Edgar Filing: GWG Holdings, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2016

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

For the transition period from _________ to ________

Commission File Number: None

GWG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

220 South Sixth Street, Suite 1200

Minneapolis, MN 55402

(Address of principal executive offices, including zip code)

(612) 746-1944

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller reporting company ☒

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

As of August 12, 2016, GWG Holdings, Inc. had 5,977,240 shares of common stock outstanding.

GWG HOLDINGS, INC.

Index to Form 10-Q

for the Quarter Ended June 30, 2016

		Page No.
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2016, and December 31, 2015	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015	2
	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2016 and 2015	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	27
Item 4.	Controls and Procedures	55

PART II.	OTHER INFORMATION

Item 6.	Exhibits	55

SIGNATURES		56

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2016 (unaudited)			December 31, 2015
A S S E T S
Cash and cash equivalents	$	17,379,350		$	34,425,105
Restricted cash		11,160,793			2,341,900
Investment in life insurance contracts, at fair value		431,820,437			356,649,715
Secured MCA advances		4,328,317			-
Life insurance contract benefits receivable		6,829,022			-
Other assets		3,510,443			2,461,045
TOTAL ASSETS	$	475,028,362		$	395,877,765

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
Revolving Senior Credit Facility	$	77,475,992		$	63,279,596
Series I Secured Notes		17,965,653			23,287,704
L Bonds		327,322,906			276,482,796
Accounts payable		2,529,206			1,517,440
Interest payable		13,323,746			12,340,061
Other accrued expenses		1,355,266			1,060,786
Deferred taxes, net		4,670,715			1,763,968
TOTAL LIABILITIES	$	444,643,484		$	379,732,351

STOCKHOLDERS’ EQUITY

CONVERTIBLE PREFERRED STOCK
(par value $0.001; shares authorized 40,000,000; shares outstanding 2,737,698 and 2,781,735; liquidation preference of $20,533,000 and $20,863,000 on June 30, 2016 and December 31, 2015, respectively)		20,445,320			20,784,841

REDEEMABLE PREFERRED STOCK
(par value $0.001; shares authorized 100,000; shares outstanding 12,222 on June 30, 2016)		12,212,767			-

MCA PREFERRED STOCK
(par value $0.001; shares authorized 2,000,000; shares outstanding 7,155 on June 30, 2016)		71,555			-

COMMON STOCK
(par value $0.001: shares authorized 210,000,000; shares issued and outstanding 5,974,790 and 5,941,790 on June 30, 2016 and December 31, 2015)		5,975			5,942
Additional paid-in capital		16,488,390			17,149,391
Accumulated deficit		(18,839,129	)		(21,794,760	)
TOTAL STOCKHOLDERS’ EQUITY		30,384,878			16,145,414

TOTAL LIABILITIES & EQUITY	$	475,028,362		$	395,877,765

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, 2016		June 30, 2015			June 30, 2016		June 30, 2015
REVENUE
Gain on life insurance contracts, net	$	20,383,347	$	8,473,886		$	38,097,059	$	25,257,295
MCA income		223,255		-			368,216		-
Interest and other income		170,880		90,380			216,100		139,676
TOTAL REVENUE		20,777,482		8,564,266			38,681,375		25,396,971

EXPENSES
Interest expense		10,365,581		7,322,347			20,025,966		14,498,881
Employee compensation and benefits		3,071,507		2,144,725			5,537,705		3,872,642
Legal and professional fees		1,304,353		642,931			2,510,481		1,166,184
Other expenses		2,332,685		1,881,321			4,744,845		3,415,060
TOTAL EXPENSES		17,074,126		11,991,324			32,818,997		22,952,767

INCOME (LOSS) BEFORE INCOME TAXES		3,703,356		(3,427,058	)		5,862,378		2,444,204
INCOME TAX EXPENSE (BENEFIT)		1,822,030		(1,176,643	)		2,906,747		1,432,728

NET INCOME (LOSS)	$	1,881,326	$	(2,250,415	)	$	2,955,631	$	1,011,476

Loss attributable to preferred shareholders		429,760		344,847			772,722		698,003
INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	2,311,086	$	(1,905,568	)	$	3,728,353	$	1,709,479
NET INCOME (LOSS) PER SHARE
Basic	$	0.32	$	(0.38	)	$	0.50	$	0.17
Diluted	$	0.29	$	(0.38	)	$	0.46	$	0.21

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		5,967,098		5,876,618			5,954,944		5,873,423
Diluted		8,081,895		5,876,618			8,036,501		7,987,923

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, 2016			June 30, 2015			June 30, 2016			June 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	1,881,326		$	(2,250,415	)	$	2,955,631		$	1,011,476
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Gain on life insurance contracts		(21,241,376	)		(14,028,327	)		(32,772,929	)		(12,134,482	)
Amortization of deferred financing and issuance costs		2,527,974			507,026			3,312,162			(42,004	)
Deferred income taxes		1,851,018			(930,470	)		2,906,747			1,251,781
Preferred stock dividends payable		166,472			146,420			330,049			335,232
(Increase) decrease in operating assets:
Life insurance contract benefits receivable		9,083,817			17,140,000			(6,829,022	)		(750,000	)
Other assets		(1,210,892	)		(225,376	)		(1,037,466	)		(356,549	)
Increase (decrease) in operating liabilities:
Due to related party		(1,814,173	)		-			(101,781	)		-
Accounts payable and other accrued expenses		(775,213	)		(1,333,241	)		1,192,756			1,302,446
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(9,531,047	)		(974,383	)		(30,043,853	)		(9,382,100	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance contracts		(24,373,714	)		(7,777,541	)		(48,700,036	)		(10,224,018	)
Carrying value of matured life insurance contracts		1,691,764			132,388			6,302,243			3,742,983
Investment in Secured MCA advances		(1,293,829	)		-			(5,647,414	)		-
Proceeds from Secured MCA advances		907,649			-			1,025,792			-
NET CASH FLOWS USED IN INVESTING ACTIVITIES		(23,068130	)		(7,645,153	)		(47,019,415	)		(6,481,035	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on (repayments of) Senior Revolving Credit Facility		(3,000,000	)		(7,150,000	)		17,000,000			(7,150,000	)
Payments for redemption of Series I Secured Notes		(485,350	)		(2,344,355	)		(5,722,743	)		(3,617,544	)
Proceeds from issuance of L Bonds		36,757,771			22,538,059			71,126,660			50,498,356
Payments for issuance and redemption of L Bonds		(11,753,782	)		(6,134,935	)		(22,663,475	)		(13,013,057	)
Proceeds from (increase in) restricted cash		8,667,826			3,410,427			(8,818,894	)		(3,627,137	)
Issuance of common stock		166,125			582,000			212,670			582,000
Proceeds from issuance of preferred stock		9,472,673			-			10,501,209			-
Payments for issuance and redemption of preferred stock		(845,361	)		(273,998	)		(1,617,914	)		(273,998	)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		38,979,902			10,627,198			60,017,513			23,398,620

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		6,380,725			2,007,662			(17,045,755	)		7,535,485

CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD		10,998,625			36,190,527			34,425,105			30,662,704
END OF PERIOD	$	17,379,350		$	38,198,189		$	17,379,350		$	38,198,189

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, 2016		June 30, 2015		June 30, 2016		June 30, 2015
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest and preferred dividends paid	$	10,714,000	$	7,041,000	$	17,168,000	$	13,143,000
Premiums paid	$	8,995,000	$	6,141,000	$	17,441,000	$	12,466,000
Stock-based compensation	$	41,000	$	-	$	50,000	$	32,000
NON-CASH INVESTING AND FINANCING ACTIVITIES
Series I Secured Notes:
Conversion of accrued interest and commissions payable to principal	$	142,000	$	86,000	$	187,000	$	127,000
L Bonds:
Conversion of accrued interest and commissions payable to principal	$	370,000	$	219,000	$	661,000	$	438,000
Issuance of Series A Preferred Stock in lieu of cash dividends	$	171,000	$	150,000	$	339,000	$	334,000
Investment in life insurance contracts included in accounts payable	$	780,000	$	61,000	$	780,000	$	61,000

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

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, 2014		2,738,966		$	20,527,866			5,870,193	$	5,870	$	16,257,686		$	(14,401,486	)	$	22,389,936

Net loss		-			-			-		-		-			(7,393,274	)		(7,393,274	)

Issuance of common stock		-			-			60,000		60		581,940			-			582,000

Series A Preferred Stock conversion to common stock		(15,463	)		(115,973	)		11,597		12		115,961			-			-

Issuance of preferred stock		58,232			387,948			-		-		-			-			387,948

Issuance of stock options		-			-			-		-		193,804			-			193,804
Balance, December 31, 2015		2,781,735		$	20,799,841			5,941,790	$	5,942	$	17,149,391		$	(21,794,760	)	$	16,160,414

Net income		-			-			-		-		-			2,955,631			2,955,631

Issuance of common stock		-			-			33,000		33		212,637			-			212,670

Redemption of Series A Preferred Stock		(92,527	)		(693,955	)									-			(693,955	)

Issuance of Series A Preferred Stock		48,490			339,433			-		-					-			339,433

Issuance of redeemable preferred stock		12,222			12,212,767			-		-		(916,618	)		-			11,296,149

Issuance of MCA preferred stock		7,155			71,556							(7,340	)					64,216

Issuance of stock options		-			-			-		-		50,320			-			50,320
Balance, June 30, 2016		2,757,075		$	32,729,642			5,974,790	$	5,975	$	16,488,390		$	(18,839,129	)	$	30,384,878

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 – Through its wholly owned subsidiaries, GWG Holdings, Inc. owns a portfolio of life insurance contracts. As of the date of this report, our portfolio had an aggregate fair value of $431.8 million. We earn income from changes in the fair value of our portfolio and through the benefits we receive upon the mortality of insureds. We are also involved in other lines of business, including a business that collects commissions for facilitating the conversion of term life insurance contracts into universal, or permanent, life insurance, and a business that participates in the merchant cash advance industry by advancing sums to merchants and lending money to businesses that advance sums to merchants. Operating results for the three- and six-month periods included in this report are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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.

Use of Estimates – The preparation of our consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the consolidated financial statements, as well as the reported amounts of revenue during the reporting period. The Company regularly evaluates estimates and assumptions, which are based on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. 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 our investments in life insurance contracts, and (2) the value of our deferred tax assets and liabilities.

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

Life Insurance Contracts – ASC 325-30, Investments in Insurance Contracts (“ASC 325-30”), permits a reporting entity to account for its investments in life insurance contracts using either the investment method or the fair value method. We elected to use the fair value method to account for our life insurance contracts. Under the fair value method we recognize our initial investment at the purchase price. At each subsequent reporting period, we re-measure the investment at fair value in its entirety and recognize the change in fair value as income in the current period income net of premiums paid. We use the term “life insurance contracts” to have the same meaning as “life insurance policies.”

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

In a case where our acquisition of a contract 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 balance sheet until the acquisition is complete and we secured title to the contract. On June 30, 2016 and December 31, 2015, a total of $16,000 and $31,000, respectively, of our “other assets” comprised direct costs and deposits that we advanced for contract acquisitions.

Deferred Financing and Issuance Costs – Loans advanced to us under our revolving senior credit facility, as described in Note 5, are reported net of financing costs, which are amortized using the straight-line method over the term of the facility. The Series I Secured Notes and L Bonds, as respectively described in Notes 6 and 7, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of those borrowings. 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, all of which were fully amortized using the interest method as of December 31, 2015. Selling and issuance costs of Redeemable Preferred Stock and MCA Preferred Stock, described in Notes 10 and 11, are netted against additional paid-in-capital.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Earnings (loss) per Share – Basic earnings (loss) per share attributable to non-redeemable interests 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 outstanding Series A Preferred Stock, Redeemable Preferred Stock, warrants and stock options.

Recently Adopted Pronouncements – On April 7, 2015, the FASB issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), as part of its simplification initiative. ASU 2015-03 changes the presentation of debt issuance costs by presenting those costs in the balance sheet as a direct deduction from the related debt liability. Amortization of the costs is reported as interest expense. We adopted ASU 2015-03 effective January 1, 2016, as required for public reporting entities, and that adoption reduced our assets, together with a corresponding reduction to our liabilities, by approximately $2,288,000 as of December 31, 2015. There was no impact on our statements of operations in 2015.

Reclassification – Certain 2015 amounts have been reclassified to conform to ASU 2015-03, as described above. These reclassifications had no effect on our reported consolidated net income or loss for prior periods.

(2) Restrictions on Cash

Under the terms of our revolving senior credit facility (discussed in Note 5), we are required to maintain collection and escrow accounts that are used to fund the acquisition of contracts, pay annual contract premiums, pay interest and other charges under the facility, and collect contract benefits. The agent for the lender authorizes the disbursements from these accounts. At June 30, 2016 and December 31, 2015, there was a balance of $11,161,000, and $2,342,000, respectively, in these restricted cash accounts.

(3) Investment in Life Insurance Contracts

Life insurance contracts are valued based on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these contracts are recorded as gain or loss on life insurance contracts, net of cash premiums paid on those contracts, in our consolidated statements of operations. Fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions derived from reports obtained from widely accepted life expectancy providers, and assumptions relating to cost-of-insurance (premium) rates. The discount rate we apply incorporates current information about discount rate applied by other reporting companies owning portfolios of life insurance contracts, the discount rates observed in the life insurance secondary market, market interest rates, the credit exposure to the insurance company that issued the life insurance contract and management’s estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. As a result of management’s analysis, discount rates of 11.05% and 11.09% were applied to our portfolio as of June 30, 2016 and December 31, 2015, respectively.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

A summary of our contracts, organized according to their estimated life expectancy dates as of the date of this report, is as follows:

	As of June 30, 2016						As of December 31, 2015
Years Ending December 31,	Number of Contracts		Estimated Fair Value		Face Value		Number of Contracts		Estimated Fair Value		Face Value
2016		2	$	4,535,000	$	5,000,000		5	$	7,503,000	$	8,500,000
2017		13		13,967,000		17,339,000		12		12,875,000		17,418,000
2018		32		38,125,000		54,499,000		27		37,109,000		58,428,000
2019		52		55,547,000		95,808,000		51		54,242,000		100,967,000
2020		79		75,764,000		150,740,000		59		64,750,000		137,868,000
2021		66		58,619,000		138,718,000		48		45,724,000		116,805,000
2022		51		40,488,000		118,010,000		44		38,394,000		116,998,000
Thereafter		252		144,775,000		574,684,000		150		96,053,000		387,860,000
Totals		547	$	431,820,000	$	1,154,798,000		396	$	356,650,000		944,844,000

We recognized life insurance benefits of $9,829,000 and $750,000 during the three months ended June 30, 2016 and 2015, respectively, related to contracts with a carrying value of $1,692,000 and $132,000, respectively, and as a result recorded realized gains of $8,137,000 and $618,000. We recognized life insurance benefits of $29,067,000 and $29,375,000 during the six months ended June 30, 2016 and 2015, respectively, related to contracts with a carrying value of $6,302,000 and $3,743,000, respectively, and as a result recorded realized gains of $22,765,000 and $25,632,000.

Reconciliation of gain on life insurance contracts:

	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Change in fair value	$	21,241,000		$	14,028,000		$	32,773,000		$	12,134,000
Premiums and other fees		(8,995,000	)		(6,172,000	)		(17,441,000	)		(12,509,000	)
Contract maturities		8,137,000			618,000			22,765,000			25,632,000
Gain on life insurance contracts, net	$	20,383,000		$	8,474,000		$	38,097,000		$	25,257,000

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

Years Ending December 31,	Premiums		Servicing		Premiums and Servicing Fees
Six months ending December 31, 2016	$	18,708,000	$	656,000	$	19,364,000
2017		39,266,000		656,000		39,922,000
2018		43,010,000		656,000		43,666,000
2019		48,131,000		656,000		48,787,000
2020		53,558,000		656,000		54,214,000
2021		59,829,000		656,000		60,485,000
	$	262,502,000	$	3,936,000	$	266,438,000

Management anticipates funding the premium payments estimated above with proceeds from our revolving senior credit facility, proceeds from additional debt and equity financing, and proceeds from maturities of life insurance contracts. The proceeds of these capital sources may also be used for the purchase, financing, and maintenance of additional life insurance contracts.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(4) Fair Value Definition and Hierarchy

ASC 820, Fair Value Measurement (“ASC 820”), establishes a hierarchical disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace, including the existence and transparency of transactions between market participants. Assets and liabilities with readily available and actively quoted prices, or for which fair value can be measured from actively quoted prices in an orderly market, generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. ASC 820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the use of observable inputs whenever available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect assumptions about how market participants price an asset or liability developed 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. 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 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 contracts is determined on a quarterly basis by our portfolio management committee, taking into consideration 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 rate applied by other reporting companies owning portfolios of life insurance contracts, the discount rates observed in the life insurance secondary market, market interest rates, the credit exposure to the insurance company that issued the life insurance contract and management’s estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole.

These inputs are then used to estimate the discounted cash flows from the portfolio using the Model Actuarial Pricing System probabilistic portfolio price model, which estimates the cash flows using various mortality probabilities and scenarios. The valuation process includes a review by senior management as of each valuation date. We also engage a third-party expert to independently test the accuracy of the valuations using the inputs we provide on a quarterly basis. See Exhibit 99.1 filed herewith.

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

	Three month ended June 30,						Six months ended June 30,
	2016			2015			2016			2015
Beginning balance	$	387,402,000		$	278,395,000		$	356,650,000		$	282,883,000
Purchases		24,869,000			9,208,000			48,700,000			10,225,000
Maturities (cash in excess of carrying value)		(1,692,000	)		(132,000	)		(6,303,000	)		(3,743,000	)
Net change in fair value		21,241,000			14,028,000			32,773,000			12,134,000
Ending balance (June 30)	$	431,820,000		$	301,499,000		$	431,820,000		$	301,499,000

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

We periodically update the independent life expectancy estimates on the insured lives in our portfolio, other than insured lives covered under small face amount contracts (i.e., under $1 million in face amount), on a continuous rotating three-year cycle. Accordingly, we update life expectancies for approximately one-twelfth of our portfolio each quarter.

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

	As of June 30, 2016			As of December 31, 2015
Weighted-average age of insured, years		82.1			82.6
Weighted-average life expectancy, months		81.3			79.3
Average face amount per contract	$	2,111,000		$	2,386,000
Discount rate		11.05	%		11.09	%

These assumptions are, by their nature, 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 contract, and the discount rates were increased or decreased by 1% and 2%, while all other variables were held constant, the fair value of our investment in life insurance contracts would increase or (decrease) as summarized below:

Change in Fair Value of the Investment in Life Insurance Contracts

	Change in life expectancy estimates
	minus 8 months		minus 4 months		plus 4 months			plus 8 months

June 30, 2016	$	58,540,000	$	29,087,000	$	(28,537,000	)	$	(56,562,000	)
December 31, 2015	$	48,339,000	$	24,076,000	$	(23,501,000	)	$	(46,482,000	)

	Change in discount rate
	minus 2%		minus 1%		plus 1%			plus 2%

June 30, 2016	$	45,656,000	$	21,871,000	$	(20,155,000	)	$	(38,770,000	)
December 31, 2015	$	35,024,000	$	16,786,000	$	(15,485,000	)	$	(29,803,000	)

Other Fair Value Considerations

The carrying value of receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term maturities and low credit risk. Using the income-based valuation approach, the estimated fair value of our Series I Secured Notes payable and L Bonds, having a combined aggregate face value of $352,997,000 as of June 30, 2016, is approximately $354,557,000 based on a weighted-average market interest rate of 7.10%. The carrying value of the revolving senior 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 contracts collateralizing the debt. The overall rate reflects market, and the carrying value of the facility approximates fair value.

Our wholly owned subsidiary GWG MCA Capital, Inc. (“GWG MCA”) participates in the merchant cash advance 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 advances and loans, and determine if an impairment reserve is necessary. At June 30, 2016 we determined that one of our secured loans was potentially impaired. The secured loan to Nulook Capital LLC had an outstanding balance of $3,304,000 and a loan loss reserve of $400,000 at June 30, 2016. We deem fair value to be the estimated collectible value on each loan made from GWG MCA. Where we estimate the collectible amount to be less than the outstanding balance, we record a reserve for the difference.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table summarizes outstanding warrants as of June 30, 2016:

Month issued	Warrants issued		Fair value per share		Risk free rate			Volatility			Term
December 2011		68,937	$	0.22		0.42	%		25.25	%	5 years
March 2012		38,130	$	0.52		0.38	%		36.20	%	5 years
June 2012		161,840	$	1.16		0.41	%		47.36	%	5 years
July 2012		144,547	$	1.16		0.41	%		47.36	%	5 years
September 2012		2,500	$	0.72		0.31	%		40.49	%	5 years
September 2014		16,000	$	1.26		1.85	%		17.03	%	5 years
		431,954

(5) Credit Facility – Autobahn Funding Company LLC

Through our subsidiaries GWG DLP Funding II, LLC (“DLP II”) and GWG DLP Funding III, LLC (“DLP III”), we are party to a $105 million revolving senior credit facility with Autobahn Funding Company LLC (“Autobahn”), providing us with a $105 million maximum borrowing amount. The facility is governed by a Credit and Security Agreement (the “Agreement”), and DZ Bank AG Deutsche Zentral-Genossenschaftsbank (“DZ Bank”) acts as the agent for Autobahn under the Agreement. The Agreement was amended and restated for the second time on May 11, 2015, primarily to add DLP III as a party, increase the total borrowing limit from $100 million to $105 million, and extend the maturity date for borrowings under the facility to June 30, 2018.

Advances under the facility bear interest at a commercial paper rate of the lender at the time of the advance, or at the lender’s cost of borrowing plus 4.25%, which is 1.75% less than interest charged under the facility prior to May 11, 2015 amendment. We make interest payments on a monthly basis. The effective rate of interest was 5.48% at June 30, 2016 and 5.58% at December 31, 2015. The weighted-average effective interest rate, after excluding an unused line fee, was 5.47% and 5.37% for the three months ended June 30, 2016 and 2015, respectively, and 5.57% and 6.00% for the six months ended June 30, 2016 and 2015, respectively.

The amount outstanding under this facility was $82,011,000 and $65,011,000 at June 30, 2016 and December 31, 2015, respectively. GWG Holdings is a performance guarantor of the various obligations of GWG Life, LLC (“GWG Life”), as servicer, under the Agreement. Obligations under the facility are secured by our pledge of ownership in our life insurance contracts to DZ Bank through an arrangement under which Wells Fargo serves as a securities intermediary.

The Agreement has certain financial (as described below) and nonfinancial covenants, and we were in compliance with these covenants at June 30, 2016 and December 31, 2015.

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, (ii) a tangible net worth on a non-GAAP basis (again, as defined and calculated under the Agreement) of not less than $45 million, and (iii) maintain cash and eligible investments of $15 million or above.

Consolidated non-GAAP net income and non-GAAP tangible net worth as of and for the four quarters ended June 30, 2016, as calculated under the Agreement, was $30,628,000 and $128,454,000, respectively.

Total funds available for additional borrowings under the facility at June 30, 2016 and December 31, 2015, were $22,989,000 and $39,989,000 respectively.

(6) Series I Secured Notes

Series I Secured Notes (“Notes”) are legal obligations of our subsidiary GWG Life and were privately offered and sold from August 2009 through June 2011. The Notes are secured by the assets of GWG Life and are subordinate to obligations under our revolving senior credit facility (see Note 5). We are party to a Third Amended and Restated Note Issuance and Security Agreement dated November 1, 2011, as amended, under which GWG Life is obligor, GWG Holdings is guarantor, and Lord Securities Corporation serves as trustee of the GWG Life Trust (“Trust”). This agreement contains certain financial and non-financial covenants, and we were in compliance with these covenants at June 30, 2016 and December 31, 2015.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Notes were sold with original maturity dates ranging from six months to seven years, and with fixed interest rates varying from 5.65% to 9.55% depending on the term of the Note. The Notes 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. Effective September 1, 2016, we no longer anticipate renewing the Notes.

Interest on the Notes is payable monthly, quarterly, annually or at maturity depending on the election of the investor. At June 30, 2016 and December 31, 2015, the weighted-average interest rate of our Notes was 8.62% and 8.47%, respectively. The principal amount of Notes outstanding was $18,283,000 and $23,578,000 at June 30, 2016 and December 31, 2015, respectively. The difference between the amount outstanding on the Notes and the carrying amount on our balance sheet is due to netting of unamortized deferred issuance costs. Overall, interest expense includes amortization of deferred financing and issuance costs of $82,000 and $193,000 for the three and six months ended June 30, 2016 and $81,000 and $211,000 for the three and six months ended June 30, 2015. Future expected amortization of deferred financing costs is $317,000 in total over the next six years.

Future contractual maturities of Notes payable and future amortization of their deferred financing costs at June 30, 2016 are as follows:

Years Ending December 31,	Contractual Maturities		Amortization of Deferred Financing Costs
Six months ending December 31, 2016	$	3,574,000	$	14,000
2017		8,758,000		113,000
2018		2,401,000		56,000
2019		869,000		16,000
2020		1,766,000		59,000
Thereafter		915,000		59,000
	$	18,283,000	$	317,000

(7) L Bonds

Our L Bonds are legal obligations of GWG Holdings. Obligations under the L Bonds are secured by the assets of GWG Holdings and by GWG Life, as a guarantor, and are subordinate to the obligations under our revolving senior credit facility (see Note 5). 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 presently being 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. We are party to an indenture governing the L Bonds and 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. The Indenture contains certain financial and non-financial covenants, and we were in compliance with these covenants at June 30, 2016 and December 31, 2015.

L Bonds have maturity dates ranging from six months to seven years, and fixed interest rates varying from 4.25% to 9.50% depending on the term of the bond. The bonds have renewal features under which we may elect to permit their renewal, subject to the right of bondholders to elect to receive payment at maturity. Interest is payable monthly or annually depending on the election of the investor.

At June 30, 2016 and December 31, 2015, the weighted-average interest rate of our L Bonds was 7.17% and 7.18%, respectively. The principal amount of L Bonds outstanding was $334,714,000 and $282,171,000 at June 30, 2016 and December 31, 2015, respectively. The difference between the amount of outstanding L Bonds and the carrying amount on our 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 $1,721,000 and $3,289,000 for the three and six months ended June 30, 2016 and $1,366,000 and $2,340,000 for the three and six months ended June 30, 2015. Future expected amortization of deferred financing costs as of June 30, 2016 is $9,960,000 in total over the next eight years.

Effective September 1, 2016, we will cease selling 6-month and 1-year L Bonds until further notice. In addition, effective September 1, 2016, the L Bond interest rates will change to 5.50%, 6.25%, 7.50% and 8.50% for the 2-, 3-, 5- and 7-year L Bonds, respectively.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Future contractual maturities of L Bonds, and future amortization of their deferred financing costs, at June 30, 2016 are as follows:

Years Ending December 31,	Contractual Maturities		Amortization of Deferred Financing Costs
Six months ending December 31, 2016	$	58,270,000	$	364,000
2017		85,052,000		1,764,000
2018		87,168,000		2,986,000
2019		50,526,000		2,148,000
2020		19,457,000		845,000
Thereafter		34,241,000		1,853,000
	$	334,714,000	$	9,960,000

(8) Note Payable to Related Party

In February 2016, GWG MCA acquired certain assets relating to our merchant cash advance business. To finance this acquisition, GWG MCA borrowed $1,760,000 from Insurance Strategies Fund, LLC, as evidenced by an unsecured promissory note dated February 16, 2016. GWG MCA paid off the promissory note in its entirety in June 2016.

(9) Convertible Preferred Stock

From July 2011 until September 2012, we privately offered shares of Series A Preferred Stock (“Series A”) of GWG Holdings at $7.50 per share. In the offering, we sold an aggregate of 3,278,000 shares for gross consideration of $24,582,000. Holders of Series A are entitled to cumulative dividends at the rate of 10% per annum, paid quarterly. Dividends on the Series A are included as interest expense in the statements of operations. Under certain circumstances described in the Certificate of Designation for the Series A, additional Series A shares may be issued in lieu of cash dividends at the rate of $7.00 per share.

Holders of Series A are entitled to a liquidation preference equal to the stated value of their preferred shares (i.e., $7.50 per share) plus accrued but unpaid dividends. Holders of Series A may presently convert each share of their Series A into 0.75 shares of our common stock.

As of June 30, 2016, we issued an aggregate of 423,000 shares of Series A in satisfaction of $2,959,000 in dividends on the Series A, and an aggregate of 693,000 shares of Series A were converted into 520,000 shares of our common stock. As of June 30, 2016, we had 2,738,000 Series A shares outstanding with respect to which we incurred aggregate issuance costs of $2,838,000, all of which is included as a component of additional paid-in capital.

Purchasers of Series A in our offering received three-year warrants to purchase an aggregate of 431,954 shares of our common stock at an exercise price of $12.50 per share. The grant date fair value of these warrants was $428,000. As of June 30, 2016 and December 31, 2015, none of these warrants were exercised, and the weighted-average remaining life of these warrants was 0.93 and 1.43, respectively.

In September 2012, we completed a public offering of our common stock and, as a result, the Series A was reclassified from temporary equity to permanent equity. We may redeem Series A shares at a price equal to 110% of their liquidation preference ($7.50 per share) at any time. As of June 30, 2016, we have redeemed an aggregate of 277,000 shares of Series A.

(10) Redeemable Preferred Stock

Beginning November 30, 2015, we began publicly offering up to 100,000 shares of Redeemable Preferred Stock (“RPS”) at $1,000 per share. Holders of RPS are entitled to cumulative dividends at the rate of 7% per annum, paid monthly. Dividends on the RPS are included as interest expense in the statements of operations. Under certain circumstances described in the Certificate of Designation for the RPS, additional shares of RPS may be issued in lieu of cash dividends.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Holders of RPS may request that we redeem their RPS at a price equal to their liquidation preference, less an applicable redemption fee, if any. Nevertheless, the Certificate of Designation for RPS permits us to decline requests for redemption in certain circumstances. 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.

As of June 30, 2016, we had sold 12,222 shares of RPS for aggregate gross consideration of $12,213,000, and incurred approximately $917,000 of selling costs related to the sale of those shares.

(11) GWG MCA Capital, Inc - 9% Preferred Stock

Beginning March 31, 2016, GWG MCA began privately offering up to 2,000,000 shares of GWG MCA 9% Preferred Stock (“MCA Preferred”) at $10.00 per share. Holders of MCA Preferred are entitled to cumulative dividends at a rate of 9% per annum, paid monthly. Dividends on the MCA Preferred are included as interest expense in the statements of operations. Under certain circumstances described in the Certificate of Designation for the MCA Preferred, additional shares of MCA Preferred may be issued in lieu of cash dividends. The MCA Preferred ranks senior to the common stock of MCA (all of which common stock is held by GWG Holdings) and entitles its holders to a liquidation preference equal to the stated value per share (i.e., $10.00) plus accrued but unpaid dividends.

Holders of MCA Preferred may request that GWG MCA redeem their MCA Preferred at a price equal to their liquidation preference, less an applicable redemption fee, if any. Nevertheless, the Certificate of Designation for MCA Preferred permits GWG MCA to decline requests for redemption in certain circumstances. In addition, after one year from the date of original issuance, GWG MCA may, at its option, call and redeem shares of MCA Preferred at a price equal to the stated value per share. As of June 30, 2016, a total of 7,155 shares of MCA Preferred had been sold for aggregate gross consideration of $72,000 and approximately $7,000 of selling costs related to the sale of these shares were incurred.

(12) Income Taxes

We had a current income tax liability as of $0 as of both June 30, 2016 and December 31, 2015. The components of current and deferred income tax expense for the three and six months ended June 30, 2016 and 2015, respectfully, consisted of the following:

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,		June 30,
	2016			2015			2016		2015
Income tax provision (benefit):
Current:
Federal	$	(23,000	)	$	(182,000	)	$	-	$	141,000
State	$	(6,000	)	$	(64,000	)	$	-	$	40,000
Total current tax expense (benefit)		(29,000	)		(246,000	)		-		181,000
Deferred:
Federal	$	1,397,000		$	(670,000	)	$	2,203,000	$	984,000
State	$	454,000		$	(261,000	)	$	704,000	$	268,000
Total deferred tax expense (benefit)		1,851,000			(931,000	)		2,907,000		1,252,000
Total income tax expense (benefit)		1,822,000			(1,177,000	)		2,907,000		1,433,000

The primary differences between the June 30, 2016 effective tax rate and the statutory federal rate are the accrual of non-deductible preferred stock dividend expense of $1,112,000, 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 contracts and revenue recognition with respect to the mark-to-market of our life insurance portfolio.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(13) Common Stock

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

On June 24, 2015 we issued 60,000 restricted common shares at $9.70 per share, determined by the closing market price on the date of grant, to a vendor as payment for services to be rendered over three years. The cost of these shares is amortized over a 12-month period. On March 17, 2016, we issued an additional 6,500 restricted common shares at an average price of $7.16 per share, determined by the closing market price on the date of grant, to this same vendor for additional services provided to us. On April 25, 2016, we issued 25,000 restricted shares of common stock at $6.25 per share, determined by the closing market price on the date of grant, to a vendor as a form of payment for services the vendor is providing to us, which is expensed in the current period.

(14) Stock Incentive Plan

We adopted our GWG Holdings 2013 Stock Incentive Plan in March 2013. The Compensation Committee of our Board of Directors administers the plan. Incentives 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. 2,000,000 common shares are presently issuable under the plan.

Through June 30, 2016, we issued stock options for 1,110,865 shares of common stock to employees, officers, and directors under the plan. Options for 577,196 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 $10.18 for those beneficially owning more than 10% of our common stock, and between $6.00 and $10.25 for all others, which is equal to the estimated market price of the shares on the date of grant using Black-Scholes binomial option pricing model. The expected annualized volatility used in the Black-Scholes model valuation of options issued during the period was 26.6%. 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. A forfeiture rate of 15% is based on historical information and expected future trend. As of June 30, 2016, stock options for 360,685 shares were forfeited and stock options for 28,001 shares were exercised.

Outstanding stock options:

	Vested			Un-vested			Total
Balance as of December 31, 2014		314,288			685,813			1,000,101
Granted during the year		79,500			273,700			353,200
Vested during the year		238,999			(238,999	)		-
Exercised during the year		(27,667	)		-			(27,667	)
Forfeited during the year		(121,417	)		(150,602	)		(272,019	)
Balance as of December 31, 2015		483,703			569,912			1,053,615
Granted during the year		15,000			67,750			82,750
Vested during the year		84,917			(84,917	)		-
Forfeited during the year		(6,424	)		(19,076	)		(25,500	)
Balance as of June 30, 2016		577,196			533,669			1,110,865

Compensation expense related to un-vested options not yet recognized is $475,000. We expect to recognize this compensation expense over the next three years ($173,000 in 2016, $208,000 in 2017, $72,000 in 2018, and $22,000 in 2019).

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(15) Net Income per Common Share

We have outstanding Series A shares, as described in Note 9. The Series A is dilutive to our net income per common share calculation at both June 30, 2016 and 2015. We also issued warrants to purchase common stock in conjunction with the sale of Series A (see Note 9). Both those warrants and our vested stock options are anti-dilutive as of both June 30, 2016 and 2015 and have not been included in the fully diluted net loss per common share calculation. We issued Redeemable Preferred Stock (see Note 10) that is non-dilutive, as the minimum conversion price of $15 per common share is above market price.

(16) Commitments

We are party to an office lease with U.S. Bank National Association as the landlord. The lease was originally for 11,695 square feet of office space located at 220 South Sixth Street, Minneapolis, Minnesota, began in April 2012 and had an original term expiring August 31, 2015. On September 1, 2015, we entered into an amendment to this lease that expanded the leased space to 17,687 square feet and extended the term through August 31, 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 these lease arrangements were $123,000 and $55,000 for the three months ended June 30, 2016 and 2015, respectively, and $232,000 and $122,000 for the six months ended June 30, 2016 and 2015, respectively.

Minimum lease payments under the amended lease are as follows:

Six months ending December 31, 2016	$	87,000
2017		178,000
2018		185,000
2019		191,000
2020		198,000
2021		204,000
2022		210,000
2023		217,000
2024		223,000
2025		230,000
2026		38,000
	$	1,961,000

(17) 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.

(18) Guarantee of L Bonds

We are publicly offering and selling L Bond under a registration statement declared effective by the SEC, as described in Note 7. Our obligations under the L Bonds are secured by substantially all the assets of GWG Holdings, a pledge of all the common stock held by our largest individual stockholders, and by a guarantee and corresponding grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest on the L Bonds. Substantially all of GWG’s life insurance contracts are held by DLP III and the Trust. The contracts held by DLP III are not collateral for the L Bond obligations as such contracts serve as collateral for the senior 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 guarantor and issuer because management does not believe that separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of GWG Holdings or GWG Life, the guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as provided herein. DLP II and DLP III are borrowers under a revolving senior credit facility with Autobahn, under which DZ Bank serves as agent, as described in Note 5. The significant majority of insurance contracts we own are subject to a collateral arrangement with DZ Bank described in Notes 2 and 5. Under this arrangement, collection and escrow accounts are used to fund premiums for the insurance contracts and to pay interest and other charges under the revolving senior credit facility. DZ Bank 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 (i.e., DLP II, DLP III, GWG Life and GWG Holdings) realizing an annualized rate of return on mortality benefits for such assets of not more than 18%, as determined by DZ Bank. After such amount is reached, the agreement governing the senior revolving credit facility 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, 2016 and December 31, 2015, with respect to the financial position, and for the three and six months ended June 30, 2016 and 2015, 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 II, DLP III and the Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries, including DLP II, DLP III and the Trust.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets

June 30, 2016	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated

A S S E T S

Cash and cash equivalents	$	10,051,621		$	6,822,484		$	505,245		$	-		$	17,379,350
Restricted cash		-			4,924,308			6,236,485			-			11,160,793
Investment in life insurance contracts, at fair value		-			-			431,820,437			-			431,820,437
Secured MCA advances		-			-			4,328,317			-			4,328,317
Life insurance contract benefits receivable		-			-			6,829,022			-			6,829,022
Other assets		4,901,911			1,367,483			30,926			(2,789,877	)		3,510,443
Investment in subsidiaries		358,804,767			363,647,320			-			(722,452,087	)		-

TOTAL ASSETS	$	373,758,299		$	376,761,595		$	449,750,432		$	(725,241,964	)	$	475,028,362

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 senior credit facility	$	-		$	(2,639,306	)	$	80,115,298		$	-		$	77,475,992
Series I Secured Notes		-			17,965,653			-			-			17,965,653
L Bonds		327,322,906			-			-			-			327,322,906
Notes payable to related parties		-			-			2,700,000			(2,700,000	)		-
Accounts payable		1,270,216			462,220			796,770			-			2,529,206
Interest payable		9,493,254			3,502,812			417,557			(89,877	)		13,323,746
Other accrued expenses		680,545			589,682			85,039			-			1,355,266
Deferred taxes, net		4,670,715			-			-			-			4,670,715
TOTAL LIABILITIES		343,437,636			19,881,061			84,114,664			(2,789,877	)		444,643,484

STOCKHOLDERS’ EQUITY (DEFICIT)
Member capital		-			356,880,534			365,571,553			(722,452,087	)		-
Convertible preferred stock		20,445,320			-			-			-			20,445,320
Redeemable preferred stock		12,212,767			-			-			-			12,212,767
MCA preferred stock		-			-			71,555			-			71,555
Common stock		5,975			-			-			-			5,975
Additional paid-in capital		16,495,730			-			(7,340	)		-			16,488,390
Accumulated deficit		(18,839,129	)		-			-			-			(18,839,129	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)		30,320,663			356,880,534			365,635,768			(722,452,087	)		30,384,878

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	373,758,299		$	376,761,595		$	449,750,432		$	(725,241,964	)	$	475,028,362

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets (continued)

December 31, 2015	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated

A S S E T S

Cash and cash equivalents	$	32,292,162		$	1,982,722		$	150,221	$	-		$	34,425,105
Restricted cash		-			2,102,257			239,643		-			2,341,900
Investment in life insurance contracts, at fair value		-			-			356,649,715		-			356,649,715
Other assets		1,742,074			688,071			30,900		-			2,461,045
Investment in subsidiaries		269,886,254			291,295,951			-		(561,182,205	)		-

TOTAL ASSETS	$	303,920,490		$	296,069,001		$	357,070,479	$	(561,182,205	)	$	395,877,765

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 senior credit facility	$	-		$	(1,000,000	)	$	64,279,596	$	-		$	63,279,596
Series I Secured Notes		-			23,287,704			-		-			23,287,704
L Bonds		276,482,796			-			-		-			276,482,796
Accounts payable		280,988			157,217			1,079,235		-			1,517,440
Interest payable		8,529,959			3,544,626			265,476		-			12,340,061
Other accrued expenses		717,365			343,421			-		-			1,060,786
Deferred taxes, net		1,763,968			-			-		-			1,763,968
TOTAL LIABILITIES		287,775,076			26,332,968			65,624,307		-			379,732,351

STOCKHOLDERS’ EQUITY (DEFICIT)
Member capital		-			269,736,033			291,446,172		(561,182,205	)		-
Convertible preferred stock		20,784,841			-			-		-			20,784,841
Common stock		5,942			-			-		-			5,942
Additional paid-in capital		17,149,391			-			-		-			17,149,391
Accumulated deficit		(21,794,760	)		-			-		-			(21,794,760	)
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT)		16,145,414			269,736,033			291,446,172		(561,182,205	)		16,145,414

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	303,920,490		$	296,069,001		$	357,070,479	$	(561,182,205	)	$	395,877,765

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations

For the six months ended June 30, 2016	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Origination and servicing income	$	-		$	13,417		$	-	$	(13,417	)	$	-
Gain on life insurance contracts, net		-			-			38,097,059		-			38,097,059
MCA income		-			-			368,216		-			368,216
Interest and other income		106,019			1,012			198,946		(89,877	)		216,100
TOTAL REVENUE		106,019			14,429			38,664,221		(103,294	)		38,681,375

EXPENSES
Origination and servicing fees		-			-			13,417		(13,417	)		-
Interest expense		15,730,192			1,301,971			3,083,680		(89,877	)		20,025,966
Employee compensation and benefits		3,175,323			2,113,049			249,333		-			5,537,705
Legal and professional fees		1,378,335			1,011,155			120,991		-			2,510,481
Other expenses		2,777,326			1,394,028			573,491		-			4,744,845
TOTAL EXPENSES		23,061,176			5,820,203			4,040,912		(103,294	)		32,818,997

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(22,955,157	)		(5,805,774	)		34,623,309		-			5,862,378

EQUITY IN INCOME OF SUBSIDIARY		28,817,535			35,136,402			-		(63,953,937	)		-

INCOME BEFORE INCOME TAXES		5,862,378			29,330,628			34,623,309		(63,953,937	)		5,862,378

INCOME TAX EXPENSE		2,906,747			-			-		-			2,906,747
NET INCOME	$	2,955,631		$	29,330,628		$	34,623,309	$	(63,953,937	)	$	2,955,631

For the six months ended June 30, 2015	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Origination and servicing income	$	-		$	1,018,750		$	-	$	(1,018,750	)	$	-
Gain on life insurance contracts, net		-			-			25,257,295		-			25,257,295
Interest and other income		25,023			6,880			107,773		-			139,676
TOTAL REVENUE		25,023			1,025,630			25,365,068		(1,018,750	)		25,396,971

EXPENSES
Origination and servicing fees		-			-			1,018,750		(1,018,750	)		-
Interest expense		11,031,758			1,458,965			2,008,158		-			14,498,881
Employee compensation and benefits		2,911,596			961,046			-		-			3,872,642
Legal and professional fees		828,858			337,326			-		-			1,166,184
Other expenses		2,056,188			1,302,036			56,836		-			3,415,060
TOTAL EXPENSES		16,828,400			4,059,373			3,083,744		(1,018,750	)		22,952,767

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(16,803,377	)		(3,033,743	)		22,281,324		-			2,444,204

EQUITY IN INCOME OF SUBSIDIARY		19,247,581			22,281,217			-		(41,528,798	)		-

INCOME BEFORE INCOME TAXES		2,444,204			19,247,474			22,281,324		(41,528,798	)		2,444,204

INCOME TAX EXPENSE		1,432,728			-			-		-			1,432,728
NET INCOME	$	1,011,476		$	19,247,474		$	22,281,324	$	(41,528,798	)	$	1,011,476

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations (continued)

For the three months ended June 30, 2016	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Gain on life insurance contracts, net		-			-			20,383,347		-			20,383,347
MCA income		-			-			223,255		-			223,255
Interest and other income		71,222			706			157,927		(58,975	)		170,880
TOTAL REVENUE		71,222			706			20,764,529		(58,975	)		20,777,482

EXPENSES
Interest expense		8,131,369			644,735			1,648,452		(58,975	)		10,365,581
Employee compensation and benefits		1,638,893			1,283,968			148,646		-			3,071,507
Legal and professional fees		783,596			476,505			44,252		-			1,304,353
Other expenses		1,519,349			425,354			387,982		-			2,332,685
TOTAL EXPENSES		12,073,207			2,830,562			2,229,332		(58,975	)		17,074,126

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(12,001,985	)		(2,829,856	)		18,535,197		-			3,703,356

EQUITY IN INCOME OF SUBSIDIARY		15,705,341			18,835,036			-		(34,540,377	)		-

INCOME BEFORE INCOME TAXES		3,703,356			16,005,180			18,535,197		(34,540,377	)		3,703,356

INCOME TAX BENEFIT		1,822,030			-			-		-			1,822,030
NET INCOME	$	1,881,326		$	16,005,180		$	18,535,197	$	(34,540,377	)	$	1,881,326

For the three months ended June 30, 2015	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Origination and servicing income	$	-		$	661,264		$	-	$	(661,264	)	$	-
Gain on life insurance contracts, net		-			-			8,473,886		-			8,473,886
Interest and other income		17,480			430			72,470		-			90,380
TOTAL REVENUE		17,480			661,694			8,546,356		(661,264	)		8,564,266

EXPENSES
Origination and servicing fees		-			-			661,264		(661,264	)		-
Interest expense		5,781,796			684,879			855,672		-			7,322,347
Employee compensation and benefits		1,605,795			538,930			-		-			2,144,725
Legal and professional fees		351,507			291,424			-		-			642,931
Other expenses		1,104,826			732,243			44,252		-			1,881,321
TOTAL EXPENSES		8,843,924			2,247,476			1,561,188		(661,264	)		11,991,324

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(8,826,444	)		(1,585,782	)		6,985,168		-			(3,427,058	)

EQUITY IN INCOME OF SUBSIDIARY		5,399,386			6,985,112			-		(12,384,498	)		-

INCOME BEFORE INCOME TAXES		(3,427,058	)		5,399,330			6,985,168		(12,384,498	)		(3,427,058	)

INCOME TAX BENEFIT		(1,176,643	)		-			-		-			(1,176,643	)
NET INCOME (LOSS)	$	(2,250,415	)	$	5,399,330		$	6,985,168	$	(12,384,498	)	$	(2,250,415	)

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Cash Flows

For the six months ended June 30, 2016	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	2,955,631		$	29,330,628		$	34,623,309		$	(63,953,937	)	$	2,955,631
Adjustments to reconcile net income to net cash flows from operating activities:
(Equity) of subsidiaries		(28,817,535	)		(35,136,402	)		-			63,953,937			-
Gain on life insurance contracts		-			-			(32,772,929	)		-			(32,772,929	)
Amortization of deferred financing and issuance costs		3,909,923			(1,446,463	)		848,702			-			3,312,162
Deferred income taxes		2,906,747			-			-			-			2,906,747
Preferred stock dividends payable		330,049			-			-			-			330,049
(Increase) in operating assets:
Life insurance contract benefits receivable		-			-			(6,829,022	)					(6,829,022	)
Other assets		(60,457,838	)		(37,895,574	)		-			97,315,946			(1,037,466	)
Increase (decrease) in operating liabilities:
Due to related party		(2,802,976	)		1,195			2,700,000			-			(101,781	)
Accounts payable and accrued expenses		2,240,523			717,298			(1,765,065	)		-			1,192,756
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(79,735,476	)		(44,429,318	)		(3,195,005	)		97,315,946			(30,043,853	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance contracts		-			-			(48,700,036	)		-			(48,700,036	)
Carrying value of matured life insurance contracts		-			-			6,302,243			-			6,302,243
Investment in Secured MCA advances		-			-			(5,647,414	)		-			(5,647,414	)
Proceeds from Secured MCA advances		-			-			1,025,792			-			1,025,792
NET CASH FLOWS USED IN INVESTING ACTIVITIES		-			-			(47,019,415	)		-			(47,019,415	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on Senior Revolving Credit Facility		-			-			17,000,000			-			17,000,000
Payments for redemption of Series I Secured Notes		-			(5,722,743	)		-			-			(5,722,743	)
Proceeds from issuance of L Bonds		71,126,660			-			-			-			71,126,660
Payments for redemption and issuance of L Bonds		(22,663,475	)		-			-			-			(22,663,475	)
Proceeds from (increase in) restricted cash		-			(2,822,051	)		(5,996,843	)		-			(8,818,894	)
Issuance of common stock		212,670			-			-			-			212,670
Proceeds from issuance of preferred stock		10,429,654			-			71,555			-			10,501,209
Payments for issuance and redemption of preferred stock		(1,610,574	)		-			(7,340	)		-			(1,617,914	)
Issuance of member capital		-			57,813,874			39,502,072			(97,315,946	)		-
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		57,494,935			49,269,080			50,569,444			(97,315,946	)		60,017,513

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(22,240,541	)		4,839,762			355,024			-			(17,045,755	)

CASH AND CASH EQUIVALENTS
BEGINNING OF THE PERIOD		32,292,162			1,982,722			150,221			-			34,425,105

END OF THE PERIOD	$	10,051,621		$	6,822,484		$	505,245		$	-		$	17,379,350

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating Statements of Cash Flows (continued)

For the six months ended June 30, 2015	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,011,476		$	19,247,474		$	22,281,324		$	(41,528,798	)	$	1,011,476
Adjustments to reconcile net income to net cash flows from operating activities:
(Equity) of subsidiaries		(19,247,582	)		(22,281,216	)		-			41,528,798			-
Gain on life insurance contracts		-			-			(12,134,482	)		-			(12,134,482	)
Amortization of deferred financing and issuance costs		1,729,175			211,116			(1,982,295	)		-			(42,004	)
Deferred income taxes		1,251,781			-			-			-			1,251,781
Preferred stock dividends payable		335,232			-			-			-			335,232
(Increase) in operating assets:
Life insurance contract benefits receivable		-			-			(750,000	)					(750,000	)
Other assets		(17,998,823	)		(11,114,039	)		-			28,756,313			(356,549	)
Increase in operating liabilities:
Accounts payable and accrued expenses		2,493,495			228,640			(1,419,689	)		-			1,302,446
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(30,425,246	)		(13,708,025	)		(5,994,858	)		28,756,313			(9,382,100	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance contracts		-			-			(10,224,018	)		-			(10,224,018	)
Carrying value of matured life insurance contracts		-			-			3,742,983			-			3,742,983
NET CASH FLOWS USED IN INVESTING ACTIVITIES		-			-			(6,481,035	)		-			(6,481,035	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Senior Revolving Credit Facility		-			-			(7,150,000	)		-			(7,150,000	)
Payments for redemption of Series I Secured Notes		-			(3,617,544	)		-			-			(3,617,544	)
Proceeds from issuance of L Bonds		50,498,356			-			-			-			50,498,356
Payments for redemption and issuance of L Bonds		(13,013,057	)		-			-			-			(13,013,057	)
Proceeds from (increase in) restricted cash		-			(102,500	)		(3,524,637	)		-			(3,627,137	)
Issuance of common stock		582,000			-			-			-			582,000
Payments for issuance and redemption of preferred stock		(273,998	)		-			-			-			(273,998	)
Issuance of member capital		-			17,445,391			11,310,922			(28,756,313	)		-
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		37,793,301			13,725,347			636,285			(28,756,313	)		23,398,620

NET INCREASE IN CASH AND CASH EQUIVALENTS		7,368,055			17,322			150,108			-			7,535,485

CASH AND CASH EQUIVALENTS
BEGINNING OF THE PERIOD		30,446,473			216,231			-			-			30,662,704

END OF THE PERIOD	$	37,814,528		$	233,553		$	150,108		$	-		$	38,198,189

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating Statements of Cash Flows (continued)

For the three months ended June 30, 2016	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,881,326		$	16,005,180		$	18,535,197		$	(34,540,377	)	$	1,881,326
Adjustments to reconcile net loss to net cash flows from operating activities:
(Equity) of subsidiaries		(15,705,341	)		(18,835,036	)		-			34,540,377			-
Gain on life insurance contracts		-			-			(21,241,376	)		-			(21,241,376	)
Amortization of deferred financing and issuance costs		2,261,032			(282,257	)		549,199			-			2,527,974
Deferred income taxes		1,851,018			-			-			-			1,851,018
Preferred stock dividends payable		166,472			-			-			-			166,472
(Increase) in operating assets:
Life insurance contract benefits receivable		-			-			9,083,817			-			9,083,817
Other assets		(21,796,633	)		(12,903,506	)		-			33,489,247			(1,210,892	)
Increase (decrease) in operating liabilities:
Due to related party		(71,975	)		17,802			(1,760,000	)		-			(1,814,173	)
Accounts payable and other accrued expenses		1,458,476			130,596			(2,364,285	)		-			(775,213	)
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(29,955,625	)		(15,867,221	)		2,802,552			33,489,247			(9,531,047	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance contracts		-			-			(24,373,714	)		-			(24,373,714	)
Carrying value of matured life insurance contracts		-			-			1,691,764			-			1,691,764
Investment in Secured MCA advances		-			-			(1,293,829	)					(1,293,829	)
Proceeds from Secured MCA advances		-			-			907,649			-			907,649
NET CASH FLOWS USED IN INVESTING ACTIVITIES		-			-			(23,068,130	)		-			(23,068,130	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net repayment of Senior Revolving Credit Facility		-			-			(3,000,000	)					(3,000,000	)
Payments for redemption of Series I Secured Notes		-			(485,350	)		-			-			(485,350	)
Proceeds from issuance of L Bonds		36,757,771			-			-			-			36,757,771
Payments for redemption and issuance of L Bonds		(11,753,782	)		-			-			-			(11,753,782	)
Proceeds from (increase in) restricted cash		-			(116,672	)		8,784,498			-			8,667,826
Issuance of member capital		-			18,951,362			14,537,885			(33,489,247	)		-
Issuance of common stock		166,125			-			-			-			166,125
Proceeds from issuance of preferred stock		9,401,118			-			71,555			-			9,472,673
Payments for issuance and redemption of preferred stock		(838,021	)		-			(7,340	)		-			(845,361	)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		33,733,211			18,349,340			20,386,598			(33,489,247	)		38,979,902

NET INCREASE IN CASH AND CASH EQUIVALENTS		3,777,586			2,482,119			121,020			-			6,380,725

CASH AND CASH EQUIVALENTS
BEGINNING OF THE PERIOD		6,274,035			4,340,365			384,225			-			10,998,625

END OF THE PERIOD	$	10,051,621		$	6,822,484		$	505,245		$	-		$	17,379,350

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidating Statements of Cash Flows (continued)

For the three months ended June 30, 2015	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated

CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(2,250,415	)	$	5,399,330		$	6,985,168		$	(12,384,498	)	$	(2,250,415	)
Adjustments to reconcile net loss to net cash flows from operating activities:
(Equity) of subsidiaries		(5,399,386	)		(6,985,112	)		-			12,384,498			-
Gain on life insurance contracts		-			-			(14,028,327	)		-			(14,028,327	)
Amortization of deferred financing and issuance costs		1,685,700			80,928			(1,259,602	)		-			507,026
Deferred income taxes		(930,470	)		-			-			-			(930,470	)
Preferred stock dividends payable		146,420			-			-			-			146,420
(Increase) in operating assets:
Life insurance contract benefits receivable		-			-			17,140,000			-			17,140,000
Other assets		(7,124,387	)		(5,236,604	)		-			12,135,615			(225,376	)
Increase (decrease) in operating liabilities:
Accounts payable and other accrued expenses		213,843			(509,444	)		(1,037,640	)		-			(1,333,241	)
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(13,658,695	)		(7,250,902	)		7,799,599			12,135,615			(974,383	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance contracts		-			-			(7,777,541	)		-			(7,777,541	)
Carrying value of matured life insurance contracts		-			-			132,388			-			132,388
NET CASH FLOWS USED IN INVESTING ACTIVITIES		-			-			(7,645,153	)		-			(7,645,153	)

CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Senior Revolving Credit Facility		-			-			(7,150,000	)					(7,150,000	)
Payments for redemption of Series I Secured Notes		-			(2,344,355	)		-			-			(2,344,355	)
Proceeds from issuance of L Bonds		22,538,059			-			-			-			22,538,059
Payments for redemption and issuance of L Bonds		(6,134,935	)		-			-			-			(6,134,935	)
Proceeds from (increase in) restricted cash		-			1,677,500			1,732,927			-			3,410,427
Issuance of member capital		-			6,872,932			5,262,683			(12,135,615	)		-
Issuance of common stock		582,000			-			-			-			582,000
Payments for issuance and redemption of preferred stock		(273,998	)		-			-			-			(273,998	)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		16,711,126			6,206,077			(154,390	)		(12,135,615	)		10,627,198

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		3,052,431			(1,044,825	)		56			-			2,007,662

CASH AND CASH EQUIVALENTS
BEGINNING OF THE PERIOD		34,762,097			1,278,378			150,052			-			36,190,527

END OF THE PERIOD	$	37,814,528		$	233,553		$	150,108		$	-		$	38,198,189

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(19) Concentrations

We purchase life insurance contracts written by life insurance companies having investment grade ratings by independent rating agencies. As a result, there may be concentrations of contracts with certain life insurance companies. The following summarizes the face value of insurance contracts with specific life insurance companies exceeding 10% of the total face value held by us.

Life insurance company	June 30,			December 31,
	2016			2015
AXA Equitable		15.1	%		14.0	%
Transamerica		10.8	%		*
John Hancock		10.0	%		12.7	%

* percentage does not exceed 10% of the total face value.

The following summarizes the number of insurance contracts insuring the lives of persons living in specific states exceeding 10% of the total face value held by us:

State of Residence	June 30,			December 31,
	2016			2015
California		21.8	%		25.2	%
Florida		19.6	%		19.2	%

(20) Subsequent events

Subsequent to June 30, 2016, one policy covering one individual matured. The life insurance contract benefit of this policy was $700,000 and we recorded realized gains of $452,000 on this policy.

Subsequent to June 30, 2016, we have issued approximately $19,009,000 in additional principal amount of L Bonds, and 7,336 shares of RPS for gross consideration of approximately $7,336,000.

Subsequent to June 30, 2016 , the Company has issued 500 shares of common stock to a vendor as a form of payment for services the vendor provided to the Company. Also, one of our Series A Preferred Stock holders converted 2,600 shares of preferred stock into 1,950 shares of common stock.

Effective September 1, 2016, we no longer anticipate renewing Series I Secured Notes.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report. This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management.

Risk Relating to Forward-Looking Statements

This report contains forward-looking statements that reflect our current expectations and projections about future events. Actual results could differ materially from those described in these forward-looking statements.

The words “believe,” “could,” “possibly,” “probably,” “anticipate,” “estimate,” “project,” “expect,” “may,” “will,” “should,” “seek,” “intend,” “plan” or “consider,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from such statements.

Such factors include, but are not limited to:

●	changes in the secondary market for life insurance;
●	our limited operating history;
●	the valuation of assets reflected on our financial statements;
●	the reliability of assumptions underlying our actuarial models;
●	our reliance on debt financing;
●	risks relating to the validity and enforceability of the life insurance contracts we purchase;
●	our reliance on information provided and obtained by third parties;
●	federal, state and FINRA regulatory matters;
●	competition in the secondary market of life insurance;
●	the relative illiquidity of life insurance contracts;
●	our ability to satisfy our debt obligations if we were to sell our entire portfolio of life insurance contracts;
●	life insurance company credit exposure;
●	cost-of-insurance (premium) increases on our life insurance contracts;
●	general economic outlook, including prevailing interest rates;
●	performance of our investments in life insurance contracts;
●	financing requirements;
●	risks associated with our recent entry into the merchant cash advance business;
●	litigation risks; and
●	restrictive covenants contained in borrowing agreements.

We caution you that the foregoing list of factors is not exhaustive. Forward-looking statements are only estimates and predictions, or statements of current intent. Actual results, outcomes or actions that we ultimately undertake, could differ materially from those anticipated in the forward-looking statements due to risks, uncertainties or actual events differing from the assumptions underlying these statements.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. This means that an “emerging growth company” can make an election to delay the adoption of certain accounting standards until those standards would apply to private companies. We have elected to delay such adoption of new or revised accounting standards and, as a result, we may not comply with new or revised accounting standards at the same time as other public reporting companies that are not “emerging growth companies.” This exemption will apply for a period of five years following our first sale of common equity securities under an effective registration statement or until we no longer qualify as an “emerging growth company” as defined under the JOBS Act, whichever is earlier.

Overview

GWG Holdings, Inc. is a specialty finance company and a leading financial purchaser of life insurance assets in the secondary market. We create opportunities for consumers owning life insurance to obtain significant value for their contracts as compared to the traditional options offered by insurance companies. We also create opportunities for investors to participate in alternative asset classes, such as life insurance, not correlated to traditional financial markets. In so doing, we enable investors to take advantage of financial opportunities dominated by banks prior to the 2008 credit crisis.

We seek to build a profitable and large portfolio of life insurance assets that are well diversified in terms of insurance companies and insureds. We believe that diversification is a key risk mitigation strategy to provide consistent cash flows and reliable investment returns from our portfolio of life insurance assets. To grow our portfolio and achieve the diversification we seek, we offer investors the opportunity to participate in the yield potentially generated by our portfolio of life insurance assets through a variety of financings and securities offerings. We chose to finance our business in this manner after the 2008 credit crisis, during which banks largely ceased financing alternative asset classes as a result of the regulatory response to the financial crisis. We believe we are well positioned to continue providing investors with yield participation opportunities from alternative asset classes once dominated by the banking sector.

Critical Accounting Policies

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with the Generally Accepted Accounting Principles (GAAP) requires us to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates, and assumptions on historical experience and on various other factors believed to be reasonable under the circumstances. Actual results could differ materially from these estimates. We evaluate our judgments, estimates, and assumptions on a regular basis and make changes accordingly. We believe that the judgments, estimates, and assumptions involved in valuing our investments in life insurance contracts have the greatest potential impact on our consolidated financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting contracts associated with these estimates as well as certain other critical accounting contracts.

Ownership of Life Insurance Contracts—Fair Value Option

We account for the purchase of life insurance contracts in accordance with ASC 325-30, Investments in Insurance Contracts, which requires us to use either the investment method or the fair value method. We have elected to account for all of our life insurance contracts using the fair value method.

The fair value of our life insurance contracts is determined as the net present value of the life insurance portfolio’s future expected cash flows (contract benefits received and required premium payments) that incorporates current life expectancy estimates and discount rate assumptions.

We initially record our purchase of life insurance contracts at the transaction price, which is the amount paid for the contract, inclusive of all external fees and costs associated with the acquisition. The fair value of our investment in our portfolio of insurance contracts is evaluated at the end of each subsequent reporting period. Changes in the fair value of our portfolio are based on periodic evaluations and are recorded in our consolidated and combined statement of operations as changes in fair value of life insurance contracts.

Fair Value Components – Medical Underwriting

Unobservable inputs, as discussed below, are a critical component of our estimate for the fair value of our investments in life insurance contracts. We currently use a probabilistic method of estimating and valuing the projected cash flows of our portfolio, which we believe to be the preferred and most prevalent valuation method in the industry. In this regard, the most significant assumptions we make are the life expectancy estimates of the insureds and the discount rate applied to the expected future cash flows to be derived from our portfolio.

The Society of Actuaries recently finalized the 2015 Valuation Basic Table (“2015 VBT”). The 2015 VBT is based on a much larger dataset of insured lives, face amount of contracts and more current information compared to the dataset underlying the 2008 Valuation Basic Table. The new 2015 VBT dataset includes 266 million contracts compared to the 2008 VBT dataset of 75 million. The experience data in the 2015 VBT dataset includes 2.55 million claims on contracts from 51 insurance carriers. Life expectancies implied by the 2015 VBT are generally longer for male and female nonsmokers between the ages of 65 and 80, while smokers and insureds of both genders over the age of 85 have significantly lower life expectancies. We adopted the 2015 VBT in our valuation process in June 2016, which increased our fair value from $425 million to $432 million as of June 30, 2016 (see Note 4 for more information about our valuation process). The contracts receiving the largest increase in value were the contracts on the oldest insured lives in our portfolio.

In September 2015, Equitable Life Insurance Company (“AXA”) announced pending cost-of-insurance rate increases for certain universal life contracts which were effected on March 1, 2016. We identified 14 affected contracts in our portfolio. In April 2016, we received updated contract illustrations from AXA and calculated the change in the fair value of our portfolio resulting from the increased premiums to be a reduction of $2,395,000. This reduction was reflected in our balance sheet as of March 31, 2016. Our review of AXA’s cost-of-insurance rate increases is complete as of June 30, 2016. We are aware of pending cost of insurance increases affecting approximately 3.8% of our portfolio by face amount of benefits. We will adjust our premium schedules and resultant valuation when we have received the required information from the related carriers.

Fair Value Components – Required Premium Payments

We must pay the premiums on the life insurance contracts within our portfolio in order to collect the contract benefit. The same probabilistic model and methodologies used to generate expected cash inflows from the life insurance contract benefits over the expected life of the insured are used to estimate cash outflows due to required premium payments. Premiums paid are offset against revenue in the applicable reporting period.

Fair Value Components – Discount Rate

A discount rate is used to calculate the net present value of the expected cash flows. The discount rate represents the internal rate of return we expect to earn on investments in a contract or in the portfolio as a whole at the stated fair value. The discount rate used to calculate fair value of our portfolio incorporates the guidance provided by ASC 820, Fair Value Measurements and Disclosures.

The table below provides the discount rate used to estimate the fair value of our portfolio of life insurance contracts for the period ending:

	June 30, 2016		December 31, 2015
	11.05%		11.09%

The change in the discount rate incorporates current information about discount rates applied by other reporting companies owning portfolios of life insurance contracts, discount rates observed by us in the life insurance secondary market, market interest rates, credit exposure to the issuing insurance companies, and our estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio of life insurance contracts. Because we use the discount rate to arrive at the fair value of our portfolio, the rate we choose necessarily assumes an orderly and arms-length transaction (i.e., a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction). The carrying value of contracts acquired during each quarterly reporting period are adjusted to their current fair value using the fair value discount rate applied to the entire portfolio as of that reporting date.

We engaged Model Actuarial Pricing Systems (“MAPS”), to prepare a calculation of our life insurance portfolio. MAPS owns and maintains the portfolio pricing software we use. MAPS processed contract data, future premium data, life expectancy estimate data, and other actuarial information to calculate a net present value for our portfolio using the specified discount rate of 11.05%. MAPS independently calculated the net present value of our portfolio of 547 contracts to be $431.8 million and furnished us with a letter documenting its calculation. A copy of such letter is filed as Exhibit 99.1 to this report.

Deferred Income Taxes

Under ASC 740, Income Taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established for deferred tax assets that are not considered more likely than not to be realized. Realization of deferred tax assets depends upon having sufficient past or future taxable income in periods to which the deductible temporary differences are expected to be recovered or within any applicable carryback or carryforward periods.

We provided a valuation allowance against the deferred tax asset related to a note receivable, which was charged-off for financial reporting purposes, because we believe that, when realized for tax purposes, it will result in a capital loss that will not be utilized because we have no expectation of generating a capital gain within the applicable carryforward period. Therefore, we do not believe that it is “more likely than not” that the deferred tax asset will be realized.

We also provided a valuation allowance against the deferred tax asset related to a tax basis capital loss generated with respect to our settlement and subsequent disposal of an earlier investment in Athena Structured Funds PLC. As we have no expectation of generating capital gains with the applicable carryforward period, we do not believe that it is “more likely than not” that the deferred asset will be realized.

After assessing the realization of the net deferred tax assets, we believe that it is “more likely than not” that we will be able to realize all of our deferred tax assets other than those which are expected to result in a capital loss.

Deferred Financing and Issuance Costs

Financing costs incurred under the revolving senior credit facility were capitalized and are amortized using the straight-line method over the term of the revolving senior credit facility. The Series I Secured Note obligations 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 L Bonds 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, was reported net of issuance costs, sales commissions, including the fair value of warrants issued, and other direct expenses, which were amortized using the interest method as interest expense over a three-year redemption period. As of December 31, 2015, these costs have been fully amortized. Selling and issuance costs of Redeemable Preferred Stock and MCA Preferred Stock, described in Notes 10 and 11, are netted against additional paid-in-capital.

Principal Revenue and Expense Items

We earn revenues from the following three primary sources.

●

Life Insurance Contract Benefits Realized. We recognize the difference between the face value of the contract benefits and carrying values when an insured’s mortality event occurs and determine that settlement and collection of the contract benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. We generally collect the face value of the life insurance contract benefit from the insurance company within 45 days of recognizing the revenue.

●	Change in Fair Value of Life Insurance Contracts. We value our portfolio investments for each reporting period in accordance with the fair value principles discussed herein, which includes the expected payment of premiums for future periods.

●	Sale of a Life Insurance Contract. In the event of a sale of a contract, we recognize gain or loss as the difference between the sale price and the carrying value of the contract on the date of the receipt of payment on such sale.

Our main components of expense are summarized below.

●

Selling, General and Administrative Expenses. We recognize and record expenses incurred in our business operations, including operations related to the purchasing and servicing of life insurance contracts. These expenses include salaries and benefits, sales, marketing, occupancy and other expenditures.

●

Interest and Dividends. We recognize and record interest expenses associated with the costs of financing our life insurance portfolio for the current period. These expenses include interest paid to our senior lender under our revolving senior credit facility, interest paid on our L Bonds and other outstanding indebtedness such as our Series I Secured Notes, and dividends on our Series A Preferred Stock and our Redeemable Preferred Stock. When we issue debt, we amortize the issuance costs associated with such indebtedness over the outstanding term of the financing, and classify it as interest expense.

Results of Operations — Three and Six Months Ended June 30, 2016 Compared to the Same Periods in 2015

The following is our analysis of the results of operations for the periods indicated below. This analysis should be read in conjunction with our consolidated financial statements and related notes.

Revenue.

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Revenue recognized from the receipt of contract benefits	$	8,137,000	$	618,000	$	22,765,000	$	25,632,000
Revenue (expense) recognized from the change in fair value of life insurance contracts, net of premiums and carrying costs (1)		12,246,000		7,856,000		15,332,000		(375,000	)
Gain on life insurance contracts, net	$	20,383,000	$	8,474,000	$	38,097,000	$	25,257,000
Number of contracts matured		6		1		12		7
The change in fair value related to new contracts acquired	$	9,822,000	$	4,511,000	$	17,841,000	$	5,123,000

(1)

The discount rate applied to estimate the fair value of the portfolio of life insurance contracts we own was 11.05% as of June 30, 2016, compared to 11.19% as of June 30, 2015. The carrying value of contracts acquired during each quarterly reporting period is adjusted to current fair value using the fair value discount rate applied to the entire portfolio as of that reporting date (see Note 4 to our consolidated financial statements).

Expenses.

	Three Months Ended June 30,						Six Months Ended June 30,
	2016		2015		Increase		2016		2015		Increase
Employee compensation and benefits (1)	$	3,071,000	$	2,145,000	$	926,000	$	5,538,000	$	3,873,000	$	1,665,000
Interest expense (including amortization of deferred financing costs and preferred stock dividends) (2)		10,366,000		7,322,000		3,044,000		20,026,000		14,499,000		5,527,000
Legal and professional expenses (3)		1,304,000		643,000		661,000		2,510,000		1,166,000		1,344,000
Other expenses (4)		2,333,000		1,881,000		452,000		4,745,000		3,415,000		1,330,000
Total expenses	$	17,074,000	$	11,991,000	$	5,083,000	$	32,819,000	$	22,953,000	$	9,866,000

(1)	We hired additional members to our sales, marketing, legal and information technology teams. At the end of 2015 we employed approximately 50 employees, and at June 30, 2016 we employed approximately 68 employees.
(2)	The increase in the current period was due to the increase in our average debt outstanding.
(3)	Increase is due to SEC filings and other costs related to securities offerings and on-going compliance.
(4)	Increase is due to increased public relations, sales and marketing costs associated with growing and servicing our network of independent financial advisors.

Income Tax Expense.

The following table reconciles our income tax expense at the statutory federal tax rate to our actual income tax expense:

	Three Months Ended									Six Months Ended
	June 30, 2016				June 30, 2015					June 30, 2016				June 30, 2015
Statutory federal income tax (benefit)	$	1,316,000	34.0	%	$	(1,167,000	)	34.0	%	$	2,050,000	34.0	%	$	831,000	34.0	%
State income taxes (benefit), net of federal benefit		291,000	7.5	%		(187,000	)	5.5	%		466,000	7.7	%		229,000	9.4	%
Series A preferred stock dividends		204,000	5.3	%		168,000		(4.9	)%		378,000	6.3	%		351,000	14.4	%
Other permanent differences		11,000	0.3	%		10,000		(0.3	)%		13,000	0.2	%		22,000	0.8	%
Total income tax expense (benefit)	$	1,822,000	47.1	%	$	(1,176,000	)	34.3	%	$	2,907,000	48.2	%	$	1,433,000	58.6	%

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 contracts and revenue recognition with respect to the fair value of life insurance portfolio.

The primary permanent difference between our effective tax rate and the statutory federal rate are the accrual of preferred stock dividend expense, state income taxes, and other non-deductible expenses. The dividends charged to interest expense were $0.6 million and $0.5 million during the three months ended June 30, 2016 and 2015, respectively, and $1.1 million and $1.0 million during the six months ended June 30, 2016 and 2015, respectively.

Liquidity and Capital Resources

We finance our business through a combination of life insurance contract benefit receipts, origination fees, equity offerings, debt offerings, and a senior revolving credit facility. We have used our debt offerings and a senior revolving credit facility primarily for contract acquisition, contract servicing, and portfolio-related financing expenditures including paying principal and interest.

As of June 30, 2016 and December 31, 2015, we had approximately $47.2 million and $74.4 million, respectively, in combined available cash and available borrowing base surplus capacity under our revolving credit facility for the purpose of purchasing additional life insurance contracts, paying premiums on existing contracts, paying portfolio servicing expenses, and paying principal and interest on our outstanding financing obligations.

Debt Financings Summary

We had the following outstanding debt balances as of June 30, 2016:

Issuer/Borrower	Principal Amount Outstanding		Weighted Average Interest Rate
GWG Holdings, Inc. – L Bonds	$	334,714,000		7.17	%
GWG Life, LLC – Series I Secured Notes		18,283,000		8.62	%
GWG DLP Funding II, LLC – Revolving credit facility		82,011,000		5.48	%
Total	$	435,008,000		6.91	%

Our total revolving senior credit facility and other indebtedness balance as of June 30, 2016 and December 31, 2015 was $435.0 million and $370.8 million, respectively. At June 30, 2016, the total outstanding face amount under our Series I Secured Notes outstanding was $18.3 million, less unamortized selling costs of $0.3 million, resulting in a carrying amount of $18.0 million. At December 31, 2015, the total outstanding face amount under our Series I Secured Notes outstanding was $23.6 million, less unamortized selling costs of $0.3 million, resulting in a carrying amount of $23.3 million. At June 30, 2016, the total outstanding face amount of L Bonds was $334.7 million plus $2.6 million of subscriptions in process, less unamortized selling costs of $10.0 million resulting in a carrying amount of $327.3 million. At December 31, 2015, the total outstanding face amount of L Bonds was $282.2 million plus $3.0 million of subscriptions in process, less unamortized selling costs of $8.2 million resulting in a carrying amount of $277.0 million.

The weighted-average interest rate of our outstanding Series I Secured Notes as of June 30, 2016 and December 31, 2015 was 8.62% and 8.47%, respectively, and the weighted-average maturity at those dates was 1.45 and 1.06 years, respectively. The Series I Secured Notes have renewal features. Since we first issued our Series I Secured Notes, we experienced $162.6 million in maturities, of which $123.0 million renewed for an additional term as of June 30, 2016. This provided us with an aggregate renewal rate of approximately 76% for investments in these securities.

The weighted-average interest rate of our outstanding L Bonds as of June 30, 2016 and December 31, 2015 was 7.17% and 7.18%, respectively, and the weighted-average maturity at those dates was 2.01 and 2.02 years, respectively. Our L Bonds have renewal features. As of June 30, 2016, $217.1 million L Bonds matured, of which $143.3 million renewed for an additional term. The aggregate renewal rate is approximately 66% for investments in these securities.

Future contractual maturities of Series I Secured Notes and L Bonds at December 31, 2016 are:

Years Ending December 31,	Series I Secured Notes		L Bonds		Total
2016	$	3,574,000	$	58,270,000	$	61,844,000
2017		8,758,000		85,052,000		93,810,000
2018		2,401,000		87,168,000		89,569,000
2019		869,000		50,526,000		51,395,000
2020		1,766,000		19,457,000		21,223,000
Thereafter		915,000		34,241,000		35,156,000
	$	18,283,000	$	334,714,000	$	352,997,000

The L Bonds and Series I Secured Notes are secured by all of our assets, and are subordinate to our revolving senior credit facility with Autobahn/DZ Bank. The L Bonds and Series I Secured Notes are pari passu with respect to a security interest in our assets pursuant to an intercreditor agreement (see Notes 6 and 7 to our consolidated financial statements).

We maintain a $105 million revolving senior credit facility with Autobahn/DZ Bank through GWG Life’s wholly owned subsidiaries DLP II and DLP III. The revolving senior credit facility is used to pay the premium expenses related to our portfolio of life insurance contracts. As of June 30, 2016 and December 31, 2015, we had approximately $82.0 million and $65.0 million, respectively, outstanding under the revolving senior credit facility, and maintained an available borrowing base surplus of $23.0 million and $40.0 million, respectively. Effective May 11, 2015, we amended and restated our senior credit facility to reduce the interest cost and extend the term of the facility to June 2018 (see Note 5 to our consolidated financial statements).

Capital expenditures have historically not been material and we do not anticipate making material capital expenditures in 2016 or beyond.

Corporate Financing History

In November 2009, our wholly owned subsidiary GWG Life offered Series I Secured Notes in a private placement to accredited investors only. This offering was closed in November 2011. As of June 30, 2016 and December 31, 2015, we had approximately $18.3 million and $23.6 million, respectively, in principal amount of Series I Secured Notes outstanding.

In September 2011, we concluded a private placement offering of Series A Preferred Stock, having received an aggregate $24.6 million in subscriptions for our Series A Preferred Stock. These subscriptions consisted of $14.0 million in conversions of outstanding Series I Secured Notes and $10.6 million of new investments. As of June 30, 2016 and December 31, 2015, respectively, we had approximately $20.4 million and $20.8 million of Series A Preferred Stock outstanding.

In January 2012, we began publicly offering up to $250.0 million in debt securities (initially named “Renewable Secured Debentures” and subsequently renamed “L Bonds”) that was completed January 2015.

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 deduction of underwriting commissions, discounts and expense reimbursements.

In January 2015, we began publicly offering up to $1.0 billion of L Bonds as a follow-on offering to our earlier $250.0 million public debt offering. Through June 30, 2016, the total amount of these L Bonds sold, including renewals, was $551.9 million. As of June 30, 2016 and December 31, 2015, respectively, we had approximately $334.7 million and $282.2 million, respectively, in principal amount of L Bonds outstanding.

In October 2015, we began publicly offering up to 100,000 shares of our Redeemable Preferred Stock at a per-share price of $1,000. As of June 30, 2016 we had issued approximately $12.2 million of Redeemable Preferred Stock.

Effective February 4, 2016, GWG MCA began to offer for sale up to of 2,000,000 shares of 9% Preferred Stock at an offering price of $10 per share in a private placement. As of June 30, 2016, GWG MCA had issued approximately $72,000 of MCA Preferred Stock.

Portfolio Assets and Secured Indebtedness

At June 30, 2016, the fair value of our investments in life insurance contracts of $431.8 million plus our cash balance of $17.4 million, our restricted cash balance of $11.2 million and our life insurance contract benefits receivable of $6.8 million, totaled $467.2 million, representing an excess of portfolio assets over secured indebtedness of $32.2 million. At December 31, 2015, the fair value of our investments in life insurance contracts of $356.6 million plus our cash balance of $34.4 million and our restricted cash balance of $2.3 million, totaled $393.3 million, representing an excess of portfolio assets over secured indebtedness of $22.5 million. The L Bonds and Series I Secured Notes are secured by all of our assets and are subordinate to our revolving senior credit facility with Autobahn/DZ Bank. The L Bonds and Series I Secured Notes are pari passu with respect to a security interest in our asset pursuant to an intercreditor agreement.

The following forward-looking table seeks to illustrate the impact of the sale of our portfolio of life insurance assets at various discount rates in order to satisfy our debt obligations as of June 30, 2016. In all cases, the sale of the life insurance assets owned by DLP III will be used first to satisfy all amounts owing under the revolving senior credit facility with Autobahn/DZ Bank. The net sale proceeds remaining after satisfying all obligations under the revolving senior credit facility would be applied to L Bonds and Series I Secured Notes on a pari passu basis.

Portfolio Discount Rate	10%		11%		12%		13%			14%
Value of portfolio	$	454,883,000	$	432,872,000	$	412,635,000	$	393,947,000		$	376,654,000
Cash, cash equivalents and life insurance contract benefits receivable		35,369,000		35,369,000		35,369,000		35,369,000			35,369,000
Total assets		490,202,000		468,241,000		448,004,000		429,316,000			412,023,000
Revolving senior credit facility Autobahn/DZ Bank		82,011,000		82,011,000		82,011,000		82,011,000			82,011,000
Net after revolving senior credit facility		408,191,000		386,230,000		365,993,000		347,305,000			330,012,000
Series I Secured Notes and L Bonds		352,997,000		352,997,000		352,997,000		352,997,000			352,997,000
Net after Series I Secured Notes and L Bonds		55,194,000		33,233,000		12,996,000		(5,692,000	)		(22,985,000	)
Impairment to Series I Secured Notes and L Bonds		No impairment		No impairment		No impairment		Impairment			Impairment

The table illustrates that our ability to fully satisfy amounts owing under the L Bonds and Series I Secured Notes would likely be impaired upon the sale of all of our life insurance assets at a price equivalent to a discount rate of approximately 12.69% or higher. At December 31, 2015, the impairment occurred at a discount rate of approximately 12.58% or higher. The discount rates used to calculate the fair value of our portfolio were 11.05% and 11.09% as of June 30, 2016 and December 31, 2015, respectively.

The table does not include any allowance for transactional fees and expenses associated with a portfolio sale (which expenses and fees could be substantial), and is provided to demonstrate how various discount rates used to value our portfolio could affect our ability to satisfy amounts owing under our debt obligations in light of our senior secured lender’s right to priority payments. You should read the above table in conjunction with the information contained in other sections of this report, including our discussion of discount rates included under the “Critical Accounting Policies — Fair Value Components – Discount Rate” caption above. This discussion and analysis is based on the beliefs of our management, as well as significant assumptions made by, and information currently available to, our management.

Cash Flows

The payment of premiums and servicing costs to maintain life insurance contracts represents our most significant requirement for cash disbursement. When a contract is purchased, we are able to calculate the minimum premium payments required to maintain the contract in-force. As the insured ages, premium payments increase (see Note 3 to our consolidated financial statements). Nevertheless, the probability of actually needing to pay the premiums decreases as the probability of mortality increases. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling. Beyond premiums, we incur contract servicing costs, including annual trustee, tracking costs, and debt servicing costs, including principal and interest payments, all of which are excluded from our internal rate of return calculations. Until we receive a stable amount of proceeds from the contract benefits, we intend to pay these costs from our senior credit facility, when permitted, and through the issuance of debt securities, including the L Bonds, and equity securities including our Redeemable Preferred Stock.

The amount of payments for anticipated premiums and servicing costs (excluding debt servicing costs) that we will be required to make over the next five years to maintain our current portfolio, assuming no mortalities, is set forth in the table below.

Years Ending December 31,	Premiums		Servicing		Premiums and Servicing Fees
Six months ending December 31, 2016	$	18,708,000	$	656,000	$	19,364,000
2017		39,266,000		656,000		39,922,000
2018		43,010,000		656,000		43,666,000
2019		48,131,000		656,000		48,787,000
2020		53,558,000		656,000		54,214,000
2021		59,829,000		656,000		60,485,000
	$	262,502,000	$	3,936,000	$	266,438,000

For the quarter-end dates set forth below, the following table illustrates the total amount of face value of contract benefits owned, and the trailing 12 months of life insurance contract benefits collected and premiums paid on our portfolio. The trailing 12-month benefits/premium coverage ratio indicates the ratio of contract benefits received to premiums paid over the trailing 12-month period from our portfolio of life insurance contracts.

Quarter End Date	Portfolio Face Amount		12-Month Trailing Benefits Collected		12-Month Trailing Premiums Paid		12-Month Trailing Benefits/Premium Coverage Ratio
March 31, 2012	$	482,455,000	$	4,203,000	$	14,977,000		28.1	%
June 30, 2012		489,255,000		8,703,000		15,412,000		56.5	%
September 30, 2012		515,661,000		7,833,000		15,837,000		49.5	%
December 31, 2012		572,245,000		7,350,000		16,597,000		44.3	%
March 31, 2013		639,755,000		11,350,000		18,044,000		62.9	%
June 30, 2013		650,655,000		13,450,000		19,182,000		70.1	%
September 30, 2013		705,069,000		18,450,000		20,279,000		91.0	%
December 31, 2013		740,648,000		16,600,000		21,733,000		76.4	%
March 31, 2014		771,940,000		12,600,000		21,930,000		57.5	%
June 30, 2014		784,652,000		6,300,000		22,598,000		27.9	%
September 30, 2014		787,964,000		4,300,000		23,121,000		18.6	%
December 31, 2014		779,099,000		18,050,000		23,265,000		77.6	%
March 31, 2015		754,942,000		46,675,000		23,786,000		196.2	%
June 30, 2015		806,274,000		47,125,000		24,348,000		193.6	%
September 30, 2015		878,882,000		44,482,000		25,313,000		175.7	%
December 31, 2015		944,844,000		31,232,000		26,650,000		117.2	%
March 31, 2016		1,027,821,000		21,845,000		28,771,000		75.9	%