GWG HOLDINGS, INC. AND SUBSIDIARIES
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
*Preferred stock dividends were paid from
additional paid-in capital until the latter was exhausted in the second quarter of 2017. Subsequent dividends were charged against
the carrying values of the respective series of the Company’s preferred stock, resulting in a difference between the Company’s
preferred stock book balances and liquidation preference of the respective series of preferred stock.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(1)
|
Nature of Business and Summary of Significant Accounting Policies
|
Nature of Business
– We are
a financial services company committed to disrupting and transforming the life insurance industry and related industries. We built
our business by creating opportunities for consumers to obtain significantly more value for their life insurance policies in a
secondary market as compared to the traditional options offered by the insurance industry. We are enhancing and extending these
activities through innovation in our products and services, business processes, financing strategies, and advanced epigenetic
technologies. At the same time, we are creating opportunities for investors to receive income and capital appreciation from our
investment activities in the life insurance and related industries.
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 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 provide cash advances to small businesses.
On August 25, 2016, GWG Holdings formed
a wholly owned subsidiary, Actüa Life & Annuity Ltd., renamed to Life Epigenetics Inc. (“Life Epigenetics”)
in August 2017, to engage in various life insurance related businesses and activities related to its exclusive license for “DNA
Methylation Based Predictor of Mortality” technology.
Use of Estimates
– The
preparation of our consolidated financial statements in conformity with GAAP requires management to make significant 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, management’s judgment, and various other factors that we believe to be
reasonable under the circumstances. Our actual results 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
–
Accounting Standards Codification 325-30,
Investments in Insurance Contracts
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. We initially record our purchase of life insurance policies at the
transaction price, which is the amount paid for the policy, inclusive of all external fees and costs associated with the acquisition.
At each subsequent reporting period, we re-measure the investment at fair value in its entirety and recognize the change in fair
value as unrealized gain (revenue) in the current period, net of premiums paid.
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 September 30, 2017 and December 31, 2016, a total of $0 and $42,000, respectively, of our “other
assets” comprised direct costs and deposits that we had advanced for life insurance policy acquisitions.
We also recognize realized gain (or loss)
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 (upon 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 we receive sale proceeds.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Other Assets
– Life Epigenetics
is engaged in various life insurance related businesses and activities related to its exclusive license for the “DNA Methylation
Based Predictor of Mortality” technology for the life insurance industry. The cost of entering into this license agreement
is included in “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 of the closing price of our common stock on the date of grant. Stock-based compensation expense is
recorded in general and 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.
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 the standard deviation of the average continuously compounded rate of return of five selected comparable companies
over the previous 52 weeks. We have not historically issued any common stock dividends and do not expect to do so in the foreseeable
future.
Deferred Financing and Issuance Costs
–
Loans advanced to us under our senior credit facility with LNV Corporation, as described in Note 6, are reported net of financing
costs, including issuance costs, sales commissions and other direct expenses, which are amortized using the straight-line method
over the term of the facility. We had no loans advanced to us under our senior credit facility with Autobahn Funding
Company during the nine months ended September 30, 2017, as described in Note 5. The Series I 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 Convertible Preferred Stock (“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 September 30,
2017. Selling and issuance costs of Redeemable Preferred Stock (“RPS”) and Series 2 Redeemable Preferred Stock (“RPS
2”), described in Notes 10 and 11, are netted against additional paid-in-capital, if any, and then against the outstanding
balance of the preferred stock.
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 Series A, RPS, RPS 2, warrants and stock options. Due to our net loss for the three and nine months ended September 30,
2017 and 2016, there are no dilutive securities.
Recently Issued Accounting 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 Accounting
Standards Update 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. Lessees will also be required to disclose key information
about their leases. Early adoption is permitted. We are currently evaluating the impact of the adoption of this pronouncement and
have not yet adopted ASU 2016-02 as of September 30, 2017.
In March 2016, the FASB issued Accounting
Standards Update 2016-09 (“ASU 2016-09”) to simplify the accounting for stock compensation related to the following
items: income tax accounting, award classification, estimation of forfeitures, and cash flow presentation. The new guidance is
effective for fiscal years beginning after December 15, 2016. We adopted ASU 2016-09 effective January 1, 2017. The impact of
the adoption was not material to the financial statements.
Under the terms of our senior credit facility
with LNV Corporation (discussed in Note 6), we are required to maintain a collection account that is used to collect policy benefits
from pledged policies, pay interest and other charges under the facility, and distribute funds to pay down the facility. The agents
for the lenders authorize disbursements from these accounts. At September 30, 2017 and December 31, 2016, there was a balance
of $5,819,000, and $37,827,000, respectively, in these restricted cash accounts.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(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 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, other than insured lives covered under small face amount policies
(i.e., $1 million in face value benefits or less), assumptions relating to cost-of-insurance (premium) rates and other assumptions.
The discount rate we apply incorporates current information about discount rates applied by other public reporting companies owning
portfolios of life insurance policies, the discount rates observed in the life insurance secondary market, market interest rates,
the estimated credit exposure to the insurance companies that issued the life insurance policies and management’s estimate
of the operational risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole.
Management has discretion regarding the combination of these and other factors when determining the discount rate. As a result
of management’s analysis, a discount rate of 10.54% was applied to our portfolio as of September 30, 2017 as compared to
10.96% as of December 31, 2016.
A summary of our policies, organized according
to their estimated life expectancy dates as of the reporting date, is as follows:
|
|
As of September 30, 2017
|
|
|
As of December 31, 2016
|
|
Years Ending December 31,
|
|
Number of Policies
|
|
|
Estimated Fair Value
|
|
|
Face Value
|
|
|
Number of Policies
|
|
|
Estimated Fair Value
|
|
|
Face Value
|
|
2017
|
|
|
2
|
|
|
$
|
2,016,000
|
|
|
$
|
2,125,000
|
|
|
|
11
|
|
|
$
|
14,837,000
|
|
|
$
|
16,939,000
|
|
2018
|
|
|
9
|
|
|
|
13,222,000
|
|
|
|
16,564,000
|
|
|
|
23
|
|
|
|
30,830,000
|
|
|
|
42,564,000
|
|
2019
|
|
|
57
|
|
|
|
63,926,000
|
|
|
|
88,967,000
|
|
|
|
55
|
|
|
|
57,556,000
|
|
|
|
88,858,000
|
|
2020
|
|
|
94
|
|
|
|
88,281,000
|
|
|
|
148,908,000
|
|
|
|
93
|
|
|
|
85,414,000
|
|
|
|
159,814,000
|
|
2021
|
|
|
88
|
|
|
|
87,710,000
|
|
|
|
162,525,000
|
|
|
|
86
|
|
|
|
73,825,000
|
|
|
|
158,744,000
|
|
2022
|
|
|
91
|
|
|
|
78,940,000
|
|
|
|
174,699,000
|
|
|
|
66
|
|
|
|
56,909,000
|
|
|
|
147,222,000
|
|
2023
|
|
|
84
|
|
|
|
63,439,000
|
|
|
|
168,821,000
|
|
|
|
64
|
|
|
|
44,953,000
|
|
|
|
128,581,000
|
|
Thereafter
|
|
|
425
|
|
|
|
222,564,000
|
|
|
|
860,018,000
|
|
|
|
292
|
|
|
|
146,868,000
|
|
|
|
618,953,000
|
|
Totals
|
|
|
850
|
|
|
$
|
620,098,000
|
|
|
$
|
1,622,627,000
|
|
|
|
690
|
|
|
$
|
511,192,000
|
|
|
|
1,361,675,000
|
|
We recognized life insurance benefits
of $9,747,000 and $5,300,000 during the three months ended September 30, 2017 and 2016, respectively, related to policies with
a carrying value of $2,333,000 and $1,078,000, respectively, and as a result recorded realized gains of $7,414,000 and $4,222,000,
respectively. We recognized life insurance benefits of $39,657,000 and $34,367,000 during the nine months ended September 30,
2017 and 2016, respectively, related to policies with a carrying value of $7,716,000 and $7,381,000, respectively, and as a result
recorded realized gains of $31,941,000 and $26,986,000.
Reconciliation of gain on life insurance policies:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Change in estimated probabilistic cash flows
|
|
$
|
12,568,000
|
|
|
$
|
12,955,000
|
|
|
$
|
40,033,000
|
|
|
$
|
34,078,000
|
|
Unrealized gain on acquisitions
|
|
|
7,217,000
|
|
|
|
11,668,000
|
|
|
|
25,863,000
|
|
|
|
29,509,000
|
|
Premiums and other annual fees
|
|
|
(13,174,000
|
)
|
|
|
(11,784,000
|
)
|
|
|
(36,124,000
|
)
|
|
|
(29,225,000
|
)
|
Change in discount rates
(1)
|
|
|
7,987,000
|
|
|
|
(378,000
|
)
|
|
|
12,130,000
|
|
|
|
460,000
|
|
Change in life expectancy evaluation
(2)
|
|
|
(5,370,000
|
)
|
|
|
(2,285,000
|
)
|
|
|
(13,974,000
|
)
|
|
|
(3,199,000
|
)
|
Face value of matured policies
|
|
|
9,747,000
|
|
|
|
5,300,000
|
|
|
|
39,657,000
|
|
|
|
34,367,000
|
|
Fair value of matured policies
|
|
|
(4,554,000
|
)
|
|
|
(1,966,000
|
)
|
|
|
(22,468,000
|
)
|
|
|
(14,383,000
|
)
|
Gain on life insurance policies, net
|
|
$
|
14,421,000
|
|
|
$
|
13,510,000
|
|
|
$
|
45,117,000
|
|
|
$
|
51,607,000
|
|
(1) The discount rate applied to estimate
the fair value of the portfolio of life insurance policies we own was 10.54% as of September 30, 2017, compared to 10.96% as of
December 31, 2016 and 11.07% as of September 30, 2016. The carrying value of policies acquired during each quarterly reporting
period is adjusted to current fair value using the fair value discount rate applied to the entire portfolio as of that reporting
date.
(2) The change in fair value due to updating
independent life expectancy estimates on certain life insurance policies in our portfolio.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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
|
|
Three months ending December 31, 2017
|
|
$
|
16,915,000
|
|
|
$
|
1,587,000
|
|
|
$
|
18,502,000
|
|
2018
|
|
|
54,931,000
|
|
|
|
1,587,000
|
|
|
|
56,518,000
|
|
2019
|
|
|
60,916,000
|
|
|
|
1,587,000
|
|
|
|
62,503,000
|
|
2020
|
|
|
68,728,000
|
|
|
|
1,587,000
|
|
|
|
70,315,000
|
|
2021
|
|
|
77,522,000
|
|
|
|
1,587,000
|
|
|
|
79,109,000
|
|
2022
|
|
|
87,424,000
|
|
|
|
1,587,000
|
|
|
|
89,011,000
|
|
|
|
$
|
366,436,000
|
|
|
$
|
9,522,000
|
|
|
$
|
375,958,000
|
|
Management anticipates funding the majority
of the premium payments estimated above with additional borrowing capacity, created as the premiums and servicing costs of pledged
life insurance policies become due, under the amended and restated senior credit facility with LNV Corporation as described in
Note 6. Management anticipates funding premiums and servicing costs of non-pledged life insurance policies from proceeds from
the receipt of policy benefits from our portfolio of life insurance policies and net proceeds from our offering of L Bonds and
RPS 2. 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
|
Accounting Standards Codification 820,
Fair Value Measurements and Disclosures
(“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 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 the Company has the ability to access. Since valuations are based on 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.
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 rates 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 estimated credit exposure to the insurance company that issued the life insurance policy and
management’s estimate of the operational risk premium a purchaser would require to receive the future cash flows derived
from our portfolio as a whole. Management has discretion regarding the combination of these and other factors when determining
the discount rate.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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 September 30,
as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
577,050,000
|
|
|
$
|
431,820,000
|
|
|
$
|
511,192,000
|
|
|
$
|
356,650,000
|
|
Purchases
|
|
|
25,199,000
|
|
|
|
25,770,000
|
|
|
|
67,321,000
|
|
|
|
74,470,000
|
|
Maturities (initial cost basis)
|
|
|
(2,333,000
|
)
|
|
|
(1,078,000
|
)
|
|
|
(7,716,000
|
)
|
|
|
(7,381,000
|
)
|
Net change in fair value
|
|
|
20,182,000
|
|
|
|
21,073,000
|
|
|
|
49,301,000
|
|
|
|
53,846,000
|
|
Ending balance
|
|
$
|
620,098,000
|
|
|
$
|
477,585,000
|
|
|
$
|
620,098,000
|
|
|
$
|
477,585,000
|
|
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. Currently, however,
the terms of our senior credit facility with LNV Corporation require us to update the independent life expectancy estimates every
two years beginning from the date of the amended facility.
The following table summarizes the inputs
utilized in estimating the fair value of our portfolio of life insurance policies:
|
|
As of
September 30,
2017
|
|
|
As of
December 31,
2016
|
|
Weighted-average age of insured, years *
|
|
|
81.7
|
|
|
|
81.6
|
|
Weighted-average life expectancy, months *
|
|
|
82.6
|
|
|
|
83.2
|
|
Average face amount per policy
|
|
$
|
1,909,000
|
|
|
$
|
1,973,000
|
|
Discount rate
|
|
|
10.54
|
%
|
|
|
10.96
|
%
|
(*) Weighted average by face amount of
policy benefits
Life expectancy estimates and market discount
rates for a portfolio of life insurance policies are 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
$
|
83,536,000
|
|
|
$
|
41,411,000
|
|
|
$
|
(40,893,000
|
)
|
|
$
|
(81,069,000
|
)
|
December 31, 2016
|
|
$
|
69,253,000
|
|
|
$
|
34,601,000
|
|
|
$
|
(33,846,000
|
)
|
|
$
|
(67,028,000
|
)
|
|
|
Change in discount rate
|
|
|
|
minus 2%
|
|
|
minus 1%
|
|
|
plus 1%
|
|
|
plus 2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
$
|
65,263,000
|
|
|
$
|
31,222,000
|
|
|
$
|
(28,708,000
|
)
|
|
$
|
(55,167,000
|
)
|
December 31, 2016
|
|
$
|
53,764,000
|
|
|
$
|
25,728,000
|
|
|
$
|
(23,668,000
|
)
|
|
$
|
(45,491,000
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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 L Bonds, having an aggregate face value of $424,778,000
as of September 30, 2017, is approximately $434,374,000 based on a weighted-average market interest rate of 6.68%. The carrying
value of the senior credit facility 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 pledged
against the debt. The overall rate reflects market, and the carrying value of the facility approximates fair value.
GWG MCA participated 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 September 30, 2017 one of our secured loans was potentially impaired. Specifically, the secured loan to Nulook Capital
LLC had an outstanding balance of $2,001,000 and a loan loss reserve of $1,506,000 at September 30, 2017. 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, referred to as an impairment charge. We recorded an impairment
charge of $28,000 and $906,000 for the three and nine months ended September 30, 2017, respectively.
The following table summarizes outstanding
warrants related to the Company’s initial public offering as of September 30, 2017:
Month issued
|
|
Warrants issued
|
|
|
Fair value per share
|
|
|
Risk free
rate
|
|
|
Volatility
|
|
|
Term
|
|
September 2014
|
|
|
16,000
|
|
|
$
|
1.26
|
|
|
|
1.85
|
%
|
|
|
17.03
|
%
|
|
|
5 years
|
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
|
Credit Facility – Autobahn Funding Company LLC
|
On September 12, 2017, we terminated our
$105 million senior credit facility with Autobahn Funding Company LLC, the Credit and Security Agreement governing the facility
as well as the related pledge agreement, pursuant to which our obligations under the facility were secured. We had paid off in
full all obligations under the facility on September 14, 2016, and since that date, we have had no amounts outstanding under the
facility.
The Credit and Security Agreement contained certain financial
and non-financial covenants, and we were in compliance with these covenants during the nine months ended September 30, 2017 until
the date of termination.
(6)
|
Credit Facility – LNV Corporation
|
On September 27, 2017, we entered into
an amended and restated senior credit facility with LNV Corporation as lender through our subsidiary GWG DLP Funding IV, LLC.
The Amended and Restated Loan Agreement governing the facility makes available a total of up to $300,000,000 in credit with a
maturity date of September 27, 2029. Additional advances are available under the Amended and Restated Loan Agreement at the LIBOR
rate as defined in the Amended and Restated Loan Agreement. Advances are available as the result of additional borrowing base
capacity, created as the premiums and servicing costs of pledged life insurance policies become due. Interest will accrue on amounts
borrowed under the Amended and Restated Loan 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) 7.50% per annum. The effective rate at September 30, 2017 was 7.52%. The interest
rate effective October 1, 2017 was 9.31%. Interest payments are made on a quarterly basis.
As of September 30, 2017, approximately
86.6% of the total face value of our portfolio is pledged to LNV Corporation. The amount outstanding under this facility was $212,513,000
at September 30, 2017 and $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 Amended and Restated Loan Agreement, through an arrangement
under which Wells Fargo serves as securities intermediary. The life insurance policies owned by DLP IV do not serve as direct
collateral for the obligations of GWG Holdings under the L Bonds. The difference between the outstanding balance as of September
30, 2017 and the carrying amount relates to unamortized debt issuance costs.
The Amended and Restated Loan Agreement
does not require DLP IV to maintain a reserve account for future premiums.
The Amended and Restated Loan Agreement
has certain financial and nonfinancial covenants, and we were in compliance with these covenants at September 30, 2017 and with
the covenants in the original Loan Agreement at December 31, 2016.
(7)
|
Series I Secured Notes
|
Series I Secured Notes were legal obligations
of GWG Life and were privately offered and sold from August 2009 through June 2011. On September 8, 2017, we redeemed all outstanding
Series I Secured Notes for an aggregate of $6,815,000.
The Series I Secured Notes were governed
by an Intercreditor Agreement, a Third Amended and Restated Note Issuance and Security Agreement dated November 1, 2011, as amended,
and a related Pledge Agreement. Upon the redemption of the Series I Secured Notes and the termination of all obligations outstanding
thereunder, those agreements were terminated effective as of September 8, 2017.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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 September 30, 2017 and December
31, 2016.
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 that
we offer 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 September 30, 2017 and December 31,
2016, the weighted-average interest rate of our L Bonds was 7.35% and 7.23%, respectively. The principal amount of L Bonds outstanding
was $424,778,000 and $387,067,000 at September 30, 2017 and December 31, 2016, 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,
cash receipts for new issuances and payments of redemptions in process. Amortization of deferred issuance costs was $2,076,000
and $4,931,000 for the three and nine months ended September 30, 2017 and $2,073,000 and $5,362,000 for the three and nine months
ended September 30, 2016. Future expected amortization of deferred financing costs as of September 30, 2017 is $14,462,000 in total
over the next seven years.
Future contractual maturities of L Bonds,
and their related unamortized deferred financing costs, at September 30, 2017 are as follows:
Years Ending December 31,
|
|
Contractual Maturities
|
|
|
Unamortized Deferred Financing Costs
|
|
Three months ending December 31, 2017
|
|
$
|
17,059,000
|
|
|
$
|
104,000
|
|
2018
|
|
|
108,717,000
|
|
|
|
1,652,000
|
|
2019
|
|
|
133,174,000
|
|
|
|
4,294,000
|
|
2020
|
|
|
63,523,000
|
|
|
|
2,763,000
|
|
2021
|
|
|
28,703,000
|
|
|
|
1,350,000
|
|
Thereafter
|
|
|
73,602,000
|
|
|
|
4,299,000
|
|
|
|
$
|
424,778,000
|
|
|
$
|
14,462,000
|
|
(9)
|
Series A Convertible Preferred Stock
|
From July 2011 through 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 were entitled to cumulative dividends at the rate of 10% per
annum, paid quarterly.
As of September 30, 2017, we issued an
aggregate of 544,000 shares of Series A in satisfaction of $3,808,000 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 September 30, 2017, we had 2,695,000 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 416,000 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 September 30, 2017, all of these warrants have expired and none of
them had been exercised.
The terms of the Series A permit us to
redeem Series A shares at a price equal to 110% of their liquidation preference ($7.50 per share) at any time.
On October 9, 2017 all shares of Series
A were redeemed with a redemption payment equal to the sum of: (i) $8.25 per Series A share and (ii) all accrued but unpaid dividends.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(10)
|
Redeemable Preferred Stock
|
On November 30, 2015, our public offering
of up to 100,000 shares of Redeemable Preferred Stock (“RPS”) at $1,000 per share was declared effective. 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, if any, then to the outstanding balance of the preferred stock if additional paid-in-capital
has been exhausted. 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 RPS 2, 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 or decline 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.
On March 31, 2017, we closed the RPS offering
to investors having sold 99,127 shares of RPS for an aggregate gross consideration of $99,127,000 and incurred approximately $7,019,000
of related selling costs.
At the time of its issuance, we determined
that the RPS contained two embedded features: (1) optional redemption by the holder; 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
Accounting Standards Codification 470
“Debt”
(“ASC 470”) 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
of 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, if any, then to the outstanding balance of the preferred
stock if additional paid-in-capital has been exhausted. 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 by such holder from us and still held by such holder.
Holders of RPS 2 may request that we redeem
their RPS 2 shares at a price equal to their liquidation preference, less an applicable redemption fee, if any. Nevertheless, the
Certificate of Designation for RPS 2 permits us complete discretion to grant or 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).
As of September 30, 2017, we had sold 48,316
shares of RPS 2 for aggregate gross consideration of $48,316,000, and incurred approximately $2,322,000 of selling costs related
to the sale of those shares.
At the time of its issuance, we determined
that the RPS 2 contained two embedded features: (1) optional redemption by the holder; 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 2 should be considered
an equity host for the purposes of assessing the embedded derivatives for potential bifurcation. Based on our assessment under
ASC 470 we do not believe bifurcation of either the holder’s redemption or conversion feature is appropriate.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
We had a current income tax liability of
$0 as of both September 30, 2017 and December 31, 2016. The components of deferred income tax expense (benefit) for the three and
nine months ended September 30, 2017 and 2016, respectfully, consisted of the following:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,095,000
|
)
|
|
$
|
(1,082,000
|
)
|
|
$
|
(4,912,000
|
)
|
|
$
|
1,121,000
|
|
State
|
|
|
(669,000
|
)
|
|
|
(346,000
|
)
|
|
|
(1,570,000
|
)
|
|
|
358,000
|
|
Total income tax expense (benefit)
|
|
$
|
(2,764,000
|
)
|
|
$
|
(1,428,000
|
)
|
|
$
|
(6,482,000
|
)
|
|
$
|
1,479,000
|
|
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 September 30, 2017
and December 31, 2016, 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.
The Company is engaged in acquiring of
life insurance policies and holding them to maturity. Due to the nature of holding policies and the aging of the underlying insureds,
Management believes the Company likely will recognize taxable income as the policies in our portfolio start maturing at an accelerated
rate in the near future. Management has evaluated and concluded on the material accuracy of our deferred tax carrying amounts.
Accounting Standards Codification 740,
Income
Taxes
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 is 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.
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 September 30, 2017 and December 31, 2016, 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 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.
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.”
In conjunction with the initial public
offering our Company issued warrants to purchase 16,000 shares of our common stock at an exercise price of $15.63 per share. As
of September 30, 2017 none of these warrants had been exercised. The weighted average remaining life of these warrants at September
30, 2017 was 2.0 years.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(14)
|
Stock Incentive Plan
|
We adopted our 2013 Stock Incentive
Plan in March 2013, as amended on June 1, 2015 and May 5, 2017. The Compensation Committee of our Board of Directors is responsible
for the administration of the plan. Participants 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. As of
September 30, 2017, 3,000,000 common stock options are issuable under the plan.
Stock Options
Through September 30, 2017, we had
outstanding stock options for 1,514,000 shares of common stock to employees, officers, and directors under the plan. Options for
762,000 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 $10.38 for those beneficially owning more than 10% of our common stock, and between $4.83 and $10.76 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 34.9%. 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. As of September 30, 2017, stock options for 682,000 shares had been forfeited and stock options for 120,000 shares had
been exercised.
Outstanding stock options:
|
|
Vested
|
|
|
Un-vested
|
|
|
Total
|
|
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
|
)
|
|
|
-
|
|
Exercised during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited during the year
|
|
|
(19,926
|
)
|
|
|
(82,140
|
)
|
|
|
(102,066
|
)
|
Balance as of December 31, 2016
|
|
|
738,065
|
|
|
|
844,334
|
|
|
|
1,582,399
|
|
Granted year-to-date
|
|
|
40,100
|
|
|
|
228,300
|
|
|
|
268,400
|
|
Vested year-to-date
|
|
|
218,218
|
|
|
|
(218,218
|
)
|
|
|
-
|
|
Exercised year-to-date
|
|
|
(92,000
|
)
|
|
|
-
|
|
|
|
(92,000
|
)
|
Forfeited year-to-date
|
|
|
(142,119
|
)
|
|
|
(102,315
|
)
|
|
|
(244,434
|
)
|
Balance as of September 30, 2017
|
|
|
762,264
|
|
|
|
752,101
|
|
|
|
1,514,365
|
|
Compensation expense related to unvested
options not yet recognized is $488,000. We expect to recognize this compensation expense over the next three years ($103,000 in
2017, $267,000 in 2018, $103,000 in 2019, and $15,000 in 2020).
Stock Appreciation Rights (SARs)
As of September 30, 2017, we have issued
SARs for 280,472 shares of common stock to employees. The strike price of the SARs was between $7.84 and $10.38, which was equal
to the market price of the common stock at the date of issuance. As of September 30, 2017, 149,000 of the SARs were vested. On
September 30, 2017 the market price of GWG’s common stock was $10.07.
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
|
|
Granted during the year
|
|
|
4,063
|
|
|
|
36,674
|
|
|
|
40,737
|
|
Vested during the year
|
|
|
38,197
|
|
|
|
(38,197
|
)
|
|
|
-
|
|
Forfeited during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance as of September 30, 2017
|
|
|
148,868
|
|
|
|
131,604
|
|
|
|
280,472
|
|
The liability for the SARs as of September
30, 2017, recorded within Other accrued expenses, was $307,000. Employee compensation and benefits expense for SARs of ($9,000)
and $303,000 was recorded during the three and nine months ended September 30, 2017.
Upon the exercise of SARs, the Company
is obligated to make cash payment equal to the positive difference between the fair market value of the Company’s common
stock on the date of exercise less the fair market value of the common stock on the date of grant.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The components of “Other expenses”
on our Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 are as follows:
|
|
Three months ended September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Contract Labor
|
|
$
|
130,041
|
|
|
$
|
218,884
|
|
|
$
|
311,314
|
|
|
$
|
717,111
|
|
Marketing
|
|
|
485,510
|
|
|
|
423,041
|
|
|
|
1,686,943
|
|
|
|
1,234,372
|
|
Information Technology
|
|
|
410,903
|
|
|
|
194,653
|
|
|
|
1,093,011
|
|
|
|
522,552
|
|
Servicing and Facility Fees
|
|
|
276,826
|
|
|
|
520,235
|
|
|
|
855,928
|
|
|
|
680,208
|
|
Travel and Entertainment
|
|
|
249,684
|
|
|
|
272,785
|
|
|
|
767,958
|
|
|
|
838,111
|
|
Insurance and Regulatory
|
|
|
415,817
|
|
|
|
452,814
|
|
|
|
1,239,670
|
|
|
|
1,107,088
|
|
Charitable Contributions
|
|
|
42,093
|
|
|
|
277,508
|
|
|
|
462,103
|
|
|
|
279,682
|
|
General and Administrative
|
|
|
760,322
|
|
|
|
503,292
|
|
|
|
2,017,690
|
|
|
|
1,828,933
|
|
|
|
$
|
2,771,196
|
|
|
$
|
2,863,212
|
|
|
$
|
8,434,617
|
|
|
$
|
7,208,057
|
|
(16)
|
Net Loss per Common Share
|
We have outstanding Series A, RPS and
RPS 2, as respectively described in Notes 9, 10 and 11. The Series A, RPS and RPS 2 are anti-dilutive to our net loss or income
attributable to common shareholders calculation at both September 30, 2017 and 2016. We also issued warrants to purchase common
stock in conjunction with the sale of Series A (see Note 9), which have expired as of September 30, 2017. Both those warrants
and our vested stock options are anti-dilutive at both September 30, 2017 and 2016.
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 October 2025. 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 $121,000
and $344,000 during the three and nine months ended September 30, 2017 and $102,000 and $306,000 for the three and nine months
ended September 30, 2016.
Minimum lease payments under the amended
lease are as follows:
Three months ending December 31, 2017
|
|
$
|
64,000
|
|
2018
|
|
|
266,000
|
|
2019
|
|
|
275,000
|
|
2020
|
|
|
284,000
|
|
2021
|
|
|
293,000
|
|
2022
|
|
|
302,000
|
|
Thereafter
|
|
|
904,000
|
|
|
|
$
|
2,388,000
|
|
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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(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. GWG Life’s
equity in DLP IV serve as collateral for our L Bond obligations. Substantially all of our life insurance policies are held by
DLP IV and the Trust. The policies held by DLP IV are not collateral for the L Bond obligations as such policies are pledged to
the senior credit facility with LNV Corporation.
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 substantial majority of insurance policies we currently
own are subject to a collateral arrangement with LNV Corporation described in Note 6. Under this arrangement, we are required
to maintain a collection account that is used to collect policy benefits from pledged policies, pay interest and other charges
under the facility, and distribute funds to pay down the facility.
The following represents consolidating
financial information as of September 30, 2017 and December 31, 2016, with respect to the financial position, and for the three
and nine months ended September 30, 2017 and 2016, 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 represents the financial information of GWG Life, the guarantor subsidiary of the L Bonds, presenting its investment
in 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 IV and the Trust.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets
September 30, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
31,382,104
|
|
|
$
|
82,587,231
|
|
|
$
|
1,376,146
|
|
|
$
|
-
|
|
|
$
|
115,345,481
|
|
Restricted cash
|
|
|
-
|
|
|
|
2,647,121
|
|
|
|
3,172,109
|
|
|
|
-
|
|
|
|
5,819,230
|
|
Investment in life insurance policies, at fair value
|
|
|
-
|
|
|
|
45,962,331
|
|
|
|
574,135,607
|
|
|
|
-
|
|
|
|
620,097,938
|
|
Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
2,623,657
|
|
|
|
-
|
|
|
|
2,623,657
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
14,597,000
|
|
|
|
-
|
|
|
|
14,597,000
|
|
Deferred taxes, net
|
|
|
4,384,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,384,546
|
|
Other assets
|
|
|
1,883,433
|
|
|
|
2,013,796
|
|
|
|
61,584
|
|
|
|
(134,613
|
)
|
|
|
3,824,200
|
|
Investment in subsidiaries
|
|
|
519,803,823
|
|
|
|
385,753,794
|
|
|
|
-
|
|
|
|
(905,557,617
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
557,453,906
|
|
|
$
|
518,964,273
|
|
|
$
|
595,966,103
|
|
|
$
|
(905,692,230
|
)
|
|
$
|
766,692,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 facility
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
201,978,580
|
|
|
$
|
-
|
|
|
$
|
201,978,580
|
|
L Bonds
|
|
|
413,060,517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
413,060,517
|
|
Accounts payable
|
|
|
1,062,708
|
|
|
|
1,259,708
|
|
|
|
1,392,820
|
|
|
|
-
|
|
|
|
3,715,236
|
|
Interest and dividends payable
|
|
|
10,541,613
|
|
|
|
-
|
|
|
|
2,980,582
|
|
|
|
(1,021
|
)
|
|
|
13,521,174
|
|
Other accrued expenses
|
|
|
1,165,044
|
|
|
|
1,351,379
|
|
|
|
409,690
|
|
|
|
(133,592
|
)
|
|
|
2,792,521
|
|
TOTAL LIABILITIES
|
|
|
425,829,882
|
|
|
|
2,611,087
|
|
|
|
206,761,672
|
|
|
|
(134,613
|
)
|
|
|
635,068,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member’s capital
|
|
|
-
|
|
|
|
516,353,186
|
|
|
|
389,204,431
|
|
|
|
(905,557,617
|
)
|
|
|
-
|
|
Convertible preferred stock
|
|
|
19,408,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,408,980
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
|
140,828,380
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,828,380
|
|
Common stock
|
|
|
5,814
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,814
|
|
Accumulated deficit
|
|
|
(28,619,150
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(28,619,150
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
131,624,024
|
|
|
|
516,353,186
|
|
|
|
389,204,431
|
|
|
|
(905,557,617
|
)
|
|
|
131,624,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
557,453,906
|
|
|
$
|
518,964,273
|
|
|
$
|
595,966,103
|
|
|
$
|
(905,692,230
|
)
|
|
$
|
766,692,052
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets (continued)
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 and dividends 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member’s 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 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Operations
For the three months ended September 30, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing income
|
|
$
|
-
|
|
|
$
|
125,525
|
|
|
$
|
-
|
|
|
$
|
(105,525
|
)
|
|
$
|
20,000
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
2,780,544
|
|
|
|
11,640,809
|
|
|
|
-
|
|
|
|
14,421,353
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
100,367
|
|
|
|
-
|
|
|
|
100,367
|
|
Interest and other income
|
|
|
40,044
|
|
|
|
(12,115
|
)
|
|
|
139,498
|
|
|
|
(12,104
|
)
|
|
|
155,323
|
|
TOTAL REVENUE
|
|
|
40,044
|
|
|
|
2,893,954
|
|
|
|
11,880,674
|
|
|
|
(117,629
|
)
|
|
|
14,697,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
105,525
|
|
|
|
(105,525
|
)
|
|
|
-
|
|
Interest expense
|
|
|
9,907,959
|
|
|
|
253,422
|
|
|
|
3,126,130
|
|
|
|
(12,104
|
)
|
|
|
13,275,407
|
|
Employee compensation and benefits
|
|
|
2,140,675
|
|
|
|
1,413,103
|
|
|
|
238,318
|
|
|
|
-
|
|
|
|
3,792,096
|
|
Legal and professional fees
|
|
|
746,939
|
|
|
|
246,691
|
|
|
|
663,460
|
|
|
|
-
|
|
|
|
1,657,090
|
|
Provision for MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
28,000
|
|
|
|
-
|
|
|
|
28,000
|
|
Other expenses
|
|
|
1,743,730
|
|
|
|
711,528
|
|
|
|
315,938
|
|
|
|
-
|
|
|
|
2,771,196
|
|
TOTAL EXPENSES
|
|
|
14,539,303
|
|
|
|
2,624,744
|
|
|
|
4,477,371
|
|
|
|
(117,629
|
)
|
|
|
21,523,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(14,499,259
|
)
|
|
|
269,210
|
|
|
|
7,403,303
|
|
|
|
-
|
|
|
|
(6,826,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
7,672,513
|
|
|
|
8,263,120
|
|
|
|
-
|
|
|
|
(15,935,633
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(6,826,746
|
)
|
|
|
8,532,330
|
|
|
|
7,403,303
|
|
|
|
(15,935,633
|
)
|
|
|
(6,826,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
(2,764,243
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,764,243
|
)
|
NET INCOME (LOSS)
|
|
|
(4,062,503
|
)
|
|
|
8,532,330
|
|
|
|
7,403,303
|
|
|
|
(15,935,633
|
)
|
|
|
(4,062,503
|
)
|
Preferred stock dividends
|
|
|
3,548,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,548,165
|
|
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(7,610,668
|
)
|
|
$
|
8,532,330
|
|
|
$
|
7,403,303
|
|
|
$
|
(15,935,633
|
)
|
|
$
|
(7,610,668
|
)
|
For the three months ended September 30, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
-
|
|
|
|
13,509,755
|
|
|
|
-
|
|
|
|
13,509,755
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
286,225
|
|
|
|
-
|
|
|
|
286,225
|
|
Interest and other income
|
|
|
75,808
|
|
|
|
30,126
|
|
|
|
83,313
|
|
|
|
(64,249
|
)
|
|
|
124,998
|
|
TOTAL REVENUE
|
|
|
75,808
|
|
|
|
30,126
|
|
|
|
13,879,293
|
|
|
|
(64,249
|
)
|
|
|
13,920,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Interest expense
|
|
|
8,705,950
|
|
|
|
554,938
|
|
|
|
1,746,151
|
|
|
|
(64,249
|
)
|
|
|
10,942,790
|
|
Employee compensation and benefits
|
|
|
1,718,683
|
|
|
|
1,038,058
|
|
|
|
155,722
|
|
|
|
-
|
|
|
|
2,912,463
|
|
Legal and professional fees
|
|
|
263,917
|
|
|
|
297,804
|
|
|
|
25,109
|
|
|
|
-
|
|
|
|
586,830
|
|
Other expenses
|
|
|
1,464,498
|
|
|
|
803,106
|
|
|
|
595,608
|
|
|
|
-
|
|
|
|
2,863,212
|
|
TOTAL EXPENSES
|
|
|
12,153,048
|
|
|
|
2,693,906
|
|
|
|
2,522,590
|
|
|
|
(64,249
|
)
|
|
|
17,305,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(12,077,240
|
)
|
|
|
(2,663,780
|
)
|
|
|
11,356,703
|
|
|
|
-
|
|
|
|
(3,384,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
8,692,923
|
|
|
|
11,361,329
|
|
|
|
-
|
|
|
|
(20,054,252
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
(3,384,317
|
)
|
|
|
8,697,549
|
|
|
|
11,356,703
|
|
|
|
(20,054,252
|
)
|
|
|
(3,384,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
(1,428,130
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,428,130
|
)
|
NET INCOME
|
|
|
(1,956,187
|
)
|
|
|
8,697,549
|
|
|
|
11,356,703
|
|
|
|
(20,054,252
|
)
|
|
|
(1,956,187
|
)
|
Preferred stock dividends
|
|
|
1,041,178
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,041,178
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(2,997,365
|
)
|
|
$
|
8,697,549
|
|
|
$
|
11,356,703
|
|
|
$
|
(20,054,252
|
)
|
|
$
|
(2,997,365
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Operations (continued)
For the nine months ended September 30, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing income
|
|
$
|
-
|
|
|
$
|
311,800
|
|
|
$
|
-
|
|
|
$
|
(291,800
|
)
|
|
$
|
20,000
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
4,481,555
|
|
|
|
40,635,883
|
|
|
|
-
|
|
|
|
45,117,438
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
480,526
|
|
|
|
-
|
|
|
|
480,526
|
|
Interest and other income
|
|
|
194,273
|
|
|
|
36,895
|
|
|
|
683,141
|
|
|
|
(79,300
|
)
|
|
|
835,009
|
|
TOTAL REVENUE
|
|
|
194,273
|
|
|
|
4,830,250
|
|
|
|
41,799,550
|
|
|
|
(371,100
|
)
|
|
|
46,452,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
291,800
|
|
|
|
(291,800
|
)
|
|
|
-
|
|
Interest expense
|
|
|
27,495,867
|
|
|
|
930,837
|
|
|
|
10,418,243
|
|
|
|
(79,300
|
)
|
|
|
38,765,647
|
|
Employee compensation and benefits
|
|
|
6,179,032
|
|
|
|
4,163,873
|
|
|
|
353,550
|
|
|
|
-
|
|
|
|
10,696,455
|
|
Legal and professional fees
|
|
|
1,524,510
|
|
|
|
687,240
|
|
|
|
1,722,277
|
|
|
|
-
|
|
|
|
3,934,027
|
|
Provision for MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
906,000
|
|
|
|
-
|
|
|
|
906,000
|
|
Other expenses
|
|
|
5,291,881
|
|
|
|
2,244,577
|
|
|
|
898,159
|
|
|
|
-
|
|
|
|
8,434,617
|
|
TOTAL EXPENSES
|
|
|
40,491,290
|
|
|
|
8,026,527
|
|
|
|
14,590,029
|
|
|
|
(371,100
|
)
|
|
|
62,736,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(40,297,017
|
)
|
|
|
(3,196,277
|
)
|
|
|
27,209,521
|
|
|
|
-
|
|
|
|
(16,283,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
24,013,244
|
|
|
|
29,569,105
|
|
|
|
-
|
|
|
|
(53,582,349
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(16,283,773
|
)
|
|
|
26,372,828
|
|
|
|
27,209,521
|
|
|
|
(53,582,349
|
)
|
|
|
(16,283,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
(6,481,917
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,481,917
|
)
|
NET INCOME (LOSS)
|
|
|
(9,801,856
|
)
|
|
|
26,372,828
|
|
|
|
27,209,521
|
|
|
|
(53,582,349
|
)
|
|
|
(9,801,856
|
)
|
Preferred stock dividends
|
|
|
7,447,022
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,447,022
|
|
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(17,248,878
|
)
|
|
$
|
26,372,828
|
|
|
$
|
27,209,521
|
|
|
$
|
(53,582,349
|
)
|
|
$
|
(17,248,878
|
)
|
For the nine months ended September 30, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing income
|
|
$
|
-
|
|
|
$
|
13,417
|
|
|
$
|
-
|
|
|
$
|
(13,417
|
)
|
|
$
|
-
|
|
Gain on life insurance policies, net
|
|
|
-
|
|
|
|
-
|
|
|
|
51,606,815
|
|
|
|
-
|
|
|
|
51,606,815
|
|
MCA income
|
|
|
-
|
|
|
|
-
|
|
|
|
654,441
|
|
|
|
-
|
|
|
|
654,441
|
|
Interest and other income
|
|
|
181,828
|
|
|
|
31,137
|
|
|
|
282,259
|
|
|
|
(154,126
|
)
|
|
|
341,098
|
|
TOTAL REVENUE
|
|
|
181,828
|
|
|
|
44,554
|
|
|
|
52,543,515
|
|
|
|
(167,543
|
)
|
|
|
52,602,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy servicing fees
|
|
|
-
|
|
|
|
-
|
|
|
|
13,417
|
|
|
|
(13,417
|
)
|
|
|
-
|
|
Interest expense
|
|
|
23,323,987
|
|
|
|
1,856,909
|
|
|
|
4,829,831
|
|
|
|
(154,126
|
)
|
|
|
29,856,601
|
|
Employee compensation and benefits
|
|
|
4,894,006
|
|
|
|
3,151,107
|
|
|
|
405,055
|
|
|
|
-
|
|
|
|
8,450,168
|
|
Legal and professional fees
|
|
|
1,642,252
|
|
|
|
1,308,959
|
|
|
|
146,101
|
|
|
|
-
|
|
|
|
3,097,312
|
|
Other expenses
|
|
|
4,241,825
|
|
|
|
2,197,133
|
|
|
|
1,169,099
|
|
|
|
-
|
|
|
|
7,608,057
|
|
TOTAL EXPENSES
|
|
|
34,102,070
|
|
|
|
8,514,108
|
|
|
|
6,563,503
|
|
|
|
(167,543
|
)
|
|
|
49,012,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(33,920,242
|
)
|
|
|
(8,469,554
|
)
|
|
|
45,980,012
|
|
|
|
-
|
|
|
|
3,590,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
37,510,458
|
|
|
|
46,497,731
|
|
|
|
-
|
|
|
|
(84,008,189
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
3,590,216
|
|
|
|
38,028,177
|
|
|
|
45,980,012
|
|
|
|
(84,008,189
|
)
|
|
|
3,590,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
1,478,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,478,617
|
|
NET INCOME
|
|
|
2,111,599
|
|
|
|
38,028,177
|
|
|
|
45,980,012
|
|
|
|
(84,008,189
|
)
|
|
|
2,111,599
|
|
Preferred stock dividends
|
|
|
2,153,333
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,153,333
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(41,734
|
)
|
|
$
|
38,028,177
|
|
|
$
|
45,980,012
|
|
|
$
|
(84,008,189
|
)
|
|
$
|
(41,734
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Cash Flows
For the three months ended September 30, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,062,503
|
)
|
|
$
|
8,532,330
|
|
|
$
|
7,403,303
|
|
|
$
|
(15,935,633
|
)
|
|
$
|
(4,062,503
|
)
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(7,672,513
|
)
|
|
|
(8,263,120
|
)
|
|
|
-
|
|
|
|
15,935,633
|
|
|
|
-
|
|
Change in fair value of life insurance policies
|
|
|
-
|
|
|
|
(3,609,194
|
)
|
|
|
(16,572,538
|
)
|
|
|
-
|
|
|
|
(20,181,732
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
2,075,632
|
|
|
|
134,445
|
|
|
|
134,464
|
|
|
|
-
|
|
|
|
2,344,541
|
|
Deferred income taxes
|
|
|
(2,764,243
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,764,243
|
)
|
Preferred stock dividends payable
|
|
|
333,391
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,391
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,627,000
|
)
|
|
|
-
|
|
|
|
(7,627,000
|
)
|
Other assets
|
|
|
(38,552,777
|
)
|
|
|
51,740,361
|
|
|
|
330,547
|
|
|
|
(13,415,694
|
)
|
|
|
102,437
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
807,511
|
|
|
|
(10,940
|
)
|
|
|
(800,000
|
)
|
|
|
-
|
|
|
|
(3,429
|
)
|
Accounts payable and accrued expenses
|
|
|
693,285
|
|
|
|
(844,072
|
)
|
|
|
(264,684
|
)
|
|
|
-
|
|
|
|
(415,471
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(49,142,217
|
)
|
|
|
47,679,810
|
|
|
|
(17,395,908
|
)
|
|
|
(13,415,694
|
)
|
|
|
(32,274,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,199,692
|
)
|
|
|
-
|
|
|
|
(25,199,692
|
)
|
Carrying value of matured life insurance policies
|
|
|
-
|
|
|
|
505,000
|
|
|
|
1,828,039
|
|
|
|
-
|
|
|
|
2,333,039
|
|
Proceeds from Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
826,621
|
|
|
|
-
|
|
|
|
826,621
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
505,000
|
|
|
|
(22,545,032
|
)
|
|
|
-
|
|
|
|
(22,040,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
56,887,491
|
|
|
|
-
|
|
|
|
56,887,491
|
|
Payments for issuance of senior debt
|
|
|
-
|
|
|
|
|
|
|
|
(3,937,907
|
)
|
|
|
-
|
|
|
|
(3,937,907
|
)
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(6,815,406
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,815,406
|
)
|
Proceeds from issuance of L Bonds
|
|
|
30,271,873
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,271,873
|
|
Payments for issuance and redemption of L Bonds
|
|
|
(19,752,717
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,752,717
|
)
|
Payments to restricted cash
|
|
|
-
|
|
|
|
1,807,105
|
|
|
|
38,533,296
|
|
|
|
-
|
|
|
|
40,340,401
|
|
Issuance of member capital
|
|
|
-
|
|
|
|
37,959,462
|
|
|
|
(51,375,156
|
)
|
|
|
13,415,694
|
|
|
|
--
|
|
Issuance of common stock
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Proceeds from issuance of preferred stock
|
|
|
25,211,870
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,211,870
|
|
Payments for issuance and redemption of preferred stock
|
|
|
(1,291,420
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,291,420
|
)
|
Payments of preferred stock dividends
|
|
|
(3,548,165
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,548,165
|
)
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
30,891,471
|
|
|
|
32,951,161
|
|
|
|
40,107,724
|
|
|
|
13,415,694
|
|
|
|
117,366,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(18,250,746
|
)
|
|
|
81,135,971
|
|
|
|
166,784
|
|
|
|
|
|
|
|
63,052,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
49,632,850
|
|
|
|
1,451,260
|
|
|
|
1,209,362
|
|
|
|
-
|
|
|
|
52,293,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
31,382,104
|
|
|
$
|
82,587,231
|
|
|
$
|
1,376,146
|
|
|
$
|
-
|
|
|
$
|
115,345,481
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Consolidating Statements of Cash Flows (continued)
For the three months ended September 30, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(1,956,187
|
)
|
|
$
|
8,697,549
|
|
|
$
|
11,356,703
|
|
|
$
|
(20,054,252
|
)
|
|
$
|
(1,956,187
|
)
|
Adjustments to reconcile net loss to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(8,692,924
|
)
|
|
|
(11,361,328
|
)
|
|
|
-
|
|
|
|
20,054,252
|
|
|
|
-
|
|
Change in fair value of life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(21,073,226
|
)
|
|
|
-
|
|
|
|
(21,073,226
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
2,072,879
|
|
|
|
81,849
|
|
|
|
611,015
|
|
|
|
-
|
|
|
|
2,765,743
|
|
Deferred income taxes
|
|
|
(1,428,130
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,428,130
|
)
|
Preferred stock dividends payable
|
|
|
333,565
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
333,565
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
700,000
|
|
|
|
-
|
|
|
|
700,000
|
|
Other assets
|
|
|
(54,428,152
|
)
|
|
|
(54,272,589
|
)
|
|
|
-
|
|
|
|
109,120,577
|
|
|
|
419,836
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
(64,249
|
)
|
|
|
(16,700
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(80,949
|
)
|
Accounts payable and other accrued expenses
|
|
|
155,980
|
|
|
|
2,172,227
|
|
|
|
(5,545,197
|
)
|
|
|
-
|
|
|
|
(3,216,990
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(64,007,218
|
)
|
|
|
(54,698,992
|
)
|
|
|
(13,950,705
|
)
|
|
|
109,120,577
|
|
|
|
(23,536,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,770,326
|
)
|
|
|
-
|
|
|
|
(25,770,326
|
)
|
Carrying value of matured life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
1,078,889
|
|
|
|
-
|
|
|
|
1,078,889
|
|
Investment in Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,965,896
|
)
|
|
|
|
|
|
|
(1,965,896
|
)
|
Proceeds from Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
220,911
|
|
|
|
-
|
|
|
|
220,911
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,436,422
|
)
|
|
|
-
|
|
|
|
(26,436,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayment of senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
(10,761,048
|
)
|
|
|
-
|
|
|
|
(10,761,048
|
)
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(541,275
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(541,275
|
)
|
Proceeds from issuance of L Bonds
|
|
|
64,350,430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,350,430
|
|
Payments for issuance and redemption of L Bonds
|
|
|
(14,373,447
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,373,447
|
)
|
Payments to restricted cash
|
|
|
-
|
|
|
|
486,283
|
|
|
|
(5,013,515
|
)
|
|
|
-
|
|
|
|
(4,527,232
|
)
|
Issuance of member capital
|
|
|
-
|
|
|
|
52,304,345
|
|
|
|
56,816,232
|
|
|
|
(109,120,577
|
)
|
|
|
-
|
|
Issuance of common stock
|
|
|
31,515
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,515
|
|
Proceeds from issuance of preferred stock
|
|
|
20,786,332
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,786,332
|
|
Payments for issuance and redemption of preferred stock
|
|
|
(2,485,304
|
)
|
|
|
-
|
|
|
|
(71,555
|
)
|
|
|
-
|
|
|
|
(2,556,859
|
)
|
Payments of preferred stock dividends
|
|
|
(1,041,178
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,041,178
|
)
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
67,268,348
|
|
|
|
52,249,353
|
|
|
|
40,970,114
|
|
|
|
(109,120,577
|
)
|
|
|
51,367,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
3,261,130
|
|
|
|
(2,449,639
|
)
|
|
|
582,987
|
|
|
|
-
|
|
|
|
1,394,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
10,051,621
|
|
|
|
6,822,484
|
|
|
|
505,245
|
|
|
|
-
|
|
|
|
17,379,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
13,312,751
|
|
|
$
|
4,372,845
|
|
|
$
|
1,088,232
|
|
|
$
|
-
|
|
|
$
|
18,773,828
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Consolidating Statements of Cash Flows (continued)
For the nine months ended September 30, 2017
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,801,856
|
)
|
|
$
|
26,372,828
|
|
|
$
|
27,209,521
|
|
|
$
|
(53,582,349
|
)
|
|
$
|
(9,801,856
|
)
|
Adjustments to reconcile net loss to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(24,013,243
|
)
|
|
|
(29,569,106
|
)
|
|
|
-
|
|
|
|
53,582,349
|
|
|
|
-
|
|
Change in fair value of life insurance policies
|
|
|
-
|
|
|
|
(4,803,015
|
)
|
|
|
(44,498,052
|
)
|
|
|
-
|
|
|
|
(49,301,067
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
4,931,441
|
|
|
|
208,829
|
|
|
|
1,368,422
|
|
|
|
-
|
|
|
|
6,508,692
|
|
Deferred income taxes
|
|
|
(6,481,917
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,481,917
|
)
|
Preferred stock dividends payable
|
|
|
1,034,139
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,034,139
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,252,000
|
)
|
|
|
-
|
|
|
|
(9,252,000
|
)
|
Other assets
|
|
|
(65,691,037
|
)
|
|
|
(3,794,004
|
)
|
|
|
788,726
|
|
|
|
69,667,082
|
|
|
|
970,767
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
1,897,406
|
|
|
|
(10,620
|
)
|
|
|
(1,900,000
|
)
|
|
|
-
|
|
|
|
(13,214
|
)
|
Accounts payable and other accrued expenses
|
|
|
2,331,255
|
|
|
|
(2,407,918
|
)
|
|
|
1,917,279
|
|
|
|
-
|
|
|
|
1,840,616
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(95,793,812
|
)
|
|
|
(14,003,006
|
)
|
|
|
(24,366,104
|
)
|
|
|
69,667,082
|
|
|
|
(64,495,840
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(67,321,363
|
)
|
|
|
-
|
|
|
|
(67,321,363
|
)
|
Carrying value of matured life insurance policies
|
|
|
-
|
|
|
|
1,256,576
|
|
|
|
6,460,271
|
|
|
|
-
|
|
|
|
7,716,847
|
|
Investment in Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,671
|
)
|
|
|
-
|
|
|
|
(39,671
|
)
|
Proceeds from Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
2,250,323
|
|
|
|
-
|
|
|
|
2,250,323
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
1,256,576
|
|
|
|
(58,650,440
|
)
|
|
|
-
|
|
|
|
(57,393,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net repayment of senior credit facilities
|
|
|
-
|
|
|
|
-
|
|
|
|
49,787,954
|
|
|
|
-
|
|
|
|
49,787,954
|
|
Payments for issuance of senior debt
|
|
|
|
|
|
|
(1,076,118
|
)
|
|
|
(4,052,201
|
)
|
|
|
-
|
|
|
|
(5,128,319
|
)
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(16,613,667
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,613,667
|
)
|
Proceeds from issuance of L Bonds
|
|
|
87,016,343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,016,343
|
|
Payments for issuance and redemption of L Bonds
|
|
|
(58,949,880
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(58,949,880
|
)
|
Payments to restricted cash
|
|
|
-
|
|
|
|
(529,472
|
)
|
|
|
32,536,838
|
|
|
|
-
|
|
|
|
32,007,366
|
|
Issuance of member capital
|
|
|
-
|
|
|
|
64,191,966
|
|
|
|
5,475,116
|
|
|
|
(69,667,082
|
)
|
|
|
-
|
|
Payments for issuance and redemption of common stock
|
|
|
(1,603,526
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,603,526
|
)
|
Proceeds from issuance of preferred stock
|
|
|
86,692,811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86,692,811
|
|
Payments for issuance and redemption of preferred stock
|
|
|
(7,013,857
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,013,857
|
)
|
Payments of preferred stock dividends
|
|
|
(7,447,022
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,447,022
|
)
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
98,694,869
|
|
|
|
45,972,709
|
|
|
|
83,747,707
|
|
|
|
(69,667,082
|
)
|
|
|
158,748,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
2,901,057
|
|
|
|
33,226,279
|
|
|
|
731,163
|
|
|
|
-
|
|
|
|
36,858,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
28,481,047
|
|
|
|
49,360,952
|
|
|
|
644,983
|
|
|
|
-
|
|
|
|
78,486,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
31,382,104
|
|
|
$
|
82,587,231
|
|
|
$
|
1,376,146
|
|
|
$
|
-
|
|
|
$
|
115,345,481
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Consolidating Statements of Cash Flows (continued)
For the nine months ended September 30, 2016
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,111,599
|
|
|
$
|
38,028,177
|
|
|
$
|
45,980,012
|
|
|
$
|
(84,008,189
|
)
|
|
$
|
2,111,599
|
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(37,510,459
|
)
|
|
|
(46,497,730
|
)
|
|
|
-
|
|
|
|
84,008,189
|
|
|
|
-
|
|
Change in fair value of life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(53,846,155
|
)
|
|
|
-
|
|
|
|
(53,846,155
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
5,982,802
|
|
|
|
(1,364,614
|
)
|
|
|
1,459,717
|
|
|
|
-
|
|
|
|
6,077,905
|
|
Deferred income taxes
|
|
|
1,478,617
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,478,617
|
|
Preferred stock dividends payable
|
|
|
663,614
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
663,614
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,129,022
|
)
|
|
|
|
|
|
|
(6,129,022
|
)
|
Other assets
|
|
|
(114,885,990
|
)
|
|
|
(92,168,163
|
)
|
|
|
-
|
|
|
|
206,436,523
|
|
|
|
(617,630
|
)
|
Increase in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to related party
|
|
|
(2,867,225
|
)
|
|
|
(15,505
|
)
|
|
|
2,700,000
|
|
|
|
-
|
|
|
|
(182,730
|
)
|
Accounts payable and accrued expenses
|
|
|
2,396,503
|
|
|
|
2,889,525
|
|
|
|
(7,310,262
|
)
|
|
|
-
|
|
|
|
(2,024,234
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(142,630,539
|
)
|
|
|
(99,128,310
|
)
|
|
|
(17,145,710
|
)
|
|
|
206,436,523
|
|
|
|
(52,468,036
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
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|
Investment in life insurance policies
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,470,362
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)
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|
|
-
|
|
|
|
(74,470,362
|
)
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Carrying value of matured life insurance policies
|
|
|
-
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|
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|
-
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|
|
|
7,381,132
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|
|
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-
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|
|
|
7,381,132
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|
Investment in Secured MCA advances
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,613,310
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)
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|
|
-
|
|
|
|
(7,613,310
|
)
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Proceeds from Secured MCA advances
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|
|
-
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|
|
|
-
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|
|
|
1,246,703
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|
|
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-
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|
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1,246,703
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|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
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-
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|
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|
-
|
|
|
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(73,455,837
|
)
|
|
|
-
|
|
|
|
(73,455,837
|
)
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|
|
|
|
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CASH FLOWS FROM FINANCING ACTIVITIES
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Net borrowings on senior credit facilities
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|
-
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|
|
|
-
|
|
|
|
6,238,952
|
|
|
|
-
|
|
|
|
6,238,952
|
|
Payments for redemption of Series I Secured Notes
|
|
|
-
|
|
|
|
(6,264,018
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,264,018
|
)
|
Proceeds from issuance of L Bonds
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|
|
135,477,090
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|
|
|
-
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|
|
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-
|
|
|
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-
|
|
|
|
135,477,090
|
|
Payments for issuance and redemption of L Bonds
|
|
|
(37,036,922
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(37,036,922
|
)
|
Payments to restricted cash
|
|
|
-
|
|
|
|
(2,335,768
|
)
|
|
|
(11,010,358
|
)
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|
|
-
|
|
|
|
(13,346,126
|
)
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Issuance of common stock
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|
|
244,185
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|
|
|
-
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|
|
|
-
|
|
|
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-
|
|
|
|
244,185
|
|
Proceeds from issuance of preferred stock
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|
|
31,215,986
|
|
|
|
-
|
|
|
|
71,555
|
|
|
|
-
|
|
|
|
31,287,541
|
|
Payments for issuance and redemption of preferred stock
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|
|
(4,095,878
|
)
|
|
|
-
|
|
|
|
(78,895
|
)
|
|
|
-
|
|
|
|
(4,174,773
|
)
|
Payments of preferred stock dividends
|
|
|
(2,153,333
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,153,333
|
)
|
Issuance of member capital
|
|
|
-
|
|
|
|
110,118,219
|
|
|
|
96,318,304
|
|
|
|
(206,436,523
|
)
|
|
|
-
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
123,651,128
|
|
|
|
101,518,433
|
|
|
|
91,539,558
|
|
|
|
(206,436,523
|
)
|
|
|
110,272,596
|
|
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|
|
|
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NET INCREASE IN CASH AND CASH EQUIVALENTS
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|
|
(18,979,411
|
)
|
|
|
2,390,123
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|
|
|
938,011
|
|
|
|
-
|
|
|
|
(15,651,277
|
)
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CASH AND CASH EQUIVALENTS
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BEGINNING OF THE PERIOD
|
|
|
32,292,162
|
|
|
|
1,982,722
|
|
|
|
150,221
|
|
|
|
-
|
|
|
|
34,425,105
|
|
|
|
|
|
|
|
|
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|
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END OF THE PERIOD
|
|
$
|
13,312,751
|
|
|
$
|
4,372,845
|
|
|
$
|
1,088,232
|
|
|
$
|
-
|
|
|
$
|
18,773,828
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
We mostly 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 of our portfolio.
Life insurance company
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
John Hancock
|
|
|
14.92
|
%
|
|
|
14.36
|
%
|
AXA Equitable
|
|
|
12.24
|
%
|
|
|
13.42
|
%
|
Lincoln National
|
|
|
11.27
|
%
|
|
|
11.22
|
%
|
The following summarizes the number of
insurance policies held in specific states exceeding 10% of the total face value of our portfolio:
State of Residence
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Florida
|
|
|
19.76
|
%
|
|
|
19.42
|
%
|
California
|
|
|
19.06
|
%
|
|
|
20.72
|
%
|
Since September 30, 2017, eight policies
covering seven individuals have matured. The combined life insurance benefits of these policies were $14,953,000.
Since September 30, 2017, we have
issued approximately $18,277,000 of L Bonds.
Since September 30, 2017, we have
issued approximately $13,037,000 of RPS 2.
On October 9, 2017, all shares of Series
A were redeemed with a redemption payment equal to the sum of (i) $8.25 per share of Series A and (ii) all accrued but unpaid dividends
calculated at an annual rate of $0.75 per share, for an aggregate of $22,252,000.
On October 23, 2017, we entered into an
Amended and Restated Indenture with GWG Life, LLC, as guarantor, and Bank of Utah, as trustee, for the purposes of (i) eliminating
references to the Series I Secured Notes that had been governed by the original indenture and were fully paid off as described
in this report (and replacing those references, where appropriate, with general references to pari passu debt that may be incurred
in the future), (ii) eliminating references to an intercreditor agreement that had been entered into for the benefit of the holders
of the Series I Secured Notes, and (iii) updating and otherwise clarifying certain provisions of the original Indenture. Our L
Bonds are presently the only securities that have been issued under the Amended and Restated Indenture.
Also on October 23, 2017, we entered into
an Amended and Restated Pledge and Security Agreement with GWG Life, LLC, Jon R. Sabes and Steven F. Sabes, each as a grantor,
and Bank of Utah, as the collateral trustee, for the purposes of (i) amending and restating the terms under which it and the other
grantors have granted a security interest for the obligations owing in respect of the L Bonds issued under the Amended and Restated
Indenture to be consistent with the Amended and Restated Indenture described above, and (ii) updating and otherwise clarifying
certain provisions of the original Pledge and Security Agreement.