Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
__________________________
FORM 10-Q
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
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. T Yes £ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes £ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer o
|
Accelerated filer o
|
|
|
Smaller reporting company x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes T No
As of August 8, 2014, GWG Holdings, Inc. had 4,562,000 shares of common stock outstanding.
GWG HOLDINGS, INC.
Index to Form 10-Q
for the Quarter Ended June 30, 2014
| |
|
Page
No.
|
|
PART I.
|
FINANCIAL INFORMATION
|
|
| |
|
|
|
Item 1.
|
Financial Statements
|
|
| |
Condensed Consolidated Balance Sheets as of June 30, 2014, and December 31, 2013
|
1
|
| |
Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and 2013
|
2
|
| |
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2014 and 2013
|
3
|
| |
Condensed Consolidated Statement of Stockholders’ Equity
|
5
|
| |
Notes to Condensed Consolidated Financial Statements
|
6
|
| |
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
29
|
| |
|
|
|
Item 4.
|
Controls and Procedures
|
51
|
| |
|
|
|
PART II.
|
OTHER INFORMATION
|
|
| |
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
52
|
| |
|
|
|
Item 6.
|
Exhibits
|
53
|
| |
|
|
|
SIGNATURES
|
54
|
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
|
June 30,
2014
|
|
|
December 31,
2013
|
|
| |
|
(unaudited) |
|
|
|
|
|
|
A S S E T S
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,059,955
|
|
|
$
|
33,449,793
|
|
|
Restricted cash
|
|
|
2,810,432
|
|
|
|
5,832,970
|
|
|
Investment in life settlements, at fair value
|
|
|
267,895,692
|
|
|
|
234,672,794
|
|
|
Other assets
|
|
|
2,822,074
|
|
|
|
1,424,919
|
|
|
TOTAL ASSETS
|
|
$
|
296,588,153
|
|
|
$
|
275,380,476
|
|
| |
|
|
|
|
|
|
|
|
|
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 (D E F I C I T)
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
79,000,000
|
|
|
$
|
79,000,000
|
|
|
Series I Secured notes payable
|
|
|
28,051,113
|
|
|
|
29,275,202
|
|
|
Renewable Secured Debentures
|
|
|
157,513,267
|
|
|
|
131,646,062
|
|
|
Interest payable
|
|
|
9,730,193
|
|
|
|
7,209,408
|
|
|
Accounts payable and accrued expenses
|
|
|
1,714,418
|
|
|
|
1,343,952
|
|
|
Deferred taxes, net
|
|
|
5,403,604
|
|
|
|
7,675,174
|
|
|
TOTAL LIABILITIES
|
|
|
281,412,595
|
|
|
|
256,149,798
|
|
| |
|
|
|
|
|
|
|
|
|
CONVERTIBLE, REDEEMABLE PREFERRED STOCK
|
|
|
|
|
|
|
|
|
|
(par value $0.001; shares authorized 40,000,000; shares issued and outstanding 3,419,767 and 3,368,109; liquidation preference of $25,648,000 and $25,261,000 on June 30, 2014 and December 31, 2013, respectively)
|
|
|
25,309,946
|
|
|
|
24,722,693
|
|
| |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Common stock (par value $0.001: shares authorized 210,000,000; shares issued and outstanding is 4,562,000 on both June 30, 2014 and December 31, 2013)
|
|
|
4,562
|
|
|
|
4,562
|
|
|
Additional paid-in capital
|
|
|
2,787,494
|
|
|
|
2,942,000
|
|
|
Accumulated deficit
|
|
|
(12,926,444
|
)
|
|
|
(8,438,577
|
)
|
|
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
(10,134,388
|
)
|
|
|
(5,492,015
|
)
|
| |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
$
|
296,588,153
|
|
|
$
|
275,380,476
|
|
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
|
|
|
Six Months Ended
|
|
| |
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life settlements, net
|
|
$ |
5,484,889 |
|
|
$ |
7,733,245 |
|
|
$ |
11,001,094 |
|
|
$ |
16,073,601 |
|
|
Interest and other income
|
|
|
6,380 |
|
|
|
3,274,323 |
|
|
|
13,747 |
|
|
|
3,441,994 |
|
|
TOTAL REVENUE
|
|
|
5,491,269 |
|
|
|
11,007,568 |
|
|
|
11,014,841 |
|
|
|
19,515,595 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
1,178,819 |
|
|
|
1,063,923 |
|
|
|
2,147,564 |
|
|
|
3,001,343 |
|
|
Legal and professional fees
|
|
|
419,337 |
|
|
|
351,910 |
|
|
|
826,339 |
|
|
|
789,200 |
|
|
Interest expense
|
|
|
6,608,043 |
|
|
|
4,941,942 |
|
|
|
12,934,591 |
|
|
|
9,409,157 |
|
|
Other expenses
|
|
|
1,188,479 |
|
|
|
1,091,132 |
|
|
|
1,865,784 |
|
|
|
2,124,277 |
|
|
TOTAL EXPENSES
|
|
|
9,394,678 |
|
|
|
7,448,907 |
|
|
|
17,774,278 |
|
|
|
15,323,977 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFOREINCOME TAXES
|
|
|
(3,903,409 |
) |
|
|
3,558,661 |
|
|
|
(6,759,437 |
) |
|
|
4,191,618 |
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(1,316,712 |
) |
|
|
1,801,971 |
|
|
|
(2,271,570 |
) |
|
|
2,367,794 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$ |
(2,586,697 |
) |
|
$ |
1,756,690 |
|
|
$ |
(4,487,867 |
) |
|
$ |
1,823,824 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock to liquidation value
|
|
|
(101,271 |
) |
|
|
(208,877 |
) |
|
|
(226,984 |
) |
|
|
(466,640 |
) |
|
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$ |
(2,687,968 |
) |
|
$ |
1,547,813 |
|
|
$ |
(4,714,851 |
) |
|
$ |
1,357,184 |
|
|
NET INCOME (LOSS) PER SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.59 |
) |
|
$ |
0.31 |
|
|
$ |
(1.03 |
) |
|
$ |
0.28 |
|
|
Diluted
|
|
$ |
(0.59 |
) |
|
$ |
0.21 |
|
|
$ |
(1.03 |
) |
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,562,000 |
|
|
|
4,984,994 |
|
|
|
4,562,000 |
|
|
|
4,774,102 |
|
|
Diluted
|
|
|
4,562,000 |
|
|
|
7,511,099 |
|
|
|
4,562,000 |
|
|
|
7,290,253 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(2,586,697 |
) |
|
$ |
1,756,690 |
|
|
$ |
(4,487,867 |
) |
|
$ |
1,823,824 |
|
|
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life settlements
|
|
|
(10,852,425 |
) |
|
|
(7,449,180 |
) |
|
|
(22,211,338 |
) |
|
|
(18,943,905 |
) |
|
Amortization of deferred financing and issuance costs
|
|
|
1,354,007 |
|
|
|
837,133 |
|
|
|
1,707,664 |
|
|
|
1,930,880 |
|
|
Deferred income taxes
|
|
|
(1,316,712 |
) |
|
|
1,802,920 |
|
|
|
(2,271,570 |
) |
|
|
2,366,794 |
|
|
Convertible, redeemable preferred stock dividends payable
|
|
|
196,991 |
|
|
|
178,235 |
|
|
|
389,331 |
|
|
|
261,937 |
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(997,073 |
) |
|
|
(4,164,004 |
) |
|
|
(1,248,919 |
) |
|
|
(3,614,132 |
) |
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
1,890,337 |
|
|
|
402,739 |
|
|
|
3,168,163 |
|
|
|
1,694,797 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(12,311,572 |
) |
|
|
(6,635,467 |
) |
|
|
(24,954,536 |
) |
|
|
(14,479,805 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in life settlements
|
|
|
(2,608,232 |
) |
|
|
(2,972,944 |
) |
|
|
(10,879,435 |
) |
|
|
(12,885,993 |
) |
|
Proceeds from settlement of life settlements
|
|
|
68,500 |
|
|
|
1,382,152 |
|
|
|
68,500 |
|
|
|
2,872,152 |
|
|
NET CASH FLOWS USED IN INVESTING ACTIVITIES
|
|
|
(2,539,732 |
) |
|
|
(1,590,792 |
) |
|
|
(10,810,935 |
) |
|
|
(10,013,841 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from revolving credit facility
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
8,000,000 |
|
|
Payments for redemption of Series I Secured notes payable
|
|
|
(670,621 |
) |
|
|
(2,423,052 |
) |
|
|
(1,538,924 |
) |
|
|
(3,930,876 |
) |
|
Proceeds from issuance of renewable secured debentures
|
|
|
14,868,830 |
|
|
|
18,588,867 |
|
|
|
33,234,487 |
|
|
|
42,439,661 |
|
|
Payments for redemption and issuance of renewable secured debentures
|
|
|
(4,393,523 |
) |
|
|
(3,033,303 |
) |
|
|
(9,322,411 |
) |
|
|
(5,336,571 |
) |
|
Proceeds from restricted cash
|
|
|
43,330 |
|
|
|
2,160,333 |
|
|
|
3,022,537 |
|
|
|
(2,370,775 |
) |
|
Repurchase of common stock
|
|
|
- |
|
|
|
(3,252,400 |
) |
|
|
- |
|
|
|
(3,252,400 |
) |
|
Issuance (redemptions) of convertible, redeemable preferred stock
|
|
|
(20,056 |
) |
|
|
(125,135 |
) |
|
|
(20,056 |
) |
|
|
(311,804 |
) |
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
9,827,960 |
|
|
|
11,915,310 |
|
|
|
25,375,633 |
|
|
|
35,237,235 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(5,023,344 |
) |
|
|
3,689,051 |
|
|
|
(10,389,838 |
) |
|
|
10,743,589 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
28,083,299 |
|
|
|
34,551,582 |
|
|
|
33,449,793 |
|
|
|
27,497,044 |
|
|
END OF PERIOD
|
|
$ |
23,059,955 |
|
|
$ |
38,240,633 |
|
|
$ |
23,059,955 |
|
|
$ |
38,240,633 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
(unaudited)
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
June 30, 2014
|
|
|
June 30, 2013
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$ |
3,531,000 |
|
|
$ |
3,214,000 |
|
|
$ |
7,781,000 |
|
|
$ |
6,512,000 |
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series I secured notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash conversion of accrued interest and commissions payable to principal
|
|
$ |
40,000 |
|
|
$ |
86,000 |
|
|
$ |
105,000 |
|
|
$ |
150,000 |
|
|
Renewable secured debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash conversion of accrued interest and commission payable to principal
|
|
$ |
162,000 |
|
|
$ |
59,000 |
|
|
$ |
282,000 |
|
|
$ |
100,000 |
|
|
Convertible, redeemable preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash conversion of dividends payable
|
|
$ |
193,000 |
|
|
$ |
178,000 |
|
|
$ |
380,000 |
|
|
$ |
262,000 |
|
|
Non-cash accretion of convertible, redeemable preferred stock to redemption value
|
|
$ |
101,000 |
|
|
$ |
209,000 |
|
|
$ |
227,000 |
|
|
$ |
467,000 |
|
|
Investment in life settlements included in accounts payable
|
|
$ |
75,000 |
|
|
$ |
262,000 |
|
|
$ |
75,000 |
|
|
$ |
262,000 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| |
|
Common
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
|
|
| |
|
Shares
|
|
|
(par)
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012
|
|
|
4,994,500
|
|
|
|
4,995
|
|
|
|
6,976,838
|
|
|
|
(8,243,622
|
)
|
|
|
(1,261,789
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(194,955
|
)
|
|
|
(194,955
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(432,500
|
)
|
|
|
(433
|
)
|
|
|
(3,251,967
|
)
|
|
|
-
|
|
|
|
(3,252,400
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
23,753
|
|
|
|
-
|
|
|
|
23,753
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock to liquidation value
|
|
|
-
|
|
|
|
-
|
|
|
|
(806,624
|
)
|
|
|
-
|
|
|
|
(806,624
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013
|
|
|
4,562,000
|
|
|
$
|
4,562
|
|
|
$
|
2,942,000
|
|
|
$
|
(8,438,577
|
)
|
|
$
|
(5,492,015
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,487,867
|
)
|
|
|
(4,487,867
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock options
|
|
|
|
-
|
|
|
-
|
|
|
|
72,478
|
|
|
|
-
|
|
|
|
72,478
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock to liquidation value
|
|
|
|
-
|
|
|
-
|
|
|
|
(226,984
|
)
|
|
|
-
|
|
|
|
(226,984
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2014
|
|
|
4,562,000
|
|
|
|
4,562
|
|
|
|
2,787,494
|
|
|
|
(12,926,444
|
)
|
|
|
(10,134,388
|
)
|
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 - GWG Holdings, Inc. and subsidiaries, located in Minneapolis, Minnesota, facilitates the purchase of life insurance policies for its own investment portfolio through its wholly owned subsidiary, GWG Life, LLC (GWG Life), and its subsidiaries, GWG Trust (Trust), GWG DLP Funding II, LLC (DLP II) and its wholly owned subsidiary, GWG DLP Master Trust II (the Trust II). Our wholly owned subsidiary, GWG Broker Services, LLC (Broker Services), was formed to earn fees for brokering policy transactions between market participants. Our wholly owned subsidiary United Lending, LLC (United Lending) and its wholly owned subsidiary United Lending SPV, LLC (United Lending SPV) were formed to finance life settlement premiums and policy loans. All of these entities are legally organized in Delaware. Unless the context otherwise requires or we specifically so indicate, all references in this report to "we", "us", "our", "our Company", "GWG", or the "Company" refer to these entities collectively. GWG Member, LLC, a wholly owned subsidiary formed November 2010 to facilitate the acquisition of policies, has not commenced operations as of June 30, 2014.
Basis of presentation - The condensed consolidated balance sheet as of June 30, 2014, the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013, and the condensed consolidated statements of cash flows for the three and six months ended June 30, 2014 and 2013, and the related information presented in these notes, have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, without audit. To the extent that information and notes required by U.S. generally accepted accounting principles for complete financial statements are contained in or are consistent with the consolidated audited financial statements in the Company’s Form 10-K for the year ended December 31, 2013, such information and notes have not been duplicated herein. In the opinion of management, all adjustments considered necessary for a fair presentation of results have been included. The condensed consolidated balance sheet at December 31, 2013 was derived from the audited consolidated financial statements as of that date. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Use of estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these consolidated financial statements relates to (1) the determination of the assumptions used in estimating the fair value of the investment in life insurance policies, and (2) the value of deferred tax assets and liabilities.
Life settlements - ASC 325-30, Investments in Insurance Contracts, allows a reporting entity the election to account for its investments in life settlements using either the investment method or the fair value method. The election shall be made on an instrument-by-instrument basis and is irrevocable. Under the investment method, an investor shall recognize the initial investment at the purchase price plus all initial direct costs. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force shall be capitalized. Under the fair value method, an investor shall recognize the initial investment at the purchase price. In subsequent periods, the investor shall remeasure the investment at fair value in its entirety at each reporting period and shall recognize the change in fair value in current period income net of premiums paid. The Company uses the fair value method to account for all life settlements.
The Company recognizes realized gains (revenue) from life settlement contracts upon one of the two following events:
| |
1)
|
Receipt of death notice or verified obituary of insured
|
| |
2)
|
Sale of policy and filing of change of ownership forms and receipt of payment
|
The Company recognizes the difference between the death benefits and carrying values of the policy when an insured event has occurred and the Company determines that settlement and ultimate collection of the death benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. In an event of a sale of a policy the Company recognizes gain or loss as the difference between the sale price and the carrying value of the policy on the date of the receipt of payment on such sale.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Deposits and initial direct costs advanced on unsettled policy acquisitions are recorded as other assets until policy ownership has been transferred to the Company. Such deposits and direct cost advances were $0 and $201,000 at June 30, 2014 and December 31, 2013, respectively.
Deferred financing and issuance costs – Costs incurred to obtain financing under the revolving credit facility, as described in note 6, have been capitalized and are amortized using the straight-line method over the term of the revolving credit facility. Amortization of deferred financing costs was $89,000 for both the three-month periods ended June 30, 2014 and 2013, and $179,000 and $276,000 for the six-month periods ended June 30, 2014 and 2013, respectively. The future amortization is expected to be $179,000 for the six months ending December 31, 2014. The Series I Secured notes payable, as described in note 7, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of each respective borrowing. The Renewable Secured Debentures, as described in note 8, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of each respective borrowing. The Series A preferred stock, as described in note 9, is reported net of issuance costs, sales commissions, including the fair value of warrants issued, and other direct expenses, which are amortized using the interest method as interest expense over the three-year redemption period.
Earnings (loss) per share - Basic per share earnings (loss) attributable to non-redeemable interests is calculated using the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated based on the potential dilutive impact, if any, of the Company’s convertible, redeemable preferred stock, and outstanding warrants, and stock options.
Subsequent events - Subsequent events are events or transactions that occur after the balance sheet date but before consolidated financial statements are issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Company’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before the consolidated financial statements are available to be issued. The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are filed for potential recognition or disclosure.
Recently adopted pronouncements - Pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company.
( 2 ) Restrictions on cash
The Company is required by its lenders to maintain collection and escrow accounts. These accounts are used to fund the acquisition, pay annual premiums of insurance policies, pay interest and other charges under the revolving credit facility, and collect policy benefits. DZ Bank AG, as agent for Autobahn Funding Company, LLC, the lender for the revolving credit facility as described in note 6, authorizes the disbursements from these accounts. At June 30, 2014 and December 31, 2013 there was a balance of $2,810,000, and $5,833,000, respectively, maintained in these restricted cash accounts.
( 3 ) Investment in life insurance policies
The life insurance policies (Level 3 fair value measurements) are valued based on unobservable inputs that are significant to the overall fair value measurement. Changes in the fair value of these instruments are recorded in gain or loss on life insurance policies in the consolidated statements of operations (net of the cash premiums paid on the policies). The fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions. Life expectancy reports have been obtained from widely accepted life expectancy providers. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. As a result of management’s analysis, discount rates of 11.56% and 11.69% were applied to the portfolio as of June 30, 2014 and December 31, 2013.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
A summary of the Company’s life insurance policies accounted for under the fair value method and their estimated maturity dates, based on remaining life expectancy, is as follows:
| |
|
As of June 30, 2014
|
|
|
As of December 31, 2013
|
|
|
Years Ending December 31,
|
|
Number of
Contracts
|
|
|
Estimated
Fair Value
|
|
|
Face Value
|
|
|
Number of
Contracts
|
|
|
Estimated
Fair Value
|
|
|
Face Value
|
|
|
2014
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
2015
|
|
|
3
|
|
|
|
4,781,000
|
|
|
|
6,000,000
|
|
|
|
4
|
|
|
|
5,065,000
|
|
|
|
6,750,000
|
|
|
2016
|
|
|
11
|
|
|
|
11,035,000
|
|
|
|
16,450,000
|
|
|
|
8
|
|
|
|
8,174,000
|
|
|
|
13,750,000
|
|
|
2017
|
|
|
26
|
|
|
|
33,191,000
|
|
|
|
59,716,000
|
|
|
|
25
|
|
|
|
33,345,000
|
|
|
|
63,916,000
|
|
|
2018
|
|
|
29
|
|
|
|
35,358,000
|
|
|
|
70,017,000
|
|
|
|
33
|
|
|
|
37,243,000
|
|
|
|
80,318,000
|
|
|
2019
|
|
|
44
|
|
|
|
44,279,000
|
|
|
|
109,795,000
|
|
|
|
34
|
|
|
|
32,844,000
|
|
|
|
89,295,000
|
|
|
2020
|
|
|
38
|
|
|
|
35,833,000
|
|
|
|
91,224,000
|
|
|
|
34
|
|
|
|
27,741,000
|
|
|
|
75,644,000
|
|
|
Thereafter
|
|
|
138
|
|
|
|
103,419,000
|
|
|
|
431,450,000
|
|
|
|
125
|
|
|
|
90,261,000
|
|
|
|
410,975,000
|
|
|
Totals
|
|
|
289
|
|
|
|
267,896,000
|
|
|
|
784,652,000
|
|
|
|
263
|
|
|
$
|
234,673,000
|
|
|
$
|
740,648,000
|
|
The Company recognized policy benefits of $300,000 and $6,600,000 during the three-month periods ended June 30, 2014 and 2013, respectively, related to policies with a carrying value of $68,000 and $1,382,000, respectively. During the six-month periods ended June 30, 2014 and 2013, the Company recorded realized gains of $232,000 and $5,218,000 on such policies. The Company recognized policy benefits of $300,000 and $10,600,000, respectively, related to policies with carrying value of $68,000 and $2,872,000, respectively. The Company recorded realized gains of $232,000 and $7,728,000 on such policies.
Reconciliation of gain on life settlements:
| |
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Change in fair value
|
|
$ |
10,852,000 |
|
|
$ |
7,449,000 |
|
|
$ |
22,211,000 |
|
|
$ |
18,944,000 |
|
|
Premiums and other annual fees
|
|
|
(5,599,000 |
) |
|
|
(4,934,000 |
) |
|
|
(11,442,000 |
) |
|
|
(10,598,000 |
) |
|
Policy maturities
|
|
|
232,000 |
|
|
|
5,218,000 |
|
|
|
232,000 |
|
|
|
7,728,000 |
|
|
Gain on life settlements, net
|
|
$ |
5,485,000 |
|
|
$ |
7,733,000 |
|
|
$ |
11,001,000 |
|
|
$ |
16,074,000 |
|
The estimated expected premium payments to maintain the above life insurance policies in force through 2018, assuming no mortalities, are as follows:
|
Years Ending December 31,
|
|
|
|
|
Six months ending December 31 ,2014
|
|
$
|
12,213,000
|
|
|
2015
|
|
|
26,693,000
|
|
|
2016
|
|
|
29,402,000
|
|
|
2017
|
|
|
32,847,000
|
|
|
2018
|
|
|
35,767,000
|
|
| |
|
$
|
136,922,000
|
|
Management anticipates funding the estimated premium payments as noted above with proceeds from the DZ Bank revolving credit facility and through additional debt and equity financing as well as from cash proceeds from maturities of life insurance policies. The proceeds of these capital sources are also intended to be used for the purchase, financing, and maintenance of additional life insurance policies.
( 4 ) Fair value definition and hierarchy
ASC 820 establishes a hierarchal disclosure framework which 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 active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. ASC 820 establishes a three-level valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. 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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The hierarchy is broken down into three levels based on the observability of inputs as follows:
|
●
|
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
|
|
●
|
Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
|
|
●
|
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
The availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including, for example, whether 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 the Company’s life settlements are determined on a quarterly basis by the Company’s portfolio management committee, taking into consideration changes in discount rate assumptions, estimated premium payments and life expectancy assumptions, as well as any changes in economic and other relevant conditions. These inputs are then used to estimate the discounted cash flows using the MAPS probabilistic portfolio pricing model, which estimates the cash flows using various different probabilities and scenarios. The valuation process includes a review by senior management as of each valuation date. Management also engages a third party expert to independently test the accuracy of the valuations using the inputs provided by management.
Life insurance policies represent financial instruments recorded at fair value on a recurring basis. The following table reconciles the beginning and ending fair value of the Company’s Level 3 investments in life insurance policies for the three and six-month periods ending June 30, 2014 and 2013, as follows:
| |
|
Three months ended June 30,
|
|
|
Six months ended June 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Beginning balance
|
|
$ |
254,504,000 |
|
|
$ |
185,020,000 |
|
|
$ |
234,673,000 |
|
|
$ |
164,317,000 |
|
|
Purchases
|
|
|
2,608,000 |
|
|
|
2,805,000 |
|
|
|
11,080,000 |
|
|
|
13,503,000 |
|
|
Maturities (cash in excess of carrying value)
|
|
|
(68,000 |
) |
|
|
(1,382,000 |
) |
|
|
(68,000 |
) |
|
|
(2,872,000 |
) |
|
Net change in fair value
|
|
|
10,852,000 |
|
|
|
7,449,000 |
|
|
|
22,211,000 |
|
|
|
18,944,000 |
|
|
Ending balance (June 30)
|
|
$ |
267,896,000 |
|
|
$ |
193,892,000 |
|
|
$ |
267,896,000 |
|
|
$ |
193,892,000 |
|
The fair value of a portfolio of life insurance policies is based on information available to the Company at the reporting date. Fair value is based upon a discounted cash flow model that incorporates life expectancy estimate assumptions. Life expectancy estimates are obtained from independent, third-party, widely accepted life expectancy estimate providers at policy acquisition. The life expectancy values of each insured, as determined at policy acquisition, are rolled down monthly for the passage of time by the MAPS actuarial software the Company uses for ongoing valuation of its portfolio of life insurance policies. The discount rate incorporates current information about discount rates applied by other reporting companies owning portfolios of life insurance policies, discount rates observed in the life insurance secondary market, market interest rates, the credit exposure to the insurance company that issued the life insurance policy and management’s estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio of life insurance policies.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
On January 22, 2013, one of the independent medical actuarial underwriting firms we utilize, 21st Services, announced advancements in its underwriting methodology, resulting in revised estimated life expectancy mortality tables for life settlement transactions. We were advised by 21st Services that the changes are very granular and relate to both specific medical conditions and lifestyles of insureds. These changes were the result of the application of additional medical information gathered by 21st Services over a period of time, and which were applied to the inputs and methodologies used to develop the actuarial life expectancies. While we do not believe these revised methodologies indicate the previous estimated life expectancies were inaccurate, we believe the revised methodologies provide additional information that should be considered in updating our estimate of the life expectancies of the insureds within our portfolio. Based upon our evaluation and analysis of data made available by 21st Services, as well as information regarding the insureds within our portfolio, we have estimated the impact of the changes in 21st Services’ methodologies for determining life expectancies on a policy-by-policy basis within our portfolio as of December 31, 2012 and applied such changes to the life expectancy inputs used to estimate fair value. We have adjusted the original life expectancies provided by 21st Services based on four factors, the impact of each analyzed individually for each insured in the GWG portfolio. The four factors are gender, anti-selection, age, and primary impairment. GWG applied this set of adjustments to all 21st Services life expectancy reports used in valuation of the portfolio as of December 31, 2012. At that time, the portfolio contained 211 policies on 194 insured lives. Of those 211 policies, 199 were valued using a 21st Services life expectancy report as part of the pricing life expectancy estimate calculation. While the analysis and adjustments were applied on an individual policy basis, the result was an average overall increase in the original life expectancy estimates of 8.67%. We have a standard practice of obtaining two third-party life expectancy estimates for each policy in our portfolio. As a result, the effective change in life expectancy on the portfolio as of December 31, 2012 was an average of approximately 4.33%, which resulted in an aggregate decrease in the fair value of our life settlements portfolio of $12.4 million as of December 31, 2012. Life expectancy reports by their very nature are estimates.
During 2013, we sought to update our life expectancy estimates from all four of the major independent third-party medical-actuarial underwriting firms (including 21st Services) with updated medical records on all of the 211 policies we originally used a life expectancy report from 21st Services. As of December 31, 2013, we had successfully procured new life expectancy reports on 176 of the 211 policies owned as of December 31, 2012. We experienced ten mortalities in 2013 for which no updated life expectancy reports were necessary. We also had two small face policies in our portfolio for which we did not update life expectancy reports. Accordingly, as of June 30, 2014 we had updated our life expectancy estimates based on updated life expectancy reports on all but 12 policies (covering 10 people) in our portfolio that we are still seeking to update.
In order to assess the reasonableness of our adjustments, made effective December 31, 2012, we compared the life expectancy estimates including any adjustments used on December 31, 2012 to the updated life expectancy estimates used on December 31, 2013. Because an additional year has elapsed since the December 31, 2012 date, the older set of adjusted life expectancy estimates were “rolled down” to shorter numbers based on an actuarial calculation to make them comparable to the updated life expectancy estimates used on December 31, 2013. The average amount of roll down to account for the 12-month passage of time was eight and one-half months.
We concluded that the adjustments we made a year ago were reasonable when we the compared the rolled down life expectancy estimates from December 31, 2012 to the updated life expectancy estimates on December 31, 2013. The average rolled down life expectancy estimate from December 31, 2012 is 80.9 months. The average updated life expectancy estimate obtained from updated life expectancy reports as of December 31, 2013 is 79.4 months, shorter by one and one-half months. We see no need to make any further adjustments to our life expectancy estimates at this time.
The fair value of life insurance policies is estimated using present value calculations of estimated cash flows based on the data specific to each individual life insurance policy. Estimated future policy premium payments are calculated based on the terms of the policy and the premium payment history. The following summarizes the unobservable inputs utilized in estimating the fair value of the portfolio of life insurance policies:
| |
|
As of
June 30,
2014
|
|
|
As of
December 31,
2013
|
|
|
Weighted average age of insured
|
|
|
82.5
|
|
|
|
82.1
|
|
|
Weighted average life expectancy, months*
|
|
|
82.2
|
|
|
|
87.0
|
|
|
Average face amount per policy
|
|
$
|
2,715,000
|
|
|
$
|
2,816,000
|
|
|
Discount rate
|
|
|
11.56
|
%
|
|
|
11.69
|
%
|
| * Standard life expectancy as adjusted for insured’s specific circumstances. |
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
These assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. The techniques used in estimating the present value of estimated cash flows are derived from valuation techniques generally used in the industry that include inputs for the asset that are not based on observable market data. The extent to which the fair value could reasonably vary in the near term has been quantified by evaluating the effect of changes in significant underlying assumptions used to estimate the fair value. If the life expectancy estimates were increased or decreased by four and eight months on each outstanding policy and the discount factors were increased or decreased by 1% and 2%, while all other variables are held constant, the fair value of the investment in life insurance policies would increase or (decrease) by the amounts summarized below:
|
|
Changes in fair value of life insurance policies
|
|
|
Change in life expectancy estimates
|
plus 8
months
|
|
minus
8 months
|
|
plus
4 months
|
|
minus
4 months
|
|
| |
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
$
|
(38,249,000
|
)
|
|
$
|
40,171,000
|
|
|
$
|
(19,368,000
|
)
|
|
$
|
19,856,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
$
|
(34,382,000
|
)
|
|
$
|
36,152,000
|
|
|
$
|
(17,417,000
|
)
|
|
$
|
17,865,000
|
|
|
Change in discount rate
|
plus 2%
|
|
|
minus 2%
|
|
|
plus 1%
|
|
|
minus 1%
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
$
|
(24,381,000
|
)
|
|
$
|
28,624,000
|
|
|
$
|
(12,666,000
|
)
|
|
$
|
13,723,000
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
$
|
(22,944,000
|
)
|
|
$
|
27,063,000
|
|
|
$
|
(11,933,000
|
)
|
|
$
|
12,959,000
|
|
Other Fair Value Considerations
Carrying value of receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term maturities and low credit risk. The estimated fair value of the Company’s Series I Secured notes payable and Renewable Secured Debentures is approximately $192,177,000 based on a weighted-average market interest rate of 7.12% based on an income approach, the combined face value of these notes is $189,603,000 as of June 30, 2014. The carrying value of the revolving credit facility reflects interest charged at the commercial paper rate 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 revolver approximates fair value. All of the financial instruments are level 3 fair value measurements.
The Company has issued warrants to purchase common stock in connection with the issuance of its convertible, redeemable preferred stock. Warrants were determined by the Company as permanent equity. The fair value measurements associated with the warrants, measured at issuance represent level 3 instruments.
As of June 30, 2014:
|
Month issued
|
|
Warrants
issued
|
|
|
Fair value
per share
|
|
|
Risk
free rate
|
|
Volatility
|
|
Term
|
|
December 2011
|
|
|
68,937
|
|
|
$
|
0.22
|
|
|
|
0.42
|
%
|
|
|
25.25
|
%
|
|
3 years
|
|
March 2012
|
|
|
38,130
|
|
|
$
|
0.52
|
|
|
|
0.38
|
%
|
|
|
36.20
|
%
|
|
3 years
|
|
June 2012
|
|
|
161,841
|
|
|
$
|
1.16
|
|
|
|
0.41
|
%
|
|
|
47.36
|
%
|
|
3 years
|
|
July 2012
|
|
|
144,547
|
|
|
$
|
1.16
|
|
|
|
0.41
|
%
|
|
|
47.36
|
%
|
|
3 years
|
|
September 2012
|
|
|
2,500
|
|
|
$
|
0.72
|
|
|
|
0.31
|
%
|
|
|
40.49
|
%
|
|
3 years
|
| |
|
|
415,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility is based upon the weekly percentage change in the stock price of selected comparable insurance companies. In June 2012, we evaluated the comparable companies used, and made certain changes to those used. The percentage change is calculated on the average price of those selected stocks at the weekly close of business for the year preceding the balance sheet date. We compare annual volatility based on this weekly information.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
( 5 ) Notes receivable from related parties
As of June 30, 2014 and December 31, 2013, the Company had receivables totaling $5,000,000 due from an affiliate, Opportunity Finance, LLC, which were fully reserved. Opportunity Finance ceased operations in 2008.
( 6 ) Credit facilities
Revolving credit facility – Autobahn Funding Company LLC
On July 15, 2008, DLP II and United Lending entered into a revolving credit facility pursuant to a Credit and Security Agreement (Agreement) with Autobahn Funding Company LLC (Autobahn), providing the Company with a maximum borrowing amount of $100,000,000. Autobahn is a commercial paper conduit that issues commercial paper to investors in order to provide funding to DLP II and United Lending. DZ Bank AG Deutsche Zentral-Genossenschaftsbank (DZ Bank) acts as the agent for Autobahn. The original Agreement was to expire on July 15, 2013. On January 29, 2013, Holdings, together with GWG Life and DLP II, entered into an Amended and Restated Credit and Security Agreement with Autobahn, extending the facility expiration date to December 31, 2014, and removing United Lending as a party to the amended and restated agreement. On May 29, 2014, Holdings, together with GWG Life and DLP II, entered into an Amendment No. 1 to Amended and Restated Credit and Security Agreement with Autobahn and DZ Bank (as committed lender and Agent). The amendment was entered into for the purpose of extending the maturity date for borrowings under the agreement to December 31, 2016. The amount outstanding under this facility as of both June 30, 2014 and December 31, 2013 was $79,000,000.
The Agreement requires DLP II to pay, on a monthly basis, interest at the commercial paper rate plus an applicable margin, as defined in the Agreement. The effective rate was 6.19% at both at June 30, 2014 and December 31, 2013, respectively. The weighted average effective interest rate was 6.20% and 6.26% (excluding the unused line fee) for the three months ended June 30, 2014 and 2013, respectively. The Agreement also requires payment of an unused line fee on the unfunded amount under the revolving credit facility. The note is secured by substantially all of DLP II assets which consist primarily of life insurance policies.
The Agreement has certain financial and nonfinancial covenants. The Company was in compliance with these covenants at June 30, 2014 and December 31, 2013. The Agreement generally prohibits the Company from:
|
●
|
changing its corporate name, offices, and jurisdiction of incorporation
|
|
●
|
changing any deposit accounts or payment instructions to insurers;
|
|
●
|
changing any operating policies and practices such that it would be reasonably likely to adversely affect the collectability of any asset in any material respect;
|
|
●
|
merging or consolidating with, or selling all or substantially all of its assets to, any third party;
|
|
●
|
selling any collateral or creating or permitting to exist any adverse claim upon any collateral;
|
|
●
|
engaging in any other business or activity than that contemplated by the Agreement;
|
|
●
|
incurring or guaranteeing any debt for borrowed money;
|
|
●
|
amending the Company’s certificate of incorporation or bylaws, making any loans or advances to, investments in, or paying any dividends to, any person unless both before and after any such loan, advance, investment or dividend there exists no actual event of default, potential event of default or termination event;
|
|
●
|
removing an independent director on the board of directors except for cause or with the consent of the lender; or
|
|
●
|
making payment on or issuing any subsidiary secured notes or debentures, or amending any agreements respecting such notes or debentures, if an event of default, potential event of default or termination event exists or would arise from any such action.
|
In addition, the Company has agreed to maintain (i) a positive consolidated net income on a Non-GAAP basis (as defined and calculated under the Agreement) for each complete fiscal year and (ii) a tangible net worth on a Non-GAAP basis (again, as defined and calculated under the Agreement) of not less than $15 million, and (iii) maintain a borrowing base surplus or cash cushion sufficient to pay 12 months of premiums and facility fees.
Consolidated net income and tangible net worth as of and for the four quarters ended June 30, 2014, as calculated under the agreement, was $19,543,000 and $63,825,000 respectively.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Advances under the Agreement are subject to a borrowing base formula, which limits the availability of advances on the borrowing base calculation based on attributes of policies pledged to the facility. Over-concentration of policies by insurance carrier, over-concentration of policies by insurance carriers with ratings below a AA- rating, and the premiums and facility fees reserve are the three primary factors with the potential of limiting availability of funds on the facility. Total funds available for additional borrowings under the borrowing base formula criteria at June 30, 2014 and December 31, 2013, were $5,824,000 and $3,937,000 respectively.
On July 15, 2008, Holdings delivered a performance guaranty in favor of Autobahn pursuant to which it guaranteed the obligations of GWG Life, in its capacity as the seller and master servicer, under the Credit and Security Agreement and related documents. On January 29, 2013 and in connection with the Amended and Restated Credit and Security Agreement, Holdings delivered a reaffirmation of its performance guaranty. The obligations of Holdings under the performance guaranty and subsequent reaffirmation do not extend to the principal and interest owed by DLP II as the borrower under the credit facility.
( 7 ) Series I Secured notes payable
Series I Secured notes payable have been issued in conjunction with the GWG Series I Secured notes private placement memorandum dated August 25, 2009 (last revised November 15, 2010). On June 14, 2011, the Company closed the offering to additional investors, however, existing investors may elect to continue advancing amounts outstanding upon maturity subject to the Company’s option. Series I Secured notes have maturity dates ranging from six months to seven years with fixed interest rates varying from 5.65% to 9.55% depending on the term of the note. Interest is payable monthly, quarterly, annually or at maturity depending on the terms of the note. At June 30, 2014 and December 31, 2013, the weighted-average interest rate of Series I Secured notes was 8.36% and 8.35%, respectively. The notes are secured by assets of GWG Life. The principal amount outstanding under these Series I Secured notes was $28,642,000 and $29,744,000 at June 30, 2014 and December 31, 2013, respectively. The difference between the amount outstanding on the Series I Secured notes and the carrying amount on the consolidated balance sheet is due to netting of unamortized deferred issuance costs. Overall, interest expense includes amortization of deferred financing and issuance costs of $134,000 and $301,000 for the three and six months ended June 30, 2014, respectively, and $161,000 and $217,000 for the three and six months ended June 30, 2013, respectively. Future expected amortization of deferred financing costs is $591,000 over the next six years.
On November 15, 2010, Jon Sabes and Steve Sabes pledged their ownership interests in the Company to the Series I Trust as security for advances under the Series I Trust arrangement.
The use of proceeds from the issuances of Series I Secured notes was limited to the following: (1) payment of commissions of Series I Secured note sales, (2) purchase life insurance policies, (3) pay premiums of life insurance policies, (4) pay principal and interest to Senior Liquidity Provider (DZ Bank), (5) pay portfolio or note operating fees or costs, (6) pay trustee (Wells Fargo Bank, N.A.), (7) pay servicer and collateral fees, (8) pay principal and interest on Series I Secured notes, (9) make distributions to equity holders for tax liability related to portfolio, (10) purchase interest rate caps, swaps, or hedging instruments, (11) pay GWG Series I Trustee fees, and (12) pay offering expenses.
On November 1, 2011, GWG entered into a Third Amended and Restated Note Issuance and Security Agreement with Lord Securities Corporation after receiving majority approval from the holders of Series I Secured notes. Among other things, the amended and restated agreement modified the use of proceeds and certain provisions relating to the distribution of collections and subordination of cash flow. Under the amended and restated agreement, GWG is no longer restricted as to its use of proceeds or subject to restrictions on certain distributions of collections and subordination of cash flows. Under the amended and restated agreement, GWG may extend the maturity of Series I Secured notes of a six-month term for up to two additional six-month terms, and Series I Secured notes of a one year term for up to six months.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Future contractual maturities of Series I Secured notes payable at June 30, 2014 are as follows:
|
Years Ending December 31,
|
|
|
|
|
Six months ending December 31 ,2014
|
|
$
|
4,586,000
|
|
|
2015
|
|
|
10,718,000
|
|
|
2016
|
|
|
8,092,000
|
|
|
2017
|
|
|
4,428,000
|
|
|
2018
|
|
|
754,000
|
|
|
Thereafter
|
|
|
64,000
|
|
| |
|
$
|
28,642,000
|
|
( 8 ) Renewable Secured Debentures
The Company has registered with the Securities and Exchange Commission, effective January 2012, the offer and sale of $250,000,000 of secured debentures. Renewable Secured Debentures have maturity dates ranging from six months to seven years with fixed interest rates varying from 4.75% to 9.50% depending on the term of the note. Interest is payable monthly, annually or at maturity depending on the terms of the debenture. At June 30, 2014 and December 31, 2013, the weighted-average interest rate of Renewable Secured Debentures was 7.51% and 7.53%, respectively. The debentures are secured by assets of GWG Life and GWG Holdings. The amount outstanding under these Renewable Secured Debentures was $160,961,000 and $134,891,000 at June 30, 2014 and December 31, 2013, respectively. The difference between the amount outstanding on the Renewable Secured Debentures and the carrying amount on the consolidated balance sheets is due to netting of unamortized deferred issuance costs and cash receipts for new issuances in process. Amortization of deferred issuance costs was $908,000 and $1,755,000 for the three and six months ended June 30, 2014, respectively, and $344,000 and $622,000 for the three and six months ended June 30, 2013, respectively. Future expected amortization of deferred financing costs as of June 30, 2014 is $5,421,000. Subsequent to June 30, 2014, the Company has issued approximately an additional $5,379,000 in principal amount of these Renewable Secured Debentures.
The use of proceeds from the issuances of Renewable Secured Debentures is limited to the following: (1) payment of commissions on sales of Renewable Secured Debentures, (2) payment of offering expenses, (3) purchase of life insurance policies, (4) Payment of premiums on life insurance policies, (5) payment of principal and interest on Renewable Secured Debentures, (6) payment of portfolio operations expenses, and (7) for general working capital.
Future contractual maturities of Renewable Secured Debentures at June 30, 2014 are as follows:
|
Years Ending December 31,
|
|
|
|
|
Six months ending December 31, 2014
|
|
$
|
27,838,000
|
|
|
2015
|
|
|
47,254,000
|
|
|
2016
|
|
|
37,660,000
|
|
|
2017
|
|
|
16,949,000
|
|
|
2018
|
|
|
8,314,000
|
|
|
Thereafter
|
|
|
22,946,000
|
|
| |
|
$
|
160,961,000
|
|
The Company entered into an indenture effective October 19, 2011 with Holdings as obligor, GWG Life as guarantor, and Bank of Utah as trustee for the benefit of the debenture holders. The Indenture has certain financial and nonfinancial covenants. The Company was in compliance with these covenants at June 30, 2014 and December 31, 2013.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
( 9 ) Convertible, redeemable preferred stock
The Company began offering 3,333,333 shares of convertible redeemable preferred stock (Series A preferred stock) for sale to accredited investors in a private placement on July 31, 2011. The offering of Series A preferred stock concluded on September 2, 2012 and resulted in 3,278,000 shares being issued for gross consideration of $24,582,000. As of June 30, 2014, 220,000 shares have been issued as a result of conversion of $1,543,000 in dividends into shares of Series A preferred stock. The Series A preferred stock was sold at an offering price of $7.50 per share. Series A preferred stock has a preferred yield of 10% per annum, and each share has the right to convert into 0.75 shares of the Company’s common stock. The Company may elect to automatically convert the Series A preferred stock to common stock as described below. Series A preferred shareholders also received three-year warrants to purchase, at an exercise price per share of $12.50, one share of common stock for every 40 shares of Series A preferred stock purchased. The warrants are exercisable immediately. In the Certificate of Designations for the Series A preferred stock dated July 31, 2011, the Company has agreed to permit preferred shareholders to sell their shares back to the Company for the stated value of $7.50 per share, plus accrued dividends, according to the following schedule:
|
●
|
Up to 33% of the holder’s unredeemed shares one year after issuance:
|
|
●
|
Up to 66% of the holder’s unredeemed shares two years after issuance; and
|
|
●
|
Up to 100% of the holder’s unredeemed shares three years after issuance.
|
The Company’s obligation to redeem Series A preferred shares will terminate upon the Company completing a registration of its common stock with the SEC. The Company may redeem the Series A preferred shares at a price equal to 110% of their liquidation preference ($7.50 per share) at any time after December 15, 2012. As of June 30, 2014, the Company had redeemed an aggregate of 86,000 shares of Series A preferred stock.
At the election of the Company, the Series A preferred shares may be automatically converted into the common stock of the Company in the event of either (1) a registered offering of the Company’s common stock with the SEC aggregating gross proceeds of at least $5.0 million at a price equal to or greater than $11.00 per share of common stock, or (2) the consent of shareholders holding at least a majority of the then-outstanding shares of Series A preferred stock. As of June 30, 2014, the Company had issued 3,420,000 preferred shares resulting in gross consideration of $25,536,000 (including cash proceeds, conversion of Series I Secured notes and accrued interest on Series I notes, and conversion of preferred dividends payable). The Company incurred Series A preferred stock issuance costs of $2,838,000, of which $2,612,000 was amortized to additional paid in capital through June 30, 2014, resulting in a carrying amount of $25,310,000.
The Company determined that the grant date fair value of the outstanding warrants attached to the Series A preferred stock was $395,000 for warrants outstanding as of June 30, 2014. The Company may redeem outstanding warrants prior to their expiration, at a price of $0.01 per share upon 30 days written notice to the investors at any time after (i) the Company has completed a registration of its common stock with the SEC and (ii) the volume of weighted-average sale price per share of common stock equals or exceeds $14.00 per share for ten consecutive trading days ending on the third business day prior to proper notice of such redemption. Total warrants outstanding as of June 30, 2014, were 415,955 with a weighted-average remaining life of 0.85 years. Total warrants outstanding at December 31, 2013, were 415,955 with a weighted-average remaining life of 1.34 years. As of June 30, 2014, none of these warrants have been exercised.
Dividends on the Series A preferred stock may be paid in either cash or additional shares of Series A preferred stock at the election of the holder and approval of the Company. The dividends are reported as an expense and included in the caption interest expense in the consolidated statements of operations. The Company declared and accrued dividends of $638,000 and $628,000 during the three months ended June 30, 2014 and 2013, respectively, and $1,276,000 and $1,263,000 during the six months ended June 30, 2014 and 2013, respectively, pursuant to a board resolution declaring the dividend. 28,000 and 25,000 shares of Series A preferred stock were issued in lieu of cash dividends in the three month periods ended June 30, 2014 and 2013, and 54,000 and 37,000 shares of Series A preferred stock were issued in lieu of cash dividends in the six month periods ended June 30, 2014 and 2013, respectively. The shares issued in lieu of cash dividends were issued at $7.00 per share. As of June 30, 2014, Holdings has $638,000 of accrued preferred dividends which were paid or converted to shares of Series A preferred stock on July 15, 2014.
( 10 ) Income taxes
For the three and six months ended June 30, 2014, the Company recorded income tax benefit of $1,317,000 and $2,272,000, or 33.7% and 33.6%, respectively, of income before taxes, compared to the recognition of an income tax expense of $1,802,000 and $2,368,000, or 50.6% and 56.5%, respectively, of income before taxes, for the three and six months ended June 30, 2013, respectively. The primary differences between the Company’s June 30, 2014 effective tax rate and the statutory federal rate are the accrual of non-deductible preferred stock dividend expense of $1,276,000, state taxes, and other non-deductible expenses.
The most significant temporary differences between GAAP net income and taxable net income are the treatment of interest costs with respect to the acquisition of the life insurance policies and revenue recognition with respect to the mark-to-market of life insurance portfolio.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
( 11 ) Common Stock
On July 11, 2011, we entered into a Purchase and Sale Agreement with Athena Securities Group, Ltd. and Athena Structured Funds PLC. Under this agreement, we issued to Athena Securities Group, Ltd. (Athena) 494,500 shares of common stock, which was equal to 9.9% of our outstanding shares, in exchange for shares equal to 9.9% of the outstanding shares in Athena Structured Funds, PLC and cash of $5,000. This 2011 agreement had contemplated cooperative efforts by the parties aimed at developing a security and related offering in Europe or Ireland, the proceeds of which would be used to finance the acquisition of life-insurance related assets in the United States. In 2013, we sought to terminate the 2011 agreement due to a changing regulatory environment in Europe that negatively affected the likelihood of consummating the contemplated offering of securities, and our dissatisfaction with Athena’s performance under the 2011 agreement. As a result, in June 2013 we entered into a second Purchase and Sale Agreement with Athena Securities Ltd. and Athena. This agreement effected the termination of the 2011 agreement. The June 2013 agreement contained mutual general releases of claims and substantially unwound certain capital stock transactions that had been effected under the 2011 agreement. In particular, Athena returned to us for redemption 432,500 shares of our common stock, and retained 62,000 common shares in recognition of their earlier efforts under the 2011 agreement. For our part, we sold back to Athena all of our ownership in Athena Structured Funds, PLC that we had originally acquired under the 2011 agreement. Presently, we have no ongoing business relationship with Athena.
Stock split — On June 24, 2014, the Company’s Board of Directors and majority stockholders approved a joint resolution to effect an amendment to the Company’s Certificate of Incorporation to effect a reverse split of the issued and outstanding common stock on a 2-for-1 basis. The effective date of the amendment and reverse stock split was June 24, 2014. In lieu of fractional shares, stockholders received cash payments in an amount equal to the fraction to which the stockholder would otherwise be entitled multiplied by the price of the common stock, as determined by the Board of Directors of the Corporation, but adjusted so as to give effect to the reverse stock split. The par value of the common stock remained at $0.001 per share.
( 12 ) Stock Incentive Plan
The Company adopted the GWG Holdings, Inc. 2013 Stock Incentive Plan on March 27, 2013. The plan is administered by Compensation Committee of the Board of Directors of the Company. The Company’s Chief Executive Officer may, on a discretionary basis and without committee review or approval, grant incentives to new employees of the Company who are not Officers of the Company. Incentives under the plan may be granted in one or a combination of the following forms: (a) incentive stock options and non-statutory stock options; (b) stock appreciation rights; (c) stock awards; (d) restricted stock; (e) restricted stock units; and (f) performance shares. Eligible participants include officers and employees of the company, members of the Board of Directors, and consultants or other independent contractors. 1,000,000 shares are issuable under the plan. No person shall receive grants of stock options and SARs under the plan that exceed, in the aggregate 200,000 shares of common stock in any one year. The term of each stock option shall be determined by the committee but shall not exceed ten years. Vested stock options may be exercised in whole or part by the holder giving notice to the Company. The holder of the option may provide payment for the exercise price or surrender shares equal to the exercise price.
The Company issued stock options for 551,185 shares of common stock to employees, officers, and directors of the Company through June 30, 2014. Options for 221,185 shares vested immediately, and the remaining options vested over three years. The shares were issued with an exercise price between $8.20 and $8.28 for those owning more than 10% of the Company’s stock and between $7.46 $7.52 for others, which is equal to the estimated market price of the shares on the date of grant valued using Black-Scholes Binomial option pricing model. The expected volatility used in the Black-Scholes model valuation of options issued during the year was 19.73% annualized. The annual volatility rate is based on the standard deviation of the average continuously compounded rate of return of five selected comparable companies over the previous 52 weeks. Forfeiture rate of 15% is based on historical company information and expected future trend. As of June 30, 2014, stock options for 60,750 shares were forfeited.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Stock options granted through June 30, 2014:
|
Grant Date
|
|
Exercise Price
|
|
|
Shares
|
|
Vesting
|
|
Binomial Value
|
|
|
Forfeiture Factor
|
|
|
Compensation Expense
|
|
|
9/5/2013
|
|
$ |
7.52 |
|
|
|
143,750 |
|
Immediate
|
|
|
0.360 |
|
|
|
0.8700 |
|
|
|
45,023 |
|
|
9/5/2013
|
|
$ |
8.28 |
|
|
|
25,000 |
|
Immediate
|
|
|
0.360 |
|
|
|
0.8700 |
|
|
|
7,830 |
|
|
9/5/2013
|
|
$ |
7.52 |
|
|
|
45,839 |
|
1 year
|
|
|
0.360 |
|
|
|
0.8500 |
|
|
|
14,027 |
|
|
9/5/2013
|
|
$ |
8.28 |
|
|
|
2,834 |
|
1 year
|
|
|
0.360 |
|
|
|
0.8500 |
|
|
|
867 |
|
|
9/5/2013
|
|
$ |
7.52 |
|
|
|
45,833 |
|
2 years
|
|
|
0.600 |
|
|
|
0.7225 |
|
|
|
19,869 |
|
|
9/5/2013
|
|
$ |
8.28 |
|
|
|
2,833 |
|
2 years
|
|
|
0.600 |
|
|
|
0.7225 |
|
|
|
1,228 |
|
|
9/5/2013
|
|
$ |
7.52 |
|
|
|
45,828 |
|
3 years
|
|
|
0.820 |
|
|
|
0.6141 |
|
|
|
23,078 |
|
|
9/5/2013
|
|
$ |
8.28 |
|
|
|
2,833 |
|
3 years
|
|
|
0.820 |
|
|
|
0.6141 |
|
|
|
1,427 |
|
|
9/30/2013
|
|
$ |
7.52 |
|
|
|
4,000 |
|
Immediate
|
|
|
0.660 |
|
|
|
0.8700 |
|
|
|
2,297 |
|
|
10/28/2013
|
|
$ |
7.52 |
|
|
|
6,000 |
|
Immediate
|
|
|
0.660 |
|
|
|
0.8700 |
|
|
|
3,445 |
|
|
10/28/2013
|
|
$ |
7.52 |
|
|
|
24,000 |
|
1 year
|
|
|
0.660 |
|
|
|
0.8500 |
|
|
|
13,464 |
|
|
10/28/2013
|
|
$ |
7.52 |
|
|
|
24,000 |
|
2 years
|
|
|
0.920 |
|
|
|
0.7225 |
|
|
|
15,953 |
|
|
10/28/2013
|
|
$ |
7.52 |
|
|
|
18,000 |
|
3 years
|
|
|
1.140 |
|
|
|
0.6141 |
|
|
|
12,602 |
|
|
11/11/2013
|
|
$ |
7.52 |
|
|
|
4,167 |
|
1 year
|
|
|
0.660 |
|
|
|
0.8500 |
|
|
|
2,338 |
|
|
11/11/2013
|
|
$ |
7.52 |
|
|
|
4,167 |
|
2 years
|
|
|
0.920 |
|
|
|
0.7225 |
|
|
|
2,770 |
|
|
11/11/2013
|
|
$ |
7.52 |
|
|
|
4,166 |
|
3 years
|
|
|
1.140 |
|
|
|
0.6141 |
|
|
|
2,917 |
|
|
12/12/2013
|
|
$ |
7.52 |
|
|
|
30,000 |
|
Immediate
|
|
|
0.660 |
|
|
|
0.8700 |
|
|
|
17,226 |
|
|
4/1/2014
|
|
$ |
7.46 |
|
|
|
1,935 |
|
Immediate
|
|
|
0.468 |
|
|
|
0.8700 |
|
|
|
788 |
|
|
4/1/2014
|
|
$ |
7.46 |
|
|
|
11,008 |
|
1 year
|
|
|
1.028 |
|
|
|
0.8500 |
|
|
|
9,619 |
|
|
4/1/2014
|
|
$ |
7.46 |
|
|
|
10,999 |
|
2 years
|
|
|
1.240 |
|
|
|
0.7225 |
|
|
|
9,854 |
|
|
4/1/2014
|
|
$ |
7.46 |
|
|
|
10,993 |
|
3 years
|
|
|
1.292 |
|
|
|
0.6141 |
|
|
|
8,722 |
|
|
4/7/2014
|
|
$ |
7.46 |
|
|
|
3,334 |
|
1 year
|
|
|
1.028 |
|
|
|
0.8500 |
|
|
|
2,913 |
|
|
4/7/2014
|
|
$ |
8.20 |
|
|
|
3,334 |
|
1 year
|
|
|
1.028 |
|
|
|
0.8500 |
|
|
|
2,913 |
|
|
4/7/2014
|
|
$ |
7.46 |
|
|
|
3,333 |
|
2 years
|
|
|
1.240 |
|
|
|
0.7225 |
|
|
|
2,986 |
|
|
4/7/2014
|
|
$ |
8.20 |
|
|
|
3,333 |
|
2 years
|
|
|
1.240 |
|
|
|
0.7225 |
|
|
|
2,986 |
|
|
4/7/2014
|
|
$ |
7.46 |
|
|
|
3,333 |
|
3 years
|
|
|
1.292 |
|
|
|
0.6141 |
|
|
|
2,645 |
|
|
4/7/2014
|
|
$ |
8.20 |
|
|
|
3,333 |
|
3 years
|
|
|
1.292 |
|
|
|
0.6141 |
|
|
|
2,645 |
|
|
4/28/2014
|
|
$ |
7.46 |
|
|
|
5,000 |
|
Immediate
|
|
|
0.468 |
|
|
|
0.8700 |
|
|
|
2,036 |
|
|
4/28/2014
|
|
$ |
7.46 |
|
|
|
2,500 |
|
1 year
|
|
|
1.028 |
|
|
|
0.8500 |
|
|
|
2,185 |
|
|
4/28/2014
|
|
$ |
7.46 |
|
|
|
2,500 |
|
2 years
|
|
|
1.240 |
|
|
|
0.7225 |
|
|
|
2,240 |
|
|
4/28/2014
|
|
$ |
7.46 |
|
|
|
2,500 |
|
3 years
|
|
|
1.292 |
|
|
|
0.6141 |
|
|
|
1,984 |
|
|
5/27/2014
|
|
$ |
7.46 |
|
|
|
2,500 |
|
Immediate
|
|
|
0.468 |
|
|
|
0.8700 |
|
|
|
1,018 |
|
|
5/27/2014
|
|
$ |
7.46 |
|
|
|
10,000 |
|
1 year
|
|
|
1.028 |
|
|
|
0.8500 |
|
|
|
8,738 |
|
|
5/27/2014
|
|
$ |
7.46 |
|
|
|
10,000 |
|
2 years
|
|
|
1.240 |
|
|
|
0.7225 |
|
|
|
8,959 |
|
|
5/27/2014
|
|
$ |
7.46 |
|
|
|
10,000 |
|
3 years
|
|
|
1.292 |
|
|
|
0.6141 |
|
|
|
7,934 |
|
|
6/20/2014
|
|
$ |
7.46 |
|
|
|
3,000 |
|
Immediate
|
|
|
0.468 |
|
|
|
0.8700 |
|
|
|
1,221 |
|
|
6/20/2014
|
|
$ |
7.46 |
|
|
|
6,000 |
|
1 year
|
|
|
1.028 |
|
|
|
0.8500 |
|
|
|
5,243 |
|
|
6/20/2014
|
|
$ |
7.46 |
|
|
|
6,000 |
|
2 years
|
|
|
1.240 |
|
|
|
0.7225 |
|
|
|
5,375 |
|
|
6/20/2014
|
|
$ |
7.46 |
|
|
|
3,000 |
|
3 years
|
|
|
1.292 |
|
|
|
0.6141 |
|
|
|
2,380 |
|
| |
|
|
|
|
|
|
551,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Outstanding stock options:
| |
|
Vested
|
|
|
Un-vested
|
|
|
Total
|
|
|
Balance as of December 31, 2013
|
|
|
195,000
|
|
|
|
210,250
|
|
|
|
405,250
|
|
|
Granted during the year
|
|
|
12,435
|
|
|
|
105,500
|
|
|
|
117,935
|
|
|
Exercised during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Forfeited during the year
|
|
|
(10,000
|
)
|
|
|
(22,750
|
)
|
|
|
(32,750
|
)
|
|
Expired during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Balance as of June 30, 2014
|
|
|
197,435
|
|
|
|
293,000
|
|
|
|
490,435
|
|
Compensation expense related to un-vested options not yet recognized is $186,000. We expect to recognize this compensation expense over the next 3.50 years. Stock-based compensation cost for the three months ended June 30, 2014 was $17,000.
( 13 ) Net loss per common share
The Company began issuing Series A preferred stock September, 1, 2011, as described in note 9. The Series A preferred stock is anti-dilutive to the net loss per common share calculation at June 30, 2014 and dilutive at June 30, 2013. The Company has also issued warrants to purchase common stock in conjunction with the sale of convertible preferred stock, as discussed in note 9. The warrants are anti-dilutive at June 30, 2014 and 2013, and have not been included in the fully diluted net loss per common share calculation.
( 14 ) Commitments
The Company entered into an office lease with U.S. Bank National Association as the landlord. The lease was effective April 22, 2012 with a term through August 31, 2015. The lease is for 11,695 square feet of office space located at 220 South Sixth Street, Minneapolis, Minnesota. The Company is obligated to pay base rent plus common area maintenance and a share of the building operating costs. Rent expenses under this agreement were $101,000 and $98,000 during the six-month periods ended June 30, 2014 and 2013, respectively, and $49,000 and $50,000 during the three-month periods ended June 30, 2014 and 2013, respectively. Minimum lease payments under the lease agreement effective April 22, 2012 are as follows:
|
Six months ending December 31, 2014
|
|
|
52,000
|
|
|
2015
|
|
|
70,000
|
|
|
Total
|
|
$
|
122,000
|
|
( 15 ) Contingencies
Litigation - In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Opportunity Finance, LLC, owned by Jon Sabes and Steven Sabes, is subject to litigation clawback claims by the bankruptcy trustee for third-party matters for payments that may have been deemed preference payments. In addition, Jon Sabes and Steven Sabes are subject to litigation clawback claims by the bankruptcy trustee for third-party matters for payments received from Opportunity Finance that may have been deemed preference payments. If the parties are unsuccessful in defending against these claims, their equity ownership in the Company may be sold or transferred to other parties to satisfy such claims. In addition, the Company loaned $1,000,000 to Opportunity Finance, LLC, and was repaid in full plus interest of $177,000. This investment amount may also be subject to clawback claims by the bankruptcy court.
( 16 ) Guarantees of secured debentures
Holdings has registered with the SEC the offer and sale $250,000,000 of secured debentures as described in note 8. The secured debentures are secured by the assets of Holdings as described in note 8 and a pledge of all the common stock by the largest shareholders. Obligations under the debentures are guaranteed by GWG Life. This guarantee involves the grant of a security interest in all the assets of GWG Life. The payment of principal and interest on the secured debentures is fully and unconditionally guaranteed by GWG Life. Substantially all of the Company’s life insurance policies are held by DLP II and the Trust. The policies held by DLP II are not collateral for the debenture obligations as such policies are collateral for the credit facility.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Holdings or GWG Life, the guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as follows. DLP II is a borrower under a credit agreement with Autobahn, with DZ Bank AG as agent, as described in note 6. The significant majority of insurance policies owned by the Company are subject to a collateral arrangement with DZ Bank AG described in note 6. Under this arrangement, collection and escrow accounts are used to fund premiums of the insurance policies and to pay interest and other charges under the revolving credit facility. DZ Bank AG and Autobahn must authorize all disbursements from these accounts, including any distributions to GWG Life. Distributions are limited to an amount that would result in the borrowers (DLP II, GWG Life and Holdings) realizing an annualized rate of return on the equity funded amount for such assets of not more than 18%, as determined by DZ Bank AG. After such amount is reached, the credit agreement requires that excess funds be used for repayments of borrowings before any additional distributions may be made.
The following represents consolidating financial information as of June 30, 2014 and December 31, 2013, with respect to the financial position, and for the three months ended June 30, 2014 and 2013 with respect to results of operations and cash flows of Holdings and its subsidiaries. The parent column presents the financial information of Holdings, the primary obligor of the secured debentures. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the secured debentures, presenting its investment in DLP II and Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries including DLP II and Trust.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets
|
June 30, 2014
|
|
Parent
|
|
Guarantor Sub
|
|
Non-Guarantor
Sub
|
|
Eliminations
|
|
Consolidated
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S E T S
|
|
Cash and cash equivalents
|
|
|
$
|
22,305,910
|
|
|
$
|
754,045
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,059,955
|
|
|
Restricted cash
|
|
|
|
-
|
|
|
|
565,000
|
|
|
|
2,245,432
|
|
|
|
-
|
|
|
|
2,810,432
|
|
|
Investment in life settlements, at fair value
|
|
|
|
-
|
|
|
|
-
|
|
|
|
267,895,692
|
|
|
|
-
|
|
|
|
267,895,692
|
|
|
Other assets
|
|
|
|
457,677
|
|
|
|
1,385,447
|
|
|
|
978,950
|
|
|
|
-
|
|
|
|
-
|
|
|
Investment in subsidiaries
|
|
|
|
161,418,051
|
|
|
|
190,380,058
|
|
|
|
-
|
|
|
|
(351,798,109
|
)
|
|
|
2,822,074
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
$
|
184,181,638
|
|
|
$
|
193,084,550
|
|
|
$
|
271,120,074
|
|
|
$
|
(351,798,109
|
)
|
|
$
|
296,588,153
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (D E F I C I T)
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,000,000
|
|
|
$
|
-
|
|
|
$
|
79,000,000
|
|
|
Series I Secured notes payable
|
|
|
|
-
|
|
|
|
28,051,113
|
|
|
|
-
|
|
|
|
-
|
|
|
|
28,051,113
|
|
|
Renewable Secured Debentures
|
|
|
|
157,513,267
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157,513,267
|
|
|
Interest payable
|
|
|
|
5,305,764
|
|
|
|
3,272,079
|
|
|
|
1,152,350
|
|
|
|
-
|
|
|
|
9,730,193
|
|
|
Accounts payable and other accrued expenses
|
|
|
|
783,445
|
|
|
|
343,308
|
|
|
|
587,665
|
|
|
|
-
|
|
|
|
1,714,418
|
|
|
Deferred taxes
|
|
|
|
5,403,604
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,403,604
|
|
|
TOTAL LIABILITIES
|
|
|
|
169,006,080
|
|
|
|
31,666,500
|
|
|
|
80,740,015
|
|
|
|
-
|
|
|
|
281,412,595
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE, REDEEMABLE PREFERRED STOCK
|
|
|
|
25,309,946
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,309,946
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
|
-
|
|
|
|
161,418,050
|
|
|
|
190,380,059
|
|
|
|
(351,798,109
|
)
|
|
|
-
|
|
|
Common stock
|
|
|
|
9,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,124
|
|
|
Additional paid-in capital
|
|
|
|
2,782,932
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,782,932
|
|
|
Accumulated deficit
|
|
|
|
(12,926,444
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,926,444
|
)
|
|
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
(10,134,388
|
)
|
|
|
161,418,050
|
|
|
|
190,380,059
|
|
|
|
(351,798,109
|
)
|
|
|
(10,134,388
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
$
|
184,181,638
|
|
|
$
|
193,084,550
|
|
|
$
|
271,120,074
|
|
|
$
|
(351,798,109
|
)
|
|
$
|
296,588,153
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheets (continued)
|
December 31, 2013
|
|
Parent
|
|
|
Guarantor Subsidiary
|
|
|
Non-Guarantor
Subsidiaries
|
|
|
Eliminations
|
|
|
Consolidated
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A S S E T S
|
|
|
Cash and cash equivalents
|
|
$
|
32,711,636
|
|
|
$
|
738,157
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33,449,793
|
|
|
Restricted cash
|
|
|
-
|
|
|
|
1,420,000
|
|
|
|
4,412,970
|
|
|
|
-
|
|
|
|
5,832,970
|
|
|
Investment in life settlements, at fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
234,672,794
|
|
|
|
-
|
|
|
|
234,672,794
|
|
|
Other assets
|
|
|
381,883
|
|
|
|
484,510
|
|
|
|
558,526
|
|
|
|
-
|
|
|
|
1,424,919
|
|
|
Investment in subsidiaries
|
|
|
129,839,241
|
|
|
|
159,798,490
|
|
|
|
-
|
|
|
|
(289,637,731
|
)
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
162,932,760
|
|
|
$
|
162,441,157
|
|
|
$
|
239,644,290
|
|
|
$
|
(289,637,731
|
)
|
|
$
|
275,380,476
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (D E F I C I T)
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
79,000,000
|
|
|
$
|
-
|
|
|
$
|
79,000,000
|
|
|
Series I Secured notes payable
|
|
|
-
|
|
|
|
29,275,202
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,275,202
|
|
|
Renewable Secured Debentures
|
|
|
131,646,062
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
131,646,062
|
|
|
Interest payable
|
|
|
3,806,820
|
|
|
|
3,065,465
|
|
|
|
337,123
|
|
|
|
-
|
|
|
|
7,209,408
|
|
|
Accounts payable and other accrued expenses
|
|
|
574,026
|
|
|
|
261,249
|
|
|
|
508,667
|
|
|
|
-
|
|
|
|
1,343,952
|
|
|
Deferred taxes
|
|
|
7,675,174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,675,174
|
|
|
TOTAL LIABILITIES
|
|
|
143,702,082
|
|
|
|
32,601,916
|
|
|
|
79,845,800
|
|
|
|
-
|
|
|
|
256,149,798
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONVERTIBLE, REDEEMABLE PREFERRED STOCK
|
|
|
24,722,693
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,722,693
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member capital
|
|
|
-
|
|
|
|
129,839,241
|
|
|
|
159,798,490
|
|
|
|
(289,637,731
|
)
|
|
|
-
|
|
|
Common stock
|
|
|
9,124
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,124
|
|
|
Additional paid-in capital
|
|
|
2,937,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,937,438
|
|