NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1)
Nature of Business and Summary of Significant Accounting Policies
Nature of Business — 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.
GWG Holdings owns a significant equity interest in The Beneficient Company Group, L.P. (“BEN LP,” including all of
the subsidiaries it may have from time to time — “Beneficient”). 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”) size institutions, which previously had few options to obtain early liquidity for their alternative assets
holdings. Beneficient has closed a limited number of these transactions to date, and intends to significantly expand its operations.
All of the GWG Holdings’ entities are legally organized in Delaware, other than GWG Life Trust, which is governed by the
laws of the state of Utah. GWG Holdings’ wholly owned subsidiary, Life Epigenetics Inc. (formerly named Actüa Life &
Annuity Ltd.) (“Life Epigenetics”) was formed to engage in various life insurance related businesses and activities
related to its development of epigenetic technology. Through its wholly owned subsidiary, youSurance General Agency, LLC (“youSurance”),
GWG Holdings offers life insurance directly to customers from a variety of life insurance carriers. On November 11, 2019, GWG contributed
the common stock of Life Epigenetics and membership interests in youSurance to a legal entity, InsurTech Holdings, LLC in exchange
for a membership interest in the entity (see Note 25). 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 currently in Minneapolis, Minnesota.
Beneficient
was formed in 2003 but began its alternative asset business 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) ACE
Portal, L.L.C. (“ACE”), through which Beneficient plans to provide an online portal for direct access to Beneficient’s
financial services and products.
In
2018 and early 2019, we consummated a series of transactions (as more fully described below) with Beneficient that has resulted
in a significant reorientation of our business and capital allocation strategy in addition to a change in our Board of Directors
and executive management team.
The
Exchange Transaction
On
August 10, 2018 (the “Initial Transfer Date”), we completed the first of two closings (the “Initial Transfer”)
contemplated by a Master Exchange Agreement with 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:
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GWG
issued to the Seller Trusts Seller Trust L Bonds due 2023 (the “Seller Trust L Bonds”) in an aggregate principal
amount of $403,234,866, as more fully described below;
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Beneficient purchased
5,000,000 shares of GWG’s Series B Convertible Preferred Stock, par value $0.001 per share and having a stated value
of $10 per share (“Series B”), for cash consideration of $50,000,000, which shares were subsequently transferred
to the Seller Trusts;
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in consideration
for GWG 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 $200,000,000 (the “Commercial Loan”);
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BEN LP delivered
to GWG a promissory note (the “Exchangeable Note”) in the principal amount of $162,911,379; and
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the Seller Trusts
delivered to GWG 4,032,349 common units of BEN LP at an assumed value of $10 per common unit.
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GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On
December 28, 2018, the final closing of the transaction occurred and the following actions took place (the “Final Closing”
and the date upon which the Final Closing occurs, the “Final Closing Date”):
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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 $181,974,314, (ii)
the principal amount of the Exchangeable Note was reduced to $148,228,432, and (iii) the principal amount of the Seller Trust
L Bonds was reduced to $366,892,000;
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the Seller Trusts
refunded to GWG $840,430 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;
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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 $192,507,946;
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the Seller Trusts
transferred to GWG an aggregate of 21,650,087 common units of BEN LP and GWG received 14,822,843 common units of BEN LP in
exchange for the Exchangeable Note, upon completion of which GWG owned (including the 4,032,349 common units received by GWG
on the Initial Transfer Date) 40,505,279 common units of BEN LP;
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BEN LP issued to
GWG an option (the “Option Agreement”) to acquire the number of common units of BEN LP, interests or other property
that would be received by a holder of the NPC-A Prime limited partnership interests of Beneficient Company Holdings, L.P.,
an affiliate of BEN LP (“Beneficient Holdings”); and
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GWG issued to the
Seller Trusts 27,013,516 shares of GWG common stock (including 5,000,000 shares issued upon conversion of the Series B).
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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 to
repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at GWG’s
option, in the form of cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under
the Commercial Loan and (ii) BEN LP common units, or a combination of cash and such property.
The
Seller Trust L Bonds (see Note 11) are senior secured obligations of GWG, ranking junior only to all senior debt of GWG (see Note
9), pari passu in right of payment and in respect of collateral with all “L Bonds” of GWG (see Note 10), and senior
in right of payment to all subordinated indebtedness of GWG. Payments under the Seller Trust L Bonds are guaranteed by GWG Life
(see Note 23).
Series
B Convertible Preferred Stock
The
Series B converted into 5,000,000 shares of our common stock at a conversion price of $10 per share upon the Final Closing.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Commercial
Loan
The
$192,508,000 principal amount under the Commercial Loan is due on August 9, 2023; however, is extendable for two five-year terms.
See Note 6 for a full description of the terms of the Commercial Loan. 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.
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, the Company, at its option, may use the outstanding principal amount of the Commercial Loan, and accrued
and unpaid interest thereon, as repayment consideration of the Seller Trust L Bonds.
Exchangeable
Note
The
Exchangeable Note accrued interest at a rate of 12.4% per year, compounded annually. Interest was payable in cash on the earlier
to occur of the maturity date or the Final Closing Date; provided that Beneficient had the option to add to the outstanding principal
balance under the Commercial Loan the accrued interest in lieu of payment in cash of such accrued interest thereon at the Final
Closing Date. At the Final Closing date, the principal amount of the Exchangeable Note was exchanged for 14,822,843 common units
of BEN LP, 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, the Company entered into the Option Agreement with BEN LP. The Option Agreement gives us the
option to acquire the number of common units in BEN LP that would be received by the holder of NPC-A Prime limited partnership
interests of Beneficient Holdings, 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.
Common
Units of BEN LP
In
connection with the Initial Transfer and Final Closing, the Seller Trusts and Beneficient delivered to us 40,505,279 common units
of BEN LP. This represented an approximate 89.9% interest in the common units of BEN LP as of the Final Closing Date (although,
on a fully diluted basis, our ownership interest in common units of BEN LP would be reduced significantly below a majority of
those issued and outstanding).
Purchase
and Contribution Agreement
On
April 15, 2019, Jon R. Sabes, GWG’s former Chief Executive Officer and a former director, and Steven F. Sabes, GWG’s
former Executive Vice President and a former director, entered into a Purchase and Contribution Agreement (the “Purchase
and Contribution Agreement”) with, among others, Beneficient. Under the Purchase and Contribution Agreement, Jon and Steven
Sabes agreed to transfer all 3,952,155 of the shares of GWG’s outstanding common stock held directly or indirectly by them
to BCC (a subsidiary of BEN LP) and AltiVerse Capital Markets, L.L.C. (“AltiVerse”). GWG 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 taking, or refraining from
taking, certain actions.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
closing of the Purchase and Contribution Transaction occurred on April 26, 2019. Prior to or in connection with such closing:
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GWG’s
bylaws were amended to increase the maximum number of directors of GWG 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 ten directors.
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All seven members
of GWG’s Board of Directors prior to the closing resigned as directors of GWG, and 11 individuals designated by Beneficient
were appointed as directors of GWG, leaving two board seats vacant after the closing.
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Jon R. Sabes resigned
from all officer positions he held with GWG or any of its subsidiaries prior to the closing, other than his position as Chief
Executive Officer of GWG’s technology focused wholly owned subsidiaries, Life Epigenetics and youSurance.
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Steven F. Sabes
resigned from all officer positions he held with GWG or any of its subsidiaries prior to the closing, except as Chief Operating
Officer of Life Epigenetics.
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The resignations
of Messrs. Jon and Steven Sabes included a full waiver and forfeit of (i) any severance that may be payable by GWG or any
of its subsidiaries in connection with such resignations or the Purchase and Contribution Transaction and (ii) all equity
awards of GWG held by either of them.
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Murray T. Holland
was appointed as Chief Executive Officer of GWG.
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GWG entered into
performance share unit agreements with certain employees of GWG 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 or one of its subsidiaries (or, if no longer employed, such employment was terminated by GWG other than for cause,
as such term is defined in the performance share unit agreement) for a period of 120 days following the closing.
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The stockholders
agreement that was entered into on the Final Closing Date was terminated by mutual consent of the parties thereto.
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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 the Company, GWG Life, LLC, Messrs. Jon and Steven Sabes and the Bank of Utah, which provides that the shares
of GWG’s common stock acquired by BCC and AltiVerse pursuant to the Purchase and Contribution Agreement will continue
to be pledged as collateral security for GWG’s obligations owing in respect of the L Bonds and Seller Trust L Bonds.
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Indemnification
Agreements
On
April 26, 2019, GWG 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 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’s bylaws and generally provide that GWG 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.
Basis
of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance
with the 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 our financial position and results of operations. These statements should be read in conjunction
with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31,
2018. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full
year.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Principles
of Consolidation — The condensed consolidated financial statements include the accounts of GWG Holdings, Inc. and all
its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated upon consolidation.
The
Company has interests in various entities including corporations and limited partnerships. For each such entity, the Company evaluates
its ownership interest to determine whether the entity is a variable interest entity (“VIE”) and, if so, whether it
is the primary beneficiary of the VIE. The Company would consolidate any entity for which it was the primary beneficiary, regardless
of its ownership or voting interests. Upon inception of a variable interest or the occurrence of a reconsideration event, the
Company makes judgments in determining whether entities in which it invests are VIEs. If so, the Company makes judgments to determine
whether it is the primary beneficiary and is thus required to consolidate the entity.
If
it is concluded that an entity is not a VIE, then the Company considers its proportional voting interests in the entity. The Company
consolidates majority-owned subsidiaries in which a controlling financial interest is maintained. A controlling financial interest
is determined by majority ownership and the absence of significant third-party participating rights. Ownership interests in entities
for which the Company has significant influence that are not consolidated under the Company’s consolidation policy are accounted
for as equity method investments. SEC Staff Announcement: Accounting for Limited Partnership Investments (codified in Accounting
Standards Codification (“ASC”) 323-30-S99-1) guidance requires the use of the equity method unless the investor’s
interest “is so minor that the limited partner may have virtually no influence over partnership operating and financial
policies.” The SEC staff’s position is that investments in limited partnerships of greater than 3% to 5% are considered
more than minor and, therefore, should be accounted for using the equity method.
Related
party transactions between the Company and its equity method investee have not been eliminated.
Use
of Estimates — The preparation of our condensed consolidated financial statements in conformity with GAAP requires management
to make significant estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the condensed
consolidated financial statements, as well as the reported amounts of revenue during the reporting period. We regularly evaluate
estimates and assumptions, which are based on current facts, historical experience, management’s judgment, and various other
factors that we believe to be reasonable under the circumstances. Our actual results may differ materially and adversely from
our estimates. The most significant estimates with regard to these condensed consolidated financial statements relate to (1) the
determination of the assumptions used in estimating the fair value of our investments in life insurance policies, (2) the assessment
of potential impairment of our equity method investment and our equity security investment and determination of the allowance
for credit losses on our financing receivables, and (3) the value of our deferred tax assets and liabilities. Periodically, we
make significant estimates in assessing the fair value of assets acquired and consideration given in return for those assets,
which are used to establish the initial recorded values of such assets in accordance with ASC 805, Business Combinations. Under
ASC 805, the consideration paid in an asset acquisition is allocated among the assets acquired based on their relative fair values
at acquisition date. In relation to the Exchange Transaction, relative fair values obtained from a third-party valuation firm
were used to calculate the amounts recorded for the Commercial Loan, the Exchangeable Note, the equity method investment and the
option agreement at their acquisition dates.
Cash
and Cash Equivalents — We consider cash in demand deposit accounts and temporary investments purchased with an original
maturity of three months or less to be cash equivalents. We maintain our cash and cash equivalents with highly rated financial
institutions. The balances in our bank accounts may exceed Federal Deposit Insurance Corporation limits. We periodically evaluate
the risk of exceeding insured levels and may transfer funds as we deem appropriate.
Cash,
cash equivalents and restricted cash on our condensed consolidated statements of cash flows include cash and cash equivalents
of $65.7 million and restricted cash of $8.2 million as of September 30, 2019, and $117.9 million and $3.1 million, respectively,
as of September 30, 2018.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Life
Insurance Policies — ASC 325-30, Investments in Insurance Contracts, permits a reporting entity to account for its
investments in life insurance policies using either the investment method or the fair value method. We elected to use the
fair value method to account for our life insurance policies. We initially record our purchase of life insurance policies at
the purchase price, which is the amount paid for the policy, inclusive of all direct external fees and costs associated with
the purchase. At each subsequent reporting period, we re-measure the investment at fair value in its entirety and recognize
the change in fair value as unrealized gain or loss in the current period, net of premiums paid, within gain (loss) on life
insurance policies, net in our condensed consolidated statements of operations.
In
a case where our acquisition of a policy is not complete as of a reporting date, but we have nonetheless advanced direct costs
and deposits for the acquisition, those costs and deposits are recorded as other assets on our condensed consolidated balance
sheets until the acquisition is complete and we have secured title to the policy. On both September 30, 2019 and December 31,
2018, none of our other assets comprised direct costs and deposits that we had advanced for life insurance policy acquisitions.
We
also recognize realized gain (or loss) from a life insurance policy upon one of the two following events: (1) our receipt of notice
or verified mortality of the insured; or (2) our sale of the policy (upon filing of change-of-ownership forms and receipt of payment).
In the case of mortality, the gain (or loss) we recognize is the difference between the policy benefits and the carrying value
of the policy once we determine that collection of the policy benefits is reasonably assured. In the case of a
policy sale, the gain (or loss) we recognize is the difference between the sale price and the carrying value of the policy on
the date we receive sale proceeds.
Life
Insurance Policy Benefits Receivable, Net — Our policy benefit receivables represent amounts due from insurance carriers
for claims submitted on matured life insurance policies. Policy benefit receivables are recorded at the policy benefit amounts
less reserves for estimated uncollectible amounts. Uncollectible policy benefits can result from challenges by the insurance carrier
to the legal validity of the policy, typically related to the concept of insurable interest, or from liquidity or solvency problems
at the insurance carrier (although policy benefits are senior to any other obligations of a carrier).
We
reserve for policy benefits when it becomes probable that we will not collect the full amount of the policy benefit. The reserve
requirements are based on the best facts available to us and are re-evaluated and adjusted as additional information becomes available.
Uncollectible policy benefits are written off against the reserves when it is deemed that a policy amount is uncollectible. As
of September 30, 2019, the balance of the allowance for uncollectible receivables was $4.5 million, relating to a single life
insurance policy claim where collection is doubtful.
Other
Assets — Included in other assets at September 30, 2019 are $38.6 million of equity security investment (see below),
$6.0 million of prepaid expenses, $1.3 million of net fixed assets, $0.6 million of security deposits with states for life settlement
provider licenses and $3.9 million of other miscellaneous assets. At December 31, 2018, other assets included $38.6 million of
equity security investment, $1.2 million of prepaid expenses, $1.5 million of net fixed assets, $0.6 million of security deposits
with states for life settlement provider licenses, $0.5 million net secured merchant cash advances and $3.1 million of other miscellaneous
assets.
In
December 2018, in connection with the Final Closing of the Exchange Transaction, the Company entered into an Option
Agreement with Beneficient. The agreement gives GWG the option to acquire the number of common units in BEN LP that would be
received by the holder of NPC-A Prime limited partnership interests of Beneficient Holdings. 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 exercise
and settle. The Option Agreement is recorded in other assets at a value of $38.6 million at both September 30, 2019 and
December 31, 2018. The Option Agreement is considered an equity security investment and the Company has elected the
measurement alternative for equity securities without a readily determinable fair value. Under this measurement alternative,
we record the Option Agreement at its cost, less any impairment, plus or minus changes resulting from observable price
changes in orderly transactions for the identical or similar investments of Beneficient. As at September 30, 2019, there were
no indications of impairment. The instrument earns a preferred return that we accrue to the investment balance and record in
interest and other income in the condensed consolidated statement of operations.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Financing
Receivables — ASC 310, Receivables, provides guidance for receivables and notes that arise from credit sales, loans
or other transactions. Financing receivables includes loans and notes receivable. Originated loans we hold for which we have the
intent and ability to hold for the foreseeable future or to maturity (or payoff) are classified as held for investment. Financing
receivables held for investment are reported in our condensed consolidated balance sheets at the outstanding principal balance
adjusted for any write-offs, allowance for loan losses, deferred fees or costs, and any unamortized premiums or discounts. Interest
income is accrued on outstanding principal as earned. Unamortized discounts and premiums are amortized using the effective interest
method with the amortization recognized as part of interest income in the condensed consolidated statements of operations.
Losses
on financing receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses.
Specific allowances are recorded for individually impaired loans to the extent we determine it is probable we will be unable to
collect all amounts due according to original contractual terms of the loan agreement. Certain loans classified as impaired may
not require an allowance for loan loss because we believe we will ultimately collect the unpaid balance (through collection or
collateral repossession). The method for calculating the best estimate of losses depends on the type and risk characteristics
of the related financing receivables. Such an estimate requires consideration of historical loss experience, adjusted for current
conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as
delinquency rates, financial health of market sectors, and the present and expected future levels of interest rates. The underlying
assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions.
Changes in such estimates can significantly affect the allowance and provision for losses. It is possible we will experience credit
losses that are different from our current estimates. We have no allowance for losses at September 30, 2019 or December 31, 2018.
Write-offs are deducted from the allowance for losses when we judge the principal to be uncollectible and subsequent recoveries
are added to the allowance at the time cash is received on a written-off account.
Equity
Method Investment — We account for investments in common stock or in-substance common stock in which we have the ability
to exercise significant influence, but do not own a controlling financial interest, under the equity method of accounting. Investments
within the scope of the equity method of accounting are initially measured at cost, including the cost of the investment itself
and direct transaction costs incurred to acquire the investment. After the initial recognition of the investment at cost, we recognize
income and losses from our investment by adjusting upward or downward the balance of our equity method investment on our condensed
consolidated balance sheet with such adjustments, if any, flowing through earnings (loss) from equity method investment on our
condensed consolidated statement of operations, in all cases adjusted to reflect amortization of basis differences, if any, and
the elimination of intercompany gains and losses, if any. Cash distributions received from equity method investees are recorded
as reductions to the investment balance and classified on the statement of cash flows using the cumulative earnings approach.
Our
equity method investment is reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of
the investment might not be recoverable. These circumstances can include, but are not limited to evidence that we do not have
the ability to recover the carrying amount, the inability of the investee to sustain earnings, a current fair value of the investment
that is less than the carrying amount, and other investors ceasing to provide support or reducing their financial commitment to
the investee. If the fair value of the investment is less than the carrying amount, and the investment will not recover in the
near term, then an other-than-temporary impairment may exist. We recognize a loss in value of an investment deemed other-than-temporary
in the period the conclusion is made.
The
Company reports its share of the income or loss of the equity method partner companies on a one-quarter lag where we do not expect
financial information to be consistently available on a timely basis.
For
more information on equity method investment, see Note 7.
Leases
– The Company currently has one significant lease relating to office space that is classified as an operating lease.
We assess whether an arrangement is a lease at inception. Leases with an initial term of twelve months or less are not recorded
on the balance sheet. We have elected the practical expedient to not separate lease and non-lease components for all assets. Operating
lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over
the lease term at the lease start date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based
on the information available at the lease start date in determining the present value of future payments. The operating lease
asset is increased by any lease payments made at or before the lease start date and reduced by lease incentives and initial direct
costs incurred. The lease term includes options to renew or terminate the lease when it is reasonably certain that we will exercise
that option. The exercise of lease renewal options is at our sole discretion. The depreciable life of lease assets and leasehold
improvements are limited by the lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Lease expense for operating leases is recognized on a straight-line basis over the lease term.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock-Based
Compensation — We measure and recognize compensation expense for all stock-based payments at fair value on the grant
date over the requisite service period. We use the Black-Scholes option pricing model to determine the 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 our common stock on the date of grant. Stock-based compensation expense is recorded in general and administrative
expenses based on the classification of the employee or vendor. The determination of fair value of stock-based payment awards
on the date of grant is affected by our stock price and a number of subjective variables. These variables include, but are not
limited to, the expected stock price volatility over the term of the awards and the expected duration of the awards. We account
for the effects of forfeitures as they occur.
The
risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the
expected life at grant date. Volatility is based on the standard deviation of the average continuously compounded rate of return
of five selected companies.
Deferred
Financing and Issuance Costs — Loans advanced to us under our amended and restated senior credit facility with LNV
Corporation, as described in Note 9, are reported net of financing costs, including issuance costs, sales commissions and
other direct expenses, which are amortized using the straight-line method over the term of the facility. The L Bonds, as
described in Note 10, are reported net of financing costs, which are amortized using the effective interest method over the
term of those borrowings. Selling and issuance costs of Redeemable Preferred Stock (“RPS”) and Series 2
Redeemable Preferred Stock (“RPS 2”), described in Notes 12 and 13, respectively, are netted against additional
paid-in capital, until depleted, and then against the outstanding balance of the preferred stock. The offerings of our RPS
and RPS 2 closed in March 2017 and April 2018, respectively. There were no issuance costs associated with the August 2018
issuance of the Series B Convertible Preferred Stock, described in Note 14.
Earnings
(Loss) per Share — Basic earnings (loss) per share attributable to common shareholders are calculated using the weighted-average
number of shares outstanding during the reported period. Diluted earnings (loss) per share are calculated based on the potential
dilutive impact of our RPS, RPS 2, restricted stock units, warrants and stock options. Due to our net loss attributable to common
shareholders for the three and nine months ended September 30, 2019 and 2018, there are no dilutive securities.
Reclassification
— Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications
had no effect on the reported results of operations. See Note 23 for an explanation of certain reclassifications we recorded in
comparative periods on the guarantor financial statements.
Newly
Adopted Accounting Pronouncements — On January 1, 2019, we adopted Accounting Standards Update (“ASU”) No.
2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize right-of-use assets and lease liabilities on the balance
sheet for all leases with a term greater than twelve months. We elected to adopt the standard using the modified retrospective
method, without restatement of prior periods’ financial information. The impact to the balance sheet was the addition of
approximately $0.9 million in right-of-use assets, a reduction to deferred rent of $0.7 million, and a net increase to lease liabilities
of $1.6 million for our operating lease. The adoption of the new standard did not materially affect our condensed consolidated
statements of operations, condensed consolidated statements of cash flows or condensed consolidated statements of changes in stockholders’
equity.
Recently
Issued Accounting Pronouncements — 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. 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)
In
August 2018, the 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. Early adoption is allowed
either for the entire standard or only the provisions that eliminate or modify the requirements. The Company believes that we
are currently compliant with this pronouncement but continues to evaluate potential impact of this guidance on our condensed consolidated
financial statements.
(2)
Correction of an Immaterial Error
In
the condensed consolidated statement of cash flows for the three and nine months ended September 30, 2018, we have separated the
gross borrowings and repayments on our senior credit facility with LNV Corporation that were previously erroneously reported on
a net basis in cash flows from financing activities.
For
the three and nine months ended September 30, 2018, we previously reported net repayments of senior debt of $18.4 million and
$50.6 million, respectively. We have revised the comparative information for the three and nine months ended September 30, 2018
to report gross borrowings on senior debt of $0 million and $12.9 million, respectively, and gross repayments of senior debt of
$18.4 million and $63.5 million, respectively, in the condensed consolidated statements of cash flows. This revision had no effect
on the total cash flows from financing activities.
(3)
Restrictions on Cash
Under
the terms of our amended and restated senior credit facility with LNV Corporation (discussed in Note 9), 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 September 30, 2019 and December 31, 2018, there was
a balance of $8,112,000 and $4,164,000, respectively, in these collection and payment accounts.
To
fund the Company’s acquisition of life insurance policies, we are required to maintain escrow accounts. Distributions from
these accounts are made according to life insurance policy purchase contracts. At September 30, 2019 and December 31, 2018, there
was a balance of $93,000 and $6,685,000, respectively, in the Company’s escrow accounts.
(4)
Investment in Life Insurance Policies
Our investments in life insurance policies
are valued based on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these policies,
net of premiums paid, are recorded in gain (loss) on life insurance policies, net in our condensed consolidated statements of operations.
Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions generally derived from reports
obtained from widely accepted life expectancy providers (other than insured lives covered under small face amount policies —
those with $1 million in face value benefits or less — 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 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 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 September 30, 2019 and December 31, 2018.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Portfolio
Information
Our
portfolio of life insurance policies, owned by our subsidiaries as of September 30, 2019 is summarized below:
Life
Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits
|
|
$
|
2,064,156,000
|
|
Average face value per policy
|
|
$
|
1,758,000
|
|
Average face value per insured life
|
|
$
|
1,887,000
|
|
Average age of insured (years)*
|
|
|
82.3
|
|
Average life expectancy estimate (years)*
|
|
|
7.3
|
|
Total number of policies
|
|
|
1,174
|
|
Number of unique lives
|
|
|
1,094
|
|
Demographics
|
|
|
74% Male; 26% Female
|
|
Number of smokers
|
|
|
45
|
|
Largest policy as % of total portfolio face value
|
|
|
0.64
|
%
|
Average policy as % of total portfolio face value
|
|
|
0.09
|
%
|
Average annual premium as % of face value
|
|
|
3.2
|
%
|
*
|
Averages presented
in the table are weighted averages by face amount of policy benefits.
|
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 September 30, 2019
|
|
|
As of December 31, 2018
|
|
Years Ending December 31,
|
|
Number of
Policies
|
|
|
Estimated
Fair Value
|
|
|
Face Value
|
|
|
Number of
Policies
|
|
|
Estimated
Fair Value
|
|
|
Face Value
|
|
2019
|
|
|
3
|
|
|
$
|
3,232,000
|
|
|
$
|
3,375,000
|
|
|
|
9
|
|
|
$
|
6,380,000
|
|
|
$
|
7,305,000
|
|
2020
|
|
|
19
|
|
|
|
12,533,000
|
|
|
|
14,917,000
|
|
|
|
41
|
|
|
|
46,338,000
|
|
|
|
59,939,000
|
|
2021
|
|
|
62
|
|
|
|
75,255,000
|
|
|
|
100,575,000
|
|
|
|
81
|
|
|
|
68,836,000
|
|
|
|
108,191,000
|
|
2022
|
|
|
109
|
|
|
|
109,003,000
|
|
|
|
180,986,000
|
|
|
|
104
|
|
|
|
97,231,000
|
|
|
|
177,980,000
|
|
2023
|
|
|
121
|
|
|
|
114,084,000
|
|
|
|
213,293,000
|
|
|
|
109
|
|
|
|
93,196,000
|
|
|
|
185,575,000
|
|
2024
|
|
|
111
|
|
|
|
98,450,000
|
|
|
|
217,355,000
|
|
|
|
107
|
|
|
|
84,150,000
|
|
|
|
211,241,000
|
|
Thereafter
|
|
|
749
|
|
|
|
394,961,000
|
|
|
|
1,333,655,000
|
|
|
|
703
|
|
|
|
351,791,000
|
|
|
|
1,297,761,000
|
|
Totals
|
|
|
1,174
|
|
|
$
|
807,518,000
|
|
|
$
|
2,064,156,000
|
|
|
|
1,154
|
|
|
$
|
747,922,000
|
|
|
$
|
2,047,992,000
|
|
We
recognized life insurance benefits of $27,470,000 and $7,973,000 during the three months ended September 30, 2019 and 2018, respectively,
related to policies with a carrying value of $6,640,000 and $2,326,000, respectively, and as a result recorded realized gains
of $20,830,000 and $5,647,000. We recognized life insurance benefits of $80,927,000 and $50,100,000 during the nine months ended
September 30, 2019 and 2018, respectively, related to policies with a carrying value of $20,685,000 and $13,558,000, respectively,
and as a result recorded realized gains of $60,242,000 and $36,542,000.
A
reconciliation of gain (loss) on life insurance policies is as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Change in estimated probabilistic cash flows(1)
|
|
$
|
17,908,000
|
|
|
$
|
19,069,000
|
|
|
$
|
52,161,000
|
|
|
$
|
55,483,000
|
|
Unrealized gain on acquisitions(2)
|
|
|
472,000
|
|
|
|
9,021,000
|
|
|
|
6,775,000
|
|
|
|
21,790,000
|
|
Premiums and other annual fees
|
|
|
(17,219,000
|
)
|
|
|
(14,765,000
|
)
|
|
|
(49,055,000
|
)
|
|
|
(39,670,000
|
)
|
Change in discount rates(3)(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Change in life expectancy evaluation(5)
|
|
|
—
|
|
|
|
73,000
|
|
|
|
—
|
|
|
|
(4,890,000
|
)
|
Face value of matured policies
|
|
|
27,470,000
|
|
|
|
7,973,000
|
|
|
|
80,927,000
|
|
|
|
50,100,000
|
|
Fair value of matured policies
|
|
|
(10,839,000
|
)
|
|
|
(5,650,000
|
)
|
|
|
(31,590,000
|
)
|
|
|
(29,883,000
|
)
|
Gain (loss) on life insurance policies, net
|
|
$
|
17,792,000
|
|
|
$
|
15,721,000
|
|
|
$
|
59,218,000
|
|
|
$
|
52,930,000
|
|
|
(1)
|
Change
in fair value of expected future cash flows relating to our investment in life insurance policies that are not specifically attributable
to changes in life expectancy, discount rate changes or policy maturity events.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2)
|
Gain resulting from
fair value in excess of the purchase price for life insurance policies acquired during the reporting period.
|
(3)
|
The discount rate
applied to estimate the fair value of the portfolio of life insurance policies we own was 8.25% at September 30 and June 30,
2019 and December 31, 2018, and was 10.45% at September 30 and June 30, 2018 and December 31, 2017.
|
(4)
|
The discount rate of 8.25% is based on our “longest life expectancy” methodology (among other factors) which was adopted at December 31, 2018, whereas the discount rate of 10.45% is based on our historical “average life expectancy methodology” (among other factors).
|
(5)
|
The change in fair
value due to updating life expectancy estimates on certain life insurance policies in our portfolio.
|
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:
Years Ending December 31,
|
|
Premiums
|
|
|
Servicing
|
|
|
Total
|
|
Three months ending December 31, 2019
|
|
$
|
16,553,000
|
|
|
$
|
430,000
|
|
|
$
|
16,983,000
|
|
2020
|
|
|
76,305,000
|
|
|
|
1,719,000
|
|
|
|
78,024,000
|
|
2021
|
|
|
88,684,000
|
|
|
|
1,719,000
|
|
|
|
90,403,000
|
|
2022
|
|
|
101,706,000
|
|
|
|
1,719,000
|
|
|
|
103,425,000
|
|
2023
|
|
|
113,838,000
|
|
|
|
1,719,000
|
|
|
|
115,557,000
|
|
2024
|
|
|
123,793,000
|
|
|
|
1,719,000
|
|
|
|
125,512,000
|
|
|
|
$
|
520,879,000
|
|
|
$
|
9,025,000
|
|
|
$
|
529,904,000
|
|
Management
anticipates funding the majority of the premium payments and servicing fees estimated above from cash flows realized from life
insurance policy benefits, and to the extent necessary, with additional borrowing capacity created as the premiums and servicing
costs of pledged life insurance policies become due, under the amended and restated senior credit facility with LNV Corporation
as described in Note 9, and the net proceeds from our offering of L Bonds as described in Note 10. Management anticipates funding
premiums and servicing costs of non-pledged life insurance policies with cash flows realized from life insurance policy benefits
from our portfolio of life insurance policies and net proceeds from our offering of L Bonds. The proceeds of these capital sources
may also be used for the purchase, policy premiums and servicing costs of additional life insurance policies, working capital
and financing expenditures including paying principal, interest and dividends.
(5)
Fair Value Definition and Hierarchy
ASC
820, Fair Value Measurements and Disclosures, establishes a hierarchical disclosure framework that prioritizes and ranks the level
of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by
a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace,
including the existence and transparency of transactions between market participants. Assets and liabilities with readily available
and actively quoted prices, or for which fair value can be measured from actively quoted prices in an orderly market, generally
will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
ASC
820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the use of observable inputs
whenever available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed
based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions about how market
participants price an asset or liability based on the best available information. Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between
market participants at the measurement date (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.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
hierarchy is broken down into three levels based on the observability of inputs as follows:
|
Level 1 —
|
Valuations based
on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuations
are based on quoted prices that are readily and regularly available in an active market.
|
|
Level 2 —
|
Valuations based
on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly
or indirectly.
|
|
Level 3 —
|
Valuations based
on inputs that are unobservable and significant to the overall fair value measurement.
|
The
availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including,
for example, whether an instrument is established in the marketplace, the liquidity of markets and other characteristics particular
to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the
market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in
determining fair value is greatest for assets and liabilities categorized in Level 3.
Level
3 Valuation Process
The estimated fair value of our portfolio
of life insurance policies is determined on a quarterly basis by management taking into consideration a number of factors, including
changes in discount rate assumptions, estimated premium payments and life expectancy estimate assumptions, as well as any changes
in economic and other relevant conditions. The discount rate incorporates current information about discount rates 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.
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.
The
following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance policies
for the periods ended September 30, as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
799,266,000
|
|
|
$
|
726,063,000
|
|
|
$
|
747,922,000
|
|
|
$
|
650,527,000
|
|
Purchases
|
|
|
711,000
|
|
|
|
42,892,000
|
|
|
|
32,250,000
|
|
|
|
98,442,000
|
|
Maturities (initial cost basis)
|
|
|
(6,640,000
|
)
|
|
|
(2,326,000
|
)
|
|
|
(20,685,000
|
)
|
|
|
(13,558,000
|
)
|
Net change in fair value
|
|
|
14,181,000
|
|
|
|
24,840,000
|
|
|
|
48,031,000
|
|
|
|
56,058,000
|
|
Ending balance
|
|
$
|
807,518,000
|
|
|
$
|
791,469,000
|
|
|
$
|
807,518,000
|
|
|
$
|
791,469,000
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Historically,
for life insurance policies with face amounts greater than $1 million and that are not pledged as collateral under our amended
and restated senior credit facility with LNV Corporation (approximately 25.3% of our portfolio by face amount of policy benefits),
we attempted to obtain updated life expectancy reports on a continuous rotating three year cycle. For life insurance policies
that are pledged under our amended and restated senior credit facility with LNV Corporation (approximately 62.5% of our portfolio
by face amount of policy benefits as of September 30, 2019), prior to entering into the second amended and restated senior credit
facility with LNV Corporation on November 1, 2019, we were required to update the life expectancy estimates every two years beginning
from the closing date of the amended and restated senior credit facility with LNV Corporation. Under the second amended and restated
senior credit facility with LNV Corporation, we are required to update the life expectancy estimates no later than December 18,
2020 and obtain updated life expectancy updates no less frequently than once every five years. For the remaining small face insurance
policies (i.e., a policy with $1 million in face value benefits or less), we historically employed other methods and timeframes
to update life expectancy estimates.
With
the adoption of the Longest Life Expectancy method in the fourth quarter of 2018 (as described under “Fair Value Components
— Life Expectancies” within the Management Discussion and Analysis section), we discontinued the practice of obtaining
updated life expectancy reports (or updating specific life expectancies in any manner) except as required by lenders to comply
with existing and future covenants within credit facilities. This change was accounted for as a change in accounting estimate
and affects current and future periods. To the extent such updated life expectancy reports are available, we do not expect to
incorporate these life expectancy reports into our revised valuation methodology; however, we will monitor this data to determine
over time if there exists any additive predictive value in relation to the basis of its mortality projections.
The
following table summarizes the inputs utilized in estimating the fair value of our portfolio of life insurance policies:
|
|
As of
September 30,
2019
|
|
|
As of
December 31,
2018
|
|
Weighted-average age of insured, years*
|
|
|
82.3
|
|
|
|
82.1
|
|
Age of insured range, years
|
|
|
62-101
|
|
|
|
61-100
|
|
Weighted-average life expectancy, months*
|
|
|
87.6
|
|
|
|
93.2
|
|
Life expectancy range, months
|
|
|
1-243
|
|
|
|
1-251
|
|
Average face amount per policy
|
|
$
|
1,758,000
|
|
|
$
|
1,775,000
|
|
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:
Change
in Fair Value of the Investment in Life Insurance Policies
|
|
Change in Life Expectancy
Estimates
|
|
|
|
minus
8 months
|
|
|
minus
4 months
|
|
|
plus
4 months
|
|
|
plus
8 months
|
|
September 30, 2019
|
|
$
|
116,229,000
|
|
|
$
|
59,050,000
|
|
|
$
|
(57,071,000
|
)
|
|
$
|
(113,742,000
|
)
|
December 31, 2018
|
|
$
|
113,410,000
|
|
|
$
|
57,611,000
|
|
|
$
|
(55,470,000
|
)
|
|
$
|
(110,473,000
|
)
|
|
|
Change
in Discount Rate
|
|
|
|
minus 2%
|
|
|
minus 1%
|
|
|
plus 1%
|
|
|
plus 2%
|
|
September
30, 2019
|
|
$
|
94,576,000
|
|
|
$
|
44,978,000
|
|
|
$
|
(40,918,000
|
)
|
|
$
|
(78,257,000
|
)
|
December
31, 2018
|
|
$
|
95,747,000
|
|
|
$
|
45,440,000
|
|
|
$
|
(41,179,000
|
)
|
|
$
|
(78,615,000
|
)
|
Other
Fair Value Considerations
The
carrying value of policy benefit receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due
to their short-term maturities and low credit risk. Using the income-based valuation approach, the estimated fair value of our
L Bonds and Seller Trust L Bonds, largely containing the same terms, having an aggregate face value of $1,209,840,000 as of September
30, 2019, is approximately $1,283,460,000 based on a weighted-average market interest rate of 6.28%.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
Commercial Loan receivable from BEN LP (see Note 6) has a below-market interest rate of 5.0% per year; provided that the accrued
interest from the date of the Initial Transfer to the Final Closing Date of the Exchange Transaction was added to the principal
balance of the Commercial Loan. From and after the Final Closing Date, one-half of the interest, or 2.5% per year, 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. Utilizing an implied yield of 6.75%,
we estimate the fair value of the Commercial Loan to be approximately $188,936,000 as of September 30, 2019 based on a market
yield analysis for similar instruments with similar credit profiles. The Commercial Loan had a carrying value of $190,018,000
as of September 30, 2019.
The
Promissory Note receivable from the LiquidTrusts (see Note 6) earns interest at 7.0% per year, payable upon maturity in 2023.
Utilizing an implied yield of 7.0%, we estimate the fair value of the Promissory Note to be approximately $49,924,000 as of September
30, 2019 based on a market yield analysis for similar instruments with similar credit profiles. The Promissory Note had a carrying
value of $51,167,000 as of September 30, 2019.
The
carrying value of the amended and restated senior credit facility with LNV Corporation reflects interest charged at 12-month LIBOR
plus an applicable margin. The margin represents our credit risk, and the strength of the portfolio of life insurance policies
collateralizing the debt. The overall rate reflects the current interest rate market, and the carrying value of the facility approximates
fair value.
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
September 30, 2019, one of our secured cash advances was impaired. Specifically, the secured loan to Nulook Capital LLC had an
outstanding balance of $1,879,000 and an allowance for loan loss of $1,879,000 at September 30, 2019. We deem fair value to be
the estimated collectible value on each loan or advance made from GWG MCA. Secured merchant cash advances, net of allowance for
loan loss, of none and $547,000 are included within other assets on our condensed consolidated balance sheets as of September
30, 2019 and December 31, 2018, respectively. Where we estimate the collectible amount to be less than the outstanding balance,
we record an allowance for the difference. Provision for merchant cash advances are recorded within other expenses on our condensed
consolidated statements of operations (see Note 18). 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.
GWG
Holdings previously had outstanding common stock warrants; however, the warrants expired in the quarter ended September 30, 2019.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(6)
Financing Receivables from Affiliates
Commercial
Loan
On
August 10, 2018, in connection with the Initial Transfer of the Exchange Transaction, GWG Life, as lender, and BEN LP, as borrower,
entered into the Commercial Loan Agreement. On December 28, 2018, the Final Closing Date of the Exchange Transaction, the agreement
was amended to adjust the principal to $192,508,000. The principal amount under the Commercial Loan is due on August 9, 2023,
but is extendable for two five-year terms under certain circumstances. The extensions are available to the borrower provided that
(a) in the event BEN LP completes at least one public offering of its common units raising at least $50,000,000, which on its
own or together with any other public offering of BEN LP’s common units results in Beneficient raising at least $100,000,000,
then the maturity date will be extended to August 9, 2028; and (b) in the event that BEN LP (i) completes at least one public
offering of its common units raising at least $50,000,000, which on its own or together with any other public offering of BEN
LP’s common units results in Beneficient raising at least $100,000,000 and (ii) at least 75% of Beneficient Holding’s
total outstanding NPC-B limited partnership interests, if any, have been converted to shares of BEN LP’s common units, then
the maturity date will be extended to August 9, 2033.
Repayment
of the Commercial Loan is subordinated in right of payment to other Beneficient obligations, including (i) Beneficient’s
exiting senior debt obligations, (ii) any of Beneficient’s commercial bank debt and (iii) any Beneficient obligations that
may arise in connection with the issuance of Preferred Series B Unit Accounts of Beneficient Holdings. BEN LP’s obligations
under the Commercial Loan Agreement are unsecured.
The
Commercial Loan Agreement contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of
liens and indebtedness by Beneficient, fundamental changes to its business and transactions with affiliates. The Commercial Loan
Agreement also contains customary affirmative covenants, including, but not limited to, preservation of corporate existence, compliance
with applicable law, payment of taxes, notice of material events, financial reporting and keeping of proper books of record and
account.
The
Commercial Loan Agreement includes customary events of default, including, but not limited to, non-payment of principal or interest,
failure to comply with covenants, failure to pay other indebtedness when due, cross-acceleration to other debt, material adverse
effects, events of bankruptcy and insolvency, and unsatisfied judgments. The borrower was in compliance with its financial reporting
covenants in the Commercial Loan Agreement as of September 30, 2019.
The
principal amount of the Commercial Loan bears interest at 5.00% per year from the Final Closing Date. One-half of the interest,
or 2.50% per year, is due and payable monthly in cash, and one-half of the interest, or 2.50% 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.
The accrued interest from the Initial Transfer to the Final Closing Date was added to the principal amount of the Commercial Loan.
The Commercial Loan was recorded at a discount as a result of the relative fair value allocations for the assets received in the
Initial Transfer of the Exchange Transaction. Under ASC 805, Business Combinations, the consideration paid in an asset acquisition
is allocated among the assets acquired based on their relative fair values at acquisition date. The discount is being amortized
to interest income over the term of the loan.
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, the Company, at its option, may use the outstanding principal amount of the Commercial
Loan, and accrued and unpaid interest thereon, as repayment consideration of the Seller Trust L Bonds (see Note 11).
Promissory
Note
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 $65,000,000. Pursuant to the terms of the Promissory Note, GWG Life will fund a term loan to the LiquidTrust
Borrowers in an aggregate principal amount of $65,000,000 (the “Loan”), which Loan is to be funded in two installments
as described below. The Loan was made pursuant to GWG’s 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 state of Texas regulatory requirements.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
LiquidTrust Borrowers are common law trusts established as part of alternative asset financings extended by a subsidiary of BEN
LP, of which the Company owns approximately 90% of the issued and outstanding common units of BEN LP (although, on a fully diluted
basis, our ownership interest in common units of BEN LP 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 $50,000,000 was funded on June 3, 2019 and, subject to satisfaction of certain customary
conditions, it is anticipated that the second advance, in the principal amount of $15,000,000, will be funded no later than December
31, 2019. The Loan bears interest at 7.0% per annum, with interest payable at maturity, and matures on June 30, 2023. 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 each of HCLP Nominees, L.L.C. (“HCLP”) and Beneficient Holdings,
Inc. (“BHI”, and together with HCLP, the “Senior Lenders”), as lenders) and events of default. The Senior
Lenders are directly or indirectly associated with one of Beneficient’s founders, who is also Chairman of the Company’s
Board of Directors.
Intercreditor
Agreements
In
connection with the Promissory Note, the Company also entered into two intercreditor and subordination agreements: (1) an Intercreditor
Agreement between the GWG Life and HCLP and (2) an Intercreditor Agreement between the GWG Life and 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 Lenders (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 Lenders), 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 Lenders have agreed not to extend the maturity of
their respective loan obligations beyond June 30, 2023 or increase the outstanding principal of the loans made by the Senior Lenders
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 Lenders (such consent not to be unreasonably withheld) or to the Company or direct or indirect wholly owned subsidiaries
thereof.
The
following table summarizes outstanding principal, discount and accrued interest balances of the financing receivables:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Commercial Loan
|
|
|
|
|
|
|
Commercial Loan receivable – principal
|
|
$
|
192,508,000
|
|
|
$
|
192,508,000
|
|
Discount on Commercial Loan receivable
|
|
|
(6,554,000
|
)
|
|
|
(7,846,000
|
)
|
Accrued interest receivable on Commercial Loan
|
|
|
4,064,000
|
|
|
|
107,000
|
|
Balance outstanding on Commercial Loan
|
|
|
190,018,000
|
|
|
|
184,769,000
|
|
|
|
|
|
|
|
|
|
|
Promissory Note
|
|
|
|
|
|
|
|
|
Promissory Note receivable – principal
|
|
|
50,000,000
|
|
|
|
-
|
|
Accrued interest receivable on Promissory Note
|
|
|
1,167,000
|
|
|
|
-
|
|
Balance outstanding on Promissory Note
|
|
|
51,167,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total financing receivables from affiliates
|
|
$
|
241,185,000
|
|
|
$
|
184,769,000
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(7)
Equity Method Investment
During
2018, in connection with the Initial Transfer and Final Closing of the Exchange Transaction, we acquired 40.5 million common units
of BEN LP for a total limited partnership interest in the common units of BEN LP of approximately 89.9% as of December 31, 2018 (although,
on a fully diluted basis, our ownership interest in common units of BEN LP would be reduced significantly below a majority of
those issued and outstanding). On June 12, 2019, we acquired an additional 1 million common units of BEN LP from a third party
for a cash investment of $10 million. The common units of BEN LP are not publicly traded on a stock exchange.
Our
investment in the common units of BEN LP is presented in equity method investment on our condensed consolidated balance sheets.
Our proportionate share of earnings or losses from our investee is recognized in earnings (loss) from equity method investment
in our condensed consolidated statements of operations. We record our share of the income or loss of Beneficient on a one-quarter
lag.
Financial
information pertaining to Beneficient is summarized in the table below:
|
|
Three Months Ended
June 30,
2019
(unaudited)
|
|
|
Nine Months Ended
June 30,
2019
(unaudited)
|
|
Total revenues
|
|
$
|
28,151,000
|
|
|
$
|
69,262,000
|
|
Net income (loss)
|
|
|
9,696,000
|
|
|
|
(36,345,000
|
)
|
Net earnings (loss) attributable to BEN LP common unitholders
|
|
|
1,080,000
|
|
|
|
(11,439,000
|
)
|
GWG portion of net earnings (loss)
|
|
|
956,000
|
(1)
|
|
|
(371,000
|
)(2)
|
|
(1)
|
Our
portion of Beneficient’s net earnings (loss) from April 1, 2019 to June 30, 2019.
|
|
(2)
|
Our
portion of Beneficient’s net earnings (loss) from October 1, 2018 to June 30, 2019.
|
Due to our accounting election to record
the equity earnings of Beneficient on a one quarter-lag, for the three months ended September 30, 2019, we recorded earnings of
$956,000 for our share of the net earnings of Beneficient for the period from April 1 to June 30, 2019, and for the nine months
ended September 30, 2019, we recorded a loss of $371,000 for the period from October 1, 2018 to June 30, 2019. We eliminated the
effects of any intercompany transactions in the summarized information presented above. For the period from October 1 to December
28, 2018, we owned 13.9% of the common units of BEN LP. Effective December 28, 2018, as a result of the Final Closing of the Exchange
Transaction, our ownership of BEN LP common units increased to approximately 89.9%. As a result of common unit issuances by BEN
LP in the first quarter of 2019, our ownership dropped to 88.1% as of March 31, 2019. Effective June 12, 2019, we acquired an additional
1 million common units of BEN LP, which increased our ownership to 90.2% (although, on a fully diluted basis, our ownership
interest in common units of BEN LP would be reduced significantly below a majority of those issued and outstanding).
A
substantial majority of the net assets of Beneficient are currently represented by intangible assets and goodwill. As such, we
believe substantially all of our equity method investment is characterized as equity method goodwill as of September 30, 2019.
We do not believe conditions exist indicating an other-than-temporary loss in the value of our investment and no impairment has
been recorded to our equity method investment as of September 30, 2019.
Beneficient
has certain share classes outstanding other than and senior to the BEN LP common units, namely Class S Ordinary units, FLP units
and Non-Participating Convertible Series A units issued by a subsidiary of BEN LP. The Class S Ordinary units and FLP units are
classified as noncontrolling interest and the Non-Participating Convertible Series A units are classified as redeemable noncontrolling
interest on the consolidated statements of financial position of Beneficient and their share of the net income of Beneficient
is classified as net income attributable to noncontrolling interests on the consolidated statements of operations of Beneficient.
These units are exchangeable or convertible into common units of BEN LP.
Beneficient
Adoption of Equity Incentive Plan
The
board of directors of Beneficient Management, L.L.C., Beneficient’s general partner, adopted an equity incentive plan (“Beneficient’s
Equity Incentive Plan”) in September 2018. Under the Beneficient Equity Incentive Plan, Beneficient is permitted to grant
equity awards representing ownership interests in BEN LP common units. Vested awards under the Beneficient Equity Incentive Plan
dilute BEN LP’s common unitholders, including GWG. The total number of common units that may be issued under the Beneficient
Equity Incentive Plan is equivalent to 15% of the number of fully diluted common units outstanding, subject to annual adjustment.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In
April 2019, initial equity awards in the form of Beneficient restricted equity units (“Beneficient REUs”) were granted
under Beneficient’s Equity Incentive Plan. These awards are generally subject to service-based vesting of a three year period
from the date of grant, though some of the awards are fully vested upon grant date. All awards are subject to performance conditions
pertaining to entry into certain transactions with GWG Holdings or a change of control event prior to July 1, 2021. While providing
services to Beneficient, if applicable, certain of these awards are subject to minimum retained ownership rules requiring the
award recipient to continuously hold BEN LP common unit equivalents equal to at least 15% of their cumulatively vested awards
that have the minimum retained ownership requirement.
For
the Beneficient REUs awarded under the Beneficient Equity Incentive Plan, Beneficient will recognize expense associated with the
vesting of these awards based on the fair value of the BEN LP common units on the date of grant, discounted for the lack of participation
rights in the expected distributions on unvested units and discounted for the lack of marketability associated with the post-vesting
transfer restrictions. Beneficient will recognize expense when it is probable that the performance condition will be met, which
will be upon entering into certain transactions with GWG Holdings or upon a change of control. A cumulative catch up of expense
will be recognized by Beneficient at the time of entering into certain transactions with GWG Holdings or a change of control for
the portion of awards that are vested at the time the performance condition is met. The remaining unrecognized compensation cost
for these awards would be recognized prospectively over the remaining requisite service period. The remaining unrecognized compensation
expense will be recognized on a straight-line basis using the graded vesting method over the life of the award and forfeitures
will be accounted for at the time that such forfeitures occur.
A
total of 3.4 million Beneficient REUs have been approved for granting in 2019 that will vest upon the grant date, subject to the
performance condition vesting described above. A total of 6.1 million Beneficient REUs have been approved for granting in 2019
that will vest over the completion of a 3-year service period beginning on the grant date, subject to the performance condition
described above. All awards are anticipated to be classified in equity. Based on the grant date fair value, the estimated total
Beneficient compensation expense attributable to these awards, assuming all vest, is approximately $90 to $100 million.
The
expense, when recognized by Beneficient, will impact the earnings at BEN LP and GWG’s equity earnings from our equity method
investment in Beneficient. The Beneficient REUs, when settled – commencing July 1, 2021 over a three-year period, will convert
to BEN LP common units and will be dilutive to the existing BEN LP common unitholders, including GWG.
Amendment
of Beneficient Holdings Limited Partner Agreement Governing Beneficient Noncontrolling Interests
BEN
LP is a holding company of capital and financial services companies, the general partner of Beneficient Holdings, and owns 100%
of the Class A Subclass 1 and Subclass 2 Units of Beneficient Holdings. Beneficient Holdings is a Delaware limited partnership
formed on July 1, 2010. Beneficient Holdings is the holding company that directly or indirectly receives all active and passive
income from its subsidiaries and allocates that income among its issued units.
Beneficient Holdings has issued general
partnership Class A Units (Subclass 1 and Subclass 2) — the class of units owned by BEN LP — and Class S Ordinary Units,
FLP Unit accounts (Subclass 1 and Subclass 2) and Preferred Series A Subclass 1 Unit accounts (formerly referred to as Non-Participating
Convertible Series A Units), which are owned by entities associated with BEN LP’s management and founders, including our
Chairman, and certain of our directors, along with our Chief Executive Officer.
At June 30, 2019, there was $1,012,873,516
of Preferred Series A Subclass 1 Unit accounts (the “Preferred Series A”) and $58,879,383 of Class S Ordinary Units
issued.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The rights of all partners of Beneficient Holdings
are governed by a Limited Partnership Agreement (“BCH LPA”). On April 26, 2019, the BCH LPA was amended. Under the
amendment, the preferred return to be paid to Preferred Series A holders is limited through December 31, 2019 by a quarterly rate
cap that is based on the annualized revenues of Beneficient Holdings. Further, under the amendment, the Preferred Series A holders
can convert up to 20% of the sub-capital balance in any calendar year into Class S Ordinary Units on or after January 1, 2021.
Upon such an election, a holder of Preferred Series A 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) $8.50.
The amendment affects several areas that could
impact the value of our ownership in BEN LP such as allocations or distributions of income to the various classes of units issued
by Beneficient Holdings, including the Class A Units (Subclass 1 and Subclass 2) owned by BEN LP, preferred returns paid to the
holders of Class S Preferred Units, FLP Units and Preferred Series A Units (collectively, “BCH Preferred Units”), distribution
of proceeds from the sale of assets, and future issuance of dilutive securities and future debt issuances, among other changes.
The impact of the BCH LPA amendment on our investment in BEN LP may vary depending on multiple factors, including, among other
things, (1) the economic performance of BEN LP, (2) the value of BEN LP’s common units, and (3) the timing, price and amount
of any conversions of BCH Preferred Units or Class S Ordinary Units.
BEN LP has notified us that, subject to receiving
approval from the board of directors of its general partner, BEN LP intends to further amend, effective April 26, 2019, the BCH
LPA to adjust the conversion price for the Preferred Series A Subclass 1 Units to the fair market value of the BEN LP common units
at conversion. This conversion price would be consistent with the previous BCH LPA prior to the most recent amendment described
above. BEN LP has determined that the accounting for this further proposed amendment will be a modification as opposed to an extinguishment
and will not have a significant impact on the relative value of the Beneficient securities. GWG has therefore concluded the collective
impacts of the amended BCH LPA, inclusive of the proposed further amendment, will not significantly impact GWG’s portion
of net earnings related to its investment in BEN LP.
(8)
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.
We
have determined that Beneficient is a VIE, but that we are not the primary beneficiary of the investment. GWG does not have the
power to direct any activities of Beneficient, or any of its related parties, that most significantly impact Beneficient’s
economic performance. GWG has no board representation at BEN LP or at its general partner. The general partner is exclusively
assigned all management powers over the business and affairs of Beneficient, and the limited partners do not have the ability
to remove the general partner. BEN LP’s limited partnership agreement specifies that any person or group that acquires beneficial
ownership of 20% or more of BEN LP’s common limited partnership units (including us) forfeits all voting rights associated
with all of its common units and such common units may not be voted on any matter. Therefore, we do not consolidate the results
of Beneficient in our consolidated financial statements. The Company’s exposure to risk of loss in Beneficient is generally
limited to its investment in the common units of BEN LP, its financing receivable from Beneficient and its equity security investment
in the Option Agreement to purchase additional common units of BEN LP.
We
have determined that the LiquidTrust Borrowers are VIEs, but that we are not the primary beneficiary of the variable interests.
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
following table shows the classification, carrying value and maximum exposure to loss with respect to the Company’s unconsolidated
VIEs at September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
Carrying
Value
|
|
|
Maximum
Exposure to Loss
|
|
|
Carrying
Value
|
|
|
Maximum
Exposure to Loss
|
|
Financing receivables from affiliates
|
|
$
|
241,185,000
|
|
|
$
|
241,185,000
|
|
|
$
|
184,769,000
|
|
|
$
|
184,769,000
|
|
Equity method investment
|
|
|
370,652,000
|
|
|
|
370,652,000
|
|
|
|
360,842,000
|
|
|
|
360,842,000
|
|
Other asset
|
|
|
38,607,000
|
|
|
|
38,607,000
|
|
|
|
38,562,000
|
|
|
|
38,562,000
|
|
Total assets
|
|
$
|
650,444,000
|
|
|
$
|
650,444,000
|
|
|
$
|
584,173,000
|
|
|
$
|
584,173,000
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(9)
Credit Facility — LNV Corporation
On September 27, 2017, we entered
into an amended and restated senior credit facility with LNV Corporation as lender through our subsidiary GWG DLP Funding IV,
LLC (“DLP IV”). The amended and restated senior credit facility makes available a total of up to $300,000,000 in
credit with a maturity date of September 27, 2029. Additional advances are available under the amended and restated senior
credit facility at the LIBOR rate as herein defined. Advances are available as the result of additional borrowing base
capacity, created as the premiums and servicing costs of pledged life insurance policies become due. Interest will accrue on
amounts borrowed under the amended and restated senior credit facility at an annual interest rate, determined as of each date
of borrowing or quarterly if there is no borrowing, equal to (a) 12-month LIBOR plus (b) 7.50% per annum. The effective rate
at September 30, 2019 was 9.68%. Interest payments are made on a quarterly basis.
As
of September 30, 2019, approximately 62.5% of the total face value of our life insurance policies portfolio is pledged to LNV
Corporation. The amount outstanding under this facility was $140,497,000 and $158,209,000 at September 30, 2019 and December 31,
2018, respectively. Obligations under the amended and restated senior credit facility are secured by a security interest in DLP
IV’s assets, for the benefit of the lenders, through an arrangement under which Wells Fargo 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 condensed
consolidated balance sheets is due to netting of unamortized debt issuance costs.
The
amended and restated senior credit facility has certain financial and nonfinancial covenants, and we were in compliance with these
covenants at September 30, 2019 and as of the date of this filing.
On November 1, 2019, we entered into the
second amended and restated senior credit facility with LNV Corporation (see Note 25).
(10)
L Bonds
We began publicly offering and selling
L Bonds in January 2012 under the name “Renewable Secured Debentures”. These debt securities were re-named “L
Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration statement permitting
us to sell up to $1.0 billion in principal amount of L Bonds through January 2018. On December 1, 2017, an additional public offering
was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds on a continuous basis until December
2020. The new offering is a follow-on to the previous L Bond offering and contains the same terms and features. We are party to
an indenture governing the L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor,
GWG Life is guarantor, and Bank of Utah serves as indenture trustee. On October 23, 2017, the parties entered into the Amended
and Restated Indenture in connection with the new offering. On March 27, 2018, GWG L Bond holders approved Amendment No.1 to the
Amended and Restated Indenture. This amendment expands the definition of Total Coverage to include, without duplication, the value
of all of our other assets as reflected on our most recently available balance sheet prepared in accordance with GAAP. The Amended
and Restated Indenture contains certain financial and nonfinancial covenants, and we were in compliance with all material covenants
at September 30, 2019 and as of the date of this filing and no Events of Default (as defined in the Amended and Restated 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 in Note 11. 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
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, an indirect subsidiary of BEN LP 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 assets, including its equity in DLP IV(2) and its beneficial interest in GWG Life Trust
(“Life Trust”), serve as collateral for our L Bond and Seller Trust L Bond obligations. The life insurance policies
held by DLP IV and Life Trust, which comprise a substantial majority of our life insurance policies, do not serve as direct collateral
for the L Bonds. Further, the life insurance policies held by DLP IV are pledged as direct collateral securing the obligations
under our amended and restated senior credit facility with LNV Corporation.
|
(1)
|
The
Seller Trust L Bonds (see Note 11) are senior secured obligations of GWG, ranking junior
to all senior debt of GWG (see Note 9) and pari passu in right of payment and in respect
of collateral with all L Bonds of GWG. Payments under the Seller Trust L Bonds are guaranteed
by GWG Life. The assets exchanged in the Exchange Transaction are available as collateral
for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the common units
of BEN LP and the Option Agreement are held by GWG Holdings and the Commercial Loan is
held by GWG Life.
|
|
(2)
|
The
terms of our amended and restated senior credit facility with LNV Corporation require
that we maintain a significant excess of pledged collateral value over the amount outstanding
on the amended and restated senior credit facility at any given time. Any excess equity
value in DLP IV after satisfying all amounts owing under our amended and restated senior
credit facility is available as collateral for the L Bonds (including the Seller Trust
L Bonds).
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
bonds have renewal features under which we may elect to permit their renewal, subject to the right of bondholders to elect to
receive payment at maturity. Interest is payable monthly or annually depending on the election of the investor.
At
September 30, 2019 and December 31, 2018, the weighted-average interest rate of our L Bonds was 7.14% and 7.10%, respectively.
The principal amount of L Bonds outstanding was $842,948,000 and $662,152,000 at September 30, 2019 and December 31, 2018, respectively.
The difference between the amount of outstanding L Bonds and the carrying amount on our condensed consolidated balance sheets
is due to netting of unamortized deferred issuance costs, cash receipts for new issuances and payments of redemptions in process.
Amortization of deferred issuance costs was $3,197,000 and $2,312,000 for the three months ended September 30, 2019 and 2018,
respectively, and $9,191,000 and $6,450,000 for the nine months ended September 30, 2019 and 2018, respectively. Future expected
amortization of deferred financing costs as of September 30, 2019 is $32,507,000 in total over the next seven years.
Future
contractual maturities of L Bonds, and future amortization of their deferred financing costs, at September 30, 2019 are as follows:
Years Ending December 31,
|
|
Contractual
Maturities
|
|
|
Unamortized
Deferred
Financing Costs
|
|
Three months ending December 31, 2019
|
|
$
|
29,267,000
|
|
|
$
|
91,000
|
|
2020
|
|
|
158,475,000
|
|
|
|
2,399,000
|
|
2021
|
|
|
174,469,000
|
|
|
|
5,461,000
|
|
2022
|
|
|
125,086,000
|
|
|
|
5,335,000
|
|
2023
|
|
|
72,640,000
|
|
|
|
3,320,000
|
|
2024
|
|
|
92,488,000
|
|
|
|
4,967,000
|
|
Thereafter
|
|
|
190,523,000
|
|
|
|
10,934,000
|
|
|
|
$
|
842,948,000
|
|
|
$
|
32,507,000
|
|
(11)
Seller Trust L Bonds
On
August 10, 2018, in connection with the Initial Transfer of the Exchange Transaction, GWG Holdings, GWG Life and Bank of Utah,
as trustee, entered into a Supplemental Indenture (the “Supplemental Indenture”) to the Amended and Restated Indenture.
GWG Holdings entered into the Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture
necessary to provide for the issuance of a new class of securities titled “Seller Trust L Bonds”. The maturity date
of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.50% per year. Interest is payable monthly
in cash.
GWG
issued Seller Trust L Bonds in the amount of $366,892,000 to the various related trusts (the “Seller Trusts”) in connection
with the Exchange Transaction on August 10, 2018.
After
the second anniversary of the Final Closing, the holders of the Seller Trust L Bonds will have the right to cause GWG to repurchase,
in whole but not in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at GWG’s option, in
the form of cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial
Loan Agreement and (ii) BEN LP common units, or a combination of cash and such property.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. 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 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
assets, including its equity in DLP IV(2) and its beneficial interest in Life Trust, serve as collateral for our L
Bond and Seller Trust L Bond obligations. The life insurance policies held by DLP IV and Life Trust, which comprise a substantial
majority of our life insurance policies, do not serve as direct collateral for the L Bonds. Further, the life insurance policies
held by DLP IV are pledged as direct collateral securing the obligations under our amended and restated senior credit facility
with LNV Corporation.
|
(1)
|
The
Seller Trust L Bonds are senior secured obligations of GWG, ranking junior to all senior
debt of GWG (see Note 9) 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 Exchange Transaction are available as collateral
for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the common units
of BEN LP and the Option Agreement are held by GWG Holdings and the Commercial Loan is
held by GWG Life.
|
|
(2)
|
The
terms of our amended and restated senior credit facility with LNV Corporation require
that we maintain a significant excess of pledged collateral value over the amount outstanding
on the amended and restated senior credit facility at any given time. Any excess equity
value of DLP IV after satisfying all amounts owing under our amended and restated senior
credit facility is available as collateral for the L Bonds (including the Seller Trust
L Bonds).
|
The
principal amount of Seller Trust L Bonds outstanding was $366,892,000 at both September 30, 2019 and December 31, 2018.
(12)
Redeemable Preferred Stock
On
November 30, 2015, our public offering of up to 100,000 shares of RPS at $1,000 per share was declared effective. Holders
of RPS are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS are recorded as a
reduction to additional paid-in capital, if any, then to the outstanding balance of the preferred stock if additional paid-in
capital has been exhausted. Under certain circumstances described in the Certificate of Designation for the RPS, additional shares
of RPS may be issued in lieu of cash dividends.
The
RPS ranks senior to our common stock and pari passu with our RPS 2 and entitles its holders to a liquidation preference equal
to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS may presently convert their RPS
into our common stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading
days immediately prior to the date of conversion, subject to a minimum conversion price of $15.00 and in an aggregate amount limited
to 15% of the stated value of RPS originally purchased from us and still held by such purchaser.
Holders
of RPS may request that we redeem their RPS at a price equal to their stated value plus accrued but unpaid dividends, less an
applicable redemption fee, if any, as specified in the Certificate of Designation. Nevertheless, the Certificate of Designation
for RPS permits us in our sole discretion to grant or decline redemption requests. Subject to certain restrictions and conditions,
we may also redeem shares of RPS without a redemption fee upon a holder’s death, total disability or bankruptcy. In addition,
after one year from the date of original issuance, we may, at our option, call and redeem shares of RPS at a price equal to their
liquidation preference.
In
March 2017, we closed the RPS offering to additional investors having sold 99,127 shares of RPS for an aggregate gross consideration
of $99,127,000 and incurred approximately $7,019,000 of related selling costs.
At
the time of its issuance, we determined that the RPS contained two embedded features: (1) optional redemption by the holder, and
(2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative; however,
based on our assessment under Accounting Standards Codification 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.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(13)
Series 2 Redeemable Preferred Stock
On
February 14, 2017, our public offering of up to 150,000 shares of RPS 2 at $1,000 per share was declared effective. Holders
of RPS 2 are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS 2 are recorded
as a reduction to additional paid-in capital, if any, then to the outstanding balance of the preferred stock if additional paid-in
capital has been exhausted. Under certain circumstances described in the Certificate of Designation for the RPS 2, additional
shares of RPS 2 may be issued in lieu of cash dividends.
The
RPS 2 ranks senior to our common stock and pari passu with our RPS and entitles its holders to a liquidation preference equal
to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS 2 may, less an applicable conversion
discount, if any, convert their RPS 2 into our common stock at a conversion price equal to the volume-weighted average price of
our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion price of
$12.75 and in an aggregate amount limited to 10% of the stated value of RPS 2 originally purchased from us and still held by such
purchaser.
Holders
of RPS 2 may request that we redeem their RPS 2 shares at a price equal to their liquidation preference, less an applicable redemption
fee, if any, as specified in the Certificate of Designation. Nevertheless, the Certificate of Designation for RPS 2 permits us
in our sole discretion to grant or decline requests for redemption. Subject to certain restrictions and conditions, we may also
redeem shares of RPS 2 without a redemption fee upon a holder’s death, total disability or bankruptcy. In addition, we may,
at our option, call and redeem shares of RPS 2 at a price equal to their liquidation preference (subject to a minimum redemption
price, in the event of redemptions occurring less than one year after issuance, of 107% of the stated value of the shares being
redeemed).
In
April 2018, we closed the RPS 2 offering to additional investors having sold 149,979 shares of RPS 2 for an aggregate gross consideration
of $149,979,000 and incurred approximately $10,284,000 of related selling costs.
At
the time of its issuance, we determined that the RPS 2 contained two embedded features: (1) optional redemption by the holder,
and (2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative;
however, based on our assessment under ASC 470 and ASC 815, we do not believe bifurcation of either the holder’s redemption
or conversion feature is appropriate.
(14)
Series B Convertible Preferred Stock
On
August 10, 2018, GWG Holdings issued 5,000,000 shares of Series B, par value $0.001 per share and having a stated value of $10.00
per share, to BEN LP for cash consideration of $50,000,000 as part of the Initial Transfer.
On
December 28, 2018, the Series B converted into 5,000,000 shares of our common stock at a conversion price of $10.00 per share
immediately following the Final Closing of the Exchange Transaction.
(15)
Income Taxes
We
had no current income tax liability as of September 30, 2019 and December 31, 2018. The components of our income tax expense (benefit)
and the reconciliation at the statutory federal tax rate to our actual income tax expense (benefit) for the three and nine months
ended September 30, 2019 and 2018 consisted of the following:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income tax (benefit)
|
|
$
|
(4,485,000
|
)
|
|
$
|
(2,234,000
|
)
|
|
$
|
(11,755,000
|
)
|
|
$
|
(4,173,000
|
)
|
State income taxes (benefit), net of federal benefit
|
|
|
(1,322,000
|
)
|
|
|
(866,000
|
)
|
|
|
(4,103,000
|
)
|
|
|
(1,558,000
|
)
|
Change in valuation allowance
|
|
|
4,697,000
|
|
|
|
3,215,000
|
|
|
|
15,025,000
|
|
|
|
5,783,000
|
|
Other permanent differences
|
|
|
1,110,000
|
|
|
|
(115,000
|
)
|
|
|
833,000
|
|
|
|
(52,000
|
)
|
Total income tax expense (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The
tax effects of temporary differences that give rise to deferred income taxes were as follows:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
9,994,000
|
|
|
$
|
10,491,000
|
|
Investment in life insurance policies
|
|
|
34,186,000
|
|
|
|
23,132,000
|
|
Other assets
|
|
|
11,429,000
|
|
|
|
6,864,000
|
|
Subtotal
|
|
|
55,609,000
|
|
|
|
40,487,000
|
|
Valuation allowance
|
|
|
(55,410,000
|
)
|
|
|
(40,385,000
|
)
|
Deferred tax assets
|
|
|
199,000
|
|
|
|
102,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
(199,000
|
)
|
|
|
(102,000
|
)
|
Net deferred tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
At September 30, 2019 and December 31,
2018, we had federal net operating loss (“NOL”) carryforwards of $34,773,000 and $36,501,000, respectively, and aggregate
state NOL carryforwards of approximately $34,747,000 and $36,475,000, respectively. The NOL carryforwards will begin to expire
in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal Revenue Code. This
section generally relates to a more than 50 percent change in ownership over a three-year period. As a result of the Exchange Transaction,
it is believed that a change in ownership for income tax purposes only has occurred as of December 28, 2018. As such, the annual
utilization of our net operating losses generated prior to the ownership change is limited. Based on the estimated value of the
Company prior to the Exchange Transaction, utilization of pre-ownership change net operating losses are subject to an annual limitation
of approximately $7,564,000.
We provide for a valuation allowance when
it is not considered “more likely than not” that our deferred tax assets will be realized. As of September 30, 2019,
based on all available evidence, we have provided a valuation allowance against our total net deferred tax asset of $55,410,000
due to uncertainty as to the realization of our deferred tax assets during the carryforward periods.
ASC
740, Income Taxes, requires the reporting of certain tax positions that do not meet a threshold of “more-likely-than-not”
to be recorded as uncertain tax benefits. It is management’s responsibility to determine whether it is “more-likely-than-not”
that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based upon
the technical merits of the position. Management has reviewed all income tax positions taken or expected to be taken and has determined
that the income tax positions are appropriately stated and supported. We do not anticipate that the total unrecognized tax benefits
will significantly change prior to December 31, 2019.
Under
our accounting policies, interest and penalties on unrecognized tax benefits, as well as interest received from favorable tax
settlements are recognized as components of income tax expense. At September 30, 2019 and December 31, 2018, we recorded no accrued
interest or penalties related to uncertain tax positions.
Our
income tax returns for tax years ended December 31, 2016 through 2018 remain open to examination by the
Internal Revenue Service and various state taxing jurisdictions. Our income tax return for tax year ended December 31, 2015 also
remains open to examination by various state taxing jurisdictions.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(16)
Common Stock
In
September 2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common
stock at $12.50 per share, and net proceeds of approximately $8.6 million after the payment of underwriting commissions, discounts
and expense reimbursements. In connection with this offering, we listed our common stock on the Nasdaq Capital Market under the
ticker symbol “GWGH.”
In
conjunction with the initial public offering, we issued warrants to purchase 16,000 shares of common stock at an exercise price
of $15.63 per share. As of September 30, 2019, all of these warrants have expired and none of them had been exercised.
On
August 10, 2018, the Company declared a special dividend of $4.30 per share of common stock payable to shareholders of record
on August 27, 2018.
On
December 28, 2018, the Series B converted into 5,000,000 shares of our common stock at a conversion price of $10.00 per share
immediately following the Final Closing of the Exchange Transaction.
On
December 28, 2018, in connection with the Exchange Transaction, we issued 22,013,516 shares of common stock to the Seller Trusts
at a market value of approximately $203.4 million in exchange for BEN LP 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.
The
common shares issued to the Seller Trusts were initially subject to a Stockholders Agreement between GWG and the Seller Trusts,
under which the Seller Trusts, as long as they own at least 10% of the voting shares of GWG, agree to vote their shares in proportion
to the votes cast by all other voting securities of GWG. In addition, the Seller Trusts agree, for the period of one year after
the Final Closing, not to seek or propose to influence or control the management, Board or policies of GWG. The Stockholders Agreement
was terminated in connection with the closing of the Purchase and Contribution Transaction on April 26, 2019.
In
addition, GWG and the Seller Trusts entered into a registration rights agreement and an orderly marketing agreement. Under these
agreements, GWG and the Seller Trusts agreed to take steps to allow for the orderly marketing and resale of the common shares
issued to Seller Trusts as part of the Exchange Transaction, and Seller Trusts agreed to sell their common shares of GWG only as
permitted under these agreements.
On
November 15, 2018, the Company’s Board of Directors 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 $1,500,000.
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 nine months ended September 30, 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 May
Yet Be
Purchased
Under the
Program
|
|
January 2019
|
|
|
42,488
|
|
|
$
|
8.47
|
|
|
|
52,523
|
|
|
$
|
1,072,000
|
|
February 2019
|
|
|
202
|
|
|
|
8.88
|
|
|
|
52,725
|
|
|
|
1,070,000
|
|
March 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
April 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
May 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
June 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
July 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
August 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
September 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
42,690
|
|
|
$
|
8.47
|
|
|
|
52,725
|
|
|
$
|
1,070,000
|
(1)
|
|
(1)
|
The
stock repurchase program expired on April 30, 2019.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(17)
Stock Incentive Plan
We adopted our 2013 Stock Incentive Plan
in March 2013, as amended on June 1, 2015, May 5, 2017 and May 8, 2018. The Stock Option Sub-Committee of our Compensation Committee
of our Board of Directors is responsible for the administration of the plan. Participants under the plan may be granted incentive
stock options and non-statutory stock options; stock appreciation rights; stock awards; restricted stock; restricted stock units;
and performance shares. Eligible participants include officers and employees of GWG Holdings and its subsidiaries, members of our
Board of Directors, and consultants. Option awards generally expire 10 years from the date of grant. As of September 30, 2019,
6,000,000 of our common stock options are authorized under the plan, of which 2,482,452 shares were reserved for issuance under
outstanding incentive awards and 3,517,548 shares remain available for future grants.
Stock
Options
As
of September 30, 2019, we had outstanding stock options for 888,000 shares of common stock to employees, officers, and directors
under the plan. Options for 665,000 shares have vested and the remaining options are scheduled to vest over three years. The options
were issued with an exercise price between $4.83 and $11.56, which is equal to the market price of the shares on the date of grant.
As of September 30, 2019, stock options for 1,164,000 shares had been forfeited and stock options for 775,000 shares had been
exercised. The total intrinsic value of stock options exercised during the three months ended September 30, 2019 was $36,000.
The aggregate intrinsic value of stock options outstanding and exercisable at September 30, 2019 was $1,145,000 and $891,000,
respectively.
Outstanding
stock options:
|
|
Vested
|
|
|
Unvested
|
|
|
Total
|
|
Balance as of December 31, 2017
|
|
|
857,192
|
|
|
|
779,756
|
|
|
|
1,636,948
|
|
Granted during the year
|
|
|
63,950
|
|
|
|
314,000
|
|
|
|
377,950
|
|
Vested during the year
|
|
|
503,503
|
|
|
|
(503,503
|
)
|
|
|
—
|
|
Exercised during the year
|
|
|
(569,864
|
)
|
|
|
—
|
|
|
|
(569,864
|
)
|
Forfeited during the year
|
|
|
(21,582
|
)
|
|
|
(25,501
|
)
|
|
|
(47,083
|
)
|
Balance as of December 31, 2018
|
|
|
833,199
|
|
|
|
564,752
|
|
|
|
1,397,951
|
|
Granted during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested during the period
|
|
|
182,053
|
|
|
|
(182,053
|
)
|
|
|
—
|
|
Exercised during the period
|
|
|
(50,685
|
)
|
|
|
—
|
|
|
|
(50,685
|
)
|
Forfeited during the period
|
|
|
(299,883
|
)
|
|
|
(158,936
|
)
|
|
|
(458,819
|
)
|
Balance as of September 30, 2019
|
|
|
664,684
|
|
|
|
223,763
|
|
|
|
888,447
|
|
As
of September 30, 2019, unrecognized compensation expense related to unvested options is $515,000. We expect to recognize this
compensation expense over the next three years: $85,000 in 2019, $302,000 in 2020, and $128,000 in 2021.
Stock
Appreciation Rights (SARs)
As
of September 30, 2019, we had outstanding SARs for 288,000 shares of common stock to employees. The strike price of the SARs was
between $6.75 and $11.55, which was equal to the market price of the common stock at the date of issuance. SARs vest over varying
terms of up to three years. As of September 30, 2019, 178,000 of the SARs were vested and 169,000 have been exercised. On September
30, 2019, the market price of GWG’s common stock was $9.98.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Outstanding
SARs:
|
|
Vested
|
|
|
Unvested
|
|
|
Total
|
|
Balance as of December 31, 2017
|
|
|
189,053
|
|
|
|
153,919
|
|
|
|
342,972
|
|
Granted during the year
|
|
|
2,625
|
|
|
|
111,025
|
|
|
|
113,650
|
|
Vested during the year
|
|
|
71,785
|
|
|
|
(71,785
|
)
|
|
|
--
|
|
Exercised during the year
|
|
|
(145,622
|
)
|
|
|
—
|
|
|
|
(145,622
|
)
|
Forfeited during the year
|
|
|
—
|
|
|
|
(39,235
|
)
|
|
|
(39,235
|
)
|
Balance as of December 31, 2018
|
|
|
117,841
|
|
|
|
153,924
|
|
|
|
271,765
|
|
Granted during the period
|
|
|
4,250
|
|
|
|
43,150
|
|
|
|
47,400
|
|
Vested during the period
|
|
|
79,150
|
|
|
|
(79,150
|
)
|
|
|
—
|
|
Exercised during the period
|
|
|
(23,448
|
)
|
|
|
—
|
|
|
|
(23,448
|
)
|
Forfeited during the period
|
|
|
—
|
|
|
|
(7,592
|
)
|
|
|
(7,592
|
)
|
Balance as of September 30, 2019
|
|
|
177,793
|
|
|
|
110,332
|
|
|
|
288,125
|
|
The
liability for the SARs as of September 30, 2019 and December 31, 2018 was $557,000 and $349,000, respectively, and was recorded
within other accrued expenses on the condensed consolidated balance sheets. Remaining compensation expense is expected to be recognized
over the next three years. Employee compensation and benefits expense for SARs of $327,000 and $25,000 was recorded for the three
months ending September 30, 2019 and 2018, respectively, and $323,000 and $15,000 was recorded for the nine months ended September
30, 2019 and 2018, respectively.
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
following summarizes information concerning outstanding shares issuable under the 2013 Stock Incentive Plan:
|
|
September 30, 2019
|
|
|
|
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Life
(years)
|
|
|
Fair Value at
Grant Date
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
664,684
|
|
|
$
|
8.88
|
|
|
|
7.05
|
|
|
$
|
2.21
|
|
SARs
|
|
|
177,793
|
|
|
$
|
8.78
|
|
|
|
4.68
|
|
|
$
|
2.07
|
|
Total Vested
|
|
|
842,477
|
|
|
$
|
8.86
|
|
|
|
6.55
|
|
|
$
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
223,763
|
|
|
$
|
9.47
|
|
|
|
8.47
|
|
|
$
|
2.56
|
|
SARs
|
|
|
110,332
|
|
|
$
|
9.57
|
|
|
|
5.79
|
|
|
$
|
2.48
|
|
Total Unvested
|
|
|
334,095
|
|
|
$
|
9.50
|
|
|
|
7.58
|
|
|
$
|
2.53
|
|
|
|
December 31, 2018
|
|
|
|
Outstanding
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Life
(years)
|
|
|
Fair Value at
Grant Date
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
833,199
|
|
|
$
|
8.88
|
|
|
|
5.95
|
|
|
$
|
2.02
|
|
SARs
|
|
|
117,841
|
|
|
$
|
8.88
|
|
|
|
5.02
|
|
|
$
|
2.02
|
|
Total Vested
|
|
|
951,040
|
|
|
$
|
8.88
|
|
|
|
5.83
|
|
|
$
|
2.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
564,752
|
|
|
$
|
9.15
|
|
|
|
7.88
|
|
|
$
|
2.35
|
|
SARs
|
|
|
153,924
|
|
|
$
|
8.37
|
|
|
|
5.98
|
|
|
$
|
2.09
|
|
Total Unvested
|
|
|
718,676
|
|
|
$
|
8.98
|
|
|
|
7.47
|
|
|
$
|
2.30
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Restricted
Stock Units
A
restricted stock unit (“RSU”) entitles the holder thereof to receive one share of our common stock (or, in some circumstances,
the cash value thereof) upon vesting. RSUs are subject to forfeiture until they vest. As of September 30, 2019, we had outstanding
RSUs for 244,083 shares of common stock (based on target grant amounts) held by employees and directors under the plan, of which
none were vested. On June 18, 2019, we granted an aggregate of 114,366 RSUs to our directors, which RSUs are subject to time-based
vesting and are scheduled to vest in their entirety on the one year anniversary of the grant date subject to the holder continuously
remaining a director or employee of, or a consultant to, GWG or one of its subsidiaries through such date. On May 31, 2019, we
granted RSUs to our Chief Executive Officer that are subject to performance-based vesting pursuant to a performance share unit
agreement (“PSU Agreement”). The PSU Agreement provides for a target award grant of 129,717 RSUs, and up to a maximum
of 259,434 RSUs, with each representing the right to receive one share of our common stock (or, following a Change-in-Control
Transaction (as defined in the PSU Agreement), the cash value thereof) upon vesting, which is generally subject to the satisfaction
of performance goals over a performance period commencing on April 26, 2019 and ending on December 31, 2021.
In the three months ended September
30, 2019, a total of 375,000 RSUs held by employees vested entitling the holders thereof, collectively, to cash payments
totaling $4.5 million. Additionally, during the nine months ended September 30, 2019, 53,403 RSUs vested and 26,701 shares of
common stock were issued to employees, net of shares forfeited to satisfy tax withholding obligations.
(18)
Other Expenses
The
components of other expenses in our condensed consolidated statements of operations for the three and nine months ended September
30, 2019 and 2018 are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Contract Labor
|
|
$
|
533,000
|
|
|
$
|
359,000
|
|
|
$
|
1,345,000
|
|
|
$
|
964,000
|
|
Marketing
|
|
|
408,000
|
|
|
|
413,000
|
|
|
|
1,229,000
|
|
|
|
1,343,000
|
|
Information Technology
|
|
|
529,000
|
|
|
|
432,000
|
|
|
|
1,513,000
|
|
|
|
1,208,000
|
|
Servicing and Facility Fees
|
|
|
450,000
|
|
|
|
382,000
|
|
|
|
1,313,000
|
|
|
|
1,244,000
|
|
Travel and Entertainment
|
|
|
321,000
|
|
|
|
204,000
|
|
|
|
823,000
|
|
|
|
650,000
|
|
Insurance and Regulatory
|
|
|
586,000
|
|
|
|
401,000
|
|
|
|
4,426,000
|
|
|
|
1,120,000
|
|
General and Administrative
|
|
|
722,000
|
|
|
|
498,000
|
|
|
|
1,666,000
|
|
|
|
1,733,000
|
|
Total Other Expenses
|
|
$
|
3,549,000
|
|
|
$
|
2,689,000
|
|
|
$
|
12,315,000
|
|
|
$
|
8,262,000
|
|
(19)
Net Loss Attributable to Common Shareholders
We
have outstanding RPS and RPS 2, as described in Notes 12 and 13. RPS and RPS 2 are anti-dilutive to our net loss attributable
to common shareholders calculation for both the three and nine months ended September 30, 2019 and 2018. Our warrants, vested
and unvested stock options and restricted stock units are also anti-dilutive for both the three and nine months ended September
30, 2019 and 2018.
(20)
Segment Reporting
GWG
has two reportable segments consisting of Secondary Life Insurance and Investment in Beneficient. In addition, the Company reports
certain of its results of operations in Corporate & Other. The Secondary Life Insurance segment seeks to earn non-correlated
yield from our portfolio of life insurance policies. Our Investment in Beneficient segment consists of our investment in the common
units of BEN LP, which we account for using the equity method, and related assets and liabilities. Beneficient 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. The Corporate & Other category consists of unallocated corporate overhead and administrative
costs and the operations of operating segments that do not meet the quantitative criteria to be separately reported.
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.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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. Equity method investments and related earnings are allocated to the Investment in Beneficient segment.
Summarized
financial information for the Company’s reportable segments is presented for the periods indicated:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Revenue:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Secondary Life Insurance
|
|
$
|
18,238,000
|
|
|
$
|
16,388,000
|
|
|
$
|
61,199,000
|
|
|
$
|
55,054,000
|
|
Investment in Beneficient
|
|
|
3,709,000
|
|
|
|
4,284,000
|
|
|
|
9,723,000
|
|
|
|
4,284,000
|
|
Corporate & Other
|
|
|
264,000
|
|
|
|
265,000
|
|
|
|
516,000
|
|
|
|
456,000
|
|
Total
|
|
$
|
22,211,000
|
|
|
$
|
20,937,000
|
|
|
$
|
71,438,000
|
|
|
$
|
59,794,000
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Segment EBT:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Secondary Life Insurance
|
|
$
|
(9,169,000
|
)
|
|
$
|
(4,932,000
|
)
|
|
$
|
(19,792,000
|
)
|
|
$
|
(4,256,000
|
)
|
Investment in Beneficient
|
|
|
(2,214,000
|
)
|
|
|
-
|
|
|
|
(11,286,000
|
)
|
|
|
-
|
|
Corporate & Other
|
|
|
(9,020,000
|
)
|
|
|
(5,590,000
|
)
|
|
|
(25,270,000
|
)
|
|
|
(15,502,000
|
)
|
Total
|
|
|
(20,403,000
|
)
|
|
|
(10,522,000
|
)
|
|
|
(56,348,000
|
)
|
|
|
(19,758,000
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net Loss
|
|
$
|
(20,403,000
|
)
|
|
$
|
(10,522,000
|
)
|
|
$
|
(56,348,000
|
)
|
|
$
|
(19,758,000
|
)
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Interest Expense:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Secondary Life Insurance
|
|
$
|
21,410,000
|
|
|
$
|
17,514,000
|
|
|
$
|
63,114,000
|
|
|
$
|
50,725,000
|
|
Investment in Beneficient
|
|
|
6,880,000
|
|
|
|
4,284,000
|
|
|
|
20,638,000
|
|
|
|
4,284,000
|
|
Corporate & Other
|
|
|
-
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
2,000
|
|
Total
|
|
$
|
28,290,000
|
|
|
$
|
21,799,000
|
|
|
$
|
83,752,000
|
|
|
$
|
55,011,000
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
Interest Income:
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Secondary Life Insurance
|
|
$
|
226,000
|
|
|
$
|
553,000
|
|
|
$
|
1,594,000
|
|
|
$
|
1,663,000
|
|
Investment in Beneficient
|
|
|
3,709,000
|
|
|
|
4,284,000
|
|
|
|
9,678,000
|
|
|
|
4,284,000
|
|
Corporate & Other
|
|
|
-
|
|
|
|
39,000
|
|
|
|
4,000
|
|
|
|
173,000
|
|
Total
|
|
$
|
3,935,000
|
|
|
$
|
4,876,000
|
|
|
$
|
11,276,000
|
|
|
$
|
6,120,000
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Total Assets:
|
|
2019
|
|
|
2018
|
|
Secondary Life Insurance
|
|
$
|
903,726,000
|
|
|
$
|
889,665,000
|
|
Investment in Beneficient
|
|
|
650,444,000
|
|
|
|
584,173,000
|
|
Corporate & Other
|
|
|
6,831,000
|
|
|
|
7,029,000
|
|
Total
|
|
$
|
1,561,001,000
|
|
|
$
|
1,480,867,000
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(21)
Leases
We
are party to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment
to our original lease that expanded the leased space to 17,687 square feet and extended the term through October 2025. Under the
amended lease, we are obligated to pay base rent plus common area maintenance and a share of building operating costs. This lease
is accounted for as an operating lease. We lease various other facilities on a short-term basis.
The
lease assets and liabilities are as follows:
|
|
|
|
September 30,
|
|
Leases
|
|
Classification
|
|
2019
|
|
|
|
|
|
|
|
Operating lease right-of-use assets
|
|
Other assets
|
|
$
|
852,000
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Other accrued expenses
|
|
$
|
1,498,000
|
|
Total
lease costs recognized for the three and nine months ended September 30, 2019 were $108,000 and $355,000, respectively, and $119,000
and $334,000 for the three and nine months ended September 30, 2018, respectively. These amounts included operating lease costs
of $50,000 and $149,000, variable lease costs of $49,000 and $159,000, and short term lease costs of $9,000 and $47,000 for the
three months and nine months ended September 30, 2019, respectively. The remaining lease term at September 30, 2019 was 6.0 years
and the discount rate was 6.96%. For the three and nine months ended September 30, 2019, cash paid for amounts included in the
measurement of operating lease liabilities and included in operating cash flows totaled $68,000 and $205,000, respectively.
Maturities
of operating lease liabilities as of September 30, 2019 are as follows:
Remaining 2019
|
|
$
|
70,000
|
|
2020
|
|
|
284,000
|
|
2021
|
|
|
293,000
|
|
2022
|
|
|
302,000
|
|
2023
|
|
|
311,000
|
|
Thereafter
|
|
|
593,000
|
|
Total lease payments
|
|
|
1,853,000
|
|
Less: imputed interest
|
|
|
(355,000
|
)
|
Present value of lease liabilities
|
|
$
|
1,498,000
|
|
The
minimum aggregate operating lease commitments as of December 31, 2018 as reported under previous lease accounting standards were
as follows:
2019
|
|
$
|
275,000
|
|
2020
|
|
|
284,000
|
|
2021
|
|
|
293,000
|
|
2022
|
|
|
302,000
|
|
2023
|
|
|
311,000
|
|
Thereafter
|
|
|
593,000
|
|
|
|
$
|
2,058,000
|
|
(22)
Contingencies
Litigation
— In the normal course of business, we are involved in various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a material adverse effect on our financial position, results of operations
or cash flows.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(23)
Guarantee 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 11. The L Bonds and Seller Trust L Bonds are
secured by substantially all the assets of GWG Holdings, a pledge of all our common stock held 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 assets, including its equity in DLP
IV(2) and its beneficial interest in Life Trust, serve as collateral for our L Bond and Seller Trust L Bond obligations.
The life insurance policies held by DLP IV and Life Trust, which comprise a substantial majority of our life insurance policies,
do not serve as direct collateral for the L Bonds. Further, the life insurance policies held by DLP IV are pledged as direct collateral
securing the obligations under our amended and restated senior credit facility with LNV Corporation.
|
(1)
|
The
Seller Trust L Bonds (see Note 11) are senior secured obligations of GWG, ranking junior to all senior debt of GWG (see Note 9),
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 Exchange Transaction are available as collateral for all
holders of the L Bonds and Seller Trust L Bonds. Specifically, the common units of BEN LP and the Option Agreement are held by
GWG Holdings and the Commercial Loan is held by GWG Life.
|
|
(2)
|
The
terms of our amended and restated senior credit facility with LNV Corporation require that we maintain a significant excess of
pledged collateral value over the amount outstanding on the amended and restated senior credit facility at any given time. Any
excess equity value of DLP IV after satisfying all amounts owing under our amended and restated senior credit facility is available
as collateral for the L Bonds (including the Seller Trust L Bonds).
|
The
following represents consolidating financial information as of September 30, 2019 and December 31, 2018, with respect to the financial
position, and as of September 30, 2019 and 2018, with respect to results of operations and cash flows of GWG Holdings and its
subsidiaries. The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds and Seller
Trust L Bonds. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the
L Bonds and Seller Trust L Bonds, presenting its investment in DLP IV and the Trust under the equity method. The non-guarantor
subsidiaries column presents the financial information of all non-guarantor subsidiaries, including DLP IV and Life Trust.
For
the three and nine months ended September 30, 2018, we reclassified certain intercompany funding outflows from operating cash
flows to investing cash flows in the condensed consolidating statement of cash flows in this guarantor footnote. This had the
effect of increasing cash flows from operations for the parent for the three and nine months ended September 30, 2018 by $59.6
million and $136.6 million, respectively, and for the guarantor for the three and nine months ended September 30, 2018 by $47.3
million and $112.8 million, respectively, and decreasing cash flow from investing activities by these amounts, compared to previous
presentation. Presentation of consolidated results in the condensed consolidated financial statements were not affected by these
reclassifications. Presentation of the condensed consolidating balance sheets and condensed consolidating statements of operations
in this guarantor footnote were not affected by these reclassifications.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Balance Sheets
September 30, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
61,701,804
|
|
|
$
|
2,605,365
|
|
|
$
|
1,373,295
|
|
|
$
|
—
|
|
|
$
|
65,680,464
|
|
Restricted cash
|
|
|
—
|
|
|
|
1,177,630
|
|
|
|
7,027,075
|
|
|
|
—
|
|
|
|
8,204,705
|
|
Investment in life insurance policies, at fair value
|
|
|
—
|
|
|
|
106,329,394
|
|
|
|
701,188,694
|
|
|
|
—
|
|
|
|
807,518,088
|
|
Life insurance policy benefits receivable, net
|
|
|
—
|
|
|
|
961,200
|
|
|
|
16,407,976
|
|
|
|
—
|
|
|
|
17,369,176
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
241,185,081
|
|
|
|
—
|
|
|
|
—
|
|
|
|
241,185,081
|
|
Equity method investment
|
|
|
370,652,128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
370,652,128
|
|
Other assets
|
|
|
43,810,955
|
|
|
|
2,433,192
|
|
|
|
4,147,164
|
|
|
|
—
|
|
|
|
50,391,311
|
|
Investment in subsidiaries
|
|
|
944,560,782
|
|
|
|
592,688,454
|
|
|
|
—
|
|
|
|
(1,537,249,236
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,420,725,669
|
|
|
$
|
947,380,316
|
|
|
$
|
730,144,204
|
|
|
$
|
(1,537,249,236
|
)
|
|
$
|
1,561,000,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
$
|
—
|
|
|
$
|
(329,050
|
)
|
|
$
|
132,046,570
|
|
|
$
|
—
|
|
|
$
|
131,717,520
|
|
L Bonds
|
|
|
830,341,949
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
830,341,949
|
|
Seller Trust L Bonds
|
|
|
366,891,940
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
366,891,940
|
|
Accounts payable
|
|
|
1,353,654
|
|
|
|
927,306
|
|
|
|
289,882
|
|
|
|
—
|
|
|
|
2,570,842
|
|
Interest and dividends payable
|
|
|
13,273,621
|
|
|
|
—
|
|
|
|
3,452,723
|
|
|
|
—
|
|
|
|
16,726,344
|
|
Other accrued expenses
|
|
|
2,812,483
|
|
|
|
3,006,986
|
|
|
|
880,867
|
|
|
|
—
|
|
|
|
6,700,336
|
|
TOTAL LIABILITIES
|
|
|
1,214,673,647
|
|
|
|
3,605,242
|
|
|
|
136,670,042
|
|
|
|
—
|
|
|
|
1,354,948,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
—
|
|
|
|
943,775,074
|
|
|
|
593,474,162
|
|
|
|
(1,537,249,236
|
)
|
|
|
—
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
|
209,817,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
209,817,500
|
|
Common stock
|
|
|
33,033
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,033
|
|
Additional paid-in capital
|
|
|
237,159,909
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
237,159,909
|
|
Accumulated deficit
|
|
|
(240,958,420
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(240,958,420
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
206,052,022
|
|
|
|
943,775,074
|
|
|
|
593,474,162
|
|
|
|
(1,537,249,236
|
)
|
|
|
206,052,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
1,420,725,669
|
|
|
$
|
947,380,316
|
|
|
$
|
730,144,204
|
|
|
$
|
(1,537,249,236
|
)
|
|
$
|
1,561,000,953
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Balance Sheets (continued)
December 31, 2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
113,293,682
|
|
|
$
|
232,387
|
|
|
$
|
1,061,015
|
|
|
$
|
—
|
|
|
$
|
114,587,084
|
|
Restricted cash
|
|
|
—
|
|
|
|
7,217,194
|
|
|
|
3,631,932
|
|
|
|
—
|
|
|
|
10,849,126
|
|
Investment in life insurance policies, at fair value
|
|
|
—
|
|
|
|
92,336,494
|
|
|
|
655,585,971
|
|
|
|
—
|
|
|
|
747,922,465
|
|
Life insurance policy benefits receivable, net
|
|
|
—
|
|
|
|
5,000,000
|
|
|
|
11,460,687
|
|
|
|
—
|
|
|
|
16,460,687
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
184,768,874
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184,768,874
|
|
Equity method investment
|
|
|
360,841,651
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
360,841,651
|
|
Other assets
|
|
|
42,944,402
|
|
|
|
1,730,581
|
|
|
|
762,181
|
|
|
|
—
|
|
|
|
45,437,164
|
|
Investment in subsidiaries
|
|
|
799,182,251
|
|
|
|
510,865,003
|
|
|
|
—
|
|
|
|
(1,310,047,254
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,316,261,986
|
|
|
$
|
802,150,533
|
|
|
$
|
672,501,786
|
|
|
$
|
(1,310,047,254
|
)
|
|
$
|
1,480,867,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
148,977,596
|
|
|
$
|
—
|
|
|
$
|
148,977,596
|
|
L Bonds
|
|
|
651,402,663
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
651,402,663
|
|
Seller Trust L Bonds
|
|
|
366,891,940
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
366,891,940
|
|
Accounts payable
|
|
|
1,126,327
|
|
|
|
1,674,494
|
|
|
|
6,475,686
|
|
|
|
—
|
|
|
|
9,276,507
|
|
Interest and dividends payable
|
|
|
14,047,248
|
|
|
|
—
|
|
|
|
4,508,045
|
|
|
|
—
|
|
|
|
18,555,293
|
|
Other accrued expenses
|
|
|
1,735,926
|
|
|
|
1,593,108
|
|
|
|
1,376,136
|
|
|
|
—
|
|
|
|
4,705,170
|
|
TOTAL LIABILITIES
|
|
|
1,035,204,104
|
|
|
|
3,267,602
|
|
|
|
161,337,463
|
|
|
|
—
|
|
|
|
1,199,809,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
—
|
|
|
|
798,882,931
|
|
|
|
511,164,323
|
|
|
|
(1,310,047,254
|
)
|
|
|
—
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
|
215,973,039
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
215,973,039
|
|
Common stock
|
|
|
33,018
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,018
|
|
Additional paid-in capital
|
|
|
249,662,168
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
249,662,168
|
|
Accumulated deficit
|
|
|
(184,610,343
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(184,610,343
|
)
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
281,057,882
|
|
|
|
798,882,931
|
|
|
|
511,164,323
|
|
|
|
(1,310,047,254
|
)
|
|
|
281,057,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND EQUITY
|
|
$
|
1,316,261,986
|
|
|
$
|
802,150,533
|
|
|
$
|
672,501,786
|
|
|
$
|
(1,310,047,254
|
)
|
|
$
|
1,480,867,051
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Operations
For the three months ended September 30, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on life insurance policies, net
|
|
$
|
—
|
|
|
$
|
2,231,897
|
|
|
$
|
15,560,427
|
|
|
$
|
—
|
|
|
$
|
17,792,324
|
|
Interest and other income
|
|
|
257,050
|
|
|
|
3,825,547
|
|
|
|
336,058
|
|
|
|
—
|
|
|
|
4,418,655
|
|
TOTAL REVENUE
|
|
|
257,050
|
|
|
|
6,057,444
|
|
|
|
15,896,485
|
|
|
|
—
|
|
|
|
22,210,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
24,573,192
|
|
|
|
—
|
|
|
|
3,716,478
|
|
|
|
—
|
|
|
|
28,289,670
|
|
Employee compensation and benefits
|
|
|
6,374,457
|
|
|
|
2,080,646
|
|
|
|
681,721
|
|
|
|
—
|
|
|
|
9,136,824
|
|
Legal and professional fees
|
|
|
1,816,531
|
|
|
|
297,254
|
|
|
|
480,682
|
|
|
|
—
|
|
|
|
2,594,467
|
|
Other expenses
|
|
|
2,094,036
|
|
|
|
586,601
|
|
|
|
868,628
|
|
|
|
—
|
|
|
|
3,549,265
|
|
TOTAL EXPENSES
|
|
|
34,858,216
|
|
|
|
2,964,501
|
|
|
|
5,747,509
|
|
|
|
—
|
|
|
|
43,570,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(34,601,166
|
)
|
|
|
3,092,943
|
|
|
|
10,148,976
|
|
|
|
—
|
|
|
|
(21,359,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
13,241,919
|
|
|
|
11,448,079
|
|
|
|
—
|
|
|
|
(24,689,998
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(21,359,247
|
)
|
|
|
14,541,022
|
|
|
|
10,148,976
|
|
|
|
(24,689,998
|
)
|
|
|
(21,359,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS) BEFORE EARNINGS (LOSS) FROM EQUITY METHOD INVESTMENT
|
|
|
(21,359,247
|
)
|
|
|
14,541,022
|
|
|
|
10,148,976
|
|
|
|
(24,689,998
|
)
|
|
|
(21,359,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from equity method investment
|
|
|
955,751
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
955,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(20,403,496
|
)
|
|
|
14,541,022
|
|
|
|
10,148,976
|
|
|
|
(24,689,998
|
)
|
|
|
(20,403,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
4,231,641
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,231,641
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(24,635,137
|
)
|
|
$
|
14,541,022
|
|
|
$
|
10,148,976
|
|
|
$
|
(24,689,998
|
)
|
|
$
|
(24,635,137
|
)
|
For the three months ended September 30, 2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
—
|
|
|
$
|
4,122,153
|
|
|
$
|
11,599,360
|
|
|
$
|
—
|
|
|
$
|
15,721,513
|
|
Interest and other income
|
|
|
3,333,424
|
|
|
|
1,700,414
|
|
|
|
181,677
|
|
|
|
—
|
|
|
|
5,215,515
|
|
TOTAL REVENUE
|
|
|
3,333,424
|
|
|
|
5,822,567
|
|
|
|
11,781,037
|
|
|
|
—
|
|
|
|
20,937,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
16,739,120
|
|
|
|
—
|
|
|
|
5,060,212
|
|
|
|
—
|
|
|
|
21,799,332
|
|
Employee compensation and benefits
|
|
|
2,292,251
|
|
|
|
3,086,682
|
|
|
|
169,838
|
|
|
|
—
|
|
|
|
5,548,771
|
|
Legal and professional fees
|
|
|
483,512
|
|
|
|
221,613
|
|
|
|
716,839
|
|
|
|
—
|
|
|
|
1,421,964
|
|
Other expenses
|
|
|
1,590,823
|
|
|
|
455,800
|
|
|
|
642,347
|
|
|
|
—
|
|
|
|
2,688,970
|
|
TOTAL EXPENSES
|
|
|
21,105,706
|
|
|
|
3,764,095
|
|
|
|
6,589,236
|
|
|
|
—
|
|
|
|
31,459,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(17,772,282
|
)
|
|
|
2,058,472
|
|
|
|
5,191,801
|
|
|
|
—
|
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
7,250,273
|
|
|
|
6,266,481
|
|
|
|
—
|
|
|
|
(13,516,754
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(10,522,009
|
)
|
|
|
8,324,953
|
|
|
|
5,191,801
|
|
|
|
(13,516,754
|
)
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS)
|
|
|
(10,522,009
|
)
|
|
|
8,324,953
|
|
|
|
5,191,801
|
|
|
|
(13,516,754
|
)
|
|
|
(10,522,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
4,313,542
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,313,542
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(14,835,551
|
)
|
|
$
|
8,324,953
|
|
|
$
|
5,191,801
|
|
|
$
|
(13,516,754
|
)
|
|
$
|
(14,835,551
|
)
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Operations (continued)
For the nine months ended September 30, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on life insurance policies, net
|
|
$
|
—
|
|
|
$
|
6,783,129
|
|
|
$
|
52,435,403
|
|
|
$
|
—
|
|
|
$
|
59,218,532
|
|
Interest and other income
|
|
|
1,438,068
|
|
|
|
9,852,224
|
|
|
|
929,470
|
|
|
|
—
|
|
|
|
12,219,762
|
|
TOTAL REVENUE
|
|
|
1,438,068
|
|
|
|
16,635,353
|
|
|
|
53,364,873
|
|
|
|
—
|
|
|
|
71,438,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
71,753,380
|
|
|
|
—
|
|
|
|
11,998,231
|
|
|
|
—
|
|
|
|
83,751,611
|
|
Employee compensation and benefits
|
|
|
13,991,440
|
|
|
|
5,791,512
|
|
|
|
1,301,863
|
|
|
|
—
|
|
|
|
21,084,815
|
|
Legal and professional fees
|
|
|
6,146,443
|
|
|
|
1,212,791
|
|
|
|
2,903,996
|
|
|
|
—
|
|
|
|
10,263,230
|
|
Other expenses
|
|
|
8,548,645
|
|
|
|
1,549,259
|
|
|
|
2,217,530
|
|
|
|
—
|
|
|
|
12,315,434
|
|
TOTAL EXPENSES
|
|
|
100,439,908
|
|
|
|
8,553,562
|
|
|
|
18,421,620
|
|
|
|
—
|
|
|
|
127,415,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(99,001,840
|
)
|
|
|
8,081,791
|
|
|
|
34,943,253
|
|
|
|
—
|
|
|
|
(55,976,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
43,025,044
|
|
|
|
39,802,437
|
|
|
|
—
|
|
|
|
(82,827,481
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(55,976,796
|
)
|
|
|
47,884,228
|
|
|
|
34,943,253
|
|
|
|
(82,827,481
|
)
|
|
|
(55,976,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS) BEFORE EARNINGS (LOSS) FROM EQUITY METHOD INVESTMENT
|
|
|
(55,976,796
|
)
|
|
|
47,884,228
|
|
|
|
34,943,253
|
|
|
|
(82,827,481
|
)
|
|
|
(55,976,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from equity method investment
|
|
|
(371,281
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(371,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
(56,348,077
|
)
|
|
|
47,884,228
|
|
|
|
34,943,253
|
|
|
|
(82,827,481
|
)
|
|
|
(56,348,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
12,806,173
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,806,173
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(69,154,250
|
)
|
|
$
|
47,884,228
|
|
|
$
|
34,943,253
|
|
|
$
|
(82,827,481
|
)
|
|
$
|
(69,154,250
|
)
|
For the nine months ended September 30, 2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on life insurance policies, net
|
|
$
|
—
|
|
|
$
|
12,135,832
|
|
|
$
|
40,794,176
|
|
|
$
|
—
|
|
|
$
|
52,930,008
|
|
Interest and other income
|
|
|
4,447,322
|
|
|
|
1,726,938
|
|
|
|
689,380
|
|
|
|
—
|
|
|
|
6,863,640
|
|
TOTAL REVENUE
|
|
|
4,447,322
|
|
|
|
13,862,770
|
|
|
|
41,483,556
|
|
|
|
—
|
|
|
|
59,793,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
38,758,326
|
|
|
|
—
|
|
|
|
16,252,193
|
|
|
|
—
|
|
|
|
55,010,519
|
|
Employee compensation and benefits
|
|
|
5,629,344
|
|
|
|
5,881,219
|
|
|
|
1,016,576
|
|
|
|
—
|
|
|
|
12,527,139
|
|
Legal and professional fees
|
|
|
1,290,614
|
|
|
|
688,003
|
|
|
|
1,772,704
|
|
|
|
—
|
|
|
|
3,751,321
|
|
Other expenses
|
|
|
5,082,525
|
|
|
|
1,397,314
|
|
|
|
1,782,485
|
|
|
|
—
|
|
|
|
8,262,324
|
|
TOTAL EXPENSES
|
|
|
50,760,809
|
|
|
|
7,966,536
|
|
|
|
20,823,958
|
|
|
|
—
|
|
|
|
79,551,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
(46,313,487
|
)
|
|
|
5,896,234
|
|
|
|
20,659,598
|
|
|
|
—
|
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY IN INCOME OF SUBSIDIARIES
|
|
|
26,555,832
|
|
|
|
23,824,330
|
|
|
|
—
|
|
|
|
(50,380,162
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(19,757,655
|
)
|
|
|
29,720,564
|
|
|
|
20,659,598
|
|
|
|
(50,380,162
|
)
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
NET INCOME (LOSS)
|
|
|
(19,757,655
|
)
|
|
|
29,720,564
|
|
|
|
20,659,598
|
|
|
|
(50,380,162
|
)
|
|
|
(19,757,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
12,356,513
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,356,513
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(32,114,168
|
)
|
|
$
|
29,720,564
|
|
|
$
|
20,659,598
|
|
|
$
|
(50,380,162
|
)
|
|
$
|
(32,114,168
|
)
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Cash Flows
For the three months ended September 30, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(20,403,496
|
)
|
|
$
|
14,541,022
|
|
|
$
|
10,148,976
|
|
|
$
|
(24,689,998
|
)
|
|
$
|
(20,403,496
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(13,241,919
|
)
|
|
|
(11,448,079
|
)
|
|
|
—
|
|
|
|
24,689,998
|
|
|
|
—
|
|
Change in fair value of life insurance policies
|
|
|
—
|
|
|
|
(2,251,068
|
)
|
|
|
(11,929,902
|
)
|
|
|
—
|
|
|
|
(14,180,970
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
3,196,852
|
|
|
|
—
|
|
|
|
263,755
|
|
|
|
—
|
|
|
|
3,460,607
|
|
Accretion of discount on financing receivables from affiliates
|
|
|
—
|
|
|
|
(427,914
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(427,914
|
)
|
Provision for uncollectible policy benefits receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
200,897
|
|
|
|
—
|
|
|
|
200,897
|
|
(Earnings) Loss from equity method investment
|
|
|
(955,751
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(955,751
|
)
|
Stock-based compensation
|
|
|
700,688
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
700,688
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
—
|
|
|
|
570,197
|
|
|
|
(12,563,873
|
)
|
|
|
—
|
|
|
|
(11,993,676
|
)
|
Accrued interest on financing receivables
|
|
|
—
|
|
|
|
(2,078,175
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,078,175
|
)
|
Other assets
|
|
|
517,880
|
|
|
|
(201,431
|
)
|
|
|
73,734
|
|
|
|
—
|
|
|
|
390,183
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
(3,366,349
|
)
|
|
|
649,937
|
|
|
|
(962,907
|
)
|
|
|
—
|
|
|
|
(3,679,319
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(33,552,095
|
)
|
|
|
(645,511
|
)
|
|
|
(14,769,320
|
)
|
|
|
—
|
|
|
|
(48,966,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
—
|
|
|
|
(710,863
|
)
|
|
|
—
|
|
|
|
(710,863
|
)
|
Carrying value of matured life insurance policies
|
|
|
—
|
|
|
|
1,347,089
|
|
|
|
5,292,830
|
|
|
|
—
|
|
|
|
6,639,919
|
|
Financing receivables from affiliates issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Equity method investment acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payment of capital contributions
|
|
|
(497,879
|
)
|
|
|
(9,715,465
|
)
|
|
|
—
|
|
|
|
10,213,344
|
|
|
|
—
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
(497,879
|
)
|
|
|
(8,368,376
|
)
|
|
|
4,581,967
|
|
|
|
10,213,344
|
|
|
|
5,929,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
3,937,020
|
|
|
|
—
|
|
|
|
3,937,020
|
|
Repayments of senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,079,600
|
)
|
|
|
—
|
|
|
|
(2,079,600
|
)
|
Proceeds from issuance of L Bonds
|
|
|
107,012,114
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
107,012,114
|
|
Payments for issuance and redemptions of L Bonds
|
|
|
(61,679,235
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(61,679,235
|
)
|
Issuance (repurchase) of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Payments for redemption of preferred stock
|
|
|
(2,920,292
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,920,292
|
)
|
Preferred stock dividends
|
|
|
(4,231,641
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,231,641
|
)
|
Issuance of member capital
|
|
|
—
|
|
|
|
(1,010,542
|
)
|
|
|
11,223,886
|
|
|
|
(10,213,344
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
38,180,946
|
|
|
|
(1,010,542
|
)
|
|
|
13,081,306
|
|
|
|
(10,213,344
|
)
|
|
|
40,038,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
4,130,972
|
|
|
|
(10,024,429
|
)
|
|
|
2,893,953
|
|
|
|
—
|
|
|
|
(2,999,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
57,570,832
|
|
|
|
13,807,424
|
|
|
|
5,506,417
|
|
|
|
—
|
|
|
|
76,884,673
|
|
END OF PERIOD
|
|
$
|
61,701,804
|
|
|
$
|
3,782,995
|
|
|
$
|
8,400,370
|
|
|
$
|
—
|
|
|
$
|
73,885,169
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Cash Flows (continued)
For the three months ended September 30, 2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,522,009
|
)
|
|
$
|
8,324,953
|
|
|
$
|
5,191,801
|
|
|
$
|
(13,516,754
|
)
|
|
$
|
(10,522,009
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(7,250,273
|
)
|
|
|
(6,266,481
|
)
|
|
|
—
|
|
|
|
13,516,754
|
|
|
|
—
|
|
Change in fair value of life insurance policies
|
|
|
—
|
|
|
|
(3,485,452
|
)
|
|
|
(21,354,115
|
)
|
|
|
—
|
|
|
|
(24,839,567
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
2,311,567
|
|
|
|
—
|
|
|
|
263,755
|
|
|
|
—
|
|
|
|
2,575,322
|
|
Amortization of discount or premium on financing receivables
|
|
|
251,672
|
|
|
|
(251,672
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
528,461
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
528,461
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on financing receivables
|
|
|
(2,839,926
|
)
|
|
|
(1,444,444
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,284,370
|
)
|
Life insurance policy benefits receivable
|
|
|
—
|
|
|
|
(2,000,000
|
)
|
|
|
18,562,304
|
|
|
|
—
|
|
|
|
16,562,304
|
|
Other assets
|
|
|
(82,158
|
)
|
|
|
98,900
|
|
|
|
305,226
|
|
|
|
—
|
|
|
|
321,968
|
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account payable and other accrued expenses
|
|
|
2,931,894
|
|
|
|
(384,380
|
)
|
|
|
(1,157,273
|
)
|
|
|
—
|
|
|
|
1,390,241
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(14,670,772
|
)
|
|
|
(5,408,576
|
)
|
|
|
1,811,698
|
|
|
|
—
|
|
|
|
(18,267,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
(11,368,457
|
)
|
|
|
(31,523,307
|
)
|
|
|
—
|
|
|
|
(42,891,764
|
)
|
Carrying value of matured life insurance policies
|
|
|
—
|
|
|
|
669,349
|
|
|
|
1,656,640
|
|
|
|
—
|
|
|
|
2,325,989
|
|
Equity method investment acquired
|
|
|
(1,421,059
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,421,059
|
)
|
Payment of capital contributions
|
|
|
(59,567,886
|
)
|
|
|
(47,346,065
|
)
|
|
|
—
|
|
|
|
106,913,951
|
|
|
|
—
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
(60,988,945
|
)
|
|
|
(58,045,173
|
)
|
|
|
(29,866,667
|
)
|
|
|
106,913,951
|
|
|
|
(41,986,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Repayments of senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(18,425,136
|
)
|
|
|
—
|
|
|
|
(18,425,136
|
)
|
Proceeds from issuance of L Bonds
|
|
|
68,884,369
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,884,369
|
|
Payments for issuance and redemptions of L Bonds
|
|
|
(20,195,657
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,195,657
|
)
|
Issuance (redemption) of common stock
|
|
|
682,954
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
682,954
|
|
Common stock dividends
|
|
|
(25,709,412
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,709,412
|
)
|
Proceeds from issuance of convertible preferred
stock
|
|
|
50,000,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000,000
|
|
Payments for redemption of preferred stock
|
|
|
(821,778
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(821,778
|
)
|
Preferred stock dividends
|
|
|
(4,313,542
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,313,542
|
)
|
Issuance of member capital
|
|
|
—
|
|
|
|
58,589,352
|
|
|
|
48,324,599
|
|
|
|
(106,913,951
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
68,526,934
|
|
|
|
58,589,352
|
|
|
|
29,899,463
|
|
|
|
(106,913,951
|
)
|
|
|
50,101,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(7,132,783
|
)
|
|
|
(4,864,397
|
)
|
|
|
1,844,494
|
|
|
|
—
|
|
|
|
(10,152,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
123,017,408
|
|
|
|
6,195,102
|
|
|
|
1,883,603
|
|
|
|
—
|
|
|
|
131,096,113
|
|
END OF PERIOD
|
|
$
|
115,884,625
|
|
|
$
|
1,330,705
|
|
|
$
|
3,728,097
|
|
|
$
|
—
|
|
|
$
|
120,943,427
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Cash Flows (continued)
For the nine months ended September 30, 2019
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(56,348,077
|
)
|
|
$
|
47,884,228
|
|
|
$
|
34,943,253
|
|
|
$
|
(82,827,481
|
)
|
|
$
|
(56,348,077
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(43,025,044
|
)
|
|
|
(39,802,437
|
)
|
|
|
—
|
|
|
|
82,827,481
|
|
|
|
—
|
|
Change in fair value of life insurance policies
|
|
|
—
|
|
|
|
(8,713,865
|
)
|
|
|
(39,317,330
|
)
|
|
|
—
|
|
|
|
(48,031,195
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
9,191,110
|
|
|
|
—
|
|
|
|
791,265
|
|
|
|
—
|
|
|
|
9,982,375
|
|
Accretion of discount on financing receivables from affiliates
|
|
|
—
|
|
|
|
(1,292,434
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,292,434
|
)
|
Provision for uncollectible policy benefit receivable
|
|
|
—
|
|
|
|
—
|
|
|
|
200,897
|
|
|
|
—
|
|
|
|
200,897
|
|
(Earnings) Loss from equity method investment
|
|
|
371,281
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
371,281
|
|
Stock-based compensation
|
|
|
1,365,219
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,365,219
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
—
|
|
|
|
4,038,800
|
|
|
|
(5,148,186
|
)
|
|
|
—
|
|
|
|
(1,109,386
|
)
|
Accrued interest on financing receivables
|
|
|
—
|
|
|
|
(5,123,774
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,123,774
|
)
|
Other assets
|
|
|
(1,048,310
|
)
|
|
|
(112,467
|
)
|
|
|
(3,395,677
|
)
|
|
|
—
|
|
|
|
(4,556,454
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
(443,269
|
)
|
|
|
(252,502
|
)
|
|
|
(7,736,395
|
)
|
|
|
—
|
|
|
|
(8,432,166
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(89,937,090
|
)
|
|
|
(3,374,451
|
)
|
|
|
(19,662,173
|
)
|
|
|
—
|
|
|
|
(112,973,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
(8,682,044
|
)
|
|
|
(23,567,353
|
)
|
|
|
—
|
|
|
|
(32,249,397
|
)
|
Carrying value of matured life insurance policies
|
|
|
—
|
|
|
|
3,403,008
|
|
|
|
17,281,959
|
|
|
|
—
|
|
|
|
20,684,967
|
|
Financing receivables from affiliates issued
|
|
|
—
|
|
|
|
(50,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(50,000,000
|
)
|
Equity method investment acquired
|
|
|
(10,000,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,000,000
|
)
|
Payment of capital contributions
|
|
|
(102,353,486
|
)
|
|
|
(42,021,014
|
)
|
|
|
—
|
|
|
|
144,374,500
|
|
|
|
—
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
(112,353,486
|
)
|
|
|
(97,300,050
|
)
|
|
|
(6,285,394
|
)
|
|
|
144,374,500
|
|
|
|
(71,564,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
3,937,020
|
|
|
|
—
|
|
|
|
3,937,020
|
|
Repayments of senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(21,648,615
|
)
|
|
|
—
|
|
|
|
(21,648,615
|
)
|
Proceeds from issuance of L Bonds
|
|
|
278,238,656
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
278,238,656
|
|
Payments for issuance and redemptions of L Bonds
|
|
|
(108,656,765
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(108,656,765
|
)
|
Issuance (repurchase) of common stock
|
|
|
57,518
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,518
|
|
Payments for redemption of preferred stock
|
|
|
(6,134,538
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,134,538
|
)
|
Preferred stock dividends
|
|
|
(12,806,173
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,806,173
|
)
|
Issuance of member capital
|
|
|
—
|
|
|
|
97,007,915
|
|
|
|
47,366,585
|
|
|
|
(144,374,500
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
150,698,698
|
|
|
|
97,007,915
|
|
|
|
29,654,990
|
|
|
|
(144,374,500
|
)
|
|
|
132,987,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(51,591,878
|
)
|
|
|
(3,666,586
|
)
|
|
|
3,707,423
|
|
|
|
—
|
|
|
|
(51,551,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
113,293,682
|
|
|
|
7,449,581
|
|
|
|
4,692,947
|
|
|
|
—
|
|
|
|
125,436,210
|
|
END OF PERIOD
|
|
$
|
61,701,804
|
|
|
$
|
3,782,995
|
|
|
$
|
8,400,370
|
|
|
$
|
—
|
|
|
$
|
73,885,169
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed
Consolidating Statements of Cash Flows (continued)
For the nine months ended September 30, 2018
|
|
Parent
|
|
|
Guarantor
Subsidiary
|
|
|
Non-Guarantor
Subsidiary
|
|
|
Eliminations
|
|
|
Consolidated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,757,655
|
)
|
|
$
|
29,720,564
|
|
|
$
|
20,659,598
|
|
|
$
|
(50,380,162
|
)
|
|
$
|
(19,757,655
|
)
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity of subsidiaries
|
|
|
(26,555,832
|
)
|
|
|
(23,824,330
|
)
|
|
|
—
|
|
|
|
50,380,162
|
|
|
|
—
|
|
Change in fair value of life insurance policies
|
|
|
—
|
|
|
|
(9,691,293
|
)
|
|
|
(46,367,043
|
)
|
|
|
—
|
|
|
|
(56,058,336
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
6,450,018
|
|
|
|
—
|
|
|
|
791,265
|
|
|
|
—
|
|
|
|
7,241,283
|
|
Amortization of discount or premium on financing receivables
|
|
|
251,672
|
|
|
|
(251,672
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation
|
|
|
788,865
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
788,865
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest on financing receivable
|
|
|
(2,839,926
|
)
|
|
|
(1,444,444
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,284,370
|
)
|
Life insurance policy benefits receivable
|
|
|
—
|
|
|
|
(1,300,000
|
)
|
|
|
7,486,065
|
|
|
|
—
|
|
|
|
6,186,065
|
|
Other assets
|
|
|
(2,477,789
|
)
|
|
|
164,028
|
|
|
|
826,523
|
|
|
|
—
|
|
|
|
(1,487,238
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account payable and other accrued expenses
|
|
|
3,832,942
|
|
|
|
(365,125
|
)
|
|
|
(3,341,098
|
)
|
|
|
—
|
|
|
|
126,719
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(40,307,705
|
)
|
|
|
(6,992,272
|
)
|
|
|
(19,944,690
|
)
|
|
|
—
|
|
|
|
(67,244,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
(26,916,457
|
)
|
|
|
(71,524,071
|
)
|
|
|
—
|
|
|
|
(98,440,528
|
)
|
Carrying value of matured life insurance policies
|
|
|
—
|
|
|
|
2,623,779
|
|
|
|
10,933,853
|
|
|
|
—
|
|
|
|
13,557,632
|
|
Equity method investment acquired
|
|
|
(1,421,059
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,421,059
|
)
|
Payment of capital contributions
|
|
|
(136,620,599
|
)
|
|
|
(112,777,113
|
)
|
|
|
—
|
|
|
|
249,397,712
|
|
|
|
—
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
(138,041,658
|
)
|
|
|
(137,069,791
|
)
|
|
|
(60,590,218
|
)
|
|
|
249,397,712
|
|
|
|
(86,303,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
12,903,166
|
|
|
|
—
|
|
|
|
12,903,166
|
|
Repayments of senior debt
|
|
|
—
|
|
|
|
—
|
|
|
|
(63,463,452
|
)
|
|
|
—
|
|
|
|
(63,463,452
|
)
|
Proceeds from issuance of L Bonds
|
|
|
166,081,914
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166,081,914
|
|
Payments for issuance and redemptions of L Bonds
|
|
|
(46,151,926
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(46,151,926
|
)
|
Issuance (redemption) of common stock
|
|
|
682,954
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
682,954
|
|
Common stock dividends
|
|
|
(25,709,412
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(25,709,412
|
)
|
Proceeds from issuance of convertible preferred stock
|
|
|
50,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000,000
|
|
Proceeds from issuance of redeemable preferred stock
|
|
|
56 ,238,128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56 ,238,128
|
|
Payments for issuance of preferred stock
|
|
|
(4,142,294
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,142,294
|
)
|
Payments for redemption of preferred stock
|
|
|
(2,361,692
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,361,692
|
)
|
Preferred stock dividends
|
|
|
(12,356,513
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,356,513
|
)
|
Issuance of member capital
|
|
|
—
|
|
|
|
134,538,735
|
|
|
|
114,858,977
|
|
|
|
(249,397,712
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
182,281,159
|
|
|
|
134,538,735
|
|
|
|
64,298,691
|
|
|
|
(249,397,712
|
)
|
|
|
131,720,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
3,931,796
|
|
|
|
(9,523,328
|
)
|
|
|
(16,236,217
|
)
|
|
|
—
|
|
|
|
(21,827,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
111,952,829
|
|
|
|
10,854,033
|
|
|
|
19,964,314
|
|
|
|
—
|
|
|
|
142,771,176
|
|
END OF PERIOD
|
|
$
|
115,884,625
|
|
|
$
|
1,330,705
|
|
|
$
|
3,728,097
|
|
|
$
|
—
|
|
|
$
|
120,943,427
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(24)
Concentration
Life
Insurance Carriers
We
mostly purchase life insurance policies written by life insurance companies rated investment-grade by certain third-party rating
agencies. As a result, there may be certain concentrations of policies with life insurance companies. The following summarizes
the face value of insurance policies with specific life insurance companies exceeding 10% of the total face value held by our
portfolio.
Life Insurance Company
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
John Hancock
|
|
|
14.02
|
%
|
|
|
13.71
|
%
|
Lincoln National
|
|
|
11.22
|
%
|
|
|
11.33
|
%
|
AXA Equitable
|
|
|
10.65
|
%
|
|
|
10.83
|
%
|
The
following summarizes the number of insureds’ state of residence exceeding 10% of the total face value held by us:
State of Residence
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
California
|
|
|
17.38
|
%
|
|
|
18.02
|
%
|
Florida
|
|
|
14.91
|
%
|
|
|
15.34
|
%
|
Investment
in Beneficient
During 2018, in connection with the Exchange
Transaction, the Company (i) acquired a limited partnership investment in the common units of BEN LP, (ii) entered into a Commercial
Loan with BEN LP as borrower, and (iii) received an Option Agreement to acquire additional common units of BEN LP. The total carrying
value of these investments at September 30, 2019 and December 31, 2018 was 650,444,000 and $584,173,000, respectively, representing
41.7% and 39.4%, respectively, of the Company’s consolidated assets. Currently there is no liquid market for the common units
of BEN LP and it is possible none will develop. Although we intend to hold the Commercial Loan to maturity, there is currently
no liquid market for this loan and it is possible none will develop.
(25)
Subsequent Events
Subsequent to September 30, 2019, policy
benefits on 12 policies covering 11 individuals have been realized. The face value of insurance benefits of these policies was
$14,544,000.
Subsequent to September 30, 2019, we issued
approximately $73,160,000 of L Bonds.
Second Amended and Restated Senior Credit
Facility with LNV Corporation
On November 1, 2019, DLP IV entered into
a Second Amended and Restated Loan and Security Agreement with LNV Corporation, as lender, and CLMG Corp., as the administrative
agent on behalf of the lenders under the agreement (the “Second Amended and Restated Agreement”), which replaced an
amended and restated agreement dated September 27, 2017 that previously governed the DLP IV’s senior credit facility (the
“Second Amended Facility”). The Second Amended Facility makes available a total of up to $300,000,000 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 Second Amended 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 Second
Amended 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.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Under the Second Amended and Restated Agreement,
DLP IV has granted the administrative agent, for the benefit of the lenders under the Second Amended Facility, a security interest
in all of DLP IV’s assets.
The Company is subject to various financial
and non-financial covenants under the Second Amended and Restated Agreement, including, but not limited to, compliance with laws,
preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that
neither DLP IV nor GWG Life, LLC become an investment company.
In conjunction with entering into the Second
Amended and Restated Agreement, 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 under the Second Amended Facility (inclusive of
certain fees and expenses incurred in connection with the negotiation and entry into the Second Amended and Restated Agreement).
After giving effect to such advance, the amount outstanding under the Second Amended Facility on November 1, 2019 was approximately
$175.5 million.
Insurtech
On November 11, 2019, GWG contributed the
common stock and membership interests of its wholly owned Life Epigenetics and youSurance subsidiaries (“Insurtech Subsidiaries”)
to a legal entity, InsurTech Holdings, LLC (“InsurTech Holdings”) in exchange for a membership interest in InsurTech
Holdings. Although we currently own 100% of InsurTech Holding’s equity, we do not have a controlling financial interest in
InsurTech Holdings because the managing member has substantive participating rights. Therefore, we will account for our ownership
interest in InsurTech Holdings as an equity method investment.
The transaction resulted in a loss of control
of the Insurtech Subsidiaries and as a result we will deconsolidate the subsidiaries and record an investment in equity method
investee during the fourth quarter of 2019. The loss of control requires us to measure the equity investment at fair value. The
valuation of our equity investment is not complete, and we expect to record the resulting gain or loss in earnings during the fourth
quarter of 2019.
In connection with the transaction, GWG
contributed $1.25 million in cash to InsurTech Holdings and is committed to contribute an additional $18.75 million to the entity
over the next two years.