Attached files

file filename
EX-99.2 - PORTFOLIO OF LIFE INSURANCE POLICIES AS OF JUNE 30, 2018 - GWG Holdings, Inc.f10q0618ex99-2_gwghold.htm
EX-99.1 - LETTER FROM MODEL ACTUARIAL PRICING SYSTEMS, DATED APRIL 23, 2018 - GWG Holdings, Inc.f10q0618ex99-1_gwghold.htm
EX-32.1 - CERTIFICATION - GWG Holdings, Inc.f10q0618ex32-1_gwgholdings.htm
EX-31.2 - CERTIFICATION - GWG Holdings, Inc.f10q0618ex31-2_gwgholdings.htm
EX-31.1 - CERTIFICATION - GWG Holdings, Inc.f10q0618ex31-1_gwgholdings.htm
EX-10.1 - SECOND AMENDMENT TO MASTER EXCHANGE AGREEMENT, DATED JUNE 29, 2018 - GWG Holdings, Inc.f10q0618ex10-1_gwgholdings.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

 

FORM 10-Q

 

 

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934

 

For the transition period from _________ to ________

 

Commission File Number: None

 

 

 

GWG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   26-2222607
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

220 South Sixth Street, Suite 1200

Minneapolis, MN 55402

(Address of principal executive offices, including zip code)

 

(612) 746-1944

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer ☐ (Do not check if a smaller reporting company) Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes  ☒ No

 

As of August 14, 2018, GWG Holdings, Inc. had 5,813,555 shares of common stock outstanding.

 

 

 

 

 

 

GWG HOLDINGS, INC.

 

Index to Form 10-Q

for the Quarter Ended June 30, 2018

 

  Page No.
PART I. FINANCIAL INFORMATION  
Item 1. Financial Statements 1
  Condensed Consolidated Balance Sheets as of June 30, 2018, and December 31, 2017 1
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 2
  Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2018 and 2017 3
  Consolidated Statement of Changes in Stockholders’ Equity 5
  Notes to Condensed Consolidated Financial Statements 6
Item 1A.

Risk Factors

29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
Item 4. Controls and Procedures 48
     
PART II. OTHER INFORMATION  
Item 6. Exhibits 49
     
SIGNATURES 50

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30,
2018
   December 31,
2017
 
   (unaudited)     
A S S E T S    
Cash and cash equivalents  $124,444,804   $114,421,491 
Restricted cash   6,651,309    28,349,685 
Investment in life insurance policies, at fair value   726,063,244    650,527,353 
Life insurance policy benefits receivable   27,035,000    16,658,761 
Other assets   10,841,567    8,898,884 
TOTAL ASSETS  $895,035,924   $818,856,174 
           
L I A B I L I T I E S & S T O C K H O L D E R S’  E Q U I T Y          
LIABILITIES          
Senior credit facility with LNV Corporation  $180,630,553   $212,238,192 
L Bonds   518,788,942    447,393,568 
Accounts payable   2,626,283    6,394,439 
Interest and dividends payable   16,936,725    15,427,509 
Other accrued expenses   4,031,070    3,730,723 
TOTAL LIABILITIES   723,013,573    685,184,431 
           
STOCKHOLDERS’ EQUITY          
           
REDEEMABLE PREFERRED STOCK          
(par value $0.001; shares authorized 100,000; shares outstanding 98,095 and 98,611; liquidation preference of $98,667,000 and $99,186,000 as of June 30, 2018 and December 31, 2017, respectively)   88,997,278    92,840,243 
SERIES 2 REDEEMABLE PREFERRED STOCK          
(par value $0.001; shares authorized 150,000; shares outstanding 148,705 and 88,709; liquidation preference of $149,573,000 and $89,208,000 as of June 30, 2018 and December 31, 2017, respectively)   131,704,423    80,275,204 
COMMON STOCK          
(par value $0.001: shares authorized 210,000,000; shares issued and outstanding 5,813,555 as of both June 30, 2018 and December 31, 2017)   5,813    5,813 
Additional paid-in capital   -    - 
Accumulated deficit   (48,685,163)   (39,449,517)
TOTAL STOCKHOLDERS’ EQUITY   172,022,351    133,671,743 
           
TOTAL LIABILITIES & EQUITY  $895,035,924   $818,856,174 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

1 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,
2018
   June 30,
2017
   June 30,
2018
   June 30,
2017
 
REVENUE                
Gain on life insurance policies, net  $23,339,750   $11,296,266   $37,208,495   $30,696,086 
Interest and other income   975,198    371,320    1,648,125    1,059,845 
TOTAL REVENUE   24,314,948    11,667,586    38,856,620    31,755,931 
                     
EXPENSES                    
Interest expense   17,147,850    12,246,025    33,211,187    25,490,241 
Employee compensation and benefits   3,235,699    3,741,299    6,978,368    6,904,360 
Legal and professional fees   1,155,728    1,330,589    2,329,357    2,276,937 
Other expenses   2,832,777    3,761,098    5,573,354    6,541,420 
TOTAL EXPENSES   24,372,054    21,079,011    48,092,266    41,212,958 
                     
INCOME (LOSS) BEFORE INCOME TAXES   (57,106)   (9,411,425)   (9,235,646)   (9,457,027)
INCOME TAX EXPENSE (BENEFIT)   -    (3,717,174)   -    (3,717,674)
                     
NET INCOME (LOSS)   (57,106)   (5,694,251)   (9,235,646)   (5,739,353)
                     
Preferred stock dividends   4,338,487    2,031,097    8,042,971    3,898,857 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS  $(4,395,593)  $(7,725,348)  $(17,278,617)  $(9,638,210)
NET INCOME (LOSS) PER SHARE                    
Basic  $(0.76)  $(1.34)  $(2.97)  $(1.69)
Diluted  $(0.76)  $(1.34)  $(2.97)  $(1.69)
                     
WEIGHTED AVERAGE SHARES OUTSTANDING                    
Basic   5,813,555    5,777,724    5,813,555    5,710,909 
Diluted   5,813,555    5,777,724    5,813,555    5,710,909 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

2 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,
2018
   June 30,
2017
   June 30,
2018
   June 30,
2017
 
CASH FLOWS FROM OPERATING ACTIVITIES                    
Net income (loss)  $(57,106)  $(5,694,251)  $(9,235,646)  $(5,739,353)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:                    
Change in fair value of life insurance policies   (14,573,175)   (15,235,502)   (31,218,769)   (29,119,335)
Amortization of deferred financing and issuance costs   2,402,773    1,497,948    4,665,961    4,164,151 
Deferred income taxes   -    (3,717,174)        (3,717,674)
(Increase) decrease in operating assets:                    
Life insurance policy benefits receivable   (14,732,270)   2,005,000    (10,376,239)   (1,625,000)
Other assets   (1,732,765)   55,656    (1,809,206)   2,252,361 
Increase (decrease) in operating liabilities:                    
Accounts payable and other accrued expenses   542,090    1,400,844    (1,003,118)   2,947,050 
NET CASH FLOWS USED IN OPERATING ACTIVITIES   (28,150,453)   (19,687,479)   (48,977,017)   (30,837,800)
                     
CASH FLOWS FROM INVESTING ACTIVITIES                    
Investment in life insurance policies   (30,248,939)   (19,432,338)   (55,548,764)   (42,121,671)
Carrying value of matured life insurance policies   6,148,349    3,014,834    11,231,643    5,383,808 
NET CASH FLOWS USED IN INVESTING ACTIVITIES   (24,100,590)   (16,417,504)   (44,317,121)   (36,737,863)
                     
CASH FLOWS FROM FINANCING ACTIVITIES                    
Net borrowings on (repayments of) senior debt   (29,080,815)   (3,845,037)   (32,135,150)   (7,099,537)
Payments for issuance of senior debt   -    (1,076,118)   -    (1,190,412)
Payments for redemption of Series I Secured Notes   -    (4,348,372)   -    (9,798,261)
Proceeds from issuance of L Bonds   60,536,446    31,875,811    97,197,545    56,744,470 
Payments for issuance and redemption of L Bonds   (13,710,821)   (15,025,566)   (25,956,269)   (39,197,163)
Issuance (repurchase) of common stock   -    4    -    (1,603,556)
Proceeds from issuance of preferred stock   14,372,959    34,301,747    56,238,128    61,480,941 
Payments for issuance of preferred stock   (984,599)   (1,945,618)   (4,142,294)   (3,963,105)
Payments for redemption of preferred stock   (1,212,690)   (1,372,593)   (1,539,914)   (1,759,332)
Preferred stock dividends   (4,338,487)   (2,031,097)   (8,042,971)   (3,898,857)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES   25,581,993    36,533,161    81,619,075    49,715,188 
                     
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (26,669,050)   428,178    (11,675,063)   (17,860,475)
                     
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH                    
BEGINNING OF PERIOD   157,765,163    98,024,925    142,771,176    116,313,578 
END OF PERIOD  $131,096,113   $98,453,103   $131,096,113   $98,453,103 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

3 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED

(unaudited)

 

   Three Months Ended   Six Months Ended 
   June 30,
2018
   June 30,
2017
   June 30,
2018
   June 30,
2017
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                
Interest paid  $13,776,000   $14,323,000   $27,251,000   $26,548,000 
Premiums paid, including prepaid  $12,393,000   $11,646,000   $24,226,000   $22,606,000 
Stock-based compensation  $47,000   $89,000   $260,000   $406,000 
Payments for exercised stock options  $-    100,000    37,000    100,000 
NON-CASH INVESTING AND FINANCING ACTIVITIES                    
Options and stock appreciation rights issued   164,000    239,000    168,000    264,000 
L Bonds:                    
Conversion of accrued interest and commissions payable to principal  $219,000   $397,000   $562,000   $905,000 
Conversion of L Bonds to redeemable preferred stock  $125,000   $657,000   $4,546,000   $1,788,000 
Preferred Stock:                    
Issuance of Series A Preferred Stock in lieu of cash dividends  $-   $166,000   $-   $337,000 
Conversion of L Bonds to redeemable preferred stock  $125,000   $657,000   $4,546,000   $1,788,000 
Investment in life insurance policies included in accounts payable  $990,000   $1,296,000   $990,000   $1,296,000 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

4 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

 

   Preferred Stock   Preferred   Common   Common Stock   Additional Paid-in   Accumulated   Total 
   Shares   Stock   Shares   (par)   Capital   Deficit   Equity 
Balance, December 31, 2016   2,699,704   $78,726,297    5,980,190   $5,980   $7,383,515   $(18,817,294)  $67,298,498 
                                    
Net income (loss)   -    -    -    -    -    (20,632,223)   (20,632,223)
                                    
Issuance of common stock   -    -    33,810    33    320,970    -    321,003 
                                    
Redemption of common stock   -    -    (200,445)   (200)   (1,603,360)   -    (1,603,560)
                                    
Issuance of Series A preferred stock   71,237    498,659    -    -    -    -    498,659 
                                    
Redemption of Series A preferred stock   (2,711,916)   (20,199,792)   -    -    -    -    (20,199,792)
                                    
Issuance of redeemable preferred stock   129,622    122,933,106    -    -    (2,338,457)   -    120,594,649 
                                    
Redemption of redeemable preferred stock   (1,328)   (1,327,776)   -    -    -    -    (1,327,776)
                                    
Preferred stock dividends   -    (8,925,807)   -    -    (3,776,534)   -    (12,702,341)
                                    
Stock-based compensation   -    1,410,760    -    -    13,866    -    1,424,626 
Balance, December 31, 2017   187,319   $173,115,447    5,813,555   $5,813   $-   $(39,449,517)  $133,671,743 
                                    
Net income (loss)   -    -    -    -    -    (9,235,646)   (9,235,646)
                                    
Issuance of redeemable preferred stock   61,021    56,878,238    -    -    -    -    56,878,238 
                                    
Redemption of redeemable preferred stock   (1,540)   (1,539,914)   -    -    -    -    (1,539,914)
                                    
Preferred stock dividends   -    (8,042,971)   -    -        -    (8,042,971)
                                    
Stock-based compensation   -    290,901    -    -    -    -    290,901 
Balance, June 30, 2018   246,800   $220,701,701    5,813,555   $5,813   $-   $(48,685,163)  $172,022,351 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

5 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(1) Nature of Business and Summary of Significant Accounting Policies

 

Nature of Business — We are a financial services company committed to disrupting and transforming the life insurance and related industries. We built our business by creating opportunities for consumers to obtain significantly more value for their life insurance policies in a secondary market as compared to the traditional options offered by the insurance industry. We are enhancing and extending our activities in the life insurance industry by bringing step change technology through the commercialization of advanced epigenetic technology. At the same time, we are creating opportunities for investors to receive income and capital appreciation from our investment activities related to the life insurance industry.

 

GWG Holdings, Inc. and all of its subsidiaries are incorporated and organized in Delaware. Unless the context otherwise requires or we specifically so indicate, all references in these footnotes to “we,” “us,” “our,” “our Company,” “GWG,” or the “Company” refer to GWG Holdings, Inc. and its subsidiaries collectively and on a consolidated basis. References to the full names of particular entities, such as “GWG Holdings, Inc.” or “GWG Holdings,” are meant to refer only to the particular entity referenced.

 

On August 25, 2016, GWG Holdings formed a wholly owned subsidiary, currently named Life Epigenetics Inc. (“Life Epigenetics”), to commercialize advanced epigenetic technology for the life insurance industry related to its exclusive license for “DNA Methylation Based Predictor of Mortality” technology.

 

Use of Estimates — The preparation of our condensed consolidated financial statements in conformity with the Generally Accepted Accounting Principles in the United States of America (GAAP) requires management to make significant estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue during the reporting period. We regularly evaluate estimates and assumptions, which are based on current facts, historical experience, management’s judgment, and various other factors that we believe to be reasonable under the circumstances. Our actual results may differ materially and adversely from our estimates. The most significant estimates with regard to these condensed consolidated financial statements relate to (1) the determination of the assumptions used in estimating the fair value of our investments in life insurance policies and (2) the value of our deferred tax assets and liabilities.

 

Cash and Cash Equivalents — We consider cash in demand deposit accounts and temporary investments purchased with an original maturity of three months or less to be cash equivalents. We maintain our cash and cash equivalents with highly rated financial institutions. The balances in our bank accounts may exceed Federal Deposit Insurance Corporation limits. We periodically evaluate the risk of exceeding insured levels and may transfer funds as we deem appropriate.

 

Life Insurance Policies — Accounting Standards Codification 325-30, Investments in Insurance Contracts permits a reporting entity to account for its investments in life insurance policies using either the investment method or the fair value method. We elected to use the fair value method to account for our life insurance policies. We initially record our purchase of life insurance policies at the transaction price, which is the amount paid for the policy, inclusive of all external fees and costs associated with the acquisition. At each subsequent reporting period, we re-measure the investment at fair value in its entirety and recognize the change in fair value as unrealized gain or loss in the current period, net of premiums paid, within gain on life insurance policies, net in our condensed consolidated statements of operations.

 

In a case where our acquisition of a policy is not complete as of a reporting date, but we have nonetheless advanced direct costs and deposits for the acquisition, those costs and deposits are recorded as other assets on our condensed consolidated balance sheets until the acquisition is complete and we have secured title to the policy. On both June 30, 2018 and December 31, 2017, a total of $0 of our other assets comprised direct costs and deposits that we had advanced for life insurance policy acquisitions.

 

6 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

We also recognize realized gain (or loss) from a life insurance policy upon one of the two following events: (1) our receipt of notice or verified mortality of the insured; or (2) our sale of the policy (upon filing of change-of-ownership forms and receipt of payment). In the case of mortality, the gain (or loss) we recognize is the difference between the policy benefits and the carrying value of the policy once we determine that collection of the policy benefits is realizable and reasonably assured. In the case of a policy sale, the gain (or loss) we recognize is the difference between the sale price and the carrying value of the policy on the date we receive sale proceeds.

 

Other Assets — Life Epigenetics is engaged in the development of intellectual property related to its exclusive license for the “DNA Methylation Based Predictor of Mortality” technology for the life insurance industry. The cost of entering into this license agreement is included in other assets on our condensed consolidated balance sheets.

 

To maintain the Company’s life insurance provider licenses in certain states, we are required to keep cash security deposits with the states’ licensing authorities. Security deposits included in other assets were $575,000 at both June 30, 2018 and December 31, 2017.

 

Stock-Based Compensation — We measure and recognize compensation expense for all stock-based payments at fair value on the grant date over the requisite service period. We use the Black-Scholes option pricing model to determine the weighted-average fair value of stock options. For restricted stock grants, fair value is determined as of the closing price of our common stock on the date of grant. Stock-based compensation expense is recorded in general and administrative expenses based on the classification of the employee or vendor. The determination of fair value of stock-based payment awards on the date of grant is affected by our stock price and a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and the expected duration of the awards.

 

The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on the standard deviation of the average continuously compounded rate of return of five selected comparable companies. We have not paid common stock dividends.

 

Deferred Financing and Issuance CostsLoans advanced to us under our senior credit facility with LNV Corporation, as described in Note 6, are reported net of financing costs, including issuance costs, sales commissions and other direct expenses, which are amortized using the straight-line method over the term of the facility. We had no loans advanced to us under our senior credit facility with Autobahn Funding Company during the year ended December 31, 2017 and this credit facility has since been terminated, as described in Note 5. The L Bonds, as described in Note 8, are reported net of financing costs, which are amortized using the interest method over the term of those borrowings. The Series I Secured Notes, as described in Note 7 have been redeemed, was reported net of financing costs, all of which were fully amortized using the interest method as of December 31, 2017. The Series A Convertible Preferred Stock (“Series A”), as described in Note 9, was reported net of financing costs (including the fair value of warrants issued), all of which were fully amortized using the interest method as of December 31, 2017. All shares of Series A have been redeemed and the obligations thereunder satisfied. Selling and issuance costs of Redeemable Preferred Stock (“RPS”) and Series 2 Redeemable Preferred Stock (“RPS 2”), described in Notes 10 and 11, are netted against additional paid-in-capital, until depleted, and then against the outstanding balance of the preferred stock.

 

Earnings (loss) per Share — Basic earnings (loss) per share attributable to common shareholders are calculated using the weighted-average number of shares outstanding during the reported period. Diluted earnings (loss) per share are calculated based on the potential dilutive impact of our Series A, RPS, RPS 2, warrants and stock options. Due to our net loss attributable to common shareholders for the three and six months ended June 30, 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.

 

Recently Issued Accounting Pronouncements — On February 25, 2016, the FASB issued Accounting Standards Update 2016-02 Leases (“ASU 2016-02”). The new guidance is effective for fiscal years beginning after December 15, 2018. ASU 2016-02 provides more transparency and comparability in the financial statements of lessees by recognizing all leases with a term greater than twelve months on the balance sheet. Lessees will also be required to disclose key information about their leases. Early adoption is permitted. We are currently evaluating the impact of the adoption of this pronouncement and have not yet adopted ASU 2016-02 as of June 30, 2018.

 

In March 2016, the FASB issued Accounting Standards Update 2016-09 (“ASU 2016-09”) to simplify the accounting for stock compensation related to the following items: income tax accounting, award classification, estimation of forfeitures, and cash flow presentation. The new guidance is effective for fiscal years beginning after December 15, 2016. We adopted ASU 2016-09 effective January 1, 2017. The impact of the adoption was not material to the financial statements.

 

In November 2016, the FASB issued Accounting Standards Update 2016-18 (“ASU 2016-18”), which amends ASC 230 Statement of Cash Flows to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance, to be applied retrospectively when adopted, requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. We adopted ASU 2016-18 as of March 31, 2018. The impact of the adoption was not material to the financial statements.

 

7 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(2) Restrictions on Cash

 

Under the terms of our senior credit facility with LNV Corporation (discussed in Note 6), we are required to maintain collection and payment accounts that are used to collect policy benefits from pledged policies, pay annual policy premiums, interest and other charges under the facility, and distribute funds to pay down the facility. The agents for the lender authorize the disbursements from these accounts. At June 30, 2018 and December 31, 2017, there was a balance of $1,937,000 and $19,967,000, respectively, in these collection and payment accounts.

 

To fund the Company’s acquisition of life insurance policies, we are required to maintain escrow accounts. Distributions from these accounts are made according to life insurance policy purchase contracts. At June 30, 2018 and December 31, 2017, there was a balance of $4,714,000 and $8,383,000, respectively, in the Company’s escrow accounts.

 

(3) Investment in Life Insurance Policies

 

Our investments in life insurance policies are valued based on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these policies, net of premiums paid, are recorded in gain on life insurance policies, net in our condensed consolidated statements of operations. Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions generally derived from reports obtained from widely accepted life expectancy providers (other than insured lives covered under small face amount policies – those with $1 million in face value benefits or less), assumptions relating to cost-of-insurance (premium) rates and other assumptions. The discount rate we apply incorporates current information about discount rates applied by other public reporting companies owning portfolios of life insurance policies, the discount rates observed in the life insurance secondary market, market interest rates, the estimated credit exposure to the insurance companies that issued the life insurance policies and management’s estimate of the operational risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. Management has discretion regarding the combination of these and other factors when determining the discount rate. As a result of management’s analysis, a discount rate of 10.45% was applied to our portfolio as of both June 30, 2018 and December 31, 2017.

 

Portfolio Information

 

Our portfolio of life insurance policies, owned by our subsidiaries as of June 30, 2018, is summarized below:

 

Life Insurance Portfolio Summary

 

Total portfolio face value of policy benefits  $1,849,079,000 
Average face value per policy  $1,831,000 
Average face value per insured life  $2,052,000 
Average age of insured (yrs.)*   81.9 
Average life expectancy estimate (yrs.)*   6.8 
Total number of policies   1,010 
Number of unique lives   901 
Demographics   76% Males; 24% Females 
Number of smokers   41 
Largest policy as % of total portfolio face value   0.72%
Average policy as % of total portfolio   0.10%
Average annual premium as % of face value   3.11%

 

* Averages presented in the table are weighted averages.

 

A summary of our policies, organized according to their estimated life expectancy dates as of the reporting date, is as follows:

 

   As of June 30, 2018   As of December 31, 2017 
Years Ending December 31,  Number of Policies   Estimated Fair Value   Face Value   Number of Policies   Estimated Fair Value   Face Value 
2018   4   $3,328,000   $3,375,000    8   $4,398,000   $4,689,000 
2019   35    44,532,000    55,472,000    48    63,356,000    83,720,000 
2020   80    77,686,000    115,736,000    87    79,342,000    127,373,000 
2021   97    104,685,000    176,820,000    98    96,154,000    170,695,000 
2022   119    100,279,000    190,208,000    90    85,877,000    181,120,000 
2023   102    84,874,000    205,340,000    93    69,467,000    175,458,000 
2024   111    83,602,000    232,258,000    100    77,638,000    228,188,000 
Thereafter   462    227,077,000    869,870,000    374    174,295,000    704,905,000 
Totals   1,010   $726,063,000   $1,849,079,000    898   $650,527,000   $1,676,148,000 

 

8 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

We recognized life insurance benefits of $27,623,000 and $10,935,000 during the three months ended June 30, 2018 and 2017, respectively. The forgoing amounts pertained to policies with carrying values of $6,148,000 and $3,015,000, respectively, for which we recorded realized gains of $21,475,000 and $7,920,000, respectively. We recognized life insurance benefits of $42,127,000 and $29,910,000 during the six months ended June 30, 2018 and 2017, respectively. The forgoing amounts pertained to policies with carrying values of $11,232,000 and $5,384,000, for which we recorded realized gains of $30,895,000 and $24,526,000, respectively.

 

Reconciliation of gain on life insurance policies:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
Change in estimated probabilistic cash flows (1)  $17,409,000   $13,431,000   $36,414,000   $27,465,000 
Unrealized gain on acquisitions (2)   5,795,000    8,044,000    12,769,000    18,646,000 
Premiums and other annual fees   (12,708,000)   (11,859,000)   (24,906,000)   (22,949,000)
Change in discount rates (3)   -    4,143,000    -    4,143,000 
Change in life expectancy evaluation (4)   (95,000)   (6,662,000)   (4,963,000)   (8,604,000)
Face value of matured policies   27,623,000    10,935,000    42,127,000    29,910,000 
Fair value of matured policies   (14,684,000)   (6,736,000)   (24,233,000)   (17,915,000)
Gain on life insurance policies, net  $23,340,000   $11,296,000   $37,208,000   $30,696,000 

  

 

(1) Change in fair value of expected future cash flows relating to our investment in life insurance policies that are not specifically attributable to changes in life expectancy, discount rate or policy maturity events.

 

(2) Gain resulting from fair value in excess of transaction price for policies acquired during the reporting period.

  

(3) The discount rate of 10.45% as of June 30, 2018 remained unchanged from both the prior quarter and year end dates. The discount rate of 10.81% as of June 30, 2017 reflected a decrease from the 10.96% rate used at both the preceding quarter and year end dates.

 

(4) The change in fair value due to updating life expectancy estimates on certain life insurance policies in our portfolio.

  

We currently estimate that premium payments and servicing fees required to maintain our current portfolio of life insurance policies in force for the next five years, assuming no mortalities, are as follows:

 

Years Ending December 31,  Premiums   Servicing   Premiums and Servicing Fees 
Six months ending December 31, 2018  $27,358,000   $677,000   $28,035,000 
2019   63,323,000    1,355,000    64,678,000 
2020   73,758,000    1,355,000    75,113,000 
2021   84,700,000    1,355,000    86,055,000 
2022   95,964,000    1,355,000    97,319,000 
2023   107,289,000    1,355,000    108,644,000 
   $452,392,000   $7,452,000   $459,844,000 

 

Management anticipates funding the majority of the premium payments estimated above from cash flows realized from life insurance policy benefits, and to the extent necessary, with additional borrowing capacity, created as the premiums and servicing costs of pledged life insurance policies become due, under the amended and restated senior credit facility with LNV Corporation as described in Note 6, and the net proceeds from our offering of L Bonds as described in Note 8. Management anticipates funding premiums and servicing costs of non-pledged life insurance policies with cash flows realized from life insurance policy benefits from our portfolio of life insurance policies and net proceeds from our offering of L Bonds. The proceeds of these capital sources may also be used for the purchase, policy premiums and servicing costs of additional life insurance policies as well as for other working capital and financing expenditures including paying principal, interest and dividends.

 

9 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(4) Fair Value Definition and Hierarchy

 

Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”) establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace, including the existence and transparency of transactions between market participants. Assets and liabilities with readily available and actively quoted prices, or for which fair value can be measured from actively quoted prices in an orderly market, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

ASC 820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the use of observable inputs whenever available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions about how market participants price an asset or liability based on the best available information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

The hierarchy is broken down into three levels based on the observability of inputs as follows:

 

Level 1 —Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Because valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

 

Level 2 —Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 —Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

The availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including, for example, whether an instrument is established in the marketplace, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for assets and liabilities categorized in Level 3.

 

Level 3 Valuation Process

 

The estimated fair value of our portfolio of life insurance policies is determined on a quarterly basis by management taking into consideration a number of factors, including changes in discount rate assumptions, estimated premium payments and life expectancy estimate assumptions, as well as any changes in economic and other relevant conditions. The discount rate incorporates current information about discount rates applied by other reporting companies owning portfolios of life insurance policies, the discount rates observed in the life insurance secondary market, market interest rates, the estimated credit exposure to the insurance company that issued the life insurance policy and management’s estimate of the operational risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. Management has discretion regarding the combination of these and other factors when determining the discount rate.

 

These inputs are then used to estimate the discounted cash flows from the portfolio using the Model Actuarial Pricing System (“MAPS”) probabilistic and stochastic portfolio pricing model, which estimates the expected cash flows using various mortality probabilities and scenarios. The valuation process includes a review by senior management as of each quarterly valuation date. We also engage MAPS to independently test the accuracy of the valuations using the inputs we provide on a quarterly basis. A copy of a letter documenting the MAPS calculation is filed as Exhibit 99.1 to this report.

 

10 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance policies for the periods ended June 30, as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
Beginning balance  $687,389,000   $545,397,000   $650,527,000   $511,192,000 
Purchases   30,249,000    19,432,000    55,549,000    42,122,000 
Maturities (initial cost basis)   (6,148,000)   (3,015,000)   (11,232,000)   (5,384,000)
Net change in fair value   14,573,000    15,236,000    31,219,000    29,120,000 
Ending balance  $726,063,000   $577,050,000   $726,063,000   $577,050,000 

 

For life insurance policies with face amounts greater than $1 million and that are not pledged under any senior credit facility (approximately 18.4% of our portfolio by face amount of policy benefits) we attempt to update the life expectancy estimates on a continuous rotating three year cycle. For life insurance policies that are pledged under the LNV senior credit facility (approximately 73.1% of our portfolio by face amount of policy benefits) we are presently required to update the life expectancy estimates every two years beginning from the date of the amended facility. For the remaining small face insurance policies (i.e., a policy with $1 million in face value benefits or less) we may employ a range of methods and timeframes to update life expectancy estimates.

 

The following table summarizes the inputs utilized in estimating the fair value of our portfolio of life insurance policies:

 

   As of
June 30,
2018
   As of
December 31,
2017
 
Weighted-average age of insured, years *   81.9    81.7 
Weighted-average life expectancy, months *   82.0    82.4 
Average face amount per policy  $1,831,000   $1,867,000 
Discount rate   10.45%   10.45%

 

 

(*)Weighted-average by face amount of policy benefits

 

Life expectancy estimates and market discount rates for a portfolio of life insurance policies are inherently uncertain and the effect of changes in estimates may be significant. For example, if the life expectancy estimates were increased or decreased by four and eight months on each outstanding policy, and the discount rates were increased or decreased by 1% and 2%, with all other variables held constant, the fair value of our investment in life insurance policies would increase or decrease as summarized below:

 

Change in Fair Value of the Investment in Life Insurance Policies

 

   Change in Life Expectancy Estimates 
   minus 8 months   minus 4 months   plus
4 months
   plus
8 months
 
                 
June 30, 2018  $96,387,000   $47,837,000   $(47,457,000)  $(94,194,000)
December 31, 2017  $86,391,000   $42,886,000   $(42,481,000)  $(84,238,000)

 

   Change in Discount Rate 
   minus 2%   minus 1%   plus 1%   plus 2% 
                 
June 30, 2018  $75,047,000   $35,898,000   $(33,001,000)  $(63,412,000)
December 31, 2017  $68,117,000   $32,587,000   $(29,964,000)  $(57,583,000)

 

11 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Other Fair Value Considerations

 

The carrying value of receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term maturities and low credit risk. Using the income-based valuation approach, the estimated fair value of our L Bonds, having an aggregate face value of $534,302,000 as of June 30, 2018, is approximately $541,680,000 based on a weighted-average market interest rate of 6.78%. The carrying value of the senior credit facility with LNV Corporation reflects interest charged at 12-month LIBOR plus an applicable margin. The margin represents our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall rate reflects market, and the carrying value of the facility approximates fair value.

 

GWG MCA participates in the merchant cash advance industry by directly advancing sums to merchants and lending money, on a secured basis, to companies that advance sums to merchants. Each quarter, we review the carrying value of these cash advances, and determine if an impairment reserve is necessary. At June 30, 2018 one of our secured cash advances was impaired. Specifically, the secured loan to Nulook Capital LLC had an outstanding balance of $1,914,000 and a loan loss reserve of $1,908,000 at June 30, 2018. We deem fair value to be the estimated collectible value on each loan or advance made from GWG MCA. Secured MCA advances, net of loan loss reserve, of $1,345,000 and $1,662,000 are included within other assets on our condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively. Where we estimate the collectible amount to be less than the outstanding balance, we record a reserve for the difference. Provision for MCA advances are recorded within other expenses on the statement of operations (see Note 15).

 

The following table summarizes outstanding common stock warrants (discussed in Note 13) as of June 30, 2018:

 

Month issued  Warrants issued   Fair value per share   Risk free
rate
   Volatility   Term
September 2014   16,000   $1.26    1.85%   17.03%  5 years
    16,000                   

 

(5) Credit Facility — Autobahn Funding Company LLC

 

On September 12, 2017, we terminated our $105 million senior credit facility with Autobahn Funding Company LLC, the Credit and Security Agreement governing the facility as well as the related pledge agreement, pursuant to which our obligations under the facility were secured. We paid off in full all obligations under the facility on September 14, 2016, and since that date, we have had no amounts outstanding under the facility.

 

The Credit and Security Agreement contained certain financial and non-financial covenants, and we were in compliance with these covenants during the year ended December 31, 2017 until the date of termination.

 

(6) Credit Facility — LNV Corporation

 

On September 27, 2017, we entered into an amended and restated senior credit facility with LNV Corporation as lender through our subsidiary GWG DLP Funding IV, LLC (“DLP IV”). The Amended and Restated Loan Agreement governing the 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 Loan Agreement at the LIBOR rate as defined in the Amended and Restated Loan Agreement. 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 Loan Agreement at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (A) the greater of 12-month LIBOR or the federal funds rate (as defined in the agreement) plus one-half of one percent per annum, plus (B) 7.50% per annum. The effective rate at June 30, 2018 was 10.19%. Interest payments are made on a quarterly basis.

 

As of June 30, 2018, approximately 73.1% of the total face value of our portfolio is pledged to LNV Corporation. The amount outstanding under this facility was $190,389,000 and $222,525,000 at June 30, 2018 and December 31, 2017, respectively. Obligations under the facility are secured by a security interest in DLP IV’s assets, for the benefit of the lenders under the Amended and Restated Loan Agreement, through an arrangement under which Wells Fargo serves as securities intermediary. The life insurance policies owned by DLP IV do not serve as direct collateral for the obligations of GWG Holdings under the L Bonds. The difference between the amount outstanding and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized debt issuance costs.

 

The Amended and Restated Loan Agreement has certain financial and nonfinancial covenants, and we were in compliance with these covenants at June 30, 2018 and December 31, 2017.

 

12 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(7) Series I Secured Notes

 

Series I Secured Notes were legal obligations of GWG Life and were privately offered and sold from August 2009 through June 2011. On September 8, 2017, we redeemed all outstanding Series I Secured Notes for an aggregate of $6,815,000.

 

(8) L Bonds

 

Our L Bonds are legal obligations of GWG Holdings. Obligations under the L Bonds are secured by the assets of GWG Holdings and by GWG Life, as a guarantor, and are subordinate to the obligations under our senior credit facility (see Note 6). We began publicly offering and selling L Bonds in January 2012 under the name “Renewable Secured Debentures”. These debt securities were re-named “L Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration statement permitting us to sell up to $1.0 billion in principal amount of L Bonds through January 2018. On December 1, 2017, an additional public offering was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds on a continuous basis. The new offering is a follow-on to the previous L Bond offering and contains the same terms and features. We are party to an indenture governing the L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor, and Bank of Utah serves as indenture trustee. On March 27, 2018 GWG L Bond holders approved Amendment No.1 to the Amended and Restated Indenture with Bank of Utah. 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 Indenture contains certain financial and non-financial covenants, and we were in compliance with these covenants at June 30, 2018 and December 31, 2017.

 

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 June 30, 2018 and December 31, 2017, the weighted-average interest rate of our L Bonds was 7.15% and 7.29%, respectively. The principal amount of L Bonds outstanding was $534,302,000 and $461,427,000 at June 30, 2018 and December 31, 2017, respectively. The difference between the amount of outstanding L Bonds and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized deferred issuance costs, cash receipts for new issuances and payments of redemptions in process. Amortization of deferred issuance costs was $2,139,000 and $927,000 for the three months ended June 30, 2018 and 2017, respectively, and $4,138,000 and $2,856,000 for the six months ended June 30, 2018 and 2017, respectively. Future expected amortization of deferred financing costs as of June 30, 2018 is $18,060,000 in total over the next seven years.

 

Future contractual maturities of L Bonds, and future amortization of their deferred financing costs, at June 30, 2018 are as follows:

 

Years Ending December 31,  Contractual Maturities   Unamortized Deferred Financing Costs 
Six months ending December 31, 2018  $60,612,000   $312,000 
2019   150,617,000    3,024,000 
2020   114,594,000    4,050,000 
2021   65,293,000    2,860,000 
2022   39,713,000    1,888,000 
2023   36,818,000    1,984,000 
Thereafter   66,655,000    3,942,000 
   $534,302,000   $18,060,000 

 

13 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(9) Series A Convertible Preferred Stock

 

From July 2011 through September 2012, we privately offered shares of Series A of GWG Holdings at $7.50 per share. In the offering, we sold an aggregate of 3,278,000 shares for gross consideration of $24,582,000. Holders of Series A were entitled to cumulative dividends at the rate of 10% per annum, paid quarterly. The Series A Convertible Preferred Stock were only redeemable at our option.

 

Purchasers of Series A in our offering received warrants to purchase an aggregate of 416,000 shares of our common stock at an exercise price of $12.50 per share. As of June 30, 2018 and December 31, 2017, all of these warrants have expired and none of them had been exercised.

 

On October 9, 2017 all shares of Series A were redeemed with a redemption payment equal to the sum of: (i) $8.25 per Series A share and (ii) all accrued but unpaid dividends.

 

(10) Redeemable Preferred Stock

 

On November 30, 2015, our public offering of up to 100,000 shares of RPS at $1,000 per share was declared effective. Holders of RPS are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS are recorded as a reduction to additional paid-in capital, if any, then to the outstanding balance of the preferred stock if additional paid-in-capital has been exhausted. Under certain circumstances described in the Certificate of Designation for the RPS, additional shares of RPS may be issued in lieu of cash dividends.

 

The RPS ranks senior to our common stock and pari passu with our RPS 2 and entitles its holders to a liquidation preference equal to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS may presently convert their RPS into our common stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion price of $15.00 and in an aggregate amount limited to 15% of the stated value of RPS originally purchased by such holder from us and still held by such holder.

 

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. Nevertheless, the Certificate of Designation for RPS permits us in our sole discretion to grant or decline redemption requests. Subject to certain restrictions and conditions, we may also redeem shares of RPS without a redemption fee upon a holder’s death, total disability or bankruptcy. In addition, after one year from the date of original issuance, we may, at our option, call and redeem shares of RPS at a price equal to their liquidation preference.

 

In March 2017, we closed the RPS offering to additional investors having sold 99,127 shares of RPS for an aggregate gross consideration of $99,127,000 and incurred approximately $7,019,000 of related selling costs.

 

At the time of its issuance, we determined that the RPS contained two embedded features: (1) optional redemption by the holder and (2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative and that the RPS should be considered an equity host for the purposes of assessing the embedded derivatives for potential bifurcation. Based on our assessment under Accounting Standards Codification 470 “Debt” (“ASC 470”) we do not believe bifurcation of either the holder’s redemption or conversion feature is appropriate.

 

(11) Series 2 Redeemable Preferred Stock

 

On February 14, 2017, our public offering of up to 150,000 shares of RPS 2 at $1,000 per share was declared effective. Holders of RPS 2 are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS 2 are recorded as a reduction to additional paid-in capital, if any, then to the outstanding balance of the preferred stock if additional paid-in capital has been exhausted. Under certain circumstances described in the Certificate of Designation for the RPS 2, additional shares of RPS 2 may be issued in lieu of cash dividends.

 

The RPS 2 ranks senior to our common stock and pari passu with our RPS and entitles its holders to a liquidation preference equal to the stated value per share (i.e., $1,000) plus accrued but unpaid dividends. Holders of RPS 2 may, less an applicable conversion discount, if any, convert their RPS 2 into our common stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion price of $12.75 and in an aggregate amount limited to 10% of the stated value of RPS 2 originally purchased by such holder from us and still held by such holder.

 

14 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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. Nevertheless, the Certificate of Designation for RPS 2 permits us in our sole discretion to grant or decline requests for redemption. Subject to certain restrictions and conditions, we may also redeem shares of RPS 2 without a redemption fee upon a holder’s death, total disability or bankruptcy. In addition, we may, at our option, call and redeem shares of RPS 2 at a price equal to their liquidation preference (subject to a minimum redemption price, in the event of redemptions occurring less than one year after issuance, of 107% of the stated value of the shares being redeemed).

 

In April 2018, we closed the RPS 2 offering to additional investors having sold 149,979 shares of RPS 2 for an aggregate gross consideration of $149,979,000 and incurred approximately $10,284,000 of related selling costs.

 

At the time of its issuance, we determined that the RPS 2 contained two embedded features: (1) optional redemption by the holder; and (2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative and that the RPS 2 should be considered an equity host for the purposes of assessing the embedded derivatives for potential bifurcation. Based on our assessment under ASC 470 we do not believe bifurcation of either the holder’s redemption or conversion feature is appropriate.

 

(12) Income Taxes

 

We had a current income tax liability of $0 as of both June 30, 2018 and December 31, 2017. The components of our income tax expense (benefit) and the reconciliation at the statutory federal tax rate to our actual income tax expense (benefit) for the three and six months ended June 30, 2018 and 2017 consisted of the following:

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30,   June 30,   June 30, 
   2018   2017   2018   2017 
                 
Statutory federal income tax (benefit)  $(12,000)  $(3,200,000)  $(1,939,000)  $(3,215,000)
State income taxes (benefit), net of federal benefit   10,000    (607,000)   (692,000)   (609,000)
Change in valuation allowance   (36,000)   -    2,568,000    - 
Other permanent differences   38,000    90,000    63,000    106,000 
Total income tax expense (benefit)  $-   $(3,717,000)  $-   $(3,718,000)

  

The tax effects of temporary differences that give rise to deferred income taxes were as follows:

 

   As of
June 30,
2018
   As of
December 31,
2017
 
Deferred tax assets:        
Note receivable from related party  $1,437,000   $1,437,000 
Net operating loss carryforwards   9,787,000    9,995,000 
Other assets   1,487,000    1,724,000 
Subtotal   12,711,000    13,156,000 
Valuation allowance   (8,954,000)   (6,386,000)
Deferred tax assets   3,757,000    6,770,000 
           
Deferred tax liabilities:          
Investment in life insurance policies   (3,651,000)   (6,630,000)
Other liabilities   (106,000)   (140,000)
Net deferred tax asset(liability)  $-   $- 

 

15 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

At June 30, 2018 and December 31, 2017, we had federal net operating loss (“NOL”) carryforwards of $34,052,000 and $34,775,000, respectively. The NOL carryforwards will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership over a three-year period. We currently do not believe that any prior issuance of common stock has resulted in an ownership change under Section 382 through June 30, 2018.

 

We provide for a valuation allowance when it is not considered “more likely than not” that our deferred tax assets will be realized. As of June 30, 2018, based on all available evidence, we have provided a valuation allowance against our total net deferred tax asset of $8,954,000 due to uncertainty as to the realization of our deferred tax assets during the carryforward periods.

 

On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (“Tax Reform Bill”). The Tax Reform Bill changed existing United States tax law, including a reduction of the U.S. corporate income tax rate. The Company re-measured deferred taxes as of the date of enactment, reflecting those changes within deferred tax assets as of December 31, 2017.

 

ASC 740 requires the reporting of certain tax positions that do not meet a threshold of “more-likely-than-not” to be recorded as uncertain tax benefits. It is management’s responsibility to determine whether it is “more-likely-than-not” that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based upon the technical merits of the position. Management has reviewed all income tax positions taken or expected to be taken for all open years and has determined that the income tax positions are appropriately stated and supported. We do not anticipate that the total unrecognized tax benefits will significantly change prior to December 31, 2018.

 

Under our accounting policies, interest and penalties on unrecognized tax benefits, as well as interest received from favorable tax settlements are recognized as components of income tax expense. At June 30, 2018 and December 31, 2017, we recorded no accrued interest or penalties related to uncertain tax positions.

 

Our income tax returns for tax years ended December 31, 2014, 2015, 2016 and 2017, when filed, remain open to examination by the Internal Revenue Service and various state taxing jurisdictions. Our income tax return for tax year ended December 31, 2013 also remains open to examination by various state taxing jurisdictions.

 

(13) Common Stock

 

In September 2014, we consummated an initial public offering of our common stock resulting in the sale of 800,000 shares of common stock at $12.50 per share, and net proceeds of approximately $8.6 million after the payment of underwriting commissions, discounts and expense reimbursements. In connection with this offering, we listed our common stock on the Nasdaq Capital Market under the ticker symbol “GWGH.”

 

In conjunction with the initial public offering our Company issued warrants to purchase 16,000 shares of common stock at an exercise price of $15.63 per share. As of June 30, 2018, none of these warrants had been exercised. The remaining life of these warrants at June 30, 2018 was 1.3 years.

 

(14) Stock Incentive Plan

 

We adopted our 2013 Stock Incentive Plan in March 2013, as amended on June 1, 2015 and May 5, 2017. The Compensation Committee of our Board of Directors is responsible for the administration of the plan. Participants under the plan may be granted incentive stock options and non-statutory stock options; stock appreciation rights; stock awards; restricted stock; restricted stock units; and performance shares. Eligible participants include officers and employees of GWG Holdings and its subsidiaries, members of our Board of Directors, and consultants. Awards generally expire 10 years from the date of grant. As of June 30, 2018, 6,000,000 common stock options are authorized under the plan, of which 3,735,564 remain available for issuance.

 

16 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Stock Options

 

As of June 30, 2018, we had outstanding stock options for 1,679,000 shares of common stock to employees, officers, and directors under the plan. Options for 1,061,000 shares have vested, and the remaining options are scheduled to vest over three years. The options were issued with an exercise price between $6.35 and $10.38 for those beneficially owning more than 10% of our common stock, and between $4.83 and $11.00 for all others, which is equal to the market price of the shares on the date of grant. The expected annualized volatility used in the Black-Scholes model valuation of options issued during the three months ended June 30, 2018 was 20.7%. The annual volatility rate is based on the standard deviation of the average continuously compounded daily changes of stock price of five selected comparable companies. As of June 30, 2018, stock options for 723,000 shares had been forfeited and stock options for 178,000 shares had been exercised.

 

Outstanding stock options:

 

   Vested   Un-vested   Total 
Balance as of December 31, 2016   738,065    844,334    1,582,399 
Granted during the year   61,099    367,500    428,599 
Vested during the year   327,061    (327,061)   - 
Exercised during the year   (126,498)   -    (126,498)
Forfeited during the year   (142,535)   (105,017)   (247,552)
Balance as of December 31, 2017   857,192    779,756    1,636,948 
Granted year-to-date   4,850    99,200    104,050 
Vested year-to-date   235,424    (235,424)   - 
Exercised year-to-date   (23,834)   -    (23,834)
Forfeited year-to-date   (12,582)   (25,501)   (38,083)
Balance as of June 30, 2018   1,061,050    618,031    1,679,081 

 

As of June 30, 2018, unrecognized compensation expense related to un-vested options is $933,000. We expect to recognize this compensation expense over the remaining vesting period ($304,000 in 2018, $426,000 in 2019, $183,000 in 2020, and $20,000 in 2021).

 

Stock Appreciation Rights (SARs)

 

As of June 30, 2018, we had outstanding SARs for 407,000 shares of the common stock to employees. The strike price of the SARs was between $7.84 and $10.38, which was equal to the market price of the common stock at the date of issuance. As of June 30, 2018, 215,000 of the SARs were vested. On June 30, 2018, the market price of GWG’s common stock was $7.68.

 

Outstanding SARs:

 

   Vested   Un-vested   Total 
Balance as of December 31, 2016   106,608    133,127    239,735 
Granted during the year   13,001    91,986    104,987 
Vested during the year   69,444    (69,444)   - 
Forfeited during the year   -    (1,750)   (1,750)
Balance as of December 31, 2017   189,053    153,919    342,972 
Granted year-to-date   -    64,050    64,050 
Vested year-to-date   25,699    (25,699)   - 
Forfeited year-to-date   -    -    - 
Balance as of June 30, 2018   214,752    192,270    407,022 

 

The liability for the SARs as of June 30, 2018 and December 31, 2017 was $483,000 and $551,000, respectively, and was recorded within other accrued expenses on the condensed consolidated balance sheets. Employee compensation and benefits expense for SARs of ($118,000) and $23,000 was recorded for the three months ended June 30, 2018 and 2017, respectively, and ($68,000) and $312,000 was recorded for the six months ended June 30, 2018 and 2017, respectively.

 

Upon the exercise of SARs, the Company is obligated to make cash payment equal to the positive difference between the fair market value of the Company’s common stock on the date of exercise less the fair market value of the common stock on the date of grant.

 

17 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following summarizes information concerning outstanding options and SARs issued under the 2013 Stock Incentive Plan:

 

   June 30, 2018 
   Outstanding   Weighted-Average Exercise Price   Weighted-Average Remaining Life (years)   Fair Value at Grant Date 
Vested                
Stock Options   1,061,050   $8.21    5.90   $1.82 
SARs   214,752   $8.61    5.41   $1.89 
Total Vested   1,275,802   $8.28    5.81   $1.83 
                     
Unvested                    
Stock Options   618,031   $9.22    7.18   $2.21 
SARs   192,270   $8.93    6.11   $2.10 
Total Unvested   810,301   $9.16    6.93   $2.18 

 

   December 31, 2017 
   Outstanding   Weighted-Average Exercise Price   Weighted-Average Remaining Life (years)   Fair Value at Grant Date 
Vested                
Stock Options   857,192   $8.05    6.17   $1.76 
SARs   189,053   $8.54    5.86   $1.90 
Total Vested   1,046,245   $8.14    6.11   $1.78 
                     
Unvested                    
Stock Options   779,756   $9.21    7.50   $2.17 
SARs   153,919   $9.16    6.24   $2.02 
Total Unvested   933,675   $9.21    7.30   $2.15 

 

(15) Other Expenses

 

The components of other expenses in our condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 are as follows:

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2018   2017   2018   2017 
Contract Labor  $305,000   $87,000   $605,000   $181,000 
Marketing   509,000    649,000    930,000    1,201,000 
Information Technology   366,000    351,000    866,000    682,000 
Servicing and Facility Fees   468,000    405,000    862,000    686,000 
Travel and Entertainment   230,000    283,000    446,000    518,000 
Insurance and Regulatory   352,000    393,000    719,000    718,000 
Charitable Contributions   -    89,000    -    420,000 
Provision for MCA Advances   94,000    878,000    94,000    878,000 
General and Administrative   509,000    626,000    1,051,000    1,257,000 
Total Other Expenses  $2,833,000   $3,761,000   $5,573,000   $6,541,000 

  

18 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(16) Net Loss Attributable to Common Shareholders

 

We have outstanding RPS and RPS 2, as described in Notes 10 and 11. RPS and RPS 2 are anti-dilutive to our net loss attributable to common shareholders calculation for both the three and six months ended June 30, 2018 and 2017. Our vested and un-vested stock options are anti-dilutive for both the three and six months ended June 30, 2018 and 2017.

 

(17) Commitments

 

We are party to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment to our original lease that expanded the leased space to 17,687 square feet and extended the term through October 2025. Under the amended lease we are obligated to pay base rent plus common area maintenance and a share of building operating costs. Rent expenses under this agreement were $110,000 during both three months ended June 30, 2018 and 2017 and $215,000 and $223,000 during the six months ended June 30, 2018 and 2017, respectively.

 

Minimum lease payments under the amended lease are as follows:

 

Six months ending December 31, 2018  $133,000 
2019   275,000 
2020   284,000 
2021   293,000 
2022   302,000 
2023   311,000 
Thereafter   593,000 
   $2,191,000 

 

(18) 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.

 

(19) Guarantee of L Bonds

 

We are publicly offering and selling L Bonds under a registration statement declared effective by the SEC, as described in Note 8. Our obligations under the L Bonds are secured by substantially all the assets of GWG Holdings, a pledge of all our common stock held individually by our largest stockholders, and by a guarantee and corresponding grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest on the L Bonds. GWG Life’s equity in DLP IV serve as collateral for our L Bond obligations. Substantially all of our life insurance policies are held by DLP IV or GWG Life Trust (“the Trust”). The policies held by DLP IV are not collateral for the L Bond obligations as such policies are pledged to the senior credit facility with LNV Corporation.

 

The consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantor and issuer, because management does not believe that separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of GWG Holdings or GWG Life, the guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as described in these notes. A substantial majority of insurance policies we currently own are subject to a collateral arrangement with LNV Corporation described in Note 6. Under this arrangement, we are required to maintain collection and payment accounts that are used to collect policy benefits from pledged policies, pay interest and other charges under the facility, and distribute funds to pay down the facility.

 

The following represents condensed consolidating financial information as of June 30, 2018 and December 31, 2017, with respect to the financial position, and as of June 30, 2018 and 2017, with respect to results of operations and cash flows of GWG Holdings and its subsidiaries. The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds, presenting its investment in DLP IV and the Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries, including DLP IV and the Trust.

 

19 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Balance Sheets

 

June 30, 2018  Parent   Guarantor Subsidiary   Non-Guarantor Subsidiaries   Eliminations   Consolidated 
                     
A S S E T S
                     
Cash and cash equivalents  $123,017,408   $546,177   $881,219   $-   $124,444,804 
Restricted cash   -    5,648,925    1,002,384    -    6,651,309 
Investment in life insurance policies, at fair value   -    70,892,773    655,170,471    -    726,063,244 
Life insurance policy benefits receivable   -    800,000    26,235,000    -    27,035,000 
Other assets   4,307,833    1,921,184    4,612,550    -    10,841,567 
Investment in subsidiaries   577,018,061    498,224,110    -    (1,075,242,171)   - 
                          
TOTAL ASSETS  $704,343,302   $578,033,169   $687,901,624   $(1,075,242,171)  $895,035,924 
                          
L I A B I L I T I E S  &  S T O C K H O L D E R S’  E Q U I T Y
                          
LIABILITIES                         
Senior credit facility with LNV Corporation  $-   $-   $180,630,553   $-   $180,630,553 
L Bonds   518,788,942    -    -    -    518,788,942 
Accounts payable   580,162    738,894    1,307,227    -    2,626,283 
Interest and dividends payable   11,449,184    -    5,487,541    -    16,936,725 
Other accrued expenses   1,502,663    1,736,033    792,374    -    4,031,070 
TOTAL LIABILITIES   532,320,951    2,474,927    188,217,695    -    723,013,573 
                          
STOCKHOLDERS’ EQUITY                         
Member capital   -    575,558,242    499,683,929    (1,075,242,171)   - 
Redeemable preferred stock and Series 2 redeemable preferred stock   220,701,701    -    -    -    220,701,701 
Common stock   5,813    -    -    -    5,813 
Accumulated deficit   (48,685,163)   -    -    -    (48,685,163)
TOTAL STOCKHOLDERS’ EQUITY   172,022,351    575,558,242    499,683,929    (1,075,242,171)   172,022,351 
                          
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $704,343,302   $578,033,169   $687,901,624   $(1,075,242,171)  $895,035,924 

 

20 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Balance Sheets (continued)

 

December 31, 2017  Parent   Guarantor Subsidiary   Non-Guarantor Subsidiaries   Eliminations   Consolidated 
                     
A S S E T S
                          
Cash and cash equivalents  $111,952,829   $1,486,623   $982,039   $-   $114,421,491 
Restricted cash   -    9,367,410    18,982,275    -    28,349,685 
Investment in life insurance policies, at fair value   -    51,093,362    599,433,991    -    650,527,353 
Life insurance policy benefits receivable   -    1,500,000    15,158,761    -    16,658,761 
Other assets   1,912,203    1,986,312    5,000,369    -    8,898,884 
Investment in subsidiaries   480,659,789    415,235,212    -    (895,895,001)   - 
                          
TOTAL ASSETS  $594,524,821   $480,668,919   $639,557,435   $(895,895,001)  $818,856,174 
                          
L I A B I L I T I E S  &  S T O C K H O L D E R S’  E Q U I T Y
                          
LIABILITIES                         
Senior credit facility with LNV Corporation  $-   $-   $212,238,192   $-   $212,238,192 
L Bonds   447,393,568    -    -    -    447,393,568 
Accounts payable   1,434,623    844,899    4,114,917    -    6,394,439 
Interest and dividends payable   10,296,584    -    5,130,925    -    15,427,509 
Other accrued expenses   1,728,303    1,610,773    391,647    -    3,730,723 
TOTAL LIABILITIES   460,853,078    2,455,672    221,875,681    -    685,184,431 
                          
STOCKHOLDERS’ EQUITY                         
Member capital   -    478,213,247    417,681,754    (895,895,001)   - 
Redeemable preferred stock and Series 2 redeemable preferred stock   173,115,447    -    -    -    173,115,447 
Common stock   5,813    -    -    -    5,813 
Accumulated deficit   (39,449,517)   -    -    -    (39,449,517)
TOTAL STOCKHOLDERS’ EQUITY   133,671,743    478,213,247    417,681,754    (895,895,001)   133,671,743 
                          
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $594,524,821   $480,668,919   $639,557,435   $(895,895,001)  $818,856,174 

 

21 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Operations

 

For the three months ended June 30, 2018  Parent   Guarantor Subsidiary   Non-Guarantor Subsidiaries   Eliminations   Consolidated 
REVENUE                    
Gain on life insurance policies, net  $-   $6,620,224   $16,719,526   $-   $23,339,750 
Interest and other income   661,859    17,798    295,541    -    975,198 
TOTAL REVENUE   661,859    6,638,022    17,015,067    -    24,314,948 
                          
EXPENSES                         
Interest expense   11,396,554    -    5,751,296    -    17,147,850 
Employee compensation and benefits   1,414,360    1,318,806    502,533    -    3,235,699 
Legal and professional fees   399,790    234,740    521,198    -    1,155,728 
Other expenses   1,697,222    476,907    658,648    -    2,832,777 
TOTAL EXPENSES   14,907,926    2,030,453    7,433,675    -    24,372,054 
                          
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES   (14,246,067)   4,607,569    9,581,392    -    (57,106)
                          
EQUITY IN INCOME OF SUBSIDIARIES   14,188,961    10,693,650    -    (24,882,611)   - 
                          
NET INCOME (LOSS) BEFORE INCOME TAXES   (57,106)   15,301,219    9,581,392    (24,882,611)   (57,106)
                          
INCOME TAX BENEFIT   -    -    -    -    - 
NET INCOME (LOSS)   (57,106)   15,301,219    9,581,392    (24,882,611)   (57,106)
Preferred stock dividends   4,338,487    -    -    -    4,338,487 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS  $(4,395,593)  $15,301,219   $9,581,392   $(24,882,611)  $(4,395,593)

 

For the three months ended June 30, 2017  Parent   Guarantor Subsidiary   Non-Guarantor Subsidiaries   Eliminations   Consolidated 
REVENUE                    
Gain on life insurance policies, net  $-   $201,685   $11,094,581   $-   $11,296,266 
Interest and other income   69,221    163,384    298,141    (159,426)   371,320 
TOTAL REVENUE   69,221    365,069    11,392,722    (159,426)   11,667,586 
                          
EXPENSES                         
Interest expense   8,325,874    391,061    3,555,266    (26,176)   12,246,025 
Employee compensation and benefits   2,109,562    1,529,188    102,549    -    3,741,299 
Legal and professional fees   284,756    179,461    866,372    -    1,330,589 
Other expenses   1,885,146    650,320    1,358,882    (133,250)   3,761,098 
TOTAL EXPENSES   12,605,338    2,750,030    5,883,069    (159,426)   21,079,011 
                          
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES   (12,536,117)   (2,384,961)   5,509,653    -    (9,411,425)
                          
EQUITY IN INCOME OF SUBSIDIARIES   3,124,692    7,241,779    -    (10,366,471)   - 
                          
NET INCOME (LOSS) BEFORE INCOME TAXES   (9,411,425)   4,856,818    5,509,653    (10,366,471)   (9,411,425)
                          
INCOME TAX BENEFIT   (3,717,174)   -    -    -    (3,717,174)
NET INCOME (LOSS)   (5,694,251)   4,856,818    5,509,653    (10,366,471)   (5,694,251)
Preferred stock dividends   2,031,097    -    -    -    2,031,097 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS  $(7,725,348)  $4,856,818   $5,509,653   $(10,366,471)  $(7,725,348)

 

22 

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Operations (continued)

 

For the six months ended June 30, 2018  Parent   Guarantor Subsidiary   Non-Guarantor Subsidiaries   Eliminations   Consolidated 
REVENUE                    
Gain on life insurance policies, net  $-   $8,013,679   $29,194,816   $-   $37,208,495 
Interest and other income   1,113,898    26,524    507,703    -    1,648,125 
TOTAL REVENUE   1,113,898    8,040,203    29,702,519    -    38,856,620 
                          
EXPENSES                         
Interest expense   22,019,206    -    11,191,981    -    33,211,187 
Employee compensation and benefits   3,337,093    2,794,537    846,738    -    6,978,368 
Legal and professional fees   807,102    466,390    1,055,865    -    2,329,357 
Other expenses   3,491,702    941,514    1,140,138    -    5,573,354 
TOTAL EXPENSES   29,655,103    4,202,441    14,234,722    -    48,092,266 
                          
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES   (28,541,205)   3,837,762    15,467,797    -    (9,235,646)
                          
EQUITY IN INCOME OF SUBSIDIARIES   19,305,559    17,557,850    -    (36,863,409)   - 
                          
NET INCOME (LOSS) BEFORE INCOME TAXES   (9,235,646)   21,395,612    15,467,797    (36,863,409)   (9,235,646)
                          
INCOME TAX BENEFIT             -    -      
NET INCOME (LOSS)   (9,235,646)   21,395,612    15,467,797    (36,863,409)   (9,235,646)
Preferred stock dividends   8,042,971    -    -    -    8,042,971 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS  $(17,278,617)  $21,395,612   $15,467,797