assets is unclear at this time. However, on March 9, 2022, the White House issued an Executive Order on Ensuring Responsible Development of Digital Assets proposing, among other things, regulation of digital assets. Future regulation of such assets may increase our compliance costs or adversely impact our business.
NFTs may also be subject to regulations of the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury and the Bank Secrecy Act. Further, the Office of Foreign Assets Controls (“OFAC”) has signaled sanctions could apply to digital transactions and has pursued enforcement actions involving cryptocurrencies and digital asset accounts. The nature of many NFT transactions also involve circumstances which present higher risks for potential violations, such as anonymity, subjective valuation, use of intermediaries, lack of transparency, and decentralization associated with blockchain technology. In addition, the Commodity Futures Trading Commission has stated that cryptocurrencies, with which NFTs have some similarities, fall within the definition of “commodities.” If NFTs were deemed to be a commodity, NFT transactions could be subject to prohibitions on deceptive and manipulative trading or restrictions on manner of trading (e.g., on a registered derivatives exchange), depending on how the transaction is conducted. Moreover, if NFTs were deemed to be a “security,” it could raise federal and state securities law implications, including exemption or registration requirements for marketplaces for NFT transactions, sellers of NFTs, and the NFT transactions themselves, as well as liability issues, such as insider trading or material omissions or misstatements, among others. NFT transactions may also be subject to laws governing virtual currency or money transmission. For example, New York has legislation regarding the operation of virtual currency businesses. NFT transactions also raise issues regarding compliance with laws of foreign jurisdictions, many of which present complex compliance issues and may conflict with one another. Our launch and operation of our NFT platform expose us to the foregoing risks, among others, any of which could materially and adversely affect the success of our NFT platform and harm our business, financial condition, results of operations, reputation, and prospects.
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Our management team relies on outside consultants and others in our industry to make informed business decisions; potential conflicts of interest involving those parties who are relied upon could adversely affect the execution of our business model
Our management team has relied and will continue to rely on consultants and service providers in our industry. Many of these consultants or service providers 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 our industry, will be able to engage these consultants. In addition, our inability to retain such consultants would negatively affect our ability to identify and evaluate life insurance products for purchase. Even as our management accumulates expertise in this industry, we will still rely on the expertise of outside consultants for a variety of information, including valuation, life expectancies, actuarials and other matters specific to life insurance policies. If we cannot obtain such services at an affordable price, our business will be harmed.
Current and future federal regulation under the Dodd-Frank Act’s consumer protection provisions may have an adverse effect on our business and our planned business operations.
On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). 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 insurance policies. In addition, the Dodd-Frank Act also limits the ability of federal laws to preempt state and local consumer laws. 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 and the entities from which we may acquire NIBs and similar life settlement products.
General economic conditions could have an adverse effect on our business.
Changes in general economic conditions, including, for example, interest rates, investor sentiment, market and regulatory changes specifically affecting the insurance industry, competition, technological developments, political and diplomatic events, tax laws, and other factors not known to us today, can substantially and adversely affect our business and prospects. There continues to be uncertainty about the prospects for growth in the U.S. economy as well as economies of other countries, driven by factors such as high current unemployment, rising government debt levels, prospective Federal Reserve (and similar foreign bodies) policy shifts, the withdrawal of government interventions in 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. Such uncertainties and general economic trends can affect the ability to obtain funds to finance life settlement products. None of these risks are or will be within our control.
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 required to file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports respecting certain events on 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 generating and compiling significant accounting, legal and financial information, including audited year-end financial statements and reviewed quarterly financial statements. The preparation of these reports, their review by management and professionals and the auditing and review process of such financial statements consumes significant resources, in terms of management time and focus, as well as expenses related to legal, accounting and audit fees. It is difficult to quantify these costs, but we believe them to be not less than between approximately $175,000 and $250,000 annually. As our business grows, these costs can only increase.
We are new to the bond, life settlement, and financial advisory industry and may not be able to successfully compete in this industry.
We only recently began providing advisory services relating to bond issuances and life settlement transactions. In order for these operations to be successful, we will need to develop sufficient expertise and establish relationships with clients. Identifying and acquiring clients in this industry will require us to compete with other larger, more experienced, and better capitalized service providers and we may not be successful in developing such client relationships. If we are not able to successful market our advisory business, our financial condition and results of operations will be materially adversely affected.
Historically, 99% of our total assets are interests in life settlement policies, resulting in a lack of diversification of assets and concentration in assets that are subject to significant fluctuations in value.
Although we currently have no ownership in life settlement policies, generally speaking, our previous investment in NIBs was usually the primary asset on our balance sheet. Life settlement products like NIBs are subject to substantial fluctuations in value, primarily based upon matters that are not within our control, such as the current health and life expectancy of the insureds underlying our NIBs, the solvency of the Holders of the policies and the Holders’ Lender, the Holders’ financing costs and ability to acquire policies and the solvency of the insurance companies. Each of these factors can result in significant fluctuations of the value of the life insurance policies underlying the NIBs, thereby affecting potential future interests.
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Limitations to the financial model we use may result in inaccurate or incomplete projections of future cash flow from the insurance policies.
The financial model we utilized to project future cash flows from potential life settlement assets was chosen because of its straight-forward approach in calculating expected cash flows. We believe the methodology used in the model is particularly desirable because it has parameters that are easily verifiable and does not require complex calculations or mathematical simulations to confirm results. However, with every financial model, there are limitations. Most require assumptions to be made. Our model is no exception. Our assumptions may prove to be incorrect and, therefore, our model may be incorrect. Our model relies on actuarial life-expectancy reports prepared by third parties from which the estimated date of maturity is calculated. It is assumed that these reports were accurately made and properly reflect real life expectancies. Our model also requires other inputs including but not limited to the following: (i) a 15-year period for projections; (ii) a distinct number of lives; (iii) a distinct number of policies; (iv) life expectancy tables and projections; (v) premiums; (vi) senior lending fees; (vii) MRI fees; and (viii) insurance, servicing and custodial fees. While this method of modeling cash flows is helpful in setting general expectations of potential returns that might be produced from a given portfolio, there is no way such results can be guaranteed. In addition to our assumptions, there are many factors that may affect the selection of inputs for the model.
The individuals insured by the life insurance policies may live longer than their actuarial life expectancies and thereby, cash flows from life insurance policies may be delayed.
The actual date of death of an insured with respect to a life insurance policy is uncertain. Life expectancies are projected from the medical records of the insured and actuarial data based upon the historical experience of similarly situated persons. However, it is impossible to predict with certainty any insured’s life expectancy. We have and will continue to base our longevity assumptions on the reports of third-party life expectancy providers, among whom there is no uniformity of assumptions, approach or procedure. There are also significant disputes among third-party life expectancy providers regarding the mortality rate relating to certain disease states and the efficacy of certain treatments. 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. |
We rely primarily on various different life expectancy providers. A life expectancy (“LE”), can be considered the life expectancy provider’s “best estimate” as to how long a person would live. We assume that the life expectancies were accurately calculated and properly assessed for purposes of our model. To introduce some “checks and balances” into our cash flow projections, we use at least two LE reports from different third-party LE providers for each policy. We do this to try to avoid any systemic bias introduced by dependency on life expectancies produced by a single source. In addition, our model gives greater weight to the longer (and more conservative) of the two LEs. By using such a long/short weighted average, our model attempts to hedge against unexpected longevities in a portfolio.
Changes in actuarial based life expectancy methodologies (which are determined by the Society of Actuaries and are amended every three to five years) could have the effect of reducing the internal rate of return on the life insurance policies and could cause increased difficulty in financing premiums. If changes are significant, they could lower prices for life insurance policies, but could also lower the value of the life insurance policies due to the lower resulting present value of the death benefits forecasted to be paid at later dates. Holders’ senior loans require that certain loan to value ratios be maintained and decreases in policy values could result in violations of these provisions. Default by Holders on their senior loans may impair their ability to obtain financing necessary to maintain the life insurance policies.
In addition, because our cash flow is usually dependent on life insurance policies coming to maturity, if life expectancies prove wrong cash flows will change. If the insured lives longer than any or all of the life expectancy appraisals predict, then the amounts available to life settlement interests could be diminished, perhaps significantly, due to the additional time during which premiums will have to be paid and financing and other related expenses incurred in order to keep the related policy in force. If the insureds with respect to too many life insurance policies live longer than their respective life expectancies, then Holders may have to liquidate such life insurance policies. The market value of such Policies will necessarily be significantly less than the related death benefits.
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Having relatively few insureds could cause the overall performance to be unduly influenced by a relatively small number of underlying policies that perform better or worse than expected.
Our life expectancy actuarial results related to smaller portfolios may not be as reliable as they would be if the underlying portfolios were larger. We understand that Standard & Poors has stated that at least 1,000 lives are required to achieve actuarial stability, while A.M. Best concluded that at least 300 lives are necessary. Having fewer lives in a policy portfolio can cause the overall performance of such portfolio to be unduly influenced by a relatively small number of “outliers” where the assets perform better or worse than expected. The industry has sought to mitigate this risk by obtaining MRI coverage, which has the effect of accelerating cash flows in cases where the assets underperform and reducing the volatility normally associated with a portfolio with fewer lives.
Increased general market interests rates could increase the carrying costs of the life insurance policies and reduce the related cash flows.
If general market interest rates increase, the value of life insurance portfolios would likely decrease. Some of the Holder’s carrying costs associated with the life insurance policy portfolios (specifically interest payments on the MRI coverage outstanding balance) are tied to interest rates. If interest rates increase, the Holder’s carrying costs will increase and the return on our investment will decrease. Because the Holders pay all of the costs associated with the life insurance policy portfolios, an increase in the Holder’s carrying costs will correspondingly decrease the amount cash flows.
In addition, if the interest rates used to determine the market value of a life insurance policy change, the present value of the policy may also change. Generally, as interest rates increase, the present value of a life insurance policy decreases. If a 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. Furthermore, Holders are generally obligated under the senior loans financing the purchase of life insurance policies to maintain certain loan to value ratios. If the present value of the life insurance policies decreases significantly, the Holder may be in breach of such obligations, which could impair the Holder’s ability to obtain financing necessary to service existing life insurance policies or acquire new policies. As a result, any life insurance portfolios may decline in value or become worthless.
Changes to foreign banking laws and regulations or decreased lending capacity for life settlements could have a negative impact on the ability of Holders to obtain loans with respect to purchases of life settlements.
Our current business model relies on the availability to the Holders of senior loans from the Holders’ Lender or any other lender. In the event of adverse regulatory changes or reduced capacity for life settlement lending, the Holders could experience the same liquidity issues that have plagued other market participants. Changes to the Holders’ Lender’s loan to value requirements, compliance with regulatory large exposure limits and changes to regulatory large exposure limits could also result in liquidity issues for the Holders and corresponding 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.
Holders may be required to obtain MRI coverage as a condition of our business model, which, if unavailable, could potentially increase our risk of failure.
The MRI is a relatively new product and there are no guarantees that the MRI provider will be able to meet the Holders’ coverage needs. In addition, it is our understanding that there is only one MRI provider. The MRI provider has refused to provide future coverage to the Holders. Without the MRI coverage, the Holders have limited options when the senior loans mature. The Holders’ Lender has demanded repayment of all outstanding amounts under the senior loans.
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The lapse of life insurance policies will result in the entire loss of our interest in the death benefits from those particular policies.
The Holders are required to make premium payments on the life insurance policies in order to keep such policies in force. These payments generally will be made from amounts available to the Holders pursuant to the senior loans, death benefits, and MRI payments, if available.
Actual results from life settlement products may not match expected results, which could reduce returns and also adversely affect the ability to service and grow a portfolio for actuarial stability.
Our business model relies on achieving actual results similar to those projected by using actuarial estimates. We believe that the larger the portfolio of policies, the more reliable actuarial estimates will be and, likewise, the greater the likelihood that expected results will be achieved.
In a study published in 2012, A.M. Best concluded that at least 300 lives are necessary to narrow the band of cash flow volatility and achieve actuarial stability, while Standard & Poor’s has indicated that actuarial stability is unlikely to be achieved with a pool of less than 1,000 lives. While there is a risk with a portfolio of any size that actual yield may be less than expected, we believe that the risk we face is presently more significant given the relatively low number of insureds underlying our potential NIBs as compared to rating agency recommendations. Even if our portfolio reaches a size that is actuarially stable according to the rating agencies, we still may experience differences between the actuarial models we use and actual mortalities. Differences between our expectations and actuarial models, and actual mortality results, could have a materially adverse effect on our operating results and cash flow. In such a case, we would face liquidity problems, including difficulties acquiring new NIBs and other life settlement products. Continued or material failures to meet our expected results could decrease the attractiveness of our securities in the eyes of potential investors, thereby making it even more difficult to obtain capital needed to acquire additional NIBs and obtain desired diversification and expansion of the underlying insureds.
The limited number of sellers of life settlement products in the secondary market may limit the ability to negotiate favorable prices in the acquisition of such life settlement interests.
Because we are not currently licensed to purchase life insurance policies directly from the insureds, we rely on re-sellers like Del Mar, PCH and HFII for such products.
Unless other sources become available, the ability to purchase the life settlement products desired may be limited. In addition, the limited number of sellers could limit the ability to negotiate favorable prices to purchase life settlement products, which could reduce profitability. Furthermore, recent declines in the secondary market for life settlements have limited the availability of pools of life insurance policies, resulting in increased price competition.
We do not track concentrations of pre-existing medical conditions of insureds in our guidelines for purchasing life settlement products.
Concentrations of pre-existing medical conditions in insureds could affect the valuation of the portfolios that such policies underlie. We do not track concentrations of pre-existing medical conditions in purchases of life settlement products. Thus, the valuation of such interests and our estimates of cash flows therefrom could be inaccurate.
If life settlement products are determined to be “securities,” Holders may be required to register as an investment company under the Investment Company Act, which would substantially increase SEC reporting costs and oversight of a Holder’s business operations.
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 as securities. One U.S. Congressman has sought to introduce a bill to make such amendment. 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 regulatory requirements under the Securities Act, the Exchange Act and the Investment Company Act.
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Such requirements could, among other things, limit our or Holder’s ability to change investment policies without stockholder approval, prohibit our acquisition of assets from an affiliate without SEC approval, limit leveraging of our assets to one-third of our total asset value, require accounting 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. In addition, intermediaries used to purchase life settlement products 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. Such regulations could substantially increase our compliance and reporting costs, which would negatively affect profitability.
There is poor liquidity in the secondary market for life insurance and life settlements.
The secondary market for life insurance policies and life settlements is relatively illiquid, and it is often difficult to sell life insurance policies or interests in life insurance policies at attractive prices, if at all. The ability to sell life insurance 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, creating an increased risk associated with holding such policies. Holders may be limited in their ability to liquidate assets if they need to do so in order to raise funds to pay premiums, or otherwise.
Life settlements, and therefore our common stock, are highly speculative and may lose all of their value.
Life settlements are highly speculative investments. With respect to life insurance policies, it is not possible 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. The longer the period between the purchase of a life settlement and the payout on the underlying policy at maturity, the lower return will be because of the cost to maintain the underlying policies.
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, to the extent we invest in NIBs, we will realize a positive return on our investment. These types of investments should be considered to be highly 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.
Risks Related to the Life Insurance Policies
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 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.
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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 in relation to the policies underlying NIBs, we could lose some or all the amounts we have invested in NIBs, although in some states the issuing insurance company may be required to repay the premiums if it rescinds the policy. Some states, such as New Jersey, allow the carrier to retain all the premiums in the event the policy is rescinded, and some states, such as Delaware, require premiums to be returned in cases where the policy is successfully challenged by the carrier. 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 NIBs and other life settlement interests we may purchase.
Concern also exists regarding the applicability of state insurable interest requirements applicable 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 life insurance policies underlying NIBs have been originated pursuant to 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, New York and Florida 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), 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 has case law that is also favorable (see PrucoLife Insurance Company v. Wells Fargo (Florida Supreme Court, which held that a policy may not be contested after the expiration of the policy’s contestability period). Delaware has laws which benefit the insurance carrier and others that are more favorable to the policy owner (see PHL Variable Insurance Co. vs. Price Dawe, (Supreme Court of Delaware) and Principal Life Insurance Company v. Lawrence Rucker 2007 Insurance Trust (District Court of Delaware)). These courts have 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. However, the Rucker case did provide that premium financing could qualify as an insured procuring a policy and satisfy requirements related to insurable interest. There is also legislation in most states regulating premium financing that must be complied with for policies originated after the legislation was enacted.
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. Neither us nor the Holders will 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 NIBs purchased prior to the enactment of such legislation and our NIBs would be worthless.
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Additional insurable interest concerns regarding life insurance policies originated pursuant to premium finance transactions may also result in adverse decisions that could effect 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 decisions issued over the past few years may also increase concerns with premium financed policies. In 2011, the Delaware Supreme Court stated in PHL Variable Insurance Company v. Price Dawe 2006 Insurance Trust 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, investors were concerned with how the court would apply such reasoning to premium financed policies. This concern was alleviated in the 2012 Delaware District Court case of Principal Life Insurance Company v. Lawrence Rucker 2007 Insurance Trust that concluded that “an insured’s ability to procure a policy is not limited to paying the premiums with his own funds; borrowing money with an obligation to repay would also qualify as an insured procuring a policy.”
We cannot predict whether a state regulator, insurance carrier or other party will assert that any 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. Decisions in Florida have increased the risk that challenges to premium financed policies may be decided in favor of the issuing insurance company. Moreover, because the life insurance policies are often 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 on 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 net death benefit related to the policies. Concerns of such nature could also negatively affect the market value and/or liquidity of the life insurance policies.
Fraud in the application for life insurance can also affect assets and interest in policies.
There are risks that policies may be procured on the basis of fraud or misrepresentation in connection with the application for the policy. Types of fraud that have enabled carriers to successfully rescind or void the related policies include, among others, misrepresentations concerning an insured’s financial net worth and/or income, need for and purpose of the life insurance protection, medical history and current physical condition, including age and whether the insured 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. There has been significant litigation regarding whether or not a policy can be contested for fraud after the expiration of the contestability period. Florida, California and New York have concluded that a carrier may not contest a policy after the contestability period. New Jersey and Delaware have allowed such contests by the carriers. 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. Furthermore, such misrepresentations can adversely affect the actuarial value of the death benefit under the related life insurance policies.
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The risk of litigation with issuing insurance companies could substantially raise our costs of operation and increase our risk of loss.
Some of the programs relating to the premium finance transactions through which certain underlying insurance policies are 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 holders 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 involving the policy holder was to occur, the policy holder would bear the costs of such litigation, and would be unable to predict its outcome, which could include losing the right to receive (or retain) the proceeds otherwise payable under one or more of the underlying policies.
The contestation of the life insurance policies by the applicable issuing insurance companies could result in the loss of the benefits from such life insurance policies.
The ability of an issuing insurance company to seek to rescind one or more life insurance policies depends on whether such issuing insurance company is barred from bringing a rescission action by operation of an incontestability clause contained in the life insurance policies 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, as stated above, 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. The successful contestation of the life insurance policies by the applicable issuing insurance companies could materially and adversely affect cash flows.
Increases in cost of insurance could reduce estimated returns and lower 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 the charges to a life insurance policy are materially increased, additional premium payments may be required to maintain enforceability of such policy.
AXA Equitable issued cost-of-insurance, referred to herein as “COI,” increases on eleven (11) of the previously held life insurance policies underlying our prior NIBs. In addition, one Transamerica and one Lincoln policy, both of which were Policies underlying our prior NIBs, were subject to increased COI’s. Other carriers have been issuing COI increases that impact life insurance policies held by large settlement funds. Multiple lawsuits, including class actions, against Phoenix Life, Lincoln National Insurance Company, AXA Equitable, Banner Life, and Transamerica Life Insurance Company are currently ongoing. However, most of these lawsuits are in the very early stages.
Carrier and service partner credit risk can adversely affect life settlements.
Holders are subject to the credit risk associated with the viability of the various insurance companies that issued the life insurance policies. 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 a policy issued by such issuing insurance company, as the collectability of the related death benefits and the ability of such issuing insurance company to pay the cash surrender value or other amounts agreed to be paid by the issuing insurance company may be reduced. 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 such insurance company, the ability of the Holder to pay the premiums due on other insurance policies and the Holders ability to pay any required policy premiums, fees and expenses of the service providers and our other expenses, which could materially and adversely affect the value of a policy.
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The inability to keep track of the insureds could keep us from updating the medical records of the insured.
It is important for the Holder of the life insurance policies 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 or 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 Holder unable to receive additional medical records.
The Holder may have to rely on a third party servicer 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 contact 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 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 Holder 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 Holder 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 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.
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 interest rate under the senior loan; thus, the policy proceeds become less valuable as time passes.
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U.S. life settlement and viatical regulations may result in determination(s) of applicable law violations.
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 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 expectations, it may be possible that under the rules of a particular state, a policy 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 the Holders’ ability to liquidate any policies we or they 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, administrative and civil sanctions and, in some instances, 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 life insurance 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 life insurance 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 life insurance policies issued by an issuing insurance company if such issuing insurance company becomes insolvent. Even if such guaranty funds are sufficient, the obligation of a state guaranty fund to make payments may not be triggered in certain circumstances.
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 policy holders 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. In addition, in the event of an issuing insurance company’s insolvency, courts and receivers may impose moratoriums or delays on payments of cash surrender values and/or death benefits.
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 entities providing services related to the life insurance policies properly obtains and uses otherwise private health information, but fails to maintain the confidentiality of such information, such service provider may receive 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.
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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 receives 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, life insurance 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 life insurance policies. Each of the foregoing factors may delay or reduce the return on life insurance policies.
Cyber-attacks or other security breaches could have a material adverse effect on our business.
In the normal course of business, we may have access to sensitive and confidential information regarding insureds. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of third party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors or other similar events.
Information security risks have increased recently in part because of new technologies, the use of the Internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks designed to disrupt key business services, such as customer-facing websites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding the insureds could result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in our business, which could have a material adverse effect on our business, financial condition or results of operations.
U.S. privacy concerns may affect the access to accurate and current medical information regarding the insured under life insurance policies.
The value of a life insurance policy 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 granted a general consent that gave 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 to subsequently 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 cooperation of the insured, it may be difficult to convince the insured’s health care providers of the consent’s efficacy and such health providers 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.
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Risk Factors Related To Our Common Stock
There is a limited public market for our common stock, and any market that may develop could be volatile.
The market for our common stock has been limited due to, among other factors, low public float of our common stock, low trading volume and the small number of brokerage firms acting as market makers. There were 17,086,922 shares of our common stock held by non-affiliates as of March 31, 2023. Thus, our common stock will be less liquid than the stock of companies with broader public ownership, and, as a result, the trading price for shares of our common stock may be more volatile. Among other things, trading of a relatively small volume of our common stock may have a greater impact on the trading price for our stock than would be the case if our public float were larger. In addition, because our common stock is thinly traded, its market price may fluctuate significantly more than the stock market in general or the stock prices of other companies listed on major stock exchanges. The average daily trading volume for our stock has varied significantly from week to week and from month to month, and the trading volume often varies widely from day to day. Because of the limitations of our market and volatility of the market price of our stock, investors may face difficulties in selling shares at attractive prices when they want to.
An active trading market for shares of our common stock may never develop or be sustained. If no trading market develops, securities analysts may not initiate or maintain research coverage of our company, which could further depress the market for our common stock. As a result, investors may not be able to sell their shares of our common stock at the time that they would like to sell. The limited market for our shares may also impair our ability to raise capital by selling additional shares and our ability to acquire other companies or technologies by using our common stock as consideration. 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; | |
| ● | Regulatory developments in the life settlement market; | |
| ● | Lack of listing for our common stock; | |
| ● | Lack of shares of our common stock in public float; | |
| ● | Lack of market makers with respect to our common stock; | |
| ● | Inability to raise needed capital; | |
| ● | Low volume of trading of our common stock; | |
| ● | 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 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board. If we do, the information that we provide stockholders may be different than what is available with respect to other public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
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We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (3) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (4) the end of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act. Decreased disclosures in our SEC filings due to our status as an “emerging growth company” may make it harder for investors to analyze our results of operations and financial prospects.
Our management and two stockholders beneficially own approximately 65% of our outstanding common stock and therefore can exert control over our business.
Members of our management team and two stockholders together beneficially own approximately 65% of our outstanding common stock. 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 appoint all officers. As a result, these persons control the Company, regardless of the vote of other stockholders. As a result, other stockholders may not have an effective voice in our affairs.
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 41,408,441 shares of our common stock that were outstanding as of March 31, 2023, 225,000 of such shares are subject to leak-out agreements. Pursuant to such agreements, each of these stockholder’s common stock can only 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 four quarterly periods beginning on January 1, 2017; 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, is allowed to sell such stockholder’s common stock. Our remaining outstanding shares are mostly freely tradable under Rule 144 and certain limitations on the number of shares that can be sold quarterly by “affiliates” of the Company 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 for further information. 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 additional shares would dilute the value of our outstanding shares of common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We conduct our business through our executive office, located in Provo, Utah, with approximately 1,600 square feet of office space. We believe that the lease to which we are subject is generally on terms consistent with prevailing market terms, and none of the leases are with our affiliates. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.
Item 3. Legal Proceedings
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.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the OTCQB 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.
Holders
We had 93 stockholders of record as of June 29, 2023 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.
Recent Sales of Unregistered Securities
On October 29, 2021, we issued a private placement memorandum offering to raise up to $500,000 through the issuance of restricted shares of our common stock (par value $0.001) to qualified investors. From November 5, 2021 to March 28, 2022, we received subscription agreements from investors, for 100,000 common shares at a purchase price of $5 per share, including 500,000 warrants exercisable at $5 per share, vested immediately upon issuance, with a five year expiration. Proceeds to us totaled $500,000.
On February 5, 2022, the Company issued 649,754 warrants to Radiant Life, LLC, 653,150 warrants to the Chairman of the Board of Directors and a stockholder and 488,583 warrants to Mr. Glenn S. Dickman in conjunction with various extensions of maturity dates during the period (see Note 8). The exercise price of these warrants was $0.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was $1,840,149. The inputs used in this calculation included a fair value of $1.049 per share, a risk-free rate of 1.76%, volatility of 131.78% and a dividend rate of 0%.
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On January 5, 2022, the Company issued 200,000 warrants to Radiant Life, LLC in conjunction with monies borrowed (see Note 8). The exercise price of these warrants was $0.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was $205,393. The inputs used in this calculation included a fair value of $1.049 per share, a risk-free rate of 1.43%, volatility of 131.78% and a dividend rate of 0%.
During the year ended March 31, 2023 the Company issued 264,600 warrants to the Chairman of the Board of Directors and 120,000 warrants to Radiant Life, LLC in conjunction with monies borrowed during the period (see Note 8). The exercise price of these warrants was $1.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model was $365,502. The inputs used in this calculation included a fair value of the underlying common stock of $1.049 per share, a risk-free between 3.62% and 4.31%, volatility between 142.23% and 148.56% and a dividend rate of 0%.
During the year ended March 31, 2023, the Company issued 339,749 warrants to Mr. Dickman, 719,300 warrants to the Chairman of the Board of Directors, and 649,754 warrants to Radiant Life, LLC in conjunction with an extension of the maturity dates during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $1.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model was $1,678,810. The inputs used in this calculation included a fair value of the underlying common stock of $1.049 per share, a risk-free between 3.49% and 3.95%, volatility between 142.92% and 145.49% and a dividend rate of 0%.
Purchases of Equity Securities by Us and Affiliated Purchasers
None.
Item 6. [Reserved.]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Overview
Our historical business model has focused on 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.”
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We currently do not hold life settlement or life insurance policies but, rather, previously held a contractual right to receive the net insurance benefits, or “NIBs”, from a portfolio of life insurance policies held by a third party (“the Owners” or “the Holders”). These NIBs represented an indirect, residual ownership interest in a portfolio of individual life insurance policies, and they allowed us to receive a portion of the settlement proceeds from such policies, after expenses related to the acquisition, financing, insuring and servicing of the policies underlying our NIBs have been paid.
NIBs are generally sold by an entity that holds the underlying life settlement or life insurance policies, either directly or indirectly through a subsidiary, such an entity being referred to herein as a “Holder.” A Holder, either directly or through a wholly owned subsidiary, purchases life insurance policies either from the insured or on the secondary market and aggregates them into a portfolio of policies. At the time of purchase, the Holder also (i) contracts with a service provider to manage the servicing of the policies until maturity, (ii) consider purchasing mortality re-insurance (“MRI”) coverage under which payments will be made to the Holder in the event the insurance policies do not mature according to actuarial life expectancies, and (iii) arranges financing to cover the initial purchase of the insurance policies, the servicing of the life insurance policies until maturity and the payment of the MRI premiums. The financing obtained by the Holder for a portfolio of life settlement or life insurance policies is secured by the insurance policies for which the financing was obtained. After a Holder purchases policies, aggregates them into a portfolio and arranges for the servicing, MRI coverage and financing, the Holder contracts to sell NIBs related to the policies, which gives the holder of the NIBs the right to receive the proceeds from the settlement of the insurance policies after all of the expenses related to such policies have been paid. When an insurance policy underlying our NIBs comes to maturity, the insurance proceeds are first used to pay expenses associated with such policy. Once all of the expenses have been paid, the Holder will retain a small percentage of the proceeds and then will pay the remaining insurance proceeds to us.
During the latter part of the fiscal year ended March 31, 2021, we began developing an additional business offering, providing professional services to specialty structured finance groups, bond issuers and life settlement aggregators. We have assembled an experienced team from the life settlement marketplace, as well as from other areas such as financial services and public financial markets. As a professional services provider, we apply industry best practices to advise on the selection of specific portfolios of life insurance policies that are tailored to meet the needs of its clients. Our clients may include bond issuers, bond investors, or other structured finance product issuers. We develop strategies and methodologies which include the acquisition of life insurance portfolios, then uses common structured finance techniques and proprietary analytics to structure bonds for issuances, including principal protected bonds. Our goal is to deliver long-term value and profitability to shareholders by growing our professional services business and asset base, resulting in the ability to pay dividends to its shareholders.
During the latter part of the year ended March 31, 2021, we began working closely with bond placement agents and aggregators to establish various aspects of a proprietary, investment grade bond offering. In this arrangement, we participate as the sole originator in the role of structuring and advising on the structure of the proprietary bond instrument. Included in the role of structuring financial assets, we use proprietary analytics to establish the makeup of the rated instrument, including but not limited to, life settlement assets (life insurance policies) and managed cash, and implements a process of selective assembly of the underlying assets and cash management that will meet the policy requirements and analytics. We provide current and ongoing resources for all analytics, as well as advisement support for the investment and non-investment grade ratings for the managed asset pool and the managed cash accounts. In our advisory role, we are reimbursed for all expenses associated with the structuring and preparation of any bond offering, will receive an advisory payment upon the closing of any bond offering, and then will hold residual rights on the balance of assets once the bond is retired.
On January 1, 2022, we entered into a marketing and consulting agreement with Tradability, LLC (“Consultant”) that required us to make an initial $100,000 payment and up to an additional $400,000 in the future (which will be financed by the Consultant via a promissory note). The $400,000 obligation is contingent upon the Consultant and us successfully reaching certain milestones. Further, the agreement requires us to issue between 1,000,000 and 10,000,000 stock options (which are exercisable into our common stock at prices between $1.00 to $2.50 per share) contingent upon the Consultant and us successfully reaching certain milestones. The milestones primarily relate to the Consultant finalizing the tokenization of 500 million non-fungible tokens (“NFTs”) and the successful placement of NFTs with proceeds of between $100 million and $500 million. The proceeds will be used to purchase Life Settlements for which we will be an advisor. As of June 29, 2023 none of the milestones related to the potential issuance of equity have been met.
| 27 |
Results of Operations
Fiscal year ended March 31, 2023 compared to March 31, 2022
General & Administrative Expenses
General and administrative expenses totaled $682,283 and $690,709 during the years ended March 31, 2023, and 2022, respectively. A significant portion of these expenses were professional fees, payroll, and rent expenses.
Other Income and Expenses
During the year ended March 31, 2022, we negotiated a settlement to reduce our outstanding accounts payable to one of our vendors by $285,192. The gain was recorded as a gain on settlement of liabilities.
During the years ended March 31, 2023, and 2022, we recognized $1,745,808, and $1,869,971, respectively, as loss on extinguishment of debt in conjunction with related party debt.
For the years ended March 31, 2023, and 2022, interest expense totaled $329,890 and $287,687, respectively. The increase in interest expense was a result of higher loan balances, as well as an additional $21,061 of debt discount recognized during the year. For the years ended March 31, 2023, and 2022, expenses incurred pursuing potential financing alternatives totaled $54,000 and $197,761, respectively.
Income Taxes
During the years ended March 31, 2023, and 2022, the Company recorded a net loss before income taxes of $2,811,981 and $2,760,936, respectively. During the year ended March 31, 2022, we had an income tax expense of $4,149 due to minimum income and franchise taxes across various state jurisdictions, with all other deferred income tax expense or benefit being offset as a result of a full valuation allowance on the net deferred tax asset.
Liquidity and Capital Resources
Since our inception our operations have been primarily financed through sales of equity instruments, debt financing, lines of credit and notes payable from related parties and the issuance of convertible debentures. As of March 31, 2023, we had $553 of cash, compared to $267,966 as of March 31, 2022. As of March 31, 2023, the Company had access to draw an additional $4,411,892 on the notes payable, related party, and $3,000,000 on the Convertible Debenture Agreement. Our monthly expenses are approximately $57,000, which includes salaries of our employee, policy servicing expenses, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. Outstanding Accounts Payable as of March 31, 2023, totaled $753,050, and other accrued liabilities totaled $1,432,243. We believe that our availability under our existing lines of credit with related parties, our existing capital resources, together with the issuance of additional notes payable and convertible debentures will be sufficient to fund our operating working capital requirements for the 12 months from the issuance of the financial statements.
2023 Cash Flows Compared to 2022 Cash Flows
For the year ended March 31, 2023, we recorded net cash used in operating activities of $459,713, compared to $813,213 used in operating activities during the year ended March 31, 2022.
For the years ended March 31, 2023, and 2022 no cash was used in or provided by investing activities.
During the year ended March 31, 2023, and 2022 net cash provided by financing activities was $192,300, and $1,060,000, respectively. Financing activities for both years consisted of borrowing on new related party promissory notes and existing notes payable and lines-of-credit. Additionally, financing activities for the fiscal years ended March 31, 2023, and 2022 included $0 and $500,000 in proceeds raised by issuance of our common stock through private placement memorandums, respectively.
| 28 |
Debt
At March 31, 2023, we owed $4,716,701, including accrued interest, for debt obligations. We owed $3,194,108 in principal pursuant to notes payable and lines-of-credits from related parties and $300,000 in other notes payable. As of March 31, 2023, one note payable had a principal balance of 1,119,508 and is due on November 30, 2024, and a line-of-credit had a principal balance of $50,000 and subsequent to year end had been extended to have be due on July 29, 2024, or when the Company completes a successful equity raise (if earlier than the due date), at which time principal and interest is due in full. The second note payable and line-of-credit had a principal balance of $1,198,600, and the line of credit is due November 30, 2024. The third series of related-party promissory notes had a total principal balance of $826,000 and subsequent to year end had been extended to have be due on August 31, 2024. The convertible debenture agreement, which has no principal balance due as of March 31, 2023, is open through November 30, 2024. As of June 29, 2023, there was $4,345,892 available under the lines-of-credit we currently have with related parties and $3,000,000 available under the 8% convertible debenture agreement.
We may borrow money in the future to finance our operations but can make no guarantees that such credit will be made available to us. Any such borrowing will increase the risk of loss to the debt holder in the event we are unsuccessful in repaying such loans.
The accompanying financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business. As the company has no current source of revenues, in order to meet financial obligations, the Company will need to continue to rely on debt financing from related parties and/or raise additional capital. Management has concluded that its existing capital resources and availability under its existing convertible debentures and debt agreements with related parties will be sufficient to fund its operating working capital requirements for at least the next 12 months, or through June 2024. Related parties have given assurance that their continued support, by way of either extensions of due dates, or increases in lines-of-credit, can be relied on. The Company also continues to evaluate other debt and equity financing opportunities.
Contractual Obligations and Contingencies
The following table sets forth payments due by period for fixed contractual obligations by maturity date as of March 31, 2023:
| Maturity Date | ||||||||||||||||
| Total | Year Ended March 31, 2024 | Year Ended March 31, 2025 | Thereafter | |||||||||||||
| Debt Obligations (1) | $ | 3,494,108 | $ | 1,176,000 | $ | 2,318,108 | $ | - | ||||||||
| Interest payable | 1,222,593 | 364,909 | 857,684 | - | ||||||||||||
| Total | $ | 4,716,701 | $ | 1,540,909 | $ | 3,175,792 | $ | - | ||||||||
| (1) | Debt obligations consist of the principal pursuant to the notes payable from related parties and non-related parties (as mentioned above) |
Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and judgments. We base these on historical experience and on other assumptions that we believe to be reasonable.
Estimates, The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
| 29 |
Stock Based Compensation and Financing Costs, We measure stock-based compensation expense related to employee stock-based awards and stock based expense associated with certain financing costs based on the estimated fair value of the awards as determined on the date of grant and is recognized as expense over the remaining requisite service period or vesting period of the warrant. We utilize the Black-Scholes pricing model to estimate the fair value of stock options issued as compensation and warrants issued as financing costs. The Black-Scholes model requires the input of highly subjective and complex assumptions, including the estimated fair value of our common stock on the date of grant, the expected term of the stock option and warrant, and the expected volatility of our common stock over the period equal to the expected term of the grant or warrant. Uncontrollable uncertainties, such as fluctuation in interest rates, can have an effect on our Black-Scholes estimate calculations. Such fluctuations and other unforeseen changes in inputs could have a material impact on the general and administrative expenses within our financial statements. Our estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Fair Value, As defined by ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values.
Those levels of input are summarized as follows:
● Level 1: Quoted prices in active markets for identical assets and liabilities.
● Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
● Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
We did not have any transfers of assets and liabilities between Levels 1, 2 and 3 of the fair value measurement hierarchy during the years ended March 31, 2023, and 2022.
Our recorded values of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded values of the Notes Payable, Related Parties and Convertible Debenture approximates the fair values as the interest rate approximates market interest rates.
| 30 |
Item 8. Financial Statements and Supplementary Data
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS
| 31 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Sundance Strategies, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Sundance Strategies, Inc. and Subsidiary (“the Company”) as of March 31, 2023 and 2022, the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended March 31, 2023 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended March 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate audit opinion on the critical audit matters or on the accounts or disclosures to which it relates.
Evaluation of a Going Concern
Description of the Critical Audit Matter
As described further in Note 9 to the financial statements, the Company has relied on debt and equity financing to finance operations, as there are not sufficient cash flows from operations, which raises doubt about its ability to continue as a going concern. Management has implemented plans to alleviate the substantial doubt. Management plans to address the concerns, as needed, by (a) utilizing recent financing obtained through notes payable; (b) utilizing current lines of credit. When considering these factors in conjunction with the Company’s operating plan, management believes it has sufficient ability to fund operations and satisfy the Company’s obligations as they come due for at least one year from the financial statement issuance date.
We determined the Company’s ability to continue as a going concern is a critical audit matter due to the estimation and execution uncertainty regarding the Company’s available capital and the risk of bias in management’s judgments and assumptions in their determination.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s assertion on its ability to continue as a going concern included the following, among others:
| ● | We performed testing procedures such as analytical procedures to identify conditions and events that indicate there could be substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. | |
| ● | We reviewed and evaluated management’s plans for dealing with adverse effect of these conditions and events that raised doubt about the Company’s ability to continue as a going concern. | |
| ● | We tested the reasonableness of management’s assessment of whether the Company has sufficient liquidity to fund operations for at least one year from the financial statement issuance date. | |
| ● | We assessed whether the Company’s determination that there is substantial doubt about its ability to continue as a going concern was adequately disclosed. |
/s/
We have served as the Company’s auditor since 2018.
June 29, 2023
| F-1 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
| March 31, | March 31, | |||||||
| 2023 | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Prepaid expenses and other assets | ||||||||
| Total Current Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Notes payable | ||||||||
| Current portion of notes payable, related parties | ||||||||
| Stock repurchase payable | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Liabilities | ||||||||
| Accrued expenses | ||||||||
| Total Long-Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, authorized shares, par value $; -- shares issued and outstanding | ||||||||
| Common stock, authorized shares, par value $; shares issued and outstanding as of March 31, 2023, and 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
| Years Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Income from Investments | $ | $ | ||||||
| General and Administrative Expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Other Income (Expense) | ||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||
| Gain on settlement of liabilities | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Financing expense | ( | ) | ( | ) | ||||
| Total Other Income (Expense) | ( | ) | ( | ) | ||||
| Loss Before Income Taxes | ( | ) | ( | ) | ||||
| Income Tax Provision (Benefit) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Loss per share – basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average shares outstanding – basic and diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Consolidated Statements of Stockholders’ Deficit
For the Year Ended March 31, 2023, and 2022
| Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued for director compensation | ||||||||||||||||||||
| Common stock and warrants issued for cash | ||||||||||||||||||||
| Warrants issued in connection with debt issuances | - | |||||||||||||||||||
| Warrants issued in connection to extinguishment of debt | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Warrants issued in connection with debt issuances | - | |||||||||||||||||||
| Warrants issued in connection to extinguishment of debt | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
| Years Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating Activities | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share based compensation – common stock | ||||||||
| Gain on settlement of liabilities | ( | ) | ||||||
| Loss on extinguishment of debt | ||||||||
| Amortization of debt discount | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ||||||||
| Net Cash used in Operating Activities | ( | ) | ( | ) | ||||
| Financing Activities | ||||||||
| Proceeds from issuance of notes payable, related party | ||||||||
| Proceeds from issuance of notes payable | ||||||||
| Common stock issued for cash | ||||||||
| Net Cash provided by Financing Activities | ||||||||
| Net Change in Cash and Cash Equivalents | ( | ) | ||||||
| Cash and Cash Equivalents at Beginning of Period | ||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non Cash Financing & Investing Activities, and Other Disclosures | ||||||||
| Issued warrants as debt issuance costs | $ | $ | ||||||
The accompanying notes are an integral part of these audited consolidated financial statements.
| F-5 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
(1) ORGANIZATION AND BASIS OF PRESENTATION
Sundance Strategies, Inc. (formerly known as Java Express, Inc.) was organized under the laws of the State of Nevada on December 14, 2001, and engaged in the retail selling of beverage products to the general public until these endeavors ceased in 2006; it had no material business operations from 2006, until its acquisition of ANEW LIFE, INC. (“ANEW LIFE”), a subsidiary of Sundance Strategies, Inc. (“Sundance Strategies”, “the Company”, “we” or “our”).
Our historical business model has focused on 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.”
During the latter part of the fiscal year ended March 31, 2021, the Company began developing an additional business offering, providing professional services to specialty structured finance groups, bond issuers and life settlement aggregators. The Company has now assembled an experienced team from the life settlement marketplace, as well as from other areas such as financial services and public financial markets. As a professional services provider, the Company applies industry best practices to advise on the selection of specific portfolios of life insurance policies that are tailored to meet the needs of its clients. The Company’s clients may include bond issuers, bond investors, or other structured finance product issuers. The Company develops strategies and methodologies which include the acquisition of life insurance portfolios, then uses common structured finance techniques and proprietary analytics to structure bonds for issuances, including principal protected bonds. The Company’s goal is to deliver long-term value and profitability to shareholders by growing the Company’s professional services business and asset base, resulting in the ability to pay dividends to its shareholders.
During the latter part of the year ended March 31, 2021, the Company began working closely with bond placement agents and aggregators to establish various aspects of a proprietary, investment grade bond offering. In this arrangement, the Company participates as the sole originator in the role of structuring and advising on the structure of the proprietary bond instrument. Included in the role of structuring financial assets, the Company uses proprietary analytics to establish the makeup of the rated instrument, including but not limited to, life settlement assets (life insurance policies) and managed cash, and implements a process of selective assembly of the underlying assets and cash management that will meet the policy requirements and analytics. The Company provides current and ongoing resources for all analytics, as well as advisement support for the investment and non-investment grade ratings for the managed asset pool and the managed cash accounts. In its advisory role, the Company is reimbursed for all expenses associated with the structuring and preparation of any bond offering, will receive an advisory payment upon the closing of any bond offering, and then will hold residual rights on the balance of assets once the bond is retired.
On
January 1, 2022, the Company entered into a marketing and consulting agreement with Tradability, LLC (“Consultant”) that
requires the Company to make an initial $
| F-6 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates, The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents, For purposes of reporting cash flows, the Company considers all highly-liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Stock-Based Compensation and Financing Costs, The Company measures stock-based compensation expense related to employee stock-based awards and stock-based expense associated with certain financing costs on the estimated fair value of the awards as determined on the date of grant and is recognized as expense over the remaining requisite service period for options and vesting period for warrants. The Company utilizes the Black-Scholes pricing model to estimate the fair value of stock options issued as compensation and warrants issued as financing costs. The Black-Scholes model requires the input of highly subjective and complex assumptions, including the estimated fair value of the Company’s common stock on the date of grant, the expected term of the stock option and warrant, and the expected volatility of the Company’s common stock over the period equal to the expected term of the grant. The Company estimates forfeitures at the date of grant and revises the estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Income Taxes, The Company accounts for income taxes under FASB ASC 740, “Income Taxes”. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized.
The tax effects from an uncertain tax position can be recognized in the financial statements only if the position is more likely than not of being sustained if the position were to be challenged by a taxing authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its balance sheet. Interest and penalties for uncertain positions, when applicable, would be recognized as a component of income tax expense.
The Company files United States Federal and State income tax returns. The income tax returns of the Company are subject to examination by taxing authorities for three to five years from the date they are filed. The Company has tax returns subject to examination for 2017-2022.
Principles of Consolidation, The consolidated financial statements include the accounts of the Company and its subsidiary. The subsidiary is wholly owned. All intercompany accounts and transactions are eliminated in consolidation.
Fair Value, As defined by ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values.
| F-7 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
Those levels of input are summarized as follows:
● Level 1: Quoted prices in active markets for identical assets and liabilities.
● Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
● Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
The Company did not have any transfers of assets and liabilities between Levels 1, 2 and 3 of the fair value measurement hierarchy during the years ended March 31, 2023, and 2022.
The Company’s recorded values of cash and cash equivalents, accounts payable and accrued liabilities approximate their fair values based on their short-term nature. The recorded values of the Notes Payable, Related Parties and Convertible Debenture approximates the fair values as the interest rate approximates market interest rates.
(3) NEW ACCOUNTING PRONOUNCEMENTS
The Company has reviewed all other recently issued, but not yet adopted, accounting standards, in order to determine their effects, if any, on its results of operations, financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have a significant effect on its financial statements.
(4) CASH AND CASH EQUIVALENTS
Cash
and cash equivalents consist principally of currency on hand and demand deposits at commercial banks. The Company had $
(5) NOTES PAYABLE
On
April 6, 2021, the Company borrowed $
| F-8 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
(6) NOTES PAYABLE, RELATED PARTY
As of March 31, 2023, and 2022, the Company had borrowed $ and $ respectively, excluding accrued interest, from related parties. Unamortized debt discount with the Notes Payable, Related party was $ and $ as of March 31, 2023, and March 31, 2022, respectively. Short-term accrued interest associated with the Notes Payable, Related Party of $and $ is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2023, and March 31, 2022, respectively. Long-term accrued interest associated with the Notes Payable, Related Party of $ and $ is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2023, and March 31, 2022, respectively.
Related Party Promissory Notes
As
of both March 31, 2023, and 2022,
the Company owed $ under the unsecured promissory notes from Mr. Dickman. The promissory notes bear interest at a rate of
On
July 29, 2021, the Company entered into an unsecured promissory note agreement with Radiant Life, LLC. This agreement was in conjunction
with the Company borrowing $
Related Party Note Payable and Line of Credit Agreements
As
of March 31, 2023, and 2022, the Company owed $
and $,
respectively, exclusive of accrued interest, under the note payable and line of credit agreement with Kraig T. Higginson, Chairman of the Board of
Directors and a stockholder.
| F-9 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
As
of March 31, 2023, and 2022, the Company owed $and $in principal, respectively, under the note payable
and lines of credit agreement with Radiant Life, LLC. The agreement allows for borrowings of up to $
(7) CONVERTIBLE DEBENTURE AGREEMENT
The
Company has entered into an 8% convertible debenture agreement with Satco International, Ltd., that allows for borrowings of up to $
As
of March 31, 2023 and March 31, 2022, the Company owed $ under the agreement, excluding accrued interest. The associated interest of
$
(8) STOCKHOLDERS’ EQUITY
Common Stock
On
October 29, 2021, the Company issued a private placement memorandum offering to raise up to $
On May 4, 2021, the Company issued shares of the Company’s common stock to members of the Board of Directors in lieu of cash compensation. The stock awards vested % on the date of grant and the remainder of the shares vested equally over the three months following the date granted. Using a fair value stock price of $ per share, the transaction resulted in a compensation expense of $.
Effective December 6, 2018, three existing stockholders have contributed to the Company a portion of their common shares held at a repurchase price to the Company of $ per share. The Company has cancelled the acquired shares, which decreased the outstanding common shares on the books of the Company. The total number of common shares canceled/retired was . The total liability related to the repurchase of these shares is $, with repayment contingent on a major financing event.
| F-10 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
Warrants to Purchase Common Stock
The following table summarizes the changes in warrants outstanding of the Company during years ended March 31, 2023, and 2022:
| Number of Warrants | Weighted Average Exercise Price ($) | |||||||
| Outstanding at March 31, 2021 | $ | |||||||
| Granted | ||||||||
| Outstanding at March 31, 2022 | ||||||||
| Granted | ||||||||
| Outstanding at March 31, 2023 | $ | |||||||
| Exercisable at March 31, 2023 | $ | |||||||
The
Company’s related party lenders consist of: the Chairman of the Board of Directors and a stockholder, Radiant Life, LLC and Mr.
Dickman, a board member and stockholder. These holders of the related party unsecured promissory notes, hold agreements that provide
each related party with common stock warrants upon the lender’s extension of a maturity due date or upon the loaning of additional
monies.
During the year ended March 31, 2023, the Company issued
During
the year ended March 31, 2023 the Company issued
| F-11 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
On
February 5, 2022, the Company issued
On
January 5, 2022, the Company issued
During the year ended March 31, 2022, the Company issued
As
mentioned above, on October 29, 2021, the Company issued a private placement memorandum offering to raise up to $
On
July 29, 2021, the Company borrowed an additional $ from Radiant Life, LLC. In conjunction with this specific loan event, a one-time
agreement specifies that the associated warrants issued totaled
On
April 6, 2021, the Company borrowed $
| F-12 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
The following table summarizes the warrants issued and outstanding as of March 31, 2023:
| Exercise Price ($) | Warrants Outstanding | Warrants Exercisable | Weighted Average Remaining Contractual Life (Years) | Proceeds to Company if Exercised | ||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
The shares of common stock issuable upon exercise of the warrants are not registered with the Securities and Exchange Commission and the holders of the warrants do not have registration rights with respect to the warrants or the underlying shares of common stock.
(9) LIQUIDITY REQUIREMENTS AND GOING CONCERN
Since
the Company’s inception on January 31, 2013, its operations have been primarily financed through sales of equity, debt
financing from related parties and the issuance of notes payable and convertible debentures. As of March 31, 2023, the Company had
$
The accompanying financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
(10) INCOME TAXES
The Company provides for income taxes under ASC 740, Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse.
| F-13 |
SUNDANCE STRATEGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2023, and 2022
The
Company recorded $ and $
The
income tax provision differs from the amount of income tax determined by applying the U.S. federal tax rate of
| 2023 | 2022 | |||||||
| Income tax benefit at U. S. federal statutory rates: | $ | ( | ) | $ | ( | ) | ||
| State tax, net of federal benefit | ( | ) | ( | ) | ||||
| Permanent and other differences | ||||||||
| Change in valuation allowance | ||||||||
| Other | ||||||||
| $ | $ | |||||||
The tax effects of significant items comprising the Company’s net deferred taxes as of March 31, 2023, and 2022 were as follows:
| 2023 | 2022 | |||||||
| Deferred Tax assets: | ||||||||
| Net operating loss carry forwards | $ | $ | ||||||
| Stock and warrant compensation | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax asset | $ | $ | ||||||
The
Company assesses the need for a valuation allowance against its deferred income tax assets at March 31, 2023. Factors considered in this
assessment include recent and expected future earnings and the Company’s liquidity and equity positions. The Company has placed
a
As
of March 31, 2023, the Company has U.S. federal net operating loss carryforwards of $
Under
FASB ASC 740-10-05-6, tax benefits are recognized only for the tax positions that are more likely than not to be sustained upon examination
by tax authorities. The amount recognized is measured as the largest amount of benefit that is
The
Company had
(11) SUBSEQUENT EVENTS
On
June 5, 2023, the related party note payable with Mr. Dickman (see Note 8) was amended to extend the due date from
On
June 6, 2023, we negotiated a settlement to reduce our outstanding accounts payable to one of our vendors by $
On
June 9, 2023 the unsecured promissory note with Satco International, Ltd. (see Note 5) was amended to extend the due date from
| F-14 |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15I and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms.
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of these disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e), as of March 31, 2023. Based on this evaluation, our principal executive officer and principal financial officer concluded our disclosure controls and procedures were not effective as of March 31, 2023, the end of the period covered by this Annual Report on Form 10-K due to the material weakness described below.
(b) Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
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 generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our internal control over financial reporting is designed to provide reasonable assurance of achieving its objectives as specified above. Management does not expect, however, that our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
Management, including our principal executive officer and principal financial officer, has assessed the effectiveness of our internal control over financial reporting as of March 31, 2023. In making our assessment of the effectiveness of internal control over financial reporting, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that, as of March 31, 2023, our internal control over financial reporting was not effective due to the material weakness described below.
(c) Material Weaknesses
As defined in SEC Regulation S-X, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management determined that the following material weaknesses exited as of March 31, 2023: The design and operating effectiveness of our control environment and risk assessment, control activities and monitoring activities were inadequate to ensure that complex accounting matters relating to the valuation of equity-based compensation instruments are always properly accounted for and reviewed in a timely manner.
| 32 |
Our principal executive and principal financial officer is in the process of performing a review of our processes and controls over complex accounting matters relating to the valuation of equity-based compensation instruments.
Notwithstanding the identified material weakness, the Company believes the financial statements included in this Annual Report on Form 10-K fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with accounting principles generally accepted in the United States of America.
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.
(c) Changes in Internal Control Over Financial Reporting
Other than described above in Item 9A. Controls and Procedures, there were no changes in our internal control over financial reporting that occurred during the fourth quarter of the ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
During the year ended March 31, 2023 the Company issued 264,600 warrants to the Chairman of the Board of Directors and 120,000 warrants to Radiant Life, LLC in conjunction with monies borrowed during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $1.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model was $365,502. The inputs used in this calculation included a fair value of the underlying common stock of $1.049 per share, a risk-free between 3.62% and 4.31%, volatility between 142.23% and 148.56% and a dividend rate of 0%.
During the year ended March 31, 2023, the Company issued 339,749 warrants to Mr. Dickman, 719,300 warrants to the Chairman of the Board of Directors, and 649,754 warrants to Radiant Life, LLC in conjunction with an extension of the maturity dates during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $1.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model was $1,678,810. The inputs used in this calculation included a fair value of the underlying common stock of $1.049 per share, a risk-free between 3.49% and 3.95%, volatility between 142.92% and 145.49% and a dividend rate of 0%.
On June 5, 2023, the related party note payable with Mr. Dickman (see Note 8) was amended to extend the due date from July 31, 2023, to August 31, 2024, or at the immediate time when alternative financing or other proceeds are received. As per the provision outlined in Note 8, and in conjunction with the extension of the due date of the agreement, the Company also agreed to provide Mr. Dickman with warrants for 543,000 shares of common stock vested immediately upon issuance, with an exercise price of $1.05 per share and a 5-year exercise window from the date of the extension agreement.
On June 6, 2023 we negotiated a settlement to reduce our outstanding accounts payable to one of our vendors by $290,000. The gain will be recorded as a gain on settlement of liabilities.
On June 9, 2023 the unsecured promissory note with Satco International, Ltd. (see Note 5) was amended to extend the due date from April 6, 2023 to August 31, 2024, or at the immediate time when alternative financing or other proceeds are received. This extension has no bearing on the warrants that were issued in conjunction with the original promissory note.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not Applicable.
| 33 |
PART III
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Identification of Directors and Executive Officers
Our executive officers and directors positions and biographical information are set forth below.
| Name | Positions Held | Date of Election or Designation | Date of Termination or Resignation | |||
| Kraig T. Higginson | Chairman of the Board | 1/12/2015 | * | |||
| Glenn S. Dickman | Director | 12/6/18 | * | |||
| Stephen E. Quesenberry | Director | 12/6/18 | * | |||
| Randall F. Pearson | President | 03/29/13 | * | |||
| Randall F. Pearson | Principal Executive Officer | 03/29/13 | * | |||
| Randall F. Pearson | Principal Financial Officer | 03/29/13 | * | |||
| Randall F. Pearson | Director | 04/01/13 | * |
| * | Presently serves in the capacities indicated opposite his name. |
The Board of Directors has set the size of the Company’s Board of Directors at four, which is within the number allowed by our Bylaws.
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
Kraig T. Higginson is 66 years of age and was appointed to the position of Chairman of the Board of Directors. Mr. Higginson served as Chief Executive Officer of VIA Motors, Inc. (“Via Motors”), a hybrid electric vehicle company (PHEV), from November 2010 to January 2014, where he was responsible for overseeing the management and business of Via Motors and its employees. From October 2003 until November 2010, he served as Chairman of the Board of Directors of Raser Technologies, Inc. (“Raser Technologies”), which was an NYSE listed company at that time. Mr. Higginson resigned as a director of Raser Technologies on February 11, 2011. Raser Technologies filed bankruptcy proceedings on April 29, 2011, and was subsequently delisted from NYSE. Mr. Higginson also founded American Telemedia Network, Inc. (“American Telemedia”), a publicly-traded NASDAQ company that developed a nationwide satellite network broadcasting data, video programming and advertising to shopping centers and malls, and he served as President and Chief Executive Officer of American Telemedia from 1984 through 1988. Mr. Higginson’s years of experience in the management of public companies is a great asset to the Company.
Mr. Glenn S. Dickman is 73 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. Dickman’s years of experience running various business entities is an invaluable resource to the board of directors.
Stephen Quesenberry is 60 years old. He has practiced law since 1989 in Washington and Utah, including complex business litigation and SEC matters. Mr. Quesenberry was one of the (many) attorneys representing Exxon Shipping in the Exxon Valdez litigation in Alaska in the early 1990s. Mr. Quesenberry has also been a principal in various property development projects in Washington and elsewhere. Mr. Quesenberry graduated from Brigham Young University in 1986 with a degree in English and was a pitcher for the BYU Cougars varsity baseball team from 1983-1986. He attended law school at the University of Kansas from 1986-1989, where he was an editor of the Kansas Law Review and a member of the Order of the Coif. He also speaks fluent German. Mr. Quesenberry’s legal expertise makes him a great resource for the board of directors.
| 34 |
Mr. Randall F. Pearson is 68 years old. He is currently serving as a member of the Board of Directors and as President and Principal Financial Officer. Mr. Pearson has served as President of the Company since inception in 2013. Prior to Sundance he worked with JWD Management Corp. for 26 years. During his time with JWD Management he served in several positions including Vice President of Operations, Vice President, President and CEO. JWD Management was a nationally recognized distribution supplier providing products to grocery stores in 33 states and managing over 450 employees. Prior to JWD Management he worked with Capital Resources investing in and managing his own and client owned residential and commercial real estate properties. Mr. Pearson attended Brigham Young University until 1977, received his real estate brokers license in 1977 and his Series 7 securities license in 1978. Mr. Pearson’s many years of management and insight into the operations of the Company create a unique and valuable perspective in his role as a director.
Significant Employees
The Company has no significant employees.
Family Relationships
There are no family relationships between any of our directors, executive officers and proposed directors or executive officers.
Directorships Held in Other Reporting Companies
None of our directors or executive officer is a director of a company that is required to file reports under Sections 15 or 13(d) of the Exchange Act.
Promoters and control person
To the best of our management’s knowledge, 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;
Corporate Governance
Overview
Our Bylaws provide that the size of our Board is to be determined by resolution of the Board. Our Board has fixed the exact number of directors at four. Our Board currently consists of four members.
We are subject to a number of technological, regulatory, product, legal and other types of risks. The Board is responsible for overseeing these risks, and we employ a number of procedures to help them carry out that duty. For example, Board members regularly consult with executive management about pending issues and expected challenges, and at each Board meeting directors receive updates from, and have an opportunity to interview and ask questions of, key personnel and management. Furthermore, because our President serves as a member of our Board, we believe that the Board has a direct channel and better access to insights into our performance, business and challenges.
Board Leadership Structure
The Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board as the Board believes it is in the best interests of the Company to make that determination based upon the position and direction of the Company and the membership of the Board. The Board has determined at this time that the Company’s Chairman should not be its President.
| 35 |
The Board has determined that of the current directors or nominees, Messrs. Higginson, Dickman and Quesenberry would qualify as independent directors as that term is defined in the listing standards of The NASDAQ Capital Market if we were listed on The NASDAQ Capital Market. Such independence definition includes a series of objective tests, including that the director is not an employee of the Company and has not engaged in various types of business dealings with the Company. As Mr. Pearson is also employed by the Company, the Board has determined that Mr. Pearson is not currently independent. Although the Company’s common stock is not listed on The NASDAQ Capital Market, the Company has applied The NASDAQ Capital Market independence rules to make its independence determinations.
Committees of the Board of Directors
The Board has not established an Audit Committee, a Compensation Committee or a Nominating Committee. Therefore, the Board has not adopted written charters for any of these committees. Because we have only four directors and one executive officer, we believe that we are able to effectively manage the issues normally considered by such committees. The Board also does not have an audit committee financial expert. We believe we are currently able to manage our audit and financial reporting obligations without an audit committee financial expert. However, as we grow, we will consider adding an audit committee financial expert.
In evaluating a director candidate, our Board of Directors will review his or her qualifications including capability, availability to serve, conflicts of interest, general understanding of business, understanding of the Company’s business and technology, educational and professional background, personal accomplishment and other relevant factors. Our Board of Directors has not established any specific qualification standards for director nominees and we do not have a formal diversity policy relating to the identification and evaluation of nominees for director, although from time to time the Board of Directors may identify certain skills or attributes as being particularly desirable to help meet specific needs that have arisen. Our Board of Directors may also interview prospective nominees in person or by telephone. After completing this evaluation, the Board of Directors will determine the nominees.
The Board has not adopted a formal process for considering director candidates who may be recommended by stockholders. However, our policy is to give due consideration to any and all such candidates. A stockholder may submit a recommendation for director candidates to us at our corporate offices, to the attention of Randall F. Pearson. We do not pay fees to any third parties to assist us in identifying potential nominees.
Number of Meetings
The Board held a total of one (1) meeting during the fiscal year ended March 31, 2023. Each incumbent director attended the Board meetings. Although we do not have a formal policy regarding attendance by directors at our annual meeting, we encourage directors to attend.
Codes of Ethics and Business Conduct
We have adopted a corporate Code of Ethics and Business Conduct which is available as Exhibit 14.1 to this filing. The Code of Ethics and Business Conduct applies to all our officers, directors and employees, including our principal executive officer, principal financial officer and controller, or persons performing similar functions. If we effect an amendment to, or waiver from, a provision of our Code of Ethics and Business Conduct, we intend to satisfy our disclosure requirements by posting a description of such amendment or waiver on our website at www.sundancestrategies.com.
ITEM 11: EXECUTIVE COMPENSATION
Director Compensation
There were no equity awards granted during fiscal year ended March 31, 2023. The following table outlines information regarding equity awards granted to our named executive officers or directors for the fiscal year ended March 31, 2022 :
Equity Awards Granted during fiscal year ended March 31, 2022
| Name | Date of Grant | Shares | $ Value | |||||||||
| Randall F. Pearson (1) | 5/4/21 | 300,000 | $ | 18,480 | ||||||||
| Glenn S. Dickman (2) | 5/4/21 | 300,000 | $ | 18,480 | ||||||||
| Stephen E. Quesenberry (3) | 5/4/21 | 300,000 | $ | 18,480 | ||||||||
| Kraig T. Higginson (4) | 5/4/21 | 300,000 | $ | 18,480 | ||||||||
| (1) | At March 31, 2023, Mr. Pearson’s beneficial ownership totaled 1,191,432 shares. |
| 36 |
| (2) | At March 31, 2023, Mr. Dickman’s beneficial ownership totaled 4,858,213 shares, including 2,090,332 warrants. |
| (3) | At March 31, 2023, Mr. Quesenberry’s beneficial ownership totaled 970,206 shares. |
| (4) | At March 31, 2023, Mr. Higginson’s beneficial ownership totaled 12,704,050 shares, including 7,000,000 shares owned by Higginson Family Inv, LLC; 750,000 shares owned by Eclipse Fund LLC; 320,000 shares owned by Radion Energy LLC; 370,000 shares owned by Ecosystems Resources LLC; and 900,000 shares owned by KGPR, LLC. Also included are 3,364,050 warrants held by Mr. Higginson. |
Executive Compensation Objectives and Principles
The overall objective of our executive compensation program is to help create long-term value for our stockholders by attracting and retaining talented executives, rewarding superior operating and financial performance, and aligning the long-term interests of our executives with those of our stockholders. Accordingly, our executive compensation program incorporates the following principles:
| ● | Compensation should be based upon individual job responsibility, demonstrated leadership ability, management experience, individual performance, and Company performance. | |
| ● | Compensation should reflect the fair market value of the services received. We believe that a fair and competitive pay package is essential to attract and retain talented executives in key positions. | |
| ● | Compensation should reward executives for long-term strategic management and enhancement of stockholder value. | |
| ● | Compensation should reward performance and promote a performance-oriented environment. |
Executive Compensation Procedures
We believe that compensation paid to our executive officers should be closely aligned with our performance and the performance of each individual executive officer on both a short-term and a long-term basis, should be based upon the value each executive officer provides to us, and should be designed to assist us in attracting and retaining the best possible executive talent, which we believe is critical to our long-term success. To attain our executive compensation objectives and implement the underlying compensation principles, we follow the procedures described below.
Role of the Board. The Board has responsibility for establishing and monitoring our executive compensation programs and for making decisions regarding the compensation of our Named Executive Officers. The Board sets the compensation package of the Named Executive Officers. Our President, Mr. Randall Pearson, suggests items to be considered by the Board from time to time, including the compensation package for the other Named Executive Officer; and participates in meetings in which the compensation package of the other Named Executive Officer is discussed.
The Board relies on its judgment in making compensation decisions after reviewing our performance and evaluating our executives’ leadership abilities and responsibilities with our Company and their current compensation arrangements. The Board’s assessment process is designed to be flexible so as to better respond to the evolving business environment and individual circumstances. The last Annual Meeting of Stockholders was held in 2016.
Role of Compensation Consultant. We have not engaged a compensation consultant.
Elements of Compensation
Our executive compensation objectives and principles are implemented through the use of the following elements of compensation, each discussed more fully below:
| ● | Base Salary |
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| ● | Annual Incentive Bonuses | |
| ● | Stock-Based Compensation | |
| ● | Other Benefits |
Base Salary. The Board approved the salaries of all our executive officers for Fiscal Year 2023. Base salaries are offered to ensure that our executive officers receive an ongoing level of compensation. Salary decisions concerning these officers were based upon a variety of considerations consistent with the compensation philosophy stated above. First, salaries were competitively set relative to both other companies in our industry and other comparable companies. The Board considered each officer’s level of responsibility and individual performance, including an assessment of the person’s overall value to the Company. In addition, internal equity among employees was factored into the decision. Finally, the Board considered our financial performance and our ability to absorb any increases in salaries.
Annual Incentive Bonuses. Annual incentive bonuses are designed to reward extraordinary performance by our executives. For Fiscal Year 2023, the Board did not precisely define the parameters of a bonus program for the Named Executive Officers, and no bonuses were awarded to the Named Executive Officers.
Stock-Based Compensation. Each Named Executive Officer or Director is eligible to receive stock-based compensation. Stock-based compensation is designed to more closely align the interests of management with those of our stockholders. We do not have any securities authorized for issuance under an equity compensation plan, or any policies for allocating compensation between long-term and currently paid out compensation or between cash and non-cash compensation or among different forms of non-cash compensation. No stock-based compensation was granted during the year ended March 31, 2023.
Other Benefits. Our Named Executive Officers receive the same benefits that are available to all other full-time employees, including the payment of health, dental, life and disability insurance premiums.
Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code disallows a tax deduction to publicly held companies for compensation paid to certain covered executives to the extent such compensation exceeds $1.0 million per covered officer in any year. The Board understands that it is possible that the compensation payable to our named executive officers will exceed the $1.0 million limit under Section 162(m). We believe that in establishing the cash and equity incentive compensation programs for our named executive officers, the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole governing factor. For that reason, we may deem it appropriate to provide one or more named executive officers with the opportunity to earn incentive compensation, whether through annual cash incentive programs tied to our financial performance or through equity awards, which together with base salary in the aggregate may be in excess of the amount deductible by reason of Section 162(m) or other provisions of the Internal Revenue Code. We believe it is important to maintain cash and equity incentive compensation at the levels needed to attract and retain the named executive officers essential to our success, even if all or part of that compensation may not be deductible by reason of the Section 162(m) limitation.
The compensation that we pay to the named executive officers is reflected in our consolidated financial statements as required by GAAP. The Board considers the financial impact, along with other factors, in determining the amount and form of compensation provided to executives. We account for stock-based compensation in accordance with the requirements of FASB ASC Topic 718.
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Summary Compensation Table
The following information presents the compensation paid to our executive officers in Fiscal Year 2023, and 2022. We refer to these executive officers as the Named Executive Officers.
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($)(1) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
| Randall F. Pearson | 2023 | 136,900 | — | — | — | — | — | 136,900 | ||||||||||||||||||||||
| President, Principal Executive Officer and Principal Financial Officer | 2022 | 136,900 | — | 18,480 | — | — | — | 155,380 | ||||||||||||||||||||||
| (1) | The fair value of stock awards was calculated in accordance with FASB ASC Topic 718, using a fair value stock price of $0.0616 and per share for 2022 (see Note 8 to the Consolidated Financial Statements) |
The directors of the Company did not receive any additional compensation beyond the equity awards described above.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The following table shows information regarding the beneficial ownership of our common stock as of the date of this filing by (a) each stockholder, or group of affiliated stockholders, that we know owns more than 10% of our outstanding common stock; (b) each of our named executive officers; (c) each of our directors; and (d) all of our current directors and executive officers as a group. The table is based upon information supplied by directors, executive officers and principal stockholders, and Schedules 13D and 13G filed with the Securities and Exchange Commission.
Percentage ownership in the table below is based on 41,408,441 shares of common stock outstanding as of June 29, 2023. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and generally includes voting power and/or investment power with respect to the securities held. Any securities not outstanding but which are subject to options or warrants exercisable within 60 days of June 29, 2023 are deemed outstanding and beneficially owned for the purpose of computing the percentage of outstanding common stock beneficially owned by the stockholder holding such options or warrants, but are not deemed outstanding for the purpose of computing the percentage of common stock beneficially owned by any other stockholder.
Unless otherwise indicated, each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned. The address for each director or named executive officer is c/o Sundance Strategies, Inc., Attention: Randall F. Pearson, 4626 North 300 West, Suite No. 365, Provo, Utah 84604.
| Shares Beneficially Owned | ||||||||
| Name and Address of Beneficial Owner | Number | Percent | ||||||
| Directors and Named Executive Officers | ||||||||
| Kraig T. Higginson (1) | 12,704,050 | 28.4 | % | |||||
| Glenn S. Dickman (4) | 4,858,213 | 11.2 | % | |||||
| Randall F. Pearson | 1,191,432 | 2.9 | % | |||||
| Stephen E. Quesenberry | 970,206 | 2.3 | % | |||||
| All executive officers and directors as a group (4 persons) | 19,723,901 | 42.1 | % | |||||
| 5% Stockholders Not Listed Above | ||||||||
| ZOE, LLC (2) | 5,100,000 | 12.3 | % | |||||
| Radiant Life, LLC (2) | 4,901,262 | 11.2 | % | |||||
| Smartrade Consulting, Inc. (3) | 2,500,000 | 6.0 | % | |||||
| (1) | Mr. Higginson’s ownership includes 7,000,000 shares owned by Higginson Family Inv, LLC; 750,000 shares owned by Eclipse Fund LLC; 320,000 shares owned by Radion Energy LLC; 370,000 shares owned by Ecosystems Resources LLC; and 900,000 shares owned by KGPR, LLC. Also included are 3,364,050 warrants held by Mr. Higginson. |
| (2) | ZOE, LLC and Radiant Life, LLC are beneficially owned by Mitchell D. Burton, for an aggregate percentage of ownership of approximately 23.5%. The address of ZOE, LLC is 4626 N. 300 W., Provo, Utah 84604. The address of Radiant Life, LLC is 4626 N. 300 W., Provo, Utah 84604. Mr. Burton’s ownership includes 2,449,262 warrants held by Radiant Life, LLC. |
| (3) | Smartrade Consulting, Inc. is held by Summit Trustees PLLC for the beneficial owner, Lam Ping of Hong Kong. The address of Smartrade Consulting, Inc. is 22G Tower 4, The Metropolis, 8 Mau Yip Road, Tsung Kwan Q, N. T., Hong Kong. |
| (4) | Mr. Dickman’s ownership includes 2,090,332 warrants. |
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.
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Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of March 31, 2023, about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans (including individual arrangements):
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-average exercise price of outstanding options, warrants and rights (b) |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||||||||
| Equity compensation plans approved by security holders | - | - | - | |||||||||
| Equity compensation plans not approved by security holders | 5,454,382 | $ | 0.51 | - | ||||||||
| Total | 5,454,382 | $ | 0.51 | - | ||||||||
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORS INDEPENDENCE
Review and Approval of Related Person Transactions
Before engaging in a related person transaction, the transaction is presented to non-interested board members for approval. In considering related person transactions, the non-interested board members are guided by their fiduciary duty to our stockholders. The Board of Directors does not have any written or oral policies or procedures regarding the review, approval and ratification of transactions with related person. Additionally, each of our directors and executive officers are required to annually complete a directors’ and officers’ questionnaire that elicits information about related person transactions. Approval of a related person transaction is provided either verbally or in writing.
Related Person Transactions
Other than as described below, 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, except as stated below.
On May 4, 2021, the Company issued 1,200,000 shares of the Company’s common stock to members of the Board of Directors in lieu of cash compensation. The stock awards vested 25% on the date of grant and the remainder of the shares vested equally over the three months following the date granted. Using a fair value stock price of $0.062 per share, the transaction resulted in a compensation expense of $73,920.
As of March 31, 2023, and 2022, the Company had borrowed $3,194,108 and $3,001,808 respectively, excluding accrued interest, from related parties. The interest associated with the Notes Payable, Related Party of $1,050,762 and $767,358 is recorded on the balance sheet as an Accrued Expense obligation at March 31, 2023 and March 31, 2022, respectively.
Warrants to Purchase Common Stock
The Company’s related party lenders consist of: Kraig Higginson, the Chairman of the Board of Directors and a stockholder, Radiant Life, LLC and Mr. Dickman, a board member and stockholder. These holders of the related party unsecured promissory notes, hold agreements that provide each related party with common stock warrants upon the lender’s extension of a maturity due date or upon the loaning of additional monies. The number of warrants issued for an extension is based on the following formula: 10,000 warrants per month the due date is extended plus 1 warrant for every $2 of the principal balance outstanding (not including interest) at the time of the extension (rounded to the nearest whole warrant). Upon the loaning of additional monies, the lender will also require 2 warrants for each dollar loaned. All warrants issued under these terms vested immediately upon issuance, have an exercise price approximately equivalent to the fair value of the Company’s common stock on the date of grant, and expire 5 years from the date of issuance.
During the fiscal year ended March 31, 2023, the Company issued 339,749 warrants to Mr. Dickman, 719,300 warrants to the Chairman of the Board of Directors, and 649,754 warrants to Radiant Life, LLC in conjunction with an extension of the maturity dates during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $1.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model was $1,678,810. The inputs used in this calculation included a fair value of the underlying common stock of $1.049 per share, a risk-free between 3.49% and 3.95%, volatility between 142.92% and 145.49% and a dividend rate of 0%.
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During the fiscal year ended March 31, 2023, the Company issued 264,600 warrants to the Chairman of the Board of Directors and 120,000 warrants to Radiant Life, LLC in conjunction with monies borrowed during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $1.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model was $365,502. The inputs used in this calculation included a fair value of the underlying common stock of $1.049 per share, a risk-free between 3.62% and 4.31%, volatility between 142.23% and 148.56% and a dividend rate of 0%.
On February 5, 2022, the Company issued 649,754 warrants to Radiant Life, LLC, 653,150 warrants to the Chairman of the Board of Directors and a stockholder and 488,583 warrants to Mr. Dickman in conjunction with various extensions of maturity dates during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $0.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was $1,840,149. The inputs used in this calculation included a fair value of $1.049 per share, a risk-free rate ranging from 1.43% to 1.76%, volatility ranging from 131.62% to 131.78% and a dividend rate of 0%. During the year ended March 31, 2022, the exercise price was adjusted from $0.05 to $1.05, which was the fair market value of the common stock on the date of the extensions.
On January 5, 2022, the Company issued 200,000 warrants to Radiant Life, LLC in conjunction with monies borrowed (see Note 8) per the terms outlined above. The exercise price of these warrants was $0.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was $205,393. The inputs used in this calculation included a fair value of $1.049 per share, a risk-free rate of 1.43%, volatility of 131.78% and a dividend rate of 0%. The Company determined the cost of debt issuance to be $40,211, to originally be amortized quarterly through November 30, 2022 (the due date of the lender’s line of credit at the time of the borrowing event). As such, $10,389 of debt discount was amortized as interest expense until February 7, 2022. On February 7, 2022, the related party note payable, and line of credit agreement was amended to extend the due date from November 30, 2022 to November 30, 2023, and on the date of the amendment the Company recorded the remaining $29,822 of debt discount as a loss on extinguishment of debt. During the fiscal year ended March 31, 2022, the exercise price was adjusted from $0.05 to $1.05, which was the estimated fair market value of the common stock on the date of the lending event.
During the year ended March 31, 2022, the Company issued 200,000 warrants to Radiant Life, LLC and 20,000 warrants to the Chairman of the Board of Directors and a stockholder in conjunction with monies borrowed during the period (see Note 8) per the terms outlined above. The exercise price of these warrants was $0.05. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was not significant. The inputs used in this calculation included a fair value of $0.062 per share, a risk-free rate ranging from 0.81% to 0.84%, volatility ranging from 41.97% to 42.01% and a dividend rate of 0%.
On July 29, 2021, the Company borrowed an additional $50,000 from Radiant Life, LLC. In conjunction with this specific loan event, a one-time agreement specifies that the associated warrants issued totaled 50,000, vested immediately upon issuance, have an exercise price of $2.00, and expire in 5 years. The value of the warrants on the date of grant, as calculated by the Black-Scholes-Merton valuation model, was not significant. The inputs used in this calculation included a fair value of $0.062 per share, a risk-free rate of 0.66% volatility of 42.14% and a dividend rate of 0%.
As of March 31, 2023, and 2022, the Company held outstanding warrants to related parties totaling 9,403,644 and 7,250,241, respectively. 3,708,754 of these warrants have an exercise price of $0.05, 1,000,000 of these warrants have an exercise price of $1.00, 4,144,890 have an exercise price of $1.05, 50,000 of these warrants have an exercise price of $2.00 per share, with the remainder having an exercise price of $5.00 per share. All warrants have a five-year life as of the date of grant and expire between November 2024 and February 2028.
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The shares of common stock issuable upon exercise of the warrants are not registered with the Securities and Exchange Commission and the holders of the warrants do not have registration rights with respect to the warrants or the underlying shares of common stock.
Parents
We have no parents.
Director Independence
The Board has determined that of the current directors, Messrs. Higginson, Dickman and Quesenberry would qualify as independent directors as that term is defined in the listing standards of The NASDAQ Capital Market if we were listed on The NASDAQ Capital Market. Such independence definition includes a series of objective tests, including that the director is not an employee of the Company and has not engaged in various types of business dealings with the Company. As Mr. Pearson is also employed by the Company, the Board has determined that Mr. Pearson is not currently independent. Although the Company’s common stock is not listed on The NASDAQ Capital Market, the Company has applied The NASDAQ Capital Market independence rules to make its independence determinations.
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, 2023, and 2022:
| Fee Category | 2023 | 2022 | ||||||
| Audit Fees | $ | 58,100 | $ | 51,500 | ||||
| Audit-related Fees | - | - | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total Fees | $ | 58,100 | $ | 51,500 | ||||
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 including out of pocket expenses.
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.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | The following documents are filed as part of this report: |
| (1) | Financial Statements |
The financial statements listed on the accompanying Index to Consolidated Financial Statements are filed as part of this report.
| (2) | Financial statement schedules |
There are no financial statements schedules included because they are either not applicable or the required information is shown in the consolidated financial statements or the notes thereto.
| (3) | Exhibits |
The following exhibits are filed or incorporated by reference as part of this Form 10-K.
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* Filed herewith.
** The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
Item 16. Form 10-K Summary
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.
| SUNDANCE STRATEGIES, INC. | ||
| Date: June 29, 2023 | By: | /s/ Randall F. Pearson |
| Randall F. Pearson | ||
| President, Principal Executive Officer and Principal Financial Officer | ||
| (Duly Authorized Representative) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dated indicated.
| Signatures | Title | Date | ||
| /s/ Kraig T. Higginson | Chairman of the Board of Directors | June 29, 2023 | ||
| Kraig T. Higginson | ||||
| /s/ Randall F. Pearson | President (Principal Executive Officer), | June 29, 2023 | ||
| Randall F. Pearson | Director and Principal Financial Officer | |||
| /s/ Glenn S. Dickman | Director | June 29, 2023 | ||
| Glenn S. Dickman | ||||
| /s/ Stephen E. Quesenberry | Director | June 29, 2023 | ||
| Stephen E. Quesenberry |
| 45 |
Exhibit 10.40
Exhibit 10.41
Exhibit 10.42
Exhibit 10.43
Exhibit 10.44
Exhibit 10.45
Exhibit 10.46
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Randall F. Pearson, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Sundance Strategies, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | ||
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 29, 2023 | By: | /s/ Randall F. Pearson |
President (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Randall F. Pearson, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Sundance Strategies, Inc.; | |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | ||
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 29, 2023 | By: | /s/ Randall F. Pearson |
| Randall F. Pearson | ||
| (Principal Financial Officer) |
EXHIBIT 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this annual report of Sundance Strategies, Inc. (the “Company”) on Form 10-K for the fiscal year ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Randall F. Pearson, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | the Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and | |
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: June 29, 2023 | By: | /s/ Randall F. Pearson |
| Randall F. Pearson | ||
| President (Principal Executive Officer) and Principal Financial Officer |