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 September 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 every Interactive Data File required to be submitted 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 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	☐	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 November 19, 2018, GWG Holdings, Inc. had 5,980,124 shares of common stock outstanding.

 

 

 

GWG HOLDINGS, INC.

 

Index to Form 10-Q

for the Quarter Ended September 30, 2018

 

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2018, and December 31, 2017	1
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017	2
	Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2018 and 2017	3
	Consolidated Statement of Changes in Stockholders’ Equity	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 4.	Controls and Procedures	53
PART II. OTHER INFORMATION
Item 5.	Other Information	54
Item 6.	Exhibits	54
SIGNATURES		55

 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2018				December 31, 2017
		(unaudited)
A S S E T S
Cash and cash equivalents		$	117,873,668			$	114,421,491
Restricted cash			3,069,759				28,349,685
Investment in life insurance policies, at fair value			791,468,587				650,527,353
Life insurance policy benefits receivable			10,472,696				16,658,761
Other assets			13,022,023				8,898,884
TOTAL ASSETS		$	935,906,733			$	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		$	162,469,172			$	212,238,192
L Bonds			570,199,704				447,393,568
Accounts payable			2,579,323				6,394,439
Interest and dividends payable			16,228,341				15,427,509
Other accrued expenses			3,272,758				3,730,723
TOTAL LIABILITIES			754,749,298				685,184,431
STOCKHOLDERS’ EQUITY
REDEEMABLE PREFERRED STOCK
(par value $0.001; shares authorized 100,000; shares outstanding 97,534 and 98,611; liquidation preference of $98,103,000 and $99,186,000 as of September 30, 2018 and December 31, 2017, respectively)			86,920,335				92,840,243
SERIES 2 REDEEMABLE PREFERRED STOCK
(par value $0.001; shares authorized 150,000; shares outstanding 148,444 and 88,709; liquidation preference of $149,310,000 and $89,208,000 as of September 30, 2018 and December 31, 2017, respectively)			129,147,704				80,275,204
SERIES B CONVERTIBLE PREFERRED STOCK
(par value $0.001; stated value $10; shares authorized and outstanding 5,000,000)			50,000,000				-
COMMON STOCK
(par value $0.001; shares authorized 210,000,000; shares issued and outstanding 5,980,124 as of September 30, 2018 and 5,813,555 as of December 31, 2017)			5,980				5,813
Additional paid-in capital			-				-
Accumulated deficit			(84,916,584	)			(39,449,517	)
TOTAL STOCKHOLDERS’ EQUITY			181,157,435				133,671,743
TOTAL LIABILITIES & EQUITY		$	935,906,733			$	818,856,174

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017
REVENUE
Gain on life insurance policies, net		$	15,721,513			$	14,421,353			$	52,930,008			$	45,117,438
Interest and other income			931,145				275,690				2,579,270				1,335,535
TOTAL REVENUE			16,652,658				14,697,043				55,509,278				46,452,973
EXPENSES
Interest expense			17,514,962				13,275,407				50,726,149				38,765,647
Employee compensation and benefits			5,548,771				3,792,096				12,527,139				10,696,455
Legal and professional fees			1,421,964				1,657,090				3,751,321				3,934,027
Other expenses			2,688,970				2,799,196				8,262,324				9,340,617
TOTAL EXPENSES			27,174,667				21,523,789				75,266,933				62,736,746
INCOME (LOSS) BEFORE INCOME TAXES			(10,522,009	)			(6,826,746	)			(19,757,655	)			(16,283,773	)
INCOME TAX EXPENSE (BENEFIT)			-				(2,764,243	)			-				(6,481,917	)
NET INCOME (LOSS)			(10,522,009	)			(4,062,503	)			(19,757,655	)			(9,801,856	)
Preferred stock dividends			4,313,542				3,548,165				12,356,513				7,447,022
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(14,835,551	)		$	(7,610,668	)		$	(32,114,168	)		$	(17,248,878	)
NET INCOME (LOSS) PER SHARE
Basic		$	(2.52	)		$	(1.31	)		$	(5.50	)		$	(2.96	)
Diluted		$	(2.52	)		$	(1.31	)		$	(5.50	)		$	(2.96	)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic			5,894,639				5,797,800				5,840,880				5,829,808
Diluted			5,894,639				5,797,800				5,840,880				5,829,808

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(10,522,009	)		$	(4,062,503	)		$	(19,757,655	)		$	(9,801,856	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Change in fair value of life insurance policies			(24,839,567	)			(20,181,732	)			(56,058,336	)			(49,301,067	)
Amortization of deferred financing and issuance costs			2,575,322				2,344,541				7,241,283				6,508,692
Deferred income taxes			-				(2,764,243	)			-				(6,481,917	)
(Increase) decrease in operating assets:
Life insurance policy benefits receivable			16,562,304				(7,627,000	)			6,186,065				(9,252,000	)
Other assets			(2,863,243	)			929,058				(4,672,449	)			3,181,419
Increase (decrease) in operating liabilities:
Accounts payable and other accrued expenses			(601,516	)			(85,509	)			(1,604,634	)			2,861,541
NET CASH FLOWS USED IN OPERATING ACTIVITIES			(19,688,709	)			(31,447,388	)			(68,665,726	)			(62,285,188	)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance policies			(42,891,764	)			(25,199,692	)			(98,440,528	)			(67,321,363	)
Carrying value of matured life insurance policies			2,325,989				2,333,039				13,557,632				7,716,847
NET CASH FLOWS USED IN INVESTING ACTIVITIES			(40,565,775	)			(22,866,653	)			(84,882,896	)			(59,604,516	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on (repayments of) senior debt			(18,425,136	)			56,887,491				(50,560,286	)			49,787,954
Payments for issuance of senior debt			-				(3,937,907	)			-				(5,128,319	)
Payments for redemption of Series I Secured Notes			-				(6,815,406	)			-				(16,613,667	)
Proceeds from issuance of L Bonds			68,884,369				30,271,873				166,081,914				87,016,343
Payments for issuance and redemption of L Bonds			(20,195,657	)			(19,752,717	)			(46,151,926	)			(58,949,880	)
Issuance (repurchase) of common stock			682,954				30				682,954				(1,603,526	)
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			-				25,211,870				56,238,128				86,692,811
Payments for issuance of redeemable preferred stock			-				(1,243,920	)			(4,142,294	)			(5,207,025	)
Payments for redemption of redeemable preferred stock			(821,778	)			(47,500	)			(2,361,692	)			(1,806,832	)
Preferred stock dividends			(4,313,542	)			(3,548,165	)			(12,356,513	)			(7,447,022	)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES			50,101,798				77,025,649				131,720,873				126,740,837
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(10,152,686	)			22,711,608				(21,827,749	)			4,851,133
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
BEGINNING OF PERIOD			131,096,113				98,453,103				142,771,176				116,313,578
END OF PERIOD		$	120,943,427			$	121,164,711			$	120,943,427			$	121,164,711

  

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid		$	15,576,000			$	17,478,000			$	42,827,000			$	45,101,000
Premiums paid, including prepaid		$	14,672,000			$	12,927,000			$	38,898,000			$	35,533,000
Stock-based compensation		$	278,000			$	270,000			$	538,000			$	350,000
Payments for exercised stock options		$	-			$	164,000			$	-			$	264,000
NON-CASH INVESTING AND FINANCING ACTIVITIES
L Bonds:
Conversion of accrued interest and commissions payable to principal		$	410,000			$	477,000			$	972,000			$	1,382,000
Conversion of L Bonds to redeemable preferred stock		$	-			$	545,000			$	4,546,000			$	2,334,000
Preferred Stock:
Issuance of Series A Preferred Stock in lieu of cash dividends		$	-			$	161,000			$	-			$	499,000
Conversion of L Bonds to redeemable preferred stock		$	-			$	545,000			$	4,546,000			$	2,334,000
Options and stock appreciation rights issued:		$	290,000			$	76,000			$	458,000			$	309,000
Investment in life insurance policies included in accounts payable		$	508,000			$	966,000			$	508,000			$	966,000

 

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

 

 

 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)			-				-				-				-				-				(19,757,655	)			(19,757,655	)
Issuance of common stock			-				-				166,569				167				1,181,435				-				1,181,602
Issuance of redeemable preferred stock			61,021				56,878,238				-				-				-				-				56,878,238
Redemption of redeemable preferred stock			(2,362	)			(2,362,914	)			-				-				-				-				(2,362,914	)
Issuance of Series B convertible preferred stock			5,000,000				50,000,000				-				-				-				-				50,000,000
Common stock dividends			-				-				-				-				-				(25,709,412	)			(25,709,412	)
Preferred stock dividends			-				(11,562,732	)			-				-				(793,781	)			-				(12,356,513	)
Stock-based compensation			-				-				-				-				(387,654	)			-				(387,654	)
Balance, September 30, 2018			5,245,978			$	266,068,039				5,980,124			$	5,980			$	-			$	(84,916,584	)		$	181,157,435

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

Nature of Business — We are a leading provider of liquidity to consumers owning life insurance policies, an owner of a portfolio of alternative assets, and a developer of epigenetic technology for the life insurance industry and beyond. We built our business providing value to consumers owning illiquid life insurance products across America, delivering more than $564 million in value for their policies since 2006. As of September 30, 2018, we own an alternative asset portfolio of $1.96 billion in face value of life insurance policy benefits.

 

In addition, we continue to innovate in the life insurance industry through our insurance technology initiative which is based upon the use of step-change epigenetic technology. Our wholly owned insurtech subsidiary, Life Epigenetics is focused on creating intellectual property and commercialized testing from supervised machine learning and advanced epigenetic technology. We believe our technology offers the life insurance industry a step-change opportunity for enhanced life insurance underwriting and risk assessment. Our wholly owned insurtech subsidiary, YouSurance is a digital life insurance agency that is working to offer life insurance directly to consumers in conjunction with our epigenetic testing. We believe that consumers who are interested in their health and wellness and in reducing the cost of their insurance will benefit from working with YouSurance.

 

The Beneficient Transaction

 

On August 10, 2018, we completed the first of two anticipated closings (the “Initial Transfer”) contemplated by a Master Exchange Agreement with The Beneficient Company Group, L.P. (“Beneficient”) and certain other parties (the “Seller Trusts”), which governs the strategic exchange of assets among the parties (the “Beneficient Transaction”). At the Initial Transfer:

 

●

GWG issued L Bonds to the Seller Trusts in an aggregate principal amount of $403,234,866 that mature on August 9, 2023, and bear interest at 7.5% per annum (the “Seller Trust L Bonds”),

 

●

GWG issued to Beneficient 5,000,000 shares of GWG’s Series B Convertible Preferred Stock, par value $0.001 per share and having a stated value of $10 per share (“Series B”), for cash consideration of $50,000,000,

 

●

Beneficient, as borrower, entered into a commercial loan agreement with GWG Life, as lender, in a principal amount of $200,000,000 (the “Commercial Loan”),

 

●

Beneficient delivered to GWG a promissory note in the principal amount of $162,911,379 (the “Exchangeable Note”), and

 

●

the Seller Trusts delivered to GWG 4,032,349 common units of Beneficient at $10 per common unit.

 

Upon the final closing of the Beneficient Transaction, which is expected at or near year-end 2018, subject to the satisfaction of certain closing conditions (the “Final Closing” and the date upon which the Final Closing occurs, the “Final Closing Date”):

 

●

the Seller Trusts will transfer to GWG an aggregate of 40,485,230 common units of Beneficient, inclusive of 16.3 million units in full satisfaction of the Exchangeable Note,

 

●

Beneficient will issue to GWG an amount of securities or other instruments, containing the same rights, preferences and privileges of certain limited partnership interests of Beneficient Company Holdings, L.P., a subsidiary of Beneficient (“Beneficient Holdings”), equivalent to seven percent (7.0%) of such limited partnership interests attributable to certain of Beneficient Holdings’ founders, and

 

●

GWG will deliver to the Seller Trusts up to 29.1 million shares of GWG common stock at $10 per share.

  

A summary of the Beneficient Transaction is set forth in our Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 14, 2018 and amended in our Current Report on Form 8-K/A filed with the Securities and Exchange Commission on November 9, 2018.

 

Application of FASB Accounting Standards Codification Topic 845, Nonmonetary Transactions (ASC 845)

 

Although the Initial Transfer occurred on August 10, 2018, the Commercial Loan, the Exchangeable Note, the common units of Beneficient issued at the Initial Transfer and the Seller Trust L Bonds are not recorded on our condensed consolidated balance sheet at September 30, 2018 or statements of operations for the three and nine months ended September 30, 2018. These amounts were not recorded because, under ASC 845, the commercial substance of the transaction was not fully known and probable and will not be fully known and probable until the satisfaction of certain conditions to the Final Closing and the occurrence thereof.

 

It is important to note that, as further described below, the rights and obligations of the assets exchanged, as governed by the transaction documents, are unaffected by our current accounting application. This means that we will benefit from the assets that we received in the exchange and we will be required to meet the obligations of the Seller Trust L Bonds that we issued in the exchange. The result is that our financial condition, including our ability to service our debt and meet our obligations as they become due, may be materially different from that which an investor can discern from a review of our condensed consolidated balance sheets and statements of operations in isolation. Likewise, financial ratios and other metrics based on our publicly filed financial statements and publicly disseminated by financial analysts, news outlets and financial websites do not reflect the assets and liabilities exchanged in the Initial Transfer and the economic consequences thereof.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Description of the Assets Exchanged at the Initial Transfer

 

Seller Trust L Bonds

 

On August 10, 2018, in connection with the Initial Transfer, GWG Holdings, GWG Life and Bank of Utah, as trustee (the “Trustee”), entered into a Supplemental Indenture (the “Supplemental Indenture”) to the Amended and Restated Indenture dated as of October 23, 2017 (the “Amended and Restated Indenture”). GWG Holdings entered into the Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Seller Trust L Bonds. The maturity date of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.5% per year. Interest is payable monthly in cash.

 

So long as the Final Closing has not occurred, the redemption price payable in respect of a redemption effected by GWG after January 31, 2019 may be paid, at GWG’s option, in the form of cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan, (ii) the outstanding principal amount and accrued and unpaid interest under the Exchangeable Note and (iii) Beneficient common units, or a combination of cash and such property. After the second anniversary of the Final Closing Date, the holders of the Seller Trust L Bonds will have the right to cause GWG to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at GWG’s option, in the form of cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan, (ii) the outstanding principal amount and accrued and unpaid interest under the Exchangeable Note and (iii) Beneficient common units, or a combination of cash and such property.

 

The Seller Trust L Bonds are senior secured obligations of GWG, ranking junior only to all senior debt of GWG (see Note 6), pari passu in right of payment and in respect of collateral with all “L Bonds” of GWG (see Note 8), 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 20).

 

Series B Convertible Preferred Stock

 

The Series B ranks, as to the payment of dividends and the distribution of our assets upon liquidation, junior to our Redeemable Preferred Stock (“RPS”) and Series 2 Redeemable Preferred Stock (“RPS 2”) and pari passu with our common stock. The Series B has no dividend rights. The Series B has no voting rights, except as required by law.

 

The Series B will convert into 5,000,000 shares of our common stock at a conversion price of $10 per share upon the Final Closing.

 

Commercial Loan

 

The $200,000,000 principal amount under the Commercial Loan is due on August 9, 2023; however, is extendable for two five-year terms. The extensions are available to the borrower provided that (a) in the event Beneficient completes at least one public offering of its common units raising at least $50,000,000 which on its own or together with any other public offering of Beneficient’s common units results in Beneficient raising at least $100,000,000, then the maturity date will be extended to August 9, 2028; and (b) in the event that Beneficient (i) completes at least one public offering of its common units raising at least $50,000,000 which on its own or together with any other public offering of Beneficient’s common units results in Beneficient raising at least $100,000,000 and (ii) at least 75% of Beneficient Holding’s total outstanding NPC-B limited partnership interests, if any, have been converted to shares of Beneficient’s common units, then the maturity date will be extended to August 9, 2033.

 

Repayment of the Commercial Loan is subordinated in right of payment to any of Beneficient’s commercial bank debt and to Beneficient’s obligations which may arise in connection with its NPC-B limited partnership interests. Beneficient’s obligations under the Commercial Loan are unsecured.

 

The Commercial Loan contains negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens and indebtedness by Beneficient, fundamental changes to its business and transactions with affiliates. The Commercial Loan also contains customary affirmative covenants, including, but not limited to, preservation of corporate existence, compliance with applicable law, payment of taxes, notice of material events, financial reporting and keeping of proper books of record and account.

 

The Commercial Loan includes customary events of default, including, but not limited to, nonpayment of principal or interest, failure to comply with covenants, failure to pay other indebtedness when due, cross-acceleration to other debt, material adverse effects, events of bankruptcy and insolvency, and unsatisfied judgments. The borrower was in compliance with the covenants as of the most recent balance sheet date.

 

The principal amount of the Commercial Loan bears interest at 5.0% per year; provided that the accrued interest from the date of the Initial Transfer to the Final Closing Date of the Beneficient Transaction will be added to the principal balance of the Commercial Loan. From and after the Final Closing Date, one-half of the interest, or 2.5% per year, will be due and payable monthly in cash, and (ii) one-half of the interest, or 2.5% per year, will accrue and compound annually on each anniversary date of the Final Closing Date and become due and payable in full in cash on the maturity date.

 

In accordance with the Supplemental Indenture issuing the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds, the Company, at its option, may use the outstanding principal amount of the Commercial Loan, and accrued and unpaid interest thereon, as repayment consideration of the Seller Trust L Bonds.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Exchangeable Note

 

The Exchangeable Note accrues interest at a rate of 12.4% per year, compounded annually. Interest is payable in cash on the earlier to occur of the maturity date or the Final Closing Date; provided that Beneficient may, at its option, add to the outstanding principal balance under the Commercial Loan the accrued interest in lieu of payment in cash of such accrued interest thereon at the Final Closing Date (or, if earlier, the maturity date of the Exchangeable Note). The principal amount of the Exchangeable Note is payable in cash on August 9, 2023. In the event the Final Closing Date occurs on or prior to the maturity date, the principal amount of the Exchangeable Note is payable in Beneficient common units at a price equal to $10 per common unit. In the event the Final Closing Date occurs prior to the maturity date, Beneficient may, at its option, pay the accrued interest on the Exchangeable Note in the form of Beneficient common units, at $10 per common unit, or in the form of a promissory note providing for a term of up to two years and cash interest payable semi-annually at the rate of 5.0% per year.

 

In accordance with the Supplemental Indenture issuing the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds, the Company, at its option, may use the outstanding principal amount of the Exchangeable Note, and accrued and unpaid interest thereon, as repayment consideration of the Seller Trust L Bonds.

 

Common Units in Beneficient

 

In connection with the Initial Transfer, the Seller Trusts delivered to us 4,032,349 common units of Beneficient. This represents a 17.6% interest in the common units of Beneficient.

 

Beneficient operates in a sector of the alternative asset market that is complementary to ours by providing a suite of innovative liquidity and trust products to mid-to-high net worth individual investors and small-to-medium institutional owners of professionally managed illiquid alternative investment assets. We believe the Beneficient Transaction provides us with the opportunity to significantly increase and diversify our alternative asset portfolio that is intended to provide us with a new source of earnings and cash flow while at the same time significantly increasing our common shareholder equity.

  

We plan to continue to create and extend transformative products and services in the life insurance industry, while at the same time increasing and diversifying our alternative asset portfolio with Beneficient that creates opportunities for investors to receive income and capital appreciation from our investment and commercial activities.

 

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

 

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

 

Through its wholly owned subsidiary, youSurance General Agency, LLC (“YouSurance”), GWG Holdings offers life insurance directly to customers from a variety of life insurance carriers.

 

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.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

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

 

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

 

Other Assets — Included in other assets at the current balance sheet date are $5.3 million of prepaid expenses, $1.6 million of net fixed assets, $1.0 cost method investment, $0.6 million of security deposits with states for life settlement provider licenses, $0.6 million net secured merchant cash advances and $3.9 million of other miscellaneous assets – including Life Epigenetics Inc.’s exclusive license for the “DNA Methylation Based Predictor of Mortality” technology for the life insurance industry. At December 31, 2017, other assets included $4.5 million of prepaid expenses, $1.9 million of net fixed assets, $0.6 million of security deposits with states for life settlement provider licenses, $1.7 million net secured merchant cash advances and $0.3 million of other miscellaneous assets.

 

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

 

The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on the standard deviation of the average continuously compounded rate of return of five selected companies.

 

Deferred Financing and Issuance Costs — Loans advanced to us under our amended and restated senior credit facility with LNV Corporation, as described in Note 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 RPS and 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. The offerings of our RPS and RPS 2 closed in March 2017 and April 2018, respectively. There were no issuance costs associated with issuance of the Series B, described in Note 12, in August 2018.

 

Earnings (Loss) per Share — Basic earnings (loss) per share attributable to common shareholders are calculated using the weighted-average number of shares outstanding during the reported period. Diluted earnings (loss) per share are calculated based on the potential dilutive impact of our Series A, RPS, RPS 2, Series B, warrants and stock options. Due to our net loss attributable to common shareholders for the three and nine months ended September 30, 2018, there are no dilutive securities.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Reclassification — Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

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

 

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

 

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

 

(2) Restrictions on Cash

 

Under the terms of our amended and restated 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 September 30, 2018 and December 31, 2017, there was a balance of $2,370,000 and $19,967,000, respectively, in these collection and payment accounts.

 

To fund the Company’s acquisition of life insurance policies, we are required to maintain escrow accounts. Distributions from these accounts are made according to life insurance policy purchase contracts. At September 30, 2018 and December 31, 2017, there was a balance of $700,000 and $8,383,000, respectively, in the Company’s escrow accounts.

 

(3) Investment in Life Insurance Policies

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Portfolio Information

 

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

 

Life Insurance Portfolio Summary

 

Total portfolio face value of policy benefits		$	1,961,598,000
Average face value per policy		$	1,805,000
Average face value per insured life		$	2,018,000
Average age of insured (years)*			82.1
Average life expectancy estimate (years)*			6.7
Total number of policies			1,087
Number of unique lives			972
Demographics			76% Males; 24% Females
Number of smokers			43
Largest policy as % of total portfolio face value			0.68	%
Average policy as % of total portfolio			0.09	%
Average annual premium as % of face value			2.90	%

 

*	Averages presented in the table are weighted averages.

 

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

 

		As of September 30, 2018												As of December 31, 2017
Years Ending December 31,		Number of Policies				Estimated Fair Value				Face Value				Number of Policies				Estimated Fair Value				Face Value
2018			2			$	2,102,000			$	2,125,000				8			$	4,398,000			$	4,689,000
2019			28				35,046,000				42,302,000				48				63,356,000				83,720,000
2020			74				79,263,000				111,584,000				87				79,342,000				127,373,000
2021			111				117,490,000				189,768,000				98				96,154,000				170,695,000
2022			128				124,662,000				227,146,000				90				85,877,000				181,120,000
2023			112				91,782,000				215,084,000				93				69,467,000				175,458,000
2024			114				91,738,000				242,455,000				100				77,638,000				228,188,000
Thereafter			518				249,386,000				931,134,000				374				174,295,000				704,905,000
Totals			1,087			$	791,469,000			$	1,961,598,000				898			$	650,527,000			$	1,676,148,000

 

We recognized life insurance benefits of $7,973,000 and $9,747,000 during the three months ended September 30, 2018 and 2017, respectively. The forgoing amounts pertained to policies with carrying values of $2,326,000 and $2,333,000, respectively, for which we recorded realized gains of $5,647,000 and $7,414,000, respectively. We recognized life insurance benefits of $50,100,000 and $39,657,000 during the nine months ended September 30, 2018 and 2017, respectively. The forgoing amounts pertained to policies with carrying values of $13,558,000 and $7,716,000, for which we recorded realized gains of $36,542,000 and $31,941,000, respectively.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Reconciliation of gain on life insurance policies:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Change in estimated probabilistic cash flows (1)		$	19,069,000			$	12,568,000			$	55,483,000			$	40,033,000
Unrealized gain on acquisitions (2)			9,021,000				7,217,000				21,790,000				25,863,000
Premiums and other annual fees			(14,765,000	)			(13,174,000	)			(39,670,000	)			(36,124,000	)
Change in discount rates (3)			-				7,987,000				-				12,130,000
Change in life expectancy evaluation (4)			73,000				(5,370,000	)			(4,890,000	)			(13,974,000	)
Face value of matured policies			7,973,000				9,747,000				50,100,000				39,657,000
Fair value of matured policies			(5,650,000	)			(4,554,000	)			(29,883,000	)			(22,468,000	)
Gain on life insurance policies, net		$	15,721,000			$	14,421,000			$	52,930,000			$	45,117,000

 

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

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

(3)	The discount rate of 10.45% as of September 30, 2018 remained unchanged from both the prior quarter and year end dates. The discount rate of 10.54% as of September 30, 2017 reflected a decrease from the 10.81% rate used at June 30, 2017 and 10.96% used at December 31, 2016.

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

  

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

 

Years Ending December 31,		Premiums				Servicing				Premiums and Servicing Fees
Three months ending December 31, 2018		$	14,034,000			$	345,000			$	14,379,000
2019			64,852,000				1,381,000				66,233,000
2020			76,664,000				1,381,000				78,045,000
2021			88,681,000				1,381,000				90,062,000
2022			101,411,000				1,381,000				102,792,000
2023			113,676,000				1,381,000				115,057,000
		$	459,318,000			$	7,250,000			$	466,568,000

 

Management anticipates funding the majority of the premium payments and servicing fees estimated above from cash flows realized from life insurance policy benefits, and to the extent necessary, with additional borrowing capacity created as the premiums and servicing costs of pledged life insurance policies become due, under the amended and restated senior credit facility with LNV Corporation as described in Note 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, working capital and financing expenditures including paying principal, interest and dividends.

 

(4) Fair Value Definition and Hierarchy

 

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

  

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

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

 

Level 1 —

Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Because valuations are based on quoted prices that are readily and regularly available in an active market.

 

Level 2 —

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

 

Level 3 —

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

 

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

 

Level 3 Valuation Process

 

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

 

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

 

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

 

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Beginning balance		$	726,063,000			$	577,050,000			$	650,527,000			$	511,192,000
Purchases			42,892,000				25,199,000				98,442,000				67,321,000
Maturities (initial cost basis)			(2,326,000	)			(2,333,000	)			(13,558,000	)			(7,716,000	)
Net change in fair value			24,840,000				20,182,000				56,058,000				49,301,000
Ending balance		$	791,469,000			$	620,098,000			$	791,469,000			$	620,098,000

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

For life insurance policies with face amounts greater than $1 million and that are not pledged under our amended and restated senior credit facility with LNV Corporation (approximately 21.5% of our portfolio by face amount of policy benefits) we attempt to update the life expectancy estimates on a continuous rotating three year cycle. For life insurance policies that are pledged under our amended and restated senior credit facility with LNV Corporation (approximately 68.7% of our portfolio by face amount of policy benefits) we are presently required to update the life expectancy estimates every two years beginning from the date of the amended and restated senior credit facility. For the remaining small face insurance policies (i.e., a policy with $1 million in face value benefits or less) we may employ a range of methods and timeframes to update life expectancy estimates (see Note 22).

 

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

 

		As of September 30, 2018				As of December 31, 2017
Weighted-average age of insured, years *			82.1				81.7
Weighted-average life expectancy, months *			79.9				82.4
Average face amount per policy		$	1,805,000			$	1,867,000
Discount rate			10.45	%			10.45	%

 

(*)

Weighted-average by face amount of policy benefits

 

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

 

Change in Fair Value of the Investment in Life Insurance Policies

 

		Change in Life Expectancy Estimates
		minus 8 months				minus 4 months				plus 4 months				plus 8 months
September 30, 2018		$	103,902,000			$	51,782,000			$	(51,418,000	)		$	(102,195,000	)
December 31, 2017		$	86,391,000			$	42,886,000			$	(42,481,000	)		$	(84,238,000	)

 

		Change in Discount Rate
		minus 2%				minus 1%				plus 1%				plus 2%
September 30, 2018		$	78,624,000			$	37,643,000			$	(34,665,000	)		$	(66,663,000	)
December 31, 2017		$	68,117,000			$	32,587,000			$	(29,964,000	)		$	(57,583,000	)

 

Other Fair Value Considerations

 

The carrying value of policy benefit receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term maturities and low credit risk. Using the income-based valuation approach, the estimated fair value of our L Bonds, having an aggregate face value of $586,063,000 as of September 30, 2018, is approximately $592,527,000 based on a weighted-average market interest rate of 6.84%. 

 

The carrying value of the amended and restated senior credit facility with LNV Corporation reflects interest charged at 12-month LIBOR plus an applicable margin. The margin represents our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall rate reflects market, and the carrying value of the facility approximates fair value.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

GWG MCA Capital, Inc. (“GWG MCA”) participates in the merchant cash advance industry by directly advancing sums to merchants and lending money, on a secured basis, to companies that advance sums to merchants. Each quarter, we review the carrying value of these cash advances, determine if an impairment exists and establish or adjust an allowance for loan loss as necessary. At September 30, 2018 one of our secured cash advances was impaired. Specifically, the secured loan to Nulook Capital LLC had an outstanding balance of $1,908,000 and an allowance for loan loss of $1,908,000 at September 30, 2018. We deem fair value to be the estimated collectible value on each loan or advance made from GWG MCA. Secured merchant cash advances, net of allowance for loan loss, of $635,000 and $1,662,000 are included within other assets on our condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively. Where we estimate the collectible amount to be less than the outstanding balance, we record an allowance for the difference. Provision for merchant cash advances are recorded within other expenses on the statement of operations (see Note 16).

 

The following table summarizes outstanding common stock warrants (discussed in Note 14) as of September 30, 2018:

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(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 senior credit facility makes available a total of up to $300,000,000 in credit with a maturity date of September 27, 2029. Additional advances are available under the amended and restated senior credit facility at the LIBOR rate as herein defined. Advances are available as the result of additional borrowing base capacity, created as the premiums and servicing costs of pledged life insurance policies become due. Interest will accrue on amounts borrowed under the amended and restated senior credit facility at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (A) the greater of 12-month LIBOR or the federal funds rate (as defined in the agreement) plus one-half of one percent per annum, plus (B) 7.50% per annum. The effective rate at September 30, 2018 was 10.30%. Interest payments are made on a quarterly basis.

 

As of September 30, 2018, approximately 68.7% of the total face value of our portfolio is pledged to LNV Corporation. The amount outstanding under this facility was $171,964,000 and $222,525,000 at September 30, 2018 and December 31, 2017, respectively. Obligations under the amended and restated senior credit facility are secured by a security interest in DLP IV’s assets, for the benefit of the lenders, through an arrangement under which Wells Fargo serves as securities intermediary. The life insurance policies owned by DLP IV do not serve as direct collateral for the obligations of GWG Holdings under the L Bonds. The difference between the amount outstanding and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized debt issuance costs.

 

The amended and restated senior credit facility has certain financial and nonfinancial covenants, and we were in compliance with these covenants at September 30, 2018 and December 31, 2017.

 

(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.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(8) L Bonds

 

We began publicly offering and selling L Bonds in January 2012 under the name “Renewable Secured Debentures”. These debt securities were re-named “L Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration statement permitting us to sell up to $1.0 billion in principal amount of L Bonds through January 2018. On December 1, 2017, an additional public offering was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds on a continuous basis. The new offering is a follow-on to the previous L Bond offering and contains the same terms and features. We are party to an indenture governing the L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor, and Bank of Utah serves as indenture trustee. On October 23, 2017, the parties entered into the Amended and Restated Indenture in connection with the new offering. On March 27, 2018, GWG L Bond holders approved Amendment No.1 to the Amended and Restated Indenture. This amendment expands the definition of Total Coverage to include, without duplication, the value of all of our other assets as reflected on our most recently available balance sheet prepared in accordance with GAAP. The Amended and Restated Indenture contains certain financial and non-financial covenants, and we were in compliance with these covenants at September 30, 2018 and December 31, 2017.

 

The L Bonds are senior secured obligations of GWG, ranking junior only to all senior debt of GWG (see Note 6), pari passu in right of payment and in respect of collateral with all L Bonds of GWG, and senior in right of payment to all subordinated indebtedness of GWG. Payments under the L Bonds are guaranteed by GWG Life (see Note 20).

 

The L Bonds are secured by the assets of GWG, primarily consisting of its investment in its subsidiaries, cash proceeds it receives from life insurance assets of its subsidiaries, and all other cash and investments it holds in various accounts. Substantially all of GWG’s life insurance assets are held in its subsidiary DLP IV. The L Bonds’ security interest is structurally subordinate to the security interest in favor of GWG’s senior secured lender, together with any future senior secured lenders of GWG. The assets of GWG Life, including proceeds it receives as distributions from DLP IV and derived from the insurance policies owned by DLP IV, are collateral for GWG Life’s guarantee of the repayment of principal and interest on the L Bonds. The L Bonds are also secured by a pledge of a majority of GWG’s outstanding common stock beneficially held by its largest stockholders.

 

The bonds have renewal features under which we may elect to permit their renewal, subject to the right of bondholders to elect to receive payment at maturity. Interest is payable monthly or annually depending on the election of the investor.

 

At September 30, 2018 and December 31, 2017, the weighted-average interest rate of our L Bonds was 7.12% and 7.29%, respectively. The principal amount of L Bonds outstanding was $586,063,000 and $461,427,000 at September 30, 2018 and December 31, 2017, respectively. The difference between the amount of outstanding L Bonds and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized deferred issuance costs, cash receipts for new issuances and payments of redemptions in process. Amortization of deferred issuance costs was $2,312,000 and $2,076,000 for the three months ended September 30, 2018 and 2017, respectively, and $6,450,000 and $4,931,000 for the nine months ended September 30, 2018 and 2017, respectively. Future expected amortization of deferred financing costs as of September 30, 2018 is $20,581,000 in total over the next seven years.

 

Future contractual maturities of L Bonds, and future amortization of their deferred financing costs, at September 30, 2018 are as follows⁽¹⁾:

 

Years Ending December 31,		Contractual Maturities				Unamortized Deferred Financing Costs
Three months ending December 31, 2018		$	26,778,000			$	79,000
2019			150,056,000				2,291,000
2020			137,067,000				4,435,000
2021			87,360,000				3,727,000
2022			39,713,000				1,777,000
2023			53,616,000				2,924,000
Thereafter			91,473,000				5,348,000
		$	586,063,000			$	20,581,000

 

(1)       The Seller Trust L Bonds are excluded from this table (see Note 1).

 

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

 

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

 

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

 

(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 from us and still held by such purchaser.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Holders of RPS may request that we redeem their RPS at a price equal to their stated value plus accrued but unpaid dividends, less an applicable redemption fee, if any, as specified in the Certificate of Designation. Nevertheless, the Certificate of Designation for RPS permits us in our sole discretion to grant or decline redemption requests. Subject to certain restrictions and conditions, we may also redeem shares of RPS without a redemption fee upon a holder’s death, total disability or bankruptcy. In addition, after one year from the date of original issuance, we may, at our option, call and redeem shares of RPS at a price equal to their liquidation preference.

 

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

 

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

 

(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 from us and still held by such purchaser.

 

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

 

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

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(12) Series B Convertible Preferred Stock

 

On August 10, 2018, GWG Holdings issued 5,000,000 shares of Series B, par value $0.001 per share and having a stated value of $10 per share, to Beneficient for cash consideration of $50,000,000 as part of the Initial Transfer.

 

The Series B ranks, as to the payment of dividends and the distribution of our assets upon liquidation, dissolution or winding up junior to our RPS and RPS 2 and pari passu with our common stock. The Series B has no dividend rights. The Series B has no voting rights, except as required by law.

 

The Series B will convert into 5,000,000 shares of our common stock at a conversion price of $10.00 per share immediately following the Final Closing of the Beneficient Transaction. The holder has no additional rights or remedies if the Final Closing is not completed.

 

(13) Income Taxes

 

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

 

		Three Months Ended								Nine Months Ended
		September 30,				September 30,				September 30,				September 30,
		2018				2017				2018				2017
Statutory federal income tax (benefit)		$	(2,234,000	)		$	(2,321,000	)		$	(4,173,000	)		$	(5,536,000	)
State income taxes (benefit), net of federal benefit			(866,000	)			(440,000	)			(1,558,000	)			(1,049,000	)
Change in valuation allowance			3,215,000				-				5,783,000				-
Other permanent differences			(115,000	)			(3,000	)			(52,000	)			103,000
Total income tax expense (benefit)		$	-			$	(2,764,000	)		$	-			$	(6,482,000	)

 

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

 

		As of September 30, 2018				As of December 31, 2017
Deferred tax assets:
Note receivable from related party		$	-			$	1,437,000
Net operating loss carryforwards			12,096,000				9,995,000
Other assets			2,930,000				1,724,000
Subtotal			15,026,000				13,156,000
Valuation allowance			(11,962,000	)			(6,386,000	)
Deferred tax assets			3,064,000				6,770,000
Deferred tax liabilities:
Investment in life insurance policies			(2,952,000	)			(6,630,000	)
Other liabilities			(112,000	)			(140,000	)
Net deferred tax asset (liability)		$	-			$	-

 

At September 30, 2018 and December 31, 2017, we had federal net operating loss (“NOL”) carryforwards of $42,085,000 and $34,775,000, respectively. The NOL carryforwards will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership over a three-year period. We currently do not believe that any prior issuance of common stock has resulted in an ownership change under Section 382 through September 30, 2018.

 

We provide for a valuation allowance when it is not considered “more likely than not” that our deferred tax assets will be realized. As of September 30, 2018, based on all available evidence, we have provided a valuation allowance against our total net deferred tax asset of $11,962,000 due to uncertainty as to the realization of our deferred tax assets during the carryforward periods.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

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

 

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

 

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

 

(14) Common Stock

 

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

 

In conjunction with the initial public offering our Company issued warrants to purchase 16,000 shares of common stock at an exercise price of $15.63 per share. As of September 30, 2018, none of these warrants had been exercised. The remaining life of these warrants at September 30, 2018 was 1.0 year.

 

On August 10, 2018, the Company declared a special dividend of $4.30 per share of common stock payable to shareholders of record on August 27, 2018.

 

(15) Stock Incentive Plan

 

We adopted our 2013 Stock Incentive Plan in March 2013, as amended on June 1, 2015, May 5, 2017 and May 8, 2018. The Compensation Committee of our Board of Directors is responsible for the administration of the plan. Participants under the plan may be granted incentive stock options and non-statutory stock options; stock appreciation rights; stock awards; restricted stock; restricted stock units; and performance shares. Eligible participants include officers and employees of GWG Holdings and its subsidiaries, members of our Board of Directors, and consultants. Awards generally expire 10 years from the date of grant. As of September 30, 2018, 6,000,000 of our common stock options are authorized under the plan, of which 2,667,832 shares were reserved for issuance under outstanding incentive awards and 3,332,168 shares remain available for future grants.

 

Stock Options

 

As of September 30, 2018, we had outstanding stock options for 1,364,000 shares of common stock to employees, officers, and directors under the plan. Options for 583,000 shares have vested and the remaining options are scheduled to vest over three years. The options were issued with an exercise price between $6.35 and $10.38 for those beneficially owning more than 10% of our common stock, and between $4.83 and $11.56 for all others, which is equal to the market price of the shares on the date of grant. The expected annualized volatility used in the Black-Scholes model valuation of options issued during the three months ended September 30, 2018 was 25.83%. The annual volatility rate is based on the standard deviation of the average continuously compounded daily changes of stock price of five selected companies. As of September 30, 2018, stock options for 732,000 shares had been forfeited and stock options for 724,000 shares had been exercised.

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Outstanding stock options:

 

		Vested				Un-vested				Total
Balance as of December 31, 2016			738,065				844,334				1,582,399
Granted during the year			61,099				367,500				428,599
Vested during the year			327,061				(327,061	)			-
Exercised during the year			(126,498	)			-				(126,498	)
Forfeited during the year			(142,535	)			(105,017	)			(247,552	)
Balance as of December 31, 2017			857,192				779,756				1,636,948
Granted year-to-date			37,950				306,500				344,450
Vested year-to-date			279,788				(279,788	)			-
Exercised year-to-date			(569,864	)			-				(569,864	)
Forfeited year-to-date			(21,582	)			(25,501	)			(47,083	)
Balance as of September 30, 2018			583,484				780,967				1,364,451

 

As of September 30, 2018, unrecognized compensation expense related to un-vested options is $1,282,000. We expect to recognize this compensation expense over the remaining vesting period ($182,000 in 2018, $614,000 in 2019, $354,000 in 2020, and $132,000 in 2021).

 

Stock Appreciation Rights (SARs)

 

As of September 30, 2018, we had outstanding SARs for 311,000 shares of the common stock to employees. The strike price of the SARs was between $6.75 and $10.38, which was equal to the market price of the common stock at the date of issuance. As of September 30, 2018, 83,000 of the SARs were vested and 146,000 have been exercised. On September 30, 2018, the market price of GWG’s common stock was $7.75.

 

Outstanding SARs:

 

		Vested				Un-vested				Total
Balance as of December 31, 2016			106,608				133,127				239,735
Granted during the year			13,001				91,986				104,987
Vested during the year			69,444				(69,444	)			-
Forfeited during the year			-				(1,750	)			(1,750	)
Balance as of December 31, 2017			189,053				153,919				342,972
Granted year-to-date			-				113,650				113,650
Vested year-to-date			39,552				(39,552	)			-
Exercised year-to-date			(145,622	)			-				(145,622	)
Balance as of September 30, 2018			82,983				228,017				311,000

 

The liability for the SARs as of September 30, 2018 and December 31, 2017 was $43,000 and $551,000, respectively, and was recorded within other accrued expenses on the condensed consolidated balance sheets. Employee compensation and benefits expense for SARs of $25,000 and ($9,000) was recorded for the three months ended September 30, 2018 and 2017, respectively, and $15,000 and $303,000 was recorded for the nine months ended September 30, 2018 and 2017, respectively.

 

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

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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

 

		September 30, 2018
		Outstanding				Weighted-Average Exercise Price				Weighted-Average Remaining Life (years)				Fair Value at Grant Date
Vested
Stock Options			583,484			$	8.71				4.10			$	1.97
SARs			82,983			$	8.92				5.06			$	1.96
Total Vested			666,467			$	8.74				4.22			$	1.97
Unvested
Stock Options			780,967			$	9.26				4.98			$	2.31
SARs			228,017			$	8.47				6.16			$	2.04
Total Unvested			1,008,984			$	9.08				5.25			$	2.25

 

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

 

Restricted Stock Units

 

A restricted stock unit (“RSU”) entitles the holder thereof to receive one share of our common stock upon vesting. As of September 30, 2018, we had outstanding RSUs for 122,396 shares of common stock held by employees under the plan, of which 51,193 RSUs were vested but for which shares had not yet been issued and 71,203 RSUs were scheduled to vest over the next twelve months.

 

(16) Other Expenses

 

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

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Contract Labor		$	359,000			$	130,000			$	964,000			$	311,000
Marketing			413,000				485,000				1,343,000				1,687,000
Information Technology			432,000				411,000				1,208,000				1,093,000
Servicing and Facility Fees			382,000				277,000				1,244,000				856,000
Travel and Entertainment			204,000				250,000				650,000				768,000
Insurance and Regulatory			401,000				416,000				1,120,000				1,240,000
Charitable Contributions			-				42,000				-				462,000
General and Administrative			498,000				788,000				1,733,000				2,924,000
Total Other Expenses		$	2,689,000			$	2,799,000			$	8,262,000			$	9,341,000

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(17) Net Loss Attributable to Common Shareholders

 

We have outstanding RPS, RPS 2 and Series B as described in Notes 10, 11 and 12. RPS, RPS 2 and Series B are anti-dilutive to our net loss attributable to common shareholders calculation for both the three and nine months ended September 30, 2018 and 2017. Our vested and un-vested stock options and warrants are anti-dilutive for both the three and nine months ended September 30, 2018 and 2017.

 

(18) Commitments

 

We are party to an office lease with U.S. Bank National Association as the landlord. On September 1, 2015, we entered into an amendment to our original lease that expanded the leased space to 17,687 square feet and extended the term through October 2025. Under the amended lease we are obligated to pay base rent plus common area maintenance and a share of building operating costs. Rent expenses under this agreement were $119,000 and $121,000 during the three months ended September 30, 2018 and 2017, respectively, and $334,000 and $344,000 during the nine months ended September 30, 2018 and 2017, respectively.

 

Minimum lease payments under the amended lease are as follows:

 

Three months ending December 31, 2018		$	68,000
2019			275,000
2020			284,000
2021			293,000
2022			302,000
2023			311,000
Thereafter			593,000
		$	2,126,000

 

(19) 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.

 

(20) 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⁽¹⁾. 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⁽²⁾ serves as collateral for our L Bonds. Substantially all of our life insurance policies are held by DLP IV or GWG Life Trust (“the Trust”). The policies held by DLP IV are not direct collateral for the L Bonds as such policies are pledged to the senior credit facility with LNV Corporation.

 

(1)

The Seller Trust L Bonds are senior secured obligations of GWG, ranking junior only to all senior debt of GWG (see Note 6), pari passu in right of payment and in respect of collateral with all L Bonds of GWG (see Note 8), and senior in right of payment to all subordinated indebtedness of GWG. Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in the Initial Transfer are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Exchangeable Note and common units of Beneficient are held by GWG Holdings and the Commercial Loan is held by GWG Life.

 

(2)

The terms of our amended and restated senior credit facility with LNV Corporation require that we maintain a significant excess of pledged collateral value over the amount outstanding on the amended and restated senior credit facility at any given time. Any excess after satisfying all amounts owing under our amended and restated senior credit facility with LNV Corporation is available as collateral for the L Bonds (including the Seller Trust L Bonds).

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following represents condensed consolidating financial information as of September 30, 2018 and December 31, 2017, with respect to the financial position, and as of September 30, 2018 and 2017, with respect to results of operations and cash flows of GWG Holdings and its subsidiaries. The parent column presents the financial information of GWG Holdings, the primary obligor for the L Bonds. 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.

 

Condensed Consolidating Balance Sheets

 

September 30, 2018		Parent				Guarantor Subsidiary				Non-Guarantor Subsidiaries				Eliminations				Consolidated
A S S E T S
Cash and cash equivalents		$	115,884,625			$	631,228			$	1,357,815			$	-			$	117,873,668
Restricted cash			-				699,477				2,370,282				-				3,069,759
Investment in life insurance policies, at fair value			-				85,077,334				706,391,253				-				791,468,587
Life insurance policy benefits receivable			-				2,800,000				7,672,696				-				10,472,696
Other assets			6,892,415				1,822,284				4,307,324				-				13,022,023
Investment in subsidiaries			642,140,104				551,836,655				-				(1,193,976,759	)			-
TOTAL ASSETS		$	764,917,144			$	642,866,978			$	722,099,370			$	(1,193,976,759	)		$	935,906,733
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		$	-			$	-			$	162,469,172			$	-			$	162,469,172
L Bonds			570,199,704				-				-				-				570,199,704
Accounts payable			1,101,453				641,741				836,129				-				2,579,323
Interest and dividends payable			11,431,884				-				4,796,457				-				16,228,341
Other accrued expenses			1,026,668				1,448,807				797,283				-				3,272,758
TOTAL LIABILITIES			583,759,709				2,090,548				168,899,041				-				754,749,298
STOCKHOLDERS’ EQUITY
Member capital			-				640,776,430				553,200,329				(1,193,976,759	)			-
Redeemable preferred stock and Series 2 redeemable preferred stock			216,068,039				-				-				-				216,068,039
Series B convertible preferred stock			50,000,000				-				-				-				50,000,000
Common stock			5,980				-				-				-				5,980
Accumulated deficit			(84,916,584	)			-				-				-				(84,916,584	)
TOTAL STOCKHOLDERS’ EQUITY			181,157,435				640,776,430				553,200,329				(1,193,976,759	)			181,157,435
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	764,917,144			$	642,866,978			$	722,099,370			$	(1,193,976,759	)		$	935,906,733

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Balance Sheets (continued)

 

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

  

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Operations 

 

For the three months ended September 30, 2018		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			745,170				4,298				181,677				-				931,145
TOTAL REVENUE			745,170				4,126,451				11,781,037				-				16,652,658
EXPENSES
Interest expense			12,454,750				-				5,060,212				-				17,514,962
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			16,821,336				3,764,095				6,589,236				-				27,174,667
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES			(16,076,166	)			362,356				5,191,801				-				(10,522,009	)
EQUITY IN INCOME OF SUBSIDIARIES			5,554,157				6,266,480				-				(11,820,637	)			-
NET INCOME (LOSS) BEFORE INCOME TAXES			(10,522,009	)			6,628,836				5,191,801				(11,820,637	)			(10,522,009	)
INCOME TAX BENEFIT			-				-				-				-				-
NET INCOME (LOSS)			(10,522,009	)			6,628,836				5,191,801				(11,820,637	)			(10,522,009	)
Preferred stock dividends			4,313,542				-				-				-				4,313,542
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(14,835,551	)		$	6,628,836			$	5,191,801			$	(11,820,637	)		$	(14,835,551	)

 

For the three months ended September 30, 2017		Parent				Guarantor Subsidiary				Non-Guarantor Subsidiaries				Eliminations				Consolidated
REVENUE
Gain on life insurance policies, net		$	-			$	2,780,544			$	11,640,809			$	-			$	14,421,353
Interest and other income			40,044				113,410				239,865				(117,629	)			275,690
TOTAL REVENUE			40,044				2,893,954				11,880,674				(117,629	)			14,697,043
EXPENSES
Interest expense			9,907,959				253,422				3,126,130				(12,104	)			13,275,407
Employee compensation and benefits			2,140,675				1,413,103				238,318				-				3,792,096
Legal and professional fees			746,939				246,691				663,460				-				1,657,090
Other expenses			1,743,730				711,528				449,463				(105,525	)			2,799,196
TOTAL EXPENSES			14,539,303				2,624,744				4,477,371				(117,629	)			21,523,789
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES			(14,499,259	)			269,210				7,403,303				-				(6,826,746	)
EQUITY IN INCOME OF SUBSIDIARIES			7,672,513				8,263,120				-				(15,935,633	)			-
NET INCOME (LOSS) BEFORE INCOME TAXES			(6,826,746	)			8,532,330				7,403,303				(15,935,633	)			(6,826,746	)
INCOME TAX BENEFIT			(2,764,243	)			-				-				-				(2,764,243	)
NET INCOME (LOSS)			(4,062,503	)			8,532,330				7,403,303				(15,935,633	)			(4,062,503	)
Preferred stock dividends			3,548,165				-				-				-				3,548,165
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(7,610,668	)		$	8,532,330			$	7,403,303			$	(15,935,633	)		$	(7,610,668	)

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Operations (continued)

 

For the nine months ended September 30, 2018		Parent				Guarantor Subsidiary				Non-Guarantor Subsidiaries				Eliminations				Consolidated
REVENUE
Gain on life insurance policies, net		$	-			$	12,135,832			$	40,794,176			$	-			$	52,930,008
Interest and other income			1,859,068				30,822				689,380				-				2,579,270
TOTAL REVENUE			1,859,068				12,166,654				41,483,556				-				55,509,278
EXPENSES
Interest expense			34,473,956				-				16,252,193				-				50,726,149
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			46,476,439				7,966,536				20,823,958				-				75,266,933
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES			(44,617,371	)			4,200,118				20,659,598				-				(19,757,655	)
EQUITY IN INCOME OF SUBSIDIARIES			24,859,716				23,824,330				-				(48,684,046	)			-
NET INCOME (LOSS) BEFORE INCOME TAXES			(19,757,655	)			28,024,448				20,659,598				(48,684,046	)			(19,757,655	)
INCOME TAX BENEFIT			-				-				-				-				-
NET INCOME (LOSS)			(19,757,655	)			28,024,448				20,659,598				(48,684,046	)			(19,757,655	)
Preferred stock dividends			12,356,513				-				-				-				12,356,513
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(32,114,168	)		$	28,024,448			$	20,659,598			$	(48,684,046	)		$	(32,114,168	)

 

For the nine months ended September 30, 2017		Parent				Guarantor Subsidiary				Non-Guarantor Subsidiaries				Eliminations				Consolidated
REVENUE
Gain on life insurance policies, net		$	-			$	4,481,555			$	40,635,883			$	-			$	45,117,438
Interest and other income			194,273				348,695				1,163,667				(371,100	)			1,335,535
TOTAL REVENUE			194,273				4,830,250				41,799,550				(371,100	)			46,452,973
EXPENSES
Interest expense			27,495,867				930,837				10,418,243				(79,300	)			38,765,647
Employee compensation and benefits			6,179,032				4,163,873				353,550				-				10,696,455
Legal and professional fees			1,524,510				687,240				1,722,277				-				3,934,027
Other expenses			5,291,881				2,244,577				2,095,959				(291,800	)			9,340,617
TOTAL EXPENSES			40,491,290				8,026,527				14,590,029				(371,100	)			62,736,746
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES			(40,297,017	)			(3,196,277	)			27,209,521				-				(16,283,773	)
EQUITY IN INCOME OF SUBSIDIARIES			24,013,244				29,569,105				-				(53,582,349	)			-
NET INCOME (LOSS) BEFORE INCOME TAXES			(16,283,773	)			26,372,828				27,209,521				(53,582,349	)			(16,283,773	)
INCOME TAX BENEFIT			(6,481,917	)			-				-				-				(6,481,917	)
NET INCOME (LOSS)			(9,801,856	)			26,372,828				27,209,521				(53,582,349	)			(9,801,856	)
Preferred stock dividends			7,447,022				-				-				-				7,447,022
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS		$	(17,248,878	)		$	26,372,828			$	27,209,521			$	(53,582,349	)		$	(17,248,878	)

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Cash Flows

 

For the three months ended September 30, 2018		Parent				Guarantor Subsidiary				Non-Guarantor Subsidiary				Eliminations				Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(10,522,009	)		$	6,628,836			$	5,191,801			$	(11,820,637	)		$	(10,522,009	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Equity of subsidiaries			(5,554,157	)			(6,266,480	)			-				11,820,637				-
Changes in fair value of life insurance policies			-				(3,485,452	)			(21,354,115	)			-				(24,839,567	)
Amortization of deferred financing and issuance costs			2,311,567				-				263,755				-				2,575,322
(Increase) decrease in operating assets:
Life insurance policy benefits receivable			-				(2,000,000	)			18,562,304				-				16,562,304
Other assets			(62,835,255	)			(47,247,165	)			305,226				106,913,951				(2,863,243	)
Increase (decrease) in operating liabilities:
Accounts payable and other accrued expenses			940,137				(384,380	)			(1,157,273	)			-				(601,516	)
NET CASH FLOWS USED IN OPERATING ACTIVITIES			(75,659,717	)			(52,754,641	)			1,811,698				106,913,951				(19,688,709	)
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
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES			-				(10,699,108	)			(29,866,667	)			-				(40,565,775	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on (repayments of) senior debt			-				-				(18,425,136	)			-				(18,425,136	)
Proceeds from issuance of L Bonds			68,884,369				-				-				-				68,884,369
Payments for redemption and issuance of L Bonds			(20,195,657	)			-				-				-				(20,195,657	)
Issuance of common stock			682,954				-				-				-				682,954
Common stock dividends			(25,709,412	)			-				-				-				(25,709,412	)
Proceeds from issuance of convertible preferred stock			50,000,000				-				-				-				50,000,000
Payments for redemption of redeemable preferred stock			(821,778	)			-				-				-				(821,778	)
Preferred stock dividends			(4,313,542	)			-				-				-				(4,313,542	)
Issuance of member capital			-				58,589,352				48,324,599				(106,913,951	)			-
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES			68,526,934				58,589,352				29,899,463				(106,913,951	)			50,101,798
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(7,132,783	)			(4,864,397	)			1,844,494				-				(10,152,686	)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
BEGINNING OF THE PERIOD			123,017,408				6,195,102				1,883,603				-				131,096,113
END OF THE PERIOD		$	115,884,625			$	1,330,705			$	3,728,097			$	-			$	120,943,427

 

 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Condensed Consolidating Statements of Cash Flows (continued)

 

For the three months ended September 30, 2017		Parent				Guarantor Subsidiary				Non-Guarantor Subsidiary				Eliminations				Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(4,062,503	)		$	8,532,330			$	7,403,303			$	(15,935,633	)		$	(4,062,503	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Equity of subsidiaries			(7,672,513	)			(8,263,120	)			-				15,935,633				-
Changes in fair value of life insurance policies			-				(3,609,194	)			(16,572,538	)			-				(20,181,732	)
Amortization of deferred financing and issuance costs			2,075,632				134,445				134,464				-				2,344,541
Deferred income taxes			(2,764,243	)			-				-				-				(2,764,243	)
(Increase) decrease in operating assets:
Life insurance policy benefits receivable			-				-				(7,627,000	)			-				(7,627,000	)
Other assets			(38,552,777	)			51,740,361				1,157,168				(13,415,694	)			929,058
Increase (decrease) in operating liabilities:
Accounts payable and other accrued expenses			1,834,187				(855,012	)			(1,064,684	)			-				(85,509	)
NET CASH FLOWS USED IN OPERATING ACTIVITIES			(49,142,217	)			47,679,810				(16,569,287	)			(13,415,694	)			(31,447,388	)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance policies			-				-				(25,199,692	)			-				(25,199,692	)
Carrying value of matured life insurance policies			-				505,000				1,828,039				-				2,333,039
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES			-				505,000				(23,371,653	)			-				(22,866,653	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on (repayments of) senior debt			-				-				56,887,491				-				56,887,491
Payments for issuance of senior debt			-				-				(3,937,907	)			-				(3,937,907	)
Payments for redemption of Series I Secured Notes			-				(6,815,406	)			-				-				(6,815,406	)
Proceeds from issuance of L Bonds			30,271,873				-				-				-				30,271,873
Payments for redemption and issuance of L Bonds			(19,752,717	)			-				-				-				(19,752,717	)
Issuance of common stock			30				-				-				-				30
Proceeds from issuance of redeemable preferred stock			25,211,870				-				-				-				25,211,870
Payments for issuance of redeemable preferred stock			(1,243,920	)			-				-				-				(1,243,920	)
Payments for redemption of redeemable preferred stock			(47,500	)			-				-				-				(47,500	)
Preferred stock dividends			(3,548,165	)			-				-				-				(3,548,165	)
Issuance of member capital			-				37,959,462				(51,375,156	)			13,415,694				-
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES			30,891,471				31,144,056				1,574,428				13,415,694				77,025,649
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(18,250,746	)			79,328,866				(38,366,512	)			-				22,711,608
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH