Proposed
Transactions
On April 15, 2019,
Jon R. Sabes, the Company’s Chief Executive Officer and a director, and Steven F. Sabes, the Company’s Executive Vice
President and a director, entered into a Purchase and Contribution Agreement (the “Purchase Agreement”) with, among
others, Beneficient. Pursuant to the Purchase Agreement, Messrs. Jon and Steven Sabes have agreed to sell and transfer all
of the shares of the Company’s common stock held directly and indirectly by them and their immediate family members (approximately
12% of the Company’s outstanding common stock in the aggregate). Specifically, Messrs. Jon and Steven Sabes have agreed to
(i) sell in aggregate 2,500,000 shares of Company common stock to a subsidiary of Beneficient for $25,000,000 in cash and (ii)
contribute the remaining 1,452,155 shares of Company common stock to a limited liability company (“SPV”) owned by certain
of Beneficient’s founders, including Brad K. Heppner (Beneficient’s Chief Executive Officer and Chairman) and Thomas
O. Hicks (one of Beneficient’s current directors), in exchange for certain equity interests in the SPV.
Also pursuant to the
Purchase Agreement, Jon R. Sabes has agreed to resign as an officer and director of the Company and is expected to be appointed
Chief Executive Officer of the Company’s technology focused wholly-owned subsidiaries, Life Epigenetics and youSurance. Steven
F. Sabes has also agreed to resign as an officer and director of the Company pursuant to the Purchase Agreement and is expected
to be appointed the Chief Operating Officer of Life Epigenetics. The resignations of Messrs. Jon and Steven Sabes will include
a full waiver and forfeit of (i) any severance that may be payable by the Company or any of its subsidiaries in connection with
such resignations or the Proposed Transactions and (ii) all equity awards of the Company currently held by either of them. The
consummation of the transactions contemplated by the Purchase Agreement are referred to herein as the “Proposed Transactions.”
In addition, the Purchase
Agreement contemplates that the Company will enter into performance share unit agreements to be granted under the Company’s
2013 Stock Incentive Plan with certain employees of the Company pursuant to which such employees will receive a bonus under certain
terms and conditions, including, among others, that the Proposed Transactions be consummated and that such employees remain employed
by the Company or one of its subsidiaries (or, if no longer employed, such employment was terminated by the Company other than
for cause, as such term is defined in the performance share unit agreement) from the closing of the Purchase Agreement through
the date that is 120 days following the closing of the Purchase Agreement. The form of performance share unit agreement is being
filed as Exhibit 10.1 to this report.
The Purchase Agreement
contemplates that after completion of the Proposed Transactions, the parties will seek to enter into an agreement pursuant to which
the Company will have the right to appoint a majority of the board of directors of the general partner of Beneficient, resulting
in the Company and Beneficient being under common control. The Company and Beneficient will also seek to enter into a joint venture
agreement pursuant to which the Company will offer and distribute (through a FINRA registered managing broker-dealer) Beneficient’s
and its subsidiaries’ liquidity products and services. The Company and Beneficient intend to reduce capital allocated to
life insurance assets while they cooperate to build a larger diversified portfolio of alternative assets investment product portfolios.
The parties have also agreed to seek to cause the appointment of Mr. Holland as interim Chief Executive Officer of the Company.
The Company is not a party
to the Purchase Agreement. However, as described below, the Proposed Transactions are subject to certain conditions that are dependent
upon the Company taking, or refraining from taking, certain actions and, as described below, the Board of Directors of the Company,
acting through a special committee, has approved the Proposed Transactions and the actions required to be taken by the Company
with respect to such Proposed Transactions.
Formation of Special Committee of Board
of Directors
The Company formed
a special committee comprised of all of its independent directors to act on behalf of the Company in connection with the Proposed
Transactions. The special committee has the full power and authority of the Board of Directors to take any and all actions on behalf
of the Board of Directors as it deems necessary to evaluate and negotiate the Proposed Transactions.
The special committee
retained McGuireWoods LLP as its legal counsel and Houlihan Lokey Capital, Inc. as its financial advisor, to assist in its review
and evaluation of the Proposed Transactions. The Company separately retained Mayer Brown LLP and Maslon LLP as its legal counsel
in connection with the Proposed Transactions.
The special committee
has evaluated the Proposed Transactions and, in consultation with its outside legal and financial advisors, has unanimously concluded
that it is in the best interest of the Company to consent to the consummation of the Proposed Transactions.
Conditions Precedent to the Proposed
Transactions
The Proposed Transactions
are subject to various conditions, including conditions that are dependent on the Company taking certain affirmative actions.
These affirmative actions include:
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Effective as of the closing of the Proposed Transactions, amending the Company’s bylaws to provide for up to 13 directors;
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Effective as of the closing of the Proposed Transactions, each current member of the Board of Directors of the Company resigning as a director of the Company;
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Effective as of the closing of the Proposed Transactions, appointing to the Company’s Board of Directors up to 13 persons identified by an affiliate of Beneficient, subject to the filing of an information statement on Schedule 14F-1 pursuant to Section 14(f) of the Securities Exchange Act of 1934 with respect to such nominees;
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Terminating the Stockholders Agreement, dated as of December 27, 2018, by and among the Company and the Seller Trusts; and
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The Company having (i) at least $145,000,000 in unrestricted cash or (ii) at least (A) $140,000,000 in unrestricted cash and (B) $5,000,000 in restricted cash.
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Consummation
of the Purchase Agreement is also subject to various conditions that are dependent on the Company refraining from taking certain
actions prior to closing, including:
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Amending
any of the Company’s organizational documents (other than to amend the Company’s
bylaws to provide for up to 13 directors);
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Directly
or indirectly acquiring or agreeing to acquire in any transaction (including by merger,
consolidation or acquisition of stock or assets) the equity interest in any entity or
division or business of any entity or the properties or assets of any person or entity,
other than acquiring insurance policies in the ordinary course of the Company’s
business;
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Declaring, setting aside, making or paying any dividend or other distribution, whether payable in cash, stock, property or otherwise, in respect of the equity securities of the Company or any of its subsidiaries, other than dividends (i) by any direct or indirect subsidiary of the Company only to the Company or any wholly owned subsidiary of the Company in the ordinary course of business consistent with past practice or (ii) to the Company’s Redeemable Preferred Stock or to its Series 2 Redeemable Preferred Stock; in each case, to the extent required pursuant to the applicable certificate of designations as in effect as of the date of the Purchase Agreement;
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Selling, pledging, disposing of, transferring, abandoning, allowing to lapse or expire, leasing, licensing, mortgaging or otherwise encumbering or subjecting to any lien (including pursuant to a sale-leaseback transaction or an asset securitization transaction), any properties, rights or assets of the Company or any of its subsidiaries, other than to (i) Bank of Utah (in its capacity as trustee under that certain Amended and Restated Pledge and Security Agreement, dated as of October 2, 2017, by and among the Company, GWG Life, LLC, Messrs. Jon and Steven Sabes and the Bank of Utah) or (ii) LNV Corporation as lender under the Amended and Restated Loan and Security Agreement, dated as of September 27, 2017, by and among, GWG DLP Funding IV, LLC, CLMG Corp. and LNV Corporation;
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(i)
issuing, delivering, selling, granting, disposing of, pledging or otherwise encumbering
any shares of capital stock of any class or any other ownership interest of the Company
or any of its subsidiaries, or any rights, warrants, options, calls, commitments or any
other agreements of any character to purchase or acquire such securities, or any securities
or rights convertible into, exchangeable or exercisable for, or evidencing the right
to subscribe for, any such securities, other than any issuances solely upon the exercise
or settlement of outstanding equity awards issued under compensation plans that are outstanding
on the date of the Purchase Agreement in accordance with their terms as of the date of
the Purchase Agreement, (ii) adjusting, splitting, combining, subdividing or reclassifying
any securities of GWG, or (iii) entering into any contract, agreement or understanding
with respect to the sale, voting, registration or repurchase of securities of the Company
or any of its subsidiaries;
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(i) increasing in any manner the compensation of any of the Company’s directors or officers or entering into, establishing, amending or terminating, or increasing any compensation or benefits under, any employment, consulting, compensation or benefit plan, policy, agreement, trust, fund or arrangement with, for or in respect of, any director or officer, other than retention, severance or employment agreements with management or other employees of the Company as approved by the Compensation Committee of the Board of Directors of each of the Company and Beneficient, (ii) paying any severance or other bonus to Messrs. Jon or Steven Sabes in connection with their resignations from their positions with the Company or the consummation of the Proposed Transactions, or (iii) deeming the transactions contemplated by this Agreement to be a Sale Transaction (as that term is defined in the Company’s 2013 Equity Incentive Plan)
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Amending
any material contract that the Company previously filed as a “material contract”
pursuant to Item 601(b)(10) of Regulation S-K under the Securities Act of 1933 or entering into any contract, agreement or
understanding that would be required to be filed by the Company as a “material contract” pursuant to Item
601(b)(10) of Regulation S-K under the Securities Act of 1933; and
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Failing to file any forms, reports, schedules, registration statements, definitive proxy statements and other
documents (including all exhibits) required to be filed by the Company with the Securities Exchange Commission, other than the
Annual Report on Form 10-K for the year ended December 31, 2018, an amendment to the Current Report on Form 8-K filed on January
4, 2019 or any other document solely due to the failure of Beneficient or its subsidiaries to provide required information to the
Company on a timely basis (which may not be timely delivered).
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Risk
Factors relating to the Proposed Transactions
Below
are certain risk factors related to the Proposed Transactions.
Because
the Proposed Transactions contemplate that the Company will terminate the Stockholders Agreement with the Seller Trusts, following
the completion of the Proposed Transactions, the Seller Trusts, which hold approximately 82% of our outstanding voting securities,
will obtain voting control over the Company.
According to their
most recent Schedule 13D filing, the Seller Trusts hold approximately 82% of our outstanding voting securities. Pursuant to the
Stockholders Agreement entered into in December 2018, the Seller Trusts agreed to vote all of their shares of Company common stock
in proportion with the votes cast by all other holders of the Company’s common stock and agreed to certain other standstill
arrangements. Following the Proposed Transactions, the Seller Trusts will be entitled to full voting rights with respect to the
shares of Company common stock they own and will be entitled to cast a majority of the votes on all matters requiring stockholder
votes, including: the election of directors; mergers, consolidations, acquisitions, joint ventures and other strategic transactions;
the sale of all or substantially all of our assets and other decisions affecting our capital structure; amendments to our Certificate
of Incorporation or our bylaws; and our winding up and dissolution. This will effectively transfer voting control over the
Company to the Seller Trusts from Messrs. Jon and Steven Sabes, who currently hold a majority of our outstanding common stock not
held by the Seller Trusts. Such concentrated ownership following the Proposed Transactions will also enable the Seller Trusts to
exert significant influence over all of our corporate activities. This concentration of ownership may delay, deter or prevent acts
that would be favored by our other stockholders. The interests of the Seller Trusts may not always coincide with our interests
or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or
deterring a change in control of the Company. Also, the Seller Trusts may seek to cause us to take courses of action that, in their
judgments, could enhance their investments in us, but which might involve risks to our other stockholders or adversely affect us
or our other stockholders. As a result, the market price of our shares could decline or stockholders might not receive a premium
over the then-current market price of our shares upon a change in control. In addition, this continued concentration of share ownership,
albeit in new hands, may adversely affect the trading price of our shares because prospective investors may perceive disadvantages
in owning shares in a company with such significant stockholders.
Failure to effectively transition the
management and oversight roles served by our current executives and our Board of Directors may materially disrupt our business
operations.
We have been heavily reliant
upon the service of Jon R. Sabes as our Chief Executive Officer. Because the Proposed Transactions contemplate that Mr. Sabes would
step down from this position, it will be vital to ensure a successful transition of Mr. Sabes’ roles, responsibilities and
leadership to his successor if the Proposed Transactions are consummated. A failure to effectively transition to a new Chief
Executive Officer could be materially disruptive to our business operations and have a material adverse effect on such operations
and our financial results. The Proposed Transactions further contemplate a complete reconstitution of our board of directors, which
may negatively impact the continuity and stability of our company and our business.
The Proposed Transactions may not be
completed.
The consummation
of the transactions contemplated by the Purchase Agreement is subject to various conditions. Because we are not a party
to the Purchase Agreement, we have no control over when and if certain of the conditions will be satisfied, or whether the
parties may waive them. Although we anticipate that the Proposed Transactions will be completed in late April, there
can be no assurance that it will be completed on this timeframe or at all. If the Proposed Transactions are not completed for
any reason, the anticipated benefits of the Proposed Transactions may not be realized. Further, the price of our common stock
may decline to the extent that the current market price reflects an assumption that the Proposed Transactions will be
completed.
Annual Report on Form 10-K; Amendment
to Current Report on Form 8-K
On April 2, 2019, the
Company filed with the Securities and Exchange Commission a Notification of Late Filing pursuant to Rule 12b-25 of the Securities
Exchange Act of 1934 indicating that it expected to file its Annual Report on Form 10-K for the fiscal year ended December 31,
2018 no later than April 16, 2019, which is the fifteenth calendar day following the prescribed due date of such filing. As a result
of the accounting for certain assets and liabilities exchanged in the 2018 Beneficient Transaction and Beneficient’s on-going
financial statement audit, the Company does not expect to file its Annual Report on Form 10-K for the year ended December 31, 2018
within such extension period. For similar reasons, the Company has not yet filed an amendment to its Current Report on Form 8-K
disclosing the completion of the 2018 Beneficient Transaction, initially filed on January 4, 2019, to include the requisite historical
financial statements of Beneficient and pro forma financial information. The Company is working diligently to complete its Annual
Report on Form 10-K and the amendment to such Current Report on Form 8-K and expects to file these reports as soon as practicable.
Forward-Looking Statements
This Current Report
on Form 8-K contains statements that are forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends these forward-looking
statements to be covered by the safe harbor provisions for such statements. All statements that do not concern historical facts
are forward-looking statements. The words “believe,” “could,” “possibly,” “probably,”
“anticipate,” “estimate,” “project,” “expect,” “may,” “will,”
“should,” “seek,” “intend,” “plan,” “expect,” or “consider”
and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such
statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially
from such statements, including, but not limited to the risks that the Proposed Transaction may not be completed on the expected
timeframe or at all, the Company may not realize the anticipated benefits of the Proposed Transactions, and the Company filing
its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and/or the amendment to its Current Report on Form 8-K
disclosing the completion of the2018 Beneficient Transaction may be delayed beyond the timeframe currently anticipated, as well
as the other risks set forth in the Company’s filings with the SEC. These forward-looking statements should be considered
in light of these risks and uncertainties. The Company bases its forward-looking statements on information currently available
to it at the time of this report and undertakes no obligation to update or revise any forward-looking statements, whether as a
result of changes in underlying circumstances, new information, future events or otherwise.