GWG HOLDINGS, INC. AND SUBSIDIARIES
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
The accompanying notes are an integral
part of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(1) Nature of Business and Summary of Significant Accounting
Policies
Nature of Business —
We are
a 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.
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 8), pari passu in right of payment and in
respect of collateral with all “L Bonds” of GWG (see Note 10), 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 23).
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.
Principles of Consolidation –
The condensed consolidated financial statements include the accounts of GWG Holdings, Inc. and all its wholly-owned subsidiaries.
All material intercompany balances and transactions have been eliminated upon consolidation.
The Company
has interests in various entities including corporations and limited partnerships. For each such entity, the Company evaluates
its ownership interest to determine whether the entity is a variable interest entity (“VIE”) and, if so, whether it
is the primary beneficiary of the VIE. The Company would consolidate any entity for which it was the primary beneficiary, regardless
of its ownership or voting interests. Upon inception of a variable interest or the occurrence of a reconsideration event, the
Company makes judgments in determining whether entities in which it invests are VIEs. If so, the Company makes judgments to determine
whether it is the primary beneficiary and is thus required to consolidate the entity.
If it is concluded
that an entity is not a VIE, then the Company considers its proportional voting interests in the entity. The Company consolidates
majority-owned subsidiaries in which a controlling financial interest is maintained. A controlling financial interest is determined
by majority ownership and the absence of significant third-party participating rights. Ownership interests in entities for which
the Company has significant influence that are not consolidated under the Company’s consolidation policy are accounted for as
equity method investments.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Related party
transactions between the Company and its equity method investee have not been eliminated.
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, (2) the assessment of potential impairment and need for an allowance for loan loss on
our notes receivable from affiliate, and (3) the value of our deferred tax assets and liabilities.
Cash and Cash Equivalents —
We
consider cash in demand deposit accounts and temporary investments purchased with an original maturity of three months or less
to be cash equivalents. We maintain our cash and cash equivalents with highly rated financial institutions. The balances in our
bank accounts may exceed Federal Deposit Insurance Corporation limits. We periodically evaluate the risk of exceeding insured
levels and may transfer funds as we deem appropriate.
Life Insurance Policies —
Accounting
Standards Codification 325-30,
Investments in Insurance Contracts
permits a reporting entity to account for its investments
in life insurance policies using either the investment method or the fair value method. We elected to use the fair value method
to account for our life insurance policies. We initially record our purchase of life insurance policies at the transaction price,
which is the amount paid for the policy, inclusive of all external fees and costs associated with the acquisition. At each subsequent
reporting period, we re-measure the investment at fair value in its entirety and recognize the change in fair value as unrealized
gain 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 $0.8 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.
Financing Receivable —
Accounting Standards Codification 310,
Receivables
provides guidance for receivables and notes that receivables arise from
credit sales, loans or other transactions. Financing receivable includes loans and notes receivable. Originated loans we hold
for which we have the intent and ability to hold for the foreseeable future or to maturity (or payoff) are classified as held
for investment. Financing receivables held for investment are reported in our condensed consolidated balance sheets at the outstanding
principal balance adjusted for any write-offs, allowance for loan losses, deferred fees or costs, and any unamortized premiums
or discounts. Interest income is accrued on outstanding principal as earned. Unamortized discounts and premiums are amortized
using the interest method with the amortization recognized as part of interest income in the condensed consolidated statements
of operations.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Losses on financing receivables are
recognized when they are incurred, which requires us to make our best estimate of probable losses. Specific allowances are recorded
for individually impaired loans to the extent we have determined that it is probable that we will be unable to collect all amounts
due according to original contractual terms of the loan agreement. Certain loans classified as impaired may not require an allowance
for loan loss because we believe that we will ultimately collect the unpaid balance (through collection or collateral repossession).
The method for calculating the best estimate of losses depends on the type and risk characteristics of the related financing receivable.
Such an estimate requires consideration of historical loss experience, adjusted for current conditions, and judgments about the
probable effects of relevant observable data, including present economic conditions such as delinquency rates, financial health
of market sectors, and the present and expected future levels of interest rates. The underlying assumptions, estimates and assessments
we use to provide for losses are updated periodically to reflect our view of current conditions. Changes in such estimates can
significantly affect the allowance and provision for losses. It is possible that we will experience credit losses that are different
from our current estimates. We have no allowance for losses as of September 30, 2018. Write-offs are deducted from the allowance
for losses when we judge the principal to be uncollectible and subsequent recoveries are added to the allowance at the time cash
is received on a written-off account.
Equity Method Investment
—
We account for investments in common stock or in-substance common stock in which we have the ability to exercise significant influence,
but do not own a controlling financial interest, under the equity method of accounting. Investments within the scope of the equity
method of accounting are initially measured at cost, including the cost of the investment itself and direct transaction costs
incurred to acquire the investment. After the initial recognition of the investment at cost, we recognize income and losses from
our investment by adjusting upward or downward the balance of our equity method investment on our condensed consolidated balance
sheet with such adjustments, if any, flowing through equity in net earnings of investee on our condensed consolidated statement
of operations, in all cases adjusted to reflect amortization of basis differences, if any, and the elimination of intercompany
gains and losses, if any. Cash distributions received from equity method investees are recorded as reductions to the investment
balance and classified on the statement of cash flows using the cumulative earnings approach.
Our equity method investment is reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable.
These circumstances can include, but are not limited to: evidence that we do not have the ability to recover the carrying amount,
the inability of the investee to sustain earnings, a current fair value of the investment that is less than the carrying amount,
and other investors ceasing to provide support or reduce their financial commitment to the investee. If the fair value of the
investment is less than the carrying amount, and the investment will not recover in the near term, then an other-than-temporary
impairment may exist. We recognize a loss in value of an investment deemed other-than-temporary in the period the conclusion is
made.
The Company reports its share of the
income or loss of the equity method investee companies on a one-quarter lag where we do not expect financial information to be
consistently available on a timely basis.
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 8, 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 7. The L Bonds, as described in Note 10, 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 9 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 12, 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 13 and 14, 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 15, 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.
Restatement of previously issued
consolidated financial statements
— The Company has restated these financial statements to correct an error in recognizing
the effects of the Beneficient Transaction described above which occurred on August 10, 2018. After consultation with the Commission,
the Company determined that it had understated certain assets and liabilities related to the Beneficient Transaction. This restatement
has recognized the effects of the transaction as noted below, which are largely balance sheet related.
Impacts of restatement –
The
effects of the restatement on the line items within the Company’s consolidated balance sheet as of September 30, 2018 are
as follows:
|
|
As
|
|
|
|
|
|
|
|
|
|
originally
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Financing receivable from affiliate
|
|
$
|
-
|
|
|
$
|
366,871,000
|
|
|
$
|
366,871,000
|
|
Equity method investment
|
|
|
-
|
|
|
|
42,069,000
|
|
|
|
42,069,000
|
|
Other assets
|
|
|
13,022,000
|
|
|
|
(3,185,000
|
)
|
|
|
9,837,000
|
|
Total assets
|
|
|
935,907,000
|
|
|
|
405,755,000
|
|
|
|
1,341,662,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Seller Trust L Bonds
|
|
$
|
-
|
|
|
$
|
403,235,000
|
|
|
$
|
403,235,000
|
|
Interest and dividends payable
|
|
|
16,228,000
|
|
|
|
2,520,000
|
|
|
|
18,748,000
|
|
Total liabilities
|
|
|
754,749,000
|
|
|
|
405,755,000
|
|
|
|
1,160,504,000
|
|
The effects of the restatement on the
line items within the Company’s condensed consolidated statements of operations for the three and nine months ended September
30, 2018 are as follows:
|
|
Three Months ended September
30, 2018
|
|
|
Nine Months ended September
30, 2018
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
originally
|
|
|
|
|
|
|
|
|
originally
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
|
reported
|
|
|
Adjustments
|
|
|
As restated
|
|
Interest and other income
|
|
$
|
931,000
|
|
|
$
|
4,285,000
|
|
|
$
|
5,216,000
|
|
|
$
|
2,579,000
|
|
|
$
|
4,285,000
|
|
|
$
|
6,864,000
|
|
Interest expense
|
|
|
17,515,000
|
|
|
|
4,285,000
|
|
|
|
21,800,000
|
|
|
|
50,726,000
|
|
|
|
4,285,000
|
|
|
|
55,011,000
|
|
Net Loss
|
|
|
(10,522,000
|
)
|
|
|
-
|
|
|
|
(10,522,000
|
)
|
|
|
(19,758,000
|
)
|
|
|
-
|
|
|
|
(19,758,000
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The effects of restatement on the major
categories within the Company’s condensed consolidated statements of cash flows for the three and nine months ended September
30, 2018 are as follows:
|
|
Three
Months ended September 30, 2018
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
originally
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
Net cash flows provided (used) in operating
activities
|
|
$
|
(19,689,000
|
)
|
|
$
|
1,421,000
|
|
|
$
|
(18,268,000
|
)
|
Net cash flows provided (used) in investing activities
|
|
|
(40,566,000
|
)
|
|
|
(1,421,000
|
)
|
|
|
(41,987,000
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(10,153,000
|
)
|
|
$
|
-
|
|
|
$
|
(10,153,000
|
)
|
|
|
Nine
Months ended September 30, 2018
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
originally
|
|
|
|
|
|
|
|
|
|
Reported
|
|
|
Adjustments
|
|
|
As
restated
|
|
Net cash flows provided (used) in operating
activities
|
|
$
|
(68,666,000
|
)
|
|
$
|
1,421,000
|
|
|
$
|
(67,245,000
|
)
|
Net cash flows provided (used) in investing activities
|
|
|
(84,883,000
|
)
|
|
|
(1,421,000
|
)
|
|
|
(86,304,000
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(21,828,000
|
)
|
|
$
|
-
|
|
|
$
|
(21,828,000
|
)
|
(2) Restrictions on Cash
Under the terms of our amended and
restated senior credit facility with LNV Corporation (discussed in Note 8), 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 8, and the
net proceeds from our offering of L Bonds as described in Note 10. 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 25).
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 Seller Trust L Bonds, which contain certain rights that differ from our other L Bonds, nevertheless have generally
similar terms to our other L Bonds. Therefore we use the same income-based approach used for L Bonds resulting in an approximate
fair value of $403,235,000 for the Seller Trust L Bonds compared to an aggregate face value of $403,235,000.
The Exchangeable Note receivable
from Beneficient is expected to be converted to Beneficient common units (at a price of $10 per unit) upon Final Closing,
which is expected to occur in the fourth quarter of 2018. Due primarily to the above market interest rate of 12.4% on the
Exchangeable Note, we estimate the fair value of approximately $170,545,000 based on the estimated convertible value of the
underlying units.
The Commercial Loan receivable from
Beneficient has a below-market interest rate of 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. We estimate the fair value of the Commercial Loan of approximately
$189,150,000 based on a market yield analysis for similar instruments with similar credit profiles. We utilized
an implied yield of approximately 6.75%.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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 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 19).
The following table summarizes outstanding
common stock warrants (discussed in Note 17) 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) Financing Receivable from Affiliate (as restated)
Commercial Loan
On August 10, 2018, in connection with
the Initial Transfer of the Beneficient Transaction, GWG Life, as lender, and Beneficient, as borrower, entered into the Commercial
Loan Agreement in the amount of $200,000,000. The principal amount under the Commercial Loan is due on August 9, 2023, but is
extendable for two five-year terms under certain circumstances. 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 senior debt and commercial bank debt, if any, and to Beneficient’s
obligations which may arise in connection with its NPC-B Unit limited partnership interests. Beneficient’s obligations under
the Commercial Loan Agreement are unsecured.
The Commercial Loan Agreement 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 Agreement 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 Agreement 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 from 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. The accrued interest from the
Initial Transfer to the Final Closing date will be added to the principal amount of the loan. The Commercial Loan was issued at
a discount as a result of the relative fair value allocations for the assets received in the Beneficient transaction. The discount
will be amortized to interest income over the term of the loan.
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 (See Note 11).
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Exchangeable Note
On August 10, 2018, in connection with
the Initial Transfer of the Beneficient Transaction, Beneficient issued to GWG the Exchangeable Promissory Note (the “Exchangeable
Note”) in the principal amount of $162,911,000. 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 Agreement 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 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 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 for 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 (See Note 11). The Exchangeable Note was issued at a premium as a result of
the relative fair value allocations for the assets received in the Beneficient transaction. The premium will be amortized to interest
income over the term of the note.
The following table summarizes outstanding
principal and accrued interest balances of the Commercial Loan and Exchangeable Note receivable:
|
|
As of
|
|
|
As of
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Commercial Loan receivable - principal
|
|
$
|
200,000,000
|
|
|
$
|
-
|
|
Discount on loan receivable
|
|
|
(9,078,000
|
)
|
|
|
|
|
Accrued interest receivable
|
|
|
1,444,000
|
|
|
|
-
|
|
Commercial Loan receivable
from affiliate
|
|
|
192,366,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Exchangeable Note receivable - principal
|
|
|
162,911,000
|
|
|
|
-
|
|
Premium on note receivable
|
|
|
8,754,000
|
|
|
|
|
|
Accrued interest receivable
|
|
|
2,840,000
|
|
|
|
-
|
|
Exchangeable Note receivable
from affiliate
|
|
|
174,505,000
|
|
|
|
-
|
|
Financing receivable from affiliate
|
|
$
|
366,871,000
|
|
|
$
|
-
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(6) Equity Method Investment (as restated)
On August 10, 2018, in connection with
the Initial Transfer of the Beneficient Transaction, we acquired 4.0 million common units of Beneficient, for a total limited
partnership interest in the common units of Beneficient of approximately 17.6%. The common units of Beneficient are not publicly
traded on a stock exchange.
In accordance with ASC 810,
Consolidation,
the Company assesses whether or not related entities are variable interest entities (“VIEs”). For those related
entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE,
and if so, to consolidate the VIE.
We have determined that Beneficient
is a VIE but that we are not the primary beneficiary of the investment. GWG does not have the power to direct any activities of
Beneficient, or any of its related parties, that most significantly impact Beneficient’s economic performance. GWG has no
board representation at Beneficient or at its general partner. The general partner is exclusively assigned all management powers
over the business and affairs of Beneficient, and the limited partners do not have the ability to remove the general partner.
Therefore, we do not consolidate the results of Beneficient in our consolidated financial statements. The Company’s exposure
to risk of loss in Beneficient is generally limited to its investment in the common units of Beneficient, and its financing receivables
from Beneficient.
The following table shows the classification,
carrying value and maximum exposure to loss with respect to the Company’s unconsolidated VIEs at September 30, 2018:
|
|
Carrying
|
|
|
Maximum Exposure
|
|
|
|
Value
|
|
|
to
Loss
|
|
Assets:
|
|
|
|
|
|
|
Financing receivable from affiliate
|
|
$
|
366,871,000
|
|
|
$
|
366,871,000
|
|
Equity method investment
|
|
|
42,069,000
|
|
|
|
42,069,000
|
|
Total
|
|
$
|
408,940,000
|
|
|
$
|
408,940,000
|
|
We account for our investment
under the equity method. Our investment is presented in equity method investment on our condensed consolidated balance sheets.
Our proportionate share of earnings or losses from our equity method investment is recognized in equity in net earnings of investee
in our condensed consolidated statements of operations. We record our share of the income or loss of Beneficient on a one-quarter
lag. As a result, no earnings from Beneficient were recorded in equity in net earnings of investee for the three or nine months
ended September 30, 2018.
Although our initial proportion of
the common ownership is below 20%, we believe it appropriate to apply equity method accounting given our additional advances made
to Beneficient, particularly in regards to the Exchangeable Note which will convert to additional Beneficient common units upon
the Final Closing Date. Additionally, SEC Staff Announcement: Accounting for Limited Partnership Investments provides guidance
requiring the use of the equity method unless the investment is so minor that the limited partner may have virtually no influence
over the partnership’s operating and financial policies. In practice, investments of more than 3% to 5% are viewed as more
than minor.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
A substantial majority of the net assets
of Beneficient are currently represented by intangible assets and goodwill. As such, we believe substantially all of our equity
method investment is characterized as equity method goodwill as of September 30, 2018. We do not believe conditions exist indicating
an other-than-temporary loss in value of our investment and no impairment has been recorded to our equity method investment as
of September 30, 2018.
Beneficient has certain share classes
outstanding other than common units, namely Class S Ordinary units issued by Beneficient and Non-Participating Convertible Series
A units issued by a subsidiary of Beneficient. These units are classified as noncontrolling interest and redeemable noncontrolling
interest, respectively, on the consolidated statements of financial position of Beneficient and their share of the net income
of Beneficient is classified as net income attributable to noncontrolling interests on the consolidated statements of operations
of Beneficient. These units are exchangeable or convertible into common units of Beneficient.
(7) 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.
(8) 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.
(9) 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)
(10) 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.
We are publicly offering and selling
L Bonds under a registration statement declared effective by the SEC and have issued Seller Trust L Bonds under a Supplemental
Indenture, as described in (see Note 11). The L Bonds and Seller Trust 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 and Seller Trust L Bonds. GWG Life’s equity
in DLP IV
(2)
serves as collateral for our L Bond and Seller Trust L Bond obligations. 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 (see Note 11) are senior secured obligations of GWG, ranking junior to all senior debt of GWG (see Note
8) and pari passu in right of payment and in respect of collateral with all L Bonds 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).
|
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 11).
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(11) Seller Trust L Bonds (as restated)
On August 10, 2018, in connection
with the Initial Transfer of the Beneficient Transaction, 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. 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 a new class of securities titled “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 7.50% per year. Interest is payable monthly in cash.
GWG issued Seller Trust L Bonds
in the amount of $403,235,000 to the various related trusts (the “Seller Trusts”) in connection with the Beneficient
Transaction on August 10, 2018.
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 Agreement, (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,
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 Agreement, (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.
We are publicly offering and selling
L Bonds under a registration statement declared effective by the SEC, as described in Note 10 and have issued Seller Trust L Bonds
under a Supplemental Indenture. The L Bonds and Seller Trust 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 and Seller Trust L Bonds. GWG Life’s equity in DLP IV
(2)
serves as collateral for our L Bond and Seller Trust L Bond obligations. 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 to all senior debt of GWG (see Note 8) and pari
passu in right of payment and in respect of collateral with all L Bonds of GWG (see Note 10). 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).
|
The principal amount of Seller
Trust L Bonds outstanding was $403,235,000 and $0 at September 30, 2018 and December 31, 2017, respectively.
(12) 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.
(13) 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.
(14) 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)
(15) 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.
(16) 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.
(17) 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.
(18) 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.
(19) 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)
(20) Net Loss Attributable to Common Shareholders
We have outstanding RPS, RPS 2 and
Series B as described in Notes 13, 14 and 15. 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.
(21) 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
|
|
(22) 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.
(23) Guarantee of L Bonds and Seller Trust L Bonds (as
restated)
We are publicly offering and selling
L Bonds under a registration statement declared effective by the SEC, as described in Note 10 and have issued Seller Trust L Bonds
under a Supplemental Indenture, as described in Note 11. The L Bonds and Seller Trust 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 and Seller Trust L Bonds. GWG
Life’s equity in DLP IV
(2)
serves as collateral for our L Bond and Seller Trust L Bond obligations. 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 to all senior debt of GWG (see Note 8) and pari
passu in right of payment and in respect of collateral with all L Bonds of GWG (see Note 10). 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 and Seller Trust L Bonds.
The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds and Seller
Trust 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
|
|
(as
restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Financing
receivable from affiliate
|
|
|
174,505,533
|
|
|
|
192,365,503
|
|
|
|
-
|
|
|
|
-
|
|
|
|
366,871,036
|
|
Equity method
investment
|
|
|
42,069,259
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42,069,259
|
|
Other assets
|
|
|
3,707,203
|
|
|
|
1,822,284
|
|
|
|
4,307,324
|
|
|
|
-
|
|
|
|
9,836,811
|
|
Investment
in subsidiaries
|
|
|
834,505,607
|
|
|
|
551,836,655
|
|
|
|
-
|
|
|
|
(1,386,342,262
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
1,170,672,227
|
|
|
$
|
835,232,481
|
|
|
$
|
722,099,370
|
|
|
$
|
(1,386,342,262
|
)
|
|
$
|
1,341,661,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit
facility with LNV Corporation
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
162,469,172
|
|
|
$
|
-
|
|
|
$
|
162,469,172
|
|
L Bonds
|
|
|
570,199,704
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
570,199,704
|
|
Seller Trust
L Bonds
|
|
|
403,234,866
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
403,234,866
|
|
Accounts
payable
|
|
|
1,101,453
|
|
|
|
641,741
|
|
|
|
836,129
|
|
|
|
-
|
|
|
|
2,579,323
|
|
Interest
and dividends payable
|
|
|
13,952,101
|
|
|
|
-
|
|
|
|
4,796,457
|
|
|
|
-
|
|
|
|
18,748,558
|
|
Other
accrued expenses
|
|
|
1,026,668
|
|
|
|
1,448,807
|
|
|
|
797,283
|
|
|
|
-
|
|
|
|
3,272,758
|
|
TOTAL
LIABILITIES
|
|
|
989,514,792
|
|
|
|
2,090,548
|
|
|
|
168,899,041
|
|
|
|
-
|
|
|
|
1,160,504,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
-
|
|
|
|
833,141,933
|
|
|
|
553,200,329
|
|
|
|
(1,386,342,262
|
)
|
|
|
-
|
|
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
|
|
|
|
833,141,933
|
|
|
|
553,200,329
|
|
|
|
(1,386,342,262
|
)
|
|
|
181,157,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,170,672,227
|
|
|
$
|
835,232,481
|
|
|
$
|
722,099,370
|
|
|
$
|
(1,386,342,262
|
)
|
|
$
|
1,341,661,816
|
|
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
(as restated)
|
|
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
|
|
|
3,333,424
|
|
|
|
1,700,414
|
|
|
|
181,677
|
|
|
|
-
|
|
|
|
5,215,515
|
|
TOTAL REVENUE
|
|
|
3,333,424
|
|
|
|
5,822,567
|
|
|
|
11,781,037
|
|
|
|
-
|
|
|
|
20,937,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
16,739,120
|
|
|
|
-
|
|
|
|
5,060,212
|
|
|
|
-
|
|
|
|
21,799,332
|
|
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
|
|
|
21,105,706
|
|
|
|
3,764,095
|
|
|
|
6,589,236
|
|
|
|
-
|
|
|
|
31,459,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(17,772,282
|
)
|
|
|
2,058,472
|
|
|
|
5,191,801
|
|
|
|
-
|
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
7,250,273
|
|
|
|
6,266,481
|
|
|
|
-
|
|
|
|
(13,516,754
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(10,522,009
|
)
|
|
|
8,324,953
|
|
|
|
5,191,801
|
|
|
|
(13,516,754
|
)
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NET INCOME (LOSS)
|
|
|
(10,522,009
|
)
|
|
|
8,324,953
|
|
|
|
5,191,801
|
|
|
|
(13,516,754
|
)
|
|
|
(10,522,009
|
)
|
Preferred stock dividends
|
|
|
4,313,542
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,313,542
|
|
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON SHAREHOLDERS
|
|
$
|
(14,835,551
|
)
|
|
$
|
8,324,953
|
|
|
$
|
5,191,801
|
|
|
$
|
(13,516,754
|
)
|
|
$
|
(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
(as restated)
|
|
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
|
|
|
4,447,322
|
|
|
|
1,726,938
|
|
|
|
689,380
|
|
|
|
-
|
|
|
|
6,863,640
|
|
TOTAL
REVENUE
|
|
|
4,447,322
|
|
|
|
13,862,770
|
|
|
|
41,483,556
|
|
|
|
-
|
|
|
|
59,793,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
38,758,326
|
|
|
|
-
|
|
|
|
16,252,193
|
|
|
|
-
|
|
|
|
55,010,519
|
|
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
|
|
|
50,760,809
|
|
|
|
7,966,536
|
|
|
|
20,823,958
|
|
|
|
-
|
|
|
|
79,551,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS)
BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(46,313,487
|
)
|
|
|
5,896,234
|
|
|
|
20,659,598
|
|
|
|
-
|
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
26,555,832
|
|
|
|
23,824,330
|
|
|
|
-
|
|
|
|
(50,380,162
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
(LOSS) BEFORE INCOME TAXES
|
|
|
(19,757,655
|
)
|
|
|
29,720,564
|
|
|
|
20,659,598
|
|
|
|
(50,380,162
|
)
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
TAX (EXPENSE)/BENEFIT
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
NET INCOME (LOSS)
|
|
|
(19,757,655
|
)
|
|
|
29,720,564
|
|
|
|
20,659,598
|
|
|
|
(50,380,162
|
)
|
|
|
(19,757,655
|
)
|
Preferred
stock dividends
|
|
|
12,356,513
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,356,513
|
|
NET
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(32,114,168
|
)
|
|
$
|
29,720,564
|
|
|
$
|
20,659,598
|
|
|
$
|
(50,380,162
|
)
|
|
$
|
(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
(as restated)
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(10,522,009
|
)
|
|
$
|
8,324,953
|
|
|
$
|
5,191,801
|
|
|
$
|
(13,516,754
|
)
|
|
$
|
(10,522,009
|
)
|
Adjustments
to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
of subsidiaries
|
|
|
(7,250,273
|
)
|
|
|
(6,266,481
|
)
|
|
|
-
|
|
|
|
13,516,754
|
|
|
|
-
|
|
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
|
|
Amortization
of discount or premium on financing receivable
|
|
|
251,672
|
|
|
|
(251,672
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
-
|
|
Financing
receivable from affiliate
|
|
|
(2,839,926
|
)
|
|
|
(1,444,444
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,284,370
|
)
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance policy benefits receivable
|
|
|
-
|
|
|
|
(2,000,000
|
)
|
|
|
18,562,304
|
|
|
|
-
|
|
|
|
16,562,304
|
|
Other
assets
|
|
|
(59,650,044
|
)
|
|
|
(47,247,165
|
)
|
|
|
305,226
|
|
|
|
106,913,951
|
|
|
|
321,968
|
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued expenses
|
|
|
3,460,355
|
|
|
|
(384,380
|
)
|
|
|
(1,157,273
|
)
|
|
|
-
|
|
|
|
1,918,702
|
|
NET
CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(74,238,658
|
)
|
|
|
(52,754,641
|
)
|
|
|
1,811,698
|
|
|
|
106,913,951
|
|
|
|
(18,267,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Equity
method investment acquired
|
|
|
(1,421,059
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,421,059
|
)
|
NET
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
(1,421,059
|
)
|
|
|
(10,699,108
|
)
|
|
|
(29,866,667
|
)
|
|
|
-
|
|
|
|
(41,986,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
(as restated)
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(19,757,655
|
)
|
|
$
|
29,720,564
|
|
|
$
|
20,659,598
|
|
|
$
|
(50,380,162
|
)
|
|
$
|
(19,757,655
|
)
|
Adjustments
to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
of subsidiaries
|
|
|
(26,555,832
|
)
|
|
|
(23,824,330
|
)
|
|
|
-
|
|
|
|
50,380,162
|
|
|
|
-
|
|
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
|
|
Amortization
of discount or premium on financing receivable
|
|
|
251,672
|
|
|
|
(251,672)
|
|
|
|
-
|
|
|
|
|
|
|
-
|
-
|
|
Financing
receivable from affiliate
|
|
|
(2,839,926
|
)
|
|
|
(1,444,444
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,284,370
|
)
|
(Increase)
decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
insurance policy benefits receivable
|
|
|
-
|
|
|
|
(1,300,000
|
)
|
|
|
7,486,065
|
|
|
|
-
|
|
|
|
6,186,065
|
|
Other
assets
|
|
|
(139,098,388
|
)
|
|
|
(112,613,085
|
)
|
|
|
826,523
|
|
|
|
249,397,712
|
|
|
|
(1,487,238
|
)
|
Increase
(decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued expenses
|
|
|
4,621,807
|
|
|
|
(365,125
|
)
|
|
|
(3,341,098
|
)
|
|
|
-
|
|
|
|
915,584
|
|
NET
CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(176,928,304
|
)
|
|
|
(119,769,385
|
)
|
|
|
(19,944,690
|
)
|
|
|
249,397,712
|
|
|
|
(67,244,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Equity
method investment acquired
|
|
|
(1,421,059
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,421,059
|
)
|
NET
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
(1,421,059
|
)
|
|
|
(24,292,678
|
)
|
|
|
(60,590,218
|
)
|
|
|
-
|
|
|
|
(86,303,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
(24) 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
|
%
|
On August 10, 2018, in connection with
the Initial Transfer of the Beneficient Transaction, the Company (i) acquired a limited partnership investment in the common units
of Beneficient, (ii) entered into a Commercial Loan with Beneficient as borrower and (iii) received the Exchangeable Note from
Beneficient as borrower. The total carrying value of these investments at September 30, 2018 is $408,940,000, representing 30.5%
of the Company’s consolidated assets. Currently there is no liquid market for the common units of Beneficient and it is
possible none will develop. Although we intend to hold the Commercial Loan (and the Exchangeable Note to the extent the Final
Closing does not occur) to maturity, there is currently no liquid market for these loans and it is possible none will develop.
(25) 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.