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, 2018

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

For the transition period from _________ to ________

Commission File Number: None

GWG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

220 South Sixth Street, Suite 1200

Minneapolis, MN 55402

(Address of principal executive offices, including zip code)

(612) 746-1944

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

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

GWG HOLDINGS, INC.

Index to Form 10-Q

for the Quarter Ended June 30, 2018

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2018, and December 31, 2017	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017	2
	Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2018 and 2017	3
	Consolidated Statement of Changes in Stockholders’ Equity	5
	Notes to Condensed Consolidated Financial Statements	6
Item 1A.	Risk Factors	29
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 4.	Controls and Procedures	48

PART II. OTHER INFORMATION
Item 6.	Exhibits	49

SIGNATURES		50

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2018			December 31, 2017
	(unaudited)
A S S E T S
Cash and cash equivalents	$	124,444,804		$	114,421,491
Restricted cash		6,651,309			28,349,685
Investment in life insurance policies, at fair value		726,063,244			650,527,353
Life insurance policy benefits receivable		27,035,000			16,658,761
Other assets		10,841,567			8,898,884
TOTAL ASSETS	$	895,035,924		$	818,856,174

L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y
LIABILITIES
Senior credit facility with LNV Corporation	$	180,630,553		$	212,238,192
L Bonds		518,788,942			447,393,568
Accounts payable		2,626,283			6,394,439
Interest and dividends payable		16,936,725			15,427,509
Other accrued expenses		4,031,070			3,730,723
TOTAL LIABILITIES		723,013,573			685,184,431

STOCKHOLDERS’ EQUITY

REDEEMABLE PREFERRED STOCK
(par value $0.001; shares authorized 100,000; shares outstanding 98,095 and 98,611; liquidation preference of $98,667,000 and $99,186,000 as of June 30, 2018 and December 31, 2017, respectively)		88,997,278			92,840,243
SERIES 2 REDEEMABLE PREFERRED STOCK
(par value $0.001; shares authorized 150,000; shares outstanding 148,705 and 88,709; liquidation preference of $149,573,000 and $89,208,000 as of June 30, 2018 and December 31, 2017, respectively)		131,704,423			80,275,204
COMMON STOCK
(par value $0.001: shares authorized 210,000,000; shares issued and outstanding 5,813,555 as of both June 30, 2018 and December 31, 2017)		5,813			5,813
Additional paid-in capital		-			-
Accumulated deficit		(48,685,163	)		(39,449,517	)
TOTAL STOCKHOLDERS’ EQUITY		172,022,351			133,671,743

TOTAL LIABILITIES & EQUITY	$	895,035,924		$	818,856,174

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
REVENUE
Gain on life insurance policies, net	$	23,339,750		$	11,296,266		$	37,208,495		$	30,696,086
Interest and other income		975,198			371,320			1,648,125			1,059,845
TOTAL REVENUE		24,314,948			11,667,586			38,856,620			31,755,931

EXPENSES
Interest expense		17,147,850			12,246,025			33,211,187			25,490,241
Employee compensation and benefits		3,235,699			3,741,299			6,978,368			6,904,360
Legal and professional fees		1,155,728			1,330,589			2,329,357			2,276,937
Other expenses		2,832,777			3,761,098			5,573,354			6,541,420
TOTAL EXPENSES		24,372,054			21,079,011			48,092,266			41,212,958

INCOME (LOSS) BEFORE INCOME TAXES		(57,106	)		(9,411,425	)		(9,235,646	)		(9,457,027	)
INCOME TAX EXPENSE (BENEFIT)		-			(3,717,174	)		-			(3,717,674	)

NET INCOME (LOSS)		(57,106	)		(5,694,251	)		(9,235,646	)		(5,739,353	)

Preferred stock dividends		4,338,487			2,031,097			8,042,971			3,898,857
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(4,395,593	)	$	(7,725,348	)	$	(17,278,617	)	$	(9,638,210	)
NET INCOME (LOSS) PER SHARE
Basic	$	(0.76	)	$	(1.34	)	$	(2.97	)	$	(1.69	)
Diluted	$	(0.76	)	$	(1.34	)	$	(2.97	)	$	(1.69	)

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		5,813,555			5,777,724			5,813,555			5,710,909
Diluted		5,813,555			5,777,724			5,813,555			5,710,909

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(57,106	)	$	(5,694,251	)	$	(9,235,646	)	$	(5,739,353	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Change in fair value of life insurance policies		(14,573,175	)		(15,235,502	)		(31,218,769	)		(29,119,335	)
Amortization of deferred financing and issuance costs		2,402,773			1,497,948			4,665,961			4,164,151
Deferred income taxes		-			(3,717,174	)					(3,717,674	)
(Increase) decrease in operating assets:
Life insurance policy benefits receivable		(14,732,270	)		2,005,000			(10,376,239	)		(1,625,000	)
Other assets		(1,732,765	)		55,656			(1,809,206	)		2,252,361
Increase (decrease) in operating liabilities:
Accounts payable and other accrued expenses		542,090			1,400,844			(1,003,118	)		2,947,050
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(28,150,453	)		(19,687,479	)		(48,977,017	)		(30,837,800	)

CASH FLOWS FROM INVESTING ACTIVITIES
Investment in life insurance policies		(30,248,939	)		(19,432,338	)		(55,548,764	)		(42,121,671	)
Carrying value of matured life insurance policies		6,148,349			3,014,834			11,231,643			5,383,808
NET CASH FLOWS USED IN INVESTING ACTIVITIES		(24,100,590	)		(16,417,504	)		(44,317,121	)		(36,737,863	)

CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on (repayments of) senior debt		(29,080,815	)		(3,845,037	)		(32,135,150	)		(7,099,537	)
Payments for issuance of senior debt		-			(1,076,118	)		-			(1,190,412	)
Payments for redemption of Series I Secured Notes		-			(4,348,372	)		-			(9,798,261	)
Proceeds from issuance of L Bonds		60,536,446			31,875,811			97,197,545			56,744,470
Payments for issuance and redemption of L Bonds		(13,710,821	)		(15,025,566	)		(25,956,269	)		(39,197,163	)
Issuance (repurchase) of common stock		-			4			-			(1,603,556	)
Proceeds from issuance of preferred stock		14,372,959			34,301,747			56,238,128			61,480,941
Payments for issuance of preferred stock		(984,599	)		(1,945,618	)		(4,142,294	)		(3,963,105	)
Payments for redemption of preferred stock		(1,212,690	)		(1,372,593	)		(1,539,914	)		(1,759,332	)
Preferred stock dividends		(4,338,487	)		(2,031,097	)		(8,042,971	)		(3,898,857	)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		25,581,993			36,533,161			81,619,075			49,715,188

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(26,669,050	)		428,178			(11,675,063	)		(17,860,475	)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
BEGINNING OF PERIOD		157,765,163			98,024,925			142,771,176			116,313,578
END OF PERIOD	$	131,096,113		$	98,453,103		$	131,096,113		$	98,453,103

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED

(unaudited)

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited)

	Preferred Stock			Preferred			Common			Common Stock			Additional Paid-in			Accumulated			Total
	Shares			Stock			Shares			(par)			Capital			Deficit			Equity
Balance, December 31, 2016		2,699,704		$	78,726,297			5,980,190		$	5,980		$	7,383,515		$	(18,817,294	)	$	67,298,498

Net income (loss)		-			-			-			-			-			(20,632,223	)		(20,632,223	)

Issuance of common stock		-			-			33,810			33			320,970			-			321,003

Redemption of common stock		-			-			(200,445	)		(200	)		(1,603,360	)		-			(1,603,560	)

Issuance of Series A preferred stock		71,237			498,659			-			-			-			-			498,659

Redemption of Series A preferred stock		(2,711,916	)		(20,199,792	)		-			-			-			-			(20,199,792	)

Issuance of redeemable preferred stock		129,622			122,933,106			-			-			(2,338,457	)		-			120,594,649

Redemption of redeemable preferred stock		(1,328	)		(1,327,776	)		-			-			-			-			(1,327,776	)

Preferred stock dividends		-			(8,925,807	)		-			-			(3,776,534	)		-			(12,702,341	)

Stock-based compensation		-			1,410,760			-			-			13,866			-			1,424,626
Balance, December 31, 2017		187,319		$	173,115,447			5,813,555		$	5,813		$	-		$	(39,449,517	)	$	133,671,743

Net income (loss)		-			-			-			-			-			(9,235,646	)		(9,235,646	)

Issuance of redeemable preferred stock		61,021			56,878,238			-			-			-			-			56,878,238

Redemption of redeemable preferred stock		(1,540	)		(1,539,914	)		-			-			-			-			(1,539,914	)

Preferred stock dividends		-			(8,042,971	)		-			-						-			(8,042,971	)

Stock-based compensation		-			290,901			-			-			-			-			290,901
Balance, June 30, 2018		246,800		$	220,701,701			5,813,555		$	5,813		$	-		$	(48,685,163	)	$	172,022,351

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

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

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

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

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

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

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

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

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

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(2) Restrictions on Cash

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

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

(3) Investment in Life Insurance Policies

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

Portfolio Information

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

Life Insurance Portfolio Summary

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

*	Averages presented in the table are weighted averages.

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

Reconciliation of gain on life insurance policies:

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

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

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

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

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

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

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(4) Fair Value Definition and Hierarchy

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

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

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

Level 1 —

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

Level 2 —

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

Level 3 —

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

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

Level 3 Valuation Process

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

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

(*)

Weighted-average by face amount of policy benefits

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

Change in Fair Value of the Investment in Life Insurance Policies

	Change in Life Expectancy Estimates
	minus 8 months		minus 4 months		plus 4 months			plus 8 months

June 30, 2018	$	96,387,000	$	47,837,000	$	(47,457,000	)	$	(94,194,000	)
December 31, 2017	$	86,391,000	$	42,886,000	$	(42,481,000	)	$	(84,238,000	)

	Change in Discount Rate
	minus 2%		minus 1%		plus 1%			plus 2%

June 30, 2018	$	75,047,000	$	35,898,000	$	(33,001,000	)	$	(63,412,000	)
December 31, 2017	$	68,117,000	$	32,587,000	$	(29,964,000	)	$	(57,583,000	)

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Other Fair Value Considerations

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

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

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

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

(5) Credit Facility — Autobahn Funding Company LLC

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

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

(6) Credit Facility — LNV Corporation

On September 27, 2017, we entered into an amended and restated senior credit facility with LNV Corporation as lender through our subsidiary GWG DLP Funding IV, LLC (“DLP IV”). The Amended and Restated Loan Agreement governing the facility makes available a total of up to $300,000,000 in credit with a maturity date of September 27, 2029. Additional advances are available under the Amended and Restated Loan Agreement at the LIBOR rate as defined in the Amended and Restated Loan Agreement. Advances are available as the result of additional borrowing base capacity, created as the premiums and servicing costs of pledged life insurance policies become due. Interest will accrue on amounts borrowed under the Amended and Restated Loan Agreement at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (A) the greater of 12-month LIBOR or the federal funds rate (as defined in the agreement) plus one-half of one percent per annum, plus (B) 7.50% per annum. The effective rate at June 30, 2018 was 10.19%. Interest payments are made on a quarterly basis.

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(7) Series I Secured Notes

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

(8) L Bonds

Our L Bonds are legal obligations of GWG Holdings. Obligations under the L Bonds are secured by the assets of GWG Holdings and by GWG Life, as a guarantor, and are subordinate to the obligations under our senior credit facility (see Note 6). We began publicly offering and selling L Bonds in January 2012 under the name “Renewable Secured Debentures”. These debt securities were re-named “L Bonds” in January 2015. L Bonds are publicly offered and sold on a continuous basis under a registration statement permitting us to sell up to $1.0 billion in principal amount of L Bonds through January 2018. On December 1, 2017, an additional public offering was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds on a continuous basis. The new offering is a follow-on to the previous L Bond offering and contains the same terms and features. We are party to an indenture governing the L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor, and Bank of Utah serves as indenture trustee. On March 27, 2018 GWG L Bond holders approved Amendment No.1 to the Amended and Restated Indenture with Bank of Utah. This amendment expands the definition of Total Coverage to include, without duplication, the value of all of our other assets as reflected on our most recently available balance sheet prepared in accordance with GAAP. The Indenture contains certain financial and non-financial covenants, and we were in compliance with these covenants at June 30, 2018 and December 31, 2017.

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

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

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(9) Series A Convertible Preferred Stock

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

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

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

(10) Redeemable Preferred Stock

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

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

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

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

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

(11) Series 2 Redeemable Preferred Stock

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

(12) Income Taxes

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

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2018			2017			2018			2017

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

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

	As of June 30, 2018			As of December 31, 2017
Deferred tax assets:
Note receivable from related party	$	1,437,000		$	1,437,000
Net operating loss carryforwards		9,787,000			9,995,000
Other assets		1,487,000			1,724,000
Subtotal		12,711,000			13,156,000
Valuation allowance		(8,954,000	)		(6,386,000	)
Deferred tax assets		3,757,000			6,770,000

Deferred tax liabilities:
Investment in life insurance policies		(3,651,000	)		(6,630,000	)
Other liabilities		(106,000	)		(140,000	)
Net deferred tax asset(liability)	$	-		$	-

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

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

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

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

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

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

(13) Common Stock

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

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

(14) Stock Incentive Plan

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Stock Options

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

Outstanding stock options:

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

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

Stock Appreciation Rights (SARs)

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

Outstanding SARs:

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

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

	June 30, 2018
	Outstanding		Weighted-Average Exercise Price		Weighted-Average Remaining Life (years)		Fair Value at Grant Date
Vested
Stock Options		1,061,050	$	8.21		5.90	$	1.82
SARs		214,752	$	8.61		5.41	$	1.89
Total Vested		1,275,802	$	8.28		5.81	$	1.83

Unvested
Stock Options		618,031	$	9.22		7.18	$	2.21
SARs		192,270	$	8.93		6.11	$	2.10
Total Unvested		810,301	$	9.16		6.93	$	2.18

	December 31, 2017
	Outstanding		Weighted-Average Exercise Price		Weighted-Average Remaining Life (years)		Fair Value at Grant Date
Vested
Stock Options		857,192	$	8.05		6.17	$	1.76
SARs		189,053	$	8.54		5.86	$	1.90
Total Vested		1,046,245	$	8.14		6.11	$	1.78

Unvested
Stock Options		779,756	$	9.21		7.50	$	2.17
SARs		153,919	$	9.16		6.24	$	2.02
Total Unvested		933,675	$	9.21		7.30	$	2.15

(15) Other Expenses

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(16) Net Loss Attributable to Common Shareholders

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

(17) Commitments

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

Minimum lease payments under the amended lease are as follows:

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

(18) Contingencies

Litigation — In the normal course of business, we are involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on our financial position, results of operations or cash flows.

(19) Guarantee of L Bonds

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

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

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets

June 30, 2018	Parent			Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated

A S S E T S

Cash and cash equivalents	$	123,017,408		$	546,177	$	881,219	$	-		$	124,444,804
Restricted cash		-			5,648,925		1,002,384		-			6,651,309
Investment in life insurance policies, at fair value		-			70,892,773		655,170,471		-			726,063,244
Life insurance policy benefits receivable		-			800,000		26,235,000		-			27,035,000
Other assets		4,307,833			1,921,184		4,612,550		-			10,841,567
Investment in subsidiaries		577,018,061			498,224,110		-		(1,075,242,171	)		-

TOTAL ASSETS	$	704,343,302		$	578,033,169	$	687,901,624	$	(1,075,242,171	)	$	895,035,924

L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y

LIABILITIES
Senior credit facility with LNV Corporation	$	-		$	-	$	180,630,553	$	-		$	180,630,553
L Bonds		518,788,942			-		-		-			518,788,942
Accounts payable		580,162			738,894		1,307,227		-			2,626,283
Interest and dividends payable		11,449,184			-		5,487,541		-			16,936,725
Other accrued expenses		1,502,663			1,736,033		792,374		-			4,031,070
TOTAL LIABILITIES		532,320,951			2,474,927		188,217,695		-			723,013,573

STOCKHOLDERS’ EQUITY
Member capital		-			575,558,242		499,683,929		(1,075,242,171	)		-
Redeemable preferred stock and Series 2 redeemable preferred stock		220,701,701			-		-		-			220,701,701
Common stock		5,813			-		-		-			5,813
Accumulated deficit		(48,685,163	)		-		-		-			(48,685,163	)
TOTAL STOCKHOLDERS’ EQUITY		172,022,351			575,558,242		499,683,929		(1,075,242,171	)		172,022,351

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	704,343,302		$	578,033,169	$	687,901,624	$	(1,075,242,171	)	$	895,035,924

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets (continued)

December 31, 2017	Parent			Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated

A S S E T S

Cash and cash equivalents	$	111,952,829		$	1,486,623	$	982,039	$	-		$	114,421,491
Restricted cash		-			9,367,410		18,982,275		-			28,349,685
Investment in life insurance policies, at fair value		-			51,093,362		599,433,991		-			650,527,353
Life insurance policy benefits receivable		-			1,500,000		15,158,761		-			16,658,761
Other assets		1,912,203			1,986,312		5,000,369		-			8,898,884
Investment in subsidiaries		480,659,789			415,235,212		-		(895,895,001	)		-

TOTAL ASSETS	$	594,524,821		$	480,668,919	$	639,557,435	$	(895,895,001	)	$	818,856,174

L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y

LIABILITIES
Senior credit facility with LNV Corporation	$	-		$	-	$	212,238,192	$	-		$	212,238,192
L Bonds		447,393,568			-		-		-			447,393,568
Accounts payable		1,434,623			844,899		4,114,917		-			6,394,439
Interest and dividends payable		10,296,584			-		5,130,925		-			15,427,509
Other accrued expenses		1,728,303			1,610,773		391,647		-			3,730,723
TOTAL LIABILITIES		460,853,078			2,455,672		221,875,681		-			685,184,431

STOCKHOLDERS’ EQUITY
Member capital		-			478,213,247		417,681,754		(895,895,001	)		-
Redeemable preferred stock and Series 2 redeemable preferred stock		173,115,447			-		-		-			173,115,447
Common stock		5,813			-		-		-			5,813
Accumulated deficit		(39,449,517	)		-		-		-			(39,449,517	)
TOTAL STOCKHOLDERS’ EQUITY		133,671,743			478,213,247		417,681,754		(895,895,001	)		133,671,743

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	594,524,821		$	480,668,919	$	639,557,435	$	(895,895,001	)	$	818,856,174

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations

For the three months ended June 30, 2018	Parent			Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Gain on life insurance policies, net	$	-		$	6,620,224	$	16,719,526	$	-		$	23,339,750
Interest and other income		661,859			17,798		295,541		-			975,198
TOTAL REVENUE		661,859			6,638,022		17,015,067		-			24,314,948

EXPENSES
Interest expense		11,396,554			-		5,751,296		-			17,147,850
Employee compensation and benefits		1,414,360			1,318,806		502,533		-			3,235,699
Legal and professional fees		399,790			234,740		521,198		-			1,155,728
Other expenses		1,697,222			476,907		658,648		-			2,832,777
TOTAL EXPENSES		14,907,926			2,030,453		7,433,675		-			24,372,054

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(14,246,067	)		4,607,569		9,581,392		-			(57,106	)

EQUITY IN INCOME OF SUBSIDIARIES		14,188,961			10,693,650		-		(24,882,611	)		-

NET INCOME (LOSS) BEFORE INCOME TAXES		(57,106	)		15,301,219		9,581,392		(24,882,611	)		(57,106	)

INCOME TAX BENEFIT		-			-		-		-			-
NET INCOME (LOSS)		(57,106	)		15,301,219		9,581,392		(24,882,611	)		(57,106	)
Preferred stock dividends		4,338,487			-		-		-			4,338,487
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(4,395,593	)	$	15,301,219	$	9,581,392	$	(24,882,611	)	$	(4,395,593	)

For the three months ended June 30, 2017	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Gain on life insurance policies, net	$	-		$	201,685		$	11,094,581	$	-		$	11,296,266
Interest and other income		69,221			163,384			298,141		(159,426	)		371,320
TOTAL REVENUE		69,221			365,069			11,392,722		(159,426	)		11,667,586

EXPENSES
Interest expense		8,325,874			391,061			3,555,266		(26,176	)		12,246,025
Employee compensation and benefits		2,109,562			1,529,188			102,549		-			3,741,299
Legal and professional fees		284,756			179,461			866,372		-			1,330,589
Other expenses		1,885,146			650,320			1,358,882		(133,250	)		3,761,098
TOTAL EXPENSES		12,605,338			2,750,030			5,883,069		(159,426	)		21,079,011

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(12,536,117	)		(2,384,961	)		5,509,653		-			(9,411,425	)

EQUITY IN INCOME OF SUBSIDIARIES		3,124,692			7,241,779			-		(10,366,471	)		-

NET INCOME (LOSS) BEFORE INCOME TAXES		(9,411,425	)		4,856,818			5,509,653		(10,366,471	)		(9,411,425	)

INCOME TAX BENEFIT		(3,717,174	)		-			-		-			(3,717,174	)
NET INCOME (LOSS)		(5,694,251	)		4,856,818			5,509,653		(10,366,471	)		(5,694,251	)
Preferred stock dividends		2,031,097			-			-		-			2,031,097
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(7,725,348	)	$	4,856,818		$	5,509,653	$	(10,366,471	)	$	(7,725,348	)

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations (continued)

For the six months ended June 30, 2018	Parent			Guarantor Subsidiary		Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Gain on life insurance policies, net	$	-		$	8,013,679	$	29,194,816	$	-		$	37,208,495
Interest and other income		1,113,898			26,524		507,703		-			1,648,125
TOTAL REVENUE		1,113,898			8,040,203		29,702,519		-			38,856,620

EXPENSES
Interest expense		22,019,206			-		11,191,981		-			33,211,187
Employee compensation and benefits		3,337,093			2,794,537		846,738		-			6,978,368
Legal and professional fees		807,102			466,390		1,055,865		-			2,329,357
Other expenses		3,491,702			941,514		1,140,138		-			5,573,354
TOTAL EXPENSES		29,655,103			4,202,441		14,234,722		-			48,092,266

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(28,541,205	)		3,837,762		15,467,797		-			(9,235,646	)

EQUITY IN INCOME OF SUBSIDIARIES		19,305,559			17,557,850		-		(36,863,409	)		-

NET INCOME (LOSS) BEFORE INCOME TAXES		(9,235,646	)		21,395,612		15,467,797		(36,863,409	)		(9,235,646	)

INCOME TAX BENEFIT							-		-
NET INCOME (LOSS)		(9,235,646	)		21,395,612		15,467,797		(36,863,409	)		(9,235,646	)
Preferred stock dividends		8,042,971			-		-		-			8,042,971
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(17,278,617	)	$	21,395,612	$	15,467,797	$	(36,863,409	)	$	(17,278,617	)

For the six months ended June 30, 2017	Parent			Guarantor Subsidiary			Non-Guarantor Subsidiaries		Eliminations			Consolidated
REVENUE
Gain on life insurance policies, net	$	-		$	1,701,012		$	28,995,074	$	-		$	30,696,086
Interest and other income		154,228			235,285			923,802		(253,470	)		1,059,845
TOTAL REVENUE		154,228			1,936,297			29,918,876		(253,470	)		31,755,931

EXPENSES
Interest expense		17,587,908			677,415			7,292,113		(67,195	)		25,490,241
Employee compensation and benefits		4,038,357			2,750,770			115,232		-			6,904,360
Legal and professional fees		777,571			440,549			1,058,817		-			2,276,937
Other expenses		3,548,149			1,533,051			1,646,496		(186,275	)		6,541,420
TOTAL EXPENSES		25,951,985			5,401,785			10,112,658		(253,470	)		41,212,958

INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES		(25,797,757	)		(3,465,488	)		19,806,218		-			(9,457,027	)

EQUITY IN INCOME OF SUBSIDIARIES		16,340,730			21,305,986			-		(37,646,716	)		-

NET INCOME (LOSS) BEFORE INCOME TAXES		(9,457,027	)		17,840,498			19,806,218		(37,646,716	)		(9,457,027	)

INCOME TAX BENEFIT		(3,717,674	)		-			-		-			(3,717,674	)
NET INCOME (LOSS)		(5,739,353	)		17,840,498			19,806,218		(37,646,716	)		(5,739,353	)
Preferred stock dividends		3,898,857			-			-		-