Our portfolio of life insurance policies, owned by our subsidiaries
as of September 30, 2020, organized by the insured’s current age and the associated number of policies and policy benefits,
is summarized below:
Our portfolio of life insurance policies,
owned by our subsidiaries as of September 30, 2020, organized by the insured’s estimated life expectancy estimates and
associated policy benefits, is summarized below:
We rely on the payment of policy benefit
claims by life insurance companies as a significant source of cash inflow. The life insurance assets we own represent obligations
of third-party life insurance companies to pay the benefit amount under the policy upon the mortality of the insured. As a result,
we manage this credit risk exposure by generally purchasing policies issued by insurance companies with investment-grade ratings
from Standard & Poor’s, and diversifying our life insurance portfolio among a number of insurance companies.
The yield to maturity on bonds issued by
life insurance carriers reflects, among other things, the credit risk (risk of default) of such insurance carrier. We follow the
yields on certain publicly traded life insurance company bonds because this information is part of the data we consider when valuing
our portfolio of life insurance policies for our financial statements.
The average yield to maturity of publicly
traded life insurance company bonds data we consider as inputs to our life insurance portfolio valuation process was 1.36% as of
September 30, 2020. We believe this reflects, in part, the financial market’s judgment that credit risk is low with
regard to these carriers’ financial obligations. The obligations of life insurance carriers to pay life insurance policy
benefits ranks senior to all of their other financial obligations, including the senior bonds they issue. As of September 30,
2020, approximately 96.2% of the face value of policy benefits in our life insurance portfolio were issued by insurance companies
with investment-grade credit ratings from Standard & Poor’s.
As of September 30, 2020, our ten
largest life insurance company credit exposures and the Standard & Poor’s credit rating of their respective financial
strength and claims-paying ability is set forth below:
Beneficient’s primary operations
pertain to its liquidity products whereby Ben LP, through its subsidiaries, extends loans collateralized by cash flows from illiquid
alternative assets and provides services to the trustees who administer the collateral. Beneficient’s core business products
are its Exchange Trust, LiquidTrust and the InterChange Trust (introduced in 2020). Beneficient’s clients select one of these
products and place their alternative assets into the custody trust that is a constituent member of a trust structure called the
“ExAlt PlanTM” (comprised of Exchange Trusts, LiquidTrusts, Custody Trusts, Collective Trusts, and Funding
Trusts). The ExAlt PlanTM then delivers to Beneficient’s clients the consideration required by the specific product
selected by those clients. At the same time, Beneficient, through a subsidiary, extends a loan to the ExAlt PlanTM.
The proceeds (cash or securities of Ben LP or its affiliates) of that loan to the ExAlt PlanTM are ultimately paid to
the client. The cash flows from the client’s alternative asset support the repayment of the loans plus any related interest
and fees.
Loans are carried at the principal amount
outstanding, plus interest paid in kind, less allowance for loan loss and net of any unearned income. Loans bear contractual interest
at the greater of 14% plus or minus 95% of certain income or losses of the associated Funding
Trust or 1-month LIBOR plus 10%, compounded monthly. In the event an alternative reference rate is required, the Secured
Overnight Financing Rate (“SOFR”) would replace LIBOR, as contemplated in our loan agreements. The primary source of
repayment for the loans and related fees is cash flows from the alternative assets collateralizing the loans. Interest income on
loans is accrued on the principal amount outstanding and interest compounds on a monthly basis.
Beneficient held loans receivable, net
of allowance for loan losses, of $227.0 million and $232.3 million at September 30, 2020 and December 31, 2019.
The loan to value ratio is calculated as
the carrying value of loans receivable prior to any allowance for loan losses over the collateral value of the loan portfolio.
The collateral value is defined as the mutual beneficial interest of the respective Collective Trust that is owed by the Funding
Trust, which is derived from the expected cash flows from the alternative assets. The collateral is valued using industry standard
valuation models which includes assumptions related to i) equity market risk premiums, ii) alternative asset beta to public equities,
iii) NAVs, iv) volatilities, v) distribution rates, and vi) market discount rates. The fair value of the mutual beneficial interests
collateralizing the loan portfolio as of September 30, 2020 and December 31, 2019 was $361.7 million and $357.8 million,
respectively.
Beneficient’s loan to value ratio
for the entire loan portfolio was .63 and .65 as of September 30, 2020 and December 31, 2019, respectively. The loan
to value ratio as of December 31, 2019 is not reflective of measurement period adjustments recorded during the measurement
period.
As of September 30, 2020, Beneficient’s
loan portfolio had exposure to 122 professionally managed alternative investment funds, comprised of 323 underlying investments,
and approximately 87 percent of Beneficient’s loan portfolio (based on NAV) was collateralized by investments in private
companies.
The collateral to Beneficient’s loan
portfolio spans across these industry sectors and geographic regions for the periods shown below (dollar amounts in thousands):
Values represent the NAV of the interests
in alternative assets, the cash flows of which comprise the collateral of Beneficient’s loan portfolio. Assets in the collateral
portfolio consist primarily of interests in alternative investment vehicles (also referred to as “funds”) that are
managed by a group of U.S. and non-U.S. based alternative asset management firms that invest in a variety of financial markets
and utilize a variety of investment strategies. The vintages of the funds in the collateral portfolio as of September 30,
2020 ranged from 1993 to 2016.
As Beneficient grows its loan portfolio,
Beneficient will monitor the diversity of its collateral portfolio through the use of concentration guidelines. These guidelines
were established, and will be periodically updated, through a data driven approach based on asset type, fund manager, vintage of
fund, industry segment and geography to manage portfolio risk. Beneficient will refer to these guidelines when making decisions
about new financing opportunities; however, these guidelines will not restrict Beneficient from entering into financing opportunities
that would result in Beneficient having exposure outside of its concentration guidelines. In addition, changes to Beneficient’s
collateral portfolio may lag changes to the concentration guidelines. As such, Beneficient’s collateral portfolio may, at
any given time, have exposures that are outside of its concentration guidelines to reflect, among other things, attractive financing
opportunities, limited availability of assets, or other business reasons. Given Beneficient’s limited operating history,
its collateral portfolio as of September 30, 2020 had exposure to certain alternative investment vehicles and investments
in private companies that were outside of those guidelines.
Classifications by industry sector, exposure
type and geography reflect classification of investments held in funds or companies held directly in the collateral portfolio.
Investments reflect the assets listed by the general partner of a fund as held by the fund and have a positive or negative net
asset value. Typical assets include portfolio companies, limited partnership interests in other funds, and net other assets, which
are a fund’s cash and other current assets minus liabilities. The alternative assets that serve as collateral for Beneficient’s
loan portfolio are primarily limited partnership interests, and the limited partnership agreements governing those interests generally
include restrictions on disclosure of fund-level information, including fund names and company names in the funds.
Industry sector is based on Global Industry
Classification Standard (GICS®) Level 2 classification (also known as “Industry Group”) of companies held in the
collateral portfolio by funds or directly, subject to certain adjustments by us. “Other” classification is not a GICS®
classification. “Other” classification reflects companies in the GICS® classification categories of Automobiles
& Components, Banks, Commercial & Professional Services, Consumer Durables & Apparel, Consumer Services, Energy, Food,
Beverage & Tobacco, Household & Personal Products, Insurance, Materials, Media & Entertainment, Real Estate, Retailing,
Semiconductors & Semiconductors Equipment, Tech Hardware & Equipment, and Transportation. N/A includes investments assets
that we have determined do not have an applicable GICS® Level 2 classification, such as Net Other Assets and investments that
are not operating companies.
Investment exposure type reflects classifications
based on each fund’s current investment strategy stage as determined by us. “Other” includes private debt strategies,
natural resources strategies and hedge funds.
Geography reflects classifications determined
by us based on each underlying investment. “Other” geography classification includes Israel, Australia and Eastern
Europe.
During the three and nine months ended September 30, 2020
and 2019, we earned revenues from the following primary sources:
During the three and nine months ended
September 30, 2020 and 2019, our main components of expense are summarized below:
The following is our analysis of the results
of operations for the periods indicated below. This analysis should be read in conjunction with our condensed consolidated financial
statements and related notes (dollar values in thousands).
Revenue from changes in estimated probabilistic
cash flows, net of premiums paid was $(3.5) million and $0.7 million during the three months ended September 30, 2020 and
2019, respectively, and $(5.1) million and $3.1 million for the nine months ended September 30, 2020 and 2019, respectively.
The decreases of $3.7 million and 15.9 million in gain on life insurance policies for the three and nine months ended September 30,
2020, over the comparable prior year periods, was driven by a combination of no gain on policy acquisitions and maturities of policies
with a higher cumulative cost basis.
The Company did not purchase any life insurance
policies during the first nine months of 2020. The face value of life insurance policies purchased in the first nine months of
2019 was $96.3 million. The resulting unrealized gain on acquisition was nil and $0.5 million for the three months ended September 30,
2020 and 2019, respectively, and nil and $6.8 million in the nine months ended September 30, 2020 and 2019, respectively.
The absence of unrealized gain on acquisition in the current year periods is the result of a strategic decision to significantly
reduce capital allocated to purchasing additional life insurance policies in the secondary market and to increase capital allocated
toward providing liquidity to a broader range of alternative assets through additional investments in Beneficient. On December
31, 2019, we obtained the right to appoint a majority of the board of directors of the general partner of Ben LP. As a result of
this change-of-control event, we reported the results of Ben LP and its subsidiaries on a consolidated basis beginning on the transaction
date of December 31, 2019. We believe Beneficient can finance investments in alternative assets that will generally produce higher
actual and risk-adjusted returns than those we can generally achieve from life insurance policies acquired in the secondary market.
Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified
alternative asset portfolio, we continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing
its value, including a possible sale, refinancing or recapitalization of our life insurance portfolio.
The face value of matured policies was
$39.8 million and $27.5 million for the three months ended September 30, 2020 and 2019, respectively, and $105.2 million and
$80.9 million for the nine months ended September 30, 2020, respectively, reflecting an increase in face value of matured
policies of $12.3 million and $24.3 million, respectively, during those periods. The resulting revenue recognized at maturity was
$26.3 million and $20.8 million during the three months ended September 30, 2020 and 2019, respectively, and $72.9 million
and $60.2 million during the nine months ended September 30, 2020 and 2019, respectively. The increased revenue recognized
at maturity during the comparable periods reflects the continued aging of the existing portfolio with no additional policies being
added.
Interest income increased $9.0 million
and $28.3 million during the three and nine months ended September 30, 2020, respectively, compared to the same periods in
2019, primarily due to the consolidation of Beneficient, which added $11.6 million and $35.1 million to interest income during
the three and nine months ended September 30, 2020, respectively. We also added $1.1 million per quarter in 2020 of interest
income from the promissory note between GWG Life and certain LiquidTrusts entered into on May 31, 2019, as discussed in Note 6
to the condensed consolidated financial statements. These increases during the three and nine months ended September 30, 2019 were
partially offset by $4.1 million and $8.5 million, respectively, of interest on the commercial loan between GWG Life and Beneficient,
which was reported in interest income during the three and nine months ended September 30, 2019, prior to the consolidation
of Beneficient on December 31, 2019. This intercompany interest was eliminated in consolidation beginning January 1, 2020.
Trust services revenues related to Beneficient’s
trust administration services were added beginning January 1, 2020, as a result of the consolidation of Beneficient on December
31, 2019.
Other income during the three months ended
September 30, 2020, includes a $3.2 million decrease to the fair value of Beneficient’s investment in put options entered
into on July 17, 2020, compared to L Bond early redemption fees and other miscellaneous income items recorded in the comparable
period in 2019. Other income increased $32.6 million during the nine months ended September 30, 2020, compared to the same period
in 2019, due to $36.3 million of income recognized during the second quarter of 2020 by Beneficient as a result of the forfeiture
of vested equity-based compensation related to one former director of Beneficient. A substantial majority of the former director’s
equity-based compensation units were fully vested, and the related expense was recorded in prior periods. The provisions of the
award agreements related to the forfeiture of vested units resulted in the previous expense being recorded to other income in the
second quarter of 2020. This income was offset by the aforementioned decrease to the fair value of Beneficient’s put options
during the third quarter of 2020. Other income during the nine months ended September 30, 2019 includes L Bond early redemption
fees and other miscellaneous income from legacy initiatives of GWG Holdings.
Interest expense, including amortization
of deferred financing costs, increased $12.5 million and $30.1 million during the three and nine months ended September 30,
2020, respectively, compared to the same periods in 2019. The increase in interest expense for the three and nine months ended
September 30, 2020, compared to the same periods in 2019, was primarily due to the increase in the average outstanding L Bonds
during each of the comparative periods. The increased average L Bond balances resulted in increases to interest expense of $7.7
million and $19.3 million during the three and nine months ended September 30, 2020, respectively, compared to the comparable periods
in 2019. Also, the consolidation of Beneficient beginning December 31, 2019 increased interest expense by $3.5 million and $7.7
million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019, related
to Beneficient’s other borrowings. Additionally, $1.5 million and $3.1 million of increased interest expense during the three
and nine months ended September 30, 2020, respectively, compared to the same periods in 2019, was due to increased interest
paid on our LNV Credit Facility associated with a higher principal balance outstanding.
The increase in employee compensation and
benefits in the three and nine months ended September 30, 2020, compared to the same periods of 2019, was primarily related
to the consolidation of Beneficient on December 31, 2019. Specifically, the Company recognized $23.2 million and $96.3 million
of equity-based compensation expense during the three and nine months ended September 30, 2020, respectively, related to Beneficient’s
equity incentive plans. Beneficient’s Board of Directors adopted the equity incentive plans in 2018 and 2019 and approved
the granting of equity incentive awards during the second quarter of 2019 to certain directors and in the first quarter of 2020
to certain employees. Awards are generally subject to service-based vesting over a multi-year period from the recipient’s
date of hire, though some awards fully vested upon the grant date. As of September 30, 2020, over 78% of the awards granted
under Beneficient’s equity incentive plans had vested.
The Company expects to recognize an additional
$4.0 million of equity-based compensation expense under Beneficient’s plans in the three months ending December 31,
2020, related to awards outstanding as of September 30, 2020. Expense associated with these awards is based on the fair value
of the equity on the date of grant. As Ben LP’s equity is not publicly traded, the fair value of the equity awards is estimated
on the grant date using internal valuations or recent equity transactions involving third parties, which provides the Company with
observable fair value information sufficient for estimating the grant date fair value.
In addition to Beneficient’s equity-based
compensation expense, we recognized additional retention, severance and other costs in the first quarter of 2020 related to the
relocation of our principal offices from Minneapolis to Dallas in late 2019.
The increase in legal and professional
fees in the three and nine months ended September 30, 2020, compared to the same periods of 2019, is primarily the result
of the consolidation of Beneficient on December 31, 2019, which added $4.7 million and $13.6 million of legal and professional
fees during the three and nine months ended September 30, 2020, respectively. In addition to the consolidation of Beneficient,
recent transactions and other ongoing initiatives resulted in increased legal and professional fees during the third quarter of
2020, compared to the same period in 2019. During the nine months ended September 30, 2020, the increase in legal and professional
fees resulting from the consolidation of Beneficient was partially offset as the nine months ended 2019 included comparatively
high legal and professional fees of GWG Holdings as a result of the Beneficient transactions detailed in Note 1 to the condensed
consolidated financial statements.
During the three months ended September 30,
2020, a loan loss provision recapture of $5.0 million was recognized due to an increase in expected cash flows for certain PCI
loans as more fully described in Note 6 to the condensed consolidated financial statements. During the nine months ended September 30,
2020, a loan loss provision expense of $2.3 million was recorded, primarily due to a decrease in expected cash flows.
The increase in other expenses, in the
three and nine months ended September 30, 2020 compared to the same periods of 2019, is primarily the result of the consolidation
of Beneficient on December 31, 2019, which added $2.0 million and $4.7 million during the three and nine months ended September 30,
2020, respectively. These increases were partially offset by lower business insurance, contract labor and other operating expenses
of GWG Holdings and subsidiaries during the comparable periods.
The Company applies an estimated annual
effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal
method prescribed by the accounting guidance established for computing income taxes in interim periods.
Consolidated income tax expense for the
three months ended September 30, 2020 was $22.4 million, and consolidated income tax expense for the nine months ended September
30, 2020 was $0.6 million. The Company’s effective tax rate was 0.4% for the nine months ended September 30, 2020. The
income tax expense for the three months ended September 30, 2020 primarily reflects the effects of a gain allocated to GWG
Holdings from Ben LP and an increase to the valuation allowance on the Company’s net deferred tax assets (described below).
The income tax benefit for the nine months ended September 30, 2020 primarily reflects the effects of a gain allocated to
GWG Holdings from Ben LP and a change in state taxing jurisdictions.
After the change-of-control transaction
with Ben LP on December 31, 2019, the Company moved its headquarters from Minnesota to Texas. This move resulted in a change in
the state deferred tax rate from 9.8% to 0%. In the third quarter 2020, GWG Holdings was allocated a gain from its investment in
Ben LP. The tax effects of these items have been recorded as discrete items.
The Company currently records a valuation
allowance against its deferred tax assets that cannot be realized by the future reversal of existing temporary differences. Due
to the uncertain timing of the reversal of certain of these temporary differences due to the constraint described below, they cannot
be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the vast majority
of the deferred tax liability cannot be utilized in determining the realizability of the deferred tax assets. This is often referred
to as a “naked credit.” Due to a prior deemed ownership change, net operating loss carryforwards are subject to Section
382 of the Internal Revenue Code.
The Company reassessed its valuation allowance
during the third quarter of 2020 and determined it will no longer utilize the reversal of a temporary difference related to the
Company’s preferred equity ownership in Beneficient, until such time as the preferred equity is no longer constrained, as
a source of income to realize existing deferred tax assets related to the net operating loss and Section 163(j) limitations. As
a result, the valuation allowance on the deferred tax assets increased as of September 30, 2020, which resulted in a larger net
deferred tax liability (naked credit) as of September 30, 2020. The naked credit as of September 30, 2020 is specifically related
to GWG Life’s investment in the Preferred Series A Subclass 1 Unit Accounts described in Note 1. The disposition of this
investment is constrained by the Pledge and Security Agreement in favor of the holders of the L Bonds of GWG Holdings. As such,
the timing of recognition of the necessary taxable income related to this investment and the future reversal of this temporary
difference cannot be predicted.
We continue to monitor and evaluate the
rationale for recording a full valuation allowance for the net amount of the deferred tax assets in excess of the deferred tax
liabilities that are not constrained. We intend to continue maintaining a full valuation allowance on these net deferred tax assets
until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation
allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the
release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis
of the level of profitability that we are able to actually achieve.
On March 27, 2020, Congress passed and
the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which included
significant changes to U.S. Federal income tax law. However, the only change that is expected to affect the Company is the modification
to Section 163(j), which increased the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted
taxable income.
We have two reportable segments: 1) Beneficient
and 2) Secondary Life Insurance. Corporate & Other includes certain activities not allocated to specific business segments.
These activities include holding company financing and investing activities, management and administrative services to support
the overall operations of the Company and our equity method investment in FOXO.
Comparison of revenue by reportable segment for the periods
indicated (in thousands):
The primary components of the changes in revenue during the
three and nine months ended September 30, 2020 compared to the same periods in 2019 were as follows:
Comparison of earnings before tax by reportable
segment for the periods indicated (in thousands):
The primary drivers of the changes in loss before tax during
the three and nine months ended September 30, 2020, compared to the same periods in 2019 were as follows:
Liquidity and Capital Resources
We finance our businesses through a combination
of life insurance policy benefit receipts; receipt of principal, interest and related fees on loans receivable; dividends and interest
on investments; equity offerings; debt offerings; and our LNV Credit Facility and other borrowings. We have traditionally used
proceeds from these sources for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures
including paying principal, interest and dividends. We have also used, and intend to continue to use, proceeds to allocate capital
to Beneficient.
As of September 30, 2020 and December 31,
2019, we had approximately $177.7 million and $151.5 million, respectively, in combined available cash, cash equivalents, restricted
cash, policy benefits receivable and fees receivable.
We currently fund our business primarily
with debt that generally has a shorter duration than the duration of our longer-term assets. The resulting asset/liability mismatch
can result in a liquidity shortfall if we are unable to renew maturing short term debt or secure suitable additional financing.
In such a situation, we could be forced to sell assets at less than optimal (distressed) prices. We heavily rely on our L Bond
offering to fund our business operations, including capital allocations to Beneficient. We were unable to offer our L Bonds, our
primary source of debt capital, for the approximately three month period commencing May 1, 2019 due to delays in filing certain
periodic reports with the SEC. We drew down our cash balances during that period as L Bonds matured but were unable to be renewed,
and we were unable to offer new L Bonds. We recommenced our L Bond offering on August 8, 2019. If we are again forced to suspend
our L Bond offering in the future for any significant length of time, or demand for our L bonds dissipates, and we are unable to
obtain replacement financing, our business would be adversely impacted and our ability to service and repay our debt obligations,
much of which is short term, would be compromised, thereby negatively affecting our business prospects and viability.
We had $86.9 million of borrowing base
capacity under the LNV Credit Facility as of September 30, 2020. Additional future borrowing base capacity for premiums and
servicing costs, created as the premiums and servicing costs of pledged life insurance policies become due and by additional policy
pledges to the facility, if any, exists under the LNV Credit Facility. The LNV Credit Facility has certain financial and nonfinancial
covenants. We were in compliance with the debt covenants as of September 30, 2020 and continue to be so as of the filing date
of this report.
As noted in the “Results of Operations”
section above, on November 11, 2019, GWG Holdings contributed the common stock and membership interests of its wholly-owned FOXO
Labs and FOXO Life subsidiaries to a legal entity, FOXO, in exchange for a membership interest in the entity. GWG Holdings has
contributed $11.2 million in cash to FOXO to date and is committed to contribute an additional $5.0 million to the entity through
October 2021.
Financings Summary
We had the following outstanding debt balances
as of September 30, 2020 and December 31, 2019 (dollars in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
Issuer/Borrower
|
|
Principal Amount Outstanding
|
|
|
Weighted Average Interest Rate
|
|
|
Principal Amount Outstanding
|
|
|
Weighted Average Interest Rate
|
|
GWG DLP Funding IV, LLC – LNV senior credit facility
|
|
$
|
213,117
|
|
|
|
9.16
|
%
|
|
$
|
184,586
|
|
|
|
9.57
|
%
|
GWG Holdings, Inc. – L Bonds
|
|
|
1,181,058
|
|
|
|
7.22
|
%
|
|
|
948,128
|
|
|
|
7.15
|
%
|
GWG Holdings, Inc. – Seller Trust L Bonds
|
|
|
366,892
|
|
|
|
7.50
|
%
|
|
|
366,892
|
|
|
|
7.50
|
%
|
Beneficient – Other borrowings
|
|
|
102,224
|
|
|
|
6.24
|
%
|
|
|
152,199
|
|
|
|
4.59
|
%
|
Total
|
|
$
|
1,863,291
|
|
|
|
7.44
|
%
|
|
$
|
1,651,805
|
|
|
|
7.26
|
%
|
The table below reconciles the face amount of our outstanding
debt to the carrying value shown on our balance sheets (dollars in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Senior credit facility with LNV Corporation
|
|
|
|
|
|
|
Face amount outstanding
|
|
$
|
213,117
|
|
|
$
|
184,586
|
|
Unamortized deferred financing costs
|
|
|
(9,210
|
)
|
|
|
(10,196
|
)
|
Carrying amount
|
|
$
|
203,907
|
|
|
$
|
174,390
|
|
L Bonds and Seller Trust L Bonds:
|
|
|
|
|
|
|
|
|
Face amount outstanding
|
|
$
|
1,547,950
|
|
|
$
|
1,315,020
|
|
Subscriptions in process
|
|
|
19,300
|
|
|
|
15,839
|
|
Unamortized selling costs
|
|
|
(45,839
|
)
|
|
|
(37,329
|
)
|
Carrying amount
|
|
$
|
1,521,411
|
|
|
$
|
1,293,530
|
|
Other borrowings:
|
|
|
|
|
|
|
—
|
|
Face amount outstanding
|
|
$
|
102,224
|
|
|
$
|
152,199
|
|
Unamortized premium (discount)
|
|
|
(2,046
|
)
|
|
|
887
|
|
Carrying amount
|
|
$
|
100,178
|
|
|
$
|
153,086
|
|
In January 2015, we began publicly offering
up to $1.0 billion of L Bonds as a follow-on to our earlier $250.0 million public debt offering. In January 2018, we began publicly
offering up to $1.0 billion L Bonds under an additional offering. Through September 30, 2020, the total amount of L Bonds
sold under these L Bond offerings, including renewals, was $2.0 billion. As of September 30, 2020 and December 31,
2019, respectively, we had approximately $1.2 billion and $948.1 million in principal amount of L Bonds outstanding (exclusive
of Seller Trust L Bonds).
On June 3, 2020, a registration statement
relating to an additional public offering was declared effective permitting us to sell up to $2.0 billion in principal amount of
L Bonds on a continuous basis through June 2023. These bonds contain the same terms and features as our previous offerings. We
have raised $108.3 million under this offering since it was declared effective.
In February 2017, we began publicly offering
up to 150,000 shares of our Series 2 Redeemable Preferred Stock (“RPS 2”) at a per-share price of $1,000. As of December
31, 2018, we had issued approximately $150 million stated value of RPS 2 and terminated that offering.
On August 10, 2018, GWG Holdings, GWG Life
and the Bank of Utah, as trustee, entered into the Supplemental Indenture to the Amended and Restated Indenture. GWG Holdings entered
into the Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide
for the issuance of the Seller Trust L Bonds. We issued Seller Trust L Bonds in the amount of $366.9 million to the Seller Trusts
in connection with the Exchange Transaction discussed in detail in Note 1 to the condensed consolidated financial statements. The
maturity date of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.5% per annum. Interest
is payable monthly in cash (see Note 10 to the condensed consolidated financial statements). The Amended and Restated Indenture
was subsequently amended on December 31, 2019, primarily to modify the calculation of the Debt Coverage Ratio in the Indenture
to provide the Company with the ability to incur indebtedness (directly or through a subsidiary of the Company) that is payable
in capital stock of the Company or mandatorily convertible into or exchangeable for capital stock of the Company that would be
excluded from the calculation of the Debt Coverage Ratio.
The weighted-average interest rate of our
outstanding L Bonds (excluding the Seller Trust L Bonds) as of September 30, 2020 and December 31, 2019 was 7.22% and
7.15%, respectively, and the weighted-average maturity at those dates was 3.22 years and 3.21 years, respectively. Our L Bonds
have renewal features. Since we first issued our L Bonds, we have experienced $736.8 million in maturities, of which $389.2 million
has renewed through September 30, 2020 for an additional term. This renewal activity has provided us with an aggregate renewal
rate of approximately 52.8% for investments in these securities.
Future contractual maturities of L Bonds
and Seller Trust L Bonds at September 30, 2020 are as follows (in thousands):
Years Ending December 31,
|
|
|
|
Three months ending December 31, 2020
|
|
$
|
34,232
|
|
2021(1)
|
|
|
566,092
|
|
2022
|
|
|
254,467
|
|
2023
|
|
|
160,353
|
|
2024
|
|
|
117,303
|
|
Thereafter
|
|
|
415,503
|
|
|
|
$
|
1,547,950
|
|
|
(1)
|
After the second anniversary of the Final Closing, the holders of the Seller Trust L Bonds will
have the right to cause GWG to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder within 45 days.
As such, while the maturity date of the $366.9 million of Seller Trust L Bonds is in August 2023, their contractual maturity is
reflected in 2021, as that is the first period in which they could become payable. The repurchase may be paid, at the option of
GWG Holdings, in the form of cash, and/or a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest
under the Commercial Loan Agreement, and (ii) Common Units, or a combination of cash and such property.
|
The L Bonds and the Seller Trust L Bonds
are secured by all of our assets and are subordinate to our LNV Credit Facility.
On September 27, 2017, we entered into
a $300.0 million amended and restated senior credit facility, which matures on September 27, 2029, with LNV Corporation in which
DLP IV is the borrower. As of September 30, 2020, we had approximately $213.1 million outstanding under the senior credit
facility. On November 1, 2019, we entered into the LNV Credit Facility, which replaced the prior agreement governing the facility.
A description of the agreement governing our LNV Credit Facility is set forth below under the caption “Amendment of Credit
Facility with LNV Corporation”. We intend to use the proceeds from this facility to maintain our portfolio of life insurance
policies, for liquidity and for general corporate purposes.
Beneficient had borrowings with an aggregate
carrying value of $100.2 million and $153.1 million as of September 30, 2020 and December 31, 2019, respectively. This
aggregate outstanding balance includes a first lien credit agreement and a second lien credit agreement with respective balances,
including accrued interest, of $27.4 million and $72.2 million as of September 30, 2020 and $77.5 million and $72.2 million
as of December 31, 2019, respectively. These amounts exclude an unamortized discount of $2.0 million as of September 30,
2020 and an unamortized premium of $0.9 million as of December 31, 2019. In accordance with the terms of the Second Amendments,
both loans accrue interest at a rate of 1-month LIBOR plus 8.0%, with a maximum rate of 9.5%. Both credit agreements were amended
and restated on August 13, 2020, which extended the maturity for both to April 10, 2021, as discussed in detail in Note 10 to the
condensed consolidated financial statements. Prior to the Second Amendments, both loans accrued interest at a rate of 1-month LIBOR
plus 3.95%, compounded daily. These loans are not currently guaranteed by GWG as of September 30, 2020.
Beneficient has additional borrowings maturing
in 2023 and 2024 with aggregate balances of $2.6 million and $2.5 million as of September 30, 2020 and December 31, 2019,
respectively.
We expect to meet our ongoing operational
capital needs for alternative asset investments, policy premiums and servicing costs, working capital and financing expenditures
including paying principal, interest and dividends through a combination of the receipt of policy benefits from our portfolio of
life insurance policies, net proceeds from our L Bond offering, dividends and interest from investments, including Beneficient’s
fee and loans receivable, and funding available from our LNV Credit Facility. We estimate that our liquidity and capital resources
are sufficient for our current and projected financial needs for at least the next twelve months given current assumptions. However,
if we are unable to continue our L Bond offering for any reason, and we are unable to obtain capital from other sources, our business
will be materially and adversely affected. In addition, our business will be materially and adversely affected if we do not receive
the policy benefits we forecast and if holders of our L Bonds fail to renew with the frequency we have historically experienced.
In such a case, we could be forced to sell our investments in life insurance policies to service or satisfy our debt-related and
other obligations. A sale under such circumstances may result in significant impairment of the recognized value of our portfolio.
Capital expenditures have historically
not been material and we do not anticipate making material capital expenditures through the remainder of 2020.
Alternative Assets and Secured Indebtedness
The following information is specifically
related to GWG Holdings, Inc. and its subsidiaries (not including the assets and liabilities held by Beneficient or any eliminations
in consolidation).
The following table seeks to illustrate
the impact that a hypothetical sale of our portfolio of life insurance assets (at various discount rates, including the discount
rate used to value our portfolio at September 30, 2020), and the realization of the investment in Common Units (a substantial
majority of the net assets of which are currently represented by intangible assets and goodwill), investment in Preferred Series
A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and the Commercial Loan Agreement (in each
case, at their respective carrying amounts and assuming no discount for lack of marketability or transaction costs, which could
be substantial) would have on our ability to satisfy our debt obligations as of September 30, 2020. The investment in Common
Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and
Commercial Loan Agreement are discussed in detail in Note 1 and other applicable notes to the consolidation financial statements.
The amounts in the table below do not include the consolidation of the assets and liabilities of Beneficient and related eliminations
as of September 30, 2020. In all cases, the sale of the life insurance assets owned by DLP IV will be used first to satisfy
all amounts owing under our LNV Credit Facility. The net sale proceeds remaining after satisfying all obligations under our LNV
Credit Facility would be applied to the L Bonds and Seller Trust L Bonds on a pari passu basis. All dollar amounts in the table
below are in thousands.
Life Insurance
Portfolio Discount Rate
|
|
8.25%(1)
|
|
|
10.00%
|
|
|
15.00%
|
|
|
18.00%
|
|
|
20.00%
|
|
Value of life insurance portfolio
|
|
$
|
787,260
|
|
|
$
|
724,925
|
|
|
$
|
589,682
|
|
|
$
|
529,946
|
|
|
$
|
496,422
|
|
Common Units
|
|
|
438,403
|
|
|
|
438,403
|
|
|
|
438,403
|
|
|
|
438,403
|
|
|
|
438,403
|
|
Preferred Series A Subclass 1 Unit Account of BCH
|
|
|
319,030
|
|
|
|
319,030
|
|
|
|
319,030
|
|
|
|
319,030
|
|
|
|
319,030
|
|
Preferred Series C Unit Account of BCH
|
|
|
161,000
|
|
|
|
161,000
|
|
|
|
161,000
|
|
|
|
161,000
|
|
|
|
161,000
|
|
Commercial Loan Agreement
|
|
|
177,512
|
|
|
|
177,512
|
|
|
|
177,512
|
|
|
|
177,512
|
|
|
|
177,512
|
|
Cash, cash equivalents and policy benefits receivable
|
|
|
144,850
|
|
|
|
144,850
|
|
|
|
144,850
|
|
|
|
144,850
|
|
|
|
144,850
|
|
Other assets
|
|
|
22,194
|
|
|
|
22,194
|
|
|
|
22,194
|
|
|
|
22,194
|
|
|
|
22,194
|
|
Total assets
|
|
|
2,050,249
|
|
|
|
1,987,914
|
|
|
|
1,852,671
|
|
|
|
1,792,935
|
|
|
|
1,759,411
|
|
Less: Senior credit facility(2)
|
|
|
213,117
|
|
|
|
213,117
|
|
|
|
213,117
|
|
|
|
213,117
|
|
|
|
213,117
|
|
Net after senior credit facility
|
|
|
1,837,132
|
|
|
|
1,774,797
|
|
|
|
1,639,554
|
|
|
|
1,579,818
|
|
|
|
1,546,294
|
|
Less: L Bonds(3)
|
|
|
1,547,950
|
|
|
|
1,547,950
|
|
|
|
1,547,950
|
|
|
|
1,547,950
|
|
|
|
1,547,950
|
|
Net remaining
|
|
$
|
289,182
|
|
|
$
|
226,847
|
|
|
$
|
91,604
|
|
|
$
|
31,868
|
|
|
$
|
(1,656
|
)
|
Impairment to L Bonds
|
|
No impairment
|
|
|
No impairment
|
|
|
No impairment
|
|
|
No Impairment
|
|
|
Impairment
|
|
|
(1)
|
The discount rate used to calculate the fair value of our
life insurance portfolio as of September 30, 2020.
|
|
(2)
|
This amount excludes unamortized deferred financing costs.
|
|
(3)
|
Amount represents aggregate outstanding principal balance
of L Bonds and Seller Trust L Bonds as of September 30, 2020.
|
The above table illustrates that our ability
to fully satisfy amounts owing under the L Bonds and Seller Trust L Bonds would likely be impaired upon the sale or the realization
of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series
C Unit Account of BCH and Commercial Loan Agreement at their respective carrying amounts, plus all our life insurance assets at
a price equivalent to a discount rate of approximately 20.00% or higher at September 30, 2020. At December 31, 2019,
the likely impairment occurred at a discount rate of approximately 27.41% or higher.
The table does not include any allowance
for transactional fees and expenses (which expenses and fees could be substantial) nor any discount for lack of marketability associated
with a portfolio sale or the realization of the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account
of BCH, investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement, respectively, and is provided to demonstrate
how various discount rates used to value our portfolio of life insurance assets could affect our ability to satisfy amounts owing
under our debt obligations in light of our senior secured lender’s right to priority payments under our senior credit facility
with LNV Corporation.
The table assumes we will realize the full
amounts of investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred
Series C Unit Account of BCH and Commercial Loan Agreement. There is currently no market for the aforementioned assets, and a market
may not develop. Our Commercial Loan receivable and a portion of our investment in the Common Units may be used as consideration
for retiring the Seller Trust L Bonds upon a redemption event or at the maturity of the Seller Trust L Bonds (see Note 10 to
the condensed consolidated financial statements). This table also does not include the yield maintenance fee we are required to
pay in certain circumstances under our LNV Credit Facility, which could be substantial. The above table should be read in conjunction
with the information contained in other sections of this report, including the notes to the condensed consolidated financial statements
in this Form 10-Q and our 2019 Form 10-K.
Amendment of Credit Facility with
LNV Corporation
Effective November 1, 2019, DLP IV entered
into the LNV Credit Facility. The LNV Credit Facility makes available a total of up to $300.0 million in credit to DLP IV with
a maturity date of September 27, 2029. Subject to available borrowing base capacity, additional advances are available under the
LNV Credit Facility at the LIBOR rate described below. Such advances are available to pay premiums and servicing costs of pledged
life insurance policies as such amounts become due. Interest will accrue on amounts borrowed under the LNV Credit Facility at an
annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (a) the greater of
9.00% or 12-month LIBOR, plus (b) 7.50% per annum. The effective rate at September 30, 2020 was 9.00%. Interest payments are
made on a quarterly basis.
Under the LNV Credit Facility, DLP IV has
granted the administrative agent, for the benefit of the lenders under the facility, a security interest in all of DLP IV’s
assets. As with prior collateral arrangements relating to the senior secured debt of GWG Holdings and its subsidiaries (on a consolidated
basis), GWG Life’s excess equity value of DLP IV after satisfying all amounts owing under our LNV Credit Facility is available
as collateral for the obligations of GWG Holdings under the L Bonds and Seller Trust L Bonds (although the life insurance assets
owned by DLP IV do not themselves serve as direct collateral for those obligations).
We are subject to various financial and
non-financial covenants under the LNV Credit Facility, including, but not limited to, compliance with laws, preservation of existence,
financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP IV nor GWG
Life become an investment company. As of September 30, 2020, we were in compliance with all financial and non-financial covenants.
Cash Flows
Interest and Dividend Payments
We finance our businesses through a combination
of: life insurance policy benefit receipts; principal, dividends and interest receipt on investments, including Ben LP fee and
loans receivable; debt and equity offerings; and our senior credit facility with LNV Corporation. We have historically relied on
debt (L Bonds and our senior credit facility with LNV Corporation) and equity (preferred stock) financing for the majority of our
cash expenditures (for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including
paying principal and interest on existing debt, and for making investments in Beneficient) as the amount of cash flows from the
realization of life insurance policy benefits and cash flows from our other investments has been insufficient to meet all of our
needs. This has resulted in the Company incurring substantial indebtedness and, to a lesser extent, obligations to make dividend
payments on our classes of preferred stock.
Beneficient finances its business through
payments on outstanding loans receivable and fees receivable and additional investments into Beneficient by GWG Holdings and/or
other parties. See Note 10 to the condensed consolidated financial statements for details on the amendments of Beneficient’s
credit agreements. Beneficient uses proceeds from these sources to fund loan originations and potential unfunded capital commitments,
working capital, debt service payments and costs associated with potential future products. Beneficient also anticipates the need
to establish sufficient regulatory capital if and when its trust charters are issued.
Our total interest expense of $40.8 million
and $28.3 million for the three months ended September 30, 2020 and 2019, respectively, and $113.8 million and $83.8 million
for the nine months ended September 30, 2020 and 2019, respectively, represent the largest cash expense item in each period.
Preferred stock cash dividends were $3.6 million and $4.2 million for the three months ended September 30, 2020 and 2019,
respectively, and $11.2 million and $12.8 million for the nine months ended September 30, 2020 and 2019, respectively. While
reducing our cost of funds and increasing our common equity base (at valuations accretive to our book value) are primary goals
of the Company, until we do so we will continue to expend significant amounts of cash for interest and dividend payments and will
thus continue to rely heavily on our ability to raise cash from our L Bond offering, senior credit facility with LNV Corporation
and other means as they are developed and available.
Life Insurance Policy Premium Payments
The payment of premiums and servicing costs
to maintain life insurance policies represents one of our most significant requirements for cash disbursement. When a policy is
purchased, we are able to calculate the minimum premium payments required to maintain the policy in-force. Over time as the insured
ages, premium payments will increase. Nevertheless, the probability we will be required to pay the premiums decreases as mortality
becomes more likely. These scheduled premiums and associated probabilities are factored into our expected internal rate of return
and cash-flow modeling. Beyond premiums, we incur policy servicing costs, including annual trustee, policy administration and tracking
costs. Additionally, we incur significant financing costs, including principal, interest and dividends. Both policy servicing costs
and financing costs are excluded from our internal rate of return calculations. We finance our businesses through a combination
of life insurance policy benefit receipts, dividends and interest on other investments, equity offerings, debt offerings, and advances
under our senior credit facility with LNV Corporation.
The amount of payments for anticipated
premiums, including the requirement under our LNV Credit Facility to maintain a two month cost-of-insurance threshold within each
policy cash value account, and 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 (in thousands):
Years Ending December 31,
|
|
Premiums
|
|
|
Servicing
|
|
|
Total
|
|
Three months ending December 31, 2020
|
|
$
|
13,088
|
|
|
$
|
405
|
|
|
$
|
13,493
|
|
2021
|
|
|
78,959
|
|
|
|
1,620
|
|
|
|
80,579
|
|
2022
|
|
|
91,220
|
|
|
|
1,620
|
|
|
|
92,840
|
|
2023
|
|
|
102,859
|
|
|
|
1,620
|
|
|
|
104,479
|
|
2024
|
|
|
112,033
|
|
|
|
1,620
|
|
|
|
113,653
|
|
2025
|
|
|
124,556
|
|
|
|
1,620
|
|
|
|
126,176
|
|
|
|
$
|
522,715
|
|
|
$
|
8,505
|
|
|
$
|
531,220
|
|
Our anticipated premium expenses are subject
to the risk of increased cost-of-insurance charges (i.e., “COI” or premium charges) for the life insurance policies
we own. We did not receive any notices of COI rate changes in 2019. We have received notices of COI increases on six policies in
the first nine months of 2020.
We have no known pending cost-of-insurance
increases on any policies in our portfolio, but we are aware that cost-of-insurance increases have become more prevalent in the
industry. Thus, we may see additional insurers implementing cost-of-insurance increases in the future.
Life Insurance Policy Benefit Receipts
For the quarter-end dates set forth below,
the following table illustrates the total amount of face value of policy benefits owned, and the trailing 12 months of life insurance
policy benefits realized and premiums paid on our portfolio. The trailing 12-month benefits/premium coverage ratio indicates the
ratio of policy benefits realized to premiums paid over the trailing 12-month period from our portfolio of life insurance policies.
Quarter End Date
|
|
Portfolio Face Amount (in Thousands)
|
|
|
12-Month Trailing Benefits Realized (in Thousands)
|
|
|
12-Month Trailing Premiums Paid (in Thousands)
|
|
|
12-Month Trailing Benefits/Premium Coverage Ratio
|
|
March 31, 2016
|
|
$
|
1,027,821
|
|
|
$
|
21,845
|
|
|
$
|
28,771
|
|
|
|
75.9
|
%
|
June 30, 2016
|
|
|
1,154,798
|
|
|
|
30,924
|
|
|
|
31,891
|
|
|
|
97.0
|
%
|
September 30, 2016
|
|
|
1,272,078
|
|
|
|
35,867
|
|
|
|
37,055
|
|
|
|
96.8
|
%
|
December 31, 2016
|
|
|
1,361,675
|
|
|
|
48,452
|
|
|
|
40,239
|
|
|
|
120.4
|
%
|
March 31, 2017
|
|
|
1,447,558
|
|
|
|
48,189
|
|
|
|
42,753
|
|
|
|
112.7
|
%
|
June 30, 2017
|
|
|
1,525,363
|
|
|
|
49,295
|
|
|
|
45,414
|
|
|
|
108.5
|
%
|
September 30, 2017
|
|
|
1,622,627
|
|
|
|
53,742
|
|
|
|
46,559
|
|
|
|
115.4
|
%
|
December 31, 2017
|
|
|
1,676,148
|
|
|
|
64,719
|
|
|
|
52,263
|
|
|
|
123.8
|
%
|
March 31, 2018
|
|
|
1,758,066
|
|
|
|
60,248
|
|
|
|
53,169
|
|
|
|
113.3
|
%
|
June 30, 2018
|
|
|
1,849,079
|
|
|
|
76,936
|
|
|
|
53,886
|
|
|
|
142.8
|
%
|
September 30, 2018
|
|
|
1,961,598
|
|
|
|
75,161
|
|
|
|
55,365
|
|
|
|
135.8
|
%
|
December 31, 2018
|
|
|
2,047,992
|
|
|
|
71,090
|
|
|
|
52,675
|
|
|
|
135.0
|
%
|
March 31, 2019
|
|
|
2,098,428
|
|
|
|
87,045
|
|
|
|
56,227
|
|
|
|
154.8
|
%
|
June 30, 2019
|
|
|
2,088,445
|
|
|
|
82,421
|
|
|
|
59,454
|
|
|
|
138.6
|
%
|
September 30, 2019
|
|
|
2,064,156
|
|
|
|
101,918
|
|
|
|
61,805
|
|
|
|
164.9
|
%
|
December 31, 2019
|
|
|
2,020,973
|
|
|
|
125,148
|
|
|
|
63,851
|
|
|
|
196.0
|
%
|
March 31, 2020
|
|
|
2,000,680
|
|
|
|
120,191
|
|
|
|
65,224
|
|
|
|
184.3
|
%
|
June 30, 2020
|
|
|
1,960,826
|
|
|
|
137,082
|
|
|
|
66,846
|
|
|
|
205.1
|
%
|
September 30, 2020
|
|
|
1,921,067
|
|
|
|
149,415
|
|
|
|
67,931
|
|
|
|
220.0
|
%
|
We believe that the portfolio cash flow
results set forth above are consistent with our general investment thesis that the life insurance policy benefits we receive will
continue to increase over time in relation to the premiums we are required to pay on the remaining polices in the portfolio. Nevertheless,
we expect that our portfolio cash flow on a period-to-period basis will remain inconsistent as we continue to allocate substantially
more capital to Beneficient.
Interest Income
We earn interest income primarily on Beneficient’s
loans receivable and the promissory note receivable from the LiquidTrusts. Although Beneficient has originated a limited number
of loans to date, we expect interest income to continue to increase as Beneficient expands its operations if and when the trust
charters are issued.
Inflation
Changes in inflation do not necessarily
correlate with changes in interest rates. We presently do not foresee any material impact of inflation on our results of operations
in the periods presented in our condensed consolidated financial statements.
Off-Balance Sheet Arrangements
Unfunded Capital Commitments
Beneficient had $35.3 million and $73.8
million of gross potential capital commitments as of September 30, 2020 and December 31, 2019, respectively, representing
potential limited partner capital funding commitments on the alternative asset fund collateral to its loans above any cash reserves.
The decrease in gross potential capital commitments from December 31, 2019 is due to the liquidation of the underlying funds
and removal of the related commitment. The trust holding the interest in the limited partnership for the alternative asset fund
is required to fund these limited partner capital commitments per the terms of the limited partnership agreement. Capital funding
commitment reserves are maintained by the associated trusts created at the origination of each trust for up to $0.1 million. To
the extent that the associated trust cannot pay the capital funding commitment, Beneficient is obligated to lend sufficient funds
to meet the commitment. Any amounts advanced by Beneficient for these limited partner capital funding commitments above the associated
capital funding commitment reserves held by the associated trusts are added to the loan balance and are expected to be recouped
through the cash distributions from the alternative asset fund collateral.
Capital commitments generally originate
from limited partner agreements having fixed or expiring expiration dates. The total limited partner capital funding commitment
amounts may not necessarily represent future cash requirements. Beneficient considers the creditworthiness on a case-by-case basis.
At both September 30, 2020 and December 31, 2019, Beneficient had no reserves for losses on unused commitments to fund
potential limited partner capital funding commitments.
Credit Risk and Interest Rate Risk
We review the credit risk associated with
our portfolio of life insurance policies when estimating its fair value. In evaluating the policies’ credit risk, we consider
insurance company solvency, credit risk indicators, economic conditions, ongoing credit evaluations, and company positions. We
attempt to manage our credit risk related to life insurance policies typically by purchasing policies issued only from companies
with an investment-grade credit rating by either Standard & Poor’s, Moody’s, or A.M. Best Company. As of September 30,
2020, 96.2% of our life insurance policies, by face value benefits, were issued by companies that maintained an investment-grade
rating (BBB or better) by Standard & Poor’s.
The assets and liabilities exchanged in
the Initial Transfer of the Exchange Transaction are excluded from this analysis.
Our LNV Credit Facility and Beneficient’s
other borrowings are floating-rate financings. In addition, our ability to offer interest and dividend rates that attract capital
(including in our continuous offering of L Bonds) is generally impacted by prevailing interest rates. Furthermore, while our L
Bond offering provides us with fixed-rate debt financing, our Debt Coverage Ratio is calculated in relation to the interest rate
on all of our debt financing, exclusive of our Seller Trust L Bonds. Therefore, increases in interest rates impact our business
by increasing our borrowing costs and reducing availability under our debt financing arrangements. Earnings from our life insurance
portfolio are based upon the spread, if any, generated between the return on the portfolio and the total cost of our financing
(excluding cost of financing for the Seller Trust L Bonds). As a result, increases in interest rates will reduce the earnings we
expect to achieve from our investments in life insurance policies.
Beneficient is subject to risks related
to markets, credit, currency, and interest rates. Beneficient issues loans that are subject to credit risk, repayment risk and
interest rate risk. Beneficient has underwriting procedures and utilizes market rates. As of September 30, 2020, all of Beneficient’s
loans are collateralized by the cash flows originating from alternative assets without recourse to the client. Currently, all of
these alternative assets consist of private equity limited partnership interests, which are primarily denominated in the U.S. dollar,
Euro, and Canadian dollar. The underlying portfolio companies primarily operate in the United States, with the largest percentage,
based on NAV, operating in healthcare technology, bio-technology, and semiconductor and equipment industries. The Company mitigates
credit risk through the ExAlt PlanTM whereby excess cash flows from a collective pool of alternative assets can be utilized
to repay the loans when cash flows from the client’s original alternative assets are not sufficient to repay the outstanding
principal, interest, and fees.
Guarantee and Collateral Provisions of L Bonds and Seller
Trust L Bonds
Our L Bonds are offered and sold under
a registration statement declared effective by the SEC, and we have issued Seller Trust L Bonds under a Supplemental Indenture,
as described in Note 10 to the condensed consolidated financial statements. The L Bonds and Seller Trust L Bonds are secured by
substantially all the assets of GWG Holdings and a pledge of all of GWG Holdings’ common stock held by BCC and AltiVerse
(which together represent approximately 12% of our outstanding common stock), and are guaranteed by a guarantee by GWG Life and
corresponding grant of a security interest in substantially all the assets of GWG Life(1). As a guarantor, GWG Life
has fully and unconditionally guaranteed the payment of principal and interest on the L Bonds and Seller Trust L Bonds. GWG Life’s
equity in GWG Life Trust, DLP IV(2), and DLP V Holdings serves as collateral for our L Bond and Seller Trust L Bond
obligations. Substantially all of our life insurance policies are held by DLP IV, DLP V, or GWG Life Trust. The policies held by
DLP IV are not direct collateral for the L Bonds as such policies are pledged to the LNV Credit Facility.
|
(1)
|
The Seller Trust L Bonds are senior secured obligations
of GWG, ranking junior to all senior debt of GWG and pari passu in right of payment and in respect of collateral with all L Bonds
of GWG (see Note 10). Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in connection with
the Beneficent transaction are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically,
the Common Units are held by GWG Holdings and the Commercial Loan is held by GWG Life.
|
|
(2)
|
The terms of our LNV Credit Facility require that
we maintain a significant excess of pledged collateral value over the amount outstanding on the LNV Credit Facility at any given
time. Any excess after satisfying all amounts owing under our LNV Credit Facility is available as collateral for the L Bonds (including
the Seller Trust L Bonds).
|
The following represents summarized financial
information as of September 30, 2020 and December 31, 2019, with respect to the financial position, and for the nine
months ended September 30, 2020, with respect to results of operations. The tables present summarized financial information
of GWG Holdings as issuer of the L Bonds and Seller Trust L Bonds, and GWG Life as guarantor, on a combined basis after elimination
of (i) intercompany transactions and balances among such entities, including GWG Holdings’ interest in GWG Life, and (ii)
equity in earnings from and investments in any subsidiary that is a non-guarantor (including DLP IV, DLP V, GWG Life Trust and
Beneficient). The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.
Summarized Balance Sheet Information (in
thousands, not intended to balance):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Assets(1)
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
91,289
|
|
|
$
|
60,365
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
67,153
|
|
Other assets
|
|
|
7,400
|
|
|
|
8,659
|
|
Total assets
|
|
$
|
98,689
|
|
|
$
|
136,177
|
|
Liabilities
|
|
|
|
|
|
|
|
|
L Bonds
|
|
$
|
1,154,519
|
|
|
$
|
926,638
|
|
Seller Trust L Bonds
|
|
|
366,892
|
|
|
|
366,892
|
|
Interest and dividends payable
|
|
|
12,145
|
|
|
|
12,491
|
|
Accounts payable and accrued expenses
|
|
|
15,988
|
|
|
|
3,093
|
|
Deferred tax liabilities
|
|
|
52,500
|
|
|
|
57,923
|
|
Total liabilities
|
|
$
|
1,602,044
|
|
|
$
|
1,367,037
|
|
Equity
|
|
|
|
|
|
|
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
$
|
167,113
|
|
|
$
|
201,891
|
|
|
(1)
|
Assets exclude: i) GWG Holdings’ investment in GWG
Life of $1.2 billion and $1.2 billion as of September 30, 2020 and December 31, 2019, respectively; ii) GWG Holdings’
aggregate investments in non-obligor subsidiaries of $613.9 million and $439.4 million as of September 30, 2020 and December 31,
2019, respectively; and iii) GWG Life’s aggregate investments in and loans to non-obligor subsidiaries of $1.1 billion and
$1.2 billion as of September 30, 2020 and December 31, 2019, respectively.
|
Summarized Statement of Operations Information
(in thousands):
|
|
Nine Months
Ended
September 30,
2020
|
|
Total revenues
|
|
$
|
90,249
|
|
|
|
|
|
|
Interest expense
|
|
$
|
91,073
|
|
Other expenses
|
|
|
29,235
|
|
Total expenses
|
|
$
|
120,308
|
|
Loss before income taxes and preferred dividends
|
|
$
|
(30,059
|
)
|
Income tax expense (benefit)
|
|
|
(1,416
|
)
|
Preferred dividends
|
|
|
11,235
|
|
Net loss
|
|
$
|
(39,878
|
)
|
Debt Coverage Ratio
The L Bond borrowing covenants of GWG Holdings
require it to maintain a Debt Coverage Ratio of less than 90%. The Debt Coverage Ratio is calculated by dividing the sum of our
total interest-bearing indebtedness (other than Excluded Indebtedness described in note 2 to the table below) by the sum of our
cash, cash equivalents, restricted cash, life insurance policy benefits receivable, the net present value of the life insurance
portfolio, and, 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 discount rate we use for the net present value of our life insurance portfolio for this calculation
may not be the same discount rate we use for our GAAP valuation and is not necessarily reflective of the amount we could realize
upon a sale of the portfolio (dollar amounts in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Life insurance portfolio policy benefits
|
|
$
|
1,921,067
|
|
|
$
|
2,020,973
|
|
Discount rate of future cash flows(1)
|
|
|
7.49
|
%
|
|
|
7.55
|
%
|
Net present value of life insurance portfolio policy benefits
|
|
$
|
817,555
|
|
|
$
|
826,196
|
|
All cash and cash equivalents (including restricted cash)
|
|
|
108,432
|
|
|
|
81,780
|
|
Life insurance policy benefits receivable, net
|
|
|
36,418
|
|
|
|
23,031
|
|
Financing receivables from affiliates(2)
|
|
|
177,512
|
|
|
|
258,402
|
|
Investments in Common Units(2)(3)
|
|
|
438,403
|
|
|
|
313,443
|
|
Investments in Preferred Series A Subclass 1 Unit Account
|
|
|
319,030
|
|
|
|
319,030
|
|
Investments in Preferred Series C Unit Account
|
|
|
161,000
|
|
|
|
—
|
|
Option Agreement and other assets(3)
|
|
|
22,194
|
|
|
|
54,365
|
|
Total Coverage(4)
|
|
$
|
2,080,544
|
|
|
$
|
1,876,247
|
|
|
|
|
|
|
|
|
|
|
Total Indebtedness(4)
|
|
$
|
1,444,454
|
|
|
$
|
1,132,714
|
|
|
|
|
|
|
|
|
|
|
Debt Coverage Ratio
|
|
|
69.43
|
%
|
|
|
60.40
|
%
|
|
(1)
|
Weighted-average interest rate paid on indebtedness, excluding
that of Seller Trust L-Bonds.
|
|
(2)
|
The LiquidTrust Promissory Note, previously included in
financing receivables from affiliates, was converted to Common Units on September 30, 2020.
|
|
(3)
|
The Option Agreement was exercised and converted to Common
Units effective August 11, 2020.
|
|
(4)
|
Total Coverage excludes the assets of Beneficient. Total
Indebtedness is equal to the total liabilities balance of GWG Holdings (excluding the liabilities of Beneficient) as of September 30,
2020, other than Excluded Indebtedness. Excluded Indebtedness is Indebtedness that is payable at the Company’s option in
Capital Stock of the Company or securities mandatorily convertible into or exchangeable for Capital Stock of the Company, or any
Indebtedness that is reasonably expected to be converted or exchanged, directly or indirectly, into Capital Stock of the Company.
This change in the definition of the Debt Coverage Ratio was defined in Amendment No. 2 to the Amended and Restated Indenture
entered into as of December 31, 2019 (see Note 10 to the condensed consolidated financial statements).
|
As of September 30, 2020 and December 31,
2019, we were in compliance with the Debt Coverage Ratio.
FINANCIAL INFORMATION
GWG HOLDINGS, INC.
Set forth below are our condensed consolidated
financial statements and the notes thereto that were included in the Quarterly Report. References to “this report”
in the notes to our condensed consolidated financial statements refer to the Quarterly Report.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share
data)
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
93,766
|
|
|
$
|
79,073
|
|
Restricted cash
|
|
|
15,990
|
|
|
|
20,258
|
|
Investment in life insurance policies, at fair value
|
|
|
787,260
|
|
|
|
796,039
|
|
Life insurance policy benefits receivable, net
|
|
|
36,418
|
|
|
|
23,031
|
|
Loans receivable, net of discount
|
|
|
229,961
|
|
|
|
232,344
|
|
Allowance for loan losses
|
|
|
(2,914
|
)
|
|
|
—
|
|
Loans receivable, net
|
|
|
227,047
|
|
|
|
232,344
|
|
Fees receivable
|
|
|
31,571
|
|
|
|
29,168
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
67,153
|
|
Other assets
|
|
|
53,501
|
|
|
|
30,135
|
|
Goodwill
|
|
|
2,384,121
|
|
|
|
2,358,005
|
|
TOTAL ASSETS
|
|
$
|
3,629,674
|
|
|
$
|
3,635,206
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
$
|
203,907
|
|
|
$
|
174,390
|
|
L Bonds
|
|
|
1,154,519
|
|
|
|
926,638
|
|
Seller Trust L Bonds
|
|
|
366,892
|
|
|
|
366,892
|
|
Other borrowings
|
|
|
100,178
|
|
|
|
153,086
|
|
Interest and dividends payable
|
|
|
23,821
|
|
|
|
16,516
|
|
Deferred revenue
|
|
|
35,848
|
|
|
|
41,444
|
|
Accounts payable and accrued expenses
|
|
|
33,235
|
|
|
|
27,836
|
|
Deferred tax liability, net
|
|
|
52,500
|
|
|
|
57,923
|
|
TOTAL LIABILITIES
|
|
|
1,970,900
|
|
|
|
1,764,725
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
|
|
1,246,753
|
|
|
|
1,269,654
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REDEEMABLE PREFERRED STOCK
|
|
|
|
|
|
|
|
|
(par value $0.001; shares authorized 100,000; shares outstanding 59,681 and 84,636; liquidation preference of $60,029 and $85,130 as of September 30, 2020 and December 31, 2019, respectively)
|
|
|
49,068
|
|
|
|
74,023
|
|
SERIES 2 REDEEMABLE PREFERRED STOCK
|
|
|
|
|
|
|
|
|
(par value $0.001; shares authorized 150,000; shares outstanding 137,341 and 147,164; liquidation preference of $138,142 and $148,023 as of September 30, 2020 and December 31, 2019, respectively)
|
|
|
118,045
|
|
|
|
127,868
|
|
COMMON STOCK
|
|
|
|
|
|
|
|
|
(par value $0.001; shares authorized 210,000,000; shares issued and outstanding, 33,094,664 and 33,033,793 as of September 30, 2020 and December 31, 2019, respectively)
|
|
|
33
|
|
|
|
33
|
|
Common stock in treasury, at cost (2,500,000 shares as of both September 30, 2020 and December 31, 2019)
|
|
|
(24,550
|
)
|
|
|
(24,550
|
)
|
Additional paid-in capital
|
|
|
178,969
|
|
|
|
233,106
|
|
Accumulated deficit
|
|
|
(200,935
|
)
|
|
|
(76,501
|
)
|
TOTAL GWG HOLDINGS STOCKHOLDERS’ EQUITY
|
|
|
120,630
|
|
|
|
333,979
|
|
Noncontrolling interests
|
|
|
291,391
|
|
|
|
266,848
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
412,021
|
|
|
|
600,827
|
|
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
3,629,674
|
|
|
$
|
3,635,206
|
|
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share
data)
(unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on life insurance policies, net
|
|
$
|
14,122
|
|
|
$
|
17,792
|
|
|
$
|
43,355
|
|
|
$
|
59,219
|
|
Interest income
|
|
|
12,928
|
|
|
|
3,935
|
|
|
|
39,588
|
|
|
|
11,273
|
|
Trust services revenues
|
|
|
4,556
|
|
|
|
—
|
|
|
|
14,412
|
|
|
|
—
|
|
Other income (loss)
|
|
|
(3,093
|
)
|
|
|
484
|
|
|
|
33,504
|
|
|
|
947
|
|
TOTAL REVENUE
|
|
|
28,513
|
|
|
|
22,211
|
|
|
|
130,859
|
|
|
|
71,439
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
40,792
|
|
|
|
28,290
|
|
|
|
113,805
|
|
|
|
83,752
|
|
Employee compensation and benefits
|
|
|
33,777
|
|
|
|
9,137
|
|
|
|
123,321
|
|
|
|
21,085
|
|
Legal and professional fees
|
|
|
7,830
|
|
|
|
2,594
|
|
|
|
21,636
|
|
|
|
10,263
|
|
(Recapture of) provision for loan losses
|
|
|
(4,986
|
)
|
|
|
—
|
|
|
|
2,914
|
|
|
|
—
|
|
Other expenses
|
|
|
4,550
|
|
|
|
3,549
|
|
|
|
13,057
|
|
|
|
12,316
|
|
TOTAL EXPENSES
|
|
|
81,963
|
|
|
|
43,570
|
|
|
|
274,733
|
|
|
|
127,416
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(53,450
|
)
|
|
|
(21,359
|
)
|
|
|
(143,874
|
)
|
|
|
(55,977
|
)
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
22,444
|
|
|
|
—
|
|
|
|
(613
|
)
|
|
|
—
|
|
NET LOSS BEFORE INCOME (LOSS) FROM EQUITY METHOD INVESTMENT
|
|
|
(75,894
|
)
|
|
|
(21,359
|
)
|
|
|
(143,261
|
)
|
|
|
(55,977
|
)
|
Income (loss) from equity method investment
|
|
|
(1,431
|
)
|
|
|
956
|
|
|
|
(4,279
|
)
|
|
|
(371
|
)
|
NET LOSS
|
|
|
(77,325
|
)
|
|
|
(20,403
|
)
|
|
|
(147,540
|
)
|
|
|
(56,348
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
12,745
|
|
|
|
—
|
|
|
|
23,106
|
|
|
|
—
|
|
Less: Preferred stock dividends
|
|
|
3,569
|
|
|
|
4,232
|
|
|
|
11,235
|
|
|
|
12,806
|
|
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(68,149
|
)
|
|
$
|
(24,635
|
)
|
|
$
|
(135,669
|
)
|
|
$
|
(69,154
|
)
|
NET LOSS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.23
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(4.44
|
)
|
|
$
|
(2.09
|
)
|
Diluted
|
|
$
|
(2.23
|
)
|
|
$
|
(0.75
|
)
|
|
$
|
(4.44
|
)
|
|
$
|
(2.09
|
)
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,584,719
|
|
|
|
33,033,420
|
|
|
|
30,552,233
|
|
|
|
33,010,100
|
|
Diluted
|
|
|
30,584,719
|
|
|
|
33,033,420
|
|
|
|
30,552,233
|
|
|
|
33,010,100
|
|
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss
|
|
$
|
(147,540
|
)
|
|
$
|
(56,348
|
)
|
Adjustments to reconcile net loss to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of life insurance policies
|
|
|
(23,476
|
)
|
|
|
(48,031
|
)
|
Amortization of deferred financing and issuance costs
|
|
|
13,345
|
|
|
|
9,982
|
|
Amortization of upfront fees
|
|
|
(5,356
|
)
|
|
|
—
|
|
Amortization of debt discount, net
|
|
|
274
|
|
|
|
—
|
|
Amortization and depreciation on long-lived assets
|
|
|
827
|
|
|
|
—
|
|
Accretion of discount on financing receivable from affiliate
|
|
|
—
|
|
|
|
(1,292
|
)
|
Provisions for uncollectible policy benefits receivable
|
|
|
—
|
|
|
|
201
|
|
Non-cash interest income
|
|
|
(38,530
|
)
|
|
|
—
|
|
Non-cash interest expense
|
|
|
1,795
|
|
|
|
—
|
|
Loss from equity method investment
|
|
|
4,279
|
|
|
|
371
|
|
Loss on fair value of put options
|
|
|
3,191
|
|
|
|
—
|
|
Provision for loan losses
|
|
|
2,914
|
|
|
|
—
|
|
Deferred income tax
|
|
|
(4,621
|
)
|
|
|
—
|
|
Equity-based compensation
|
|
|
96,618
|
|
|
|
1,365
|
|
Forfeiture of vested equity-based compensation
|
|
|
(36,267
|
)
|
|
|
—
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
(13,387
|
)
|
|
|
(1,109
|
)
|
Fees receivable
|
|
|
(2,643
|
)
|
|
|
—
|
|
Accrued interest on financing receivable
|
|
|
—
|
|
|
|
(5,124
|
)
|
Other assets
|
|
|
(2,634
|
)
|
|
|
(4,557
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
|
8,306
|
|
|
|
(8,432
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(142,905
|
)
|
|
|
(112,974
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
(32,249
|
)
|
Return of investment for matured life insurance policies
|
|
|
32,255
|
|
|
|
20,685
|
|
Purchases of fixed assets
|
|
|
(2,498
|
)
|
|
|
—
|
|
Financing receivables from affiliates issued
|
|
|
—
|
|
|
|
(50,000
|
)
|
Equity method investments
|
|
|
(10,144
|
)
|
|
|
(10,000
|
)
|
Net change in loans receivable
|
|
|
11,169
|
|
|
|
—
|
|
Investment in put options
|
|
|
(14,775
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
16,007
|
|
|
|
(71,564
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
28,530
|
|
|
|
3,937
|
|
Repayments of senior debt and other borrowings
|
|
|
(50,000
|
)
|
|
|
(21,649
|
)
|
Payments for deferred financing costs for other borrowings
|
|
|
(3,307
|
)
|
|
|
—
|
|
Purchase of noncontrolling interest
|
|
|
(1,195
|
)
|
|
|
—
|
|
Proceeds from issuance of L Bonds
|
|
|
317,302
|
|
|
|
278,239
|
|
Payments for issuance of L Bonds
|
|
|
(20,203
|
)
|
|
|
(16,562
|
)
|
Payments for redemption of L Bonds
|
|
|
(82,206
|
)
|
|
|
(92,095
|
)
|
Issuance of common stock
|
|
|
8
|
|
|
|
58
|
|
Payments for redemption of preferred stock
|
|
|
(34,779
|
)
|
|
|
(6,135
|
)
|
Preferred stock dividends
|
|
|
(11,235
|
)
|
|
|
(12,806
|
)
|
Tax distribution to noncontrolling interest
|
|
|
(5,592
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
137,323
|
|
|
|
132,987
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
10,425
|
|
|
|
(51,551
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
99,331
|
|
|
|
125,436
|
|
END OF PERIOD
|
|
$
|
109,756
|
|
|
$
|
73,885
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Interest paid
|
|
$
|
97,098
|
|
|
$
|
75,153
|
|
Premiums paid, including prepaid
|
|
|
52,136
|
|
|
|
51,586
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
L Bonds: Conversion of accrued interest and commissions payable to principal
|
|
$
|
1,296
|
|
|
$
|
1,086
|
|
Conversion of Promissory Note (see Note 6)
|
|
|
70,565
|
|
|
|
—
|
|
Employee payroll tax liability on restricted equity units
|
|
|
1,555
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Business combination measurement period adjustments:
|
|
|
|
|
|
|
|
|
Reduction in loans receivable (see Note 4)
|
|
$
|
26,116
|
|
|
$
|
—
|
|
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
For the three and nine months ended September 30, 2020:
|
|
Redeemable
Preferred
Stock
Shares
|
|
|
Redeemable
Preferred
Stock
|
|
|
Common
Shares
|
|
|
Common
Stock
(par)
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Total
GWG
Holdings
Stockholders’
Equity
|
|
|
Noncontrolling
Interests
|
|
|
Total
Stockholders’
Equity
|
|
|
Redeemable
noncontrolling
interests
|
|
Balance,
June 30, 2020 (unaudited)
|
|
|
207,311
|
|
|
$
|
177,402
|
|
|
|
30,537,481
|
|
|
$
|
33
|
|
|
$
|
225,537
|
|
|
$
|
(136,355
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
242,067
|
|
|
$
|
298,705
|
|
|
$
|
540,772
|
|
|
$
|
1,264,031
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(64,580
|
)
|
|
|
—
|
|
|
|
(64,580
|
)
|
|
|
(1,059
|
)
|
|
|
(65,639
|
)
|
|
|
(11,686
|
)
|
Issuance of common
stock
|
|
|
—
|
|
|
|
—
|
|
|
|
57,183
|
|
|
|
—
|
|
|
|
524
|
|
|
|
—
|
|
|
|
—
|
|
|
|
524
|
|
|
|
—
|
|
|
|
524
|
|
|
|
—
|
|
Redemption of redeemable
preferred stock
|
|
|
(10,289
|
)
|
|
|
(10,289
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,289
|
)
|
|
|
—
|
|
|
|
(10,289
|
)
|
|
|
—
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,569
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,569
|
)
|
|
|
—
|
|
|
|
(3,569
|
)
|
|
|
—
|
|
LiquidTrust promissory
note conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,274
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,274
|
)
|
|
|
(26,291
|
)
|
|
|
(70,565
|
)
|
|
|
—
|
|
Tax distribution to
noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,592
|
)
|
Equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
23,222
|
|
|
|
23,275
|
|
|
|
—
|
|
Accrual for employee
payroll taxes due on restricted equity units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,554
|
)
|
|
|
(1,554
|
)
|
|
|
—
|
|
Adjustment to noncontrolling
interest for change in ownership of Common Units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
698
|
|
|
|
—
|
|
|
|
—
|
|
|
|
698
|
|
|
|
(698
|
)
|
|
|
—
|
|
|
|
—
|
|
Purchase
of noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(934
|
)
|
|
|
(934
|
)
|
|
|
—
|
|
Balance,
September 30, 2020 (unaudited)
|
|
|
197,022
|
|
|
$
|
167,113
|
|
|
|
30,594,664
|
|
|
$
|
33
|
|
|
$
|
178,969
|
|
|
$
|
(200,935
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
120,630
|
|
|
$
|
291,391
|
|
|
$
|
412,021
|
|
|
$
|
1,246,753
|
|
|
|
Redeemable
Preferred
Stock
Shares
|
|
|
Redeemable
Preferred
Stock
|
|
|
Common
Shares
|
|
|
Common
Stock (par)
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Treasury
Stock
|
|
|
Total
GWG
Holdings
Stockholders’
Equity
|
|
|
Noncontrolling
Interests
|
|
|
Total
Stockholders’
Equity
|
|
|
Redeemable
noncontrolling
interests
|
|
Balance,
December 31, 2019 (audited)
|
|
|
231,800
|
|
|
$
|
201,891
|
|
|
|
30,533,793
|
|
|
$
|
33
|
|
|
$
|
233,106
|
|
|
$
|
(76,501
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
333,979
|
|
|
$
|
266,848
|
|
|
$
|
600,827
|
|
|
$
|
1,269,654
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(124,434
|
)
|
|
|
—
|
|
|
|
(124,434
|
)
|
|
|
(5,797
|
)
|
|
|
(130,231
|
)
|
|
|
(17,309
|
)
|
Issuance of common
stock
|
|
|
—
|
|
|
|
—
|
|
|
|
60,871
|
|
|
|
—
|
|
|
|
534
|
|
|
|
—
|
|
|
|
—
|
|
|
|
534
|
|
|
|
—
|
|
|
|
534
|
|
|
|
—
|
|
Redemption of redeemable
preferred stock
|
|
|
(34,778
|
)
|
|
|
(34,778
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(34,778
|
)
|
|
|
—
|
|
|
|
(34,778
|
)
|
|
|
—
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,235
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,235
|
)
|
|
|
—
|
|
|
|
(11,235
|
)
|
|
|
—
|
|
LiquidTrust promissory
note conversion
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,274
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(44,274
|
)
|
|
|
(26,291
|
)
|
|
|
(70,565
|
)
|
|
|
—
|
|
Tax distribution to
noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,592
|
)
|
Equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
140
|
|
|
|
—
|
|
|
|
—
|
|
|
|
140
|
|
|
|
96,345
|
|
|
|
96,485
|
|
|
|
—
|
|
Forfeiture of vested
equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,267
|
)
|
|
|
(36,267
|
)
|
|
|
—
|
|
Accrual for employee
payroll taxes due on restricted equity units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,554
|
)
|
|
|
(1,554
|
)
|
|
|
—
|
|
Adjustment to noncontrolling
interest for change in ownership of Common Units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
698
|
|
|
|
—
|
|
|
|
—
|
|
|
|
698
|
|
|
|
(698
|
)
|
|
|
—
|
|
|
|
—
|
|
Purchase
of noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,195
|
)
|
|
|
(1,195
|
)
|
|
|
—
|
|
Balance,
September 30, 2020 (unaudited)
|
|
|
197,022
|
|
|
$
|
167,113
|
|
|
|
30,594,664
|
|
|
$
|
33
|
|
|
$
|
178,969
|
|
|
$
|
(200,935
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
120,630
|
|
|
$
|
291,391
|
|
|
$
|
412,021
|
|
|
$
|
1,246,753
|
|
The accompanying notes are an integral part
of these Condensed Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
For the three and nine months ended September 30, 2019:
|
|
Redeemable
Preferred
Stock
Shares
|
|
|
Redeemable
Preferred
Stock
|
|
|
Common
Shares
|
|
|
Common
Stock (par)
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders’
Equity
|
|
Balance, June 30, 2019 (unaudited)
|
|
|
242,648
|
|
|
$
|
212,738
|
|
|
|
33,033,420
|
|
|
$
|
33
|
|
|
$
|
241,318
|
|
|
$
|
(220,555
|
)
|
|
$
|
233,534
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,403
|
)
|
|
|
(20,403
|
)
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Redemption of redeemable preferred stock
|
|
|
(2,920
|
)
|
|
|
(2,920
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,920
|
)
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,232
|
)
|
|
|
—
|
|
|
|
(4,232
|
)
|
Equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
|
|
74
|
|
Balance, September 30, 2019 (unaudited)
|
|
|
239,728
|
|
|
|
209,818
|
|
|
|
33,033,420
|
|
|
$
|
33
|
|
|
$
|
237,160
|
|
|
$
|
(240,958
|
)
|
|
$
|
206,053
|
|
|
|
Redeemable
Preferred
Stock
Shares
|
|
|
Redeemable
Preferred
Stock
|
|
|
Common
Shares
|
|
|
Common
Stock (par)
|
|
|
Additional
Paid-in
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders’
Equity
|
|
Balance, December 31, 2018 (audited)
|
|
|
245,883
|
|
|
$
|
215,973
|
|
|
|
33,018,161
|
|
|
$
|
33
|
|
|
$
|
249,662
|
|
|
$
|
(184,610
|
)
|
|
$
|
281,058
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(56,348
|
)
|
|
|
(56,348
|
)
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
58,009
|
|
|
|
—
|
|
|
|
419
|
|
|
|
—
|
|
|
|
419
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(42,750
|
)
|
|
|
—
|
|
|
|
(361
|
)
|
|
|
—
|
|
|
|
(361
|
)
|
Redemption of redeemable preferred stock
|
|
|
(6,155
|
)
|
|
|
(6,155
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,155
|
)
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(12,806
|
)
|
|
|
—
|
|
|
|
(12,806
|
)
|
Equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
246
|
|
|
|
—
|
|
|
|
246
|
|
Balance, September 30, 2019 (unaudited)
|
|
|
239,728
|
|
|
$
|
209,818
|
|
|
|
33,033,420
|
|
|
$
|
33
|
|
|
$
|
237,160
|
|
|
$
|
(240,958
|
)
|
|
$
|
206,053
|
|
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
Organizational Structure
GWG Holdings, Inc. (“GWG Holdings”)
conducts its life insurance secondary market business through a wholly-owned subsidiary, GWG Life, LLC (“GWG Life”),
and GWG Life’s wholly-owned subsidiaries, GWG Life Trust, GWG DLP Funding IV, LLC (“DLP IV”) and GWG DLP Funding
V Holdings, LLC (“DLP V Holdings”). DLP V Holdings is the sole member of GWG DLP Funding V, LLC (“DLP V”),
which holds certain life insurance policies.
GWG Holdings’ has indirect interests
in loans collateralized by cash flows from other alternative assets. These loans are held by The Beneficient Company Group, L.P.
(“Ben LP,” including all of the subsidiaries it may have from time to time — “Beneficient”) and its
general partner, Beneficient Management, L.L.C. (“Beneficient Management”). Prior to December 31, 2019, GWG Holdings’
investment in Beneficient was accounted for as an equity method investment. On December 31, 2019, as more fully described
below, Beneficient became a consolidated subsidiary of GWG Holdings.
Ben LP is the general partner of Beneficient
Company Holdings, L.P. (“BCH”) and owns 100% of the Class A Subclass A-1 and A-2 Units of BCH. BCH is the holding company
that directly or indirectly receives all active and passive income of Beneficient and allocates that income among the units issued
by BCH. As of September 30, 2020, BCH has issued general partnership Class A Units (Subclass A-1 and A-2), Class S Ordinary
Units, Class S Preferred Units, FLP Units (Subclass 1 and Subclass 2), Preferred Series A Subclass 1 Unit Accounts, Preferred Series
A Subclass 2 Unit Accounts, and Preferred Series C Unit Accounts. BCH issued to Ben LP Preferred Series A Subclass 2 Unit Accounts
as part of the transaction with GWG Holdings discussed below. Preferred Series A Subclass 2 Unit Accounts hold the same rights
and privileges as the Preferred Series A Subclass 1 Unit Accounts. The 5th Amended and Restated Limited Partnership Agreement (“LPA”)
of BCH allows for Preferred Series A Subclass 0 Unit Accounts (“Preferred A.0”) to be issued once the trust charters
are received (as discussed in more detail below).
GWG Holdings also has a financial interest
in FOXO BioScience LLC (“FOXO”, formerly InsurTech Holdings, LLC), which, through its wholly-owned subsidiaries FOXO
Labs Inc. (“FOXO Labs”, formerly, Life Epigenetics Inc.) and FOXO Life, LLC (“FOXO Life”, formerly, youSurance
General Agency, LLC), seeks to commercialize epigenetic technology for the longevity industry and offer life insurance directly
to customers utilizing epigenetic technology.
All of the aforementioned legal entities
are organized in Delaware, other than GWG Life Trust, which is governed by the laws of the state of Utah. Unless the context otherwise
requires or we specifically so indicate, all references in this report to “we,” “us,” “our,”
“our Company,” “GWG,” or the “Company” refer to these entities collectively. Our headquarters
are located in Dallas, Texas.
Nature of Business
GWG Holdings, through its wholly-owned
subsidiary GWG Life, purchased life insurance policies in the secondary market and has built a large, actuarially diverse portfolio
of life insurance policies backed by highly rated life insurance companies. These policies were purchased between April 2006 and
November 2019 and were funded primarily through sales of L Bonds, as discussed in Note 10. Beginning in 2018, GWG Holdings made
a strategic decision to reorient its business and increase capital allocated toward providing liquidity products to a broader range
of alternative assets through investments in Beneficient. We believe that the investments in Beneficient will transform GWG Holdings
from a niche provider of liquidity to owners of life insurance to a full-scale provider of trust and liquidity products and trust
services to holders of a broad range of alternative assets.
As a result of such strategic decision,
GWG Holdings’ business today is focused on raising capital from securities offerings and using the proceeds from such offerings
to grow GWG Holdings’ alternative asset exposure through investments in Beneficient in the form of equity investments and/or
loans to Beneficient or related entities. GWG Holdings believes funding Beneficient’s operations will generally produce higher
actual and risk-adjusted returns than those we can achieve from life insurance policies acquired in the secondary market.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Furthermore, although we believe that our
portfolio of life insurance policies is a meaningful component of a diversified alternative asset portfolio, we do not anticipate
purchasing additional life insurance policies in the secondary market, and we continue to explore strategic alternatives for our
life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing or recapitalization of the portfolio.
Beneficient is a financial services firm
based in Dallas, Texas that provides liquidity solutions for high net worth (“HNW”) individuals and small-to-mid- (“STM”)
sized institutions, which previously had few options to obtain early liquidity for their alternative asset holdings. On September
25, 2018, Beneficient applied for trust charters from the Texas Department of Banking to merge into to-be organized limited trust
associations. Beneficient submitted revised charter applications on March 6, 2020. As of November 19, 2020, the trust charters
have not been issued to Beneficient. As such, Beneficient has closed a limited number of transactions to date, but intends to significantly
expand its operations if and when the trust charters are issued.
Beneficient was formed in 2003 but began
its current operations in September 2017. Beneficient operates primarily through its subsidiaries, which provide Beneficient’s
products and services. These subsidiaries include: (i) Beneficient Capital Company, L.L.C. (“BCC”), through which Beneficient
offers loans and liquidity products; (ii) Beneficient Administrative and Clearing Company, L.L.C. (“BACC”), through
which Beneficient provides services for fund and trust administration and plans to provide custody services; (iii) Pen Indemnity
Insurance Company, LTD (“Pen”), through which Beneficient plans to offer insurance services; and (iv) Ben Markets Management
Holdings, L.P., formerly called ACE Portal, L.L.C. (“Ben Markets”), through which Beneficient plans to provide an online
portal for direct access to Beneficient’s financial services and products.
Beneficient’s primary operations
pertain to its liquidity products whereby Beneficient extends loans collateralized by cash flows from illiquid alternative assets
and provides services to the trustees who administer the collateral. Beneficient’s core business products are its Exchange
Trust, LiquidTrust and the InterChange Trust (introduced in 2020). Beneficient’s clients select one of these products and
place their alternative assets into the custody trust that is a constituent member of a trust structure called the “ExAlt
Plan™” (comprised of the Exchange Trusts, LiquidTrusts, Custody Trusts, Collective Trusts, and Funding Trusts). The
ExAlt Plan™ then delivers to Beneficient’s clients the consideration required by the specific product selected by those
clients. At the same time, Beneficient, extends a loan to the ExAlt Plan™. The proceeds (cash, securities of Ben LP or its
affiliates, or other forms of consideration, as applicable) of that loan received by the ExAlt Plan™ are ultimately paid
to the client. The cash flows from the client’s alternative asset support the repayment of the loan plus any related interest
and fees.
In 2018 and 2019, GWG Holdings and GWG
Life consummated a series of transactions (as more fully described below) with Beneficient that has resulted in a significant reorientation
of the Company’s business and capital allocation strategy in addition to changes in the Company’s Board of Directors
and executive management team.
The Exchange Transaction
On August 10, 2018 (the “Initial
Transfer Date”), the first of two closings was completed (the “Initial Transfer”) as contemplated by a Master
Exchange Agreement between GWG Holdings, GWG Life, Ben LP and certain other parties (the “Seller Trusts”), which governs
the strategic exchange of assets among the parties (the “Exchange Transaction”). On the Initial Transfer Date:
|
●
|
GWG Holdings issued to the Seller Trusts Seller Trust L Bonds due 2023 (the “Seller Trust
L Bonds”) in an aggregate principal amount of $403.2 million, as more fully described below;
|
|
●
|
Beneficient purchased 5,000,000 shares of GWG Holdings’ Series B Convertible Preferred Stock,
par value $0.001 per share and having a stated value of $10 per share (“Series B”), for cash consideration of $50.0 million,
which shares were subsequently transferred to the Seller Trusts;
|
|
●
|
in consideration for GWG Holdings and GWG Life entering into the Master Exchange Agreement and
consummating the transactions contemplated thereby, Ben LP, as borrower, entered into a commercial loan agreement (the “Commercial
Loan Agreement”) with GWG Life, as lender, providing for a loan in a principal amount of $200.0 million (the “Commercial
Loan”);
|
|
●
|
Ben LP delivered to GWG Life a promissory note (the “Exchangeable Note”) in the principal
amount of $162.9 million; and
|
|
●
|
the Seller Trusts delivered to GWG Holdings 4,032,349 common units of Ben LP (“Common Units”)
at an assumed value of $10 per unit.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
On December 28, 2018, the final closing
of the above transaction occurred, and the following actions took place (the “Final Closing” and the date upon which
the Final Closing occurred, the “Final Closing Date”):
|
●
|
in accordance with the Master Exchange Agreement, and based on the net asset value of alternative
asset financings as of the Final Closing Date, effective as of the Initial Transfer Date, (i) the principal amount of the Commercial
Loan was reduced to $182.0 million, (ii) the principal amount of the Exchangeable Note was reduced to $148.2 million,
and (iii) the principal amount of the Seller Trust L Bonds was reduced to $366.9 million;
|
|
●
|
the Seller Trusts refunded to GWG Holdings $0.8 million in interest paid on the Seller Trust
L Bonds related to the Seller Trust L Bonds that were issued as of the Initial Transfer Date but cancelled, effective as of the
Initial Transfer Date, on the Final Closing Date;
|
|
●
|
the accrued interest on the Commercial Loan and the Exchangeable Note was added to the principal
amount of the Commercial Loan, as a result of which the principal amount of the Commercial Loan as of the Final Closing Date was
$192.5 million;
|
|
●
|
the Seller Trusts transferred to GWG Holdings an aggregate of 21,650,087 Common Units and GWG Holdings
received 14,822,843 Common Units in exchange for the Exchangeable Note, upon completion of which GWG Holdings owned (including
the 4,032,349 Common Units received by GWG Holdings on the Initial Transfer Date) 40,505,279 Common Units;
|
|
●
|
Ben LP issued to GWG Holdings an option (the “Option Agreement”) to acquire the number
of Common Units, interests or other property that would be received by a holder of Preferred Series A Subclass 1 Unit Accounts
of BCH; and
|
|
●
|
GWG Holdings issued to the Seller Trusts 27,013,516 shares of GWG Holdings common stock (including
5,000,000 shares issued upon conversion of the Series B).
|
Description of the Assets Exchanged
Seller Trust L Bonds
On August 10, 2018, in connection with
the Initial Transfer, GWG Holdings, GWG Life and Bank of Utah, as trustee, entered into a Supplemental Indenture (the “Supplemental
Indenture”) to the Amended and Restated Indenture dated as of October 23, 2017 (the “Amended and Restated Indenture”).
GWG Holdings entered into the Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture
necessary to provide for the issuance of the Seller Trust L Bonds. The maturity date of the Seller Trust L Bonds is August 9, 2023.
The Seller Trust L Bonds bear interest at 7.5% per year. Interest is payable monthly in cash.
After the second anniversary of the Final
Closing Date, the holders of the Seller Trust L Bonds will have the right to cause GWG Holdings to repurchase, in whole but not
in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at GWG Holdings’ option, in the form of
cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan, and
(ii) Common Units, or a combination of cash and such property.
The Seller Trust L Bonds are senior secured
obligations of GWG Holdings, ranking junior only to all senior debt of GWG Holdings, pari passu in right of payment and in respect
of collateral with all “L Bonds” of GWG Holdings (see Note 10), and senior in right of payment to all subordinated
indebtedness of GWG Holdings. Payments under the Seller Trust L Bonds are guaranteed by GWG Life (see Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations).
Series B Convertible Preferred Stock
The Series B converted into 5,000,000 shares
of GWG Holdings common stock at a conversion price of $10 per share upon the Final Closing.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Commercial Loan
The $192.5 million principal amount
under the Commercial Loan is due on August 9, 2023; however, it is extendable for two five-year terms. Ben LP's obligations under
the Commercial Loan are unsecured.
The principal amount of the Commercial
Loan bears interest at 5.0% per year. From and after the Final Closing Date, one-half of the interest, or 2.5% per year, is due
and payable monthly in cash, and one-half of the interest, or 2.5% per year, accrues and compounds annually on each anniversary
date of the Final Closing Date and becomes due and payable in full in cash on the maturity date.
In accordance with the Supplemental Indenture
governing the issuance of the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds,
GWG Holdings, at its option, may use the outstanding principal amount of the Commercial Loan, and accrued and unpaid interest thereon,
as repayment consideration of the Seller Trust L Bonds.
The Commercial Loan and its related interest
are eliminated upon consolidation.
Exchangeable Note
At the Final Closing date, the principal
amount of the Exchangeable Note was exchanged for 14,822,843 Common Units, and the accrued interest on the Exchangeable Note was
added to the principal balance of the Commercial Loan.
Option Agreement
In connection with the Final Closing, GWG
Holdings entered into the Option Agreement with Ben LP. The Option Agreement gave GWG Holdings the option to acquire the number
of Common Units that would be received by the holder of Preferred Series A Subclass 1 Unit Accounts of BCH, if such holder were
converting on that date. There was no exercise price and the Company could exercise the option at any time until December 27, 2028,
at which time the option automatically settled. The carrying value of the Option Agreement eliminates upon consolidation.
Effective August 11, 2020, as a result
of the Exchange Agreement entered into by the parties on December 31, 2019 (discussed below), and the mutual agreement of the parties,
the Option Agreement was automatically exercised under the provisions of the Option Agreement. As such, GWG Holdings received $57.5 million
of Common Units at a price per unit equal to $12.50 per unit. The exercise of the Option Agreement has no impact on the Company’s
condensed consolidated financial statements as it is eliminated in consolidation.
Common Units of Ben LP
In connection with the Initial Transfer
and Final Closing, the Seller Trusts and Beneficient delivered to GWG Holdings 40,505,279 Common Units. These units represented
an approximate 89.9% interest in the Common Units as of the Final Closing Date (although, on a fully diluted basis, GWG Holdings’
ownership interest in Common Units would be reduced significantly below a majority of those issued and outstanding). These amounts
eliminate upon consolidation.
Purchase and Contribution Agreement
On April 15, 2019, Jon R. Sabes, the former
Chief Executive Officer and a former director of GWG Holdings, and Steven F. Sabes, the former Executive Vice President and a former
director of GWG Holdings, entered into a Purchase and Contribution Agreement (the “Purchase and Contribution Agreement”)
with, among others, Ben LP. Under the Purchase and Contribution Agreement, Jon and Steven Sabes agreed to transfer all 3,952,155
of the shares of GWG Holdings’ outstanding common stock held directly or indirectly by them to BCC (a subsidiary of Ben LP)
and AltiVerse Capital Markets, L.L.C. (“AltiVerse”). AltiVerse is a limited liability company owned by an entity related
to Beneficient’s founders, including Brad K. Heppner (GWG Holdings’ Chairman and Beneficient’s Chief Executive
Officer and Chairman) and an entity related to Thomas O. Hicks (one of Beneficient’s current directors and a director of
GWG Holdings). GWG Holdings was not a party to the Purchase Agreement; however, the closing of the transactions contemplated by
the Purchase and Contribution Agreement (the “Purchase and Contribution Transaction”) were subject to certain conditions
that were dependent upon GWG Holdings taking, or refraining from taking, certain actions. The closing of the Purchase and Contribution
Transaction occurred on April 26, 2019.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
In connection with such closing, BCC and
AltiVerse executed and delivered a Consent and Joinder to the Amended and Restated Pledge and Security Agreement dated October
23, 2017 by and among GWG Holdings, GWG Life, Messrs. Jon and Steven Sabes and the Bank of Utah, which provides that the shares
of GWG Holdings’ common stock acquired by BCC and AltiVerse pursuant to the Purchase and Contribution Agreement will continue
to be pledged as collateral security for GWG Holdings’ obligations owing in respect of the L Bonds and Seller Trust L Bonds.
The Investment and Exchange Agreements
On December 31, 2019, GWG Holdings, Ben
LP, BCH, and Beneficient Management entered into a Preferred Series A Unit Account and Common Unit Investment Agreement (the “Investment
Agreement”).
Pursuant to the Investment Agreement, GWG
Holdings transferred $79.0 million to Ben LP in return for 666,667 Common Units and a Preferred Series A Subclass 1 Unit Account
of BCH.
In connection with the Investment Agreement,
GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management, the general partner
of Ben LP. As a result, GWG Holdings obtained control of Ben LP and began reporting the results of Ben LP and its subsidiaries
on a consolidated basis beginning on the transaction date of December 31, 2019. See Note 4 for more details on the accounting for
the consolidation. GWG Holdings’ right to appoint a majority of the board of directors of Beneficient Management will terminate
in the event (i) GWG Holdings’ ownership of the fully diluted equity of Ben LP (excluding equity issued upon the conversion
or exchange of Preferred Series A Unit Accounts of BCH held as of December 31, 2019 by parties other than GWG Holdings) is less
than 25%, (ii) the Continuing Directors of GWG Holdings cease to constitute a majority of the board of directors of GWG Holdings,
or (iii) certain bankruptcy events occur with respect to GWG Holdings. The term “Continuing Directors” means, as of
any date of determination, any member of the board of directors of GWG Holdings who: (1) was a member of the board of directors
on December 31, 2019; or (2) was nominated for election or elected to the board of directors with the approval of a majority of
the Continuing Directors who were members of the board of directors at the time of such nomination or election.
Following the transaction, and as agreed
upon in the Investment Agreement, GWG Holdings was issued an initial capital account balance for the Preferred Series A Subclass
1 Unit Account of $319.0 million. The other holders of the Preferred Series A Subclass 1 Unit Accounts are principally an entity
related to the founders of Ben LP and an entity related to one of the directors of both GWG Holdings and Beneficient (the “Related
Account Holders”), and the aggregate capital accounts of all holders of the Preferred Series A Subclass 1 Unit Accounts after
giving effect to the investment by GWG Holdings was $1.6 billion. GWG Holdings’ Preferred Series A Subclass 1 Unit Account
is the same class of preferred security as held by the Related Account Holders. If the Related Account Holders exchange their Preferred
Series A Subclass 1 Unit Accounts for securities of GWG Holdings, the Preferred Series A Subclass 1 Unit Account of GWG Holdings
will also convert into Common Units (so neither GWG Holdings nor the founders would hold Preferred Series A Subclass 1 Unit Accounts).
Also, on December 31, 2019, in a transaction
related to the Investment Agreement, GWG Holdings transferred its interest in the Preferred Series A Subclass 1 Unit Account to
its wholly-owned subsidiary, GWG Life.
In addition, on December 31, 2019, GWG
Holdings, Ben LP and the holders of Common Units entered into an Exchange Agreement (the “Exchange Agreement”) pursuant
to which the holders of Common Units from time to time have the right, on a quarterly basis, to exchange their Common Units for
common stock of GWG Holdings. The exchange ratio in the Exchange Agreement is based on the ratio of the capital account associated
with the Common Units to be exchanged to the market price of GWG Holdings common stock based on the volume weighted average price
of GWG Holdings common stock for the five consecutive trading days prior to the quarterly exchange date. The Exchange Agreement
is intended to facilitate the marketing of Ben LP’s products to holders of alternative assets.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Preferred Series C Unit Purchase Agreement
On July 15, 2020, GWG Holdings entered
into a Preferred Series C Unit Purchase Agreement (“UPA”) with Ben LP and BCH. The UPA was reviewed and approved by
the Special Committee of the Board of Directors of GWG Holdings.
Pursuant to the UPA, and provided it has
adequate liquidity, GWG Holdings has agreed to make capital contributions from time to time to BCH in exchange for Preferred Series
C Unit accounts of BCH during a purchasing period commencing on the Effective Date and continuing until the earlier of (i) the
occurrence of a Change of Control Event (as defined below) and (ii) the mutual agreement of the parties (the “Purchasing
Period”). A “Change of Control Event” shall mean (A) the occurrence of an event that results in GWG Holdings’
ownership of the fully diluted equity of Beneficient is less than 25%, the Continuing Directors (as defined below) of GWG Holdings
cease to constitute a majority of the board of directors of GWG Holdings, or certain bankruptcy events occur with respect to GWG
Holdings, and (B) the listing of Common Units on a national securities exchange (a “Public Listing”). The term “Continuing
Directors” means, as of any date of determination, any member of the board of directors of GWG Holdings who: (1) was a member
of the board of directors on December 31, 2019; or (2) was nominated for election or elected to the board of directors with the
approval of a majority of the Continuing Directors who were members of the board of directors at the time of such nomination or
election.
If, on or prior to the end of the Purchasing
Period, a Public Listing occurs, the BCH Purchased Units shall be automatically exchanged for Common Units, or another unit of
Beneficient, as the parties may mutually agree (the “Beneficient Units”), at the lower of (i) the volume-weighted average
of the Beneficient Units for the 20 trading days following the Public Listing, and (ii) $12.75.
In addition, at any time following the
Effective Date, all or some of the Preferred Series C Unit Accounts purchased under the UPA may be exchanged for Beneficient Units
at the option of the Company (exercised by its Special Committee of the Board of Directors or, if such committee is no longer in
place, the appropriate governing body of the Company); provided that, if Company exchanges less than all of the Preferred Series
C Unit Accounts purchased under the UPA, then, immediately after giving effect to such exchange, the Company shall be required
to continue to hold Preferred Series C Unit Accounts with a capital account that is at least $10 million. The exchange price
for such Beneficient Units shall be determined by third-party valuation agents selected by GWG Holdings and Beneficient.
The Exchange Transaction, the Purchase
and Contribution Transaction, the Investment and Exchange Agreements, and the UPA, are referred to collectively as the “Beneficient
Transactions”.
(2) Summary of Significant Accounting
Policies
Basis of Presentation — The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and
Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial
information normally required by Generally Accepted Accounting Principles in the United States of America (“GAAP”)
to be condensed or omitted. In our opinion, the condensed consolidated financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary for the fair presentation of the Company’s financial position and results
of operations. These statements should be read in conjunction with the consolidated financial statements and notes included in
our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 27, 2020 (“2019 Form
10-K”). The results of operations for interim periods are not necessarily indicative of the results to be expected for the
full year.
Significant accounting policies are detailed
in Note 2 to the consolidated financial statements included in the Company’s 2019 Form 10-K. Summarized below are those new
or revised significant accounting policies, including those that resulted from the consolidation of Beneficient on December 31,
2019.
Use of Estimates — The preparation
of the Company’s condensed consolidated financial statements in conformity with 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. Management regularly evaluates 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. Actual results may differ materially and adversely from our estimates. Material
estimates that are particularly susceptible to change, in the near term, relate to: the determination of the fair values of assets
acquired, liabilities assumed and noncontrolling interests under business combinations accounting guidance; the determination of
the assumptions used in estimating the fair value of our investments in life insurance policies; determining the grant date fair
value for equity-based compensation awards; determining our allowance for loan losses; evaluation of potential impairment of goodwill
and other intangibles; and the value of our deferred tax assets and liabilities.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Loans Receivable — Loans are
recorded at their fair value at the acquisition date, change-of-control date, or other liquidation event. Credit discounts are
included in the determination of fair value; therefore, an allowance for loan losses is not recorded as of the date of valuation.
Purchased loans are evaluated upon acquisition and classified as either purchased credit impaired (“PCI”) or non-purchased
credit impaired (“non-PCI”).
PCI loans reflect credit deterioration
since origination such that it is probable as of the date of valuation that Beneficient will be unable to collect all contractually
required payments. For PCI loans, expected cash flows as of the date of valuation in excess of the fair value of loans are recorded
as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows is reasonably
estimable. Subsequently, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest
income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan loss. Beneficient
does not report PCI loans as nonperforming due to the accretion of interest income.
For non-PCI loans, the difference between
the fair value and unpaid principal balance (“UPB”) of the loan as of the date of valuation, referred to as a purchase
premium or discount, is amortized or accreted to interest income over the contractual life of the loans using the effective interest
method. In the event of prepayment, the remaining unamortized amount is recognized in interest income.
Impaired loans include non-accrual loans
and partially charged-off loans. The accrual of interest on impaired loans is discontinued when, in management’s opinion,
doubt exists about the full collectability of principal and interest. When a loan is placed on non-accrual status, all previously
accrued and unpaid interest is charged against income. If the ultimate collectability of principal, wholly or partially, is in
doubt, any payment received on a loan on which the accrual of interest has been suspended is applied to reduce principal first.
Once all principal has been received, additional interest payments are recognized on a cash basis as interest income. Loans are
returned to accrual status once collection of contractually required principal and interest is reasonably assured. At such time,
the accrual of interest and amortization of any remaining discount shall resume. Any interest income that was applied to the principal
balance is not reversed and is subsequently recognized as an adjustment to yield over the remaining life of the loan.
Allowance for Loan Losses —
The allowance for loan losses is a valuation allowance for probable incurred credit losses in the portfolio. Management’s
determination of the allowance is based upon an evaluation of the loan portfolio, impaired loans, economic conditions, volume,
growth and composition of the collateral to the loan portfolio, and other risks inherent in the portfolio. Management applies risk
factors to categories of loans and individually reviews all impaired loans above a de minimis threshold. Management relies heavily
on statistical analysis, current net asset value (“NAV”) and distribution performance of the underlying alternative
asset collateral and industry trends related to alternative asset investments to estimate losses. Management evaluates the adequacy
of the allowance by reviewing relevant internal and external factors that affect credit quality. The cash flows generated from
the collateral are the sole source of repayment of the loans and related interest. Beneficient recognizes the charge-off in the
period in which it is confirmed. Therefore, impaired loans are written down to their estimated net present value.
Goodwill and Identifiable Intangible
Assets — Goodwill and other identifiable intangible assets are initially recorded at their estimated fair values at the
date of acquisition. Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement
purposes. In the event that facts and circumstances indicate that the goodwill or other identifiable intangible assets may be impaired,
an interim impairment test would be required. Intangible assets with finite lives are amortized over their useful lives. We perform
required annual impairment tests of our goodwill and other intangible assets as of October 1 for our reporting units.
The goodwill impairment test requires us
to make judgments and assumptions. The test consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples
of our peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of each reporting
unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, we will recognize an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, any loss
recognized will not exceed the total amount of goodwill allocated to that reporting unit.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
This evaluation includes multiple assumptions,
including estimated discounted cash flows and other estimates that may change over time. If future discounted cash flows become
less than those projected by us, future impairment charges may become necessary that could have a materially adverse impact on
our results of operations and financial condition in the period in which the write-off occurs.
Equity-Based Compensation —
The Company measures and recognizes compensation expense for all equity-based payments at fair value on the grant date over the
requisite service period. GWG Holdings uses the Black-Scholes option pricing model to determine the fair value of stock options
and stock appreciation rights. For restricted stock grants (including restricted stock units), fair value is determined as of the
closing price of GWG Holdings’ common stock on the date of grant. As it is not publicly traded, Beneficient uses various
methods to determine the grant date fair value of its equity-based compensation awards, as more fully described in Note 12.
Equity-based compensation expense is recorded
in employee compensation and benefits in the condensed consolidated statements of operations. The determination of fair value of
equity-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, the expected duration of the
awards, the results of a probability-weighted discounted cash flow analysis and observable transactions. We account for the effects
of forfeitures as they occur.
The risk-free interest rate is based on
the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility
is based on the standard deviation of the average continuously compounded rate of return of five selected companies.
Earnings (Loss) per Common 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 redeemable preferred stock (“RPS”), Series 2 redeemable preferred stock (“RPS 2”), restricted
stock units, warrants (if applicable) and stock options.
Net earnings, less any preferred dividends
accumulated for the period (whether or not declared), is allocated to common stock. Basic earnings per common share is computed
by dividing net earnings available to common stockholders by the weighted average number of common shares.
Diluted earnings per common share is computed
in a similar manner, except that the denominator is increased to include the number of additional common shares that would have
been outstanding if potentially dilutive common shares were issued using the treasury stock method in the case of restricted stock
units, warrants and options, or the if-converted method in the case of RPS and RPS 2. Our dilution calculation also takes into
account the weighted average number of shares of a subsidiary that are exchangeable for shares of GWG Holdings common stock.
Reclassification — Certain
prior year amounts have been reclassified for consistency with the current year presentation. Specifically, our equity method investment
in FOXO as of December 31, 2019, was reclassified to other assets in the condensed consolidated balance sheets to maintain consistency
with the current year presentation. This reclassification had no effect on the reported results of operations.
Additionally, payments for issuances of
L Bonds were previously combined with payments for redemptions of L Bonds in the condensed consolidated statements of cash flows.
These payments are now presented separately within the cash flows from financing activities section. This change had no effect
on the reported net cash flows provided by financing activities.
Newly Adopted Accounting Pronouncements
— In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2017-04, Goodwill, (Topic 350). This standard simplifies how an entity is required to test goodwill for impairment by
eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair
value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new guidance, goodwill impairment
loss will be measured on the basis of the fair value of the reporting unit relative to the reporting unit’s carrying amount
rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. ASU 2017-04
is effective for annual periods beginning after December 15, 2019, including interim periods within those periods, for public business
entities. The Company adopted this ASU on January 1, 2020, and the adoption did not have a material impact on its condensed consolidated
financial statements and related disclosures.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair
Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The guidance
is effective for fiscal years and interim periods beginning after December 15, 2019. Certain of the amendments require prospective
application, while the remainder require retrospective application. The Company adopted this ASU on January 1, 2020, and it did
not have a material impact on its condensed consolidated financial statements and related disclosures.
In March 2020, the SEC amended Regulation
S-X to create Rules 13-01 and 13-02. These new rules reduce and simplify financial disclosure requirements for issuers and guarantors
of registered debt offerings. Previously, with limited exceptions, a parent entity was required to provide detailed disclosures
with regard to guarantors of registered debt offerings within the footnotes to the consolidated financial statements. Under the
new regulations, disclosure exceptions have been expanded and required disclosures may be provided within Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations rather than in the notes to the financial statements.
Further, summarized financial information covering guarantor balance sheets and income statements are permitted, replacing the
previously required condensed consolidating financial statements. Summarized financial information only needs be disclosed for
the current fiscal year rather than all years presented in the financial statements as was previously required. The amendments
were subsequently included in the FASB codification through the issuance of ASU No. 2020-09, Debt (Topic 470) in October
2020. The guidance will become effective for filings on or after January 4, 2021, with early adoption permitted. The Company elected
to early adopt the new regulations during the second quarter of 2020. Our summarized guarantor financial information is now presented
in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Accounting Pronouncements Issued But
Not Yet Adopted — In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and
certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans. There have been numerous
codification improvements and technical corrections issued through subsequent ASUs since the issuance of ASU No. 2016-13. The standard
requires entities to use a new, forward-looking “expected loss” model that is expected to generally result in the earlier
recognition of allowances for losses. The guidance is effective for annual periods beginning after December 15, 2022, including
interim periods within those years, for smaller reporting companies, as defined by the SEC, but early adoption is permitted. The
Company is evaluating the potential impact of this guidance on our consolidated financial statements.
ASU 2019-12, Income Taxes: Simplifying
the Accounting for Income Taxes (Topic 740), was issued in December 2019. The amendments in ASU 2019-12 eliminate certain exceptions
related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the
recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects
of the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2020, for public business entities. Early adoption is permitted, including adoption in any interim period. The
Company is evaluating the impact of this ASU on its consolidated financial statements and disclosures.
ASU 2020-04, Reference Rate Reform (Topic
848) was issued in March 2020. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to
contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04
can be applied by all entities as of the beginning of the interim period that includes March 12, 2020, or any date thereafter,
and entities may elect to apply the amendments prospectively through December 31, 2022. The Company is evaluating the impact of
this ASU on its consolidated financial statements and disclosures.
ASU 2020-06, Debt—Debt with Conversion
and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity was issued in August 2020. The amendments
in ASU 2020-06 simplify the accounting for convertible instruments by removing major separation models and removing certain settlement
condition qualifiers for the derivatives scope exception for contracts in an entity’s own equity, and simplify the related
diluted net income per share calculation for both Subtopics. ASU 2020-06 is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2023, for smaller reporting companies, as defined by the SEC. Early adoption is
permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
The Company is evaluating the impact of this ASU on its consolidated financial statements and disclosures.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(3) Restrictions on Cash
Under the terms of our second amended and
restated senior credit facility with LNV Corporation (“LNV Credit Facility”, discussed further in Note 10), 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, distribute funds to pay down the facility, and distribute excess
funds to the borrower (GWG DLP Funding IV, LLC).
The agents for the lender authorize the
disbursements from these accounts. At September 30, 2020 and December 31, 2019, there was a balance of $16.0 million
and $20.3 million, respectively, in these collection and payment accounts.
(4) Business Combination
Prior to December 31, 2019, GWG Holdings
owned 41,505,279 Common Units, for a total limited partnership interest in the Common Units of approximately 90.2%. This investment
was historically accounted for using the equity method (see Note 8). On December 31, 2019, GWG Holdings entered into the Investment
Agreement and Exchange Agreement as described in Note 1.
Pursuant to the Investment Agreement, GWG
Holdings transferred $79.0 million to Ben LP in return for 666,667 additional Common Units and a Preferred Series A Subclass 1
Unit Account of BCH, which increased GWG Holdings’ ownership of Common Units to approximately 95.5%. Also, on December 31,
2019, in a transaction related to the Investment Agreement, GWG Holdings transferred its interest in the Preferred Series A Subclass
1 Unit Account to its wholly-owned subsidiary, GWG Life. In connection with the Investment Agreement, GWG Holdings obtained the
right to appoint a majority of the board of directors of Beneficient Management, the general partner of Ben LP. As a result, GWG
Holdings obtained control of Ben LP, resulting in the consolidation of Ben LP as of December 31, 2019, in accordance with ASC 805,
Business Combinations.
As a result of the change-of-control, GWG
Holdings was required to remeasure its existing equity investment at fair value prior to consolidation. At December 31, 2019, GWG
Holdings’ equity investment in Common Units had a carrying value of $368.6 million, prior to the additional investment noted
above. GWG Holdings estimated the fair value of its preexisting investment in Ben LP to be approximately $622.5 million, resulting
in the recognition of a gain, which is provisional, of $253.9 million during the fourth quarter of 2019. This gain was included
in gain on consolidation of equity method investment in the Company’s consolidated statement of operations for the year ended
December 31, 2019. This gain was partially offset by the remeasurement to fair value of the Commercial Loan Agreement between GWG
Life and Ben LP and the Option Agreement between GWG Holdings and Ben LP, which resulted in a net loss of $4.2 million. The net
gain on consolidation of equity method investment after remeasurement of these preexisting balances was $249.7 million. GWG Holdings’
proportionate share of the earnings or losses from Ben LP was recognized in earnings (loss) from equity method investment in the
consolidated statement of operations from August 10, 2018 until December 31, 2019 (see Note 8 for further information) and was
previously recorded on a one-quarter lag basis. In connection with the consolidation of Beneficient, the one-quarter lag was discontinued.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The following table summarizes the fair
value measurement of the assets acquired and liabilities assumed (in thousands):
|
|
Fair Value
at Acquisition
Date
|
|
|
Measurement
Period
Adjustments(1)
|
|
|
Adjusted Fair
Value at
Acquisition Date
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Loans receivable(1)
|
|
$
|
232,344
|
|
|
$
|
(26,116
|
)
|
|
$
|
206,228
|
|
Fees receivable
|
|
|
29,168
|
|
|
|
—
|
|
|
|
29,168
|
|
Investment in public equity securities
|
|
|
24,550
|
|
|
|
—
|
|
|
|
24,550
|
|
Other assets
|
|
|
14,053
|
|
|
|
—
|
|
|
|
14,053
|
|
Intangible assets(2)
|
|
|
3,449
|
|
|
|
—
|
|
|
|
3,449
|
|
Total identifiable assets acquired
|
|
|
303,564
|
|
|
|
(26,116
|
)
|
|
|
277,448
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
|
153,086
|
|
|
|
—
|
|
|
|
153,086
|
|
Commercial loan agreement from parent
|
|
|
168,420
|
|
|
|
—
|
|
|
|
168,420
|
|
Other liabilities and deferred revenue
|
|
|
105,866
|
|
|
|
—
|
|
|
|
105,866
|
|
Accounts payable and accrued expenses
|
|
|
13,713
|
|
|
|
—
|
|
|
|
13,713
|
|
Total liabilities assumed
|
|
|
441,085
|
|
|
|
—
|
|
|
|
441,085
|
|
Net liabilities assumed
|
|
|
(137,521
|
)
|
|
|
(26,116
|
)
|
|
|
(163,637
|
)
|
NONCONTROLLING INTERESTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Units not owned by GWG Holdings(3)
|
|
|
181,383
|
|
|
|
—
|
|
|
|
181,383
|
|
Class S Ordinary Units
|
|
|
85,448
|
|
|
|
—
|
|
|
|
85,448
|
|
Class S Preferred Units
|
|
|
17
|
|
|
|
—
|
|
|
|
17
|
|
Preferred Series A Subclass 1 Unit Accounts
|
|
|
1,269,654
|
|
|
|
—
|
|
|
|
1,269,654
|
|
Total noncontrolling interests
|
|
|
1,536,502
|
|
|
|
—
|
|
|
|
1,536,502
|
|
ACQUISITION CONSIDERATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, less cash acquired
|
|
|
61,479
|
|
|
|
—
|
|
|
|
61,479
|
|
Fair value of preexisting investment in Common Units(4)
|
|
|
622,503
|
|
|
|
—
|
|
|
|
622,503
|
|
Fair value of noncontrolling interest
|
|
|
1,536,502
|
|
|
|
—
|
|
|
|
1,536,502
|
|
Total estimated consideration
|
|
|
2,220,484
|
|
|
|
—
|
|
|
|
2,220,484
|
|
Less: Net liabilities assumed
|
|
|
(137,521
|
)
|
|
|
(26,116
|
)
|
|
|
(163,637
|
)
|
Resulting preliminary goodwill
|
|
$
|
2,358,005
|
|
|
$
|
26,116
|
|
|
$
|
2,384,121
|
|
|
(1)
|
As a result of additional information obtained about the collateral value used in the valuation
of the loan portfolio for certain collateral dependent loans, the Company recorded measurement period adjustments during the nine
months ended September 30, 2020, which resulted in a decrease to loans receivable of $26.1 million with a corresponding adjustment
to goodwill. The measurement period adjustments are comprised of $14.6 million during the three months ended March 31, 2020 and
$11.5 million during the three months ended June 30, 2020.
|
|
(2)
|
Includes an insurance license valued at $3.1 million and a non-compete agreement valued at $0.3
million.
|
|
(3)
|
Calculated as 1,974,677 Common Units not owned by GWG Holdings at December 31, 2019, multiplied
by the $15 per unit derived from the enterprise valuation of Beneficient on that date. Also includes $151.8 million of equity-based
payment awards that were granted by Beneficient prior to the change in control but were not replaced by awards of GWG Holdings
upon the change in control. These awards were treated as noncontrolling interests in accordance with ASC 805, Business Combinations.
|
|
(4)
|
Calculated as 41,505,279 Common Units owned by GWG Holdings prior to the change in control multiplied
by the $15 per unit derived from the enterprise valuation of Beneficient.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Methods Used to Determine Equity Value
and to Fair Value Assets and Liabilities
The following is a description of the valuation
methodologies used to estimate the fair value of equity and the fair values of major categories of assets acquired and liabilities
assumed. In many cases, determining the fair value of equity and the acquired assets and assumed liabilities required management
to estimate cash flows expected from those assets and liabilities and to discount those cash flows at appropriate rates of interest.
This determination required the utilization of significant estimates and management judgment in accounting for the change-of-control
event.
Loans receivable — The loan
portfolio was valued using current accounting guidance that defines fair value as the price that would be received to sell an asset
or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized
to value the loan portfolio and included the use of present value techniques employing cash flow estimates and incorporated assumptions
that marketplace participants would use in estimating fair values, specifically market interest rate and general credit fair value
assumptions. In instances where reliable market information was not available, management used assumptions in an effort to determine
reasonable fair value. There was no carryover related allowance for loan losses.
Cash and cash equivalents and fees receivable
— Cash and cash equivalents and fees receivable were valued using their current carrying amounts, which approximate fair
value.
Investment in public equity securities
— The fair value of the investments in public equity securities was determined using quoted market prices. As these were
investments by Beneficient in the common stock of GWG Holdings, these amounts were eliminated in consolidation and treated as treasury
stock.
Other assets — Other assets
include miscellaneous receivables that were valued using the current carrying amount as that amount approximates fair value due
to the relatively short time between their origination date and the fair value date. Miscellaneous intercompany receivables were
eliminated in consolidation.
Intangible assets — Intangible
assets include an insurance license and a non-compete agreement. Both assets were valued using their current carrying amount, which
approximates fair value.
Other borrowings and commercial loan
agreement from parent — The measurement of the fair value of other borrowings and Commercial Loan Agreement from parent
was based on market prices that generally are observable for similar liabilities at commonly quoted intervals and is considered
a level 2 fair value measurement. The Commercial Loan Agreement between Beneficient and GWG Life was eliminated in consolidation.
Other liabilities and deferred revenue
— The carrying amounts of other liabilities and deferred revenue approximate their fair value. The Option Agreement between
Beneficient and GWG Holdings was eliminated in consolidation.
Accounts payable and accrued expenses
— Due to their short-term nature, the carrying amounts of accounts payable and accrued expenses approximate the fair value.
Miscellaneous intercompany payables were eliminated in consolidation.
Noncontrolling interests —
The values for each noncontrolling interest component were calculated after determination of an overall enterprise value for the
Company. The enterprise value of the Company was determined using the Option Pricing Model (“OPM”) Backsolve approach
under the market method. The OPM Backsolve approach uses a Black-Scholes option pricing model to calculate the implied equity value
of the firm. Once an overall equity value was determined, amounts were allocated to the various classes of equity based on the
security class preferences. The inputs to the OPM Backsolve approach are the equity value for one component of the capital structure,
expected time to exit, the risk-free interest rate and an assumed volatility based on the volatility of similar publicly traded
companies. The OPM Backsolve estimates include Level 3 inputs.
Goodwill — The resulting excess
of the overall enterprise value after deducting the fair values of assets acquired and liabilities assumed is recognized as goodwill.
The goodwill recognized is the result of the inherent value associated with the assembled business after all separately identifiable
assets acquired and liabilities assumed are deducted from the enterprise value. The excess estimated enterprise value of Beneficient
over the fair value of its net assets is primarily attributable to the potentially large and underserved market that Beneficient
is seeking to address, including the estimated demand from HNW individuals and STM size institutions seeking liquidity for their
professionally managed alternative assets. None of the goodwill is expected to be deductible for income tax purposes. The goodwill
is allocated to our Beneficient reporting unit.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The initial accounting for the estimates
of equity values, which includes noncontrolling interests, the fair value of loans receivable, and any separately identifiable
intangibles was based on the facts and circumstances that existed as of the acquisition date. Should management obtain new information
during the measurement period, in addition to that discussed above, about facts and circumstances that existed at the acquisition
date, further adjustments to the fair values assigned to these items could occur during the measurement period of up to one year
from the acquisition date. Any such adjustment will result in corresponding adjustments to goodwill.
The following unaudited pro forma financial
information presents the combined results of operations of GWG Holdings for the three and nine months ended September 30,
2019, as if the acquisition of Ben LP had occurred as of January 1, 2019 (in thousands, except per share data):
|
|
Three Months
Ended
September 30,
2019
|
|
|
Nine Months
Ended
September 30,
2019
|
|
Total Revenue
|
|
|
|
|
|
|
Pro forma
|
|
$
|
36,532
|
|
|
$
|
123,242
|
|
As reported
|
|
|
22,211
|
|
|
|
71,439
|
|
|
|
|
|
|
|
|
|
|
Net Loss Attributable to Common Shareholders
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(26,761
|
)
|
|
$
|
(66,564
|
)
|
As reported
|
|
|
(24,635
|
)
|
|
|
(69,154
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss per Diluted Common Share
|
|
|
|
|
|
|
|
|
Pro forma
|
|
$
|
(0.81
|
)
|
|
$
|
(2.02
|
)
|
As reported
|
|
|
(0.75
|
)
|
|
|
(2.09
|
)
|
The unaudited pro forma financial information
is presented for informational purposes only. It is not necessarily indicative of what our condensed consolidated results of operations
actually would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future
results of operations of the combined company.
The unaudited pro forma financial information
above gives effect to the following:
|
●
|
Deconsolidation of certain Beneficient trusts included in the ExAlt Plan™;
|
|
●
|
Reduction of Beneficient interest expense related to acquisition-date debt principal payments;
and
|
|
●
|
Elimination of intercompany transactions, including the Commercial Loan Agreement and Option Agreement.
|
(5) Investment in Life Insurance Policies
The Company’s investments in life
insurance policies include 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 (loss) 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 $1.0 million in face value benefits or less — which utilize either a single fully
underwritten, or simplified report based on self-reported medical interview), assumptions relating to cost-of-insurance (premium)
rates and other assumptions. The discount rate we apply incorporates information about the discount rates observed in the life
insurance secondary market through competitive bidding observations (which have recently declined for us as a result of our decreased
purchase activity) and other means, fixed income 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 yield premium a purchaser would
require to receive the future cash flows derived from our portfolio as a whole. Management has significant 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 8.25% was applied to our portfolio as of both September 30, 2020 and December 31, 2019.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Portfolio Information
Our portfolio of life insurance policies,
owned by our subsidiaries as of September 30, 2020, is summarized below:
Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in thousands)
|
|
$
|
1,921,067
|
|
Average face value per policy (in thousands)
|
|
$
|
1,777
|
|
Average face value per insured life (in thousands)
|
|
$
|
1,913
|
|
Weighted average age of insured (years)
|
|
|
82.9
|
|
Weighted average life expectancy estimate (years)
|
|
|
6.9
|
|
Total number of policies
|
|
|
1,081
|
|
Number of unique lives
|
|
|
1,004
|
|
Demographics
|
|
|
74% Male; 26% Female
|
|
Number of smokers
|
|
|
43
|
|
Largest policy as % of total portfolio face value
|
|
|
0.7
|
%
|
Average policy as % of total portfolio face value
|
|
|
0.1
|
%
|
Average annual premium as % of face value
|
|
|
3.7
|
%
|
A summary of our policies organized according
to their estimated life expectancy dates, grouped by year, as of the reporting date, is as follows (dollars in thousands):
|
|
As of September 30, 2020
|
|
|
As of December 31, 2019
|
|
Years Ending December 31,
|
|
Number of
Policies
|
|
|
Estimated
Fair Value
|
|
|
Face Value
|
|
|
Number of
Policies
|
|
|
Estimated
Fair Value
|
|
|
Face Value
|
|
Three months ending December 31, 2020
|
|
|
3
|
|
|
$
|
3,351
|
|
|
$
|
3,375
|
|
|
|
8
|
|
|
$
|
5,869
|
|
|
$
|
6,342
|
|
2021
|
|
|
25
|
|
|
|
24,270
|
|
|
|
28,848
|
|
|
|
55
|
|
|
|
62,061
|
|
|
|
79,879
|
|
2022
|
|
|
66
|
|
|
|
67,724
|
|
|
|
93,448
|
|
|
|
90
|
|
|
|
89,074
|
|
|
|
138,723
|
|
2023
|
|
|
114
|
|
|
|
114,510
|
|
|
|
184,202
|
|
|
|
128
|
|
|
|
123,352
|
|
|
|
222,369
|
|
2024
|
|
|
118
|
|
|
|
126,943
|
|
|
|
228,041
|
|
|
|
109
|
|
|
|
103,111
|
|
|
|
217,053
|
|
2025
|
|
|
111
|
|
|
|
86,759
|
|
|
|
194,267
|
|
|
|
113
|
|
|
|
74,223
|
|
|
|
171,961
|
|
Thereafter
|
|
|
644
|
|
|
|
363,703
|
|
|
|
1,188,886
|
|
|
|
648
|
|
|
|
338,349
|
|
|
|
1,184,646
|
|
Totals
|
|
|
1,081
|
|
|
$
|
787,260
|
|
|
$
|
1,921,067
|
|
|
|
1,151
|
|
|
$
|
796,039
|
|
|
$
|
2,020,973
|
|
We recognized life insurance benefits of
$39.8 million and $27.5 million during the three months ended September 30, 2020 and 2019, respectively, related to policies
with a carrying value of $13.5 million and $6.6 million, respectively, and as a result recorded realized gains of $26.3 million
and $20.8 million, respectively. We recognized life insurance benefits of $105.2 million and $80.9 million during the nine months
ended September 30, 2020 and 2019, respectively, related to policies with a carrying value of $32.3 million and $20.7 million,
respectively, and as a result recorded realized gains of $72.9 million and $60.2 million, respectively. The aforementioned carrying
value, which represents the aggregate cost basis in the policies that matured during the period, is considered a return of investment
within the investing section of the condensed consolidated statements of cash flows. Changes in fair value of policies and the
other components of the net gain on life insurance policies, as detailed below, are included in the operating section of the condensed
consolidated statements of cash flows.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
A reconciliation of gain (loss) on life
insurance policies is as follows (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Change in estimated probabilistic cash flows(1)
|
|
$
|
14,723
|
|
|
$
|
17,908
|
|
|
$
|
47,923
|
|
|
$
|
52,161
|
|
Unrealized gain on acquisitions(2)
|
|
|
—
|
|
|
|
472
|
|
|
|
—
|
|
|
|
6,775
|
|
Premiums and other annual fees
|
|
|
(18,235
|
)
|
|
|
(17,219
|
)
|
|
|
(53,060
|
)
|
|
|
(49,055
|
)
|
Face value of matured policies
|
|
|
39,803
|
|
|
|
27,470
|
|
|
|
105,194
|
|
|
|
80,927
|
|
Fair value of matured policies
|
|
|
(22,169
|
)
|
|
|
(10,839
|
)
|
|
|
(56,702
|
)
|
|
|
(31,590
|
)
|
Gain on life insurance policies, net
|
|
$
|
14,122
|
|
|
$
|
17,792
|
|
|
$
|
43,355
|
|
|
$
|
59,218
|
|
|
(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 changes or policy maturity events.
|
|
(2)
|
Gain resulting from fair value in excess of the purchase price for life insurance policies acquired
during the reporting period. There were no policy acquisitions during the three or nine months ended September 30, 2020.
|
Estimated 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 (in thousands):
Years Ending December 31,
|
|
Premiums
|
|
|
Servicing
|
|
|
Total
|
|
Three months ending December 31, 2020
|
|
$
|
13,088
|
|
|
$
|
405
|
|
|
$
|
13,493
|
|
2021
|
|
|
78,959
|
|
|
|
1,620
|
|
|
|
80,579
|
|
2022
|
|
|
91,220
|
|
|
|
1,620
|
|
|
|
92,840
|
|
2023
|
|
|
102,859
|
|
|
|
1,620
|
|
|
|
104,479
|
|
2024
|
|
|
112,033
|
|
|
|
1,620
|
|
|
|
113,653
|
|
2025
|
|
|
124,556
|
|
|
|
1,620
|
|
|
|
126,176
|
|
|
|
$
|
522,715
|
|
|
$
|
8,505
|
|
|
$
|
531,220
|
|
Management funds the majority of the premium
payments and servicing fees estimated above from cash flows realized from life insurance policy benefits, and to the extent necessary,
with additional borrowing capacity created as the premiums and servicing costs of pledged life insurance policies become due, under
the LNV Credit Facility and the net proceeds from our offering of L Bonds as described in Note 10. Management funds 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 are used for: additional
allocations to Beneficient; policy premiums and servicing costs of life insurance policies; working capital; and financing expenditures
including paying principal, interest and dividends.
(6) Loans Receivable
Beneficient Loans Receivable
Loans receivable held by the Company as
of September 30, 2020 and December 31, 2019, were originated primarily through the initial capitalization transactions
of Beneficient in 2017 and 2018. These loans are collateralized by the cash flows from the portfolio of alternative assets held
in the custody of certain trusts of the ExAlt Plan™. The outstanding principal balance was $460.6 million and
$425.9 million as of September 30, 2020 and December 31, 2019, respectively, which included $200.6 million and $154.7
million of inception-to-date interest income paid-in-kind, respectively.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Components of the carrying value of loans
receivable were as follows for the periods presented below (in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Loans receivable, net of discount
|
|
$
|
229,961
|
|
|
$
|
232,344
|
|
Allowance for loan losses
|
|
|
(2,914
|
)
|
|
|
—
|
|
Loans receivable, net
|
|
$
|
227,047
|
|
|
$
|
232,344
|
|
As described in Note 4, on December 31,
2019, a change-of-control event occurred that resulted in the application of push-down accounting, and all of Beneficient’s
assets and liabilities were recorded at fair value. Certain of the purchased loans were determined to be PCI loans under ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit Quality, as defined in Note 2, with the remaining loans accounted
for under ASC 310-20, Nonrefundable Fees and Other Costs. For loans accounted for under ASC 310-20, the discount arising
due to the difference between each loan’s carrying value and the estimated fair value at the time of acquisition will be
accreted into interest income over its remaining contractual life. Should management obtain new information about facts and circumstances
that existed at the acquisition date, additional adjustments to the fair values assigned to acquired loans could occur during the
measurement period of one year from the acquisition date.
The following table reflects the fair value
of non-PCI and PCI loans as of December 31, 2019, the date of the change-of control (in thousands):
Fair value of non-PCI loans
|
|
$
|
86,436
|
|
|
|
|
|
|
Fair value of PCI loans
|
|
$
|
145,908
|
|
The fair values above do not include the
downward measurement period adjustments totaling $26.1 million discussed in Note 4.
The following table reflects the outstanding
principal balance and carrying amounts of the non-PCI loans (in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying
Value
|
|
|
Unpaid
Balance
|
|
|
Carrying
Value
|
|
|
Unpaid
Balance
|
|
Loans receivable
|
|
$
|
93,625
|
|
|
$
|
140,997
|
|
|
$
|
86,436
|
|
|
$
|
129,304
|
|
The following table reflects the outstanding
principal balance and carrying amounts of the PCI loans (in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying
Value
|
|
|
Unpaid
Balance
|
|
|
Carrying
Value
|
|
|
Unpaid
Balance
|
|
Loans receivable
|
|
$
|
133,422
|
|
|
$
|
319,607
|
|
|
$
|
145,908
|
|
|
$
|
296,627
|
|
As of December 31, 2019, total contractually
required payments receivable, including interest, on PCI loans over the remaining contract period was $772.2 million. This assumes
all loans accrue interest through maturity, with maturities on loans that existed at December 31, 2019 ranging from 2029 to
2030. Cash flows expected to be collected at the acquisition date totaled $235.6 million. The difference between total cash flows
expected to be collected and the fair value of the loans represents accretable yield.
The following table presents a rollforward
of the accretable yield for the three and nine months ended September 30, 2020 (in thousands):
|
|
Three Months Ended
September 30, 2020
|
|
|
Nine Months Ended
September 30, 2020
|
|
Balance, beginning of period
|
|
$
|
66,383
|
|
|
$
|
89,647
|
|
Accretion
|
|
|
(7,899
|
)
|
|
|
(22,863
|
)
|
Decrease in accretable yield(a)
|
|
|
—
|
|
|
|
(8,300
|
)
|
Balance, end of period
|
|
$
|
58,484
|
|
|
$
|
58,484
|
|
|
(a)
|
Includes changes in the accretable yield due to both transfers from the nonaccretable difference
and the impact of changes in the expected timing of cash flows.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The changes in the allowance for loan losses
for the three and nine months ended September 30, 2020 are as follows (in thousands):
|
|
Three Months
Ended
September 30,
2020
|
|
|
Nine Months
Ended
September 30,
2020
|
|
Beginning balance
|
|
$
|
7,900
|
|
|
$
|
—
|
|
(Recapture) provision
|
|
|
(4,986
|
)
|
|
|
2,914
|
|
Charge-offs and other, net
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
2,914
|
|
|
$
|
2,914
|
|
As of September 30, 2020, the allowance
for loan losses was $2.9 million, $2.3 million of which was related to PCI loans. There were no net charge-offs related to PCI
loans during the three and nine months ended September 30, 2020.
During the three months ended September 30,
2020, a loan loss provision recapture of $5.0 million was recorded, all of which was related to PCI loans. The quarter-to-date
loan loss provision recapture was due to an increase in expected cash flows from the underlying collateral for certain PCI loans.
During the nine months ended September 30, 2020, a loan loss provision expense of $2.9 million was recorded, $2.3 million
of which was related to PCI loans. The year-to-date loan loss provision expense was primarily due to a decrease in expected cash
flows.
As a result of the push-down accounting
described in Note 4, the loans were recorded at fair value and there was no carryover allowance for loan losses recorded as of
December 31, 2019.
Promissory Note-LiquidTrusts
On May 31, 2019, GWG Life entered into
a Promissory Note (the “Promissory Note”), made by Jeffrey S. Hinkle and Dr. John A. Stahl, not in their individual
capacity but solely as trustees of The LT-1 LiquidTrust, The LT-2 LiquidTrust, The LT-5 LiquidTrust, The LT-7 LiquidTrust, The
LT-8 LiquidTrust and The LT-9 LiquidTrust (collectively, the “LiquidTrust Borrowers”). Pursuant to the terms of the
Promissory Note, GWG Life funded a term loan to the LiquidTrust Borrowers in an aggregate principal amount of $65.0 million (the
“Loan”). The Loan was made pursuant to GWG Holdings’ strategy to further diversify into alternative assets (beyond
life insurance) and ancillary businesses and was intended to better position Beneficient’s balance sheet, working capital
and liquidity profile to satisfy anticipated Texas Department of Banking regulatory requirements. The Loan bears interest at 7.0%
per annum, with interest payable at maturity, and matures on June 30, 2023.
The loan is reported in financing receivables
from affiliates in the consolidated balance sheets and included accrued interest receivable of $2.2 million as of December 31,
2019. There was no allowance for loan losses related to the Promissory Note as of December 31, 2019.
On September 30, 2020, GWG Holdings, GWG
Life, BCH, Ben LP, BCC, and the LiquidTrust Borrowers entered into an agreement (the “Promissory Note Repayment”) by
which the parties agreed to repay the Promissory Note and any related accrued interest for a $75.0 million Preferred Series C Unit
Account (the “Preferred C”) of BCH that Ben LP issued to the LiquidTrust Borrowers for no consideration; however, the
transaction ultimately increased the value of the collateral of Beneficient's loan portfolio. The $75.0 million of Preferred C
received by GWG Life was transferred to GWG Holdings upon execution of the Promissory Note Conversion, which increased GWG Holdings’
ownership percentage in Beneficient. As part of the agreement, if Beneficient has not received a trust charter as of the one-year
anniversary of the Promissory Note Conversion, or if no trust charter filing is still pending or in the process of being refiled,
GWG Holdings would receive an additional $5.0 million of Preferred C. The outstanding balance of the Promissory Note on September
30, 2020, immediately prior to the transaction, with accrued and unpaid interest thereon, was $70.6 million.
As a result of the change in ownership
while GWG Holdings retained a controlling interest, a rebalancing of the noncontrolling interests was performed in accordance with
ASC 810-10. Ultimately, the transaction resulted in a $26.3 million decrease to noncontrolling interests based on the rebalancing
of equity performed as a result of GWG Holdings’ receipt of additional Preferred C, a $70.6 million decrease to financing
receivables from affiliates, and a resulting $44.3 million decrease to additional paid-in-capital in GWG Holdings’ condensed
consolidated financial statements. The Preferred C that was received by GWG Holdings is eliminated in consolidation.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(7) Fair Value Definition and Hierarchy
ASC 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 third-party
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
(a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction).
The fair value hierarchy prioritizes the
inputs 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 as of the measurement date. Valuations
are based on quoted prices that are readily and regularly available in an active market.
|
|
Level 2 —
|
Valuations based quoted prices for similar
instruments in active markets; quoted prices for identical or similar instruments in in markets that are not active; and model-derived
valuations whose inputs are observable or whose significant value drivers are observable market data.
|
|
Level 3 —
|
Valuations based on inputs that are unobservable,
are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques,
and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions
and projections in determining the fair value assigned to such instruments.
|
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is significant to the 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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Financial instruments measured at fair
value on a recurring basis
The Company’s financial assets and
liabilities carried at fair value on a recurring basis, including the level in the fair value hierarchy, on September 30,
2020 and December 31, 2019 are presented below (in thousands).
|
|
As of September 30, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in put options
|
|
$
|
11,584
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,584
|
|
Investments in life insurance policies
|
|
|
—
|
|
|
|
—
|
|
|
|
787,260
|
|
|
|
787,260
|
|
|
|
As of December 31, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in life insurance policies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
796,039
|
|
|
$
|
796,039
|
|
The following is a description of the valuation
methodologies used for financial instruments measured at fair value on a recurring basis:
Investment in put options
On July 17, 2020, Beneficient, through
its subsidiary CT Risk Management, L.L.C., made aggregate payments of $14.8 million to purchase put options against a decrease
in the S&P 500 Index. The options have an aggregate notional amount of $300.0 million and are designed to protect the
net asset value of the interests in alternative assets that collateralize Beneficient’s loan portfolio against market risk.
One-half of the put options expire in July 2022 with the remaining put options expiring in July 2023. Changes in the fair value
of the options are recognized directly in earnings. The fair value of the options is recorded in the other assets line item of
the condensed consolidated balance sheets, and changes in the fair value of the options are recognized directly in earnings in
the other income (loss) line item of the condensed consolidated statements of operations.
Investments in life insurance policies
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 information about discount rates observed in the life
insurance secondary market through competitive bidding observations (which have declined recently as a result of our decreased
purchase activity) and other means, fixed income 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 yield premium a purchaser would require
to receive the future cash flows derived from our portfolio as a whole. Management has significant discretion regarding the combination
of these and other factors when determining the discount rate.
Under our Longest Life Expectancy portfolio
valuation methodology, we: i) utilize life expectancy reports from third-party life expectancy providers for the pricing of all
life insurance policies; ii) apply a stable valuation methodology driven by the experience of our life insurance portfolio, which
is re-evaluated if experience deviates by a specified margin; and iii) use relevant market observations that can be validated and
mapped to the discount rate used to value the life insurance portfolio.
These inputs are then used to estimate
the discounted cash flows from the portfolio using the ClariNet LS probabilistic and stochastic portfolio pricing model from ClearLife
Limited, 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 ClearLife Limited to prepare a net present value
calculation of our life insurance portfolio using the inputs we provide on a quarterly basis.
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 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
794,706
|
|
|
$
|
799,266
|
|
|
$
|
796,039
|
|
|
$
|
747,922
|
|
Total gain in earnings(1)
|
|
|
6,021
|
|
|
|
14,181
|
|
|
|
23,476
|
|
|
|
48,031
|
|
Purchases
|
|
|
—
|
|
|
|
711
|
|
|
|
—
|
|
|
|
32,250
|
|
Settlements(2)
|
|
|
(13,467
|
)
|
|
|
(6,640
|
)
|
|
|
(32,255
|
)
|
|
|
(20,685
|
)
|
Transfers into Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Transfers out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
787,260
|
|
|
$
|
807,518
|
|
|
$
|
787,260
|
|
|
$
|
807,518
|
|
|
(1)
|
Net change in fair value
|
|
(2)
|
Policy maturities at initial cost basis
|
The net activity in the table above is
reported in gain on life insurance policies, net, in the condensed consolidated statements of operations.
There have been no transfers between levels
for any assets or liabilities recorded at fair value on a recurring basis or any changes in the valuation techniques used for measuring
the fair value as of September 30, 2020 and December 31, 2019. The following table provides quantitative information
about the significant unobservable inputs used in the fair value measurement of the Company’s Level 3 fair value assets:
|
|
As of
September 30,
2020
|
|
|
As of
December 31,
2019
|
|
Weighted-average age of insured, years*
|
|
|
82.9
|
|
|
|
82.4
|
|
Age of insured range, years
|
|
|
63-100
|
|
|
|
62-101
|
|
Weighted-average life expectancy, months*
|
|
|
82.8
|
|
|
|
86.2
|
|
Life expectancy range, months
|
|
|
0-240
|
|
|
|
0-240
|
|
Average face amount per policy (in thousands)
|
|
$
|
1,777
|
|
|
$
|
1,756
|
|
Discount rate
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
(*)
|
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 (in thousands):
|
|
Change in Life Expectancy Estimates
|
|
|
|
Minus
8 months
|
|
|
Minus
4 months
|
|
|
Plus
4 months
|
|
|
Plus
8 months
|
|
September 30, 2020
|
|
$
|
98,909
|
|
|
$
|
46,028
|
|
|
$
|
(62,483
|
)
|
|
$
|
(115,452
|
)
|
December 31, 2019
|
|
$
|
113,812
|
|
|
$
|
57,753
|
|
|
$
|
(55,905
|
)
|
|
$
|
(111,340
|
)
|
|
|
Change in Discount Rate
|
|
|
|
Minus 2%
|
|
|
Minus 1%
|
|
|
Plus 1%
|
|
|
Plus 2%
|
|
September 30, 2020
|
|
$
|
84,613
|
|
|
$
|
40,314
|
|
|
$
|
(36,802
|
)
|
|
$
|
(70,497
|
)
|
December 31, 2019
|
|
$
|
91,890
|
|
|
$
|
43,713
|
|
|
$
|
(39,790
|
)
|
|
$
|
(76,118
|
)
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Financial instruments measured at fair
value on a non-recurring basis
There were no assets or liabilities measured
at fair value on a non-recurring basis as of September 30, 2020. As of December 31, 2019, Beneficient’s assets
and liabilities were recorded at fair value in the consolidated balance sheet due to the application of purchase accounting in
accordance with ASC 805 as described in Note 4.
Carrying amounts and estimated fair
values
The Company is required to disclose the
estimated fair value of financial instruments, whether or not recognized in the condensed consolidated balance sheets, for which
it is practicable to estimate those values. These fair value estimates are determined based on relevant market information and
information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be
sold or the price at which a liability could be settled. However, given there is no active market or observable market transactions
for many of the Company’s financial instruments, estimates of fair values are subjective in nature, involve uncertainties
and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly
affect the estimated values. Nonfinancial instruments are excluded from disclosure requirements.
The carrying amounts and estimated fair
values of the Company’s financial instruments not recorded at fair value were as noted in the tables below (in thousands).
|
|
As of September 30, 2020
|
|
|
Level in Fair
Value Hierarchy
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
1
|
|
$
|
109,756
|
|
|
$
|
109,756
|
|
Life insurance policy benefits receivable, net
|
|
1
|
|
|
36,418
|
|
|
|
36,418
|
|
Loans receivable, net of allowance for loan losses and discount
|
|
3
|
|
|
227,047
|
|
|
|
257,764
|
|
Fees receivable
|
|
1
|
|
|
31,571
|
|
|
|
31,571
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
2
|
|
$
|
203,907
|
|
|
$
|
213,117
|
|
L Bonds and Seller Trust L bonds
|
|
2
|
|
|
1,521,411
|
|
|
|
1,638,227
|
|
Other borrowings
|
|
2
|
|
|
100,178
|
|
|
|
101,368
|
|
Other liabilities
|
|
1
|
|
|
57,056
|
|
|
|
57,056
|
|
|
|
As of December 31, 2019
|
|
|
Level in Fair
Value Hierarchy
|
|
Carrying
Amount
|
|
|
Estimated Fair
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
1
|
|
$
|
99,331
|
|
|
$
|
99,331
|
|
Life insurance policy benefits receivable, net
|
|
1
|
|
|
23,031
|
|
|
|
23,031
|
|
Loans receivable, net of allowance for loan losses and discount
|
|
3
|
|
|
232,344
|
|
|
|
232,344
|
|
Fees receivable
|
|
1
|
|
|
29,168
|
|
|
|
29,168
|
|
Financing receivables from affiliates
|
|
2
|
|
|
67,153
|
|
|
|
59,608
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
2
|
|
$
|
174,390
|
|
|
$
|
184,587
|
|
L Bonds and Seller Trust L Bonds
|
|
2
|
|
|
1,293,530
|
|
|
|
1,390,288
|
|
Other borrowings
|
|
2
|
|
|
153,086
|
|
|
|
153,086
|
|
Other liabilities
|
|
1
|
|
|
44,352
|
|
|
|
44,352
|
|
Other liabilities is comprised of the interest
and dividends payable and accounts payable and accrued expenses line items on the condensed consolidated balance sheets as of September 30,
2020 and December 31, 2019.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(8) Equity Method Investments
FOXO BioScience LLC (formerly, InsurTech
Holdings, LLC)
On November 11, 2019, GWG contributed the
common stock and membership interests of its wholly-owned subsidiaries, FOXO Labs and FOXO Life (“Insurtech Subsidiaries”),
to a legal entity, FOXO, in exchange for a membership interest in FOXO. Although GWG Holdings currently owns 100% of FOXO’s
equity, we do not have a controlling financial interest in FOXO because the managing member has substantive participating rights.
Therefore, we account for our ownership interest in FOXO as an equity method investment.
The transaction resulted in a loss of control
of the Insurtech Subsidiaries and, as a result, we deconsolidated the subsidiaries and recorded an equity method investment balance
during the fourth quarter of 2019. The loss of control required us to measure the equity investment at fair value. We determined
the fair value of our investment in FOXO approximated the carrying value of $3.4 million, which was primarily comprised of cash
and fixed assets contributed to the entity during the fourth quarter of 2019. We recognized a loss on equity method investment
of $1.6 million during the fourth quarter of 2019, resulting in a balance of $1.8 million as of December 31, 2019.
The following table includes a rollforward
of the equity method investment in FOXO (in thousands):
|
|
Three Months Ended
September 30,
2020
|
|
|
Nine Months Ended
September 30,
2020
|
|
Beginning balance
|
|
$
|
7,773
|
|
|
$
|
1,761
|
|
Contributions
|
|
|
3,884
|
|
|
|
13,051
|
|
Loss on equity method investment
|
|
|
(1,431
|
)
|
|
|
(4,279
|
)
|
Other
|
|
|
10
|
|
|
|
(297
|
)
|
Ending balance
|
|
$
|
10,236
|
|
|
$
|
10,236
|
|
In accordance with the operating agreement
of FOXO, as of September 30, 2020, GWG Holdings is committed to contribute an additional $5.0 million to the entity through
October 2021. Our investment in the membership interest of FOXO is presented in other assets in our condensed consolidated balance
sheets. Our proportionate share of earnings or losses from our investee is recognized in earnings (loss) from equity method investments
in our condensed consolidated statements of operations.
The Beneficient Company Group, L.P.
During 2018, we acquired 40,505,279 million
Common Units for a total limited partnership interest in the Common Units of approximately 89.9% as of December 31, 2018.
On June 12, 2019, we acquired an additional 1,000,000 Common Units from a third party for a cash investment of $10.0 million.
Prior to December 31, 2019, our investment
in Common Units was presented in equity method investment on our condensed consolidated balance sheets. Our proportionate share
of earnings or losses from our investee was recognized in earnings (loss) from equity method investments in our condensed consolidated
statements of operations. We recorded our share of the earnings or loss of Beneficient through September 30, 2019, on a one-quarter
lag.
On December 31, 2019, we obtained control
of Beneficient and consolidated Beneficient as of that date in accordance with ASC 805, Business Combinations. See Note
4 for further information on the business combination. In connection with the consolidation, we discontinued the one-quarter reporting
lag.
Pre-consolidation financial information
after the elimination of any intercompany transactions pertaining to Beneficient is summarized in the table below (in thousands):
|
|
Three Months
Ended
June 30,
2019
|
|
|
Nine Months
Ended
June 30,
2019
|
|
Total revenues
|
|
$
|
28,151
|
|
|
$
|
69,262
|
|
Net loss
|
|
|
9,696
|
|
|
|
(36,345
|
)
|
Net gain (loss) attributable to Ben LP common unitholders
|
|
|
1,080
|
|
|
|
(11,439
|
)
|
GWG portion of net earnings (loss)
|
|
|
956
|
(1)
|
|
|
(371
|
)(2)
|
|
1.
|
Our portion of Beneficient’s net earnings (loss) from March 31, 2019 to June 30, 2019. This
amount was recognized during the three months ended September 30, 2019.
|
|
2.
|
Our portion of Beneficient's net earnings (loss) from October 1, 2018 to June 30, 2019. This amount
was recognized during the nine months ended September 30, 2019.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(9) Variable Interest Entities
In accordance with ASC 810, Consolidation,
the Company assesses whether it has a variable interest in legal entities in which it has a financial relationship and, if so,
whether or not those entities are variable interest entities (“VIEs”). For those entities that qualify as VIEs, ASC
810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.
VIEs for which the Company is the Primary
Beneficiary
On March 20, 2020, CT Risk Management,
LLC (“CT”) was created as a Delaware limited liability company to reduce the impact of a potential market downturn
on the alternative assets used to collateralize receivables held by Beneficient by distributing any potential profits to the Collective
Trusts thereby offsetting any reduction in the value of the alternative assets. The LLC agreement was amended and restated on April
16, 2020. There was no activity of CT until July 2020 when Beneficient made a capital contribution of $14.8 million, which
was used to purchase the put options reflected in the condensed consolidated balance sheet as of September 30, 2020.
CT is considered a VIE as the at-risk equity
holder, Beneficient, does not have all of the characteristics of a controlling financial interest due to Beneficient’s receipt
of returns being limited to its initial investment in CT. The Company concluded that Beneficient is the primary beneficiary of
CT as it has the power to direct the most significant activities and has an obligation to absorb potential losses of CT. Accordingly,
the results of CT are included in the Company’s condensed consolidated financial statements.
As of September 30, 2020, the condensed
consolidated balance sheets include assets of this consolidated VIE with a carrying value of $11.6 million, which is recorded in
the other assets line item. Additionally, the Company recorded a $3.2 million loss on investment for the three and nine months
ended September 30, 2020, which is reported in the other income (loss) line item of the condensed consolidated statements
of operations.
VIEs for which the Company is Not the
Primary Beneficiary
We determined that the LiquidTrust Borrowers
are VIEs, but that we are not the primary beneficiary of these VIEs. We do not have the power to direct any activities of the LiquidTrust
Borrowers that most significantly impact the Borrower’s economic performance. The Company’s exposure to risk of loss
in the LiquidTrust Borrowers is limited to its financing receivable from the LiquidTrust Borrowers.
The Company also determined that certain
other trusts included within the ExAlt PlanTM used in connection with Beneficient’s operations are VIEs, but that
we are not the primary beneficiary of these VIEs. The Company does not have both the power to direct the most significant activities
of the trusts and the obligation to absorb losses or right to receive benefits that could potentially be significant to the trusts.
The Company’s investments in the trusts are carried in loans receivable in the condensed consolidated balance sheets. The
Company’s exposure to risk of loss was determined as the amortized cost of the loans to the trusts, any earned but unpaid
fees or expenses plus any remaining potential contributions for unfunded capital commitments and cash reserve commitments.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
We determined that FOXO is a VIE, but that
we are not the primary beneficiary of the VIE. We do not have the power to direct any activities of FOXO that most significantly
impact its economic performance. The Company’s exposure to risk of loss in FOXO is limited to its equity method investment
in the membership interests of FOXO and its remaining unfunded capital commitments.
The following table shows the classification,
carrying value and maximum exposure to loss with respect to the Company’s unconsolidated VIEs (in thousands):
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying
Value
|
|
|
Maximum
Exposure to
Loss
|
|
|
Carrying
Value
|
|
|
Maximum
Exposure to
Loss
|
|
Loans receivable
|
|
$
|
227,047
|
|
|
$
|
293,847
|
|
|
$
|
232,344
|
|
|
$
|
335,255
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
67,153
|
|
|
|
67,153
|
|
Equity method investment
|
|
|
10,236
|
|
|
|
15,236
|
|
|
|
1,761
|
|
|
|
19,661
|
|
Accounts payable and accrued expenses
|
|
|
(2,583
|
)
|
|
|
—
|
|
|
|
(2,515
|
)
|
|
|
—
|
|
Total
|
|
$
|
234,700
|
|
|
$
|
309,083
|
|
|
$
|
298,743
|
|
|
$
|
422,069
|
|
(10) Debt
Senior Credit Facility with LNV Corporation
On November 1, 2019, DLP IV entered into
a second amended and restated senior credit facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent
on behalf of the lenders under the agreement, which replaced the amended and restated senior credit facility dated September 27,
2017 that previously governed DLP IV’s senior credit facility. The LNV Credit Facility makes available a total of up to $300.0
million in credit to DLP IV with a maturity date of September 27, 2029. Subject to available borrowing base capacity, additional
advances are available under the LNV Credit Facility at the LIBOR rate described below. Such advances are available to pay the
premiums and servicing costs of pledged life insurance policies as such amounts become due. Interest will accrue on amounts borrowed
under the LNV Credit Facility at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing,
equal to (a) the greater of 1.50% or 12-month LIBOR, plus (b) 7.50% per annum. The effective rate at September 30, 2020 was
9.00%. Interest payments are made on a quarterly basis.
Under the LNV Credit Facility, DLP IV has
granted the administrative agent, for the benefit of the lenders under the agreement, a security interest in all of DLP IV’s
assets.
In conjunction with entering into the LNV
Credit Facility, DLP IV pledged life insurance policies having an aggregate face value of approximately $298.3 million as additional
collateral and received an advance of approximately $37.1 million (inclusive of certain fees and expenses incurred in connection
with the negotiation and entry into the LNV Credit Facility). We were in compliance with all covenants of the LNV Credit Facility
at September 30, 2020, and continue to be as of the date of this filing.
As of September 30, 2020, approximately
76.9% of the total face value of our life insurance policies portfolio is pledged to LNV Corporation. The principal amount outstanding
under this facility was $213.1 million and $184.6 million at September 30, 2020 and December 31, 2019, respectively.
There were unamortized deferred financing costs of $9.2 million and $10.2 million as of September 30, 2020 and December 31,
2019, respectively. Obligations under the LNV Credit Facility are secured by a security interest in DLP IV’s assets, for
the benefit of the lenders, through an arrangement under which Wells Fargo Bank, N.A. 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 and
Seller Trust 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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
L Bonds
We began publicly offering and selling
L Bonds in January 2012 under the name “Renewable Secured Debentures”. These debt securities were re-named “L
Bonds” in January 2015. L Bonds were 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, a registration statement
relating to an additional public offering was declared effective permitting us to sell up to an additional $1.0 billion in principal
amount of L Bonds on a continuous basis through December 2020. We reached the maximum capacity on this offering during the third
quarter of 2020.
On June 3, 2020, a registration statement
relating to an additional public offering was declared effective permitting us to sell up to $2.0 billion in principal amount of
L Bonds on a continuous basis through June 2023. These bonds contain the same terms and features as our previous offerings.
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. Effective December 31, 2019, we entered into Amendment No. 2 to the indenture,
which primarily modified the calculation of the debt coverage ratio to allow the Company greater flexibility to finance and to
anticipate the potential impacts of GWG Holdings’ expanding relationship with Beneficient.
We were in compliance with the covenants
of the indenture at September 30, 2020, and as of the date of this filing.
We publicly offer and sell L Bonds under
a registration statement declared effective by the SEC and have issued Seller Trust L Bonds under a Supplemental Indenture, as
described below. We temporarily suspended the offering of our L Bonds on May 1, 2019 as a result of our delay in filing certain
periodic reports with the SEC. We recommenced our L Bond offering on August 8, 2019.
The bonds have renewal features under which
we may elect to permit their renewal, subject to the right of bondholders to elect to receive payment at maturity. Interest is
payable monthly or annually depending on the election of the investor.
At September 30, 2020 and December 31,
2019, the weighted-average interest rate of our outstanding L Bonds was 7.22% and 7.15%, respectively. The principal amount of
L Bonds outstanding was $1.2 billion and $0.9 billion at September 30, 2020 and December 31, 2019, 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 $4.3 million and $3.2 million for the three months ended September 30, 2020 and 2019, respectively.
Amortization of deferred issuance costs was $12.4 million and $9.2 million for the nine months ended September 30, 2020 and
2019, respectively. Future expected amortization of deferred financing costs as of September 30, 2020 is $45.8 million in
total over the next seven years.
Seller Trust L Bonds
On August 10, 2018, in connection with
the Initial Transfer of the Exchange Transaction described in Note 1, GWG Holdings issued Seller Trust L Bonds in the amount of
$366.9 million to the Seller Trusts. The maturity date of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds
bear interest at 7.50% per year. Interest is payable monthly in cash.
After December 28, 2020, the holders of
the Seller Trust L Bonds will have the right to cause GWG Holdings to repurchase, in whole but not in part, the Seller Trust L
Bonds held by such holder. The repurchase may be paid, at the option of GWG Holdings, in the form of cash, and/or a pro rata portion
of (i) the outstanding principal amount and accrued and unpaid interest under the commercial loan between GWG Life and Ben LP entered
into on August 10, 2018 and (ii) Common Units, or a combination of cash and such property.
The principal amount of Seller Trust L
Bonds outstanding was $366.9 million at both September 30, 2020 and December 31, 2019.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Other Borrowings
As of September 30, 2020 and December 31,
2019, Beneficient had borrowings that consisted of the following (in thousands):
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
First Lien Credit Agreement
|
|
$
|
27,373
|
|
|
$
|
77,477
|
|
Second Lien Credit Agreement
|
|
|
72,245
|
|
|
|
72,184
|
|
Other borrowings
|
|
|
2,606
|
|
|
|
2,538
|
|
Unamortized debt premiums (discounts)
|
|
|
(2,046
|
)
|
|
|
887
|
|
Total Other Borrowings
|
|
$
|
100,178
|
|
|
$
|
153,086
|
|
Beneficient First and Second Lien Credit
Agreement
On May 15, 2020, Beneficient executed a
Term Sheet with its lender to amend its then senior credit agreement and subordinated credit agreement. The resulting Second Amended
and Restated First Lien Credit Agreement and Second Amended and Restated Second Lien Credit Agreement (collectively, the “Second
Amendments”) was executed on August 13, 2020, with terms and conditions substantially consistent with the Term Sheet, as
further described below. Prior to the execution of the Second Amendments, other amendments extended the June 30, 2020 maturity
dates of both loans to August 13, 2020, while Beneficient and the lender finalized the amended and restated credit agreements.
Additional agreements were entered into on June 10, 2020, and on June 19, 2020, consistent with the Term Sheet, whereby Beneficient
agreed to repay $25.0 million of the then outstanding principal balance and pay an extension fee of 2.5% of the outstanding
aggregate principal balance of the loans, calculated after the $25.0 million repayment, on July 15, 2020. A total of $28.6 million
was paid on July 15, 2020, which included the $25.0 million principal payment, related accrued interest thereon, and the extension
fee described above.
GWG Holdings, GWG Life, and a newly formed
entity, DLP V, have also entered into the credit agreements with respect to provisions related to the potential future assumption
of the loans by DLP V as described below. The amendments extend the maturity date of both loans to April 10, 2021, and increase
the interest rate on each loan to 1-month LIBOR plus 8.0%, with a maximum interest rate of 9.5%. The loans are payable in three
installments of $25.0 million on each of September 10, 2020, December 10, 2020, and March 10, 2021, with the remaining balance
payable on April 10, 2021. Through September 30, 2020, all principal and interest due under the Second Amendments have been paid.
The amendments provide for the assumption
of the loans by DLP V pursuant to a Third Amended and Restated First Lien Credit Agreement, upon satisfaction of certain conditions
precedent, including the issuance of Beneficient’s trust company charters by the Texas Department of Banking. The amendments
provide that DLP V will receive Preferred C interests in exchange for assuming Beneficient’s amended loans in an amount equal
to 110% of the then outstanding loan balance. Upon assumption of the loans, the lender will receive a fee of 2.0% of the then outstanding
balance of the loans. Furthermore, upon assumption of the loans, the Commercial Loan Agreement between GWG Life and Beneficient
will be assumed by GWG Life USA, LLC, a wholly owned subsidiary of GWG Holdings, in exchange for Class A Subclass A-2 Units of
BCH equivalent to the outstanding principal balance of the debt evidenced by the Commercial Loan Agreement. In connection with
the assumption of the loans by DLP V, the lender will be granted a security interest in the Preferred Series A Subclass 1 Unit
Accounts of BCH held by GWG Life and the life insurance policies held by DLP V, which are to be contributed to DLP V from GWG Life
Trust.
In connection with the agreement by DLP
V to assume the loans upon the issuance of Beneficient's trust company charters, (i) the lender will be permitted to make capital
contributions of up to $152.0 million in exchange for a Preferred Series A Subclass 1 Unit Account of BCH for an equal amount of
cash for two years after the assumption of the loans; should the lender elect to make such a capital contribution, GWG Holdings
or one of its subsidiaries will be allowed to exchange an amount of Preferred C into Preferred Series A Subclass 1 Unit Accounts
or contribute cash for Preferred Series A Subclass 1 Unit Accounts, in certain circumstances, in order to maintain its relative
ownership percentage of the Preferred Series A Subclass 1 Unit Accounts; (ii) BHI, which owns a majority of the Class S Ordinary
Units, Preferred Series A Subclass 1 Unit Accounts, and FLP Subclass 1 Unit Accounts issued by BCH, will grant certain tax-related
concessions related to the transaction to the lender as may be mutually agreed upon between the parties, and (iii) in exchange
for the tax-related concessions to be agreed between the parties, (a) 5% of BHI’s Preferred Series A Sub Class 1 Unit Account,
which will be held by the lender, may convert, upon delivery of notice by BHI or its designee, to a Preferred A.0 Unit Account
of BCH, and (b) recipients of a grant of Preferred Series A Subclass 1 Unit Accounts from BHI will have the right to put an amount
of Preferred Series A Subclass 1 Unit Accounts to Beneficient equal to any associated tax liability stemming from any such grant;
provided that the aggregated associated tax liability shall not relate to more than $30 million of grants of Preferred Series
A Subclass 1 Unit Accounts from BHI; and provided, further, that such a put cannot be exercised prior to July 1, 2021. There has
been no liability recorded for the put right as of September 30, 2020, as the transfer of Preferred Series A Subclass Unit
Accounts has not occurred.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The amended loan terms and ancillary documents
contain covenants that (i) prevent Beneficient from issuing any securities senior to the Preferred Series A Subclass 1 or Preferred
A.0 Unit Accounts; (ii) prevent Beneficient from incurring additional debt or borrowings greater than $10.0 million, other
than trade payables, while the loans are outstanding; (iii) prevent, without the written consent of the lender, GWG Life Trust
or DLP V from selling, transferring or otherwise disposing any of the life insurance policies held by GWG Life Trust as of May
15, 2020, except that life insurance policies may be sold, transferred, or otherwise disposed of, provided that concurrent with
the assumption of the loans by DLP V, a prepayment of the loans would be required, if necessary, to maintain certain loan-to-value
percentages, after giving effect to such sale, transfer or disposal; and (iv) prevent, without the written consent of the lender,
GWG Holdings from selling, transferring, or otherwise disposing of any Preferred Series A Subclass 1 Unit Accounts held as of May
15, 2020, other than to DLP V. These covenants are materially similar to the terms under the Third Amended and Restated First Lien
Credit Agreement once assumed by DLP V. As of September 30, 2020, Beneficient was in compliance with all covenants.
The assumption set forth in the amendments
are subject to, among other things, the satisfaction of certain closing conditions, some of which may be outside of the parties’
control. These loans are not currently guaranteed by GWG.
Beneficient's additional borrowings as
detailed in the table above mature in 2023 and 2024.
(11) Stockholders’ Equity
GWG Holdings Equity
Common Stock
In September 2014, GWG Holdings consummated
an initial public offering of its 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, the common stock of GWG Holdings was listed on the Nasdaq Capital Market under the ticker symbol
“GWGH.”
The 2018 transactions between GWG Holdings,
GWG Life, Beneficient and the Seller Trusts described in Note 1 ultimately resulted in the issuance of 27,013,516 shares of GWG
Holdings common stock to the Seller Trust in exchange for Common Units. The shares were offered and sold in reliance upon the exemption
from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended. Also, the Purchase and Contribution
Agreement described in Note 1 ultimately resulted in the sale of 2,500,000 shares of GWG Holdings common stock to BCC, and the
contribution of 1,452,155 shares of GWG Holdings common stock to AltiVerse.
Pursuant to the Exchange Agreement described
in Note 1, commencing on December 31, 2019, holders of Ben LP Common Units have the right to exchange their Common Units for common
stock of GWG Holdings. The exchange ratio in the Exchange Agreement is based on the ratio of the capital account associated with
the Common Units to be exchanged to the market price of the common stock of GWG Holdings based on the volume weighted average price
of GWG Holdings’ common stock for the five consecutive trading days prior to the quarterly exchange date. No Ben LP Common
Units have been exchanged for common stock of GWG Holdings through September 30, 2020.
On November 15, 2018, the Board of Directors
of GWG Holdings approved a stock repurchase program pursuant to which the Company was permitted, from time to time, to purchase
shares of its common stock for an aggregate purchase price not to exceed $1.5 million. Stock repurchases were able to be executed
through various means, including, without limitation, open market transactions, privately negotiated transactions or otherwise.
The stock repurchase program did not obligate the Company to purchase any shares, and expired on April 30, 2019.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The following table includes information
about the stock repurchase program for the nine months ended September 30, 2019 (dollar amounts in thousands, except per share
data):
2019 Monthly Period
|
|
Number of
Shares
Purchased
|
|
|
Average
Price
Paid per
Share
|
|
|
Total Number
of Shares
Purchased as
Part of the
Program
|
|
|
Maximum
Dollar Value
of Shares
that Remained
Under
the Program
|
|
January 2019
|
|
|
42,488
|
|
|
$
|
8.47
|
|
|
|
52,523
|
|
|
$
|
1,072
|
|
February 2019
|
|
|
202
|
|
|
|
8.88
|
|
|
|
52,725
|
|
|
|
1,070
|
|
|
(1)
|
No stock was repurchased after February 2019, and the stock repurchase program expired on April
30, 2019.
|
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 (see further details in the section below) 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 convert their RPS into our common
stock at a conversion price equal to the volume-weighted average price of our common stock for the 20 trading days immediately
prior to the date of conversion, subject to a minimum conversion price of $15.00 and in an aggregate amount limited to 15% of the
stated value of RPS originally purchased from us and still held by such purchaser.
Holders of RPS may request that we redeem
their RPS at a price equal to their stated value plus accrued but unpaid dividends, less an applicable redemption fee, if any,
as specified in the Certificate of Designation. Nevertheless, the Certificate of Designation for RPS permits us in our sole discretion
to grant or decline redemption requests. Subject to certain restrictions and conditions, we may also redeem shares of RPS without
a redemption fee upon a holder’s death, total disability or bankruptcy. In addition, after one year from the date of original
issuance, we may, at our option, call and redeem shares of RPS at a price equal to their liquidation preference.
In March 2017, we closed the RPS offering
to additional investors having sold 99,127 shares of RPS for an aggregate gross consideration of $99.1 million and incurred
approximately $7.0 million 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; however, based on our assessment under ASC
470, Debt, (“ASC 470”) and ASC 815, Derivatives and Hedging, (“ASC 815”), we do not believe
bifurcation of either the holder’s redemption or conversion feature is appropriate.
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. The terms of the RPS 2 are largely consistent
with those of the RPS, other than the conversion and redemption features discussed below.
Holders of RPS 2 may, less an applicable
conversion discount, if any, convert their RPS 2 into our common stock at a conversion price equal to the volume-weighted average
price of our common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion
price of $12.75 and in an aggregate amount limited to 10% of the stated value of RPS 2 originally purchased from us and still held
by such purchaser. 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).
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
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 $150.0 million and incurred
approximately $10.3 million of related selling costs.
The RPS 2 was determined to have the same
two embedded features discussed in the RPS section above (optional redemption and optional conversion by the holder). We do not
believe bifurcation of either the holder’s redemption or conversion feature is appropriate.
Beneficient Equity
As of September 30, 2020, BCH, a consolidated
subsidiary of Ben LP, has issued general partnership Class A Units (Subclass A-1 and A-2), Class S Ordinary Units, Class S Preferred
Units, FLP Units (Subclass 1 and Subclass 2), Preferred Series A Subclass 1 Unit Accounts, Preferred Series A Subclass 2 Unit Accounts,
and Preferred Series C Unit Accounts. The Preferred Series A Subclass 0 Unit Accounts were created under the 5th Amended and Restated
LPA; however, none have been issued as of September 30, 2020. The 5th Amended and Restated LPA of BCH governs the terms of
these equity securities.
Common Units
As of September 30, 2020 and December 31,
2019, Beneficient has a total of 48,749,630 and 44,146,623 Common Units issued and outstanding, respectively. As of September 30,
2020 and December 31, 2019, GWG owns 46,887,963 and 42,171,946, Common Units, respectively, which are eliminated in consolidation.
The remaining issued and outstanding Common Units are recorded in the condensed consolidated balance sheet in the noncontrolling
interests line item.
Preferred Series A Subclass 0 (Noncontrolling
Interests)
On July 15, 2020, BCH, a consolidated subsidiary
of Ben LP, amended its limited partnership agreement in a 5th Amended and Restated LPA, which created a new subclass of Preferred
Series A Unit Accounts, the Preferred A.0.
As a subclass of the Preferred Series A
Unit Accounts, the Preferred A.0 receives the same preferred return on a quarterly basis as the other Preferred Series A subclasses.
However, the Preferred A.0 is senior to all other classes of preferred equity, including the other subclasses of Preferred Series
A in terms of allocations of profits, distributions, and liquidation. The Preferred A.0 can be converted into Class S Units at
the election of the holder, at a price equal to (x) prior to the initial public listing, the per Common Unit fair market value
as determined by the general Partner and (y) following the initial public listing, the lesser of (i) $10 and (ii) if the Common
Units are listed on a national securities exchange, the volume-weighted average closing price of a Common Unit as reported on the
exchange on which the Common Units are traded for the twenty (20) days immediately prior to the applicable exchange date, or if
the Common Units are not listed on a national securities exchange, then the volume-weighted average closing price of a security
traded on a national securities exchange or quoted in an automated quotation system into which the Common Units are convertible
or exchangeable for the twenty (20) days immediately prior to the applicable exchange date.
Preferred Series A Subclass 1 (Redeemable
Noncontrolling Interest)
BCH, a consolidated subsidiary of Ben LP,
has non-unitized equity outstanding. The Preferred Series A Subclass 1 Unit Accounts are non-participating and convertible on a
dollar basis.
In 2019, Preferred Series A Subclass 1
Unit Account holders signed an agreement to forbear the right to receive an annualized preferred return in excess of a rate determined
materially consistent with the methodology below until, initially, the earlier of December 31, 2019 or three months following the
issuance of the limited trust association charters by the Texas Department of Banking. The charters from the Texas Department of
Banking were not issued as of December 31, 2019. In 2020, this forbearance agreement was extended through September 30, 2020.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
The income allocation methodology under
this forbearance agreement was as follows:
|
●
|
First, Ben, as the sole holder of Class A Units issued by BCH is allocated income from BCH to cover
the expenses incurred solely by Ben;
|
|
●
|
Second, the remaining income at BCH is allocated 50% to the aggregate of Class A Units and Class
S Ordinary Units and 50% to Preferred Series A Subclass 1 Unit Accounts, until the Common Units issued by Ben receive a 1% annualized
return on the Common Unit account balance;
|
|
●
|
Third, after the 1% annualized return to the Common Unit issued by Ben is achieved, additional
income is allocated to the Preferred Series A until the Preferred Series A is allocated the amount required under the LPA, (as
amended); and
|
|
●
|
Finally, any remaining income is allocated under the terms of the current LPA (pro-rata between
the Class A Units and Class S Ordinary Units).
|
If and when the forbearance agreement expires,
account holders will be entitled to a compounded quarterly preferred return. The preferred return to be paid to Preferred Series
A Unitholders is limited by a quarterly preferred return rate cap that is based on the annualized revenues of BCH. Annualized revenues
are defined as four times the sum of total quarterly interest, fee and dividend income plus total noninterest revenues. This quarterly
rate cap is defined as follows:
|
●
|
0.25% if annualized revenues are $80 million or less;
|
|
●
|
0.50% if annualized revenues are greater than $80 million but equal to or less than $105 million;
|
|
●
|
0.75% if annualized revenues are greater than $105 million but equal to or less than $125 million;
|
|
●
|
1.00% if annualized revenues are greater than $125 million but equal to or less than $135 million;
|
|
●
|
1.25% if annualized revenues are greater than $135 million but equal to or less than $140 million;
and
|
|
●
|
If over $140 million, the preferred return calculation is based on a fraction (i) the numerator
of which is (A) the positive percentage rate change, if any, to the seasonally adjusted CPI-U covering the period from the date
of the last allocation of profits to such holders, plus (B) (x) 2% prior to an Initial Public Offering (as defined in the BCH LPA)
by Ben and (y) 3% thereafter, and (ii) the denominator of which is one minus the highest effective marginal combined U.S. federal,
state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made
for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the
quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long
term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually
allocated in respect of the quarterly preferred return for the fiscal year reflected in the BCH's most recently filed Internal
Revenue Service Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax.
|
The definition of Initial Public Offering
includes an event, transaction or agreement pursuant to which the Common Units are convertible or exchangeable into equity securities
listed on a national securities exchange or quotation in an automated quotation system.
No amounts have been paid to the Preferred
Series A Subclass 1 Unit Account holders related to the preferred return from inception through September 30, 2020. In connection
with the issuance of Preferred Series A Subclass 2 Units as part of the Option Agreement, the preferred return of Preferred Series
A Subclass 1 Unit Account holders is reduced by the preferred return allocated to the Preferred Series A Subclass 2 Units during
the period the Option Agreement remains outstanding. Additionally, certain Preferred Series A Subclass 1 Unit Account holders agreed
to be specially allocated any income or losses associated with the Beneficient Management Partners, L.P. Equity Incentive Plan
and certain other costs.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
Upon election by a holder, the Preferred
Series A Unit Accounts (other than Preferred Series A Subclass 2 Unit Accounts) are, at any time on or after January 1, 2021, convertible
in an amount of Preferred Series A Unit Accounts (other than Preferred Series A Subclass 2 Unit Accounts), equal to 20% of their
Sub-Capital Accounts into Class S Ordinary Units (with the right to convert any unconverted amount from previous years in any subsequent
years). Upon an election, a holder of Preferred Series A Subclass 1 Unit Accounts will be issued Class S Ordinary Units necessary
to provide the holder with a number of Class S Ordinary Units that, in the aggregate, equal (a) the balance of the holder’s
capital account associated with the Preferred Series A Subclass 1 Unit Accounts being converted divided by (b) either (x) prior
to an initial public offering, the appraised per Class A Unit fair market value as determined by Beneficient or (y) following an
initial public offering, the average price of a Common Unit for the thirty (30) day period ended immediately prior to the applicable
conversion date. The holder of such newly issued Class S Ordinary Units may immediately convert them into Common Units. Additionally,
effective December 31, 2030, if the Preferred Series A Subclass 1 Unit Accounts have not been converted, they will redeem for cash
in an amount equal to the then outstanding capital account balance of the accounts. If available redeeming cash (as defined in
the LPA) is insufficient to satisfy any such redemption requirements, BCH, on a quarterly basis, will redeem additional Preferred
Series A Units until all such Preferred Series A Units have been redeemed. The Preferred Series A Subclass 1 Unit Accounts are
subject to certain other conversion and redemption provisions.
The current LPA of BCH also includes certain
limitations of BCH, without the consent of a majority-in-interest of the Preferred Series A Unit Account holders, to (i) issue
any new equity securities and (ii) except as otherwise provided, incur indebtedness that is senior to or pari passu with any right
of distribution, redemption, repayment, repurchase or other payments relating to the Preferred Series A Unit accounts. Further,
BCH cannot, prior to the conversion of all the Preferred Series A Unit accounts, incur any additional long-term debt unless (i)
after giving effect to the incurrence of the new long-term debt on a pro forma basis, the sum of certain preferred stock, existing
debt and any new long-term indebtedness would not exceed 55% of BCH’s net asset value (“NAV”) plus cash on hand,
and (ii) at the time of incurrence of any new long-term indebtedness, the aggregate balance of BCH’s (including controlled
subsidiaries) debt plus such new long-term debt does not exceed 40% of the sum of the NAV of the collateral underlying the loan
portfolio of BCH and its subsidiaries plus cash on hand at Ben LP, BCH and its subsidiaries.
The Preferred Series A Subclass 1 Unit
Accounts are recorded in the condensed consolidated balance sheet in the redeemable noncontrolling interest line item.
Preferred Series C Unit Accounts
The 5th Amended and Restated LPA also created
a new class of preferred equity, the Preferred Series C Unit Accounts. The Preferred Series C Unit Accounts are non-participating
and convertible on a basis consistent with the UPA discussed in Note 1. Account holders are entitled to a compounded quarterly
preferred return based on a fraction, the numerator of which is (a) the sum of an inflation adjustment amount, plus (1) 0.5% prior
to the initial public listing and (2) 0.75% following the initial public listing, and the denominator of which is (b) 1 minus the
means of the highest effective marginal combined U.S. federal, state and local income tax rate (including the rate of taxes under
Section 1411 of the Code) for a Fiscal Year prescribed for an individual resident in New York, New York (taking into account (a)
the nondeductibility of expenses subject to the limitations described in Sections 67 and 68 of the Code and (b) the character (e.g.,
long-term or short-term capital gain or ordinary or exempt income) of the applicable income, but not taking into account the deductibility
of state and local income taxes for U.S. federal income tax purposes), based on the Partnership’s most recently filed IRS
form 1065.
BCH calculates two Preferred Series C Unit
Accounts capital accounts: the Liquidation Capital Account and the Conversion Capital Account. In calculating the Conversion Capital
Account, the Preferred Series C Unit Accounts are allocated profits and losses junior to the Preferred Series A Unit Accounts.
In calculating the Liquidation Capital Account, the Preferred Series C Unit Accounts are allocated profits and losses pari passu
with the Preferred Series A Unit Accounts.
Following the exchange of any Preferred
Series C Unit Accounts into Common Units under the UPA described in Note 1, the excess of the profits and losses allocated to the
Preferred Series C Unit Accounts under the Liquidation Capital Account will be deemed the “Excess Amount.” This Excess
Amount will be specially allocated at each tax period in accordance with the principals of Treasury Regulation Section 1.704-1(b)(4)(x),
to the Preferred Series A Subclass 1 Units Accounts, prior to any amount of profit, income or gain being allocated to any other
class of units (other than the Preferred A.0) or limited partners until such special allocations equal, in the aggregate, such
Excess Amount.
The only conversion, redemption, or exchange
rights available to the Preferred Series C Unit Accounts are those rights afforded in accordance with the UPA, described in Note
1, or such similar agreement.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
While any amount of Preferred Series C
Unit Accounts is outstanding, BCH cannot make any distributions, other than tax distributions and redemptions, distributions upon
a liquidation of BCH, and distributions of net consideration received from a sale of BCH, without the prior consent of a majority
in interest of the holders of the Preferred Series C Unit Accounts.
As of September 30, 2020, GWG owns
$161.0 million of Preferred Series C Unit Accounts. The Preferred Series C Unit Accounts are eliminated upon consolidation.
Class S Ordinary Units
As of both September 30, 2020 and
December 31, 2019, BCH had issued and outstanding 5.7 million Class S Ordinary Units. The Class S Ordinary Units participate
on an as-converted basis pro-rata in the share of the profits or losses of BCH and subsidiaries following all other allocations
made by BCH and its subsidiaries. As limited partner interests, these units have limited voting rights and do not entitle participation
in the management of BCH’s business and affairs. The Class S Ordinary Units are exchangeable for Common Units on a one-for-one
basis, subject to customary conversion rate adjustments for splits, distributions and reclassifications, as well as compliance
with any applicable vesting and transfer restrictions. Each conversion also results in the issuance to Ben LP of a Class A Unit
of BCH for each common unit issued.
The Class S Ordinary Units are recorded
in the condensed consolidated balance sheet in the noncontrolling interests line item.
Class S Preferred Units
The limited partnership agreement of BCH
allows it to issue Class S Preferred Units. The Class S Preferred Units are entitled to a quarterly preferred return that is limited
by the quarterly preferred return rate cap described above for Preferred Series A Subclass 1 except for when annualized revenues
exceed $140 million, the Class S Preferred return is based on a fraction (i) the numerator of which is (A) the positive percentage
rate change, if any, to the seasonally adjusted CPI-U covering the period from the date of the last allocation of profits to such
holders, plus (B) 0.75 percent, and (ii) the denominator of which is one minus the highest effective marginal combined U.S. federal,
state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made
for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the
quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long
term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually
allocated in respect of the quarterly preferred return for the fiscal year reflected in the Ben Group Partnership’s most
recently filed IRS Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax. The Class
S Preferred Units also participate on an as-converted basis pro-rata in the share of the profits or losses of BCH and subsidiaries
following all other allocations made by BCH and its subsidiaries. As limited partner interests, these units are generally non-voting
and do not entitle participation in the management of BCH’s business and affairs. Generally, the Class S Preferred Units
are exchangeable for Common Units in Ben LP on a 1.2-for-1 basis, subject to customary conversion rate adjustments for splits,
distributions and reclassifications, as well as compliance with any applicable vesting and transfer restrictions. Each conversion
also results in the issuance to Ben LP of a Class A Unit for each Common Unit issued. Holders of Class S Preferred Units may elect
to convert into Class S Ordinary Units in connection with a sale or dissolution of BCH.
No amounts have been paid to the Class
S Preferred Unit holders related to the preferred return from inception through September 30, 2020. The Class S Preferred
Units are recorded in the condensed consolidated balance sheet in the noncontrolling interests line item.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
(12) Equity-Based Compensation
As of September 30, 2020, the Company
has outstanding equity-based awards under the GWG Holdings 2013 Stock Incentive Plan, the Beneficient Management Partners, L.P.
(“BMP”) Equity Incentive Plan, and the Ben Equity Incentive Plan, as more fully described in the sections below.
2013 Stock Incentive Plan
GWG Holdings adopted the 2013 Stock Incentive
Plan in March 2013, as amended on June 1, 2015, May 5, 2017 and May 8, 2018. 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. Option awards generally expire 10 years from the date of grant. As of September 30, 2020,
the Company has granted stock options, stock appreciation rights (“SAR”), and restricted stock units (“RSU”)
under this plan.
During the nine months ended September 30,
2020, a total of 84,018 stock options held by employees vested. Additionally, as a result of stock option exercises, 3,688 shares
of common stock were issued to employees, net of shares forfeited to satisfy tax withholding obligations.
Upon the exercise of SARs, the Company
is obligated to make cash payments equal to the positive difference between the market value of the Company’s common stock
on the date of exercise less the market value of the common stock on the date of grant. The liability for the SARs as of September 30,
2020 and December 31, 2019 was $0.7 million and $0.6 million, respectively, and was recorded within accounts payable and accrued
expenses in the condensed consolidated balance sheets.
During the nine months ended September 30,
2020, 57,183 of the RSUs held by employees and directors vested.
BMP Equity Incentive Plan
The Board of Directors of Beneficient Management,
Ben LP’s general partner, adopted the BMP Equity Incentive Plan in 2019. Under the BMP Equity Incentive Plan, certain directors
and employees of Ben are eligible to receive equity units in BMP, an entity affiliated with the board of directors of Beneficient
Management, in return for their services to Ben. The BMP equity units eligible to be awarded to employees are comprised of BMP’s
Class A Units and/or BMP’s Class B Units (collectively, the “BMP Equity Units”). The BMP Equity Units awarded
in 2019 and during the three and nine months ended September 30, 2020, included some awards that were fully vested upon grant
date, and some awards that are subject to service-based vesting over a four-year period from the date of hire. Expense
recognized for these awards is specially allocated to certain holders of redeemable noncontrolling interests.
As BMP’s equity is not publicly traded,
the fair value of the BMP Equity Units is determined on each grant date using a probability-weighted discounted cash flow analysis.
This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement
within the fair value hierarchy. The resultant probability-weighted cash flows are then discounted using a rate that reflects the
uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant
assumption.
During second quarter 2020, 1,963,969 vested
units were forfeited and returned as a result of an agreement allowing Beneficient to recover the aforementioned units held by
one former director of Beneficient (see further discussion below).
Ben Equity Incentive Plan
The Board of Directors of Beneficient Management
adopted the Ben Equity Incentive Plan in September 2018. Under the Ben Equity Incentive Plan, Ben is permitted to grant equity
awards, in the form of restricted equity units (“REUs”) representing ownership interests in Common Units. Settled awards
under the Ben Equity Incentive Plan dilute Ben’s Common Unitholders. The total number of Common Units that may be issued
under the Ben Equity Incentive Plan is equivalent to 15% of the number of fully diluted Common Units outstanding, subject to annual
adjustment.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(unaudited)
All REUs are subject to two performance
conditions, both of which were met during 2019. Additionally, if a change-of-control event occurs prior to July 1, 2021, then all
units, vested and unvested, will settle within 60 days. Any transaction where GWG Holdings obtains the right to appoint a majority
of the members of Beneficient Management’s Board of Directors is expressly excluded from the definition of change-of-control
for the REUs. Awards will generally be subject to service-based vesting over a multi-year period from the recipient’s date
of hire, though some awards fully vest upon grant date. While providing services to Ben, if applicable, certain of these awards
are subject to minimum retained ownership rules requiring the award recipient to continuously hold Common Unit equivalents equal
to at least 15% of their cumulatively granted awards that have the minimum retained ownership requirement.
As Ben LP’s equity is not publicly
traded, the fair value of the REUs is estimated on the grant date using recent equity transactions involving third parties, which
provides the Company with observable fair value information sufficient for estimating the grant date fair value.
During second quarter 2020, 507,500 vested
units were forfeited as a result of an agreement allowing Beneficient to recover the aforementioned units held by one former director
of Beneficient. Beneficient recognized $36.3 million of other income as a result of this recovery of equity-based compensation,
including both BMP Equity Units and REUs. A substantial majority of the former director’s equity-based compensation units
were fully vested, and the majority of the related expense was allocated to certain holders of noncontrolling interests and recorded
in prior periods. The provisions of the award agreements related to the forfeiture of vested units resulted in the previous expense
being recorded to other income in the year-to-date period, accordingly.
During third quarter 2020, 515,000 units
were granted to a senior partner director subject to a performance condition. The performance condition has not been met as of
September 30, 2020. As the performance condition of the grant is based on a liquidity
event, recognition of the related compensation cost is deferred until the condition has been met. Total unrecognized compensation
cost related to this award is approximately $6.4 million as of September 30, 2020.
The following table summarizes the award
activity, in number of units, for each plan during the nine months ended September 30, 2020:
GWG HOLDINGS, INC. AND SUBSIDIARIES
The holders of certain of the units issued
under the BMP Equity Incentive Plan and the Ben Equity Incentive Plan, upon vesting, have the right to convert the units to shares
of GWG Holdings common stock per the Exchange Agreement discussed in Note 1. As such, units vested and issued under Beneficient’s
equity incentive plans may result in dilution of the common stock of GWG Holdings.
The following table presents the components
of equity-based compensation expense recognized in the condensed consolidated statement of operations (in thousands):
Unrecognized equity-based compensation
expense, excluding the expense related to the performance award discussed above, totaled approximately $38.3 million as of
September 30, 2020. We currently expect to recognize equity-based compensation expense of $4.1 million during the
remainder of 2020, and the remainder thereafter based on scheduled vesting of awards outstanding as of September 30,
2020. The following table presents the equity-based compensation expense expected to be recognized over the next five years based
on scheduled vesting of awards outstanding, excluding the award subject to the performance condition discussed above, as of September 30,
2020 (in thousands):
The Company applies an estimated annual
effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal
method prescribed by the accounting guidance established for computing income taxes in interim periods. Prior to 2020, the Company
determined the quarterly income tax provision using a discrete year-to-date calculation.
Consolidated income tax expense was $22.4
million for the three months ended September 30, 2020, and consolidated income tax benefit was $0.6 million for the nine months
ended September 30, 2020. The Company’s effective tax rate was 0.4% for the nine months ended September 30, 2020.
The income tax expense for the three months ended September 30, 2020 primarily reflects the effects of a gain allocated to
GWG Holdings from Ben LP and an increase to the valuation allowance on the Company’s net deferred tax assets (described below).
The income tax benefit for the nine months ended September 30, 2020 primarily reflects the effects of a gain allocated to
GWG Holdings from Ben LP and a change in state taxing jurisdictions.
After the change-of-control transaction
with Ben LP on December 31, 2019, the Company moved its headquarters from Minnesota to Texas. This move resulted in a change in
the state deferred tax rate from 9.8% to 0%. In the third quarter 2020, GWG Holdings was allocated a gain from its investment in
Ben LP. The tax effects of these items have been recorded as discrete items.
GWG HOLDINGS, INC. AND SUBSIDIARIES
The Company currently records a valuation
allowance against its deferred tax assets that cannot be realized by the future reversal of existing temporary differences. Due
to the uncertain timing of the reversal of certain of these temporary differences due to the constraint described below, they cannot
be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the vast majority
of the deferred tax liability cannot be utilized in determining the realizability of the deferred tax assets. This is often referred
to as a “naked credit.” Due to a prior deemed ownership change, net operating loss carryforwards are subject to Section
382 of the Internal Revenue Code.
The Company reassessed its valuation allowance
during the third quarter of 2020 and determined it will no longer utilize the reversal of a temporary difference related to the
Company’s preferred equity ownership in Beneficient, until such time as the preferred equity is no longer constrained, as
a source of income to realize existing deferred tax assets related to the net operating loss and Section 163(j) limitations. As
a result, the valuation allowance on the deferred tax assets increased as of September 30, 2020, which resulted in a larger net
deferred tax liability (naked credit) as of September 30, 2020. The naked credit as of September 30, 2020 is specifically related
to GWG Life’s investment in the Preferred Series A Subclass 1 Unit Accounts described in Note 1. The disposition of this
investment is constrained by the Pledge and Security Agreement in favor of the holders of the L Bonds of GWG Holdings. As such,
the timing of recognition of the necessary taxable income related to this investment and the future reversal of this temporary
difference cannot be predicted.
We continue to monitor and evaluate the
rationale for recording a full valuation allowance for the net amount of the deferred tax assets in excess of the deferred tax
liabilities that are not constrained. We intend to continue maintaining a full valuation allowance on these net deferred tax assets
until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of the valuation
allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the
release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis
of the level of profitability that we are able to actually achieve.
On March 27, 2020, Congress passed and
the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which included
significant changes to U.S. Federal income tax law. However, the only change that is expected to affect the Company is the modification
to Section 163(j), which increased the allowable business interest deduction from 30% of adjusted taxable income to 50% of adjusted
taxable income.
The computations of basic and diluted income
(loss) attributable to common shareholders per share for the three and nine months ended September 30, 2020 and 2019 are as
follows (in thousands, except share data and per share data):
For the three months ended September 30,
2020 and 2019, RPS, RPS 2, restricted stock units, and stock options for a potential 2,222,118 and 2,737,679 shares, respectively,
were not included in the calculation of diluted earnings per share because we recorded a net loss during these periods and the
effects were anti-dilutive. For the nine months ended September 30, 2020 and 2019, RPS, RPS 2, restricted stock units, and
stock options for a potential 2,377,628 and 2,698,524 shares, respectively, were not included in the calculation of diluted earnings
per share because we recorded a net loss during these periods and the effects were anti-dilutive. Potentially dilutive instruments
issued by Ben LP that are ultimately exchangeable into GWG common stock were also excluded from the calculation of diluted earnings
per share for the three and nine months ended September 30, 2020 because we recorded a net loss during this period and the
effects were anti-dilutive.
GWG HOLDINGS, INC. AND SUBSIDIARIES
The Company has two reportable segments
consisting of Secondary Life Insurance and Beneficient. Corporate & Other includes certain activities not allocated to specific
business segments. These activities include holding company financing and investing activities, and management and administrative
services to support the overall operations of the Company and from November 1, 2019, include our equity method investment in FOXO.
The Secondary Life Insurance segment seeks
to earn non-correlated yield from our portfolio of life insurance policies. Our Beneficient segment consists of the assets and
operations of Ben LP and its subsidiaries. Beneficient became a consolidated subsidiary of GWG Holdings as of December 31, 2019,
as described in Note 4. Ben LP provides a variety of trust services, liquidity products and loans for alternative assets and illiquid
investment funds, and other financial services to HNW individuals. Prior to December 31, 2019, we accounted for our investment
in the Common Units under the equity method.
These segments are differentiated by the
products and services they offer as well as by the information used by the Company’s chief operating decision maker to determine
allocation of resources and assess performance.
Earnings before taxes (“EBT”)
is the measure of profitability used by management to assess performance of its segments and allocate resources. Segment EBT represents
net income (loss) excluding income taxes and includes earnings (loss) from equity method investments and gain on consolidation
of equity method investment.
The total assets of the Beneficient segment at both September 30,
2020 and December 31, 2019 includes goodwill of $2.4 billion, which represents all of the goodwill on the Company’s
condensed consolidated balance sheet as of the end of each reporting period.
Our portfolio consists of purchased life
insurance policies written by life insurance companies rated investment-grade by third-party rating agencies, including A.M. Best
Company, Standard & Poor’s and Moody’s. As a result, there may be concentrations of policies with certain life
insurance companies. The following summarizes the aggregate face value of insurance policies with individual life insurance companies
exceeding 10% of the total face value of our portfolio.
GWG HOLDINGS, INC. AND SUBSIDIARIES
The following summarizes the number of
insureds’ state of residence exceeding 10% of the total face value of our portfolio:
Beneficient’s underlying portfolio
companies primarily operate in the United States, with the largest percentage, based on NAV, operating in semiconductor and equipment,
diversified financials, and telecommunications industries.
On July 6, 2020, GWG Holdings filed documents
with the SEC seeking authority to potentially effect an exchange of its equity securities for securities issued by GWG Holdings
or one or more of its subsidiaries (“subsidiary securities”) by adopting an Amended and Restated Certificate of Incorporation
of GWG Holdings (the “Amended Charter”).
The proposed Amended Charter has been adopted
by the Board of Directors of GWG Holdings, which declared its advisability, based upon a recommendation from a Special Committee
of independent and disinterested directors. It has also been approved through a written consent from the holders of a majority
of the outstanding shares of GWG Holdings’ common stock. To become effective, the Amended Charter must also be approved by
the holders of a majority of the outstanding shares of RPS and RPS 2, each series voting separately as a class. We plan to solicit
the consent of the holders of our RPS and RPS 2 to the Amended Charter. While we believe such an exchange of equity securities
may be a potential avenue to create efficiencies, no plans have been approved to exchange either the common stock, RPS or RPS 2
of GWG Holdings or the specific terms or issuer of any such securities that may be issued in connection therewith.
The proposed Amended Charter provides that
the value for which each share of common stock to be exchanged may not be less than the greater of (i) $10 (subject to certain
adjustments), or (ii) the volume weighted average price (“VWAP”) of the common stock for the twenty (20) trading days
immediately prior to the date of any notice of exchange. The Amended Charter also requires that at least one class of the subsidiary
securities to be listed on a national securities exchange prior to, or at the time of, the exchange.
In addition, the Amended Charter would
permit GWG Holdings to exchange all of the RPS and RPS 2 for preferred equity securities of GWG Holdings or one or more of its
subsidiaries (the “subsidiary preferred interest”) with substantially similar terms to that of the RPS and RPS 2, provided
that, the Amended Charter requires the subsidiary preferred interest to have the following preferential terms:
The Amended Charter would also provide
for an exclusive forum in the state of Delaware for certain potential claims by stockholders, as specified in the Amended Charter.
There can be no assurance that GWG Holdings
will receive the required consents of the holders of the RPS and RPS 2, and the Company has not approved any plans to exchange
either the common stock or the RPS or RPS 2 or the terms or issuer or issuers of any securities issued in connection therewith,
and there can be no assurance that any such exchange will occur or what the terms of the securities to be issued in connection
with such exchange will be, other than as provided for in the Amended Charter. Any such exchange would be subject to approval of
the terms of any such exchange by the Board of Directors of GWG Holdings and conditions precedent, some of which are outside of
the Company’s control, including the issuance of trust company charters from the Texas Department of Banking.
GWG HOLDINGS, INC. AND SUBSIDIARIES
In December, 2019, a novel strain of coronavirus
and the associated respiratory disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later,
on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The extent of COVID-19’s effect on the Company’s
operational and financial performance will depend on continuing developments, including the duration, spread and intensity of the
pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Although a substantial
majority of our employees continue to work remotely, we have maintained our operations at or near normal levels. We have not experienced
any significant disruptions due to operational issues, loss of communication capabilities, technology failure or cyber-attacks.
The Company continues to raise capital, receive interest income and insurance policy benefits, pay interest and dividends and otherwise
meet its ongoing obligations. However, depending on the extent of the ongoing economic crisis resulting from the pandemic and its
impact on the Company’s business, the pandemic could have a material adverse effect on our results of operations, financial
condition and cash flows.
As discussed in our 2019 Form 10-K, management
performs goodwill and intangible asset impairment testing annually, during the fourth quarter, or when events occur, or circumstances
change that would more likely than not indicate impairment has occurred. The Company recorded goodwill on December 31,
2019, as a result of the transactions with Beneficient discussed in Note 4 to the condensed consolidated financial statements,
and the measurement period remains open as of the date of this filing. Due to the significance of the COVID-19 pandemic, management
performed a qualitative assessment of the goodwill of the Beneficient reporting unit as of September 30, 2020. Management
concluded that the potentially large and underserved market that Beneficient is seeking to address, including the estimated demand
from HNW individuals and STM size institutions seeking liquidity for their professionally managed alternative assets, has not been
negatively affected by the COVID-19 pandemic such that it is more likely than not that the fair value of the Beneficient reporting
unit would exceed its carrying value as of September 30, 2020. Therefore, the impact of the COVID-19 pandemic through September 30,
2020 was not a triggering event to perform a quantitative test.
The annual quantitative test as of October
1, which is in the process of being finalized as of the date of this filing, is the first annual assessment since the recognition
of this goodwill. The Company has experienced lower-than-forecasted operating results during the first nine months of 2020. These
conditions will be considered during the respective annual impairment evaluation of goodwill as of October 1, 2020. If the estimated
fair value is less than the carrying value, the Company would be required to recognize an impairment charge for the amount by which
the carrying amount exceeds Beneficient’s fair value; however, the loss recognized would not exceed the total amount of Beneficient’s
recorded goodwill.
As of September 30, 2020, we had cash,
cash equivalents and restricted cash of $109.8 million. We generated net losses attributable to common shareholders of $135.7 million
and $69.2 million for the nine months ended September 30, 2020 and 2019, respectively. As of November 6, 2020, we had cash,
cash equivalents and restricted cash of approximately $95.1 million. Besides funding operating expenditures and having sufficient
cash to fund anticipated additional investments in Beneficient primarily for its lending products and working capital needs, we
are obligated to pay other items such as interest payments and debt redemptions, and preferred stock dividends and redemptions.
We expect to satisfy these obligations and fund our operations through anticipated operating cash flows, receipt of proceeds from
our insurance policies, sales of additional L Bonds, and, potentially, additional borrowings under existing debt facilities or
new borrowings with other third-party lenders or asset sales.
GWG Holdings has a history of selling L
Bonds dating back to January 2012. GWG Holdings may not be able sell additional L Bonds on terms as favorable to the Company as
past transactions or in quantities sufficient to fund all of the Company’s operating requirements. Additionally, the Company
may not be able to obtain additional borrowing under existing debt facilities or new borrowings with other third-party lenders.
To the extent that GWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of
those debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve
negative covenants that restrict GWG Holdings’ ability to take specific actions, such as incurring additional debt or making
additional investments in growing the operations of the Company. If GWG Holdings is unable to fund its operations and other obligations,
or defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding or ii) to raise
additional capital through the sale of equity and the ownership interest of our equity holders may be diluted.
GWG HOLDINGS, INC. AND SUBSIDIARIES
Based on projections of anticipated operating
cash flows, receipt of proceeds from our insurance policies, sales of additional L-Bonds, and, potentially, additional borrowings
under existing debt facilities or new borrowings with other third-party lenders, we believe that we will have sufficient cash resources
to finance our operations, satisfy our other obligations, and to fund anticipated additional investments in Beneficient through
November 19, 2021.
Subsequent to September 30, 2020 through
November 6, 2020, policy benefits on 9 policies covering 8 individuals have been realized. The face value of insurance benefits
of these policies was $7.7 million.
Subsequent to September 30, 2020 through
November 6, 2020, we have issued approximately $63.4 million of L Bonds.
Subsequent to September 30, 2020 through
November 6, 2020, we have originated approximately $8.1 million of loans receivable.