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SUND > SEC Filings for SUND > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for SUNDANCE STRATEGIES, INC.

Form 10-Q for SUNDANCE STRATEGIES, INC.


14-Aug-2014

Quarterly Report


Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations.

Forward-looking Statements

This Quarterly Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Exchange Act. In some cases, you can identify forward-looking statements by the following words:
"anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause our results, levels of activity, performance or achievements to be materially different from the information expressed or implied by the forward-looking statements in this report. These factors include, but are not limited to, economic conditions generally in the United States and internationally, and in the industry and markets in which we have and may participate in the future, competition within our chosen industry, our current and intended business, our assets and plans, the effect of applicable United States and foreign laws, rules and regulations on our business and our failure to successfully develop, compete in and finance our current and intended business operations.

You should read any other cautionary statements made in this Quarterly Report as being applicable to all related forward-looking statements wherever they appear in this Quarterly Report. We cannot assure you that the forward-looking statements in this Quarterly Report will prove to be accurate, and therefore, prospective investors are encouraged not to place undue reliance on forward-looking statements. You should read this Quarterly Report completely, and it should be considered in light of all other information contained in the reports or registration statement that we file with the SEC, including all risk factors outlined therein. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.

Plan of Operation

We are engaged in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies, including notes, drafts, acceptances, open accounts receivable and other obligations representing part or all of the sales price of insurance, life settlements and related insurance contracts being traded in the secondary marketplace, often referred to as the "life settlements market." These life insurance interests are anticipated to be held to maturity. Our plan of operation for the next 12 months is to continue the acquisition of these life insurance interests whereby we will acquire the interests in life insurance policies at a discount to their face value for investment purposes. We began purchasing the net insurance benefits in life insurance policies ("NIBs") during our fiscal year ended March 31, 2013. This is not a market sector without competition, and at present, we are a minor competitor. We will need substantial funds to effectively compete in this industry and no assurance can be given that we will be able to adequately fund our current and intended operations, whether through revenues generated from our current interest in NIBs acquired in fiscal 2013, and 2014, or through debt or equity financing. At our discretion, we may be required to expend not less than approximately $56 million on premiums, interest and servicing costs over the next five years to protect our interest in our NIBs, thought we have no legal responsibility for these payments.

We currently estimate proceeds of approximately $79 million on the NIBs owned as of June 30, 2014, and acquired from PCH Financial and Del Mar Financial. This amount is based on the estimated proceeds from polices of approximately $217 million in face value, which includes estimated return of premiums; less the senior debt or MRI repayments outstanding of approximately $36 million, expected premium payments of approximately $65 million over the life expectancies, and estimated expenses and interest of approximately $37 million over the term of the senior loans.

We use an estimation methodology to project cash flows and returns as presented. The estimation model required many assumptions, including, but not limited to the following: (i) an assumption that the distinct number of lives in the portfolio would exhibit similar experience to a statistically diverse portfolio based upon which the mortality tables have been created; (ii) an assumption that the life expectancies (the "LE" or "LE's") provided by third-party LE providers represent the actuarial mean of the life expectancies of the insureds in the portfolio, (iii) the weighted average of the LE's provided by the LE providers represents an appropriate method for adjusting for discrepancies in the LE's;
(iv) life expectancy tables and projections are accurate; (v) the minimum premiums calculated based on


the in-force illustrations provided by life insurance carriers are accurate and will not change over the course of the lifespan of the portfolio; and the senior lending fees, MRI fees, and insurance, servicing and custodial fees do not change materially over time. While this method of modeling cash flows is helpful in providing a theoretical expectation of potential returns that might be produced from our NIBs portfolio, actual cash flows and returns inevitably will be different (possibly materially) due to the fact that predicting the exact date of death of any individual is virtually impossible. The provision of a theoretical cash flow model is by no means any guarantee of any results. The actual performance of these NIB interests (as well as our future expectations as to what such performance might be) may differ substantially from our expectations, especially if any of the assumptions change or differ from the Company's initial assumptions. These portfolios currently contain only 60 fractionalized policies on 32 individual insureds, though insurance rating agencies have stated that at least 1,000 lives are required to achieve actuarial stability. Many risk factors beyond these assumptions may result in our expectations being incorrect; therefore, no assurance can be given that these estimated results will occur.

We advanced payments to purchase future additional life settlement products during the three months ended June 30, 2014, and if these life settlement products become "Qualified NIBs" as defined in the acquisition documents, we will also utilize the estimation methodology to estimate what our proceeds from these "Qualified NIBs" may be, all subject to the same assumptions, qualifications and risks referenced above.

Results of Operations

Income and Cost Recognition

Interest income on investment in NIBs represents the excess of all cash flows attributable to the investment in net insurance benefits greater than the initial investment over the life of each pool of net insurance benefits using the effective yield method. Changes in the estimate of expected cash flows from investments in NIBs are adjusted prospectively.

During the period from April 1, 2013, through June 30, 2013, our investment in net insurance benefits was on non-accrual status. This decision was primarily based on the initial incremental uncertainty experienced by us during our first three quarters of the year ended March 31, 2014, after closing of the acquisition on the first pool of "Qualified NIBs." Management concluded these uncertainties were significantly mitigated during the quarter beginning January 1, 2014, as additional experience and information was obtained, including the observation of the proper functioning of the entire system in response to the death of an insured in the quarter beginning January 1, 2014. Non-accrual status was removed effective January 1, 2014. Interest income on investment in NIBs totaled $563,498 for the three months ended June 30, 2014.

Operating and General & Administrative Expenses

Operating Expenses

During the three months ended June 30, 2014, and 2013, we engaged in the business of purchasing or acquiring life insurance policies and residual interests in or financial products tied to life insurance policies. General and administrative expenses were $616,366 and $1,033,865 during the three months ended June 30, 2014, and 2013, respectively. A significant portion of these expenses were professional fees, payroll and travel expenses. Most all of the professional fees were legal and accounting fees related to the preparation and filing of reports with the SEC under the Exchange Act. Payroll is made up of cash payroll costs and non-cash equity issuances to management, directors and others.

Income Taxes

During the three months ended June 30, 2014, and 2013, we had no taxable income.


Liquidity and Capital Resources

From our inception on January 31, 2013, through June 30, 2014, we incurred net losses of $369,153. Management has expressed its belief that we need to raise approximately $40 million to $50 million in additional funds through equity or debt financing to continue our business model and to effectively compete in the life settlement industry during fiscal 2015 and beyond. We raised $11,792,500 (gross) in our private placement that commenced in April 2013. Our monthly expenses are between approximately $150,000 and $200,000, which includes salaries of our employees, consulting agreements and contract labor, general and administrative expenses and estimated legal and accounting expenses. As of June 30, 2014, we were current in all of our payables, and we had approximately $6,492 in cash, along with a Subscription Agreement executed on June 24, 2014, for $3.3 million to purchase 660,000 shares of our common stock, payable on or before August 15, 2014. We believe we will have adequate cash resources for our estimated monthly expenses through the end of our fiscal year of March 31, 2015, excluding any other acquisitions of additional NIBs and other life settlement products, and assuming payment of this Subscription Agreement; however, we have been advised that there will be a delay on the payment of this subscription, and no assurance can be given that this subscription will be paid.

We have cash assets at June 30, 2014, and March 31, 2014, of $6,492 and $375,212, respectively. At June 30, 2014, we have $12,806,909 in investment in NIBs and have paid $4,238,419 for advance for investment in NIBs. We also had a Secured Promissory Note payable for $1,326,876, excluding accrued interest, related to our investment in NIBs. We have only common stock as our capital resource. We will be reliant upon stockholder loans or private placements of equity or debt to fund any future of operations. We have secured no sources of loans. There is no assurance that we will be able to raise any required debt or equity financing.

For the three months ended June 30, 2014, and 2013, we recorded net cash used in operating activities of $1,018,720 and $6,238,665, respectively. We used $553,557 and $5,797,700 as an advance for investments in NIBs under the Del Mar ATA and accreted $563,498 and $0 in interest income on investment in net insurance benefits during the three months ended June 30, 2014, and 2013, respectively. No cash was used during the three months ended June 30, 2014, and 2013, to purchase investments in NIBs. We received $550,000 from proceeds from notes receivable during the three months ended June 30, 2014. Net cash provided by financing activities totaled $100,000 and $6,951,775 for the three months ended June 30, 2014 and 2013, respectively.

Long-Term Debt

At June 30, 2014, we had a long term notes payable balance of $1,326,876 excluding accrued interest. We may borrow money in the future to finance our operations. Any such borrowing will increase the risk of loss to the debt holder in the event we are unsuccessful in repaying such loans.

We may issue additional shares to finance our future operations. Any such issuance may result in substantial additional dilution to previous investors.

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.

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