NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(
1 ) Nature of Business and Summary of Significant Accounting Policies
Nature of Business
– We are a
financial services company committed to finding new ways of disrupting and transforming the life insurance and related industries
through innovative products and services, business processes, financing strategies, and advanced epigenetic technology. Historically,
we have focused on creating opportunities for consumers to obtain significantly more value for their life insurance policies as
compared to the traditional options offered by the insurance industry. As part of our business, we create opportunities for investors
to receive income and capital appreciation from our various activities in the life insurance and related industries. Through its
wholly owned subsidiaries, GWG Holdings, Inc. owns a portfolio of life insurance policies. As of the date of this report, our
portfolio had an aggregate fair value of $511.2 million. We earn income from changes in the fair value of our portfolio and through
the benefits we receive upon the mortality of insureds.
GWG
Holdings, Inc. and all of its subsidiaries are incorporated and organized in Delaware. Unless the context otherwise requires or
we specifically so indicate, all references in these footnotes to “we,” “us,” “our,” “our
Company,” “GWG,” or the “Company” refer to GWG Holdings, Inc. and its subsidiaries collectively
and on a consolidated basis. References to the full names of particular entities, such as “GWG Holdings, Inc.” or
“GWG Holdings,” are meant to refer only to the particular entity referenced.
On
September 30, 2015, GWG Holdings formed a wholly owned subsidiary, Wirth Park Agency, LLC. Wirth Park Agency was formed to convert
term life insurance policies into universal, or permanent life insurance. Wirth Park Agency produces commission revenue through
this activity.
On
December 7, 2015, GWG Holdings formed a wholly owned subsidiary, GWG MCA, LLC. On January 13, 2016, GWG MCA, LLC was converted
to a corporation and became GWG MCA Capital, Inc. GWG MCA Capital, Inc. was formed to engage in the merchant cash advance business.
On August 25, 2016, GWG Holdings formed a wholly owned
subsidiary, Actüa Life & Annuity Ltd. to engage in various life insurance related businesses and activities.
Use
of Estimates
– The preparation of our consolidated financial statements in conformity with GAAP requires management
to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial
statements, as well as the reported amounts of revenue during the reporting period. We regularly evaluate estimates and assumptions,
which are based on current facts, historical experience, and various other factors that it believes to be reasonable under the
circumstances. The actual results that we experience may differ materially and adversely from our estimates. The most significant
estimates with regard to these consolidated financial statements relate to (1) the determination of the assumptions used in estimating
the fair value of our investments in life insurance policies, and (2) the value of our deferred tax assets and liabilities.
Cash
and Cash Equivalents
– We consider cash in demand deposit accounts and temporary investments purchased with an original
maturity of three months or less to be cash equivalents. We maintain our cash and cash equivalents with highly rated financial
institutions. The balances in our bank accounts may exceed Federal Deposit Insurance Corporation limits. We periodically evaluate
the risk of exceeding insured levels and may transfer funds as we deem appropriate.
Life
Insurance Policies
– ASC 325-30 permits a reporting entity to account for its investments in life insurance policies
using either the investment method or the fair value method. We elected to use the fair value method to account for our life insurance
policies. Under the fair value method we recognize our initial investment at the purchase price. At each subsequent reporting
period, we re-measure the investment at fair value in its entirety and recognize the change in fair value as revenue in the current
period net of premiums paid.
We
also recognize realized gain (revenue) from a life insurance policy upon one of the two following events: (1) our receipt of notice
or verified mortality of the insured; or (2) our sale of the policy, filing of change-of-ownership forms and receipt of payment.
In the case of mortality, the gain (or loss) we recognize is the difference between the policy benefits and the carrying values
of the policy once we determine that collection of the policy benefits is realizable and reasonably assured. In the case of a
policy sale, the gain (or loss) we recognize is the difference between the sale price and the carrying value of the policy on
the date of our receipt of sale proceeds.
In a case where our acquisition of a policy
is not complete as of a reporting date, but we have nonetheless advanced direct costs and deposits for the acquisition, those
costs and deposits are recorded as “other assets” on our balance sheet until the acquisition is complete and we have
secured title to the policy. On December 31, 2016 and 2015, a total of $42,000 and $31,000, respectively, of our “other
assets” comprised direct costs and deposits that we advanced for policy acquisitions.
Other Assets
–
Actüa Life & Annuity Ltd. (“Actüa”) is a new wholly-owned subsidiary of GWG Holdings engaged in various
life insurance businesses and activities. In August 2016, Actüa entered into an exclusive option agreement with the Regents
of the University of California to explore the use of predictive mortality forecasting using an epigenetic mortality predictor
invented by Dr. Steve Horvath. The cost of entering into this exclusive option agreement is listed as “other assets.”
Stock-Based Compensation
: We measure
and recognize compensation expense for all stock-based payments at fair value over the requisite service period. We use the Black-Scholes
option pricing model to determine the weighted average fair value of options. For restricted stock grants, fair value is determined
as the average price of our common stock on the date of grant. Equity-based compensation expense is recorded in administrative
expenses based on the classification of the employee or vendor. The determination of fair value of stock-based payment awards
on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number
of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of
the awards, and actual and projected employee stock option exercise behaviors.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The expected terms of the options are based on evaluations of historical and expected future employee exercise
behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately
equal to the expected life at grant date. Volatility is based on historical and expected future volatility of our stock. To date,
we have not paid any dividends on our common stock. Forfeitures for both option and restricted stock grants are estimated at the
time of the grant and revised in subsequent periods if actual forfeitures differ from estimates.
Deferred Financing and Issuance Costs
–
Loans advanced to us under our senior credit facilities, as described in Notes 5 and 6, are reported net of financing costs, which
include issuance costs, sales commissions and other direct expenses, which are amortized using the straight-line method over the
term of the facility. The Series I Secured Notes and L Bonds, as respectively described in Notes 7 and 8, are reported
net of financing costs, which are amortized using the interest method over the term of those borrowings. The Series A, as described
in Note 9, is reported net of financing costs (including the fair value of warrants issued), all of which were fully amortized
using the interest method as of December 31, 2016. Selling and issuance costs of RPS and Series 2 Redeemable Preferred Stock (“RPS
2”), described in Notes 10 and 11, are netted against additional paid-in-capital.
Earnings (loss) per Share
–
Basic earnings (loss) per share attributable to common shareholders are calculated using the weighted-average number of shares
outstanding during the reported period. Diluted earnings (loss) per share are calculated based on the potential dilutive impact
of our outstanding Series A, RPS, warrants and stock options. Due to our net loss for years ended December 31, 2016 and 2015,
there are no dilutive securities.
Recently
Adopted Pronouncements
–
On April 7, 2015, the FASB issued Accounting Standards
Update No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”), as part of its simplification
initiative. ASU 2015-03 changes the presentation of debt issuance costs by presenting those costs in the balance sheet as a direct
deduction from the related debt liability. Amortization of the costs is reported as interest expense. We
adopted ASU 2015-03
effective January 1, 2016, as required for public reporting entities.
On February 25, 2016, the FASB issued ASU 2016-02
Leases
("ASU 2016-02"). The new guidance is effective for fiscal years beginning after December 15, 2018. ASU
2016-02 provides more transparency and comparability in the financial statements of lessees by recognizing all leases with a term
greater than twelve months on the balance sheet. Leasees will also be required to disclose key information about their leases.
Early adoption is permitted. We have not adopted ASU 2016-02 as of December 31, 2016.
(
2 ) Restrictions on Cash
Under
the terms of our senior credit facilities (discussed in Notes 5 and 6), we are required to maintain collection and escrow accounts
that are used to fund the acquisition of policies, pay annual policy premiums, pay interest and other charges under the facility,
and collect policy benefits. The agent for the lender authorizes the disbursements from these accounts. At December 31, 2016 and
December 31, 2015, there was a balance of $37,827,000, and $2,342,000, respectively, in these restricted cash accounts.
(
3 ) Investment in Life Insurance Policies
Life insurance policies are valued based on
unobservable inputs that are significant to their overall fair value. Changes in the fair value of these policies are recorded
as gain or loss on life insurance policies, net of cash premiums paid on those policies, in our consolidated statements of operations.
Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions generally derived from
reports obtained from widely accepted life expectancy providers, assumptions relating to cost-of-insurance (premium) rates and
other assumptions. The discount rate we apply incorporates current information about discount rate applied by other reporting
companies owning portfolios of life insurance policies, the discount rates observed in the life insurance secondary market, market
interest rates, the credit exposure to the insurance companies that issued the life insurance policies and management’s
estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole.
As a result of management’s analysis, discount rates of 10.96% and 11.09% were applied to our portfolio as of December 31,
2016 and December 31, 2015, respectively.
A
summary of our policies, organized according to their estimated life expectancy dates as of the dates indicated, is as follows:
|
|
As
of December 31, 2016
|
|
|
As
of December 31, 2015
|
|
Years
Ending December 31,
|
|
Number
of Policies
|
|
|
Estimated
Fair Value
|
|
|
Face
Value
|
|
|
Number
of Policies
|
|
|
Estimated
Fair Value
|
|
|
Face
Value
|
|
2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
5
|
|
|
$
|
7,503,000
|
|
|
$
|
8,500,000
|
|
2017
|
|
|
11
|
|
|
|
14,837,000
|
|
|
|
16,939,000
|
|
|
|
12
|
|
|
|
12,875,000
|
|
|
|
17,418,000
|
|
2018
|
|
|
23
|
|
|
|
30,830,000
|
|
|
|
42,564,000
|
|
|
|
27
|
|
|
|
37,109,000
|
|
|
|
58,428,000
|
|
2019
|
|
|
55
|
|
|
|
57,556,000
|
|
|
|
88,858,000
|
|
|
|
51
|
|
|
|
54,242,000
|
|
|
|
100,967,000
|
|
2020
|
|
|
93
|
|
|
|
85,414,000
|
|
|
|
159,814,000
|
|
|
|
59
|
|
|
|
64,750,000
|
|
|
|
137,868,000
|
|
2021
|
|
|
86
|
|
|
|
73,825,000
|
|
|
|
158,744,000
|
|
|
|
48
|
|
|
|
45,724,000
|
|
|
|
116,805,000
|
|
2022
|
|
|
66
|
|
|
|
56,909,000
|
|
|
|
147,222,000
|
|
|
|
44
|
|
|
|
38,394,000
|
|
|
|
116,998,000
|
|
Thereafter
|
|
|
356
|
|
|
|
191,821,000
|
|
|
|
747,534,000
|
|
|
|
150
|
|
|
|
96,053,000
|
|
|
|
387,860,000
|
|
Totals
|
|
|
690
|
|
|
$
|
511,192,000
|
|
|
|
1,361,675,000
|
|
|
|
396
|
|
|
$
|
356,650,000
|
|
|
$
|
944,844,000
|
|
We
recognized life insurance benefits of $48,452,000 and $31,232,000 during 2016 and 2015, respectively, related to policies with
a carrying value of $10,993,000 and $4,511,000, respectively, and as a result recorded realized gains of $37,459,000 and $26,721,000.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation
of gain on life insurance policies:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Change in fair value
|
|
$
|
70,582,000
|
|
|
$
|
39,371,000
|
|
Premiums and other annual fees
|
|
|
(40,240,000
|
)
|
|
|
(26,711,000
|
)
|
Policy maturities
|
|
|
37,460,000
|
|
|
|
26,721,000
|
|
Gain on life insurance policies, net
|
|
$
|
67,802,000
|
|
|
$
|
39,381,000
|
|
We
currently estimate that premium payments and servicing fees required to maintain our current portfolio of life insurance policies
in force for the next five years, assuming no mortalities, are as follows:
Years
Ending December 31,
|
|
Premiums
|
|
|
Servicing
|
|
|
Premiums and
Servicing Fees
|
|
2017
|
|
$
|
44,787,000
|
|
|
$
|
534,000
|
|
|
$
|
45,321,000
|
|
2018
|
|
|
50,165,000
|
|
|
|
534,000
|
|
|
|
50,699,000
|
|
2019
|
|
|
55,685,000
|
|
|
|
534,000
|
|
|
|
56,219,000
|
|
2020
|
|
|
60,561,000
|
|
|
|
534,000
|
|
|
|
61,095,000
|
|
2021
|
|
|
67,824,000
|
|
|
|
534,000
|
|
|
|
68,358,000
|
|
|
|
$
|
279,022,000
|
|
|
$
|
2,670,000
|
|
|
$
|
281,692,000
|
|
Management
anticipates funding the premium payments estimated above with proceeds from our senior credit facilities, proceeds from additional
debt and equity financing, and proceeds from maturities of life insurance policies. The proceeds of these capital sources may
also be used for the purchase, financing, and maintenance of additional life insurance policies.
(
4 ) Fair Value Definition and Hierarchy
ASC
820 establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in
measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type
of investment, the characteristics specific to the investment and the state of the marketplace, including the existence and transparency
of transactions between market participants. Assets and liabilities with readily available and actively quoted prices, or for
which fair value can be measured from actively quoted prices in an orderly market, generally will have a higher degree of market
price observability and a lesser degree of judgment used in measuring fair value. ASC 820 maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring the use of observable inputs whenever available. Observable inputs are
inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent
sources. Unobservable inputs are inputs that reflect assumptions about how market participants price an asset or liability developed
based on the best available information. Fair value is defined as the price that would be received to sell an asset or paid to
transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement
date.
The
hierarchy is broken down into three levels based on the observability of inputs as follows:
●
|
Level
1 - Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Since valuations are based quoted prices that are readily and regularly available in an active market, valuation of these
products does not entail a significant degree of judgment.
|
●
|
Level
2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable,
either directly or indirectly.
|
●
|
Level
3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The
availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including,
for example, whether an instrument is established in the marketplace, the liquidity of markets and other characteristics particular
to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the
market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in
determining fair value is greatest for assets and liabilities categorized in Level 3.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Level 3
Valuation Process
The
estimated fair value of our portfolio of life insurance policies is determined on a quarterly basis by our portfolio management
committee, taking into consideration changes in discount rate assumptions, estimated premium payments and life expectancy estimate
assumptions, as well as any changes in economic and other relevant conditions. The discount rate incorporates current information
about discount rate applied by other reporting companies owning portfolios of life insurance policies, the discount rates observed
in the life insurance secondary market, market interest rates, the credit exposure to the insurance company that issued the life
insurance policy and management’s estimate of the risk premium a purchaser would require to receive the future cash flows
derived from our portfolio as a whole.
These
inputs are then used to estimate the discounted cash flows from the portfolio using the Model Actuarial Pricing System probabilistic
portfolio price model, which estimates the cash flows using various mortality probabilities and scenarios. The valuation process
includes a review by senior management as of each valuation date. We also engage a third-party expert to independently test the
accuracy of the valuations using the inputs we provide on a quarterly basis. See Exhibit 99.1 filed herewith.
The
following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance policies
for the periods ended December 31, as follows:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
356,650,000
|
|
|
$
|
282,883,000
|
|
Purchases
|
|
|
94,953,000
|
|
|
|
38,907,000
|
|
Maturities (initial cost basis)
|
|
|
(10,993,000
|
)
|
|
|
(4,511,000
|
)
|
Net change in fair value
|
|
|
70,582,000
|
|
|
|
39,371,000
|
|
Ending balance
|
|
$
|
511,192,000
|
|
|
$
|
356,650,000
|
|
In the past, we periodically updated the independent
life expectancy estimates on the insured lives in our portfolio, other than insured lives covered under small face amount policies
(i.e., $1 million in face value benefits or less), on a continuous rotating three-year cycle, and through that effort attempted
to update life expectancies for approximately one-twelfth of our portfolio each quarter. Nevertheless, the terms of our senior
credit facility with LNV Corporation currently requires us to attempt to update life expectancies on a rotating two-year cycle.
The
following table summarizes the inputs utilized in estimating the fair value of our portfolio of life insurance policies:
|
|
As
of
December 31,
2016
|
|
|
As
of
December 31,
2015
|
|
Weighted-average age of
insured, years
|
|
|
81.6
|
|
|
|
82.6
|
|
Weighted-average life expectancy, months
|
|
|
83.2
|
|
|
|
79.3
|
|
Average face amount per policy
|
|
$
|
1,973,000
|
|
|
$
|
2,386,000
|
|
Discount rate
|
|
|
10.96
|
%
|
|
|
11.09
|
%
|
These assumptions are, by their nature, inherently
uncertain and the effect of changes in estimates may be significant. For example, if the life expectancy estimates were increased
or decreased by four and eight months on each outstanding policy, and the discount rates were increased or decreased by 1% and
2%, while all other variables were held constant, the fair value of our investment in life insurance policies would increase or
(decrease) as summarized below:
Change
in Fair Value of the Investment in Life Insurance Policies
|
|
Change
in life expectancy estimates
|
|
|
|
minus
8 months
|
|
|
minus
4 months
|
|
|
plus
4 months
|
|
|
plus
8 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
69,253,000
|
|
|
$
|
34,601,000
|
|
|
$
|
(33,846,000
|
)
|
|
$
|
(67,028,000
|
)
|
December 31, 2015
|
|
$
|
48,339,000
|
|
|
$
|
24,076,000
|
|
|
$
|
(23,501,000
|
)
|
|
$
|
(46,482,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in discount rate
|
|
|
|
minus
2%
|
|
|
minus
1%
|
|
|
plus
1%
|
|
|
plus
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
$
|
53,764,000
|
|
|
$
|
25,728,000
|
|
|
$
|
(23,668,000
|
)
|
|
$
|
(45,491,000
|
)
|
December 31, 2015
|
|
$
|
35,024,000
|
|
|
$
|
16,786,000
|
|
|
$
|
(15,485,000
|
)
|
|
$
|
(29,803,000
|
)
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Other
Fair Value Considerations
The
carrying value of receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term
maturities and low credit risk. Using the income-based valuation approach, the estimated fair value of our Series I Secured Notes
and L Bonds, having a combined aggregate face value of $403,681,000 as of December 31, 2016, is approximately $414,419,000 based
on a weighted-average market interest rate of 6.45%. The carrying value of the senior credit facilities reflects interest
charged at the commercial paper rate or 12-month LIBOR, as applicable, plus an applicable margin. The margin represents our credit
risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall rate reflects market,
and the carrying value of the facility approximates fair value.
GWG MCA participates in the merchant cash advance industry by directly advancing sums to merchants
and lending money, on a secured basis, to companies that advance sums to merchants. Each quarter, we review the carrying value
of these advances and loans, and determine if an impairment reserve is necessary. At December 31, 2016 one of our secured loans
was potentially impaired. The secured loan to Nulook Capital LLC had an outstanding balance of $2,527,000 and a loan loss reserve
of $600,000 at December 31, 2016. We deem fair value to be the estimated collectible value on each loan or advance made from
GWG MCA. Where we estimate the collectible amount to be less than the outstanding balance, we record a reserve for the difference.
The
following table summarizes outstanding warrants as of December 31, 2016:
Month issued
|
|
Warrants
issued
|
|
|
Fair
value per share
|
|
|
Risk
free
rate
|
|
|
Volatility
|
|
|
Term
|
March 2012
|
|
|
38,130
|
|
|
$
|
0.52
|
|
|
|
0.38
|
%
|
|
|
36.20
|
%
|
|
5 years
|
June 2012
|
|
|
161,840
|
|
|
$
|
1.16
|
|
|
|
0.41
|
%
|
|
|
47.36
|
%
|
|
5 years
|
July 2012
|
|
|
144,547
|
|
|
$
|
1.16
|
|
|
|
0.41
|
%
|
|
|
47.36
|
%
|
|
5 years
|
September 2012
|
|
|
2,500
|
|
|
$
|
0.72
|
|
|
|
0.31
|
%
|
|
|
40.49
|
%
|
|
5 years
|
September 2014
|
|
|
16,000
|
|
|
$
|
1.26
|
|
|
|
1.85
|
%
|
|
|
17.03
|
%
|
|
5 years
|
|
|
|
363,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
5 ) Credit Facility – Autobahn Funding Company LLC
Through DLP III, we are party to a $105 million
senior credit facility with Autobahn Funding Company LLC (“Autobahn”), with a maturity date of June 30, 2018. The
facility is governed by a Credit and Security Agreement (the “Agreement”), and DZ Bank AG Deutsche Zentral-Genossenschaftsbank
(“DZ Bank”) acts as the agent for Autobahn under the Agreement. On September 14, 2016, we paid off the senior credit
facility in full with funds received from a new senior credit facility with LNV Corporation as described in Note 6.
Advances
under the facility bear interest at a commercial paper rate of the lender at the time of the advance, or at the lender’s
cost of borrowing plus 4.25%. We make interest payments on a monthly basis. The effective rate of interest was 5.42% at September
14, 2016 and 5.58% at December 31, 2015.
The
amount outstanding under this facility was $0 and $65,011,000 at December 31, 2016 and December 31, 2015, respectively. GWG Holdings
is a performance guarantor of the various obligations of GWG Life, as servicer, under the Agreement. Obligations under the facility
are secured by our pledge of ownership in our life insurance policies to DZ Bank through an arrangement under which Wells Fargo
serves as a securities intermediary.
The
Agreement has certain financial (as described below) and nonfinancial covenants, and we were in compliance with these covenants
at both December 31, 2016 and 2015.
We
have agreed to maintain (i) a positive consolidated net income on a non-GAAP basis (as defined and calculated under the Agreement)
for each complete fiscal year, (ii) a tangible net worth on a non-GAAP basis (again, as defined and calculated under the Agreement)
of not less than $45 million, and (iii) maintain cash and eligible investments of $15 million or above.
Consolidated
non-GAAP net income and non-GAAP tangible net worth as of and for the four quarters ended December 31, 2016, as calculated under
the Agreement, was $38,642,000 and $182,514,000, respectively.
Total
funds available for additional borrowings under the facility at December 31, 2016 and 2015, were $0 and $39,989,000, respectively.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(
6 ) Credit Facility – CSG Investments, Inc.
On September 14, 2016, we entered into a senior credit
facility with LNV Corporation as lender through our subsidiary GWG DLP Funding IV, LLC (“DLP IV”). The facility is
governed by a Loan and Security Agreement (the “Loan Agreement”), with CLMG Corp. acting as administrative agent on
behalf of the lenders under the Loan Agreement. The Loan Agreement makes available a total of up to $172,300,000 in credit with
a maturity date of September 14, 2026. Additional quarterly advances are available under the Loan Agreement at the LIBOR rate as
defined by the lender. Interest will accrue on amounts borrowed under the agreement at an annual interest rate, determined as of
each date of borrowing or quarterly if there is no borrowing, equal to (A) the greater of 12-month LIBOR or the federal funds rate
(as defined in the agreement) plus one-half of one percent per annum, plus (B) 5.75% per annum. Interest payments are made on a
quarterly basis.
The
amount outstanding under this facility was $162,725,000 at December 31, 2016. Obligations under the facility are secured
by a security interest in DLP IV’s assets, for the benefit of the lenders under the Loan Agreement, through an arrangement
under which Wells Fargo serves as security intermediary. The life insurance policies owned by DLP IV do not serve as direct
collateral for the obligations of GWG Holdings under its L Bonds or Series I Secured Notes. The difference between the outstanding
balance as of December 31, 2016 and the carrying amount relates to unamortized debt issuance costs.
The
Loan Agreement requires DLP IV to maintain a reserve account in an amount sufficient to pay 12 months of servicing, administrative
and third party expenses identified under the Loan Agreement, and 12 months of debt service as calculated under the Loan Agreement.
As of December 31, 2016, the amount set aside in the reserve account was $27,500,000.
The
Agreement has certain financial and nonfinancial covenants, and we were in compliance with these covenants at December 31, 2016.
Total
funds available for additional borrowings under the facility at December 31, 2016 was $0.
(
7 ) Series I Secured Notes
Series
I Secured Notes (“Series I”) are legal obligations of GWG Life and were privately offered and sold from August 2009
through June 2011. The Series I are secured by the assets of GWG Life and are subordinate to obligations under our senior credit
facilities (see Notes 5 and 6). We are party to a Third Amended and Restated Note Issuance and Security Agreement dated November
1, 2011, as amended, under which GWG Life is obligor, GWG Holdings is guarantor, and Lord Securities Corporation serves as trustee
of the GWG Life Trust (“Trust”). This agreement contains certain financial and non-financial covenants, and we were
in compliance with these covenants at both December 31, 2016 and 2015.
The
Series I were sold with original maturity dates ranging from six months to seven years, and with fixed interest rates varying
from 5.65% to 9.55% depending on the term of the note. The Series I have renewal features under which we may elect to permit
their renewal, subject to the right of bondholders to elect to receive payment at maturity. Effective September 1, 2016, we no
longer renew the Series I.
Interest
on the Series I is payable monthly, quarterly, annually or at maturity depending on the election of the investor. At December
31, 2016 and 2015, the weighted-average interest rate of our Series I was 8.68% and 8.47%, respectively. The principal amount
of Series I outstanding was $16,614,000 and $23,578,000 at December 31, 2016 and 2015, respectively. The difference between the
amount outstanding on the Series I and the carrying amount on our balance sheet is due to netting of unamortized deferred issuance
costs. Overall, interest expense includes amortization of deferred financing and issuance costs of $332,000 and $362,000 in 2016
and 2015, respectively. Future expected amortization of deferred financing costs is $209,000 in total over the next five years.
Future
contractual maturities of Series I payable and future amortization of their deferred financing costs at December 31, 2016 are
as follows:
Years
Ending December 31,
|
|
Contractual
Maturities
|
|
|
Amortization
of Deferred Financing Costs
|
|
2017
|
|
$
|
10,523,000
|
|
|
$
|
41,000
|
|
2018
|
|
|
2,401,000
|
|
|
|
41,000
|
|
2019
|
|
|
1,024,000
|
|
|
|
20,000
|
|
2020
|
|
|
1,725,000
|
|
|
|
52,000
|
|
2021
|
|
|
941,000
|
|
|
|
55,000
|
|
|
|
$
|
16,614,000
|
|
|
$
|
209,000
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(
8 ) L Bonds
Our
L Bonds are legal obligations of GWG Holdings. Obligations under the L Bonds are secured by the assets of GWG Holdings and by
GWG Life, as a guarantor, and are subordinate to the obligations under our senior credit facilities (see Notes 5 and 6). We began
publicly offering and selling L Bonds in January 2012 under the name “Renewable Secured Debentures.” These debt securities
were re-named “L Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration
statement permitting us to sell up to $1.0 billion in principal amount of L Bonds. We are party to an indenture governing the
L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor,
and Bank of Utah serves as indenture trustee. The Indenture contains certain financial and non-financial covenants, and we were
in compliance with these covenants at December 31, 2016 and 2015.
Effective
September 1, 2016, we ceased selling 6-month and 1-year L Bonds until further notice. In addition, effective September 1, 2016,
the L Bond interest rates changed to 5.50%, 6.25%, 7.50% and 8.50% for the 2-, 3-, 5- and 7-year L Bonds, respectively. The bonds
have renewal features under which we may elect to permit their renewal, subject to the right of bondholders to elect to receive
payment at maturity. Interest is payable monthly or annually depending on the election of the investor.
At
December 31, 2016 and 2015, the weighted-average interest rate of our L Bonds was 7.23% and 7.16%, respectively. The principal
amount of L Bonds outstanding was $387,067,000 and $282,171,000 at December 31, 2016 and 2015, respectively. The difference between
the amount of outstanding L Bonds and the carrying amount on our balance sheets is due to netting of unamortized deferred issuance
costs and cash receipts for new issuances in process. Amortization of deferred issuance costs was $7,099,000 and $5,285,000 in
2016 and 2015, respectively. Future expected amortization of deferred financing costs as of December 31, 2016 is $11,636,000 in
total over the next eight years.
Future
contractual maturities of L Bonds, and future amortization of their deferred financing costs, at December 31, 2016 are as follows:
Years
Ending December 31,
|
|
Contractual
Maturities
|
|
|
Amortization
of Deferred Financing Costs
|
|
2017
|
|
$
|
106,955,000
|
|
|
$
|
1,178,000
|
|
2018
|
|
|
109,407,000
|
|
|
|
3,000,000
|
|
2019
|
|
|
90,463,000
|
|
|
|
3,450,000
|
|
2020
|
|
|
20,679,000
|
|
|
|
809,000
|
|
2021
|
|
|
28,923,000
|
|
|
|
1,512,000
|
|
Thereafter
|
|
|
30,640,000
|
|
|
|
1,687,000
|
|
|
|
$
|
387,067,000
|
|
|
$
|
11,636,000
|
|
(
9 ) Series A Convertible Preferred Stock
From July 2011 until September 2012, we privately
offered shares of Series A of GWG Holdings at $7.50 per share. In the offering, we sold an aggregate of 3,278,000 shares for gross
consideration of $24,582,000. Holders of Series A are entitled to cumulative dividends at the rate of 10% per annum, paid quarterly.
Dividends on the Series A are accumulating and are recorded as a reduction to additional paid-in capital. Under certain circumstances
described in the Certificate of Designation for the Series A, additional Series A shares may be issued in lieu of cash dividends
at the rate of $7.00 per share.
Holders of Series A are entitled to a liquidation preference
equal to the stated value of their preferred shares (i.e., $7.50 per share) plus accrued but unpaid dividends. Holders of Series
A may presently convert each share of their Series A into 0.75 shares of our common stock at a price of $10.00 per share.
As of December 31, 2016, we issued an aggregate of
473,000 shares of Series A in satisfaction of $3,310,000 in dividends on the Series A, and an aggregate of 696,000 shares of Series
A were converted into 522,000 shares of our common stock. As of December 31, 2016, we had 2,640,000 Series A shares outstanding
with respect to which we incurred aggregate issuance costs of $2,838,000, all of which is included as a component of additional
paid-in capital.
Purchasers
of Series A in our offering received warrants to purchase an aggregate of 431,954 shares of our common stock at an exercise price
of $12.50 per share. The grant date fair value of these warrants was $428,000. As of December 31, 2016, none of these warrants
were exercised, 69,000 warrants have expired. The weighted-average remaining life of these warrants was 0.56 and 1.43 years at
December 31, 2016 and 2015, respectively.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
September 2014, we completed, at our discretion, a public offering of our common stock and, as a result, the Series A was
reclassified from temporary equity to permanent equity. We may redeem Series A shares at a price equal to 110% of their liquidation
preference ($7.50 per share) at any time. As of December 31, 2016, we have redeemed an aggregate of 277,000 shares of Series A.
(
10 ) Redeemable Preferred Stock
Beginning
November 30, 2015, we began publicly offering up to 100,000 shares of Redeemable Preferred Stock (“RPS”) at $1,000
per share. Holders of RPS are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS
are recorded as a reduction to additional paid-in capital. Under certain circumstances described in the Certificate of Designation
for the RPS, additional shares of RPS may be issued in lieu of cash dividends.
The
RPS ranks senior to our common stock and pari passu with our Series A, and entitles its holders to a liquidation preference equal
to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS may presently convert their RPS
into our common stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading
days immediately prior to the date of conversion, subject to a minimum conversion price of $15.00 and in an aggregate amount limited
to 15% of the stated value of RPS originally purchased by such holder from us and still held by such holder.
Holders
of RPS may request that we redeem their RPS at a price equal to their stated value plus accrued but unpaid dividends, less an
applicable redemption fee, if any. Nevertheless, the Certificate of Designation for RPS permits us complete discretion to grant
redemption requests. Subject to certain restrictions and conditions, we may also redeem shares of RPS without a redemption fee
upon a holder’s death, total disability or bankruptcy. In addition, after one year from the date of original issuance, we
may, at our option, call and redeem shares of RPS at a price equal to their liquidation preference.
As of December 31, 2016, we had sold 59,183
shares of RPS for aggregate gross consideration of $59,025,000, and incurred approximately $4,134,000 of selling costs related
to the sale of those shares.
At the time of its issuance, we determined that the RPS contained two embedded features: (1) optional
redemption by the holder at our discretion and (2) optional conversion by the holder. We determined that each of the embedded
features met the definition of a derivative and that the RPS should be considered an equity host for the purposes of assessing
the embedded derivatives for potential bifurcation. Based on our assessment under ASC 470 “Debt” we do not believe
bifurcation of either the holder’s redemption or conversion feature is appropriate.
(
11 ) Series 2 Redeemable Preferred Stock
On
February 14, 2017, our public offering up to 150,000 shares of Series 2 Redeemable Preferred Stock (“RPS 2”) at $1,000
per share was declared effective. Holders of RPS 2 are entitled to cumulative dividends at the rate of 7% per annum, paid monthly.
Dividends on the RPS 2, when payable, will be recorded as a reduction to additional paid-in capital. Under certain circumstances
described in the Certificate of Designation for the RPS 2, additional shares of RPS 2 may be issued in lieu of cash dividends.
The
RPS 2 ranks senior to our common stock and pari passu with our Series A and RPS, and entitles its holders to a liquidation preference
equal to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS 2 may, less an applicable
conversion discount, if any, convert their RPS 2 into our common stock at a conversion price equal to the volume-weighted average
price of our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion
price of $12.75 and in an aggregate amount limited to 10% of the stated value of RPS 2 originally purchased from us.
Holders of RPS 2 may request that we redeem their RPS 2 at a price equal to their liquidation preference at
a price equal to their stated value plus accrued but unpaid dividends, less an applicable redemption fee, if any. Nevertheless,
the Certificate of Designation for RPS 2 permits us complete discretion to decline requests for redemption. Subject to certain
restrictions and conditions, we may also redeem shares of RPS 2 without a redemption fee upon a holder’s death, total disability
or bankruptcy. In addition, we may, at our option, call and redeem shares of RPS 2 at a price equal to their liquidation preference
(subject to a minimum redemption price, in the event of redemptions occurring less than one year after issuance, of 107% of
the stated value of the shares being redeemed).
We have not sold any shares of RPS 2.
(
12 ) GWG MCA Capital, Inc - 9% Preferred Stock
Beginning
March 31, 2016, GWG MCA began privately offering up to 2,000,000 shares of GWG MCA 9% Preferred Stock (“MCA Preferred”)
at $10.00 per share. Holders of MCA Preferred are entitled to cumulative dividends at a rate of 9% per annum, paid monthly. Dividends
on the MCA Preferred are included as interest expense in the statements of operations. As of December 31, 2016, a total of 7,155
shares of MCA Preferred had been sold for aggregate gross consideration of $72,000 and approximately $7,000 of selling costs related
to the sale of these shares were incurred.
Holders
of MCA Preferred were redeemed as of December 31, 2016 at the stated value of their shares plus accrued but unpaid dividends.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(
13 ) Income Taxes
We
had a current income tax liability of $0 as of both December 31, 2016 and 2015. The components of deferred income tax expense
(benefit) for 2016 and 2015, respectfully, consisted of the following:
Income tax provision:
|
|
2016
|
|
|
2015
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
252,000
|
|
|
$
|
(2,660,000
|
)
|
State
|
|
|
81,000
|
|
|
|
(850,000
|
)
|
Total income tax
expense (benefit)
|
|
$
|
333,000
|
|
|
$
|
(3,510,000
|
)
|
We
provided a valuation allowance against the deferred tax asset related to a note receivable, which was charged-off for financial
reporting purposes, because we believe that, when realized for tax purposes, it will result in a capital loss that will not be
utilized because we have no expectation of generating a capital gain within the applicable carryforward period. Therefore, we
do not believe that it is “more likely than not” that the deferred tax asset will be realized.
We
also provided a valuation allowance against the deferred tax asset related to a tax basis capital loss generated with respect
to our settlement and subsequent disposal of an earlier investment. As we have no expectation of generating capital gains with
the applicable carryforward period, we do not believe that it is “more likely than not” that the deferred asset will
be realized.
The
primary differences between the December 31, 2016 effective tax rate and the statutory federal rate are state taxes, and other
non-deductible expenses. The most significant temporary differences between GAAP net income and taxable net income are the treatment
of interest costs with respect to the acquisition of the life insurance policies and revenue recognition with respect to the mark-to-market
of our life insurance portfolio.
The
following table provides a reconciliation of our income tax expense (benefit) at the statutory federal tax rate to our actual
income tax expense (benefit):
|
|
2016
|
|
|
2015
|
|
Statutory federal income tax
|
|
$
|
247,000
|
|
|
|
34.0
|
%
|
|
$
|
(3,004,000
|
)
|
|
|
34.0
|
%
|
State income taxes, net of federal benefit
|
|
|
56,000
|
|
|
|
7.8
|
%
|
|
|
(561,000
|
)
|
|
|
6.3
|
%
|
Other permanent differences
|
|
|
30,000
|
|
|
|
4.2
|
%
|
|
|
55,000
|
|
|
|
(0.6
|
)%
|
Total income tax expense
|
|
$
|
333,000
|
|
|
|
46.0
|
%
|
|
$
|
(3,510,000
|
)
|
|
|
39.7
|
%
|
The
tax effects of temporary differences that give rise to deferred income taxes were as follows:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets :
|
|
|
|
|
|
|
Note receivable from related party
|
|
$
|
2,023,000
|
|
|
$
|
2,023,000
|
|
Net operating loss carryforwards
|
|
|
10,781,000
|
|
|
|
7,049,000
|
|
Other assets
|
|
|
1,130,000
|
|
|
|
375,000
|
|
Subtotal
|
|
|
13,934,000
|
|
|
|
9,447,000
|
|
Valuation allowance
|
|
|
(2,164,000
|
)
|
|
|
(2,164,000
|
)
|
Deferred tax assets
|
|
|
11,770,000
|
|
|
|
7,283,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
(13,867,000
|
)
|
|
|
(9,046,000
|
)
|
Other
|
|
|
-
|
|
|
|
(1,000
|
)
|
Net deferred tax liability
|
|
$
|
(2,097,000
|
)
|
|
$
|
(1,764,000
|
)
|
At
December 31, 2016 and 2015, we had federal net operating loss (“NOL”) carryforwards of $26,642,000 and $17,451,000,
respectively, and aggregate state NOL carryforwards of approximately $26,616,000 and $17,423,000, respectively. The NOL carryforwards
will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal
Revenue Code. This section generally relates to a more than 50 percent change in ownership over a three-year period. We currently
do not believe that any issuance of common stock has resulted in an ownership change under Section 382.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
We provide for a valuation allowance when
it is not considered “more likely than not” that our deferred tax assets will be realized. At both December 31, 2016
and 2015 based upon all available evidence, we provided a valuation allowance of $2,164,000, against deferred tax assets related
to the likelihood of recovering the tax benefit of a capital loss on a note receivable from a related entity and other capital
losses. Management believes all other deferred tax assets are recoverable.
ASC
740 requires the reporting of certain tax positions that do not meet a threshold of “more-likely-than-not”
to be recorded as uncertain tax benefits. It management's responsibility to determine whether it is “more-likely-than-not”
that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based upon
the technical merits of the position. Management has reviewed all income tax positions taken or expected to be taken for all open
years and determined that the income tax positions are appropriately stated and supported. We do not anticipate that the total
unrecognized tax benefits will significantly change prior to December 31, 2016.
Under
our accounting policies, interest and penalties on unrecognized tax benefits, as well as interest received from favorable tax
settlements are recognized as components of income tax expense. At December 31, 2016 and 2015, we recorded no accrued interest
or penalties related to uncertain tax positions.
Our
income tax returns for tax years ended December 31, 2013, 2014, 2015 and 2016, when filed, remain open to examination by the Internal
Revenue Service and various state taxing jurisdictions. Our tax return for tax year 2012 has now been examined by the IRS (finalized
April of 2015) but is open for examination by various state taxing jurisdictions.
(
14 ) Common Stock
In
September 2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common
stock at $12.50 per share, and net proceeds of approximately $8.6 million after the payment of underwriting commissions, discounts
and expense reimbursements. In connection with this offering, we listed our common stock on the Nasdaq Capital Market under the
ticker symbol “GWGH.”
On
June 24, 2015 we issued 60,000 restricted common shares at $9.70 per share, determined by the closing market price on the date
of grant, to a vendor as payment for services to be rendered over three years. The cost of these shares is amortized over a 12-month
period. On March 17, 2016, we issued an additional 6,500 restricted common shares at an average price of $7.16 per share, determined
by the closing market price on the date of grant, to this same vendor for additional services provided to us. On April 25, 2016,
we issued 25,000 restricted shares of common stock at $6.25 per share, determined by the closing market price on the date of grant,
to a vendor as a form of payment for services the vendor is providing to us, which is expensed in the current period.
(
15 ) Stock Incentive Plan
We adopted our 2013 Stock Incentive Plan in March 2013. The Compensation Committee of our Board of Directors
is responsible for the administration the plan. Incentives under the plan may be granted incentive stock options and non-statutory
stock options; stock appreciation rights; stock awards; restricted stock; restricted stock units; and performance shares. Eligible
participants include officers and employees of GWG Holdings and its subsidiaries, members of our Board of Directors, and consultants.
2,000,000 common shares are presently issuable under the plan.
In
September 2014, we entered into a stock option agreement with a new management employee granting the employee the right to purchase
up to 318,000 of our common stock at an exercise price of $12.50. The grant of such rights to purchase our common stock was treated
as an inducement grant and was issued outside the GWG Holdings Inc. 2013 Stock Incentive Plan.
Through December 31, 2016, we had issued stock options for 2,048,000 shares of
common stock to employees, officers, and directors under the plan. Options for 738,000 shares have vested, and the remaining options
are scheduled to vest over three years. The options were issued with an exercise price between $6.35 and $10.18 for those beneficially
owning more than 10% of our common stock, and between $6.00 and $10.25 for all others, which is equal to the estimated market price
of the shares on the date of grant. The expected annualized volatility used in the Black-Scholes model valuation of options issued
during the period was 25.9%. The annual volatility rate is based on the standard deviation of the average continuously compounded
rate of return of five selected comparable companies over the previous 52 weeks. A forfeiture rate of 15% is based on historical
information and expected future trend. As of December 31, 2016, stock options for 437,000 shares were forfeited and stock options
for 28,000 shares were exercised.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Outstanding
stock options:
|
|
Vested
|
|
|
Un-vested
|
|
|
Total
|
|
Balance as of December 31, 2014
|
|
|
314,288
|
|
|
|
685,813
|
|
|
|
1,000,101
|
|
Granted during the year
|
|
|
79,500
|
|
|
|
273,700
|
|
|
|
353,200
|
|
Vested during the year
|
|
|
238,999
|
|
|
|
(238,999
|
)
|
|
|
-
|
|
Exercised during the year
|
|
|
(27,667
|
)
|
|
|
-
|
|
|
|
(27,667
|
)
|
Forfeited during the year
|
|
|
(121,417
|
)
|
|
|
(150,602
|
)
|
|
|
(272,019
|
)
|
Balance as of December 31, 2015
|
|
|
483,703
|
|
|
|
569,912
|
|
|
|
1,053,615
|
|
Granted during the year
|
|
|
22,500
|
|
|
|
608,350
|
|
|
|
630,850
|
|
Vested during the year
|
|
|
251,788
|
|
|
|
(251,788
|
)
|
|
|
-
|
|
Forfeited during the year
|
|
|
(19,926
|
)
|
|
|
(82,140
|
)
|
|
|
(102,066
|
)
|
Balance as of December 31, 2016
|
|
|
738,065
|
|
|
|
844,334
|
|
|
|
1,582,399
|
|
Compensation
expense related to un-vested options not yet recognized is $525,000. We expect to recognize this compensation expense over the
next three years ($265,000 in 2017, $157,000 in 2018, and $103,000 in 2019).
Stock
Appreciation Rights (SARs) - On September 19, 2016 we issued SARs for 145,388 shares of the common stock to employees. The strike
price of the SARs was $8.76, which was equal to the market price of the common stock at the close of business on September 19,
2016. 56,358 of the SARs were vested as of December 31, 2016, on which date the market price of the common stock was $8.82. A
forfeiture rate of 15% was used in calculating our liability for the SARs.
Outstanding
Stock Appreciation Rights:
|
|
Vested
|
|
|
Un-vested
|
|
|
Total
|
|
Balance as of December 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Granted during the year
|
|
|
106,608
|
|
|
|
133,127
|
|
|
|
239,735
|
|
Forfeited during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of December 31, 2016
|
|
|
106,608
|
|
|
|
133,127
|
|
|
|
239,735
|
|
A
liability for Stock Appreciation Rights - Compensation Expense was recorded on December 31, 2016 in the amount of $4,266 and Compensation
Expense was charged for the same amount.
(
16 ) Net Loss per Common Share
We
have outstanding Series A and RPS, as described in Notes 9 and 10. The Series A and RPS are anti-dilutive to our net loss attributable
to common shareholders calculation for the years ended December 31, 2016 and December 31, 2015. We also issued warrants to purchase
common stock in conjunction with the sale of Series A (see Note 9). Both those warrants and our vested stock options are anti-dilutive
at December 31, 2016 and 2015 and have not been included in the fully diluted net loss per common share calculation.
(
17 ) Commitments
We
are party to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment
to our original lease that expanded the leased space to 17,687 square feet and extended the term through 2026. Under the amended
lease we are obligated to pay base rent plus common area maintenance and a share of building operating costs. Rent expenses under
this agreement were $415,000 and $283,000 during 2016 and 2015, respectively.
Minimum
lease payments under the amended lease are as follows:
2017
|
|
|
178,000
|
|
2018
|
|
|
185,000
|
|
2019
|
|
|
191,000
|
|
2020
|
|
|
198,000
|
|
2021
|
|
|
204,000
|
|
2022
|
|
|
210,000
|
|
2023
|
|
|
217,000
|
|
2024
|
|
|
223,000
|
|
2025
|
|
|
230,000
|
|
|
|
$
|
1,836,000
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(
18 ) Contingencies
Litigation
– In the normal course of business, we are involved in various legal proceedings. In the opinion of management, any liability
resulting from such proceedings would not have a material adverse effect on our financial position, results of operations or cash
flows.
(
19 ) Guarantee of L Bonds
We are publicly offering and selling L Bonds under a registration statement declared effective by the
SEC, as described in Note 8. Our obligations under the L Bonds are secured by substantially all the assets of GWG Holdings, a pledge
of all our common stock held individually by our largest stockholders, and by a guarantee and corresponding grant of a security
interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment
of principal and interest on the L Bonds. Substantially all of our life insurance policies are held by DLP III, DLP IV and
the Trust. The policies held by DLP III and DLP IV are not collateral for the L Bond obligations as such policies serve as direct
collateral for the senior credit facilities.
The
consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the
subsidiary guarantor and issuer because management does not believe that separate financial statements and related disclosures
would be material to investors. There are currently no significant restrictions on the ability of GWG Holdings or GWG Life, the
guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as described in these notes. A
majority of insurance policies we own are subject to a collateral arrangement with LNV described in Note 6. Under this arrangement,
collection and escrow accounts are used to fund premiums for the insurance policies and to pay interest and other charges under
the senior credit facility.
The
following represents consolidating financial information as of December 31, 2016 and December 31, 2015, with respect to the financial
position, and as of December 31, 2016 and 2015, with respect to results of operations and cash flows of GWG Holdings and its subsidiaries.
The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds. The guarantor subsidiary
column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds, presenting its investment in DLP
III, DLP IV and the Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of
all non-guarantor subsidiaries, including DLP III, DLP IV and the Trust.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating
Balance Sheets
December
31, 2016
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,481,047
|
|
|
$
|
49,360,952
|
|
|
$
|
644,983
|
|
|
$
|
-
|
|
|
$
|
78,486,982
|
|
Restricted cash
|
|
|
-
|
|
|
|
2,117,649
|
|
|
|
35,708,947
|
|
|
|
-
|
|
|
|
37,826,596
|
|
Investment in life
insurance policies, at fair value
|
|
|
-
|
|
|
|
41,277,896
|
|
|
|
469,914,458
|
|
|
|
-
|
|
|
|
511,192,354
|
|
Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
5,703,147
|
|
|
|
-
|
|
|
|
5,703,147
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
5,345,000
|
|
|
|
-
|
|
|
|
5,345,000
|
|
Other assets
|
|
|
3,854,233
|
|
|
|
2,056,822
|
|
|
|
810,640
|
|
|
|
(2,033,592
|
)
|
|
|
4,688,103
|
|
Investment in
subsidiaries
|
|
|
429,971,148
|
|
|
|
352,337,037
|
|
|
|
-
|
|
|
|
(782,308,185
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
462,306,428
|
|
|
$
|
447,150,356
|
|
|
$
|
518,127,175
|
|
|
$
|
(784,341,777
|
)
|
|
$
|
643,242,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L
I A B I L I T I E S & S T O C K H O L D E R S' E Q U I T Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
156,064,818
|
|
|
$
|
-
|
|
|
$
|
156,064,818
|
|
Series I Secured Notes
|
|
|
-
|
|
|
|
16,404,836
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,404,836
|
|
L Bonds
|
|
|
381,312,587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
381,312,587
|
|
Accounts payable
|
|
|
853,470
|
|
|
|
731,697
|
|
|
|
641,545
|
|
|
|
-
|
|
|
|
2,226,712
|
|
Interest payable
|
|
|
9,882,133
|
|
|
|
3,743,277
|
|
|
|
2,535,189
|
|
|
|
-
|
|
|
|
16,160,599
|
|
Other accrued expenses
|
|
|
862,369
|
|
|
|
544,032
|
|
|
|
2,303,952
|
|
|
|
(2,033,592
|
)
|
|
|
1,676,761
|
|
Deferred taxes,
net
|
|
|
2,097,371
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,097,371
|
|
TOTAL LIABILITIES
|
|
|
395,007,930
|
|
|
|
21,423,842
|
|
|
|
161,545,504
|
|
|
|
(2,033,592
|
)
|
|
|
575,943,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
-
|
|
|
|
425,726,514
|
|
|
|
356,581,671
|
|
|
|
(782,308,185
|
)
|
|
|
-
|
|
Convertible preferred stock
|
|
|
19,701,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,701,133
|
|
Redeemable preferred stock
|
|
|
59,025,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,025,164
|
|
Common stock
|
|
|
5,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,980
|
|
Additional paid-in capital
|
|
|
7,383,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,383,515
|
|
Accumulated deficit
|
|
|
(18,817,294
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,817,294
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
67,298,498
|
|
|
|
425,726,514
|
|
|
|
356,581,671
|
|
|
|
(782,308,185
|
)
|
|
|
67,298,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
462,306,428
|
|
|
$
|
447,150,356
|
|
|
$
|
518,127,175
|
|
|
$
|
(784,341,777
|
)
|
|
$
|
643,242,182
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating
Balance Sheets (continued)
December
31, 2015
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,292,162
|
|
|
$
|
1,982,722
|
|
|
$
|
150,221
|
|
|
$
|
-
|
|
|
$
|
34,425,105
|
|
Restricted cash
|
|
|
-
|
|
|
|
2,102,257
|
|
|
|
239,643
|
|
|
|
-
|
|
|
|
2,341,900
|
|
Investment
in life insurance policies, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
356,649,715
|
|
|
|
-
|
|
|
|
356,649,715
|
|
Other assets
|
|
|
1,742,074
|
|
|
|
688,071
|
|
|
|
30,900
|
|
|
|
-
|
|
|
|
2,461,045
|
|
Investment
in subsidiaries
|
|
|
269,886,254
|
|
|
|
291,295,951
|
|
|
|
-
|
|
|
|
(561,182,205
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
303,920,490
|
|
|
$
|
296,069,001
|
|
|
$
|
357,070,479
|
|
|
$
|
(561,182,205
|
)
|
|
$
|
395,877,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
L
I A B I L I T I E S & S T O C K H O L D E R S' E Q U I T Y
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facilities
|
|
$
|
-
|
|
|
$
|
(1,000,000
|
)
|
|
$
|
64,279,596
|
|
|
$
|
-
|
|
|
$
|
63,279,596
|
|
Series I Secured
Notes
|
|
|
-
|
|
|
|
23,287,704
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,287,704
|
|
L Bonds
|
|
|
276,482,796
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
276,482,796
|
|
Accounts payable
|
|
|
280,988
|
|
|
|
157,217
|
|
|
|
1,079,235
|
|
|
|
-
|
|
|
|
1,517,440
|
|
Interest payable
|
|
|
8,529,959
|
|
|
|
3,544,626
|
|
|
|
265,476
|
|
|
|
-
|
|
|
|
12,340,061
|
|
Other accrued expenses
|
|
|
717,365
|
|
|
|
343,421
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,060,786
|
|
Deferred
taxes, net
|
|
|
1,763,968
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,763,968
|
|
TOTAL
LIABILITIES
|
|
|
287,775,076
|
|
|
|
26,332,968
|
|
|
|
65,624,307
|
|
|
|
-
|
|
|
|
379,732,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
-
|
|
|
|
269,736,033
|
|
|
|
291,446,172
|
|
|
|
(561,182,205
|
)
|
|
|
-
|
|
Convertible preferred
stock
|
|
|
20,784,841
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,784,841
|
|
Common stock
|
|
|
5,942
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,942
|
|
Additional paid-in
capital
|
|
|
14,563,834
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,149,391
|
|
Accumulated
deficit
|
|
|
(19,209,203
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,209,203
|
)
|
TOTAL STOCKHOLDERS’
EQUITY
|
|
|
16,145,414
|
|
|
|
269,736,033
|
|
|
|
291,446,172
|
|
|
|
(561,182,205
|
)
|
|
|
16,145,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
303,920,490
|
|
|
$
|
296,069,001
|
|
|
$
|
357,070,479
|
|
|
$
|
(561,182,205
|
)
|
|
$
|
395,877,765
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated
Statements of Operations
For the year ended December 31, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
$
|
-
|
|
|
$
|
13,417
|
|
|
$
|
-
|
|
|
$
|
(13,417
|
)
|
|
$
|
-
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
379,405
|
|
|
|
67,422,160
|
|
|
|
-
|
|
|
|
67,801,565
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
929,303
|
|
|
|
-
|
|
|
|
929,303
|
|
Interest and other income
|
|
|
260,087
|
|
|
|
59,340
|
|
|
|
639,414
|
|
|
|
(212,375
|
)
|
|
|
746,466
|
|
TOTAL REVENUE
|
|
|
260,087
|
|
|
|
452,162
|
|
|
|
68,990,877
|
|
|
|
(225,792
|
)
|
|
|
69,477,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination and servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
13,417
|
|
|
|
(13,417
|
)
|
|
|
-
|
|
Interest expense
|
|
|
32,149,577
|
|
|
|
2,311,819
|
|
|
|
8,094,353
|
|
|
|
(212,375
|
)
|
|
|
42,343,374
|
|
Employee compensation and benefits
|
|
|
6,874,368
|
|
|
|
4,358,406
|
|
|
|
551,522
|
|
|
|
-
|
|
|
|
11,784,296
|
|
Legal and professional fees
|
|
|
2,107,053
|
|
|
|
1,628,408
|
|
|
|
211,915
|
|
|
|
-
|
|
|
|
3,947,376
|
|
Other expenses
|
|
|
5,822,621
|
|
|
|
2,871,318
|
|
|
|
1,983,037
|
|
|
|
-
|
|
|
|
10,676,976
|
|
TOTAL EXPENSES
|
|
|
46,953,619
|
|
|
|
11,169,951
|
|
|
|
10,854,244
|
|
|
|
(225,792
|
)
|
|
|
68,752,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(46,693,532
|
)
|
|
|
(10,717,789
|
)
|
|
|
58,136,633
|
|
|
|
-
|
|
|
|
725,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
47,418,844
|
|
|
|
58,822,543
|
|
|
|
-
|
|
|
|
(106,241,387
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BEFORE INCOME TAXES
|
|
|
725,312
|
|
|
|
48,104,754
|
|
|
|
58,136,633
|
|
|
|
(106,241,387
|
)
|
|
|
725,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
333,403
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,403
|
|
NET INCOME
|
|
|
391,909
|
|
|
|
48,104,754
|
|
|
|
58,136,633
|
|
|
|
(106,241,387
|
)
|
|
|
391,909
|
|
Preferred stock dividends
|
|
|
(3,537,287
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,537,287
|
)
|
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(3,145,378
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(3,145,378
|
)
|
For
the year ended December 31, 2015
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy
servicing fees
|
|
$
|
-
|
|
|
$
|
2,217,471
|
|
|
$
|
-
|
|
|
$
|
(2,217,471
|
)
|
|
$
|
-
|
|
Gain on
life insurance policies, net
|
|
|
-
|
|
|
|
-
|
|
|
|
39,381,003
|
|
|
|
-
|
|
|
|
39,381,003
|
|
Interest
and other income
|
|
|
45,613
|
|
|
|
62,125
|
|
|
|
143,511
|
|
|
|
|
|
|
|
251,249
|
|
TOTAL REVENUE
|
|
|
45,613
|
|
|
|
2,279,596
|
|
|
|
39,524,514
|
|
|
|
(2,217,471
|
)
|
|
|
39,632,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination
and servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
2,217,471
|
|
|
|
(2,217,471
|
)
|
|
|
-
|
|
Interest
expense
|
|
|
22,416,821
|
|
|
|
2,703,124
|
|
|
|
4,398,743
|
|
|
|
-
|
|
|
|
29,518,718
|
|
Employee
compensation and benefits
|
|
|
6,007,347
|
|
|
|
2,002,673
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,010,020
|
|
Legal and
professional fees
|
|
|
2,115,580
|
|
|
|
1,037,203
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,152,783
|
|
Other
expenses
|
|
|
4,295,085
|
|
|
|
3,347,294
|
|
|
|
141,971
|
|
|
|
-
|
|
|
|
7,784,350
|
|
TOTAL EXPENSES
|
|
|
34,834,863
|
|
|
|
9,090,294
|
|
|
|
6,758,185
|
|
|
|
(2,217,471
|
)
|
|
|
48,465,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(34,789,250
|
)
|
|
|
(6,810,698
|
)
|
|
|
32,766,329
|
|
|
|
-
|
|
|
|
(8,833,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY
IN INCOME OF SUBSIDIARIES
|
|
|
25,955,631
|
|
|
|
32,766,108
|
|
|
|
-
|
|
|
|
(58,721,739
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(8,833,619
|
)
|
|
|
25,955,410
|
|
|
|
32,766,329
|
|
|
|
(58,721,739
|
)
|
|
|
(8,833,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX BENEFIT
|
|
|
(3,509,587
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,509,587
|
)
|
NET INCOME (LOSS)
|
|
|
(5,324,032
|
)
|
|
|
25,955,410
|
|
|
|
32,766,329
|
|
|
|
(58,721,739
|
)
|
|
|
(5,324,032
|
)
|
Preferred
stock dividends
|
|
|
(2,069,242
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,069,242
|
)
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(7,393,274
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(7,393,274
|
)
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated
Statements of Cash Flows
For the year ended December 31, 2016
|
|
Parent
|
|
|
Guarantor
Sub
|
|
|
Non-Guarantor
Sub
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
391,909
|
|
|
$
|
48,104,754
|
|
|
$
|
58,136,633
|
|
|
$
|
(106,241,387
|
)
|
|
$
|
391,909
|
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Equity) of subsidiaries
|
|
|
(47,418,845
|
)
|
|
|
(58,822,542
|
)
|
|
|
-
|
|
|
|
106,241,387
|
|
|
|
-
|
|
Gain on life insurance policies, gross
|
|
|
-
|
|
|
|
-
|
|
|
|
(48,988,406
|
)
|
|
|
-
|
|
|
|
(48,988,406
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
7,720,065
|
|
|
|
(1,307,640
|
)
|
|
|
2,032,827
|
|
|
|
-
|
|
|
|
8,445,252
|
|
Deferred income taxes
|
|
|
333,402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,402
|
|
Preferred stock issued in lieu of cash dividends
|
|
|
689,742
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
689,742
|
|
Preferred stock dividends payable
|
|
|
302,972
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
302,972
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,345,000
|
)
|
|
|
-
|
|
|
|
(5,345,000
|
)
|
Due from related parties
|
|
|
-
|
|
|
|
1,169
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,169
|
|
Other assets
|
|
|
(112,725,117
|
)
|
|
|
(44,866,357
|
)
|
|
|
19,683,919
|
|
|
|
114,884,593
|
|
|
|
(23,022,962
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
(2,033,592
|
)
|
|
|
-
|
|
|
|
2,033,592
|
|
|
|
-
|
|
|
|
-
|
|
Accounts payable
|
|
|
572,483
|
|
|
|
574,481
|
|
|
|
(437,692
|
)
|
|
|
-
|
|
|
|
709,272
|
|
Interest payable
|
|
|
2,191,113
|
|
|
|
420,259
|
|
|
|
2,256,824
|
|
|
|
-
|
|
|
|
4,868,196
|
|
Other accrued expenses
|
|
|
706,718
|
|
|
|
2,873,233
|
|
|
|
(7,979,395
|
)
|
|
|
-
|
|
|
|
(4,399,444
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(149,269,149
|
)
|
|
|
(53,022,643
|
)
|
|
|
21,393,302
|
|
|
|
114,884,593
|
|
|
|
(66,013,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(94,952,879
|
)
|
|
|
-
|
|
|
|
(94,952,879
|
)
|
Carrying value of matured life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
10,992,624
|
|
|
|
-
|
|
|
|
10,992,624
|
|
Investment in Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,727,924
|
)
|
|
|
-
|
|
|
|
(8,727,924
|
)
|
Proceeds from Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
2,553,466
|
|
|
|
-
|
|
|
|
2,553,466
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
-
|
|
|
|
(90,134,713
|
)
|
|
|
-
|
|
|
|
(90,134,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
97,713,952
|
|
|
|
-
|
|
|
|
97,713,952
|
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(7,469,462
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,469,462
|
)
|
Proceeds from issuance of L Bonds
|
|
|
153,874,402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153,874,402
|
|
Payment of deferred issuance costs for L Bonds
|
|
|
(10,149,316
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,149,316
|
)
|
Payments for redemption of L Bonds
|
|
|
(45,754,691
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,754,691
|
)
|
Issuance of common stock
|
|
|
244,185
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
244,185
|
|
Proceeds (payments) from restricted cash
|
|
|
-
|
|
|
|
(15,392
|
)
|
|
|
(35,469,305
|
)
|
|
|
-
|
|
|
|
(35,484,697
|
)
|
Proceeds from issuance of preferred stock
|
|
|
57,040,946
|
|
|
|
-
|
|
|
|
71,555
|
|
|
|
-
|
|
|
|
57,112,501
|
|
Payments for issuance costs of preferred stock
|
|
|
(4,133,526
|
)
|
|
|
-
|
|
|
|
(7,340
|
)
|
|
|
-
|
|
|
|
(4,140,866
|
)
|
Payments for redemption of preferred stock
|
|
|
(2,126,678
|
)
|
|
|
-
|
|
|
|
(71,555
|
)
|
|
|
-
|
|
|
|
(2,198,233
|
)
|
Payments of preferred stock dividends
|
|
|
(3,537,288
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,537,288
|
)
|
Issuance of member capital
|
|
|
-
|
|
|
|
107,885,727
|
|
|
|
6,998,866
|
|
|
|
(114,884,593
|
)
|
|
|
-
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
145,458,034
|
|
|
|
100,400,873
|
|
|
|
69,236,173
|
|
|
|
(114,884,593
|
)
|
|
|
200,210,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(3,811,115
|
)
|
|
|
47,378,230
|
|
|
|
494,762
|
|
|
|
-
|
|
|
|
44,061,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
32,292,162
|
|
|
|
1,982,722
|
|
|
|
150,221
|
|
|
|
-
|
|
|
|
34,425,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
28,481,047
|
|
|
$
|
49,360,952
|
|
|
$
|
644,983
|
|
|
$
|
-
|
|
|
$
|
78,486,982
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated
Statements of Cash Flows (continued)
For the year ended December 31, 2015
|
|
Parent
|
|
|
Guarantor
Sub
|
|
|
Non-Guarantor
Sub
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(5,324,032
|
)
|
|
$
|
25,955,410
|
|
|
$
|
32,766,329
|
|
|
$
|
(58,721,739
|
)
|
|
$
|
(5,324,032
|
)
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Equity) of subsidiaries
|
|
|
(25,955,632
|
)
|
|
|
(32,766,107
|
)
|
|
|
-
|
|
|
|
58,721,739
|
|
|
|
-
|
|
Gain on life insurance policies, gross
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,371,059
|
)
|
|
|
-
|
|
|
|
(39,371,059
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
4,081,051
|
|
|
|
362,457
|
|
|
|
(731,452
|
)
|
|
|
-
|
|
|
|
3,712,056
|
|
Deferred income taxes
|
|
|
(3,509,587
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,509,587
|
)
|
Preferred stock issued in lieu of cash dividends
|
|
|
683,133
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
683,133
|
|
Preferred stock dividends payable
|
|
|
6,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,800
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from related parties
|
|
|
-
|
|
|
|
(1,256
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,256
|
)
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750,000
|
|
|
|
-
|
|
|
|
1,750,000
|
|
Other assets
|
|
|
(58,689,451
|
)
|
|
|
(43,314,345
|
)
|
|
|
-
|
|
|
|
101,699,270
|
|
|
|
(304,526
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(129,909
|
)
|
|
|
(85,463
|
)
|
|
|
529,236
|
|
|
|
-
|
|
|
|
313,864
|
|
Interest payable
|
|
|
2,730,921
|
|
|
|
233,786
|
|
|
|
(751,178
|
)
|
|
|
-
|
|
|
|
2,213,529
|
|
Other accrued expenses
|
|
|
2,059,136
|
|
|
|
149,242
|
|
|
|
(24,985
|
)
|
|
|
-
|
|
|
|
2,183,393
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(84,047,570
|
)
|
|
|
(49,466,276
|
)
|
|
|
(5,833,109
|
)
|
|
|
101,699,270
|
|
|
|
(37,647,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(38,906,934
|
)
|
|
|
-
|
|
|
|
(38,906,934
|
)
|
Proceeds from settlement of life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
4,511,289
|
|
|
|
-
|
|
|
|
4,511,289
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
-
|
|
|
|
(34,395,645
|
)
|
|
|
-
|
|
|
|
(34,395,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayment of senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,150,000
|
)
|
|
|
-
|
|
|
|
(7,150,000
|
)
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(4,891,681
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,891,681
|
)
|
Proceeds from issuance of L Bonds
|
|
|
131,159,348
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,159,348
|
|
Payment of deferred issuance costs for L Bonds
|
|
|
(7,499,601
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,499,601
|
)
|
Payments for redemption of L Bonds
|
|
|
(35,984,061
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(35,984,061
|
)
|
Proceeds (payments) from restricted cash
|
|
|
-
|
|
|
|
(2,019,757
|
)
|
|
|
3,973,910
|
|
|
|
-
|
|
|
|
1,954,153
|
|
Issuance of common stock
|
|
|
582,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
582,000
|
|
Payments for redemption of preferred stock
|
|
|
(295,185
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(295,185
|
)
|
Payments of preferred stock dividends
|
|
|
(2,069,242
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,069,242
|
)
|
Issuance of member capital
|
|
|
-
|
|
|
|
58,144,205
|
|
|
|
43,555,065
|
|
|
|
(101,699,270
|
)
|
|
|
-
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
85,893,259
|
|
|
|
51,232,767
|
|
|
|
40,378,975
|
|
|
|
(101,699,270
|
)
|
|
|
75,805,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
1,845,689
|
|
|
|
1,766,491
|
|
|
|
150,221
|
|
|
|
-
|
|
|
|
3,762,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
30,446,473
|
|
|
|
216,231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,662,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
32,292,162
|
|
|
$
|
1,982,722
|
|
|
$
|
150,221
|
|
|
$
|
-
|
|
|
$
|
34,425,105
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(
20 ) Concentration
We
purchase life insurance policies written by life insurance companies having investment-grade ratings by independent rating agencies.
As a result, there may be certain concentrations of policies with life insurance companies. The following summarizes the face
value of insurance policies with specific life insurance companies exceeding 10% of the total face value held by us.
|
|
As
of December 31,
|
|
Life insurance company
|
|
2016
|
|
|
2015
|
|
John Hancock
|
|
|
14.36
|
%
|
|
|
12.73
|
%
|
AXA Equitable
|
|
|
13.42
|
%
|
|
|
14.00
|
%
|
Lincoln National
|
|
|
11.22
|
%
|
|
|
*
|
|
*
percentage does not exceed 10% of the total face value.
The
following summarizes the number of insurance policies held in specific states exceeding 10% of the total face value held by us:
|
|
As of December 31,
|
|
State of residence
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
California
|
|
|
20.72
|
%
|
|
|
25.25
|
%
|
Florida
|
|
|
19.42
|
%
|
|
|
19.95
|
%
|
(
21 ) Subsequent Events
Subsequent
to December 31, 2016, eight policies covering seven individuals have matured. The combined insurance benefits of
these policies were $15,975,000. We recorded realized gains of $13,956,000 on these seven policies.
Subsequent
to December 31, 2016, we have issued approximately an additional $15,318,000 in principal amount of L Bonds.
Subsequent to December 31, 2016 we have issued
approximately $16,871,000 of RPS.
On February 9, 2017, we declared a special cash dividend
in the amount of $2.50 per share, payable on or about April 14, 2017, to the holders of RPS of record as of the close of business
on April 5, 2017.
On February 14, 2017, we began a public offering of up to 150,000 shares of RPS 2 at $1,000
per share. As of the date of this report, we have not sold any shares of RPS 2.
Effective
February 16, 2017, Paul Siegert, Director and Executive Chairman, voluntarily resigned from the Board of Directors. As part of
his resignation, we agreed to repurchase Mr. Siegert’s 200,445 shares of GWG common stock for an aggregate of approximately
$1.604 million. As a separation payment, Mr. Siegert will continue to receive his regular salary payments (annualized to approximately
$201,000) through December 31, 2017 and he forfeited all options, both unvested and vested, to purchase shares of GWG common stock.
Following his resignation, the Board of Directors appointed Mark Schwarzmann as a director of the Board and Jon Sabes was
appointed Chairman of the Board.
( 22 ) Reclassification of Preferred Stock Dividends
For the quarter ended December 31,
2016, we identified an error relating to prior periods in the classification of preferred stock dividends on the consolidated
statement of operations and balance sheet. Preferred stock dividends have been classified as interest expense since the third
quarter of 2014, when our initial public offering became effective. As a result, dividend cost resulted in an increase of the
accumulated deficit on the balance sheet. The preferred stock dividends should have been charged directly to additional paid-in
capital and are separately reflected as preferred stock dividends on the consolidated statement of operations. The reclassification
of preferred stock dividends did not result in any changes to total equity in any of the periods effected. Additionally, the reclassification
did not result in any changes to net loss attributable to common shareholders or net loss per common share for the year ended
December 31, 2015.