NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Nature of Business and Summary
of Significant Accounting Policies
Nature of
Business —
We are a leading provider of liquidity to consumers owning life insurance policies, an owner of a portfolio
of alternative assets, and a developer of epigenetic technology for the life insurance industry and beyond. We built our business
providing value to consumers owning illiquid life insurance products across America, delivering more than $564 million in value
for their policies since 2006. As of September 30, 2018, we own an alternative asset portfolio of $1.96 billion in face value
of life insurance policy benefits.
In addition, we continue to innovate in
the life insurance industry through our insurance technology initiative which is based upon the use of step-change epigenetic technology.
Our wholly owned insurtech subsidiary, Life Epigenetics is focused on creating intellectual property and commercialized testing
from supervised machine learning and advanced epigenetic technology. We believe our technology offers the life insurance industry
a step-change opportunity for enhanced life insurance underwriting and risk assessment. Our wholly owned insurtech subsidiary,
YouSurance is a digital life insurance agency that is working to offer life insurance directly to consumers in conjunction with
our epigenetic testing. We believe that consumers who are interested in their health and wellness and in reducing the cost of their
insurance will benefit from working with YouSurance.
The Beneficient
Transaction
On August 10, 2018, we completed the first
of two anticipated closings (the “Initial Transfer”) contemplated by a Master Exchange Agreement with The Beneficient
Company Group, L.P. (“Beneficient”) and certain other parties (the “Seller Trusts”), which governs the
strategic exchange of assets among the parties (the “Beneficient Transaction”). At the Initial Transfer:
|
●
|
GWG
issued L Bonds to the Seller Trusts in an aggregate principal amount of $403,234,866 that mature on August 9, 2023, and bear
interest at 7.5% per annum (the “Seller Trust L Bonds”),
|
|
●
|
GWG issued to Beneficient 5,000,000 shares of GWG’s Series B Convertible Preferred Stock, par value $0.001 per share and having a stated value of $10 per share (“Series B”), for cash consideration of $50,000,000,
|
|
●
|
Beneficient, as borrower, entered into a commercial loan agreement with GWG Life, as lender, in a principal amount of $200,000,000 (the “Commercial Loan”),
|
|
●
|
Beneficient delivered to GWG a promissory note in the principal amount of $162,911,379 (the “Exchangeable Note”), and
|
|
●
|
the Seller Trusts delivered to GWG 4,032,349 common units of Beneficient at $10 per common unit.
|
Upon the final closing of the Beneficient
Transaction, which is expected at or near year-end 2018, subject to the satisfaction of certain closing conditions (the “Final
Closing” and the date upon which the Final Closing occurs, the “Final Closing Date”):
|
●
|
the Seller Trusts will transfer to GWG an aggregate of 40,485,230 common units of Beneficient, inclusive of 16.3 million units in full satisfaction of the Exchangeable Note,
|
|
●
|
Beneficient will issue to GWG an amount of securities or other instruments, containing the same rights, preferences and privileges of certain limited partnership interests of Beneficient Company Holdings, L.P., a subsidiary of Beneficient (“Beneficient Holdings”), equivalent to seven percent (7.0%) of such limited partnership interests attributable to certain of Beneficient Holdings’ founders, and
|
|
●
|
GWG will deliver to the Seller Trusts up to 29.1 million shares of GWG common stock at $10 per share.
|
A summary of the Beneficient Transaction
is set forth in our Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 14, 2018 and amended
in our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on November 9, 2018.
Application of FASB Accounting Standards
Codification Topic 845, Nonmonetary Transactions (ASC 845)
Although
the Initial Transfer occurred on August 10, 2018, the Commercial Loan, the Exchangeable Note, the common units of Beneficient issued
at the Initial Transfer and the Seller Trust L Bonds are
not
recorded on our condensed consolidated balance sheet at September
30, 2018 or statements of operations for the three and nine months ended September 30, 2018. These amounts were not recorded because,
under ASC 845, the commercial substance of the transaction was not fully known and probable and will not be fully known and probable
until the satisfaction of certain conditions to the Final Closing and the occurrence thereof
.
It is important to note that, as further
described below, the rights and obligations of the assets exchanged, as governed by the transaction documents, are unaffected by
our current accounting application. This means that we will benefit from the assets that we received in the exchange and we will
be required to meet the obligations of the Seller Trust L Bonds that we issued in the exchange.
The result is that our financial
condition, including our ability to service our debt and meet our obligations as they become due, may be materially different from
that which an investor can discern from a review of our condensed consolidated balance sheets and statements of operations in isolation.
Likewise, financial ratios and other metrics based on our publicly filed financial statements and publicly disseminated by financial
analysts, news outlets and financial websites do not reflect the assets and liabilities exchanged in the Initial Transfer and the
economic consequences thereof.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Description of the Assets Exchanged
at the Initial Transfer
Seller Trust L Bonds
On August 10, 2018, in connection with
the Initial Transfer, GWG Holdings, GWG Life and Bank of Utah, as trustee (the “Trustee”), entered into a Supplemental
Indenture (the “Supplemental Indenture”) to the Amended and Restated Indenture dated as of October 23, 2017 (the “Amended
and Restated Indenture”). GWG Holdings entered into the Supplemental Indenture to add and modify certain provisions of the
Amended and Restated Indenture necessary to provide for the issuance of the Seller Trust L Bonds. The maturity date of the Seller
Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.5% per year. Interest is payable monthly in cash.
So long as the Final Closing has not occurred,
the redemption price payable in respect of a redemption effected by GWG after January 31, 2019 may be paid, at GWG’s option,
in the form of cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial
Loan, (ii) the outstanding principal amount and accrued and unpaid interest under the Exchangeable Note and (iii) Beneficient common
units, or a combination of cash and such property. After the second anniversary of the Final Closing Date, the holders of the Seller
Trust L Bonds will have the right to cause GWG to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder.
The repurchase may be paid, at GWG’s option, in the form of cash, a pro rata portion of (i) the outstanding principal amount
and accrued and unpaid interest under the Commercial Loan, (ii) the outstanding principal amount and accrued and unpaid interest
under the Exchangeable Note and (iii) Beneficient common units, or a combination of cash and such property.
The Seller Trust L Bonds are senior secured
obligations of GWG, ranking junior only to all senior debt of GWG (see Note 6), pari passu in right of payment and in respect of
collateral with all “L Bonds” of GWG (see Note 8), and senior in right of payment to all subordinated indebtedness
of GWG. Payments under the Seller Trust L Bonds are guaranteed by GWG Life (see Note 20).
Series B Convertible Preferred Stock
The Series B ranks, as to the payment of
dividends and the distribution of our assets upon liquidation, junior to our Redeemable Preferred Stock (“RPS”) and
Series 2 Redeemable Preferred Stock (“RPS 2”) and pari passu with our common stock. The Series B has no dividend rights.
The Series B has no voting rights, except as required by law.
The Series B will convert into 5,000,000
shares of our common stock at a conversion price of $10 per share upon the Final Closing.
Commercial Loan
The $200,000,000 principal amount under
the Commercial Loan is due on August 9, 2023; however, is extendable for two five-year terms. The extensions are available to the
borrower provided that (a) in the event Beneficient completes at least one public offering of its common units raising at least
$50,000,000 which on its own or together with any other public offering of Beneficient’s common units results in Beneficient
raising at least $100,000,000, then the maturity date will be extended to August 9, 2028; and (b) in the event that Beneficient
(i) completes at least one public offering of its common units raising at least $50,000,000 which on its own or together with any
other public offering of Beneficient’s common units results in Beneficient raising at least $100,000,000
and
(ii)
at least 75% of Beneficient Holding’s total outstanding NPC-B limited partnership interests, if any, have been converted
to shares of Beneficient’s common units, then the maturity date will be extended to August 9, 2033.
Repayment of the Commercial Loan is subordinated
in right of payment to any of Beneficient’s commercial bank debt and to Beneficient’s obligations which may arise in
connection with its NPC-B limited partnership interests. Beneficient’s obligations under the Commercial Loan are unsecured.
The Commercial Loan contains negative covenants
that limit or restrict, subject to certain exceptions, the incurrence of liens and indebtedness by Beneficient, fundamental changes
to its business and transactions with affiliates. The Commercial Loan also contains customary affirmative covenants, including,
but not limited to, preservation of corporate existence, compliance with applicable law, payment of taxes, notice of material events,
financial reporting and keeping of proper books of record and account.
The Commercial Loan includes customary
events of default, including, but not limited to, nonpayment of principal or interest, failure to comply with covenants, failure
to pay other indebtedness when due, cross-acceleration to other debt, material adverse effects, events of bankruptcy and insolvency,
and unsatisfied judgments. The borrower was in compliance with the covenants as of the most recent balance sheet date.
The principal amount of the Commercial
Loan bears interest at 5.0% per year; provided that the accrued interest from the date of the Initial Transfer to the Final Closing
Date of the Beneficient Transaction will be added to the principal balance of the Commercial Loan. From and after the Final Closing
Date, one-half of the interest, or 2.5% per year, will be due and payable monthly in cash, and (ii) one-half of the interest, or
2.5% per year, will accrue and compound annually on each anniversary date of the Final Closing Date and become due and payable
in full in cash on the maturity date.
In accordance with the Supplemental Indenture
issuing the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds, the Company, at
its option, may use the outstanding principal amount of the Commercial Loan, and accrued and unpaid interest thereon, as repayment
consideration of the Seller Trust L Bonds.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Exchangeable Note
The Exchangeable Note accrues interest
at a rate of 12.4% per year, compounded annually. Interest is payable in cash on the earlier to occur of the maturity date or the
Final Closing Date; provided that Beneficient may, at its option, add to the outstanding principal balance under the Commercial
Loan the accrued interest in lieu of payment in cash of such accrued interest thereon at the Final Closing Date (or, if earlier,
the maturity date of the Exchangeable Note). The principal amount of the Exchangeable Note is payable in cash on August 9, 2023.
In the event the Final Closing Date occurs on or prior to the maturity date, the principal amount of the Exchangeable Note is payable
in Beneficient common units at a price equal to $10 per common unit. In the event the Final Closing Date occurs prior to the maturity
date, Beneficient may, at its option, pay the accrued interest on the Exchangeable Note in the form of Beneficient common units,
at $10 per common unit, or in the form of a promissory note providing for a term of up to two years and cash interest payable semi-annually
at the rate of 5.0% per year.
In accordance with the Supplemental Indenture
issuing the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds, the Company, at
its option, may use the outstanding principal amount of the Exchangeable Note, and accrued and unpaid interest thereon, as repayment
consideration of the Seller Trust L Bonds.
Common Units in Beneficient
In connection with the Initial Transfer,
the Seller Trusts delivered to us 4,032,349 common units of Beneficient. This represents a 17.6% interest in the common units
of Beneficient.
Beneficient operates in a sector of the
alternative asset market that is complementary to ours by providing a suite of innovative liquidity and trust products to mid-to-high
net worth individual investors and small-to-medium institutional owners of professionally managed illiquid alternative investment
assets. We believe the Beneficient Transaction provides us with the opportunity to significantly increase and diversify our alternative
asset portfolio that is intended to provide us with a new source of earnings and cash flow while at the same time significantly
increasing our common shareholder equity.
We plan to
continue to create and extend transformative products and services in the life insurance industry, while at the same time increasing
and diversifying our alternative asset portfolio with Beneficient that creates opportunities for investors to receive income and
capital appreciation from our investment and commercial activities.
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 August 25,
2016, GWG Holdings formed a wholly owned subsidiary, currently named Life Epigenetics Inc. (“Life Epigenetics”), to
commercialize advanced epigenetic technology for the life insurance industry related to its exclusive license for “DNA Methylation
Based Predictor of Mortality” technology, as well as through the development of its own proprietary intellectual property.
Through its
wholly owned subsidiary, youSurance General Agency, LLC (“YouSurance”), GWG Holdings offers life insurance directly
to customers from a variety of life insurance carriers.
Use of Estimates
—
The preparation of our condensed consolidated financial statements in conformity with the Generally Accepted Accounting
Principles in the United States of America (GAAP) requires management to make significant estimates and assumptions affecting
the reported amounts of assets and liabilities at the date of the condensed 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 condensed 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.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 or loss in the current period, net of premiums paid, within gain on life insurance policies,
net in our condensed consolidated statements of operations.
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 condensed consolidated balance sheets until
the acquisition is complete and we have secured title to the policy. On both September 30, 2018 and December 31, 2017, a total
of $0 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 value 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.
Other Assets
—
Included in other assets at the current balance sheet date are $5.3 million of prepaid expenses, $1.6 million of net
fixed assets, $1.0 cost method investment, $0.6 million of security deposits with states for life settlement provider licenses,
$0.6 million net secured merchant cash advances and $3.9 million of other miscellaneous assets – including Life Epigenetics
Inc.’s exclusive license for the “DNA Methylation Based Predictor of Mortality” technology for the life insurance
industry. At December 31, 2017, other assets included $4.5 million of prepaid expenses, $1.9 million of net fixed assets, $0.6
million of security deposits with states for life settlement provider licenses, $1.7 million net secured merchant cash advances
and $0.3 million of other miscellaneous assets.
Stock-Based
Compensation
— We measure and recognize compensation expense for all stock-based payments at fair value on the grant
date over the requisite service period. We use the Black-Scholes option pricing model to determine the weighted-average fair value
of stock options. For restricted stock grants (including restricted stock units), 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 is affected by our stock price and a number of subjective variables. These variables include, but are not limited to,
the expected stock price volatility over the term of the awards and the expected duration 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 companies.
Deferred Financing and Issuance Costs
— Loans advanced to us under our amended and restated 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 year ended December 31, 2017 and this credit facility has since been terminated, as described
in Note 5. The L Bonds, as described in Note 8, are reported net of financing costs, which are amortized using the interest method
over the term of those borrowings. The Series I Secured Notes, as described in Note 7 have been redeemed, was reported net of financing
costs, all of which were fully amortized using the interest method as of December 31, 2017. The Series A Convertible Preferred
Stock (“Series A”), as described in Note 9, was reported net of financing costs (including the fair value of warrants
issued), all of which were fully amortized using the interest method as of December 31, 2017. All shares of Series A have been
redeemed and the obligations thereunder satisfied. Selling and issuance costs of RPS and RPS 2, described in Notes 10 and 11, are
netted against additional paid-in-capital, until depleted, and then against the outstanding balance of the preferred stock. The
offerings of our RPS and RPS 2 closed in March 2017 and April 2018, respectively. There were no issuance costs associated with
issuance of the Series B, described in Note 12, in August 2018.
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, Series B, warrants and stock options. Due to our net loss attributable
to common shareholders for the three and nine months ended September 30, 2018, there are no dilutive securities.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Reclassification
—
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications
had no effect on the reported results of operations.
Recently
Issued Accounting Pronouncements
—
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, 2018. The impact of the adoption
is not expected to be material to the financial statements.
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.
In November
2016, the FASB issued Accounting Standards Update 2016-18 (“ASU 2016-18”), which amends ASC 230
Statement
of Cash Flows
to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash
flows. The guidance, to be applied retrospectively when adopted, requires entities to show the changes in the total of cash, cash
equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance is effective for
fiscal years beginning after December 15, 2017, and interim periods within those years. We adopted ASU 2016-18 as of March 31,
2018. The impact of the adoption was not material to the financial statements.
(2) Restrictions on Cash
Under the terms
of our amended and restated senior credit facility with LNV Corporation (discussed in Note 6), we are required to maintain collection
and payment accounts that are used to collect policy benefits from pledged policies, pay annual policy premiums, interest and
other charges under the facility, and distribute funds to pay down the facility. The agents for the lender authorize the disbursements
from these accounts. At September 30, 2018 and December 31, 2017, there was a balance of $2,370,000 and $19,967,000, respectively,
in these collection and payment accounts.
To fund the
Company’s acquisition of life insurance policies, we are required to maintain escrow accounts. Distributions from these
accounts are made according to life insurance policy purchase contracts. At September 30, 2018 and December 31, 2017, there was
a balance of $700,000 and $8,383,000, respectively, in the Company’s escrow accounts.
(3) Investment in Life Insurance
Policies
Our investments
in 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, net of premiums paid, are recorded in gain on life insurance policies, net in our condensed
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 – those with $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 10.45% was applied to our portfolio
as of both September 30, 2018 and December 31, 2017.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Portfolio Information
Our portfolio
of life insurance policies, owned by our subsidiaries as of September 30, 2018, is summarized below:
Life Insurance
Portfolio Summary
Total portfolio face value of policy benefits
|
|
$
|
1,961,598,000
|
|
Average face value per policy
|
|
$
|
1,805,000
|
|
Average face value per insured life
|
|
$
|
2,018,000
|
|
Average age of insured (years)*
|
|
|
82.1
|
|
Average life expectancy estimate (years)*
|
|
|
6.7
|
|
Total number of policies
|
|
|
1,087
|
|
Number of unique lives
|
|
|
972
|
|
Demographics
|
|
|
76%
Males; 24% Females
|
|
Number of smokers
|
|
|
43
|
|
Largest policy as % of total portfolio face value
|
|
|
0.68
|
%
|
Average policy as % of total portfolio
|
|
|
0.09
|
%
|
Average annual premium as % of face value
|
|
|
2.90
|
%
|
*
|
Averages
presented in the table are weighted averages.
|
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, 2018
|
|
|
As
of December 31, 2017
|
|
Years Ending December 31,
|
|
Number
of Policies
|
|
|
Estimated
Fair Value
|
|
|
Face
Value
|
|
|
Number
of Policies
|
|
|
Estimated
Fair Value
|
|
|
Face
Value
|
|
2018
|
|
|
2
|
|
|
$
|
2,102,000
|
|
|
$
|
2,125,000
|
|
|
|
8
|
|
|
$
|
4,398,000
|
|
|
$
|
4,689,000
|
|
2019
|
|
|
28
|
|
|
|
35,046,000
|
|
|
|
42,302,000
|
|
|
|
48
|
|
|
|
63,356,000
|
|
|
|
83,720,000
|
|
2020
|
|
|
74
|
|
|
|
79,263,000
|
|
|
|
111,584,000
|
|
|
|
87
|
|
|
|
79,342,000
|
|
|
|
127,373,000
|
|
2021
|
|
|
111
|
|
|
|
117,490,000
|
|
|
|
189,768,000
|
|
|
|
98
|
|
|
|
96,154,000
|
|
|
|
170,695,000
|
|
2022
|
|
|
128
|
|
|
|
124,662,000
|
|
|
|
227,146,000
|
|
|
|
90
|
|
|
|
85,877,000
|
|
|
|
181,120,000
|
|
2023
|
|
|
112
|
|
|
|
91,782,000
|
|
|
|
215,084,000
|
|
|
|
93
|
|
|
|
69,467,000
|
|
|
|
175,458,000
|
|
2024
|
|
|
114
|
|
|
|
91,738,000
|
|
|
|
242,455,000
|
|
|
|
100
|
|
|
|
77,638,000
|
|
|
|
228,188,000
|
|
Thereafter
|
|
|
518
|
|
|
|
249,386,000
|
|
|
|
931,134,000
|
|
|
|
374
|
|
|
|
174,295,000
|
|
|
|
704,905,000
|
|
Totals
|
|
|
1,087
|
|
|
$
|
791,469,000
|
|
|
$
|
1,961,598,000
|
|
|
|
898
|
|
|
$
|
650,527,000
|
|
|
$
|
1,676,148,000
|
|
We recognized
life insurance benefits of $7,973,000 and $9,747,000 during the three months ended September 30, 2018 and 2017, respectively.
The forgoing amounts pertained to policies with carrying values of $2,326,000 and $2,333,000, respectively, for which we recorded
realized gains of $5,647,000 and $7,414,000, respectively. We recognized life insurance benefits of $50,100,000 and $39,657,000
during the nine months ended September 30, 2018 and 2017, respectively. The forgoing amounts pertained to policies with carrying
values of $13,558,000 and $7,716,000, for which we recorded realized gains of $36,542,000 and $31,941,000, respectively.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Reconciliation
of gain on life insurance policies:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Change
in estimated probabilistic cash flows
(1)
|
|
$
|
19,069,000
|
|
|
$
|
12,568,000
|
|
|
$
|
55,483,000
|
|
|
$
|
40,033,000
|
|
Unrealized
gain on acquisitions
(2)
|
|
|
9,021,000
|
|
|
|
7,217,000
|
|
|
|
21,790,000
|
|
|
|
25,863,000
|
|
Premiums and other annual fees
|
|
|
(14,765,000
|
)
|
|
|
(13,174,000
|
)
|
|
|
(39,670,000
|
)
|
|
|
(36,124,000
|
)
|
Change
in discount rates
(3)
|
|
|
-
|
|
|
|
7,987,000
|
|
|
|
-
|
|
|
|
12,130,000
|
|
Change
in life expectancy evaluation
(4)
|
|
|
73,000
|
|
|
|
(5,370,000
|
)
|
|
|
(4,890,000
|
)
|
|
|
(13,974,000
|
)
|
Face value of matured policies
|
|
|
7,973,000
|
|
|
|
9,747,000
|
|
|
|
50,100,000
|
|
|
|
39,657,000
|
|
Fair value of matured policies
|
|
|
(5,650,000
|
)
|
|
|
(4,554,000
|
)
|
|
|
(29,883,000
|
)
|
|
|
(22,468,000
|
)
|
Gain on life insurance policies, net
|
|
$
|
15,721,000
|
|
|
$
|
14,421,000
|
|
|
$
|
52,930,000
|
|
|
$
|
45,117,000
|
|
(1)
|
Change
in fair value of expected future cash flows relating to our investment in life insurance policies that are not specifically
attributable to changes in life expectancy, discount rate or policy maturity events.
|
(2)
|
Gain
resulting from fair value in excess of transaction price for policies acquired during the reporting period.
|
(3)
|
The
discount rate of 10.45% as of September 30, 2018 remained unchanged from both the prior quarter and year end dates. The discount
rate of 10.54% as of September 30, 2017 reflected a decrease from the 10.81% rate used at June 30, 2017 and 10.96% used at
December 31, 2016.
|
(4)
|
The
change in fair value due to updating life expectancy estimates on certain life insurance policies in our portfolio.
|
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, 2018
|
|
$
|
14,034,000
|
|
|
$
|
345,000
|
|
|
$
|
14,379,000
|
|
2019
|
|
|
64,852,000
|
|
|
|
1,381,000
|
|
|
|
66,233,000
|
|
2020
|
|
|
76,664,000
|
|
|
|
1,381,000
|
|
|
|
78,045,000
|
|
2021
|
|
|
88,681,000
|
|
|
|
1,381,000
|
|
|
|
90,062,000
|
|
2022
|
|
|
101,411,000
|
|
|
|
1,381,000
|
|
|
|
102,792,000
|
|
2023
|
|
|
113,676,000
|
|
|
|
1,381,000
|
|
|
|
115,057,000
|
|
|
|
$
|
459,318,000
|
|
|
$
|
7,250,000
|
|
|
$
|
466,568,000
|
|
Management
anticipates funding the majority of the premium payments and servicing fees estimated above from cash flows realized from life
insurance policy benefits, and to the extent necessary, 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, and the net proceeds from our offering of L Bonds as described in Note 8. Management anticipates funding
premiums and servicing costs of non-pledged life insurance policies with cash flows realized from life insurance policy benefits
from our portfolio of life insurance policies and net proceeds from our offering of L Bonds. The proceeds of these capital sources
may also be used for the purchase, policy premiums and servicing costs of additional life insurance policies, working capital
and financing expenditures including paying principal, interest and dividends.
(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.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. Because
valuations are based on quoted prices that are readily and regularly available in an active market.
|
|
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 management taking into consideration
a number of factors, including 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.
These inputs
are then used to estimate the discounted cash flows from the portfolio using the Model Actuarial Pricing System (“MAPS”)
probabilistic and stochastic portfolio pricing model, which estimates the expected cash flows using various mortality probabilities
and scenarios. The valuation process includes a review by senior management as of each quarterly valuation date. We also engage
MAPS to independently verify the accuracy of the valuations using the inputs we provide on a quarterly basis. A copy of a letter
documenting the MAPS calculation is filed as Exhibit 99.1 to this report.
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
726,063,000
|
|
|
$
|
577,050,000
|
|
|
$
|
650,527,000
|
|
|
$
|
511,192,000
|
|
Purchases
|
|
|
42,892,000
|
|
|
|
25,199,000
|
|
|
|
98,442,000
|
|
|
|
67,321,000
|
|
Maturities (initial cost basis)
|
|
|
(2,326,000
|
)
|
|
|
(2,333,000
|
)
|
|
|
(13,558,000
|
)
|
|
|
(7,716,000
|
)
|
Net change in fair value
|
|
|
24,840,000
|
|
|
|
20,182,000
|
|
|
|
56,058,000
|
|
|
|
49,301,000
|
|
Ending balance
|
|
$
|
791,469,000
|
|
|
$
|
620,098,000
|
|
|
$
|
791,469,000
|
|
|
$
|
620,098,000
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For life insurance
policies with face amounts greater than $1 million and that are not pledged under our amended and restated senior credit facility
with LNV Corporation (approximately 21.5% of our portfolio by face amount of policy benefits) we attempt to update the life expectancy
estimates on a continuous rotating three year cycle. For life insurance policies that are pledged under our amended and restated
senior credit facility with LNV Corporation (approximately 68.7% of our portfolio by face amount of policy benefits) we are presently
required to update the life expectancy estimates every two years beginning from the date of the amended and restated senior credit
facility. For the remaining small face insurance policies (i.e., a policy with $1 million in face value benefits or less) we may
employ a range of methods and timeframes to update life expectancy estimates (see Note 22).
The following
table summarizes the inputs utilized in estimating the fair value of our portfolio of life insurance policies:
|
|
As
of
September 30,
2018
|
|
|
As
of
December 31,
2017
|
|
Weighted-average age of insured, years *
|
|
|
82.1
|
|
|
|
81.7
|
|
Weighted-average life expectancy, months *
|
|
|
79.9
|
|
|
|
82.4
|
|
Average face amount per policy
|
|
$
|
1,805,000
|
|
|
$
|
1,867,000
|
|
Discount rate
|
|
|
10.45
|
%
|
|
|
10.45
|
%
|
|
(*)
|
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%, with all other variables 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, 2018
|
|
$
|
103,902,000
|
|
|
$
|
51,782,000
|
|
|
$
|
(51,418,000
|
)
|
|
$
|
(102,195,000
|
)
|
December 31, 2017
|
|
$
|
86,391,000
|
|
|
$
|
42,886,000
|
|
|
$
|
(42,481,000
|
)
|
|
$
|
(84,238,000
|
)
|
|
|
Change
in Discount Rate
|
|
|
minus
2%
|
|
minus
1%
|
|
plus
1%
|
|
plus
2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
$
|
78,624,000
|
|
|
$
|
37,643,000
|
|
|
$
|
(34,665,000
|
)
|
|
$
|
(66,663,000
|
)
|
December 31, 2017
|
|
$
|
68,117,000
|
|
|
$
|
32,587,000
|
|
|
$
|
(29,964,000
|
)
|
|
$
|
(57,583,000
|
)
|
Other Fair Value Considerations
The carrying
value of policy benefit 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 $586,063,000 as of September 30, 2018, is approximately $592,527,000 based on a weighted-average
market interest rate of 6.84%.
The carrying value of the amended and restated senior
credit facility with LNV Corporation reflects interest charged at 12-month LIBOR plus an applicable margin. The margin represents
our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall rate reflects
market, and the carrying value of the facility approximates fair value.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
GWG MCA Capital,
Inc. (“GWG MCA”) participates in the merchant cash advance industry by directly advancing sums to merchants and lending
money, on a secured basis, to companies that advance sums to merchants. Each quarter, we review the carrying value of these cash
advances, determine if an impairment exists and establish or adjust an allowance for loan loss as necessary. At September 30,
2018 one of our secured cash advances was impaired. Specifically, the secured loan to Nulook Capital LLC had an outstanding balance
of $1,908,000 and an allowance for loan loss of $1,908,000 at September 30, 2018. We deem fair value to be the estimated collectible
value on each loan or advance made from GWG MCA. Secured merchant cash advances, net of allowance for loan loss, of $635,000 and
$1,662,000 are included within other assets on our condensed consolidated balance sheets as of September 30, 2018 and December
31, 2017, respectively. Where we estimate the collectible amount to be less than the outstanding balance, we record an allowance
for the difference. Provision for merchant cash advances are recorded within other expenses on the statement of operations (see
Note 16).
The following
table summarizes outstanding common stock warrants (discussed in Note 14) as of September 30, 2018:
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(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 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 year ended December 31, 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 (“DLP IV”). The amended and restated senior credit 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 senior credit facility at the LIBOR rate as herein defined. 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 senior credit facility 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, 2018 was
10.30%. Interest payments are made on a quarterly basis.
As of September
30, 2018, approximately 68.7% of the total face value of our portfolio is pledged to LNV Corporation. The amount outstanding under
this facility was $171,964,000 and $222,525,000 at September 30, 2018 and December 31, 2017, respectively. Obligations under the
amended and restated senior credit facility are secured by a security interest in DLP IV’s assets, for the benefit of the
lenders, 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 amount
outstanding and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized debt issuance
costs.
The amended and restated senior credit facility has certain
financial and nonfinancial covenants, and we were in compliance with these covenants at September 30, 2018 and December 31, 2017.
(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.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(8) L Bonds
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 through January 2018. On December 1, 2017, an additional public offering
was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds on a continuous basis. The new offering
is a follow-on to the previous L Bond offering and contains the same terms and features. 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. On October 23, 2017, the parties entered into the Amended and Restated Indenture
in connection with the new offering. On March 27, 2018, GWG L Bond holders approved Amendment No.1 to the Amended and Restated
Indenture. This amendment expands the definition of Total Coverage to include, without duplication, the value of all of our other
assets as reflected on our most recently available balance sheet prepared in accordance with GAAP. The Amended and Restated Indenture
contains certain financial and non-financial covenants, and we were in compliance with these covenants at September 30, 2018 and
December 31, 2017.
The L Bonds are senior secured obligations
of GWG, ranking junior only to all senior debt of GWG (see Note 6), pari passu in right of payment and in respect of collateral
with all L Bonds of GWG, and senior in right of payment to all subordinated indebtedness of GWG. Payments under the L Bonds are
guaranteed by GWG Life (see Note 20).
The L Bonds
are secured by the assets of GWG, primarily consisting of its investment in its subsidiaries, cash proceeds it receives from life
insurance assets of its subsidiaries, and all other cash and investments it holds in various accounts. Substantially all of GWG’s
life insurance assets are held in its subsidiary DLP IV. The L Bonds’ security interest is structurally subordinate to the
security interest in favor of GWG’s senior secured lender, together with any future senior secured lenders of GWG. The assets
of GWG Life, including proceeds it receives as distributions from DLP IV and derived from the insurance policies owned by DLP
IV, are collateral for GWG Life’s guarantee of the repayment of principal and interest on the L Bonds. The L Bonds are also
secured by a pledge of a majority of GWG’s outstanding common stock beneficially held by its largest stockholders.
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, 2018 and December 31, 2017, the weighted-average interest rate of our L Bonds was 7.12% and 7.29%, respectively. The principal
amount of L Bonds outstanding was $586,063,000 and $461,427,000 at September 30, 2018 and December 31, 2017, respectively. The
difference between the amount of outstanding L Bonds and the carrying amount on our condensed consolidated 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 $2,312,000 and $2,076,000 for the three months ended September 30, 2018 and 2017, respectively,
and $6,450,000 and $4,931,000 for the nine months ended September 30, 2018 and 2017, respectively. Future expected amortization
of deferred financing costs as of September 30, 2018 is $20,581,000 in total over the next seven years.
Future contractual
maturities of L Bonds, and future amortization of their deferred financing costs, at September 30, 2018 are as follows
(1)
:
Years Ending December 31,
|
|
Contractual
Maturities
|
|
|
Unamortized
Deferred Financing Costs
|
|
Three months ending December 31, 2018
|
|
$
|
26,778,000
|
|
|
$
|
79,000
|
|
2019
|
|
|
150,056,000
|
|
|
|
2,291,000
|
|
2020
|
|
|
137,067,000
|
|
|
|
4,435,000
|
|
2021
|
|
|
87,360,000
|
|
|
|
3,727,000
|
|
2022
|
|
|
39,713,000
|
|
|
|
1,777,000
|
|
2023
|
|
|
53,616,000
|
|
|
|
2,924,000
|
|
Thereafter
|
|
|
91,473,000
|
|
|
|
5,348,000
|
|
|
|
$
|
586,063,000
|
|
|
$
|
20,581,000
|
|
(1) The
Seller Trust L Bonds are
excluded
from this table (see Note 1).
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(9) Series A Convertible Preferred
Stock
From July 2011
through September 2012, we privately offered shares of Series A Convertible Preferred Stock of GWG Holdings at $7.50 per share
(the “Series A”). 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. The Series A were only
redeemable at our option.
Purchasers of the 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. As of September 30, 2018
and December 31, 2017, all of these warrants have expired and none of them had been exercised.
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.
(10) Redeemable Preferred Stock
On November
30, 2015, our public offering of up to 100,000 shares of 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 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 from us and still held by such purchaser.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, as specified in the Certificate of Designation. Nevertheless, the Certificate of Designation for RPS permits
us in our sole 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.
In March 2017,
we closed the RPS offering to additional 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 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 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 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 RPS and entitles its holders to a liquidation preference equal to the stated
value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS 2 may, less an applicable conversion discount,
if any, convert their RPS 2 into our common stock at a conversion price equal to the volume-weighted average price of our common
stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion price of $12.75 and
in an aggregate amount limited to 10% of the stated value of RPS 2 originally purchased from us and still held by such purchaser.
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, as specified in the Certificate
of Designation. Nevertheless, the Certificate of Designation for RPS 2 permits us in our sole 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).
In April 2018,
we closed the RPS 2 offering to additional investors having sold 149,979 shares of RPS 2 for an aggregate gross consideration
of $149,979,000 and incurred approximately $10,284,000 of related selling costs.
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)
(12) Series
B Convertible Preferred Stock
On August 10, 2018, GWG Holdings issued
5,000,000 shares of Series B, par value $0.001 per share and having a stated value of $10 per share, to Beneficient for cash consideration
of $50,000,000 as part of the Initial Transfer.
The Series
B ranks, as to the payment of dividends and the distribution of our assets upon liquidation, dissolution or winding up junior
to our RPS and RPS 2 and
pari passu
with our common stock. The Series B has no dividend rights. The Series B has no voting
rights, except as required by law.
The Series B will convert into 5,000,000 shares of our common stock at a conversion
price of $10.00 per share immediately following the Final Closing of the Beneficient Transaction. The holder has no additional
rights or remedies if the Final Closing is not completed.
(13) Income Taxes
We had a current
income tax liability of $0 as of both September 30, 2018 and December 31, 2017. The components of our income tax expense (benefit)
and the reconciliation at the statutory federal tax rate to our actual income tax expense (benefit) for the three and nine months
ended September 30, 2018 and 2017 consisted of the following:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal
income tax (benefit)
|
|
$
|
(2,234,000
|
)
|
|
$
|
(2,321,000
|
)
|
|
$
|
(4,173,000
|
)
|
|
$
|
(5,536,000
|
)
|
State income taxes (benefit),
net of federal benefit
|
|
|
(866,000
|
)
|
|
|
(440,000
|
)
|
|
|
(1,558,000
|
)
|
|
|
(1,049,000
|
)
|
Change in valuation allowance
|
|
|
3,215,000
|
|
|
|
-
|
|
|
|
5,783,000
|
|
|
|
-
|
|
Other
permanent differences
|
|
|
(115,000
|
)
|
|
|
(3,000
|
)
|
|
|
(52,000
|
)
|
|
|
103,000
|
|
Total income
tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
(2,764,000
|
)
|
|
$
|
-
|
|
|
$
|
(6,482,000
|
)
|
The tax effects
of temporary differences that give rise to deferred income taxes were as follows:
|
|
As
of
September 30,
2018
|
|
|
As
of
December 31,
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Note receivable from related party
|
|
$
|
-
|
|
|
$
|
1,437,000
|
|
Net operating loss carryforwards
|
|
|
12,096,000
|
|
|
|
9,995,000
|
|
Other assets
|
|
|
2,930,000
|
|
|
|
1,724,000
|
|
Subtotal
|
|
|
15,026,000
|
|
|
|
13,156,000
|
|
Valuation allowance
|
|
|
(11,962,000
|
)
|
|
|
(6,386,000
|
)
|
Deferred tax assets
|
|
|
3,064,000
|
|
|
|
6,770,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
(2,952,000
|
)
|
|
|
(6,630,000
|
)
|
Other liabilities
|
|
|
(112,000
|
)
|
|
|
(140,000
|
)
|
Net deferred tax asset
(liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
At September
30, 2018 and December 31, 2017, we had federal net operating loss (“NOL”) carryforwards of $42,085,000 and $34,775,000,
respectively. The NOL carryforwards will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitations
under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership over
a three-year period. We currently do not believe that any prior issuance of common stock has resulted in an ownership change under
Section 382 through September 30, 2018.
We provide
for a valuation allowance when it is not considered “more likely than not” that our deferred tax assets will be realized.
As of September 30, 2018, based on all available evidence, we have provided a valuation allowance against our total net deferred
tax asset of $11,962,000 due to uncertainty as to the realization of our deferred tax assets during the carryforward periods.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On December
22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“Tax Reform Bill”). The Tax Reform Bill changed
existing United States tax law, including a reduction of the U.S. corporate income tax rate. The Company re-measured deferred
taxes as of the date of enactment, reflecting those changes within deferred tax assets as of December 31, 2017.
ASC 740 requires
the reporting of certain tax positions that do not meet a threshold of “more-likely-than-not” to be recorded as uncertain
tax benefits. It 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
has determined that the income tax positions are appropriately stated and supported. We do not anticipate that the total unrecognized
tax benefits will significantly change prior to December 31, 2018.
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, 2018 and December 31, 2017, we recorded no accrued interest or
penalties related to uncertain tax positions.
Our income
tax returns for tax years ended December 31, 2014, 2015, 2016 and 2017, when filed, remain open to examination by the Internal
Revenue Service and various state taxing jurisdictions. Our income tax return for tax year ended December 31, 2013 also remains
open to examination by various state taxing jurisdictions.
(14) Common Stock
In September
2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common stock at
$12.50 per share, and net proceeds of approximately $8.6 million after the payment of underwriting commissions, discounts and
expense reimbursements. In connection with this offering, we listed our common stock on the Nasdaq Capital Market under the ticker
symbol “GWGH.”
In conjunction
with the initial public offering our Company issued warrants to purchase 16,000 shares of common stock at an exercise price of
$15.63 per share. As of September 30, 2018, none of these warrants had been exercised. The remaining life of these warrants at
September 30, 2018 was 1.0 year.
On August 10,
2018, the Company declared a special dividend of $4.30 per share of common stock payable to shareholders of record on August 27,
2018.
(15) Stock Incentive Plan
We adopted our 2013 Stock Incentive Plan
in March 2013, as amended on June 1, 2015, May 5, 2017 and May 8, 2018. 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.
Awards generally expire 10 years from the date of grant. As of September 30, 2018, 6,000,000 of our common stock options are authorized
under the plan, of which 2,667,832 shares were reserved for issuance under outstanding incentive awards and 3,332,168 shares remain
available for future grants.
Stock Options
As of September
30, 2018, we had outstanding stock options for 1,364,000 shares of common stock to employees, officers, and directors under the
plan. Options for 583,000 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 $11.56 for all others, which is equal to the 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 three months ended September 30, 2018 was 25.83%.
The annual volatility rate is based on the standard deviation of the average continuously compounded daily changes of stock price
of five selected companies. As of September 30, 2018, stock options for 732,000 shares had been forfeited and stock options for
724,000 shares had been exercised.
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Outstanding
stock options:
|
|
Vested
|
|
|
Un-vested
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
|
738,065
|
|
|
|
844,334
|
|
|
|
1,582,399
|
|
Granted during the year
|
|
|
61,099
|
|
|
|
367,500
|
|
|
|
428,599
|
|
Vested during the year
|
|
|
327,061
|
|
|
|
(327,061
|
)
|
|
|
-
|
|
Exercised during the year
|
|
|
(126,498
|
)
|
|
|
-
|
|
|
|
(126,498
|
)
|
Forfeited during the year
|
|
|
(142,535
|
)
|
|
|
(105,017
|
)
|
|
|
(247,552
|
)
|
Balance as of December
31, 2017
|
|
|
857,192
|
|
|
|
779,756
|
|
|
|
1,636,948
|
|
Granted year-to-date
|
|
|
37,950
|
|
|
|
306,500
|
|
|
|
344,450
|
|
Vested year-to-date
|
|
|
279,788
|
|
|
|
(279,788
|
)
|
|
|
-
|
|
Exercised year-to-date
|
|
|
(569,864
|
)
|
|
|
-
|
|
|
|
(569,864
|
)
|
Forfeited year-to-date
|
|
|
(21,582
|
)
|
|
|
(25,501
|
)
|
|
|
(47,083
|
)
|
Balance as of September 30, 2018
|
|
|
583,484
|
|
|
|
780,967
|
|
|
|
1,364,451
|
|
As of September
30, 2018, unrecognized compensation expense related to un-vested options is $1,282,000. We expect to recognize this compensation
expense over the remaining vesting period ($182,000 in 2018, $614,000 in 2019, $354,000 in 2020, and $132,000 in 2021).
Stock Appreciation Rights (SARs)
As of September
30, 2018, we had outstanding SARs for 311,000 shares of the common stock to employees. The strike price of the SARs was between
$6.75 and $10.38, which was equal to the market price of the common stock at the date of issuance. As of September 30, 2018, 83,000
of the SARs were vested and 146,000 have been exercised. On September 30, 2018, the market price of GWG’s common stock was
$7.75.
Outstanding
SARs:
|
|
Vested
|
|
|
Un-vested
|
|
|
Total
|
|
Balance as of December 31, 2016
|
|
|
106,608
|
|
|
|
133,127
|
|
|
|
239,735
|
|
Granted during the year
|
|
|
13,001
|
|
|
|
91,986
|
|
|
|
104,987
|
|
Vested during the year
|
|
|
69,444
|
|
|
|
(69,444
|
)
|
|
|
-
|
|
Forfeited during the year
|
|
|
-
|
|
|
|
(1,750
|
)
|
|
|
(1,750
|
)
|
Balance as of December 31, 2017
|
|
|
189,053
|
|
|
|
153,919
|
|
|
|
342,972
|
|
Granted year-to-date
|
|
|
-
|
|
|
|
113,650
|
|
|
|
113,650
|
|
Vested year-to-date
|
|
|
39,552
|
|
|
|
(39,552
|
)
|
|
|
-
|
|
Exercised year-to-date
|
|
|
(145,622
|
)
|
|
|
-
|
|
|
|
(145,622
|
)
|
Balance as of September 30, 2018
|
|
|
82,983
|
|
|
|
228,017
|
|
|
|
311,000
|
|
The liability
for the SARs as of September 30, 2018 and December 31, 2017 was $43,000 and $551,000, respectively, and was recorded within other
accrued expenses on the condensed consolidated balance sheets. Employee compensation and benefits expense for SARs of $25,000
and ($9,000) was recorded for the three months ended September 30, 2018 and 2017, respectively, and $15,000 and $303,000 was recorded
for the nine months ended September 30, 2018 and 2017, respectively.
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 following
summarizes information concerning outstanding options and SARs issued under the 2013 Stock Incentive Plan:
|
|
September
30, 2018
|
|
|
|
Outstanding
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Life (years)
|
|
|
Fair
Value at Grant Date
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
583,484
|
|
|
$
|
8.71
|
|
|
|
4.10
|
|
|
$
|
1.97
|
|
SARs
|
|
|
82,983
|
|
|
$
|
8.92
|
|
|
|
5.06
|
|
|
$
|
1.96
|
|
Total Vested
|
|
|
666,467
|
|
|
$
|
8.74
|
|
|
|
4.22
|
|
|
$
|
1.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
780,967
|
|
|
$
|
9.26
|
|
|
|
4.98
|
|
|
$
|
2.31
|
|
SARs
|
|
|
228,017
|
|
|
$
|
8.47
|
|
|
|
6.16
|
|
|
$
|
2.04
|
|
Total Unvested
|
|
|
1,008,984
|
|
|
$
|
9.08
|
|
|
|
5.25
|
|
|
$
|
2.25
|
|
|
|
December
31, 2017
|
|
|
|
Outstanding
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining Life (years)
|
|
|
Fair
Value at Grant Date
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
857,192
|
|
|
$
|
8.05
|
|
|
|
6.17
|
|
|
$
|
1.76
|
|
SARs
|
|
|
189,053
|
|
|
$
|
8.54
|
|
|
|
5.86
|
|
|
$
|
1.90
|
|
Total Vested
|
|
|
1,046,245
|
|
|
$
|
8.14
|
|
|
|
6.11
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
779,756
|
|
|
$
|
9.21
|
|
|
|
7.50
|
|
|
$
|
2.17
|
|
SARs
|
|
|
153,919
|
|
|
$
|
9.16
|
|
|
|
6.24
|
|
|
$
|
2.02
|
|
Total Unvested
|
|
|
933,675
|
|
|
$
|
9.21
|
|
|
|
7.30
|
|
|
$
|
2.15
|
|
Restricted
Stock Units
A restricted
stock unit (“RSU”) entitles the holder thereof to receive one share of our common stock upon vesting. As of September
30, 2018, we had outstanding RSUs for 122,396 shares of common stock held by employees under the plan, of which 51,193 RSUs were
vested but for which shares had not yet been issued and 71,203 RSUs were scheduled to vest over the next twelve months.
(16) Other Expenses
The components
of other expenses in our condensed consolidated statements of operations for the three and nine months ended September 30, 2018
and 2017 are as follows:
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Contract Labor
|
|
$
|
359,000
|
|
|
$
|
130,000
|
|
|
$
|
964,000
|
|
|
$
|
311,000
|
|
Marketing
|
|
|
413,000
|
|
|
|
485,000
|
|
|
|
1,343,000
|
|
|
|
1,687,000
|
|
Information Technology
|
|
|
432,000
|
|
|
|
411,000
|
|
|
|
1,208,000
|
|
|
|
1,093,000
|
|
Servicing and Facility Fees
|
|
|
382,000
|
|
|
|
277,000
|
|
|
|
1,244,000
|
|
|
|
856,000
|
|
Travel and Entertainment
|
|
|
204,000
|
|
|
|
250,000
|
|
|
|
650,000
|
|
|
|
768,000
|
|
Insurance and Regulatory
|
|
|
401,000
|
|
|
|
416,000
|
|
|
|
1,120,000
|
|
|
|
1,240,000
|
|
Charitable Contributions
|
|
|
-
|
|
|
|
42,000
|
|
|
|
-
|
|
|
|
462,000
|
|
General and Administrative
|
|
|
498,000
|
|
|
|
788,000
|
|
|
|
1,733,000
|
|
|
|
2,924,000
|
|
Total Other Expenses
|
|
$
|
2,689,000
|
|
|
$
|
2,799,000
|
|
|
$
|
8,262,000
|
|
|
$
|
9,341,000
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(17) Net Loss Attributable to
Common Shareholders
We have outstanding
RPS, RPS 2 and Series B as described in Notes 10, 11 and 12. RPS, RPS 2 and Series B are anti-dilutive to our net loss attributable
to common shareholders calculation for both the three and nine months ended September 30, 2018 and 2017. Our vested and un-vested
stock options and warrants are anti-dilutive for both the three and nine months ended September 30, 2018 and 2017.
(18) Commitments
We are party
to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment to
our original lease that expanded the leased space to 17,687 square feet and extended the term through 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 $119,000 and $121,000 during the three months ended September 30, 2018 and 2017, respectively,
and $334,000 and $344,000 during the nine months ended September 30, 2018 and 2017, respectively.
Minimum lease
payments under the amended lease are as follows:
Three months ending December 31, 2018
|
|
$
|
68,000
|
|
2019
|
|
|
275,000
|
|
2020
|
|
|
284,000
|
|
2021
|
|
|
293,000
|
|
2022
|
|
|
302,000
|
|
2023
|
|
|
311,000
|
|
Thereafter
|
|
|
593,000
|
|
|
|
$
|
2,126,000
|
|
(19) Contingencies
Litigation
—
In the normal course of business, we are involved in various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a material adverse effect on our financial position, results of operations
or cash flows.
(20) 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
(1)
. 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
(2)
serves as collateral for our L Bonds. Substantially all of our
life insurance policies are held by DLP IV or GWG Life Trust (“the Trust”). The policies held by DLP IV are not direct
collateral for the L Bonds as such policies are pledged to the senior credit facility with LNV Corporation.
(1)
|
The Seller Trust L Bonds are senior secured obligations of GWG, ranking junior only to all senior debt of GWG (see Note 6), pari passu in right of payment and in respect of collateral with all L Bonds of GWG (see Note 8), and senior in right of payment to all subordinated indebtedness of GWG. Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in the Initial Transfer are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Exchangeable Note and common units of Beneficient are held by GWG Holdings and the Commercial Loan is held by GWG Life.
|
|
(2)
|
The
terms of our amended and restated senior credit facility with LNV Corporation require that we maintain a significant excess of
pledged collateral value over the amount outstanding on the amended and restated senior credit facility at any given time. Any
excess after satisfying all amounts owing under our amended and restated senior credit facility with LNV Corporation is available
as collateral for the L Bonds (including the Seller Trust L Bonds).
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following
represents condensed consolidating financial information as of September 30, 2018 and December 31, 2017, with respect to the financial
position, and as of September 30, 2018 and 2017, with respect to results of operations and cash flows of GWG Holdings and its
subsidiaries. The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds. The guarantor
subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds, presenting its investment
in DLP 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.
Condensed Consolidating Balance
Sheets
September 30, 2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S
E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
115,884,625
|
|
|
$
|
631,228
|
|
|
$
|
1,357,815
|
|
|
$
|
-
|
|
|
$
|
117,873,668
|
|
Restricted cash
|
|
|
-
|
|
|
|
699,477
|
|
|
|
2,370,282
|
|
|
|
-
|
|
|
|
3,069,759
|
|
Investment in life insurance
policies, at fair value
|
|
|
-
|
|
|
|
85,077,334
|
|
|
|
706,391,253
|
|
|
|
-
|
|
|
|
791,468,587
|
|
Life insurance policy benefits
receivable
|
|
|
-
|
|
|
|
2,800,000
|
|
|
|
7,672,696
|
|
|
|
-
|
|
|
|
10,472,696
|
|
Other assets
|
|
|
6,892,415
|
|
|
|
1,822,284
|
|
|
|
4,307,324
|
|
|
|
-
|
|
|
|
13,022,023
|
|
Investment
in subsidiaries
|
|
|
642,140,104
|
|
|
|
551,836,655
|
|
|
|
-
|
|
|
|
(1,193,976,759
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
764,917,144
|
|
|
$
|
642,866,978
|
|
|
$
|
722,099,370
|
|
|
$
|
(1,193,976,759
|
)
|
|
$
|
935,906,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 with
LNV Corporation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
162,469,172
|
|
|
$
|
-
|
|
|
$
|
162,469,172
|
|
L Bonds
|
|
|
570,199,704
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
570,199,704
|
|
Accounts payable
|
|
|
1,101,453
|
|
|
|
641,741
|
|
|
|
836,129
|
|
|
|
-
|
|
|
|
2,579,323
|
|
Interest and dividends payable
|
|
|
11,431,884
|
|
|
|
-
|
|
|
|
4,796,457
|
|
|
|
-
|
|
|
|
16,228,341
|
|
Other
accrued expenses
|
|
|
1,026,668
|
|
|
|
1,448,807
|
|
|
|
797,283
|
|
|
|
-
|
|
|
|
3,272,758
|
|
TOTAL
LIABILITIES
|
|
|
583,759,709
|
|
|
|
2,090,548
|
|
|
|
168,899,041
|
|
|
|
-
|
|
|
|
754,749,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
-
|
|
|
|
640,776,430
|
|
|
|
553,200,329
|
|
|
|
(1,193,976,759
|
)
|
|
|
-
|
|
Redeemable preferred stock
and Series 2 redeemable preferred stock
|
|
|
216,068,039
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
216,068,039
|
|
Series B convertible preferred
stock
|
|
|
50,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000,000
|
|
Common stock
|
|
|
5,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,980
|
|
Accumulated
deficit
|
|
|
(84,916,584
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(84,916,584
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
181,157,435
|
|
|
|
640,776,430
|
|
|
|
553,200,329
|
|
|
|
(1,193,976,759
|
)
|
|
|
181,157,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
764,917,144
|
|
|
$
|
642,866,978
|
|
|
$
|
722,099,370
|
|
|
$
|
(1,193,976,759
|
)
|
|
$
|
935,906,733
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating
Balance Sheets (continued)
December 31, 2017
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S
E T S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
111,952,829
|
|
|
$
|
1,486,623
|
|
|
$
|
982,039
|
|
|
$
|
-
|
|
|
$
|
114,421,491
|
|
Restricted cash
|
|
|
-
|
|
|
|
9,367,410
|
|
|
|
18,982,275
|
|
|
|
-
|
|
|
|
28,349,685
|
|
Investment in life insurance
policies, at fair value
|
|
|
-
|
|
|
|
51,093,362
|
|
|
|
599,433,991
|
|
|
|
-
|
|
|
|
650,527,353
|
|
Life insurance policy benefits
receivable
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
15,158,761
|
|
|
|
-
|
|
|
|
16,658,761
|
|
Other assets
|
|
|
1,912,203
|
|
|
|
1,986,312
|
|
|
|
5,000,369
|
|
|
|
-
|
|
|
|
8,898,884
|
|
Investment
in subsidiaries
|
|
|
480,659,789
|
|
|
|
415,235,212
|
|
|
|
-
|
|
|
|
(895,895,001
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
594,524,821
|
|
|
$
|
480,668,919
|
|
|
$
|
639,557,435
|
|
|
$
|
(895,895,001
|
)
|
|
$
|
818,856,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 with
LNV Corporation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
212,238,192
|
|
|
$
|
-
|
|
|
$
|
212,238,192
|
|
L Bonds
|
|
|
447,393,568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
447,393,568
|
|
Accounts payable
|
|
|
1,434,623
|
|
|
|
844,899
|
|
|
|
4,114,917
|
|
|
|
-
|
|
|
|
6,394,439
|
|
Interest and dividends payable
|
|
|
10,296,584
|
|
|
|
-
|
|
|
|
5,130,925
|
|
|
|
-
|
|
|
|
15,427,509
|
|
Other
accrued expenses
|
|
|
1,728,303
|
|
|
|
1,610,773
|
|
|
|
391,647
|
|
|
|
-
|
|
|
|
3,730,723
|
|
TOTAL
LIABILITIES
|
|
|
460,853,078
|
|
|
|
2,455,672
|
|
|
|
221,875,681
|
|
|
|
-
|
|
|
|
685,184,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
-
|
|
|
|
478,213,247
|
|
|
|
417,681,754
|
|
|
|
(895,895,001
|
)
|
|
|
-
|
|
Redeemable preferred stock
and Series 2 redeemable preferred stock
|
|
|
173,115,447
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
173,115,447
|
|
Common stock
|
|
|
5,813
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,813
|
|
Accumulated
deficit
|
|
|
(39,449,517
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(39,449,517
|
)
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
133,671,743
|
|
|
|
478,213,247
|
|
|
|
417,681,754
|
|
|
|
(895,895,001
|
)
|
|
|
133,671,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
594,524,821
|
|
|
$
|
480,668,919
|
|
|
$
|
639,557,435
|
|
|
$
|
(895,895,001
|
)
|
|
$
|
818,856,174
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Operations
For the three months ended September 30,
2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
-
|
|
|
$
|
4,122,153
|
|
|
$
|
11,599,360
|
|
|
$
|
-
|
|
|
$
|
15,721,513
|
|
Interest and other income
|
|
|
745,170
|
|
|
|
4,298
|
|
|
|
181,677
|
|
|
|
-
|
|
|
|
931,145
|
|
TOTAL REVENUE
|
|
|
745,170
|
|
|
|
4,126,451
|
|
|
|
11,781,037
|
|
|
|
-
|
|
|
|
16,652,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
12,454,750
|
|
|
|
-
|
|
|
|
5,060,212
|
|
|
|
-
|
|
|
|
17,514,962
|
|
Employee compensation and benefits
|
|
|
2,292,251
|
|
|
|
3,086,682
|
|
|
|
169,838
|
|
|
|
-
|
|
|
|
5,548,771
|
|
Legal and professional fees
|
|
|
483,512
|
|
|
|
221,613
|
|
|
|
716,839
|
|
|
|
-
|
|
|
|
1,421,964
|
|
Other expenses
|
|
|
1,590,823
|
|
|
|
455,800
|
|
|
|
642,347
|
|
|
|
-
|
|
|
|
2,688,970
|
|
TOTAL EXPENSES
|
|
|
16,821,336
|
|
|
|
3,764,095
|
|
|
|
6,589,236
|
|
|
|
-
|
|
|
|
27,174,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY
IN INCOME OF SUBSIDIARIES
|
|
|
(16,076,166
|
)
|
|
|
362,356
|
|
|
|
5,191,801
|
|
|
|
-
|
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
5,554,157
|
|
|
|
6,266,480
|
|
|
|
-
|
|
|
|
(11,820,637
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME
TAXES
|
|
|
(10,522,009
|
)
|
|
|
6,628,836
|
|
|
|
5,191,801
|
|
|
|
(11,820,637
|
)
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NET INCOME (LOSS)
|
|
|
(10,522,009
|
)
|
|
|
6,628,836
|
|
|
|
5,191,801
|
|
|
|
(11,820,637
|
)
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
4,313,542
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,313,542
|
|
NET INCOME
(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(14,835,551
|
)
|
|
$
|
6,628,836
|
|
|
$
|
5,191,801
|
|
|
$
|
(11,820,637
|
)
|
|
$
|
(14,835,551
|
)
|
For the three months ended September
30, 2017
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
-
|
|
|
$
|
2,780,544
|
|
|
$
|
11,640,809
|
|
|
$
|
-
|
|
|
$
|
14,421,353
|
|
Interest and other income
|
|
|
40,044
|
|
|
|
113,410
|
|
|
|
239,865
|
|
|
|
(117,629
|
)
|
|
|
275,690
|
|
TOTAL REVENUE
|
|
|
40,044
|
|
|
|
2,893,954
|
|
|
|
11,880,674
|
|
|
|
(117,629
|
)
|
|
|
14,697,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Other expenses
|
|
|
1,743,730
|
|
|
|
711,528
|
|
|
|
449,463
|
|
|
|
(105,525
|
)
|
|
|
2,799,196
|
|
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
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET 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 INCOME
(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(7,610,668
|
)
|
|
$
|
8,532,330
|
|
|
$
|
7,403,303
|
|
|
$
|
(15,935,633
|
)
|
|
$
|
(7,610,668
|
)
|
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,
2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
-
|
|
|
$
|
12,135,832
|
|
|
$
|
40,794,176
|
|
|
$
|
-
|
|
|
$
|
52,930,008
|
|
Interest and other income
|
|
|
1,859,068
|
|
|
|
30,822
|
|
|
|
689,380
|
|
|
|
-
|
|
|
|
2,579,270
|
|
TOTAL REVENUE
|
|
|
1,859,068
|
|
|
|
12,166,654
|
|
|
|
41,483,556
|
|
|
|
-
|
|
|
|
55,509,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
34,473,956
|
|
|
|
-
|
|
|
|
16,252,193
|
|
|
|
-
|
|
|
|
50,726,149
|
|
Employee compensation and benefits
|
|
|
5,629,344
|
|
|
|
5,881,219
|
|
|
|
1,016,576
|
|
|
|
-
|
|
|
|
12,527,139
|
|
Legal and professional fees
|
|
|
1,290,614
|
|
|
|
688,003
|
|
|
|
1,772,704
|
|
|
|
-
|
|
|
|
3,751,321
|
|
Other expenses
|
|
|
5,082,525
|
|
|
|
1,397,314
|
|
|
|
1,782,485
|
|
|
|
-
|
|
|
|
8,262,324
|
|
TOTAL EXPENSES
|
|
|
46,476,439
|
|
|
|
7,966,536
|
|
|
|
20,823,958
|
|
|
|
-
|
|
|
|
75,266,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY
IN INCOME OF SUBSIDIARIES
|
|
|
(44,617,371
|
)
|
|
|
4,200,118
|
|
|
|
20,659,598
|
|
|
|
-
|
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
24,859,716
|
|
|
|
23,824,330
|
|
|
|
-
|
|
|
|
(48,684,046
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME
TAXES
|
|
|
(19,757,655
|
)
|
|
|
28,024,448
|
|
|
|
20,659,598
|
|
|
|
(48,684,046
|
)
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NET INCOME (LOSS)
|
|
|
(19,757,655
|
)
|
|
|
28,024,448
|
|
|
|
20,659,598
|
|
|
|
(48,684,046
|
)
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
12,356,513
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,356,513
|
|
NET INCOME
(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(32,114,168
|
)
|
|
$
|
28,024,448
|
|
|
$
|
20,659,598
|
|
|
$
|
(48,684,046
|
)
|
|
$
|
(32,114,168
|
)
|
For the nine months ended September 30,
2017
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
-
|
|
|
$
|
4,481,555
|
|
|
$
|
40,635,883
|
|
|
$
|
-
|
|
|
$
|
45,117,438
|
|
Interest and other income
|
|
|
194,273
|
|
|
|
348,695
|
|
|
|
1,163,667
|
|
|
|
(371,100
|
)
|
|
|
1,335,535
|
|
TOTAL REVENUE
|
|
|
194,273
|
|
|
|
4,830,250
|
|
|
|
41,799,550
|
|
|
|
(371,100
|
)
|
|
|
46,452,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Other expenses
|
|
|
5,291,881
|
|
|
|
2,244,577
|
|
|
|
2,095,959
|
|
|
|
(291,800
|
)
|
|
|
9,340,617
|
|
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
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET 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 INCOME
(LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(17,248,878
|
)
|
|
$
|
26,372,828
|
|
|
$
|
27,209,521
|
|
|
$
|
(53,582,349
|
)
|
|
$
|
(17,248,878
|
)
|
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,
2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,522,009
|
)
|
|
$
|
6,628,836
|
|
|
$
|
5,191,801
|
|
|
$
|
(11,820,637
|
)
|
|
$
|
(10,522,009
|
)
|
Adjustments to reconcile net
income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(5,554,157
|
)
|
|
|
(6,266,480
|
)
|
|
|
-
|
|
|
|
11,820,637
|
|
|
|
-
|
|
Changes in fair value of
life insurance policies
|
|
|
-
|
|
|
|
(3,485,452
|
)
|
|
|
(21,354,115
|
)
|
|
|
-
|
|
|
|
(24,839,567
|
)
|
Amortization of deferred
financing and issuance costs
|
|
|
2,311,567
|
|
|
|
-
|
|
|
|
263,755
|
|
|
|
-
|
|
|
|
2,575,322
|
|
(Increase) decrease in operating
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits
receivable
|
|
|
-
|
|
|
|
(2,000,000
|
)
|
|
|
18,562,304
|
|
|
|
-
|
|
|
|
16,562,304
|
|
Other assets
|
|
|
(62,835,255
|
)
|
|
|
(47,247,165
|
)
|
|
|
305,226
|
|
|
|
106,913,951
|
|
|
|
(2,863,243
|
)
|
Increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued expenses
|
|
|
940,137
|
|
|
|
(384,380
|
)
|
|
|
(1,157,273
|
)
|
|
|
-
|
|
|
|
(601,516
|
)
|
NET
CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(75,659,717
|
)
|
|
|
(52,754,641
|
)
|
|
|
1,811,698
|
|
|
|
106,913,951
|
|
|
|
(19,688,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance
policies
|
|
|
-
|
|
|
|
(11,368,457
|
)
|
|
|
(31,523,307
|
)
|
|
|
-
|
|
|
|
(42,891,764
|
)
|
Carrying
value of matured life insurance policies
|
|
|
-
|
|
|
|
669,349
|
|
|
|
1,656,640
|
|
|
|
-
|
|
|
|
2,325,989
|
|
NET
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
(10,699,108
|
)
|
|
|
(29,866,667
|
)
|
|
|
-
|
|
|
|
(40,565,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on (repayments
of) senior debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(18,425,136
|
)
|
|
|
-
|
|
|
|
(18,425,136
|
)
|
Proceeds from issuance of
L Bonds
|
|
|
68,884,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68,884,369
|
|
Payments for redemption and
issuance of L Bonds
|
|
|
(20,195,657
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,195,657
|
)
|
Issuance of common stock
|
|
|
682,954
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
682,954
|
|
Common stock dividends
|
|
|
(25,709,412
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,709,412
|
)
|
Proceeds from issuance of
convertible preferred stock
|
|
|
50,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000,000
|
|
Payments for redemption of
redeemable preferred stock
|
|
|
(821,778
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(821,778
|
)
|
Preferred stock dividends
|
|
|
(4,313,542
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,313,542
|
)
|
Issuance
of member capital
|
|
|
-
|
|
|
|
58,589,352
|
|
|
|
48,324,599
|
|
|
|
(106,913,951
|
)
|
|
|
-
|
|
NET
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
68,526,934
|
|
|
|
58,589,352
|
|
|
|
29,899,463
|
|
|
|
(106,913,951
|
)
|
|
|
50,101,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
|
|
(7,132,783
|
)
|
|
|
(4,864,397
|
)
|
|
|
1,844,494
|
|
|
|
-
|
|
|
|
(10,152,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND
CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
123,017,408
|
|
|
|
6,195,102
|
|
|
|
1,883,603
|
|
|
|
-
|
|
|
|
131,096,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
115,884,625
|
|
|
$
|
1,330,705
|
|
|
$
|
3,728,097
|
|
|
$
|
-
|
|
|
$
|
120,943,427
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statements
of Cash Flows (continued)
For the three months ended September 30,
2017
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
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 (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(7,672,513
|
)
|
|
|
(8,263,120
|
)
|
|
|
-
|
|
|
|
15,935,633
|
|
|
|
-
|
|
Changes 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
|
)
|
(Increase) decrease in operating
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,627,000
|
)
|
|
|
-
|
|
|
|
(7,627,000
|
)
|
Other assets
|
|
|
(38,552,777
|
)
|
|
|
51,740,361
|
|
|
|
1,157,168
|
|
|
|
(13,415,694
|
)
|
|
|
929,058
|
|
Increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued expenses
|
|
|
1,834,187
|
|
|
|
(855,012
|
)
|
|
|
(1,064,684
|
)
|
|
|
-
|
|
|
|
(85,509
|
)
|
NET
CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(49,142,217
|
)
|
|
|
47,679,810
|
|
|
|
(16,569,287
|
)
|
|
|
(13,415,694
|
)
|
|
|
(31,447,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
NET
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
505,000
|
|
|
|
(23,371,653
|
)
|
|
|
-
|
|
|
|
(22,866,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on (repayments
of) senior debt
|
|
|
-
|
|
|
|
-
|
|
|
|
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 redemption and
issuance of L Bonds
|
|
|
(19,752,717
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(19,752,717
|
)
|
Issuance of common stock
|
|
|
30
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
Proceeds from issuance of
redeemable preferred stock
|
|
|
25,211,870
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,211,870
|
|
Payments for issuance of
redeemable preferred stock
|
|
|
(1,243,920
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,243,920
|
)
|
Payments for redemption of
redeemable preferred stock
|
|
|
(47,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(47,500
|
)
|
Preferred stock dividends
|
|
|
(3,548,165
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,548,165
|
)
|
Issuance
of member capital
|
|
|
-
|
|
|
|
37,959,462
|
|
|
|
(51,375,156
|
)
|
|
|
13,415,694
|
|
|
|
-
|
|
NET
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
30,891,471
|
|
|
|
31,144,056
|
|
|
|
1,574,428
|
|
|
|
13,415,694
|
|
|
|
77,025,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
|
|
(18,250,746
|
)
|
|
|
79,328,866
|
|
|
|
(38,366,512
|
)
|
|
|
-
|
|
|
|
22,711,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND
CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
49,632,850
|
|
|
|
5,905,486
|
|
|
|
42,914,767
|
|
|
|
-
|
|
|
|
98,453,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
31,382,104
|
|
|
$
|
85,234,352
|
|
|
$
|
4,548,255
|
|
|
$
|
-
|
|
|
$
|
121,164,711
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statements
of Cash Flows (continued)
For the nine months ended September 30,
2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,757,655
|
)
|
|
$
|
28,024,448
|
|
|
$
|
20,659,598
|
|
|
$
|
(48,684,046
|
)
|
|
$
|
(19,757,655
|
)
|
Adjustments to reconcile net
income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(24,859,716
|
)
|
|
|
(23,824,330
|
)
|
|
|
-
|
|
|
|
48,684,046
|
|
|
|
-
|
|
Changes in fair value of
life insurance policies
|
|
|
-
|
|
|
|
(9,691,293
|
)
|
|
|
(46,367,043
|
)
|
|
|
-
|
|
|
|
(56,058,336
|
)
|
Amortization of deferred
financing and issuance costs
|
|
|
6,450,018
|
|
|
|
-
|
|
|
|
791,265
|
|
|
|
-
|
|
|
|
7,241,283
|
|
(Increase) decrease in operating
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits
receivable
|
|
|
-
|
|
|
|
(1,300,000
|
)
|
|
|
7,486,065
|
|
|
|
-
|
|
|
|
6,186,065
|
|
Other assets
|
|
|
(142,283,599
|
)
|
|
|
(112,613,085
|
)
|
|
|
826,523
|
|
|
|
249,397,712
|
|
|
|
(4,672,449
|
)
|
Increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued expenses
|
|
|
2,101,589
|
|
|
|
(365,125
|
)
|
|
|
(3,341,098
|
)
|
|
|
-
|
|
|
|
(1,604,634
|
)
|
NET
CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(178,349,363
|
)
|
|
|
(119,769,385
|
)
|
|
|
(19,944,690
|
)
|
|
|
249,397,712
|
|
|
|
(68,665,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance
policies
|
|
|
-
|
|
|
|
(26,916,457
|
)
|
|
|
(71,524,071
|
)
|
|
|
-
|
|
|
|
(98,440,528
|
)
|
Carrying
value of matured life insurance policies
|
|
|
-
|
|
|
|
2,623,779
|
|
|
|
10,933,853
|
|
|
|
-
|
|
|
|
13,557,632
|
|
NET
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
(24,292,678
|
)
|
|
|
(60,590,218
|
)
|
|
|
-
|
|
|
|
(84,882,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on (repayments
of) senior debt
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,560,286
|
)
|
|
|
|
|
|
|
(50,560,286
|
)
|
Proceeds from issuance of
L Bonds
|
|
|
166,081,914
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
166,081,914
|
|
Payments for redemption and
issuance of L Bonds
|
|
|
(46,151,926
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(46,151,926
|
)
|
Issuance of common stock
|
|
|
682,954
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
682,954
|
|
Common stock dividends
|
|
|
(25,709,412
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,709,412
|
)
|
Proceeds from issuance of
convertible preferred stock
|
|
|
50,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,000,000
|
|
Proceeds from issuance of
redeemable preferred stock
|
|
|
56,238,128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,238,128
|
|
Payments for issuance of
redeemable preferred stock
|
|
|
(4,142,294
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,142,294
|
)
|
Payments for redemption of
preferred stock
|
|
|
(2,361,692
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,361,692
|
)
|
Preferred stock dividends
|
|
|
(12,356,513
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,356,513
|
)
|
Issuance
of member capital
|
|
|
-
|
|
|
|
134,538,735
|
|
|
|
114,858,977
|
|
|
|
(249,397,712
|
)
|
|
|
-
|
|
NET
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
182,281,159
|
|
|
|
134,538,735
|
|
|
|
64,298,691
|
|
|
|
(249,397,712
|
)
|
|
|
131,720,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
|
|
3,931,796
|
|
|
|
(9,523,328
|
)
|
|
|
(16,236,217
|
)
|
|
|
-
|
|
|
|
(21,827,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND
CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
111,952,829
|
|
|
|
10,854,033
|
|
|
|
19,964,314
|
|
|
|
-
|
|
|
|
142,771,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
115,884,625
|
|
|
$
|
1,330,705
|
|
|
$
|
3,728,097
|
|
|
$
|
-
|
|
|
$
|
120,943,427
|
|
GWG HOLDINGS,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statements
of Cash Flows (continued)
For the nine months ended September
30, 2017
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
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
income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(24,013,243
|
)
|
|
|
(29,569,106
|
)
|
|
|
-
|
|
|
|
53,582,349
|
|
|
|
-
|
|
Changes 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, net
|
|
|
(6,481,917
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,481,917
|
)
|
(Increase) decrease in operating
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,252,000
|
)
|
|
|
-
|
|
|
|
(9,252,000
|
)
|
Other assets
|
|
|
(65,691,037
|
)
|
|
|
(3,794,004
|
)
|
|
|
2,999,378
|
|
|
|
69,667,082
|
|
|
|
3,181,419
|
|
Increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued expenses
|
|
|
5,262,800
|
|
|
|
(2,418,538
|
)
|
|
|
17,279
|
|
|
|
-
|
|
|
|
2,861,541
|
|
NET
CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(95,793,812
|
)
|
|
|
(14,003,006
|
)
|
|
|
(22,155,452
|
)
|
|
|
69,667,082
|
|
|
|
(62,285,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
NET
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
-
|
|
|
|
1,256,576
|
|
|
|
(60,861,092
|
)
|
|
|
-
|
|
|
|
(59,604,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS
FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings on (repayments
of) senior debt
|
|
|
-
|
|
|
|
-
|
|
|
|
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 redemption and
issuance of L Bonds
|
|
|
(58,949,880
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(58,949,880
|
)
|
Redemption of common stock
|
|
|
(1,603,526
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,603,526
|
)
|
Proceeds from issuance of
redeemable preferred stock
|
|
|
86,692,811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86,692,811
|
|
Payments for issuance of
redeemable preferred stock
|
|
|
(5,207,025
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,207,025
|
)
|
Payments for redemption of
redeemable preferred stock
|
|
|
(1,806,832
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,806,832
|
)
|
Preferred stock dividends
|
|
|
(7,447,022
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,447,022
|
)
|
Issuance
of member capital
|
|
|
-
|
|
|
|
64,191,966
|
|
|
|
5,475,116
|
|
|
|
(69,667,082
|
)
|
|
|
-
|
|
NET
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
98,694,869
|
|
|
|
46,502,181
|
|
|
|
51,210,869
|
|
|
|
(69,667,082
|
)
|
|
|
126,740,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
|
|
|
2,901,057
|
|
|
|
33,755,751
|
|
|
|
(31,805,675
|
)
|
|
|
-
|
|
|
|
4,851,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND
CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF THE PERIOD
|
|
|
28,481,047
|
|
|
|
51,478,601
|
|
|
|
36,353,930
|
|
|
|
-
|
|
|
|
116,313,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF THE PERIOD
|
|
$
|
31,382,104
|
|
|
$
|
85,234,352
|
|
|
$
|
4,548,255
|
|
|
$
|
-
|
|
|
$
|
121,164,711
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(21) Concentration
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 held by our
portfolio.
Life Insurance Company
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
John Hancock
|
|
|
14.25
|
%
|
|
|
15.57
|
%
|
AXA Equitable
|
|
|
11.18
|
%
|
|
|
11.88
|
%
|
Lincoln National
|
|
|
10.60
|
%
|
|
|
10.80
|
%
|
The
following summarizes the states, based on insured state of residence of the insurance policies in our portfolio, exceeding 10%
of the total face value held by us:
State of Residence
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Florida
|
|
|
19.78
|
%
|
|
|
20.16
|
%
|
California
|
|
|
18.12
|
%
|
|
|
18.60
|
%
|
(22) Subsequent
Events
Subsequent
to September 30, 2018, policy benefits on five policies covering four individuals have been realized. The face value of insurance
benefits of these policies was $4,140,000.
Subsequent
to September 30, 2018, we have issued approximately $42,452,000 of L Bonds.
The fair value
of our life insurance policies is determined as the net present value of the life insurance portfolio's future expected net cash
flows (policy benefits received and required premium payments) that incorporates current life expectancy estimates and discount
rate assumptions. The life expectancy estimates we use for life insurance policies with face amounts greater than $1 million are
based upon the average of two life expectancy reports we receive from independent third-party medical-actuarial underwriting firms.
We presently attempt to update our life expectancy estimates continuously on a maximum three cycle.
On October 18,
2018, ITM TwentyFirst, LLC ("TwentyFirst"), one of the primary independent third-party medical actuarial underwriting
firms we use for life expectancy reports, released an update to their mortality tables and medical underwriting methodologies.
As of September 30, 2018, 568 of our life insurance policies, representing approximately $1.3 billion in face value of policy benefits
(approximately 65% of our portfolio by face amount), were valued using life expectancy reports that included a report provided
by TwentyFirst.
On November 12,
2018, AVS, LLC ("AVS"), another primary independent third-party medical-actuarial underwriting firm we use for life expectancy
reports, also released updated mortality tables and medical underwriting methodologies. As of September 30, 2018, 788 of our life
insurance policies, representing approximately $1.7 billion in face value of policy benefits (approximately 89% of our portfolio
by face amount), were valued using life expectancy reports that included a report provided by AVS.
Based upon information
provided by TwentyFirst, we expect that our life expectancy estimates will lengthen, and assuming the application of our current
valuation methodology, we have determined the impact (reduction) to the fair value of our life insurance policy portfolio to be
$39,800,000 to $54,900,000 (approximately 5.0% to 7.0% of the investment in life insurance policies, at fair value as of September
30, 2018). TwentyFirst's changes relate to revised estimates of the originally issued life expectancy reports and do not encompass
any change in an individual insured's health condition (for better or worse) since the report was originally issued. Changes in
individual insureds health conditions over time can significantly impact actual policy valuations.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
To
date, we have received limited summarized information from AVS regarding the impacts of this revision to their mortality model,
which is based on the actual to expected experience of their senior mortality dataset. The revision suggests a lengthening of
their prior life expectancy estimates. We have not received any detailed information from AVS regarding the impacts on our individual
policies and we do not expect that such detailed information will be provided. Accordingly, at this time we are unable to estimate
the impact to the fair value of the portfolio within a reliable range.
We
have experienced significant non-cash, unrealized financial statement impacts over the past several years from the frequent changes
in methodologies made by certain independent third-party medical-actuarial underwriting firms. We are also aware of the potential
conflict arising out the fact that each successive change to underwriting tables and/or methodologies results in the need for
secondary market participants to spend significant sums acquiring new life expectancy reports and estimates from these same firms. We
have noted that these changes over the past several years have not resulted in a narrowing of consensus in the life expectancy
of any one individual.
Accordingly,
we intend to continue evaluating the efficacy of the changes announced by TwentyFirst and AVS, as well as, evaluate alternative
means and methods to produce accurate and stable life expectancy estimates for our models. This may include, but not be limited
to, using in-house underwriting, using a broader array of independent third-party medical-actuarial underwriting firms, working
with established actuarial underwriting firms to aid us in better forecasting our cash-flow models, as well as the use of epigenetic
and other emerging technologies. These efforts are designed to mitigate the volatility associated with our ownership of life insurance
policies and reduce our historical reliance on a limited number of medical-actuarial underwriting firms to value our portfolio.
We expect to complete our evaluation prior to the filing of our Annual Report on Form 10-K with the SEC for the year ending 2018.
See
Note 4 Fair Value Definition and Hierarchy, Level 3 Valuation Process for example changes in fair value of our investment in life
insurance policies from Changes in Life Expectancy Estimates.