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.
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(1) Nature of Business
Organizational Structure
GWG Holdings, Inc. (“GWG Holdings”)
conducts its life insurance secondary market business through a wholly-owned subsidiary, GWG Life, LLC (“GWG Life”),
and GWG Life’s wholly-owned subsidiaries, GWG Life Trust and GWG DLP Funding IV, LLC (“DLP IV”).
GWG Holdings’ indirect interests
in loans collateralized by cash flows from other alternative assets are held by The Beneficient Company Group, L.P. (“Ben
LP,” including all of the subsidiaries it may have from time to time — “Beneficient”) and its general partner,
Beneficient Management, L.L.C. (“Beneficient Management”). Prior to December 31, 2019, GWG Holdings’ investment
in Beneficient was accounted for as an equity method investment. On December 31, 2019, as more fully described below, Beneficient
became a consolidated subsidiary of GWG Holdings.
Ben LP is the general partner to Beneficient
Company Holdings, L.P. (“BCH”) and owns 100% of the Class A Subclass A-1 and A-2 Units of BCH. BCH is the holding company
that directly or indirectly receives all active and passive income of Beneficient and allocates that income among the units issued
by BCH. As of March 31, 2020, BCH has issued general partnership Class A Units (Subclass A-1 and A-2), Class S Ordinary Units,
Class S Preferred Units, FLP Units (Subclass 1 and Subclass 2), Preferred Series A Subclass 1 Unit Accounts, and Preferred Series
A Subclass 2 Units. BCH issued to Ben LP Preferred Series A Subclass 2 Units as part of the transaction with GWG Holdings discussed
below. Preferred Series A Subclass 2 Units hold the same rights and privileges as the Preferred Series A Subclass 1 Unit Accounts.
GWG Holdings also has a controlling financial interest in FOXO
BioScience LLC (“FOXO”, formerly InsurTech Holdings, LLC), which, through its wholly-owned subsidiaries Life Epigenetics
Inc. (“Life Epigenetics”) and youSurance General Agency, LLC (“youSurance”), seeks to commercialize epigenetic
technology for the longevity industry and offer life insurance directly to customers utilizing epigenetic technology.
All of the aforementioned legal entities
are organized in Delaware, other than GWG Life Trust, which is governed by the laws of the state of Utah. Unless the context otherwise
requires or we specifically so indicate, all references in this report to “we,” “us,” “our,”
“our Company,” “GWG,” or the “Company” refer to these entities collectively. Our headquarters
are located in Dallas, Texas.
Nature of Business
GWG Holdings, through its wholly-owned
subsidiary GWG Life, purchased life insurance policies in the secondary market and has built a large, actuarially diverse
portfolio of life insurance policies backed by highly rated life insurance companies. These policies were purchased between
April 2006 and November 2019 and were funded primarily through sales of L Bonds, as discussed in Note 10. Beginning in 2018,
GWG Holdings made a strategic decision to reorient its business and increase capital allocated toward providing liquidity
products to a broader range of alternative assets through investments in Beneficient. We believe that the investments in
Beneficient will transform GWG Holdings from a niche provider of liquidity to owners of life insurance to a full-scale
provider of trust and liquidity products and trust services to a broad range of alternative assets.
As a result of such strategic decision,
GWG Holdings’ business today is focused on raising capital from securities offerings and using the proceeds from such offerings
to grow GWG Holdings’ alternative asset exposure through investments in Beneficient in the form of equity investments and/or
loans to Beneficient or related entities. GWG Holdings believes funding Beneficient’s operations will generally produce higher
risk-adjusted returns than those we can generally achieve from life insurance policies acquired in the secondary market.
Furthermore, although we believe that our portfolio of life
insurance policies is a meaningful component of a diversified alternative asset portfolio, we do not anticipate purchasing additional
life insurance policies in the secondary market, and we will continue to explore strategic alternatives for our life insurance
portfolio aimed at maximizing its value, including a possible sale, refinancing or recapitalization of the portfolio.
Beneficient is a financial services firm
based in Dallas, Texas that provides liquidity solutions for mid-to-high net worth (“MHNW”) individuals and small-to-mid-
(“STM”) sized institutions, which previously had few options to obtain early liquidity for their alternative assets
holdings. On September 25, 2018, Beneficient’s capital companies applied for trust charters from the Texas Department of
Banking to merge into to-be organized limited trust associations. Beneficient submitted revised charter applications on March 6,
2020. As of May 15, 2020, the trust charters had not been issued to Beneficient. As such, Beneficient has closed a limited number
of transactions to date, but intends to significantly expand its operations if and when the trust charters are issued.
Beneficient was formed in 2003 but
began its current operations in September 2017. Beneficient operates primarily through its subsidiaries, which provide
Beneficient’s products and services. These subsidiaries include: (i) Beneficient Capital Company, L.L.C.
(“BCC”), through which Beneficient offers loans and liquidity products; (ii) Beneficient Administrative and
Clearing Company, L.L.C. (“BACC”), through which Beneficient provides services for fund and trust administration
and plans to provide custody services; (iii) Pen Indemnity Insurance Company, LTD (“Pen”), through which
Beneficient plans to offer insurance services; and (iv) Ben Markets Management Holdings, L.P., formerly called ACE Portal,
L.L.C. (“Ben Markets”), through which Beneficient plans to provide an online portal for direct access to
Beneficient’s financial services and products.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Beneficient’s primary operations
pertain to its liquidity products whereby Beneficient extends loans collateralized by cash flows from illiquid alternative assets
and provides services to the trustees who administer the collateral. Beneficient’s core business products are its Exchange
Trust, LiquidTrust and the InterChange Trust (introduced in 2020). Beneficient’s clients select one of these products and
place their alternative assets into the custody trust that is a constituent member of a trust structure called the “ExAlt
PlanTM” (comprised of the Exchange Trusts, LiquidTrusts, Custody Trusts, Collective Trusts, and Funding Trusts).
The ExAlt PlanTM then delivers to Beneficient’s clients the consideration required by the specific product selected
by Beneficient’s clients. At the same time, Beneficient, extends a loan to the ExAlt PlanTM. The proceeds (cash,
securities of Ben LP or its affiliates, or other forms of consideration, as applicable) of that loan to the ExAlt PlanTM
are ultimately paid to the client. The cash flows from the client’s alternative asset support the repayment of the loans
plus any related interest and fees.
In 2018 and 2019, GWG Holdings and GWG
Life consummated a series of transactions (as more fully described below) with Beneficient that has resulted in a significant reorientation
of the Company’s business and capital allocation strategy in addition to changes in the Company’s Board of Directors
and executive management team.
The Exchange Transaction
On August 10, 2018 (the “Initial
Transfer Date”), the first of two closings was completed (the “Initial Transfer”) as contemplated by a Master
Exchange Agreement between GWG Holdings, GWG Life, Ben LP and certain other parties (the “Seller Trusts”), which governs
the strategic exchange of assets among the parties (the “Exchange Transaction”). On the Initial Transfer Date:
|
●
|
GWG Holdings issued to the Seller Trusts Seller Trust L Bonds due 2023 (the “Seller Trust
L Bonds”) in an aggregate principal amount of $403.2 million, as more fully described below;
|
|
●
|
Beneficient purchased 5,000,000 shares of GWG Holdings’ 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 $50.0
million, which shares were subsequently transferred to the Seller Trusts;
|
|
●
|
in consideration for GWG Holdings and GWG Life entering into the Master Exchange Agreement and
consummating the transactions contemplated thereby, Ben LP, as borrower, entered into a commercial loan agreement (the “Commercial
Loan Agreement”) with GWG Life, as lender, providing for a loan in a principal amount of $200.0 million (the “Commercial
Loan”);
|
|
●
|
Ben LP delivered to GWG Life a promissory note (the “Exchangeable Note”) in the principal
amount of $162.9 million; and
|
|
●
|
the Seller Trusts delivered to GWG Holdings 4,032,349 common units of Ben LP (“Common Units”)
at an assumed value of $10 per unit.
|
On December 28, 2018, the final closing of
the above transaction occurred, and the following actions took place (the “Final Closing” and the date upon which the
Final Closing occurred, the “Final Closing Date”):
|
●
|
in accordance with the Master Exchange Agreement, and based on the net asset value of alternative
asset financings as of the Final Closing Date, effective as of the Initial Transfer Date, (i) the principal amount of the Commercial
Loan was reduced to $182.0 million, (ii) the principal amount of the Exchangeable Note was reduced to $148.2 million, and (iii)
the principal amount of the Seller Trust L Bonds was reduced to $366.9 million;
|
|
●
|
the Seller Trusts refunded to GWG Holdings $0.8 million in interest paid on the Seller Trust L
Bonds related to the Seller Trust L Bonds that were issued as of the Initial Transfer Date but cancelled, effective as of the Initial
Transfer Date, on the Final Closing Date;
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
|
●
|
the accrued interest on the Commercial Loan and the Exchangeable Note was added to the principal
amount of the Commercial Loan, as a result of which the principal amount of the Commercial Loan as of the Final Closing Date was
$192.5 million;
|
|
●
|
the Seller Trusts transferred to GWG Holdings an aggregate of 21,650,087 Common Units and GWG Holdings
received 14,822,843 Common Units in exchange for the Exchangeable Note, upon completion of which GWG Holdings owned (including
the 4,032,349 Common Units received by GWG Holdings on the Initial Transfer Date) 40,505,279 common units of Ben LP;
|
|
●
|
Ben LP issued to GWG Holdings an option (the “Option Agreement”) to acquire the number
of Common Units, interests or other property that would be received by a holder of Preferred Series A Subclass 1 Unit Accounts
of BCH; and
|
|
●
|
GWG Holdings issued to the Seller Trusts 27,013,516 shares of GWG Holdings common stock (including
5,000,000 shares issued upon conversion of the Series B).
|
Description of the Assets Exchanged
Seller Trust L Bonds
On August 10, 2018, in connection with
the Initial Transfer, GWG Holdings, GWG Life and Bank of Utah, as 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.
After the second anniversary of the Final
Closing Date, the holders of the Seller Trust L Bonds will have the right to cause GWG Holdings to repurchase, in whole but not
in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at GWG Holdings’ 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, and
(ii) Common Units, or a combination of cash and such property.
The Seller Trust L Bonds are senior secured
obligations of GWG Holdings, ranking junior only to all senior debt of GWG Holdings, pari passu in right of payment and in respect
of collateral with all “L Bonds” of GWG Holdings (see Note 10), and senior in right of payment to all subordinated
indebtedness of GWG Holdings. Payments under the Seller Trust L Bonds are guaranteed by GWG Life (see Note 18).
Series B Convertible Preferred Stock
The Series B converted into 5,000,000 shares
of GWG Holdings common stock at a conversion price of $10 per share upon the Final Closing.
Commercial Loan
The $192.5 million principal amount under
the Commercial Loan is due on August 9, 2023; however, it is extendable for two five-year terms. Ben LP’s obligations under
the Commercial Loan are unsecured.
The principal amount of the Commercial
Loan bears interest at 5.0% per year. From and after the Final Closing Date, one-half of the interest, or 2.5% per year, is due
and payable monthly in cash, and one-half of the interest, or 2.5% per year, accrues and compounds annually on each anniversary
date of the Final Closing Date and becomes due and payable in full in cash on the maturity date.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
In accordance with the Supplemental Indenture
governing the issuance of the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds,
GWG Holdings, 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.
The Commercial Loan and its related interest
are eliminated upon consolidation.
Exchangeable Note
At the Final Closing date, the principal
amount of the Exchangeable Note was exchanged for 14,822,843 Common Units, and the accrued interest on the Exchangeable Note was
added to the principal balance of the Commercial Loan.
Option Agreement
In connection with the Final Closing, GWG Holdings
entered into the Option Agreement with Ben LP. The Option Agreement gives GWG Holdings the option to acquire the number of Common
Units that would be received by the holder of Preferred Series A Subclass 1 Unit Accounts of BCH, if such holder were converting
on that date. There is no exercise price and the Company may exercise the option at any time until December 27, 2028, at which
time the option will automatically settle. The carrying value of the Option Agreement eliminates upon consolidation.
Common Units of Ben LP
In connection with the Initial Transfer
and Final Closing, the Seller Trusts and Beneficient delivered to GWG Holdings 40,505,279 Common Units. These units represented
an approximate 89.9% interest in the Common Units as of the Final Closing Date (although, on a fully diluted basis, GWG Holdings’
ownership interest in Common Units would be reduced significantly below a majority of those issued and outstanding). These amounts
eliminate upon consolidation.
Purchase and Contribution Agreement
On April 15, 2019, Jon R. Sabes, the former
Chief Executive Officer and a former director of GWG Holdings, and Steven F. Sabes, the former Executive Vice President and a former
director of GWG Holdings, entered into a Purchase and Contribution Agreement (the “Purchase and Contribution Agreement”)
with, among others, Ben LP. Under the Purchase and Contribution Agreement, Jon and Steven Sabes agreed to transfer all 3,952,155
of the shares of GWG Holdings’ outstanding common stock held directly or indirectly by them to BCC (a subsidiary of Ben LP)
and AltiVerse Capital Markets, L.L.C. (“AltiVerse”). AltiVerse is a limited liability company owned by an entity related
to Beneficient’s founders, including Brad K. Heppner (GWG Holdings’ Chairman and Beneficient’s Chief Executive
Officer and Chairman) and an entity related to Thomas O. Hicks (one of Beneficient’s current directors and a director of
GWG Holdings). GWG Holdings was not a party to the Purchase Agreement; however, the closing of the transactions contemplated by
the Purchase and Contribution Agreement (the “Purchase and Contribution Transaction”) were subject to certain conditions
that were dependent upon GWG Holdings taking, or refraining from taking, certain actions.
The closing of the Purchase and Contribution
Transaction occurred on April 26, 2019. Prior to or in connection with such closing:
|
●
|
GWG Holdings’ bylaws were amended to increase the maximum number of directors of GWG Holdings
from nine to 13, and the actual number of directors comprising the Board of Director was increased from seven to 11. The size of
the Board has since been reduced and currently consists of nine directors.
|
|
●
|
All seven members of GWG Holdings’ Board of Directors prior to the closing resigned as directors
of GWG, and 11 individuals designated by Beneficient were appointed as directors of GWG Holdings, leaving two board seats vacant
after the closing.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
|
●
|
Jon R. Sabes resigned from all officer positions he held with GWG Holdings or any of its subsidiaries
prior to the closing, other than his position as Chief Executive Officer of Life Epigenetics and youSurance.
|
|
●
|
Steven F. Sabes resigned from all officer positions he held with GWG Holdings or any of its subsidiaries
prior to the closing, except as Chief Operating Officer of Life Epigenetics.
|
|
●
|
The resignations of Messrs. Jon and Steven Sabes included a full waiver and forfeit of (i) any
severance that may be payable by GWG Holdings or any of its subsidiaries in connection with such resignations or the Purchase and
Contribution Transaction, and (ii) all equity awards of GWG Holdings held by either of them.
|
|
●
|
Murray T. Holland was appointed as Chief Executive Officer
of GWG Holdings.
|
|
●
|
GWG Holdings entered into performance share unit agreements with certain of its employees pursuant
to which such employees will collectively receive up to $4.5 million in cash compensation under certain terms and conditions, including,
among others, that such employees remain employed by GWG Holdings or one of its subsidiaries (or, if no longer employed, such employment
was terminated by GWG Holdings other than for cause, as such term is defined in the performance share unit agreement) for a period
of 120 days following the closing.
|
|
●
|
The stockholders agreement that was entered into on the Final Closing Date was terminated by mutual
consent of the parties thereto.
|
|
●
|
BCC and AltiVerse executed and delivered a Consent and Joinder to the Amended and Restated Pledge
and Security Agreement dated October 23, 2017 by and among GWG Holdings, GWG Life, Messrs. Jon and Steven Sabes and the Bank of
Utah, which provides that the shares of GWG Holdings’ common stock acquired by BCC and AltiVerse pursuant to the Purchase
and Contribution Agreement will continue to be pledged as collateral security for GWG Holdings’ obligations owing in respect
of the L Bonds and Seller Trust L Bonds.
|
Indemnification Agreements
On April 26, 2019, GWG Holdings entered
into Indemnification Agreements (the “Indemnification Agreements”) with each of its executive officers and the directors
appointed to the Board of Directors on such date. On May 13, 2019, GWG Holdings entered into Indemnification Agreement with the
three additional directors appointed to the Board of Directors on such date (collectively with the executive officers and directors
appointed on April 26, 2019, the “Indemnitees”). The Indemnification Agreements clarify and supplement indemnification
provisions already contained in GWG Holdings’ bylaws and generally provide that GWG Holdings shall indemnify the indemnitees
to the fullest extent permitted by applicable law, subject to certain exceptions, against expenses, judgments, fines and other
amounts actually and reasonably incurred in connection with their service as a director or officer and also provide for rights
to advancement of expenses and contribution.
The Investment and Exchange Agreements
On December 31, 2019, GWG Holdings, Ben
LP, BCH, and Beneficient Management entered into a Preferred Series A Unit Account and Common Unit Investment Agreement (the “Investment
Agreement”).
Pursuant to the Investment Agreement, GWG
Holdings transferred $79.0 million to Ben LP in return for 666,667 Common Units and a Preferred Series A Subclass 1 Unit Account
of BCH.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
In connection with the Investment Agreement,
GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management, the general partner
of Ben LP. As a result, GWG Holdings obtained control of Ben LP and began reporting the results of Ben LP and its subsidiaries
on a consolidated basis beginning on the transaction date of December 31, 2019. See Note 4 for more details on the accounting for
the consolidation. GWG Holdings’ right to appoint a majority of the board of directors of Beneficient Management will terminate
in the event (i) GWG Holdings’ ownership of the fully diluted equity of Ben LP (excluding equity issued upon the conversion
or exchange of Preferred Series A Unit Accounts of BCH held as of December 31, 2019 by parties other than GWG Holdings) is less
than 25%, (ii) the Continuing Directors of GWG Holdings cease to constitute a majority of the board of directors of GWG Holdings,
or (iii) certain bankruptcy events occur with respect to GWG Holdings. The term “Continuing Directors” means, as of
any date of determination, any member of the board of directors of GWG Holdings who: (1) was a member of the board of directors
on December 31, 2019; or (2) was nominated for election or elected to the board of directors with the approval of a majority of
the Continuing Directors who were members of the board of directors at the time of such nomination or election.
Following the transaction, and as agreed upon
in the Investment Agreement, GWG Holdings was issued an initial capital account balance for the Preferred Series A Subclass 1 Unit
Account of $319.0 million. The other holders of the Preferred Series A Subclass 1 Unit Accounts are principally an entity related
to the founders of Ben LP and an entity related to one of the directors of both GWG Holdings and Beneficient (the “Related
Account Holders”), and the aggregate capital accounts of all holders of the Preferred Series A Subclass 1 Unit Accounts after
giving effect to the investment by GWG Holdings was $1.6 billion. GWG Holdings’ Preferred Series A Subclass 1 Unit Account
is the same class of preferred security as held by the Related Account Holders. If the Related Account Holders exchange their Preferred
Series A Subclass 1 Unit Accounts for securities of GWG Holdings, the Preferred Series A Subclass 1 Unit Account of GWG Holdings
will also convert into Common Units (so neither GWG Holdings nor the founders would hold Preferred Series A Subclass 1 Unit Accounts).
Also, on December 31, 2019, in a transaction
related to the Investment Agreement, GWG Holdings transferred its interest in the Preferred Series A Subclass 1 Unit Account to
its wholly-owned subsidiary, GWG Life.
In addition, on December 31, 2019, GWG
Holdings, Ben LP and the holders of Common Units entered into an Exchange Agreement (the “Exchange Agreement”) pursuant
to which the holders of Common Units from time to time have the right, on a quarterly basis, to exchange their Common Units for
common stock of GWG Holdings. The exchange ratio in the Exchange Agreement is based on the ratio of the capital account associated
with the Common Units to be exchanged to the market price of GWG Holdings common stock based on the volume weighted average price
of GWG Holdings common stock for the five consecutive trading days prior to the quarterly exchange date. The Exchange Agreement
is intended to facilitate the marketing of Ben LP’s products to holders of alternative assets.
The Exchange Transaction, the Purchase
and Contribution Transaction, and the Investment and Exchange Agreements are referred to collectively as the “Beneficient
Transactions.”
(2) Summary of Significant Accounting
Policies
Basis of Presentation — The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and
Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial
information normally required by Generally Accepted Accounting Principles in the United States of America ("GAAP") to
be condensed or omitted. In our opinion, the condensed consolidated financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary for the fair presentation of the Company’s financial position and results of
operations. These statements should be read in conjunction with the condensed consolidated financial statements and notes included
in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 27, 2020 (“2019 Form
10-K”). The results of operations for interim periods are not necessarily indicative of the results to be expected for the
full year.
Significant accounting policies are detailed
in Note 2 to the condensed consolidated financial statements included in the Company’s 2019 Form 10-K. Summarized below
are those new or revised significant accounting policies, including those that resulted from the consolidation of Beneficient
on December 31, 2019.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Use of Estimates — The preparation
of the Company’s condensed consolidated financial statements in conformity with GAAP requires management to make significant
estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the condensed consolidated financial
statements, as well as the reported amounts of revenue during the reporting period. Management regularly evaluates 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. Actual results may differ materially and adversely from our estimates. Material
estimates that are particularly susceptible to change, in the near term, relate to: the determination of the fair values of assets
acquired, liabilities assumed and noncontrolling interests under business combinations accounting guidance; the determination of
the assumptions used in estimating the fair value of our investments in life insurance policies; determining the grant date fair
value for equity-based compensation awards; determining our allowance for loan losses; evaluation of potential impairment of goodwill
and other intangibles; and the value of our deferred tax assets and liabilities.
Loans Receivable — Loans
are recorded at their fair value at the acquisition date, change-of-control date, or other liquidation event. Credit
discounts are included in the determination of fair value; therefore, an allowance for loan losses is not recorded as of the
date of valuation. Purchased loans are evaluated upon acquisition and classified as either purchased credit impaired
(“PCI”) or non-purchased credit impaired (“non-PCI”).
PCI loans reflect credit deterioration
since origination such that it is probable as of the date of valuation that Beneficient will be unable to collect all contractually
required payments. For PCI loans, expected cash flows as of the date of valuation in excess of the fair value of loans are recorded
as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows is reasonably
estimable. Subsequently, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest
income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan loss. Beneficient
does not report PCI loans as nonperforming due to the accretion of interest income.
For non-PCI loans, the difference between
the fair value and unpaid principal balance (“UPB”) of the loan as of the date of valuation is amortized or accreted
to interest income over the contractual life of the loans using the effective interest method. In the event of prepayment, the
remaining unamortized amount is recognized in interest income.
Equity-Based Compensation —
The Company measures and recognizes compensation expense for all equity-based payments at fair value on the grant date over the
requisite service period. GWG Holdings uses the Black-Scholes option pricing model to determine the fair value of stock options
and stock appreciation rights. For restricted stock grants (including restricted stock units), fair value is determined as of the
closing price of GWG Holdings’ common stock on the date of grant. As it is not publicly traded, Beneficient uses various
methods to determine the grant date fair value of its equity-based compensation awards, as more fully described in Note 12.
Equity-based compensation expense is recorded
in employee compensation and benefits in the condensed consolidated statements of operations. The determination of fair value of
equity-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, the expected duration of the
awards, the results of a probability-weighted discounted cash flow analysis and observable transactions. We account for the effects
of forfeitures as they occur.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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.
Earnings (Loss) per Common 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 redeemable preferred stock (“RPS”), Series 2 redeemable preferred stock (“RPS 2”), restricted
stock units, warrants (if applicable) and stock options.
Net earnings, less any preferred dividends
accumulated for the period (whether or not declared), is allocated to common stock. Basic earnings per common share is computed
by dividing net earnings available to common stockholders by the weighted average number of common shares.
Diluted earnings per common share is computed
in a similar manner, except that first the denominator is increased to include the number of additional common shares that would
have been outstanding if potentially dilutive common shares were issued using the treasury stock method in the case of restricted
stock units, warrants and options, or the if-converted method in the case of RPS and RPS 2. Our dilution calculation also takes
into account the weighted average number of shares of a subsidiary that are exchangeable for shares of GWG Holdings common stock.
Reclassification — Certain prior
year amounts have been reclassified for consistency with the current year presentation. Specifically, our equity method investment
in FOXO as of December 31, 2019, was reclassified to other assets in the condensed consolidated balance sheets to maintain consistency
with the current year presentation. This reclassification had no effect on the reported results of operations.
Newly Adopted Accounting Pronouncements
— Accounting Standards Update (“ASU”) No. 2017-04, Goodwill, (Topic 350) was issued in January 2017. This
standard simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment
test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with
the carrying amount of that goodwill. Under the new guidance, goodwill impairment loss will be measured on the basis of the fair
value of the reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount
of goodwill relative to the goodwill balance of the reporting unit. ASU 2017-04 is effective for annual periods beginning after
December 15, 2019, including interim periods within those periods, for public business entities. The Company adopted this ASU on
January 1, 2020, and it did not have a material impact on its condensed consolidated financial statements and related disclosures.
In August 2018, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework —
Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements
for fair value measurements. The guidance is effective for fiscal years and interim periods beginning after December 15, 2019.
Certain of the amendments require prospective application, while the remainder require retrospective application. The Company adopted
this ASU on January 1, 2020, and it did not have a material impact on its condensed consolidated financial statements and related
disclosures.
Accounting Pronouncements Issued But
Not Yet Adopted — In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets
and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans. There have been
numerous codification improvements and technical corrections issued through subsequent ASUs since the issuance of ASU No. 2016-13.
The standard requires entities to use a new, forward-looking “expected loss” model that is expected to generally result
in the earlier recognition of allowances for losses. The guidance is effective for annual periods beginning after December 15,
2022, including interim periods within those years, for smaller reporting companies, as defined by the SEC, but early adoption
is permitted. The Company is evaluating the potential impact of this guidance on our condensed consolidated financial statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
ASU 2019-12, Income Taxes: Simplifying
the Accounting for Income Taxes (Topic 740), was issued in December 2019. The amendments in ASU 2019-12 eliminate certain exceptions
related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the
recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects
of the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020, for public business entities. Early adoption is permitted, including adoption in any interim period. The
Company is evaluating the impact of this ASU on the condensed consolidated financial statements and disclosures.
ASU 2020-04, Reference Rate Reform
(Topic 848) was issued in March 2020. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying
GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
ASU 2020-04 can be applied by all entities as of the beginning of the interim period that includes March 12, 2020, or any date
thereafter, and entities may elect to apply the amendments prospectively through December 31, 2022. The Company is evaluating
the impact of this ASU on the condensed consolidated financial statements and disclosures.
(3) Restrictions on Cash
Under the terms of our second amended and
restated senior credit facility with LNV Corporation (discussed in Note 10), 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, distribute funds to pay down the facility, and distribute excess funds to the borrower (GWG DLP Funding IV,
LLC).
The agents for the lender authorize the
disbursements from these accounts. At March 31, 2020 and December 31, 2019, there was a balance of $26.4 million and $20.3 million,
respectively, in these collection and payment accounts.
(4) Business Combination
Prior to December 31, 2019, GWG Holdings
owned 41,505,279 Common Units, for a total limited partnership interest in the common units of Ben LP of approximately 90.2%. This
investment was historically accounted for using the equity method (see Note 8). On December 31, 2019, GWG Holdings entered into
the Investment Agreement and Exchange Agreement as described in Note 1.
Pursuant to the Investment Agreement, GWG Holdings
transferred $79.0 million to Ben LP in return for 666,667 additional Common Units and a Preferred Series A Subclass 1 Unit Account
of BCH, which increased GWG Holdings’ ownership of Common Units to approximately 95.5%. Also, on December 31, 2019, in a
transaction related to the Investment Agreement, GWG Holdings transferred its interest in the Preferred Series A Subclass 1 Unit
Account to its wholly-owned subsidiary, GWG Life. In connection with the Investment Agreement, GWG Holdings obtained the right
to appoint a majority of the board of directors of Beneficient Management, the general partner of Ben LP. As a result, GWG Holdings
obtained control of Ben LP, resulting in the consolidation of Ben LP as of December 31, 2019, in accordance with ASC 805, Business
Combinations.
As a result of the change-of-control, GWG
Holdings was required to remeasure its existing equity investment at fair value prior to consolidation. At December 31, 2019, GWG
Holdings’ equity investment in Common Units had a carrying value of $368.6 million, prior to the additional investment noted
above. GWG Holdings estimated the fair value of its preexisting investment in Ben LP to be approximately $622.5 million, resulting
in the recognition of a gain of $253.9 million during the fourth quarter of 2019. This gain was included in gain on consolidation
of equity method investment in the Company’s consolidated statement of operations for the year ended December 31, 2019. This
gain was partially offset by the remeasurement to fair value of the Commercial Loan Agreement between GWG Life and Ben LP and the
Option Agreement between GWG Holdings and Ben LP, which resulted in a net loss of $4.2 million. The net gain on consolidation of
equity method investment after remeasurement of these preexisting balances was $249.7 million. GWG Holdings’ proportionate
share of the earnings or losses from Ben LP was recognized in earnings (loss) from equity method investment in the consolidated
statement of operations from August 10, 2018 until December 31, 2019 (see Note 8 for further information) and was previously recorded
on a one-quarter lag basis. In connection with the consolidation of Beneficient, the one-quarter lag was required to be discontinued.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The following table summarizes the fair
value measurement of the assets acquired and liabilities assumed (in thousands):
|
|
Fair Value at Acquisition
Date
|
|
|
Measurement
Period Adjustment(1)
|
|
|
Adjusted Fair Value at
Acquisition Date
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
|
$
|
232,344
|
|
|
$
|
(14,590
|
)
|
|
$
|
217,754
|
|
Fees receivable
|
|
|
29,168
|
|
|
|
—
|
|
|
|
29,168
|
|
Investment in public equity securities
|
|
|
24,550
|
|
|
|
—
|
|
|
|
24,550
|
|
Other assets
|
|
|
14,053
|
|
|
|
—
|
|
|
|
14,053
|
|
Intangible assets(2)
|
|
|
3,449
|
|
|
|
—
|
|
|
|
3,449
|
|
Total identifiable assets acquired
|
|
|
303,564
|
|
|
|
(14,590
|
)
|
|
|
288,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
|
153,086
|
|
|
|
—
|
|
|
|
153,086
|
|
Commercial loan agreement from parent
|
|
|
168,420
|
|
|
|
—
|
|
|
|
168,420
|
|
Other liabilities and deferred revenue
|
|
|
105,866
|
|
|
|
—
|
|
|
|
105,866
|
|
Accounts payable and accrued expenses
|
|
|
13,713
|
|
|
|
—
|
|
|
|
13,713
|
|
Total liabilities assumed
|
|
|
441,085
|
|
|
|
—
|
|
|
|
441,085
|
|
Net liabilities assumed
|
|
|
(137,521
|
)
|
|
|
(14,590
|
)
|
|
|
(152,111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCONTROLLING INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units not owned by GWG Holdings(3)
|
|
|
181,383
|
|
|
|
—
|
|
|
|
181,383
|
|
Class S Ordinary Units
|
|
|
85,448
|
|
|
|
—
|
|
|
|
85,448
|
|
Class S Preferred Units
|
|
|
17
|
|
|
|
—
|
|
|
|
17
|
|
Preferred Series A Subclass 1 Unit Accounts
|
|
|
1,269,654
|
|
|
|
—
|
|
|
|
1,269,654
|
|
Total noncontrolling interests
|
|
|
1,536,502
|
|
|
|
—
|
|
|
|
1,536,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACQUISITION CONSIDERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, less cash acquired
|
|
|
61,479
|
|
|
|
—
|
|
|
|
61,479
|
|
Fair value of preexisting investment in Common Units(4)
|
|
|
622,503
|
|
|
|
—
|
|
|
|
622,503
|
|
Fair value of noncontrolling interest
|
|
|
1,536,502
|
|
|
|
—
|
|
|
|
1,536,502
|
|
Total estimated consideration
|
|
|
2,220,484
|
|
|
|
—
|
|
|
|
2,220,484
|
|
Less: Net liabilities assumed
|
|
|
(137,521
|
)
|
|
|
(14,590
|
)
|
|
|
(152,111
|
)
|
Resulting preliminary goodwill
|
|
$
|
2,358,005
|
|
|
$
|
14,590
|
|
|
$
|
2,372,595
|
|
(1)
|
As a result of additional information obtained about the collateral value used in the valuation of the loan portfolio for certain collateral dependent loans, the Company recorded a measurement period adjustment during the first quarter of 2020, which resulted in a decrease to loans receivable of $14.6 million with a corresponding adjustment to goodwill.
|
(2)
|
Includes an insurance license valued at $3.1 million and a non-compete agreement valued at $0.3 million.
|
(3)
|
Calculated as 1,974,677 Common Units not owned by GWG Holdings at December 31, 2019, multiplied by the $15.00 per unit derived from the enterprise valuation of Beneficient. Also includes $151.8 million of equity-based payment awards that were granted by Beneficient prior to the change in control but were not replaced by awards of GWG Holdings upon the change in control. These awards were treated as noncontrolling interests in accordance with ASC 805, Business Combinations.
|
(4)
|
Calculated as 41,505,279 Common Units owned by GWG Holdings prior to the change in control multiplied by the $15.00 per unit derived from the enterprise valuation of Beneficient.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Methods Used to Determine Equity Value
and to Fair Value Assets and Liabilities
The following is a description of the valuation
methodologies used to estimate the fair value of equity and the fair values of major categories of assets acquired and liabilities
assumed. In many cases, determining the fair value of equity and the acquired assets and assumed liabilities required management
to estimate cash flows expected from those assets and liabilities and to discount those cash flows at appropriate rates of interest.
This determination required the utilization of significant estimates and management judgment in accounting for the 2019 change-of-control
event.
Loans receivable — The loan portfolio
was valued using current accounting guidance that defines fair value as the price that would be received to sell an asset or transfer
a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value
the loan portfolio and included the use of present value techniques employing cash flow estimates and incorporated assumptions
that marketplace participants would use in estimating fair values, specifically market interest rate and general credit fair value
assumptions. In instances where reliable market information was not available, management used assumptions in an effort to determine
reasonable fair value. There was no carryover related allowance for loan losses.
Cash and cash equivalents and fees receivable
— Cash and cash equivalents and fees receivable were valued using their current carrying amounts which approximate fair
value.
Investment in public equity securities —
The fair value of the investments in public equity securities was determined using quoted market prices. As these were investments
by Beneficient in the common stock of GWG Holdings, these amounts were eliminated in consolidation and treated as treasury stock.
Other assets — Other assets
include miscellaneous receivables that were valued using the current carrying amount as that amount approximates fair value due
to the relatively short time between their origination date and the fair value date. Miscellaneous intercompany receivables were
eliminated in consolidation.
Intangible assets — Intangible
assets include an insurance license and a non-compete agreement. Both assets were valued using their current carrying amount which
approximates fair value.
Other borrowings and commercial loan
agreement from parent — The measurement of the fair value of other borrowings and Commercial Loan Agreement from parent
was based on market prices that generally are observable for similar liabilities at commonly quoted intervals and is considered
a level 2 fair value measurement. The Commercial Loan Agreement between Beneficient and GWG Life was eliminated in consolidation.
Other liabilities and deferred revenue
— The carrying amounts of other liabilities and deferred revenue approximate their fair value. The Option Agreement between
Beneficient and GWG Holdings was eliminated in consolidation.
Accounts payable and accrued expenses
— Due to their short-term nature, the carrying amounts of accounts payable and accrued expenses approximate the fair value.
Miscellaneous intercompany payables were eliminated in consolidation.
Noncontrolling interests —
The values for each noncontrolling interest component were calculated after determination of an overall enterprise value for the
Company. The enterprise value of the Company was determined using the Option Pricing Model (“OPM”) Backsolve approach
under the market method. The OPM Backsolve approach uses a Black-Scholes option pricing model to calculate the implied equity value
of the firm. Once an overall equity value was determined, amounts were allocated to the various classes of equity based on the
security class preferences. The inputs to the OPM Backsolve approach are the equity value for one component of the capital structure,
expected time to exit, the risk-free interest rate and an assumed volatility based on the volatility of similar publicly traded
companies. The OPM Backsolve inputs include Level 3 inputs.
Goodwill — The resulting excess
of the overall enterprise value after deducting the fair values of assets acquired and liabilities assumed is recognized as goodwill.
The goodwill recognized is the result of the inherent value associated with the assembled business after all separately identifiable
assets acquired and liabilities assumed are deducted from the enterprise value. The excess estimated enterprise value of Beneficient
over the fair value of its net assets is primarily attributable to the potentially large and underserved market that Beneficient
is seeking to address, including the estimated demand from MHNW individuals and STM size institutions seeking liquidity for their
professionally managed alternative assets. None of the goodwill is expected to be deductible for income tax purposes. The goodwill
is allocated to our Beneficient reporting unit.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The initial accounting for the estimates
of equity values, which includes noncontrolling interests, the fair value of loans receivable, and any separately identifiable
intangibles was based on the facts and circumstances that existed as of the acquisition date. Should management obtain new information
during the measurement period, in addition to that discussed above, about facts and circumstances that existed at the acquisition
date, further adjustments to the fair values assigned to these items could occur during the measurement period of one year from
the acquisition date. Any such adjustment will result in corresponding adjustments to goodwill.
The following unaudited pro forma financial
information presents the combined results of operations of GWG Holdings for the three months ended March 31, 2019, as if the acquisition
of Ben LP had occurred as of January 1, 2019 (in thousands, except per share data):
Total Revenue
|
|
|
|
Pro forma
|
|
$
|
43,935
|
|
As reported
|
|
|
25,217
|
|
|
|
|
|
|
Net Loss Attributable to Common Shareholders
|
|
|
|
|
Pro forma
|
|
$
|
(15,459
|
)
|
As reported
|
|
|
(18,910
|
)
|
|
|
|
|
|
Net Loss per Diluted Common Share
|
|
|
|
|
Pro forma
|
|
$
|
(0.41
|
)
|
As reported
|
|
|
(0.57
|
)
|
The unaudited pro forma financial information
is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually
would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future results of
operations of the combined company.
The unaudited pro forma financial information
above gives effect to the following:
|
●
|
Deconsolidation
of certain Beneficient trusts included in the ExAlt PlanTM;
|
|
|
|
|
●
|
Reduction of Beneficient interest expense related to acquisition-date debt principal payments; and
|
|
|
|
|
●
|
Elimination of intercompany transactions, including the Commercial Loan Agreement and Option Agreement.
|
(5) Investment in Life Insurance Policies
The Company’s investments in life insurance
policies include 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 (loss) on life insurance policies, net in our consolidated statements of operations.
Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions generally derived from reports
obtained from widely accepted life expectancy providers (other than insured lives covered under small face amount policies —
those with $1 million in face value benefits or less — which utilize either a single fully underwritten, or simplified report
based on self-reported medical interview), assumptions relating to cost-of-insurance (premium) rates and other assumptions. The
discount rate we apply incorporates current information about the discount rates observed in the life insurance secondary market
through competitive bidding observations (which have recently declined for us as a result of our decreased purchase activity) and
other means, fixed income 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 yield premium a purchaser would require to receive the
future cash flows derived from our portfolio as a whole. Management has significant 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 8.25% was
applied to our portfolio as of both March 31, 2020 and December 31, 2019.
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 March 31, 2020, is summarized below:
Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in thousands)
|
|
$
|
2,000,680
|
|
Average face value per policy (in thousands)
|
|
$
|
1,769
|
|
Average face value per insured life (in thousands)
|
|
$
|
1,900
|
|
Weighted average age of insured (years)
|
|
|
82.6
|
|
Weighted average life expectancy estimate (years)
|
|
|
7.2
|
|
Total number of policies
|
|
|
1,131
|
|
Number of unique lives
|
|
|
1,053
|
|
Demographics
|
|
|
74% Male; 26% Female
|
|
Number of smokers
|
|
|
47
|
|
Largest policy as % of total portfolio face value
|
|
|
0.7
|
%
|
Average policy as % of total portfolio face value
|
|
|
0.1
|
%
|
Average annual premium as % of face value
|
|
|
3.5
|
%
|
A summary of our policies organized according
to their estimated life expectancy dates, grouped by year, as of the reporting date, is as follows:
|
|
As of March 31, 2020
|
|
|
As of December 31, 2019
|
|
Years Ending December 31,
|
|
Number of
Policies
|
|
|
Estimated
Fair Value
(in thousands)
|
|
|
Face
Value
(in thousands)
|
|
|
Number of
Policies
|
|
|
Estimated
Fair Value
(in thousands)
|
|
|
Face
Value
(in thousands)
|
|
2020
|
|
|
6
|
|
|
|
5,325
|
|
|
|
5,644
|
|
|
|
8
|
|
|
|
5,869
|
|
|
|
6,342
|
|
2021
|
|
|
41
|
|
|
|
49,578
|
|
|
|
61,040
|
|
|
|
55
|
|
|
|
62,061
|
|
|
|
79,879
|
|
2022
|
|
|
91
|
|
|
|
91,241
|
|
|
|
137,197
|
|
|
|
90
|
|
|
|
89,074
|
|
|
|
138,723
|
|
2023
|
|
|
123
|
|
|
|
120,539
|
|
|
|
212,493
|
|
|
|
128
|
|
|
|
123,352
|
|
|
|
222,369
|
|
2024
|
|
|
116
|
|
|
|
116,681
|
|
|
|
230,260
|
|
|
|
109
|
|
|
|
103,111
|
|
|
|
217,053
|
|
2025
|
|
|
112
|
|
|
|
77,648
|
|
|
|
179,796
|
|
|
|
113
|
|
|
|
74,223
|
|
|
|
171,961
|
|
Thereafter
|
|
|
642
|
|
|
|
341,169
|
|
|
|
1,174,250
|
|
|
|
648
|
|
|
|
338,349
|
|
|
|
1,184,646
|
|
Totals
|
|
|
1,131
|
|
|
$
|
802,181
|
|
|
$
|
2,000,680
|
|
|
|
1,151
|
|
|
$
|
796,039
|
|
|
$
|
2,020,973
|
|
We recognized life insurance benefits of
$25.5 and $30.5 million during the three months ended March 31, 2020 and 2019, respectively, related to policies with a carrying
value of $6.0 and $8.7 million, respectively, and as a result recorded realized gains of $19.5 and $21.8 million, respectively.
A reconciliation of gain (loss) on life insurance policies is
as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Change in estimated probabilistic cash flows(1)
|
|
$
|
17,851
|
|
|
$
|
17,131
|
|
Unrealized gain on acquisitions(2)
|
|
|
—
|
|
|
|
4,459
|
|
Premiums and other annual fees
|
|
|
(17,199
|
)
|
|
|
(15,832
|
)
|
Face value of matured policies
|
|
|
25,502
|
|
|
|
30,459
|
|
Fair value of matured policies
|
|
|
(11,709
|
)
|
|
|
(14,721
|
)
|
Gain on life insurance policies, net
|
|
$
|
14,445
|
|
|
$
|
21,496
|
|
(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 changes or policy maturity events.
|
(2)
|
Gain resulting from fair value in excess of the purchase price for life insurance policies acquired during the reporting period. There were no policy acquisitions during the three months ended March 31, 2020.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Estimated 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 (in
thousands):
Years Ending December 31,
|
|
Premiums
|
|
|
Servicing
|
|
|
Total
|
|
Nine months ending December 31, 2020
|
|
$
|
49,708
|
|
|
$
|
1,222
|
|
|
$
|
50,930
|
|
2021
|
|
|
83,813
|
|
|
|
1,630
|
|
|
|
85,443
|
|
2022
|
|
|
96,636
|
|
|
|
1,630
|
|
|
|
98,266
|
|
2023
|
|
|
108,749
|
|
|
|
1,630
|
|
|
|
110,379
|
|
2024
|
|
|
118,269
|
|
|
|
1,630
|
|
|
|
119,899
|
|
2025
|
|
|
131,528
|
|
|
|
1,630
|
|
|
|
133,158
|
|
|
|
$
|
588,703
|
|
|
$
|
9,372
|
|
|
$
|
598,075
|
|
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 second amended and restated senior credit facility with LNV Corporation 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: additional allocations to
Beneficient; the purchase, policy premiums and servicing costs of additional life insurance policies; working capital; and financing
expenditures including paying principal, interest and dividends.
(6) Loans Receivable
Beneficient Loans Receivable
Loans receivable held by the Company as
of March 31, 2020 and December 31, 2019, were originated primarily through the initial capitalization transactions of
Beneficient in 2017 and 2018. These loans are collateralized by the portfolio of alternative assets held in the custody of certain
trusts of the ExAlt PlanTM. The outstanding principal balance was $430.1 million and $425.9 million as of March 31,
2020 and December 31, 2019, respectively, which included $169.5 million and $154.7 million of interest income paid-in-kind,
respectively.
Components of the carrying value of loans
receivable were as follows for the periods presented below (in thousands):
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Loans receivable, net of unearned income
|
|
$
|
219,296
|
|
|
$
|
232,344
|
|
Allowance for loan losses
|
|
|
(700
|
)
|
|
|
—
|
|
Loans receivable, net
|
|
$
|
218,596
|
|
|
$
|
232,344
|
|
As described in Note 4, on December 31,
2019, a change-of-control event occurred that resulted in the application of push-down accounting, and all of Beneficient’s
assets and liabilities were recorded at fair value. Certain of the purchased loans were determined to be PCI loans under ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit Quality, as defined in Note 2, with the remaining loans accounted
for under ASC 310-20, Nonrefundable Fees and Other Costs. For loans accounted for under ASC 310-20, the discount arising
due to the difference between each loan’s carrying value and the estimated fair value at the time of acquisition will be
accreted into interest income over its remaining contractual life. Should management obtain new information about facts and circumstances
that existed at the acquisition date, additional adjustments to the fair values assigned to acquired loans could occur during the
measurement period of one year from the acquisition date.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The following table reflects the fair value
of non-PCI and PCI loans as of the date of the change-of control (in thousands):
Fair value of non-PCI loans
|
|
$
|
86,436
|
|
Fair value of PCI loans
|
|
$
|
145,908
|
|
The fair value of PCI loans above does
not include the downward measurement period adjustment to PCI loans of $14.6 million discussed in Note 4.
The following table reflects the outstanding
principal balance and carrying amounts of the non-PCI loans (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying Value
|
|
|
Unpaid Balance
|
|
|
Carrying Value
|
|
|
Unpaid Balance
|
|
Loans receivable
|
|
$
|
89,135
|
|
|
$
|
131,925
|
|
|
$
|
86,436
|
|
|
$
|
129,304
|
|
The following table reflects the outstanding
principal balance and carrying amounts of the PCI loans (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying Value
|
|
|
Unpaid Balance
|
|
|
Carrying Value
|
|
|
Unpaid Balance
|
|
Loans receivable
|
|
$
|
129,461
|
|
|
$
|
298,127
|
|
|
$
|
145,908
|
|
|
$
|
296,627
|
|
Total contractually required payments receivable
on PCI loans over the remaining contract period as of December 31, 2019 was $772.2 million. Cash flows expected to be collected
at the acquisition date totaled $235.6 million. The difference between total cash flows expected to be collected and the fair value
of the loans represents accretable yield.
The following table presents a rollforward
of the accretable yield for the three months ended March 31, 2020 (in thousands):
Balance, beginning of period
|
|
$
|
89,647
|
|
Accretion
|
|
|
(7,537
|
)
|
Decrease in accretable yield(a)
|
|
|
(581
|
)
|
Balance, end of period
|
|
$
|
81,529
|
|
|
(a)
|
Includes changes in the accretable yield due to both transfers
from the nonaccretable difference and the impact of changes in the expected timing of cash flows.
|
As of March 31, 2020, the allowance for
loan losses related to PCI loans was $0.7 million. The loan loss provision expense related to PCI loans during the three months
ended March 31, 2020 was $0.7 million.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The changes in the allowance for loan
losses for the three months ended March 31, 2020 are as follows (in thousands):
Beginning balance
|
|
$
|
—
|
|
Provision
|
|
|
700
|
|
Charge-offs and other, net
|
|
|
—
|
|
Ending balance
|
|
$
|
700
|
|
As a result of the push-down accounting described
in Note 4, the loans were recorded at fair value and there was no carryover allowance for loan losses recorded as of December 31,
2019.
Beneficient recognizes charge-offs in the
period in which they arise for its collateral-dependent loans. Therefore, impaired collateral-dependent loans are written down
to their estimated net realizable value, based on disposition value.
Promissory Note-LiquidTrusts
On May 31, 2019, GWG Life entered into
a Promissory Note (the “Promissory Note”), made by Jeffrey S. Hinkle and Dr. John A. Stahl, not in their individual
capacity but solely as trustees of The LT-1 LiquidTrust, The LT-2 LiquidTrust, The LT-5 LiquidTrust, The LT-7 LiquidTrust, The
LT-8 LiquidTrust and The LT-9 LiquidTrust (collectively, the “LiquidTrust Borrowers”) in the principal amount of $65.0
million. Pursuant to the terms of the Promissory Note, GWG Life funded a term loan to the LiquidTrust Borrowers in an aggregate
principal amount of $65.0 million (the “Loan”), which Loan was funded in two installments as described below. The Loan
was made pursuant to GWG Holdings’ strategy to further diversify into alternative assets (beyond life insurance) and ancillary
businesses and was intended to better position Beneficient’s balance sheet, working capital and liquidity profile to satisfy
anticipated Texas Department of Banking regulatory requirements.
The LiquidTrust Borrowers are common law
trusts established as part of alternative asset financings extended by a subsidiary of Ben LP, of which the GWG Holdings owns approximately
95% of the issued and outstanding Common Units (although, on a fully diluted basis, GWG Holdings’ ownership interest in Common
Units would be reduced significantly below a majority of those issued and outstanding). Although each Borrower is allocated a portion
of the Loan equal to approximately 16.7% of the aggregate outstanding principal of the Loan, the Loan constitutes the joint and
several obligations of the LiquidTrust Borrowers.
An initial advance in the principal amount
of $50.0 million was funded on June 3, 2019 and, subsequent to satisfaction of certain customary conditions, the second advance
in the principal amount of $15.0 million was funded on November 22, 2019. The Loan bears interest at 7.0% per annum, with interest
payable at maturity, and matures on June 30, 2023. The loan is reported in financing receivables from affiliates in the consolidated
balance sheets and included accrued interest receivable of $3.3 million and $2.2 million as of March 31, 2020 and December 31,
2019, respectively. Subject to the Intercreditor Agreements (as defined below), the Loan can be prepaid at the LiquidTrust Borrowers’
election without premium or penalty.
The Loan is unsecured and is subject to
certain covenants (including a restriction on the incurrence of any indebtedness senior to the Loan other than existing senior
loan obligations to HCLP Nominees, L.L.C. (“HCLP”), as Senior Lender) and events of default. HCLP is indirectly associated
with one of Beneficient’s founders, who is also Chairman of the Board of Directors of GWG Holdings.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Intercreditor Agreements
In connection with the Promissory Note,
GWG Life also entered into two intercreditor and subordination agreements: (1) an Intercreditor Agreement between GWG Life and
HCLP and (2) an Intercreditor Agreement between GWG Life and Beneficient Holdings, Inc. (“BHI”) (the “Intercreditor
Agreements”). Under the Intercreditor Agreements, GWG Life agrees to subordinate the Loan to the secured obligations of Beneficient
and its affiliates outstanding to the Senior Lender (the “Senior Loan Obligations”), agrees to not take any liens to
secure the Loan (and to subordinate such liens, if any, to the liens of the Senior Lender), and agrees not to take enforcement
actions under the Promissory Note until such Senior Loan Obligations are paid in full. The Intercreditor Agreements establish various
other inter-lender and subordination terms, including, without limitation, with respect to permitted actions by each party, permitted
payments, waivers, voting arrangements in bankruptcy, application of certain proceeds and limitations on amendments of the respective
loan obligations of the parties. The Senior Lender has agreed not to extend the maturity of its loan obligations beyond June 30,
2023 or increase the outstanding principal of the loans made by the Senior Lender without the written consent of GWG Life. GWG
Life has agreed not to transfer, assign, pledge, grant a security interest in or otherwise dispose of (including, without limitation,
pursuant to a foreclosure) the Promissory Note except with the written consent of the Senior Lender (such consent not to be unreasonably
withheld) or to the Company or direct or indirect wholly-owned subsidiaries thereof.
(7) Fair Value Definition and Hierarchy
ASC 820, Fair Value Measurements
and Disclosures (“ASC 820”), establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price
observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of
factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace,
including the existence and transparency of transactions between market participants. Assets and liabilities with readily
available and actively quoted prices, or for which fair value can be measured from actively quoted prices in an orderly
market, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring
fair value.
ASC 820 maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring the use of observable inputs whenever available. Observable inputs
are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from third-party
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
(a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction). A sale of the portfolio
or a portion of the portfolio in an other than orderly transaction would likely occur at less than the fair value of the respective
life insurance policies.
The fair value hierarchy prioritizes the
inputs 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 as of the measurement date. Valuations are based on quoted prices that are readily and regularly available in an active market.
|
|
|
|
|
Level 2 —
|
Valuations based quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable market data.
|
|
|
|
|
Level 3 —
|
Valuations based on inputs that are unobservable, are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such instruments.
|
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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.
Financial instruments measured at fair
value on a recurring basis
The Company’s financial assets and
liabilities carried at fair value on a recurring basis, including the level in the fair value hierarchy, on March 31, 2020
and December 31, 2019 are presented below (in thousands).
|
|
As of March 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in life insurance policies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
802,181
|
|
|
$
|
802,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in life insurance policies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
796,039
|
|
|
$
|
796,039
|
|
The following is a description of the valuation
methodologies used for financial instruments measured at fair value on a recurring basis:
Investments in life insurance policies
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 observed in
the life insurance secondary market through competitive bidding observations (which have declined recently as a result of our decreased
purchase activity) and other means, fixed income 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 yield premium a purchaser would require
to receive the future cash flows derived from our portfolio as a whole. Management has significant discretion regarding the combination
of these and other factors when determining the discount rate.
Under our Longest Life Expectancy portfolio
valuation methodology, we: i) utilize life expectancy reports from third-party life expectancy providers for the pricing of all
life insurance policies; ii) apply a stable valuation methodology driven by the experience of our life insurance portfolio, which
is re-evaluated if experience deviates by a specified margin; and iii) use relevant market observations that can be validated and
mapped to the discount rate used to value the life insurance portfolio.
These inputs are then used to estimate
the discounted cash flows from the portfolio using the ClariNet LS probabilistic and stochastic portfolio pricing model from ClearLife
Limited, 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 ClearLife Limited to prepare a net present value
calculation of our life insurance portfolio using the inputs we provide on a quarterly basis.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The following table reconciles the beginning
and ending fair value of our Level 3 investments in our portfolio of life insurance policies (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
796,039
|
|
|
$
|
747,922
|
|
Total gain in earnings(1)
|
|
|
12,177
|
|
|
|
15,571
|
|
Purchases
|
|
|
—
|
|
|
|
27,393
|
|
Settlements(2)
|
|
|
(6,035
|
)
|
|
|
(8,701
|
)
|
Transfers into Level 3
|
|
|
—
|
|
|
|
—
|
|
Transfers out of Level 3
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
802,181
|
|
|
$
|
782,185
|
|
|
(1)
|
Net change in fair value
|
|
(2)
|
Policy maturities at initial cost basis
|
The
net activity in the table above is reported in gain on life insurance policies, net, in the condensed consolidated statements of
operations. There were no net unrealized gains/losses for Level 3 assets included in other comprehensive income as of March 31,
2020 and 2019.
There have been no transfers between levels
for any assets or liabilities recorded at fair value on a recurring basis or any changes in the valuation techniques used for measuring
the fair value as of March 31, 2020 and December 31, 2019. The following table provides quantitative information about
the significant unobservable inputs used in the fair value measurement of the Company’s Level 3 fair value assets:
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
Weighted-average age of insured, years*
|
|
|
82.6
|
|
|
|
82.4
|
|
Age of insured range, years
|
|
|
63-101
|
|
|
|
62-101
|
|
Weighted-average life expectancy, months*
|
|
|
86.6
|
|
|
|
86.2
|
|
Life expectancy range, months
|
|
|
0-240
|
|
|
|
0-240
|
|
Average face amount per policy (in thousands)
|
|
$
|
1,769
|
|
|
$
|
1,756
|
|
Discount rate
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
(*)
|
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 (in thousands):
|
|
Change in Life Expectancy Estimates
|
|
|
|
minus
8 months
|
|
|
minus
4 months
|
|
|
plus
4 months
|
|
|
plus
8 months
|
|
March 31, 2020
|
|
$
|
112,668
|
|
|
$
|
57,263
|
|
|
$
|
(55,449
|
)
|
|
$
|
(110,453
|
)
|
December 31, 2019
|
|
$
|
113,812
|
|
|
$
|
57,753
|
|
|
$
|
(55,905
|
)
|
|
$
|
(111,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Discount Rate
|
|
|
|
minus 2%
|
|
|
minus 1%
|
|
|
plus 1%
|
|
|
plus 2%
|
|
March 31, 2020
|
|
$
|
89,558
|
|
|
$
|
42,637
|
|
|
$
|
(38,865
|
)
|
|
$
|
(74,399
|
)
|
December 31, 2019
|
|
$
|
91,890
|
|
|
$
|
43,713
|
|
|
$
|
(39,790
|
)
|
|
$
|
(76,118
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Financial instruments measured at fair value on a non-recurring
basis
There were no assets or liabilities measured at fair value on a
non-recurring basis as of March 31, 2020. As of December 31, 2019, Beneficient’s assets and liabilities were recorded
at fair value in the consolidated balance sheet due to the application of purchase accounting in accordance with ASC 805 as described
in Note 4.
Carrying amounts and estimated fair values
The Company is required to disclose the estimated
fair value of financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable
to estimate those values. These fair value estimates are determined based on relevant market information and information about
the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price
at which a liability could be settled. However, given there is no active market or observable market transactions for many of the
Company’s financial instruments, estimates of fair values are subjective in nature, involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated
values. Nonfinancial instruments are excluded from disclosure requirements.
The carrying amounts and estimated fair values
of the Company’s financial instruments not recorded at fair value, were as noted in the tables below (in thousands).
|
|
As of March 31, 2020
|
|
|
|
Level in Fair
Value
Hierarchy
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
|
1
|
|
|
$
|
142,878
|
|
|
$
|
142,878
|
|
Life insurance policy benefits receivable, net
|
|
|
1
|
|
|
|
15,330
|
|
|
|
15,330
|
|
Fees receivable
|
|
|
1
|
|
|
|
30,453
|
|
|
|
30,453
|
|
Loans receivable, net of allowance for loan losses
|
|
|
3
|
|
|
|
218,596
|
|
|
|
206,531
|
|
Financing receivables from affiliates
|
|
|
2
|
|
|
|
68,290
|
|
|
|
61,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
|
2
|
|
|
$
|
188,793
|
|
|
$
|
198,661
|
|
L Bonds and Seller Trust L bonds
|
|
|
2
|
|
|
|
1,376,673
|
|
|
|
1,492,433
|
|
Other borrowings
|
|
|
2
|
|
|
|
152,597
|
|
|
|
152,597
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
|
|
As of December 31, 2019
|
|
|
Level in Fair
Value
Hierarchy
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
1
|
|
$
|
99,331
|
|
|
$
|
99,331
|
|
Life insurance policy benefits receivable, net
|
|
1
|
|
|
23,031
|
|
|
|
23,031
|
|
Fees receivable
|
|
1
|
|
|
29,168
|
|
|
|
29,168
|
|
Loans receivable, net of allowance for loan losses
|
|
3
|
|
|
232,344
|
|
|
|
232,344
|
|
Financing receivables from affiliates
|
|
2
|
|
|
67,153
|
|
|
|
59,608
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
2
|
|
$
|
174,390
|
|
|
$
|
184,587
|
|
L Bonds and Seller Trust L Bonds
|
|
2
|
|
|
1,293,530
|
|
|
|
1,390,288
|
|
Other borrowings
|
|
2
|
|
|
153,086
|
|
|
|
153,086
|
|
The following methods and assumptions were
used in estimating the fair values of each of the assets and liabilities in the tables above:
Cash, Cash Equivalents and Restricted Cash
The carrying amounts reported in the consolidated
balance sheets for cash, cash equivalents and restricted cash approximate their fair values.
Life Insurance Policy Benefits Receivable
The carrying value of life insurance policy benefits receivable
approximate fair value due to their short-term maturities and low credit risk.
Fees Receivable
The carrying value of fees receivable generally approximates
fair value.
Loans Receivable, Net of Allowance for
Loan Losses
The loan portfolio was valued using current
accounting guidance that defines fair value as the price that would be received to sell an asset or transfer a liability in an
orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the loan portfolio
and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants
would use in estimating fair values, specifically market interest rate and general credit fair value assumptions. In instances
where reliable market information was not available, management used assumptions in an effort to determine reasonable fair value.
As discussed in Note 4, Beneficient’s
assets and liabilities, including loans receivable, were recorded at fair value as a result of the change-of-control event on December
31, 2019. Accordingly, there was no carryover related allowance for loan losses.
Financing Receivables from Affiliates
The fair value of the Promissory Note receivable
from the LiquidTrusts (see Note 6) was measured utilizing an implied yield of 10.0% based on a market yield analysis for similar
instruments with similar credit profiles.
Senior Credit Facility with LNV Corporation
The carrying value of the LNV Credit Facility
reflects interest charged at 12-month LIBOR plus an applicable margin, net of unamortized deferred financing costs. The margin
represents our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall
rate reflects the current interest rate market, and the outstanding principal balance of the facility approximates its fair value.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
L Bonds and Seller Trust L Bonds
The measurement of the fair values of L
Bonds and Seller Trust L Bonds, largely containing the same terms, were determined using weighted-average market interest rates
of 6.21% and 6.34% as of March 31, 2020 and December 31, 2019, respectively.
Other Borrowings
The measurement of the fair values of these
debt instruments is based on market prices that generally are observable for similar liabilities at commonly quoted intervals and
are considered a Level 2 fair value measurement. The carrying value approximates fair value as of March 31, 2020.
As discussed in Note 4, Beneficient’s
assets and liabilities, including these other borrowings, were recorded at fair value as a result of the change-of-control event
on December 31, 2019.
Other Fair Value Considerations
GWG MCA Capital, Inc. (“GWG MCA”)
participated in the merchant cash advance industry by directly advancing sums to merchants and lending money, on a secured basis,
to companies that advance sums to merchants. Each quarter, we review the carrying value of these cash advances, determine if an
impairment exists and establish or adjust an allowance for loan loss as necessary. At both March 31, 2020 and December 31, 2019,
we fully reserved for the entire $2.2 million of GWG MCA’s outstanding loans based on the low likelihood of collectibility
on these loans. GWG MCA no longer participates in the merchant cash advance industry.
Certain assets are subject to periodic
impairment testing by comparing the respective carrying value of the asset to its estimated fair value. In the event we determine
these assets to be impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the impaired
asset exceeds its estimated fair value. These periodic impairment tests utilize company-specific assumptions involving significant
unobservable inputs, or Level 3, in the fair value hierarchy.
(8) Equity Method Investments
FOXO BioScience LLC (formerly, InsurTech Holdings, LLC)
On November 11, 2019, GWG contributed the
common stock and membership interests of its wholly-owned subsidiaries, Life Epigenetics and youSurance, (“Insurtech Subsidiaries”)
to a legal entity, FOXO, in exchange for a membership interest in FOXO. Although GWG Holdings currently owns 100% of FOXO’s
equity, we do not have a controlling financial interest in FOXO because the managing member has substantive participating rights.
Therefore, we account for our ownership interest in FOXO as an equity method investment.
The transaction resulted in a loss of control
of the Insurtech Subsidiaries and, as a result, we deconsolidated the subsidiaries and recorded an equity method investment balance
during the fourth quarter of 2019. The loss of control required us to measure the equity investment at fair value. We determined
the fair value of our investment in FOXO approximated the carrying value of $3.4 million, which was primarily comprised of cash
and fixed assets contributed to the entity during the fourth quarter of 2019. We recognized a loss on equity method investment
of $1.6 million during the fourth quarter of 2019, resulting in an ending balance of $1.8 million as of December 31, 2019. We made
additional cash contributions of $5.4 million and recognized a loss on equity method investment of $1.5 million during the three
months ended March 31, 2020, resulting in an ending balance of $5.6 million as of March 31, 2020.
In accordance with the operating agreement
of FOXO, GWG Holdings is committed to contribute an additional $12.5 million to the entity through October 2021. Our investment
in the membership interest of FOXO is presented in other assets in our consolidated balance sheets. Our proportionate share of
earnings or losses from our investee is recognized in earnings (loss) from equity method investments in our consolidated statements
of operations.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The Beneficient Company Group, L.P.
During 2018, we acquired 40.5 million Common
Units for a total limited partnership interest in the common units of Ben LP of approximately 89.9% as of December 31, 2018. On
June 12, 2019, we acquired an additional 1,000,000 Common Units from a third party for a cash investment of $10.0 million. On December
31, 2019, we acquired an additional 666,667 newly-issued Common Units for a cash investment of $10.0 million. The Common Units
are not publicly traded on a stock exchange.
Prior to December 31, 2019, our investment
in Common Units was presented in equity method investment on our consolidated balance sheets. Our proportionate share of earnings
or losses from our investee was recognized in earnings (loss) from equity method investments in our consolidated statements of
operations. We recorded our share of the income or loss of Beneficient through September 30, 2019, on a one-quarter lag.
On December 31, 2019, we obtained control of
Beneficient and consolidated Beneficient as of that date in accordance with ASC 805, Business Combinations. See Note 4 for
further information on the business combination. In connection with the consolidation, we discontinued the one-quarter reporting
lag.
Financial information pertaining to Beneficient
is summarized in the table below (in thousands):
|
|
October 1 to
December 31,
2018
(unaudited)
|
|
Total revenues
|
|
$
|
25,306
|
|
Net loss
|
|
|
(41,644
|
)
|
Net loss attributable to Ben LP common unitholders
|
|
|
(13,192
|
)
|
GWG portion of net earnings (loss)(1)
|
|
|
(1,927
|
)
|
|
(1)
|
Our
portion of Beneficient’s net earnings (loss) for the period noted. This amount was recognized during the three months ended
March 31, 2019, in accordance with our one-quarter lag election.
|
We eliminated the effects of any intercompany
transactions in the summarized information presented above. Our historical ownership percentage of our investment in Common Units
is as follows:
Date
|
|
Percentage of outstanding Common Units
|
|
Reason
|
August 10, 2018
|
|
13.9%
|
|
Purchase of units
|
December 28, 2018
|
|
89.9%
|
|
Purchase of units
|
March 31, 2019
|
|
88.1%
|
|
Change in investee outstanding units
|
June 12, 2019
|
|
90.2%
|
|
Purchase of units
|
December 31, 2019
|
|
95.5%
|
|
Purchase of units
|
There was no change in GWG Holdings’
percentage ownership in Beneficient during the three months ended March 31, 2020.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(9) Variable Interest Entities
In accordance with ASC 810, Consolidation,
the Company assesses whether it has a variable interest in legal entities in which it has a financial relationship and, if so,
whether or not those entities are variable interest entities (“VIEs”). For those 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.
Prior to December 31, 2019, we determined
that Beneficient was a VIE, but that we were not the primary beneficiary of the VIE. GWG Holdings did not have the power to direct
any activities of Beneficient, or any of its related parties, that most significantly impacted Beneficient’s economic performance.
GWG Holdings had no board representation at Ben LP or at its general partner. The general partner was exclusively assigned all
management powers over the business and affairs of Beneficient, and the limited partners did not have the ability to remove the
general partner. Therefore, GWG Holdings did not consolidate the results of Beneficient in our condensed consolidated financial
statements until the change-of-control occurred on December 31, 2019. Prior to the change-of-control, GWG Holdings’ exposure
to risk of loss in Beneficient was generally limited to its investment in Common Units, its financing receivable from Beneficient
and its equity security investment in the Option Agreement to purchase additional common units of Ben LP. Effective December 31,
2019, GWG Holdings obtained the ability to appoint a majority of the board of directors of the general partner of Ben LP. As a
result, GWG Holdings became the primary beneficiary of Ben LP on December 31, 2019, and consolidated Beneficient on that date.
We determined that the LiquidTrust Borrowers
are VIEs, but that we are not the primary beneficiary of these VIEs. We do not have the power to direct any activities of the
LiquidTrust Borrowers that most significantly impact the Borrower’s economic performance. The Company’s exposure to
risk of loss in the LiquidTrust Borrowers is limited to its financing receivable from the LiquidTrust Borrowers.
The Company also determined that certain
other trusts included within the ExAltTM Plans used in connection with Beneficient’s operations are VIEs but that
we are not the primary beneficiary of these VIEs. The Company does not have both the power to direct the most significant activities
of the trusts and the obligation to absorb losses or right to receive benefits that could potentially be significant to the trusts.
The Company’s investments in the trusts are carried in loans receivable in the consolidated balance sheets. The Company’s
exposure to risk of loss was determined as the amortized cost of the loans to the trusts, any earned but unpaid fees or expenses
plus any remaining potential contributions for unfunded capital commitments and cash reserve commitments.
We determined that FOXO is a VIE, but that
we are not the primary beneficiary of the VIE. We do not have the power to direct any activities of FOXO that most significantly
impact its economic performance. The Company’s exposure to risk of loss in FOXO is limited to its equity method investment
in the membership interests of FOXO and its remaining unfunded capital commitments.
The following table shows the classification,
carrying value and maximum exposure to loss with respect to the Company’s unconsolidated VIEs (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying
Value
|
|
|
Maximum
Exposure to
Loss
|
|
|
Carrying
Value
|
|
|
Maximum
Exposure
to Loss
|
|
Loans receivable
|
|
$
|
218,596
|
|
|
$
|
322,748
|
|
|
$
|
232,344
|
|
|
$
|
335,255
|
|
Financing receivables from affiliates
|
|
|
68,290
|
|
|
|
68,290
|
|
|
|
67,153
|
|
|
|
67,153
|
|
Equity method investment
|
|
|
5,648
|
|
|
|
18,148
|
|
|
|
1,761
|
|
|
|
19,661
|
|
Accounts payable and accrued expenses
|
|
|
(2,538
|
)
|
|
|
—
|
|
|
|
(2,515
|
)
|
|
|
—
|
|
Total
|
|
$
|
289,996
|
|
|
$
|
409,186
|
|
|
$
|
298,743
|
|
|
$
|
422,069
|
|
(10) Debt
Senior Credit Facility with LNV Corporation
On November 1, 2019, DLP IV entered into
a second amended and restated senior credit facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent
on behalf of the lenders under the agreement (the “LNV Credit Facility”), which replaced the amended and restated senior
credit facility dated September 27, 2017 that previously governed DLP IV’s senior credit facility. The LNV Credit Facility
makes available a total of up to $300.0 million in credit to DLP IV with a maturity date of September 27, 2029. Subject to available
borrowing base capacity, additional advances are available under the LNV Credit Facility at the LIBOR rate described below. Such
advances are available to pay the premiums and servicing costs of pledged life insurance policies as such amounts become due. Interest
will accrue on amounts borrowed under the LNV Credit Facility at an annual interest rate, determined as of each date of borrowing
or quarterly if there is no borrowing, equal to (a) 12-month LIBOR, plus (b) 7.50% per annum. The effective rate at March 31, 2020
was 9.50%. Interest payments are made on a quarterly basis.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Under the LNV Credit Facility, DLP IV has
granted the administrative agent, for the benefit of the lenders under the agreement, a security interest in all of DLP IV’s
assets.
In conjunction with entering into the
LNV Credit Facility, DLP IV pledged life insurance policies having an aggregate face value of approximately $298.3 million as
additional collateral and received an advance of approximately $37.1 million (inclusive of certain fees and expenses incurred
in connection with the negotiation and entry into the LNV Credit Facility). The LNV Credit Facility has certain financial and
nonfinancial covenants, and we were in compliance with these covenants at March 31, 2020 and as of the date of this
filing.
As of March 31, 2020, approximately 77.1%
of the total face value of our life insurance policies portfolio is pledged to LNV Corporation. The principal amount outstanding
under this facility was $198.7 million and $184.6 million at March 31, 2020 and December 31, 2019, respectively. Obligations under
the LNV 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 Bank, N.A. 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 and Seller Trust L Bonds. The difference between
the amount outstanding and the carrying amount on our consolidated balance sheets is due to netting of unamortized debt issuance
costs.
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 were 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, a registration statement
relating to an additional public offering was declared effective permitting us to sell up to an additional $1.0 billion in principal
amount of L Bonds on a continuous basis until December 2020. This offering contains the same terms and features as the previous
offering. As of May 11, 2020, we had remaining capacity of approximately $70.0 million under our current registered L Bond offering.
On March 30, 2020, we filed a registration
statement to offer up to $2.0 billion in principal amount of L Bonds on a continuous basis until the third anniversary of the effective
date of the registration statement. These bonds contain the same terms and features as our previous offerings.
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. Effective December 31, 2019, we entered into Amendment No. 2 to the indenture which
primarily modified the calculation of the debt coverage ratio to allow the Company greater flexibility to finance and to anticipate
the potential impacts of GWG Holdings’ expanding relationship with Beneficient.
We were in compliance with the covenants of
the indenture at March 31, 2020, and as of the date of this filing, and no events of default (as defined in the Indenture) existed
as of such dates.
We publicly offer and sell L Bonds under
a registration statement declared effective by the SEC and have issued Seller Trust L Bonds under a Supplemental Indenture, as
described below. We temporarily suspended the offering of our L Bonds on May 1, 2019 as a result of our delay in filing certain
periodic reports with the SEC. We recommenced our L Bond offering on August 8, 2019.
The collateral and guarantee provisions
of the L Bonds and Seller Trust L Bonds are described in Note 18.
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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
At March 31, 2020 and December 31, 2019,
the weighted-average interest rate of our L Bonds was 7.18% and 7.15%, respectively. The principal amount of L Bonds outstanding
was $1.0 billion and $948.1 million at March 31, 2020 and December 31, 2019, respectively. The difference between the amount of
outstanding L Bonds and the carrying amount on our 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 $3.9
million and $2.8 million for the three months ended March 31, 2020 and 2019, respectively. Future expected amortization of deferred
financing costs as of March 31, 2020 is $41.2 million in total over the next seven years.
Seller Trust L Bonds
On August 10, 2018, in connection with
the Initial Transfer of the Exchange Transaction described in Note 1, GWG Holdings issued Seller Trust L Bonds in the amount of
$366.9 million to the Seller Trusts. 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.
After December 28, 2020, the holders of
the Seller Trust L Bonds will have the right to cause GWG Holdings to repurchase, in whole but not in part, the Seller Trust L
Bonds held by such holder. The repurchase may be paid, at the option of GWG Holdings, in the form of cash, and/or a pro rata portion
of (i) the outstanding principal amount and accrued and unpaid interest under the commercial loan between GWG Life and Ben LP entered
into on August 10, 2018 and (ii) Common Units, or a combination of cash and such property.
The principal amount of Seller Trust L
Bonds outstanding was $366.9 million at both March 31, 2020 and December 31, 2019.
Other Borrowings
Beneficient had borrowings with an aggregate
carrying value of $152.6 million and $153.1 million as of March 31, 2020 and December 31, 2019, respectively. This aggregate outstanding
balance includes a senior credit agreement and a subordinate credit agreement with respective balances, including accrued interest,
of $77.5 million and $72.2 million at both March 31, 2020 and December 31, 2019. These amounts exclude an aggregate unamortized
premium of $0.4 million and $0.9 million as of March 31, 2020 and December 31, 2019, respectively. Both loans accrue interest
at a rate of 1-month LIBOR plus 3.95%, compounded daily, with interest due by the 15th of each month. The senior credit
agreement and the subordinate credit agreement both mature on June 30, 2020. These loans are not currently guaranteed by GWG.
The loans contain customary covenants and events of default and termination, including cross-default provisions. As of March 31,
2020, Beneficient was in compliance with all covenants. As discussed in Note 20, on May 15, 2020, Beneficient and the lender signed
a Binding Term Sheet to Amend the Credit Agreement (“Term Sheet”) which would amend the terms of the loans.
Beneficient has additional borrowings maturing
in 2023 and 2024 with an aggregate carrying value of $2.5 million as of both March 31, 2020 and December 31, 2019.
(11) Stockholders’ Equity
Common Stock
In September 2014, GWG Holdings consummated an initial public
offering of its 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,
the common stock of GWG Holdings was listed on the Nasdaq Capital Market under the ticker symbol “GWGH.”
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The 2018 transactions between GWG Holdings, GWG Life, Beneficient
and the Seller Trusts described in Note 1 ultimately resulted in the issuance of 27,013,516 shares of GWG Holdings common stock
to the Seller Trust in exchange for Common Units. The shares were offered and sold in reliance upon the exemption from registration
provided by Section 4(a)(2) under the Securities Act of 1933, as amended. Also, the Purchase and Contribution Agreement described
in Note 1 ultimately resulted in the sale of 2,500,000 shares of GWG Holdings common stock to BCC, and the contribution of 1,452,155
shares of GWG Holdings common stock to AltiVerse.
Pursuant to the Exchange Agreement described
in Note 1, on December 31, 2019, holders of Ben LP common units have the right to exchange their common units for common stock
of GWG Holdings. The exchange ratio in the Exchange Agreement is based on the ratio of the capital account associated with the
common units to be exchanged to the market price of the common stock of GWG Holdings based on the volume weighted average price
of GWG Holdings’ common stock for the five consecutive trading days prior to the quarterly exchange date. No Ben LP common
units have been exchanged for common stock of GWG Holdings through March 31, 2020.
On November 15, 2018, the Board of Directors
of GWG Holdings approved a stock repurchase program pursuant to which the Company was permitted, from time to time, to purchase
shares of its common stock for an aggregate purchase price not to exceed $1.5 million. Stock repurchases were able to be executed
through various means, including, without limitation, open market transactions, privately negotiated transactions or otherwise.
The stock repurchase program did not obligate the Company to purchase any shares, and expired on April 30, 2019.
The following table includes information
about the stock repurchase program for the three months ended March 31, 2019 (dollar amounts in thousands, except per share data):
2019 Monthly Period
|
|
Number of
Shares
Purchased
|
|
|
Average Price
Paid per
Share
|
|
|
Total Number
of Shares
Purchased as
Part of the
Program
|
|
|
Maximum
Dollar Value of Shares
that Remained
Under the
Program
|
|
January 2019
|
|
|
42,488
|
|
|
$
|
8.47
|
|
|
|
52,523
|
|
|
$
|
1,072
|
|
February 2019
|
|
|
202
|
|
|
|
8.88
|
|
|
|
52,725
|
|
|
|
1,070
|
|
|
(1)
|
No
stock was repurchased after February 2019, and the stock repurchase program expired on April 30, 2019.
|
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 (see further details in the section below) 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 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 $99.1 million and incurred approximately
$7.0 million 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; however, based on our assessment under ASC
470, Debt, (“ASC 470”) and ASC 815, Derivatives and Hedging, (“ASC 815”), we do not believe
bifurcation of either the holder’s redemption or conversion feature is appropriate.
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. The terms of the RPS 2 are largely consistent
with those of the RPS, other than the conversion and redemption features discussed below.
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. 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 $150.0 million and incurred
approximately $10.3 million of related selling costs.
The RPS 2 was determined to have the same
two embedded features discussed in the RPS section above (optional redemption and optional conversion by the holder). We do not
believe bifurcation of either the holder’s redemption or conversion feature is appropriate.
Preferred Series A Subclass 1 (Redeemable
noncontrolling interest)
BCH, a consolidated subsidiary of Ben LP,
has non-unitized equity outstanding. The Preferred Series A Subclass 1 Unit accounts are non-participating and convertible on a
dollar basis. The 4th Amended and Restated Limited Partnership Agreement (“LPA”) of BCH governs the terms of BCH’s
equity securities.
Beginning June 1, 2018, the Preferred
Series A Subclass 1 Unitholders agreed to temporarily reduce the preferred return rate. On March 31, 2019, Preferred Series A
Subclass 1 Unit Account holders signed an agreement to forbear the right to receive an annualized preferred return in excess of
a rate determined materially consistent with the methodology below until, initially, the earlier of December 31, 2019 or three
months following the issuance of the limited trust association charters by the Texas Department of Banking. The charters from
the Texas Department of Banking were not issued as of December 31, 2019. In 2020, this forbearance agreement was extended through
March 31, 2020. The income allocation methodology under this forbearance agreement was as follows:
|
●
|
First, Ben, as the sole holder of Class A Units issued by BCH is allocated income from BCH to cover the expenses incurred solely by Ben;
|
|
●
|
Second, the remaining income at BCH is allocated 50% to the aggregate of Class A Units and Class S Ordinary Units and 50% to Preferred Series A Subclass 1 Unit Accounts, until the Common Units issued by Ben receive a 1% annualized return on the Common Unit account balance;
|
|
●
|
Third, after the 1% annualized return to the Common Unit issued by Ben is achieved, additional income is allocated to the Preferred Series A until the Preferred Series A is allocated the amount required under the LPA, (as amended); and
|
|
|
|
|
●
|
Finally, any remaining income is allocated under the
terms of the current LPA (pro-rata between the Class A Units and Class S Ordinary Units).
|
If and when the forbearance agreement expires,
account holders will be entitled to a compounded quarterly preferred return. The preferred return to be paid to Preferred Series
A Unitholders is limited by a quarterly preferred return rate cap that is based on the annualized revenues of BCH. Annualized revenues
are defined as four times the sum of total quarterly interest, fee and dividend income plus total noninterest revenues. This quarterly
rate cap is defined as follows:
|
●
|
0.25% if annualized revenues are $80 million or less;
|
|
●
|
0.50% if annualized revenues are greater than $80 million but equal to or less than $105 million;
|
|
●
|
0.75% if annualized revenues are greater than $105 million but equal to or less than $125 million;
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
|
●
|
1.00% if annualized revenues are greater than $125 million but equal to or less than $135 million;
|
|
●
|
1.25% if annualized revenues are greater than $135 million but equal to or less than $140 million; and
|
|
●
|
If over $140 million, the preferred return calculation is based on a fraction (i) the numerator of which is (A) the positive percentage rate change, if any, to the seasonally adjusted CPI-U covering the period from the date of the last allocation of profits to such holders, plus (B) (x) 2% prior to an Initial Public Offering (as defined in the BCH LPA) by Ben and (y) 3% thereafter, and (ii) the denominator of which is one minus the highest effective marginal combined U.S. federal, state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually allocated in respect of the quarterly preferred return for the fiscal year reflected in the BCH’s most recently filed Internal Revenue Service Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax.
|
The definition of Initial Public Offering
includes an event, transaction or agreement pursuant to which the Common Units are convertible or exchangeable into equity securities
listed on a national securities exchange or quotation in an automated quotation system.
No amounts have been paid to the Preferred
Series A Subclass 1 Unit Account holders related to the preferred return from inception through March 31, 2020. In connection with
the issuance of Preferred Series A Subclass 2 Units as part of the Option Agreement, the preferred return of Preferred Series A
Subclass 1 Unit Account holders is reduced by the preferred return allocated to the Preferred Series A Subclass 2 Units during
the period the Option Agreement remains outstanding.
Upon election by a holder, the Preferred
Series A Unit Accounts (other than Preferred Series A Subclass 2 Unit Accounts) are, at any time on or after January 1, 2021, convertible
in an amount of Preferred Series A Unit Accounts (other than Preferred Series A Subclass 2 Unit Accounts), equal to 20% of their
Sub-Capital Accounts into Class S Ordinary Units (with the right to convert any unconverted amount from previous years in any subsequent
years). Upon an election, a holder of Preferred Series A Subclass 1 Unit Accounts will be issued Class S Ordinary Units necessary
to provide the holder with a number of Class S Ordinary Units that, in the aggregate, equal (a) the balance of the holder’s
capital account associated with the Preferred Series A Subclass 1 Unit Accounts being converted divided by (b) either (x) prior
to an initial public offering, the appraised per Class A Unit fair market value as determined by Beneficient or (y) following an
initial public offering, the average price of a Common Unit for the thirty (30) day period ended immediately prior to the applicable
conversion date. The holder of such newly issued Class S Ordinary Units may immediately convert them into Common Units. Additionally,
effective December 31, 2030, if the Preferred Series A Subclass 1 Unit Accounts have not been converted, they will redeem for cash
in an amount equal to the then outstanding capital account balance of the accounts. If available redeeming cash (as defined in
the LPA) is insufficient to satisfy any such redemption requirements, BCH, on a quarterly basis, will redeem additional Preferred
Series A Units until all such Preferred Series A Units have been redeemed. The Preferred Series A Subclass 1 Unit Accounts are
subject to certain other conversion and redemption provisions.
The current LPA of BCH also includes certain
limitations of BCH, without the consent of a majority-in-interest of the Preferred Series A Unit Account holders, to (i) issue
any new equity securities and (ii) except as otherwise provided, incur indebtedness that is senior to or pari passu with any right
of distribution, redemption, repayment, repurchase or other payments relating to the Preferred Series A Unit accounts. Further,
BCH cannot, prior to the conversion of all the Preferred Series A Unit accounts, incur any additional long-term debt unless (i)
after giving effect to the incurrence of the new long-term debt on a pro forma basis, the sum of certain preferred stock, existing
debt and any new long-term indebtedness would not exceed 55% of BCH’s net asset value (“NAV”) plus cash on hand,
and (ii) at the time of incurrence of any new long-term indebtedness, the aggregate balance of BCH’s (including controlled
subsidiaries) debt plus such new long-term debt does not exceed 40% of the sum of the NAV of the collateral underlying the loan
portfolio of BCH and its subsidiaries plus cash on hand at Ben LP, BCH and its subsidiaries.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The Preferred Series A Subclass 1 Unit
Accounts are recorded in the consolidated balance sheet in the redeemable noncontrolling interest line item.
Class S Ordinary Units
As of both March 31, 2020 and December
31, 2019, BCH had issued and outstanding 5.8 million Class S Ordinary Units. The Class S Ordinary Units participate on an as-converted
basis pro-rata in the share of the profits or losses of BCH and subsidiaries following all other allocations made by BCH and its
subsidiaries. As limited partner interests, these units have limited voting rights and do not entitle participation in the management
of BCH’s business and affairs. The Class S Ordinary Units are exchangeable for Common Units on a one-for-one basis,
subject to customary conversion rate adjustments for splits, distributions and reclassifications, as well as compliance with any
applicable vesting and transfer restrictions. Each conversion also results in the issuance to Ben LP of a Class A Unit of BCH for
each common unit issued.
The Class S Ordinary Units are recorded
in the consolidated balance sheet in the noncontrolling interests line item.
Class S Preferred Units
The limited partnership agreement of BCH
allows it to issue Class S Preferred Units. The Class S Preferred Units are entitled to a quarterly preferred return that is limited
by the quarterly preferred return rate cap described above for Preferred Series A Subclass 1 except for when annualized revenues
exceed $140 million, the Class S Preferred return is based on a fraction (i) the numerator of which is (A) the positive percentage
rate change, if any, to the seasonally adjusted CPI-U covering the period from the date of the last allocation of profits to such
holders, plus (B) 0.75 percent, and (ii) the denominator of which is one minus the highest effective marginal combined U.S. federal,
state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made
for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the
quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long
term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually
allocated in respect of the quarterly preferred return for the fiscal year reflected in the Ben Group Partnership’s most
recently filed IRS Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax. The Class
S Preferred Units also participate on an as-converted basis pro-rata in the share of the profits or losses of BCH and subsidiaries
following all other allocations made by BCH and its subsidiaries. As limited partner interests, these units are generally non-voting
and do not entitle participation in the management of BCH’s business and affairs. Generally, the Class S Preferred
Units are exchangeable for Common Units in Ben LP on a 1.2-for-1 basis, subject to customary conversion rate adjustments for splits,
distributions and reclassifications, as well as compliance with any applicable vesting and transfer restrictions. Each conversion
also results in the issuance to Ben LP of a Class A Unit for each Common Unit issued. Holders of Class S Preferred Units may elect
to convert into Class S Ordinary Units in connection with a sale or dissolution of BCH.
No amounts have been paid to the Class
S Preferred Unit holders related to the preferred return from inception through March 31, 2020. The Class S Preferred Units are
recorded in the consolidated balance sheet in the noncontrolling interests line item.
(12) Equity-Based Compensation
As of March 31,
2020, the Company has outstanding equity-based awards under the 2013 Stock Incentive Plan, the Beneficient Management Partners,
L.P. (“BMP”) Equity Incentive Plan, and the Ben Equity Incentive Plan, as more fully described in the sections below.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
2013 Stock
Incentive Plan
GWG Holdings adopted
the 2013 Stock Incentive Plan in March 2013, as amended on June 1, 2015, May 5, 2017 and May 8, 2018. 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. Option awards generally expire 10 years from the date of grant. As of March
31, 2020, the Company has granted stock options, stock appreciation rights (“SAR”), and restricted stock units (“RSU”)
under this plan.
During the three
months ended March 31, 2020, a total of 20,751 stock options held by employees vested. Additionally, as a result of stock option
exercises, 1,456 shares of common stock were issued to employees, net of shares forfeited to satisfy tax withholding obligations.
Upon the exercise
of SARs, the Company is obligated to make cash payment equal to the positive difference between the market value of the Company’s
common stock on the date of exercise less the market value of the common stock on the date of grant. The liability for the SARs
as of March 31, 2020 and December 31, 2019 was $0.8 million and $0.6 million, respectively, and was recorded within accounts payable
and accrued expenses in the condensed consolidated balance sheets.
During the three
months ended March 31, 2020, none of the RSUs held by employees have vested.
BMP Equity
Incentive Plan
The Board of
Directors of Beneficient Management, Ben LP’s general partner, adopted the BMP Equity Incentive Plan in 2019. Under the
BMP Equity Incentive Plan, certain directors and employees of Ben are eligible to receive equity units in BMP, an entity
affiliated with the board of directors of Beneficient Management, in return for their services to Ben. The BMP equity units
eligible to be awarded to employees are comprised of BMP’s Class A Units and/or BMP’s Class B Units
(collectively, the “BMP Equity Units”). The BMP Equity Units awarded in 2019 and during the three months ended
March 31, 2020, included some awards that were fully vested upon grant date, and some awards that are subject to
service-based vesting over a four-year period from the date of hire.
As BMP’s
equity is not publicly traded, the fair value of the BMP Equity Units is determined on each grant date using a probability-weighted
discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus
represents a Level 3 measurement within the fair value hierarchy. The resultant probability-weighted cash flows are then discounted
using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative
of a market participant assumption.
Ben Equity
Incentive Plan
The Board of Directors
of Beneficient Management adopted the Ben Equity Incentive Plan in September 2018. Under the Ben Equity Incentive Plan, Ben is
permitted to grant equity awards, in the form of restricted equity units (“REUs”) representing ownership interests
in Common Units. Settled awards under the Ben Equity Incentive Plan dilute Ben’s Common Unitholders. The total number of
Common Units that may be issued under the Ben Equity Incentive Plan is equivalent to 15% of the number of fully diluted Common
Units outstanding, subject to annual adjustment.
All REUs are
subject to two performance conditions which were met during 2019. Additionally, if a change-of-control event occurs prior to July
1, 2021, then all units, vested and unvested, will settle within 60 days. Any transaction where GWG Holdings obtains the right
to appoint a majority of the members of Beneficient Management’s Board of Directors is expressly excluded from the definition
of change-of-control for the REUs. Awards will generally be subject to service-based vesting over a multi-year period from the
recipient’s date of hire, though some awards fully vest upon grant date. While providing services to Ben, if applicable,
certain of these awards are subject to minimum retained ownership rules requiring the award recipient to continuously hold Common
Unit equivalents equal to at least 15% of their cumulatively granted awards that have the minimum retained ownership requirement.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
As Ben LP’s
equity is not publicly traded, the fair value of the REUs is estimated on the grant date using recent equity transactions involving
third parties, which provides the Company with observable fair value information sufficient for estimating the grant date fair
value.
The following table
summarizes the award activity, in number of units, for each plan during the three months ended March 31, 2020:
|
|
Balance at
December 31,
2019
|
|
|
Granted
during
the period
|
|
|
Vested
during the
period
|
|
|
Exercised
during
the period
|
|
|
Forfeited
during
the period
|
|
|
Balance at
March 31,
2020
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
673,341
|
|
|
|
—
|
|
|
|
20,751
|
|
|
|
(19,304
|
)
|
|
|
(55,917
|
)
|
|
|
618,871
|
|
SAR
|
|
|
200,745
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,284
|
)
|
|
|
(2,051
|
)
|
|
|
197,410
|
|
RSU
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BMP Equity Units
|
|
|
7,980,037
|
|
|
|
3,451,017
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,431,054
|
|
REU
|
|
|
2,164,742
|
|
|
|
2,281,681
|
|
|
|
7,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,453,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
232,040
|
|
|
|
—
|
|
|
|
(20,751
|
)
|
|
|
—
|
|
|
|
(44,858
|
)
|
|
|
166,431
|
|
SAR
|
|
|
174,880
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,317
|
)
|
|
|
149,563
|
|
RSU
|
|
|
244,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
244,083
|
|
BMP Equity Units
|
|
|
180,000
|
|
|
|
2,649,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(70,000
|
)
|
|
|
2,759,200
|
|
REU
|
|
|
246,500
|
|
|
|
1,902,472
|
|
|
|
(7,500
|
)
|
|
|
—
|
|
|
|
(77,500
|
)
|
|
|
2,063,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
905,381
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19,304
|
)
|
|
|
(100,775
|
)
|
|
|
785,302
|
|
SAR
|
|
|
375,625
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,284
|
)
|
|
|
(27,368
|
)
|
|
|
346,973
|
|
RSU
|
|
|
244,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
244,083
|
|
BMP Equity Units
|
|
|
8,160,037
|
|
|
|
6,100,217
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(70,000
|
)
|
|
|
14,190,254
|
|
REU
|
|
|
2,411,242
|
|
|
|
4,184,153
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(77,500
|
)
|
|
|
6,517,895
|
|
The holders of
certain of the units issued under the BMP Equity Incentive Plan and the Ben Equity Incentive Plan, upon vesting, have the right
to convert the units to shares of GWG Holdings common stock per the Exchange Agreement discussed in Note 1. As such, units vested
and issued under Beneficient’s equity incentive plans may result in dilution of the common stock of GWG Holdings.
The following table
presents the components of equity-based compensation expense recognized in the consolidated statement of operations (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
$
|
48
|
|
|
$
|
262
|
|
Stock appreciation rights
|
|
|
206
|
|
|
|
413
|
|
Restricted stock units
|
|
|
260
|
|
|
|
159
|
|
BMP equity units
|
|
|
38,024
|
|
|
|
—
|
|
REU
|
|
|
30,910
|
|
|
|
—
|
|
Total equity-based compensation
|
|
$
|
69,448
|
|
|
$
|
834
|
|
Unrecognized equity-based
compensation expense totaled approximately $45.2 million as of March 31, 2020. We currently expect to recognize equity-based
compensation expense of $13.0 million during the remainder of 2020, and the remainder thereafter based on scheduled
vesting of awards outstanding as of March 31, 2020. The following table presents the equity-based compensation expense expected
to be recognized over the next five years based on scheduled vesting of awards outstanding as of March 31, 2020 (in thousands):
|
|
Stock Options
|
|
|
SAR
|
|
|
RSU
|
|
|
REU
|
|
|
BMP Equity Units
|
|
|
Total
|
|
Nine months ending 2020
|
|
$
|
202
|
|
|
$
|
81
|
|
|
$
|
226
|
|
|
$
|
6,169
|
|
|
$
|
6,301
|
|
|
$
|
12,979
|
|
2021
|
|
|
142
|
|
|
|
132
|
|
|
|
—
|
|
|
|
8,027
|
|
|
|
8,363
|
|
|
|
16,664
|
|
2022
|
|
|
20
|
|
|
|
81
|
|
|
|
—
|
|
|
|
5,306
|
|
|
|
5,705
|
|
|
|
11,112
|
|
2023
|
|
|
—
|
|
|
|
6
|
|
|
|
—
|
|
|
|
2,148
|
|
|
|
1,904
|
|
|
|
4,058
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
262
|
|
|
|
139
|
|
|
|
401
|
|
Total
|
|
$
|
364
|
|
|
$
|
300
|
|
|
$
|
226
|
|
|
$
|
21,912
|
|
|
$
|
22,412
|
|
|
$
|
45,214
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(13) Income Taxes
The Company applies an estimated annual
effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal
method prescribed by the accounting guidance established for computing income taxes in interim periods.
Income tax benefit was $14.5 million for
the three months ended March 31, 2020, compared to $0.0 million for the three months ended March 31, 2019. The Company’s
effective tax rate was 16.03% and 0% for the same periods. Our tax benefit for the year primarily reflects the effect of a change
in state taxing jurisdictions, the reduction of a naked credit (described below) and current tax expense.
In late 2019, the Company moved its headquarters
from Minnesota to Texas. This move resulted in a change in the state deferred tax rate from 9.8% to 0%. The tax effects of this
move has been recorded as a discrete item during the period.
The Company currently records a valuation
allowance against its deferred tax assets to the extent there are indefinite lived intangibles related to investments, business
interest expense and net operating losses. Due to the uncertain timing of the reversal of these temporary differences, they cannot
be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore the deferred tax
liability cannot offset deferred tax assets. This is often referred to as a “naked credit.” Due to a prior deemed ownership
change, net operating loss carryforwards are subject to Section 382 of the Internal Revenue Code.
We continue to monitor and evaluate the
rationale for recording a full valuation allowance for the net amount of the deferred tax assets which are in excess of the indefinite-lived
deferred tax assets and liabilities. We intend to continue maintaining a full valuation allowance on these net deferred tax assets
until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation
allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the
release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis
of the level of profitability that we are able to actually achieve.
On March 27, 2020, Congress passed and
the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which included
significant changes to U.S. Federal income tax law. However, the only change that is expected to affect the Company is the modification
to Section 163(j), which increased the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted
taxable income.
(14) Loss per Common Share
The computations of basic and diluted income
(loss) attributable to common shareholders per share for the three months ended March 31, 2020 and 2019 are as follows (in thousands,
except share data and per share data):
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(49,384
|
)
|
|
$
|
(18,910
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic – weighted average common shares outstanding
|
|
|
30,534,977
|
|
|
|
32,984,741
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
—
|
|
Diluted – weighted average common shares outstanding
|
|
|
30,534,977
|
|
|
|
32,984,741
|
|
Basic loss per common share
|
|
$
|
(1.62
|
)
|
|
$
|
(0.57
|
)
|
Diluted loss per common share
|
|
$
|
(1.62
|
)
|
|
$
|
(0.57
|
)
|
For the three months ended March 31, 2020
and 2019, RPS, RPS 2, restricted stock units, and stock options for a potential 2,543,665 and 2,814,635 shares, respectively,
were not included in the calculation of diluted earnings per share because we recorded a net loss during these periods and the
effects were anti-dilutive. Potentially dilutive instruments issued by Ben LP that are ultimately exchangeable into GWG common
stock were also excluded from the calculation of diluted earnings per share for the three months ended March 31, 2020 because
we recorded a net loss during this period and the effects were anti-dilutive.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(15) Segment Reporting
The Company has two reportable segments consisting
of Secondary Life Insurance and Beneficient. Corporate & Other includes certain activities not allocated to specific business
segments. These activities include holding company financing and investing activities, and management and administrative services
to support the overall operations of the Company and from November 1, 2019, include our equity method investment in FOXO.
The Secondary Life Insurance segment seeks
to earn non-correlated yield from our portfolio of life insurance policies. Our Beneficient segment consists of the assets and
operations of Ben LP and its subsidiaries. Beneficient became a consolidated subsidiary of GWG Holdings as of December 31, 2019,
as described in Note 4. Ben LP provides a variety of trust services, liquidity products and loans for alternative assets and illiquid
investment funds, and other financial services to mid-to-high net worth individuals. Prior to December 31, 2019, we accounted for
our investment in the common units of Beneficient under the equity method.
These segments are differentiated by the
products and services they offer as well as by the information used by the Company’s chief operating decision maker to determine
allocation of resources and assess performance.
Earnings before taxes (“EBT”)
is the measure of profitability used by management to assess performance of its segments and allocate resources. Segment EBT represents
net income (loss) excluding income taxes and includes earnings (loss) from equity method investments and gain on consolidation
of equity method investment.
|
|
Three Months Ended
March 31,
|
|
Revenue:
|
|
2020
|
|
|
2019
|
|
Secondary Life Insurance
|
|
$
|
15,148
|
|
|
$
|
22,183
|
|
Beneficient
|
|
|
18,409
|
|
|
|
2,870
|
|
Corporate & Other
|
|
|
—
|
|
|
|
164
|
|
Total
|
|
$
|
33,557
|
|
|
$
|
25,217
|
|
|
|
Three Months Ended
March 31,
|
|
Interest Expense:
|
|
2020
|
|
|
2019
|
|
Secondary Life Insurance
|
|
$
|
22,693
|
|
|
$
|
20,096
|
|
Beneficient
|
|
|
13,178
|
|
|
|
6,879
|
|
Corporate & Other
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
35,871
|
|
|
$
|
26,975
|
|
|
|
Three Months Ended
March 31,
|
|
Interest Income:
|
|
2020
|
|
|
2019
|
|
Secondary Life Insurance
|
|
$
|
615
|
|
|
$
|
631
|
|
Beneficient
|
|
|
13,374
|
|
|
|
2,825
|
|
Corporate & Other
|
|
|
—
|
|
|
|
4
|
|
Total
|
|
$
|
13,989
|
|
|
$
|
3,460
|
|
|
|
Three Months Ended
March 31,
|
|
Segment EBT:
|
|
2020
|
|
|
2019
|
|
Secondary Life Insurance
|
|
$
|
(14,721
|
)
|
|
$
|
(1,623
|
)
|
Beneficient
|
|
|
(70,149
|
)
|
|
|
(5,936
|
)
|
Corporate & Other
|
|
|
(7,153
|
)
|
|
|
(7,055
|
)
|
Total
|
|
|
(92,023
|
)
|
|
|
(14,614
|
)
|
Income tax benefit
|
|
|
14,507
|
|
|
|
—
|
|
Net loss
|
|
$
|
(77,516
|
)
|
|
$
|
(14,614
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Total Assets:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Secondary Life Insurance
|
|
$
|
952,447
|
|
|
$
|
904,363
|
|
Beneficient
|
|
|
2,719,387
|
|
|
|
2,721,546
|
|
Corporate & Other
|
|
|
12,395
|
|
|
|
9,297
|
|
Total
|
|
$
|
3,684,229
|
|
|
$
|
3,635,206
|
|
The total assets of the Beneficient segment
at March 31, 2020 and December 31, 2019, includes goodwill of $2.4 billion and $2.4 billion, respectively, which represents all
of the goodwill on our consolidated balance sheet as of the end of each reporting period.
(16) Leases
The Company leases certain real estate for
its office premises under operating lease agreements which expire in 2021 and 2025. Under these leases, we are obligated to pay
base rent plus common area maintenance and a share of building operating costs. The lease agreements contain extension options
that we have not included in our liability calculations. We lease various other facilities on a short-term basis.
The lease assets and liabilities are as follows (in thousands):
|
|
|
|
March 31,
|
|
Leases
|
|
Classification
|
|
2020
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
Other assets
|
|
$
|
1,714
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Other accrued expenses
|
|
$
|
2,320
|
|
Total lease costs recognized for the three
months ended March 31, 2020 and 2019 were $0.3 million and $0.1 million, respectively. These amounts included operating lease costs
of $0.2 million and $50 thousand, variable lease costs of $53 thousand and $55 thousand, and short term lease costs of $49 thousand
and $26 thousand for the three months ended March 31, 2020 and 2019, respectively. The weighted average remaining lease term at
March 31, 2020 was 4.1 years and the weighted average discount rate was 6.6%. For the three months ended March 31, 2020 and 2019,
cash paid for amounts included in the measurement of operating lease liabilities and included in operating cash flows totaled $0.3
million and $0.1 million, respectively.
Maturities of operating lease liabilities as of March 31, 2020
are as follows (in thousands):
2020
|
|
$
|
751
|
|
2021
|
|
|
715
|
|
2022
|
|
|
302
|
|
2023
|
|
|
311
|
|
2024
|
|
|
320
|
|
Thereafter
|
|
|
273
|
|
Total lease payments
|
|
|
2,672
|
|
Less: imputed interest
|
|
|
(352
|
)
|
Present
value of lease liabilities
|
|
$
|
2,320
|
|
(17) Commitments and 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.
Commitments — GWG Holdings
is committed to contribute an additional $12.5 million to FOXO through 2021, with an additional $8.4 million in the nine months
ending December 31, 2020 and $4.1 million in 2021. Beneficient had $73.7 million and $73.8 million of gross potential capital
commitments as of March 31, 2020 and December 31, 2019, respectively, representing potential limited partner capital funding commitments
on the alternative asset fund collateral to its loans above any cash reserves. The trust holding the interest in the limited partnership
for the alternative asset fund is required to fund these limited partner capital commitments per the terms of the limited partnership
agreement. To the extent that the associated trust cannot pay the capital funding commitment, Beneficient is obligated to lend
sufficient funds to meet the commitment. Capital commitments generally originate from limited partner agreements having fixed
or expiring expiration dates. The total limited partner capital funding commitment amounts may not necessarily represent future
cash requirements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(18) Guarantee and Collateral Provisions of L Bonds and Seller
Trust L Bonds
Our L Bonds are offered and sold under
a registration statement declared effective by the SEC, as described in Note 10, and we have issued Seller Trust L Bonds under
a Supplemental Indenture, as described in Note 10. 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 by BCC and AltiVerse (which together represent approximately 12% of our
outstanding common stock), 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 policies
held by DLP IV are not direct collateral for the L Bonds as such policies are pledged to the LNV Credit Facility.
|
(1)
|
The Seller Trust L
Bonds are senior secured obligations of GWG, ranking junior to all senior debt of GWG 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 in connection with the Beneficent transaction are available as collateral
for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Common Units of Ben LP are held by GWG Holdings
and the Commercial Loan is held by GWG Life.
|
|
(2)
|
The terms of our LNV Credit Facility require that we maintain a significant excess of pledged collateral value over the amount outstanding on the LNV Credit Facility at any given time. Any excess after satisfying all amounts owing under our LNV Credit Facility is available as collateral for the L Bonds (including the Seller Trust L Bonds).
|
The following represents consolidating financial
information as of March 31, 2020 and December 31, 2019, with respect to the financial position, and for the three months ended
March 31, 2020 and 2019, 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 GWG Life Trust under the equity method. The non-guarantor subsidiaries column presents
the financial information of all non-guarantor subsidiaries, including DLP IV, GWG Life Trust and Beneficient.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets
(in thousands)
March 31, 2020
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
101,529
|
|
|
$
|
1,753
|
|
|
$
|
13,150
|
|
|
$
|
—
|
|
|
$
|
116,432
|
|
Restricted cash
|
|
|
—
|
|
|
|
512
|
|
|
|
25,934
|
|
|
|
—
|
|
|
|
26,446
|
|
Investment in life insurance policies, at fair value
|
|
|
—
|
|
|
|
344
|
|
|
|
801,837
|
|
|
|
—
|
|
|
|
802,181
|
|
Life insurance policy benefits receivable, net
|
|
|
—
|
|
|
|
200
|
|
|
|
15,130
|
|
|
|
—
|
|
|
|
15,330
|
|
Loans receivable, net of unearned income
|
|
|
—
|
|
|
|
—
|
|
|
|
219,296
|
|
|
|
—
|
|
|
|
219,296
|
|
Allowance for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
(700
|
)
|
|
|
—
|
|
|
|
(700
|
)
|
Loans receivable, net
|
|
|
—
|
|
|
|
—
|
|
|
|
218,596
|
|
|
|
—
|
|
|
|
218,596
|
|
Fees receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
30,453
|
|
|
|
—
|
|
|
|
30,453
|
|
Financing receivable from affiliate
|
|
|
—
|
|
|
|
239,564
|
|
|
|
—
|
|
|
|
(171,274
|
)
|
|
|
68,290
|
|
Investment in GWG stock
|
|
|
—
|
|
|
|
—
|
|
|
|
25,400
|
|
|
|
(25,400
|
)
|
|
|
—
|
|
Other assets
|
|
|
67,792
|
|
|
|
320,460
|
|
|
|
23,471
|
|
|
|
(377,817
|
)
|
|
|
33,906
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
2,372,595
|
|
|
|
—
|
|
|
|
2,372,595
|
|
Investment in subsidiaries
|
|
|
1,569,254
|
|
|
|
653,926
|
|
|
|
—
|
|
|
|
(2,223,180
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,738,575
|
|
|
$
|
1,216,759
|
|
|
$
|
3,526,566
|
|
|
$
|
(2,797,671
|
)
|
|
$
|
3,684,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
188,793
|
|
|
$
|
—
|
|
|
$
|
188,793
|
|
L Bonds
|
|
|
1,009,781
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,009,781
|
|
Seller Trust L Bonds
|
|
|
366,892
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
366,892
|
|
Other borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
152,597
|
|
|
|
—
|
|
|
|
152,597
|
|
Intercompany debt – Commercial loan
|
|
|
—
|
|
|
|
—
|
|
|
|
171,329
|
|
|
|
(171,329
|
)
|
|
|
—
|
|
Interest and dividends payable
|
|
|
12,162
|
|
|
|
—
|
|
|
|
10,241
|
|
|
|
—
|
|
|
|
22,403
|
|
Deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
39,651
|
|
|
|
—
|
|
|
|
39,651
|
|
Accounts payable and accrued expenses
|
|
|
8,532
|
|
|
|
2,071
|
|
|
|
69,238
|
|
|
|
(58,702
|
)
|
|
|
21,139
|
|
Deferred tax liability, net
|
|
|
40,206
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
40,206
|
|
TOTAL LIABILITIES
|
|
|
1,437,573
|
|
|
|
2,071
|
|
|
|
631,849
|
|
|
|
(230,031
|
)
|
|
|
1,841,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
1,553,554
|
|
|
|
(311,913
|
)
|
|
|
1,241,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
—
|
|
|
|
1,214,688
|
|
|
|
655,073
|
|
|
|
(1,869,761
|
)
|
|
|
—
|
|
Common units
|
|
|
—
|
|
|
|
—
|
|
|
|
603,417
|
|
|
|
(603,417
|
)
|
|
|
—
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
|
186,658
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
186,658
|
|
Common stock
|
|
|
33
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
Common stock in treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24,550
|
)
|
|
|
(24,550
|
)
|
Additional paid-in-capital
|
|
|
229,207
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
229,207
|
|
Accumulated deficit
|
|
|
(114,896
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(7,037
|
)
|
|
|
(121,933
|
)
|
Noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
82,673
|
|
|
|
249,038
|
|
|
|
331,711
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
301,002
|
|
|
|
1,214,688
|
|
|
|
1,341,163
|
|
|
|
(2,255,727
|
)
|
|
|
601,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
1,738,575
|
|
|
$
|
1,216,759
|
|
|
$
|
3,526,566
|
|
|
$
|
(2,797,671
|
)
|
|
$
|
3,684,229
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets
(in thousands) (continued)
December 31, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
57,721
|
|
|
$
|
2,644
|
|
|
$
|
18,708
|
|
|
$
|
—
|
|
|
$
|
79,073
|
|
Restricted cash
|
|
|
—
|
|
|
|
—
|
|
|
|
20,258
|
|
|
|
—
|
|
|
|
20,258
|
|
Investment in life insurance policies, at fair value
|
|
|
—
|
|
|
|
340
|
|
|
|
795,699
|
|
|
|
—
|
|
|
|
796,039
|
|
Life insurance policy benefits receivable, net
|
|
|
—
|
|
|
|
200
|
|
|
|
22,831
|
|
|
|
—
|
|
|
|
23,031
|
|
Investment in GWG stock
|
|
|
—
|
|
|
|
—
|
|
|
|
24,550
|
|
|
|
(24,550
|
)
|
|
|
—
|
|
Loans receivable, net of unearned income
|
|
|
—
|
|
|
|
—
|
|
|
|
232,344
|
|
|
|
—
|
|
|
|
232,344
|
|
Allowance for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Loans receivable, net
|
|
|
—
|
|
|
|
—
|
|
|
|
232,344
|
|
|
|
—
|
|
|
|
232,344
|
|
Fees receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
29,168
|
|
|
|
—
|
|
|
|
29,168
|
|
Financing receivable from affiliates
|
|
|
—
|
|
|
|
235,573
|
|
|
|
—
|
|
|
|
(168,420
|
)
|
|
|
67,153
|
|
Other assets
|
|
|
446,618
|
|
|
|
320,490
|
|
|
|
22,163
|
|
|
|
(759,136
|
)
|
|
|
30,135
|
|
Goodwill
|
|
|
—
|
|
|
|
—
|
|
|
|
2,358,005
|
|
|
|
—
|
|
|
|
2,358,005
|
|
Investment in subsidiaries
|
|
|
1,221,227
|
|
|
|
664,723
|
|
|
|
—
|
|
|
|
(1,885,950
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,725,566
|
|
|
$
|
1,223,970
|
|
|
$
|
3,523,726
|
|
|
$
|
(2,838,056
|
)
|
|
$
|
3,635,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
174,390
|
|
|
$
|
—
|
|
|
$
|
174,390
|
|
L Bonds
|
|
|
926,638
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
926,638
|
|
Seller Trust L Bonds
|
|
|
366,892
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
366,892
|
|
Other borrowings
|
|
|
—
|
|
|
|
—
|
|
|
|
153,086
|
|
|
|
—
|
|
|
|
153,086
|
|
Intercompany debt – commercial loan
|
|
|
—
|
|
|
|
—
|
|
|
|
168,420
|
|
|
|
(168,420
|
)
|
|
|
—
|
|
Interest and dividends payable
|
|
|
12,491
|
|
|
|
—
|
|
|
|
4,025
|
|
|
|
—
|
|
|
|
16,516
|
|
Deferred revenue
|
|
|
—
|
|
|
|
—
|
|
|
|
41,444
|
|
|
|
—
|
|
|
|
41,444
|
|
Account payable and accrued expenses
|
|
|
3,093
|
|
|
|
3,891
|
|
|
|
78,455
|
|
|
|
(57,603
|
)
|
|
|
27,836
|
|
Deferred tax liability
|
|
|
57,923
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,923
|
|
TOTAL LIABILITIES
|
|
|
1,367,037
|
|
|
|
3,891
|
|
|
|
619,820
|
|
|
|
(226,023
|
)
|
|
|
1,764,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
1,588,604
|
|
|
|
(318,950
|
)
|
|
|
1,269,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
—
|
|
|
|
1,220,079
|
|
|
|
665,871
|
|
|
|
(1,885,950
|
)
|
|
|
—
|
|
Common units
|
|
|
—
|
|
|
|
—
|
|
|
|
563,966
|
|
|
|
(563,966
|
)
|
|
|
—
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
|
201,891
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
201,891
|
|
Common stock
|
|
|
33
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33
|
|
Treasury stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24,550
|
)
|
|
|
(24,550
|
)
|
Additional paid-in capital
|
|
|
233,106
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
233,106
|
|
Accumulated deficit
|
|
|
(76,501
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(76,501
|
)
|
Noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
85,465
|
|
|
|
181,383
|
|
|
|
266,848
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
358,529
|
|
|
|
1,220,079
|
|
|
|
1,315,302
|
|
|
|
(2,293,083
|
)
|
|
|
600,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,725,566
|
|
|
$
|
1,223,970
|
|
|
$
|
3,523,726
|
|
|
$
|
(2,838,056
|
)
|
|
$
|
3,635,206
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Operations
(in thousands)
For the three months ended March 31, 2020
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
14,442
|
|
|
$
|
—
|
|
|
$
|
14,445
|
|
Interest and other income
|
|
|
365
|
|
|
|
5,237
|
|
|
|
18,447
|
|
|
|
(4,937
|
)
|
|
|
19,112
|
|
TOTAL REVENUE
|
|
|
365
|
|
|
|
5,240
|
|
|
|
32,889
|
|
|
|
(4,937
|
)
|
|
|
33,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
28,737
|
|
|
|
—
|
|
|
|
11,221
|
|
|
|
(4,087
|
)
|
|
|
35,871
|
|
Employee compensation and benefits
|
|
|
7,391
|
|
|
|
100
|
|
|
|
70,213
|
|
|
|
—
|
|
|
|
77,704
|
|
Legal and professional fees
|
|
|
1,947
|
|
|
|
134
|
|
|
|
4,082
|
|
|
|
—
|
|
|
|
6,163
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
—
|
|
|
|
700
|
|
Other expenses
|
|
|
2,461
|
|
|
|
423
|
|
|
|
728
|
|
|
|
—
|
|
|
|
3,612
|
|
TOTAL EXPENSES
|
|
|
40,536
|
|
|
|
657
|
|
|
|
86,944
|
|
|
|
(4,087
|
)
|
|
|
124,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME (LOSS) OF
SUBSIDIARIES
|
|
|
(40,171
|
)
|
|
|
4,583
|
|
|
|
(54,055
|
)
|
|
|
(850
|
)
|
|
|
(90,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME (LOSS) OF
SUBSIDIARIES
|
|
|
(11,128
|
)
|
|
|
9,561
|
|
|
|
—
|
|
|
|
1,567
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(51,299
|
)
|
|
|
14,144
|
|
|
|
(54,055
|
)
|
|
|
717
|
|
|
|
(90,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX BENEFIT
|
|
|
(14,434
|
)
|
|
|
—
|
|
|
|
(73
|
)
|
|
|
—
|
|
|
|
(14,507
|
)
|
NET INCOME (LOSS) BEFORE EARNINGS (LOSS) FROM EQUITY METHOD INVESTMENT
|
|
|
(36,865
|
)
|
|
|
14,144
|
|
|
|
(53,982
|
)
|
|
|
717
|
|
|
|
(75,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from equity method investment
|
|
|
(1,530
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(38,395
|
)
|
|
|
14,144
|
|
|
|
(53,982
|
)
|
|
|
717
|
|
|
|
(77,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
—
|
|
|
|
—
|
|
|
|
37,842
|
|
|
|
(5,758
|
)
|
|
|
32,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends
|
|
|
3,952
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,952
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(42,347
|
)
|
|
$
|
14,144
|
|
|
$
|
(16,140
|
)
|
|
$
|
(5,041
|
)
|
|
$
|
(49,384
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Operations (in
thousands) (continued)
For the three months ended March 31, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-
Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on life insurance policies, net
|
|
$
|
—
|
|
|
$
|
2,067
|
|
|
$
|
19,429
|
|
|
$
|
—
|
|
|
$
|
21,496
|
|
Interest and other income
|
|
|
614
|
|
|
|
2,833
|
|
|
|
274
|
|
|
|
—
|
|
|
|
3,721
|
|
TOTAL REVENUE
|
|
|
614
|
|
|
|
4,900
|
|
|
|
19,703
|
|
|
|
—
|
|
|
|
25,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
22,607
|
|
|
|
—
|
|
|
|
4,368
|
|
|
|
—
|
|
|
|
26,975
|
|
Employee compensation and benefits
|
|
|
3,224
|
|
|
|
1,855
|
|
|
|
75
|
|
|
|
—
|
|
|
|
5,154
|
|
Legal and professional fees
|
|
|
1,280
|
|
|
|
580
|
|
|
|
1,087
|
|
|
|
—
|
|
|
|
2,947
|
|
Other expenses
|
|
|
1,692
|
|
|
|
473
|
|
|
|
663
|
|
|
|
—
|
|
|
|
2,828
|
|
TOTAL EXPENSES
|
|
|
28,803
|
|
|
|
2,908
|
|
|
|
6,193
|
|
|
|
—
|
|
|
|
37,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(28,189
|
)
|
|
|
1,992
|
|
|
|
13,510
|
|
|
|
—
|
|
|
|
(12,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
15,502
|
|
|
|
14,885
|
|
|
|
—
|
|
|
|
(30,387
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(12,687
|
)
|
|
|
16,877
|
|
|
|
13,510
|
|
|
|
(30,387
|
)
|
|
|
(12,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS) BEFORE LOSS FROM EQUITY METHOD INVESTMENT
|
|
|
(12,687
|
)
|
|
|
16,877
|
|
|
|
13,510
|
|
|
|
(30,387
|
)
|
|
|
(12,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from equity method investment
|
|
|
(1,927
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(14,614
|
)
|
|
|
16,877
|
|
|
|
13,510
|
|
|
|
(30,387
|
)
|
|
|
(14,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
4,296
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,296
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(18,910
|
)
|
|
$
|
16,877
|
|
|
$
|
13,510
|
|
|
$
|
(30,387
|
)
|
|
$
|
(18,910
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Cash
Flows (in thousands)
For the three months ended March 31, 2020
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-
Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(38,395
|
)
|
|
$
|
14,144
|
|
|
$
|
(53,982
|
)
|
|
$
|
717
|
|
|
$
|
(77,516
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
11,128
|
|
|
|
(9,561
|
)
|
|
|
—
|
|
|
|
(1,567
|
)
|
|
|
—
|
|
Change in fair value of life insurance policies
|
|
|
—
|
|
|
|
(4
|
)
|
|
|
(12,173
|
)
|
|
|
—
|
|
|
|
(12,177
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
3,882
|
|
|
|
—
|
|
|
|
329
|
|
|
|
—
|
|
|
|
4,211
|
|
Amortization of upfront fees
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,793
|
)
|
|
|
—
|
|
|
|
(1,793
|
)
|
Amortization of debt premiums
|
|
|
—
|
|
|
|
—
|
|
|
|
(473
|
)
|
|
|
—
|
|
|
|
(473
|
)
|
Amortization and depreciation on long-lived assets
|
|
|
31
|
|
|
|
1
|
|
|
|
140
|
|
|
|
—
|
|
|
|
172
|
|
Accretion of discount on financing receivable from affiliate
|
|
|
—
|
|
|
|
(1,620
|
)
|
|
|
1,620
|
|
|
|
—
|
|
|
|
—
|
|
Non-cash interest income
|
|
|
—
|
|
|
|
(1,138
|
)
|
|
|
(12,236
|
)
|
|
|
—
|
|
|
|
(13,374
|
)
|
Non-cash interest expense
|
|
|
—
|
|
|
|
—
|
|
|
|
676
|
|
|
|
—
|
|
|
|
676
|
|
Loss from equity method investment
|
|
|
1,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,530
|
|
Provision for loan losses
|
|
|
—
|
|
|
|
—
|
|
|
|
700
|
|
|
|
—
|
|
|
|
700
|
|
Deferred income tax
|
|
|
(17,717
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,717
|
)
|
Equity-based compensation
|
|
|
4,303
|
|
|
|
—
|
|
|
|
65,145
|
|
|
|
—
|
|
|
|
69,448
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
7,701
|
|
|
|
—
|
|
|
|
7,701
|
|
Fees receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,285
|
)
|
|
|
—
|
|
|
|
(1,285
|
)
|
Accrued interest on financing receivable
|
|
|
—
|
|
|
|
(1,234
|
)
|
|
|
1,234
|
|
|
|
—
|
|
|
|
—
|
|
Other assets
|
|
|
270
|
|
|
|
29
|
|
|
|
(1,880
|
)
|
|
|
1,949
|
|
|
|
368
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
5,372
|
|
|
|
(1,821
|
)
|
|
|
(3,555
|
)
|
|
|
(1,099
|
)
|
|
|
(1,103
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(29,596
|
)
|
|
|
(1,204
|
)
|
|
|
(9,832
|
)
|
|
|
—
|
|
|
|
(40,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of matured life insurance policies
|
|
|
—
|
|
|
|
—
|
|
|
|
6,035
|
|
|
|
—
|
|
|
|
6,035
|
|
Purchases of fixed assets
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
(421
|
)
|
|
|
—
|
|
|
|
(481
|
)
|
Equity method investments
|
|
|
(5,417
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,417
|
)
|
Net change of loans receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
10,614
|
|
|
|
—
|
|
|
|
10,614
|
|
Payment of capital contributions
|
|
|
19,528
|
|
|
|
20,359
|
|
|
|
—
|
|
|
|
(39,887
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
|
|
|
14,051
|
|
|
|
20,359
|
|
|
|
16,228
|
|
|
|
(39,887
|
)
|
|
|
10,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
14,074
|
|
|
|
—
|
|
|
|
14,074
|
|
Proceeds from issuance of L Bonds
|
|
|
109,053
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
109,053
|
|
Payments for issuance and redemptions of L Bonds
|
|
|
(30,532
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(30,532
|
)
|
Issuance of common stock
|
|
|
18
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
Payments for redemption of preferred stock
|
|
|
(15,233
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(15,233
|
)
|
Preferred stock dividends
|
|
|
(3,952
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,952
|
)
|
Issuance of member capital
|
|
|
—
|
|
|
|
(19,534
|
)
|
|
|
(20,353
|
)
|
|
|
39,887
|
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
59,354
|
|
|
|
(19,534
|
)
|
|
|
(6,279
|
)
|
|
|
39,887
|
|
|
|
73,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
43,809
|
|
|
|
(379
|
)
|
|
|
117
|
|
|
|
—
|
|
|
|
43,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
57,720
|
|
|
|
2,644
|
|
|
|
38,967
|
|
|
|
—
|
|
|
|
99,331
|
|
END OF PERIOD
|
|
$
|
101,529
|
|
|
$
|
2,265
|
|
|
$
|
39,084
|
|
|
$
|
—
|
|
|
$
|
142,878
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Condensed Consolidating Statements of Cash Flows (in thousands)
(continued)
For the three months ended March 31, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-
Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(14,614
|
)
|
|
$
|
16,877
|
|
|
$
|
13,510
|
|
|
$
|
(30,387
|
)
|
|
$
|
(14,614
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(15,502
|
)
|
|
|
(14,885
|
)
|
|
|
—
|
|
|
|
30,387
|
|
|
|
—
|
|
Change in fair value of life insurance policies
|
|
|
—
|
|
|
|
(3,620
|
)
|
|
|
(11,951
|
)
|
|
|
—
|
|
|
|
(15,571
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
2,836
|
|
|
|
—
|
|
|
|
264
|
|
|
|
—
|
|
|
|
3,100
|
|
Accretion of discount on financing receivable from affiliate
|
|
|
—
|
|
|
|
(419
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(419
|
)
|
Loss from equity method investment
|
|
|
1,927
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,927
|
|
Equity-based compensation
|
|
|
834
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
834
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
—
|
|
|
|
5,000
|
|
|
|
2,261
|
|
|
|
—
|
|
|
|
7,261
|
|
Accrued interest on financing receivable
|
|
|
—
|
|
|
|
(1,551
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,551
|
)
|
Other assets
|
|
|
(416
|
)
|
|
|
72
|
|
|
|
(3,598
|
)
|
|
|
—
|
|
|
|
(3,942
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
1,404
|
|
|
|
(481
|
)
|
|
|
(4,251
|
)
|
|
|
—
|
|
|
|
(3,328
|
)
|
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
(23,531
|
)
|
|
|
993
|
|
|
|
(3,765
|
)
|
|
|
—
|
|
|
|
(26,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
(8,681
|
)
|
|
|
(18,711
|
)
|
|
|
—
|
|
|
|
(27,392
|
)
|
Carrying value of matured life insurance policies
|
|
|
—
|
|
|
|
169
|
|
|
|
8,532
|
|
|
|
—
|
|
|
|
8,701
|
|
Payment of capital contributions
|
|
|
(33,724
|
)
|
|
|
(28,498
|
)
|
|
|
|
|
|
|
62,222
|
|
|
|
—
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
(33,724
|
)
|
|
|
(37,010
|
)
|
|
|
(10,179
|
)
|
|
|
62,222
|
|
|
|
(18,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,373
|
)
|
|
|
—
|
|
|
|
(2,373
|
)
|
Proceeds from issuance of L Bonds
|
|
|
125,985
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,985
|
|
Payments for issuance and redemptions of L Bonds
|
|
|
(23,974
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,974
|
)
|
Repurchase of common stock
|
|
|
(269
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(269
|
)
|
Payments for redemption of preferred stock
|
|
|
(819
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(819
|
)
|
Preferred stock dividends
|
|
|
(4,296
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,296
|
)
|
Issuance of member capital
|
|
|
—
|
|
|
|
31,713
|
|
|
|
30,509
|
|
|
|
(62,222
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
96,627
|
|
|
|
31,713
|
|
|
|
28,136
|
|
|
|
(62,222
|
)
|
|
|
94,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
39,372
|
|
|
|
(4,304
|
)
|
|
|
14,192
|
|
|
|
—
|
|
|
|
49,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
113,294
|
|
|
|
7,449
|
|
|
|
4,693
|
|
|
|
—
|
|
|
|
125,436
|
|
END OF PERIOD
|
|
$
|
152,666
|
|
|
$
|
3,145
|
|
|
$
|
18,885
|
|
|
$
|
—
|
|
|
$
|
174,696
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(19) Concentration
Life Insurance Carriers
We primarily purchase life insurance policies
written by life insurance companies rated investment-grade by third-party rating agencies, including A.M. Best, Standard &
Poor’s and Moody’s. As a result, there may be concentrations of policies with certain 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
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
John Hancock Life Insurance Company
|
|
|
14.24
|
%
|
|
|
14.23
|
%
|
The Lincoln National Life Insurance Company
|
|
|
10.91
|
%
|
|
|
11.55
|
%
|
AXA Equitable Life Insurance Company
|
|
|
10.83
|
%
|
|
|
10.63
|
%
|
The following summarizes the number of
insureds’ state of residence exceeding 10% of the total face value held by us:
State of Residence
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
California
|
|
|
17.68
|
%
|
|
|
17.46
|
%
|
Florida
|
|
|
14.68
|
%
|
|
|
14.86
|
%
|
Beneficient’s underlying portfolio
companies primarily operate in the United States, with the largest percentage, based on NAV, operating in healthcare technology,
bio-technology, and diversified telecommunications services industries.
(20) Subsequent Events and Other Matters
COVID-19
In December 2019, a novel strain of coronavirus
(“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization
declared COVID-19 a pandemic. The extent of COVID-19’s effect on the Company’s operational and financial performance
will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and
difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall
impact of COVID-19 on the Company’s business. The Company continues to raise capital, receive interest income and insurance
policy benefits and meet its ongoing obligations. However, depending on the extent of the ensuing economic crisis resulting from
the pandemic and its impact on the Company’s business, the disease could have a material adverse effect on our results of
operations, financial condition and cash flows.
As discussed in our 2019 Form 10-K, management
performs goodwill and intangible asset impairment testing annually, during the fourth quarter, or when events occur, or circumstances
change that would more likely than not indicate impairment has occurred. The Company recorded goodwill on December 31, 2019,
as a result of the transactions with Beneficient discussed in Note 4 to the condensed consolidated financial statements. Due to
the significance of the COVID-19 pandemic, management performed a qualitative assessment of the goodwill of the Beneficient reporting
unit. Management concluded that the potentially large and underserved market that Beneficient is seeking to address, including
the estimated demand from MHNW individuals and STM size institutions seeking liquidity for their professionally managed alternative
assets, has not been negatively affected by the COVID-19 pandemic such that it is more likely than not that the fair value of
the Beneficient reporting unit would exceed its carrying value as of March 31, 2020. Therefore, the impact of the COVID-19 pandemic
through the end of the first quarter of 2020 was not a triggering event to perform a quantitative test. We will continue to monitor
the impact of COVID-19 on the economy and our business and will perform an interim quantitative goodwill impairment test if necessary.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Liquidity and Capital Resources
As of March 31, 2020, we had cash, cash
equivalents and restricted cash of $142.9 million. We generated net losses attributable to common shareholders of $49.4 million
and $18.9 million for the three months ended March 31, 2020 and 2019, respectively. As of May 13, 2020, we had cash, cash equivalents
and restricted cash of approximately $140 million. Besides funding operating expenditures and having sufficient cash to fund anticipated
additional investments in Beneficient primarily for its lending products and working capital needs, we are obligated to pay other
items such as interest payments and debt redemptions, and preferred stock dividends and redemptions. We expect to satisfy these
obligations and fund our operations through anticipated operating cash flows, receipt of proceeds from our insurance policies,
sales of additional L Bonds, and, potentially, additional borrowings under existing debt facilities or new borrowings with other
third-party lenders.
GWG Holdings has a history of selling L Bonds
dating back to January 2012. GWG Holdings may not be able sell additional L Bonds on terms as favorable to the Company as past
transactions or in quantities sufficient to fund all of the Company’s operating requirements. Additionally, the Company may
not be able to obtain additional borrowing under existing debt facilities or new borrowings with other third-party lenders. To
the extent that GWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of those
debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve negative
covenants that restrict GWG Holdings’ ability to take specific actions, such as incurring additional debt or making additional
investments in growing the operations of the Company. If GWG Holdings is unable to fund its operations and other obligations, or
defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding or ii) to raise
additional capital through the sale of equity and the ownership interest of our equity holders may be diluted.
Based on projections of anticipated operating
cash flows, receipt of proceeds from our insurance policies, sales of additional L-Bonds, and, potentially, additional borrowings
under existing debt facilities or new borrowings with other third-party lenders, we believe that we will have sufficient cash resources
to finance our operations, satisfy our other obligations, and to fund anticipated additional investments in Beneficient through
May 15, 2021.
Amendment of Beneficient Credit Agreements
On May 15, 2020, Beneficient signed
the Term Sheet with its lender to amend its senior credit agreement and subordinated credit agreement (described in Note 10).
The amendment would extend the maturity date of both loans to April 10, 2021, and includes an extension fee of 2.5% of the
outstanding aggregate principal balance of the loans. The amendment would also increase the interest rate on each loan to
1-month LIBOR plus 8.0%, with a maximum interest rate of 9.5%. The loans would be payable in four installments of $25.0
million on each of June 1, 2020, September 10, 2020, December 10, 2020, and March 10, 2021, with the remaining balance
payable on April 10, 2021.
The amendment also would provide for the
assignment of the loans from Beneficient to GWG Life Trust, if permitted, or GWG Life upon issuance of Beneficient’s trust
company charters by the Texas Department of Banking. GWG Holdings or GWG Life will receive additional Common Units in exchange
for assuming Beneficient’s amended loans. Upon transfer of the loans, GWG Holdings or GWG Life will pay a fee of 2.0% of
the then-remaining outstanding balance to the lender. Furthermore, upon transfer of the loans, the Commercial Loan Agreement between
GWG Life and Beneficient will convert to Common Units in full satisfaction of the Commercial Loan Agreement.
In connection with the transfer of
the loans from Beneficient, the lender would be granted a security interest in the Preferred Series A Subclass 1 Unit
Accounts of BCH held by GWG Life and the life insurance policies held by GWG Life Trust. Furthermore, the lender will be
permitted to purchase up to $152.0 million of Preferred Series A Subclass 1 units from BCH for cash for two years after the
amendment of the loans. The Term Sheet also provides that, in connection with the transfer of the loans, (i) BHI, which owns
a majority of the Class S Ordinary Units, Preferred Series A Subclass 1 Unit Accounts, and FLP Subclass 1 Unit Accounts
issued by BCH, will grant certain tax-related concessions related to the transaction as may be mutually agreed upon between
the parties, and (ii) in exchange for the tax-related concessions to be agreed between the parties, (a) 5% of BHI’s
Preferred Series A Sub Class 1 Unit Account will become senior in allocations, distributions, redemption rights, and
liquidation (potentially as a different class) (the “Senior Preferred Series A Sub Class 1 Unit Accounts”) to all
other Preferred Series A Sub Class 1 Unit Accounts or any other securities issued by Beneficient or a subsidiary thereof, and
(b) recipients of a grant of Preferred Series A Sub Class 1 Unit Accounts from BHI will have the right to put an amount of
Preferred Series A Sub Class 1 Unit Accounts to Beneficient equal to any associated tax liability stemming from any such
grant; provided that the aggregated associated tax liability shall not relate to more than $30 million of grants of Preferred
Series A Sub Class 1 Unit Accounts from BHI; and provided, further, that such a put cannot be exercised prior to July 1,
2021. The agreed upon amended loan terms would contain covenants that would i) prevent Beneficient from issuing any
securities senior to the Preferred Series A Subclass 1 Unit Accounts or the Senior Preferred Series A Sub Class 1 Unit
Accounts, and ii) prevent Beneficient from incurring additional debt or borrowings, other than trade payables, while the
loans are outstanding.
The amendments set forth in the Term
Sheet are subject to, among other things, the negotiation and execution of definitive agreements governing the amendments and
the satisfaction of closing conditions to be set forth therein, some of which may be outside of the parties’ control.
The parties have agreed to use their reasonable best efforts to enter into definitive agreements by June 1, 2020.
Policy Benefits and L Bonds
Subsequent to March 31, 2020 through May
6, 2020, policy benefits on 13 policies covering 12 individuals have been realized. The face value of insurance benefits of these
policies was $14.8 million.
Subsequent to March 31, 2020 through May
12, 2020, we have issued approximately $41.6 million of L Bonds.