The information contained in this prospectus supplement
supplements and amends our prospectus dated June 3, 2020 (the “Prospectus”), and should be read in conjunction therewith.
This prospectus supplement may not be delivered or utilized without the Prospectus. This prospectus supplement is qualified by reference
to the Prospectus, except to the extent that the information in this prospectus supplement updates and supersedes the information contained
in the Prospectus. Capitalized terms contained in this prospectus supplement have the same meanings as in the Prospectus or the Annual
Report (as defined below), which is incorporated by reference in the Prospectus, unless otherwise stated herein.
On November 5, 2021, GWG Holdings, Inc. (“GWG
Holdings,” the “Company,” “we,” “us” or “our”) filed our Annual Report on Form 10-K
for the year ended December 31, 2020 (the “Annual Report”). This prospectus supplement has been prepared primarily to set
forth certain information contained in the Annual Report.
Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in thousands)
|
|
$
|
1,900,715
|
|
Average face value per policy (in thousands)
|
|
$
|
1,797
|
|
Average face value per insured life (in thousands)
|
|
$
|
1,943
|
|
Weighted average age of insured (years)
|
|
|
83.1
|
|
Weighted average life expectancy (LE) estimate (years)
|
|
|
6.9
|
|
Total number of policies
|
|
|
1,058
|
|
Number of unique lives
|
|
|
978
|
|
Demographics
|
|
|
74% Male; 26% Female
|
|
Number of smokers
|
|
|
40
|
|
Largest policy as % of total portfolio face value
|
|
|
0.7
|
%
|
Average policy as % of total portfolio
|
|
|
0.1
|
%
|
Average annual premium as % of face value
|
|
|
3.8
|
%
|
Our portfolio of life insurance policies, owned
by GWG Holdings’ subsidiaries as of December 31, 2020, organized by the insured’s current age and the associated number
of policies and policy benefits, is summarized below:
Distribution of Policies and Policy Benefits
by Current Age of Insured
|
|
|
|
|
|
|
|
|
|
Percentage of Total
|
|
|
Weighted
|
|
Min Age
|
|
Max Age
|
|
Number of
Policies
|
|
|
Policy Benefits
(in thousands)
|
|
|
Number of
Policies
|
|
|
Policy Benefits
|
|
|
Average LE
(Years)
|
|
63
|
|
69
|
|
|
42
|
|
|
$
|
49,535
|
|
|
|
4.0
|
%
|
|
|
2.6
|
%
|
|
|
10.21
|
|
70
|
|
74
|
|
|
191
|
|
|
|
222,761
|
|
|
|
18.1
|
%
|
|
|
11.7
|
%
|
|
|
10.6
|
|
75
|
|
79
|
|
|
206
|
|
|
|
349,467
|
|
|
|
19.5
|
%
|
|
|
18.4
|
%
|
|
|
9.44
|
|
80
|
|
84
|
|
|
213
|
|
|
|
375,926
|
|
|
|
20.0
|
%
|
|
|
19.7
|
%
|
|
|
7.54
|
|
85
|
|
89
|
|
|
229
|
|
|
|
556,339
|
|
|
|
21.6
|
%
|
|
|
29.3
|
%
|
|
|
4.84
|
|
90
|
|
94
|
|
|
153
|
|
|
|
296,310
|
|
|
|
14.5
|
%
|
|
|
15.6
|
%
|
|
|
2.99
|
|
95
|
|
100
|
|
|
24
|
|
|
|
50,377
|
|
|
|
2.3
|
%
|
|
|
2.7
|
%
|
|
|
2.09
|
|
Total
|
|
|
|
|
1,058
|
|
|
$
|
1,900,715
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
6.92
|
|
Our portfolio of life insurance policies, owned
by GWG Holdings’ subsidiaries as of December 31, 2020, organized by the insured’s estimated life expectancy estimates
and associated policy benefits, is summarized below:
Distribution of Policies by Current Life Expectancies
of Insured
|
|
|
|
|
|
|
|
|
|
Percentage of Total
|
|
Min LE (Months)
|
|
Max LE (Months)
|
|
Number of
Policies
|
|
|
Policy Benefits
(in thousands)
|
|
|
Number of
Policies
|
|
|
Policy Benefits
|
|
0
|
|
47
|
|
|
300
|
|
|
$
|
518,044
|
|
|
|
28.4
|
%
|
|
|
27.3
|
%
|
48
|
|
71
|
|
|
225
|
|
|
|
421,774
|
|
|
|
21.3
|
%
|
|
|
22.2
|
%
|
72
|
|
95
|
|
|
192
|
|
|
|
318,497
|
|
|
|
18.1
|
%
|
|
|
16.8
|
%
|
96
|
|
119
|
|
|
150
|
|
|
|
283,899
|
|
|
|
14.2
|
%
|
|
|
14.9
|
%
|
120
|
|
143
|
|
|
109
|
|
|
|
167,195
|
|
|
|
10.3
|
%
|
|
|
8.8
|
%
|
144
|
|
179
|
|
|
71
|
|
|
|
145,581
|
|
|
|
6.7
|
%
|
|
|
7.7
|
%
|
180
|
|
240
|
|
|
11
|
|
|
|
45,725
|
|
|
|
1.0
|
%
|
|
|
2.3
|
%
|
Total
|
|
|
|
|
1,058
|
|
|
$
|
1,900,715
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
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 credit 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 1.15% as of December 31,
2020. We believe this average yield to maturity 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 December 31, 2020,
96.3% of the face value benefits of our life insurance policies were issued by insurers having an investment-grade credit rating
(BBB or better) by Standard & Poor’s.
As of December 31, 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:
Distribution of Policy Benefits by Top 10 Insurance
Companies
Rank
|
|
|
Policy Benefits
(in thousands)
|
|
|
Percentage of
Policy Benefit
Amount
|
|
|
Insurance Company
|
|
Ins. Co.
S&P Rating
|
|
1
|
|
|
$
|
279,792
|
|
|
|
14.7
|
%
|
|
John Hancock Life Insurance Company
|
|
AA-
|
|
2
|
|
|
|
212,879
|
|
|
|
11.2
|
%
|
|
Lincoln National Life Insurance Company
|
|
AA-
|
|
3
|
|
|
|
200,936
|
|
|
|
10.6
|
%
|
|
Equitable Life Insurance Company
|
|
A+
|
|
4
|
|
|
|
164,391
|
|
|
|
8.6
|
%
|
|
Transamerica Life Insurance Company
|
|
A+
|
|
5
|
|
|
|
157,755
|
|
|
|
8.3
|
%
|
|
Brighthouse Life Insurance Company
|
|
AA-
|
|
6
|
|
|
|
87,339
|
|
|
|
4.6
|
%
|
|
American General Life Insurance Company
|
|
A+
|
|
7
|
|
|
|
84,998
|
|
|
|
4.5
|
%
|
|
Pacific Life Insurance Company
|
|
AA-
|
|
8
|
|
|
|
67,376
|
|
|
|
3.5
|
%
|
|
ReliaStar Life Insurance Company
|
|
A+
|
|
9
|
|
|
|
59,808
|
|
|
|
3.1
|
%
|
|
Security Life of Denver Insurance Company
|
|
A+
|
|
10
|
|
|
|
57,153
|
|
|
|
3.0
|
%
|
|
Protective Life Insurance Company
|
|
AA-
|
|
|
|
|
$
|
1,372,427
|
|
|
|
72.1
|
%
|
|
|
|
|
ExAlt Trusts’ Investment in Alternative Assets
Beneficient’s primary operations, which
commenced on September 1, 2017, consist of offering its liquidity and trust administration services to its customers, primarily through
certain of Ben LP’s operating subsidiaries, Ben Liquidity (as defined below) and Ben Custody Admin (as defined below), respectively.
Ben Liquidity offers simple, rapid and cost-effective liquidity products to its customers through the use of customized trust vehicles,
the ExAlt Trusts, that facilitate the exchange of a customer’s alternative assets for consideration using a unique financing structure.
A subsidiary of Ben Liquidity makes ExAlt Loans to certain of the ExAlt Trusts. Ben Liquidity generates interest and fee income earned
in connection with such ExAlt Loans to certain of the ExAlt Trusts, which are collateralized by the cash flows from the exchanged alternative
assets (the “Collateral”). Ben Custody Admin provides trust administration services to the trustees of certain of the ExAlt
Trusts that own the exchanged alternative asset following a liquidity transaction for fees payable quarterly. The Collateral supports
the repayment of the loans plus any related interest and fees. Since the ExAlt Trusts are consolidated, Ben LP’s operating subsidiary
ExAlt Loans and interest and fee income are eliminated in the presentation of our consolidated financial statements.
The ExAlt Trusts’ investments in alternative
assets are the source of the Collateral supporting the ExAlt Loans. These assets consist primarily of limited partnership interests in
various alternative investments, including private equity funds. These alternative investments are valued using NAV as a practical expedient.
Changes in the NAV of these investments are recorded in investment income, net in our consolidated statements of operations. The ExAlt
Trusts’ investments in alternative assets provide the economic value creating the Collateral to the ExAlt Loans made in connection
with each liquidity transaction.
The ExAlt Trusts held interests in alternative
assets with a net asset value of $221.9 million and $342.0 million at December 31, 2020
and December 31, 2019, respectively. As of December 31, 2020, the ExAlt Trusts’ portfolio had exposure to 117 professionally
managed alternative investment funds, comprised of 327 underlying investments, 91 percent of which are investments in private companies.
The portfolio of alternative assets, excluding
the collateral exchanged in the Collateral Swap, which is eliminated in consolidation, covers the following industry sectors and geographic
regions as of the dates shown below (dollar amounts in thousands):
|
|
|
|
|
|
|
|
(As Restated)
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Industry Sector
|
|
Value
|
|
|
Percent of
Total
|
|
|
Value
|
|
|
Percent of
Total
|
|
Diversified Financials
|
|
$
|
28,462
|
|
|
|
12.8
|
%
|
|
$
|
27,418
|
|
|
|
8.0
|
%
|
Telecommunication Services
|
|
|
27,401
|
|
|
|
12.3
|
%
|
|
|
27,059
|
|
|
|
7.9
|
%
|
Food and Staples Retailing
|
|
|
24,450
|
|
|
|
11.0
|
%
|
|
|
20,507
|
|
|
|
6.0
|
%
|
Software and Services
|
|
|
23,310
|
|
|
|
10.5
|
%
|
|
|
22,573
|
|
|
|
6.6
|
%
|
Utilities
|
|
|
21,740
|
|
|
|
9.8
|
%
|
|
|
15,733
|
|
|
|
4.6
|
%
|
Semiconductors and Semiconductor Equipment
|
|
|
21,271
|
|
|
|
9.6
|
%
|
|
|
14,658
|
|
|
|
4.3
|
%
|
Not Applicable (e.g., Escrow, Earnouts)
|
|
|
18,138
|
|
|
|
8.2
|
%
|
|
|
26,569
|
|
|
|
7.7
|
%
|
Health Care Equipment and Services
|
|
|
14,682
|
|
|
|
6.6
|
%
|
|
|
92,418
|
|
|
|
27.0
|
%
|
Pharmaceuticals, Biotechnology and Life Sciences(1)
|
|
|
3,415
|
|
|
|
1.5
|
%
|
|
|
52,202
|
|
|
|
15.3
|
%
|
Other(1)
|
|
|
39,025
|
|
|
|
17.7
|
%
|
|
|
42,875
|
|
|
|
12.6
|
%
|
Total
|
|
$
|
221,894
|
|
|
|
100.0
|
%
|
|
$
|
342,012
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
(As Restated)
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Geography
|
|
Value
|
|
|
Percent of
Total
|
|
|
Value
|
|
|
Percent of
Total
|
|
North America
|
|
$
|
95,569
|
|
|
|
43.1
|
%
|
|
$
|
211,722
|
|
|
|
61.9
|
%
|
Western Europe
|
|
|
50,219
|
|
|
|
22.6
|
%
|
|
|
46,719
|
|
|
|
13.7
|
%
|
Asia
|
|
|
36,436
|
|
|
|
16.4
|
%
|
|
|
29,144
|
|
|
|
8.5
|
%
|
Latin & South America
|
|
|
25,255
|
|
|
|
11.4
|
%
|
|
|
22,377
|
|
|
|
6.5
|
%
|
Other(2)
|
|
|
14,415
|
|
|
|
6.5
|
%
|
|
|
32,050
|
|
|
|
9.4
|
%
|
Total
|
|
$
|
221,894
|
|
|
|
100.0
|
%
|
|
$
|
342,012
|
|
|
|
100.0
|
%
|
|
(1)
|
Industries in this category each comprise less than 5 percent as of December 31, 2020. Pharmaceuticals,
Biotechnology and Life Sciences is shown separately as it comprised greater than 5 percent as of December 31, 2019.
|
|
(2)
|
Locations in this category each comprise less than 5 percent.
|
Assets in the 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 portfolio as of December 31, 2020 ranged from 1993 to 2018.
As the ExAlt Trusts grow its portfolio, it will
monitor the diversity of the 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 the ExAlt Trusts’ portfolio may lag changes to the concentration guidelines. As such, the ExAlt
Trusts’ 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 the ExAlt Trusts’ limited
operating history, the portfolio as of December 31, 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 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 underlying interests in alternative assets 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 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, Capital Goods, Commercial
& Professional Services, Consumer Durables & Apparel, Consumer Services, Energy, Food, Beverage & Tobacco, Household &
Personal Products, Insurance, Materials, Media & Entertainment, Real Estate, Retailing, 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, Northern Europe, and
Eastern Europe.
Principal Revenue and Expense Items
During the years ended December 31, 2020
and 2019, we earned revenues from the following primary sources:
|
●
|
Revenue Realized from Maturities of Life Insurance Policies. We recognize the difference between
the face value of the policy benefits and carrying value when an insured event has occurred and determine that collection of the policy
benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. We generally
collect the face value of the life insurance policy from the insurance company within 45 days of our notification of the insured’s
mortality, but this collection time varies depending on the insurance company and individual policy.
|
|
●
|
Change in Fair Value of Life Insurance Policies. We value our life insurance portfolio investments
for each reporting period in accordance with the fair value principles discussed herein, which reflects the expected receipt of policy
benefits in future periods, net of premium costs, as shown in our consolidated financial statements.
|
|
●
|
Investment Income. Includes the change in net asset value of the alternative assets held by certain
of the ExAlt Trusts as well as the change in fair value of repurchase options issued by certain of the ExAlt Trusts.
|
|
●
|
Interest Income. During the year ended December 31, 2019, and thus prior to the consolidation of
Beneficient. interest income primarily included interest income on the Promissory Note and Commercial Loan Agreement. Interest earned
on the Promissory Note and the Commercial Loan Agreement was eliminated in consolidation with Beneficient beginning January 1, 2020. As
such, interest income during the year ended December 31, 2020 only includes interest earned from policy benefits receivable and cash held
in banks.
|
|
●
|
Other Income. Includes changes in the fair value of Beneficient’s investment in put options,
L Bond redemption fees, and other miscellaneous income. Additionally, includes income totaling $36.3 million 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.
|
During the years ended December 31, 2020
and 2019, our main components of expense are summarized below:
|
●
|
Interest Expense. Includes interest incurred under the second amended and restated senior credit
facility with LNV Corporation (as amended from time to time, “LNV Credit Facility”), as well as interest on GWG Holdings’
L Bonds, Seller Trust L Bonds and other outstanding indebtedness, including Beneficient’s debt due to related parties. When we issue
debt, we amortize the financing costs (commissions and other fees) associated with such indebtedness over the outstanding term of the
financing and classify it as interest expense.
|
|
●
|
Employee Compensation and Benefits. Employee compensation and benefits includes salaries, bonuses
and other incentives and costs of employee benefits. Also included are significant non-cash compensation expenses totaling $110.7 million
related to Beneficient’s equity incentive plans for the year ended December 31, 2020.
|
|
●
|
Selling, General and Administrative Expenses. We recognize and record expenses incurred in our
business operations, including operations related to the purchasing and servicing of life insurance policies, the origination and servicing
of ExAlt Loans and costs associated with trust administration. These expenses include legal and professional fees, sales, marketing, occupancy
and other expenditures.
|
Additional components of our net earnings include:
|
●
|
Earnings (Loss) from Equity Method Investment. Prior to the Investment and Exchange Agreements
on December 31, 2019, we accounted for GWG Holdings’ investment in the common units of Ben LP (“Common Units”) using
the equity method. Under this method, we recorded our share of the net earnings or losses attributable to holders of Common Units, on
a one quarter lag, as a separate line on our consolidated statements of operations. We also account for GWG Holdings’ investment
in FOXO as an equity method investment, which is also included in earnings (loss) from equity method investment in our consolidated statements
of operations. We had losses of $7.3 million and $4.1 million from equity method investments during the years ended December 31,
2020 and 2019, respectively.
|
|
●
|
Gain on Consolidation of Equity Method Investment. In conjunction with the consolidation of Beneficient
on December 31, 2019, we remeasured our preexisting equity method investment to fair value, resulting in a gain due to the increase in
the estimated fair value compared to our existing book value. The gain on consolidation of Beneficient on December 31, 2019 was $243.0
million. Refer to Note 4 to the consolidated financial statements for further information.
|
Results of Operations — 2020 Compared to 2019
The following is our analysis of the results of
operations for the periods indicated below. This analysis should be read in conjunction with our consolidated financial statements and
related notes (dollar values in thousands).
Net Income (Loss) Attributable to Common Shareholders
Net loss attributable to common shareholders was
$168.5 million for 2020 compared to net income attributable to common shareholders of $70.5 million for 2019. The results of operations
for 2020 reflect the consolidation of Beneficient compared to an equity method investment in 2019. The year ended December 31, 2020
includes significant non-cash equity based compensation expense of $110.7 million related to Beneficient’s equity incentive plans.
The net income for 2019 was primarily driven by the net gain of $243.0 million realized upon consolidation of Beneficient. More details
regarding revenue and expenses in 2020 compared to 2019 are included in the discussion below.
Revenue from Secondary Life Insurance
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue realized from maturities of life insurance policies
|
|
$
|
86,923
|
|
|
$
|
91,882
|
|
Revenue recognized from change in fair value of life insurance policies
|
|
|
34,114
|
|
|
|
49,015
|
|
Premiums and other annual fees
|
|
|
(71,439
|
)
|
|
|
(65,577
|
)
|
Gain on life insurance policies, net
|
|
$
|
49,598
|
|
|
$
|
75,320
|
|
|
|
|
|
|
|
|
|
|
Attribution of gain on life insurance policies, net:
|
|
|
|
|
|
|
|
|
Change in estimated probabilistic cash flows, net of premium and other annual fees paid
|
|
$
|
(7,976
|
)
|
|
$
|
1,609
|
|
Net revenue recognized at maturity
|
|
|
57,574
|
|
|
|
69,122
|
|
Unrealized gain on acquisitions
|
|
|
—
|
|
|
|
6,921
|
|
Change in life expectancy evaluation
|
|
|
—
|
|
|
|
(2,332
|
)
|
Gain on life insurance policies, net
|
|
$
|
49,598
|
|
|
$
|
75,320
|
|
|
|
|
|
|
|
|
|
|
Number of policies acquired
|
|
|
—
|
|
|
|
83
|
|
Face value of purchases
|
|
$
|
—
|
|
|
$
|
97,316
|
|
Purchases (initial cost basis)
|
|
$
|
—
|
|
|
$
|
32,356
|
|
Unrealized gain on acquisition (% of face value)
|
|
|
—
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
Number of policies matured
|
|
|
92
|
|
|
|
78
|
|
Face value of matured policies
|
|
$
|
125,109
|
|
|
$
|
125,148
|
|
Net revenue recognized at maturity event (% of face value matured)
|
|
|
46.0
|
%
|
|
|
55.2
|
%
|
Revenue from changes in estimated probabilistic
cash flows, net of premiums paid, was a charge of $8.0 million in 2020 compared to a credit of $1.6 million in 2019. The decrease of $25.7 million
in gain on life insurance policies for the year ended December 31, 2020, over the comparable prior year period, was driven by a combination
of no gain on policy acquisitions, maturities of life insurance policies with a higher cumulative cost basis, and higher premiums paid.
The Company did not purchase any life insurance
policies during 2020. The face value of policies purchased in 2019 was $97.3 million. The resulting unrealized gain on acquisition was
$6.9 million in 2019. The absence of an unrealized gain on acquisition in the current period is the result of a strategic decision
to significantly reduce capital allocated to purchasing additional life insurance policies through the secondary market and to increase
capital allocated toward providing liquidity to a broader range of alternative assets, primarily through additional investments in Beneficient.
On December 31, 2019, GWG Holdings 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 that Beneficient’s operations will generally produce higher risk-adjusted
returns than those we can achieve from life insurance policies acquired in the secondary market; however, returns on equity in life settlements,
especially with the current availability of financings on favorable terms, appear to be an attractive option to diversify our exposure
to alternative assets, and we have begun exploring the feasibility of acquiring such policies. 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, recapitalization,
partnership, reinsurance guarantees, life insurance operations or other transactions involving of our life insurance portfolio, as well
as pursuing other alternatives to increase our exposure to alternative assets.
The face value of matured policies was $125.1 million
for each period presented. The net revenue recognized at maturity was $57.6 million and $69.1 million, respectively, reflecting
a decrease in revenue attributable to maturity events of $11.5 million primarily from maturities of policies with a higher cumulative
cost basis in 2020 compared to 2019.
There were no net revenue charges from change
in life expectancy evaluation in 2020 compared to a charge of $2.3 million in 2019. The resulting net revenue increase of $2.3 million
primarily resulted from refinement of life expectancy data that occurred during 2019 that were nonrecurring in 2020.
Investment Income, Interest Income and Other Income (in thousands)
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Increase/(Decrease)
|
|
Investment income
|
|
$
|
44,106
|
|
|
$
|
—
|
|
|
$
|
44,106
|
|
Interest income
|
|
|
1,594
|
|
|
|
15,646
|
|
|
|
(14,052
|
)
|
Other income
|
|
|
29,073
|
|
|
|
1,310
|
|
|
|
27,763
|
|
Total
|
|
$
|
74,773
|
|
|
$
|
16,956
|
|
|
$
|
57,817
|
|
Investment income was added as result of the consolidation
of Beneficient on December 31, 2019. Investment income was $44.1 million during the year ended December 31, 2020, and is comprised of
$17.6 million decrease in net asset value of the alternative assets held by certain of the ExAlt Trusts and $61.7 million increase in
fair value of repurchase options issued by certain of the ExAlt Trusts.
Interest income decreased $14.1 million during
the year ended December 31, 2020, compared to the same period in 2019, primarily due to the consolidation of Beneficient, which eliminated
interest earned on the Promissory Note and Commercial Loan Agreement beginning January 1, 2020. Interest income on the Promissory Note
entered into on May 31, 2019, was $2.2 million during 2019. Interest income earned on the commercial loan between GWG Life and Beneficient
was $11.3 million during the year ended December 31, 2019. Interest income recognized during the year ended December 31, 2020
and 2019, also includes interest earned from policy benefits receivable and cash held in banks, which in the aggregate was $1.3 million
and $2.1 million, respectively. The decrease was driven by lower average cash balances and slightly lower interest rates in 2020 compared
to 2019.
Other income increased during the year ended December 31,
2020 compared to the same period in 2019. Other income for the year ended 2020 includes $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. This income was offset by a $7.8 million decrease to the fair value of Beneficient’s put
options during 2020. Other income during the year ended December 31, 2019, includes L Bond early redemption fees and other miscellaneous
income from legacy initiatives of GWG Holdings.
Interest and Operating Expenses (in thousands)
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
Increase/
(Decrease)
|
|
Interest expense (including amortization of deferred financing costs)
|
|
$
|
154,616
|
|
|
$
|
114,844
|
|
|
$
|
39,772
|
|
Employee compensation and benefits
|
|
|
146,363
|
|
|
|
28,309
|
|
|
|
118,054
|
|
Legal and professional fees
|
|
|
30,075
|
|
|
|
12,824
|
|
|
|
17,251
|
|
Other expenses
|
|
|
18,227
|
|
|
|
15,896
|
|
|
|
2,331
|
|
Total expenses
|
|
$
|
349,281
|
|
|
$
|
171,873
|
|
|
$
|
177,408
|
|
Interest expense, including amortization of deferred
financing costs, increased $39.8 million during the year ended December 31, 2020 compared to the same period in 2019. The increase
in interest expense was primarily due to the increase in the average outstanding L Bonds in 2020 compared to 2019, contributing $26.5
million of increased interest expense, including amortization of deferred financing costs. Also, the consolidation of Beneficient beginning
December 31, 2019, increased interest expense by $11.3 million for the year ended December 31, 2020 compared to the same period in
2019, related to Beneficient’s debt due to related parties. Additionally, $3.8 million of increased interest expense, including
amortization of deferred financing costs, during the year ended December 31, 2020, compared to the same period in 2019, was due to
increased interest paid on the LNV Credit Facility associated with a higher average principal balance outstanding. Finally, these increases
were partially offset by a $1.8 million decrease in interest expense on Seller Trusts L Bonds related to the portion of Seller Trust L
Bonds eliminated as of September 30, 2020 as a result of the Collateral Swap discussed in Note 1 to the consolidated financial statements.
The increase in employee compensation and benefits
in 2020 compared to 2019 was primarily related to the consolidation of Beneficient on December 31, 2019. Specifically, the Company recognized
$110.7 million of equity-based compensation expense during the year ended December 31, 2020, 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 December 31, 2020, over 78% of the awards granted under Beneficient’s equity incentive
plans had vested.
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 the most recent valuation received from a reputable third-party valuation firm, 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 GWG Holdings’ principal offices from Minneapolis to Dallas in late 2019.
The increase in legal and professional fees in
2020 compared to 2019 is primarily the result of the consolidation of Beneficient on December 31, 2019, which added $19.0 million of legal
and professional fees during the year ended December 31, 2020. The increase attributable to the consolidation of Beneficient was
partially offset by lower consulting fees during 2020, compared to 2019.
The increase in other expenses during the year
ended December 31, 2020 compared to the same period of 2019, is primarily the result of the consolidation of Beneficient on December
31, 2019, which added $7.6 million of other expenses during 2020. These increases were partially offset by lower business insurance, contract
labor and other operating expenses of GWG Holdings and subsidiaries during the comparable periods.
FOXO Initiatives
During 2019, we incurred $5.5 million of expenses
related to the development of intellectual property surrounding advanced epigenetic testing technology. These expenses were included in
the loss from our equity method investment in FOXO during 2020.
On November 13, 2020, FOXO BioScience LLC converted
to a corporation and is now known as FOXO Technologies Inc. GWG’s previous membership interest in the LLC converted to preferred
equity in FOXO. We believe that as a separate entity (rather than as a small subsidiary of a large financial services holding company),
the FOXO businesses can reach their maximum potential in terms of marketing and branding, attraction of talent, appropriate peer group
comparisons and, ultimately, return to its owners. We expect FOXO’s costs to increase in the future, which will affect our consolidated
earnings through our earnings (loss) from equity method investment. Under GWG Holdings’ subscription agreement with FOXO, we are
obligated to invest approximately $20.0 million in FOXO over a two year period ending in October 2021, of which $16.2 million has been
funded through December 31, 2020.
Income Taxes
We realized $16.4 million in income tax benefit
and $71.9 million in income tax expense for the years ended December 31, 2020 and 2019, respectively, which resulted in effective tax
rates of 7.9% and 34.8%, compared to the statutory federal income tax rate of 21.0% for both periods.
The following table provides a reconciliation
of our income tax expense (benefit) at the statutory federal income tax rate to our actual income tax expense (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
(As Restated)
|
|
Statutory federal income tax (benefit)
|
|
$
|
(43,339
|
)
|
|
|
21.0
|
%
|
|
$
|
33,449
|
|
|
|
21.0
|
%
|
State income taxes (benefit), net of federal benefit
|
|
|
(2,995
|
)
|
|
|
1.5
|
%
|
|
|
12,962
|
|
|
|
8.1
|
%
|
Change in valuation allowance
|
|
|
20,688
|
|
|
|
(10.0
|
)%
|
|
|
25,547
|
|
|
|
5.8
|
%
|
Noncontrolling interest
|
|
|
7,718
|
|
|
|
(3.7
|
)%
|
|
|
—
|
|
|
|
—
|
%
|
Other permanent differences, net
|
|
|
1,538
|
|
|
|
(0.9
|
)%
|
|
|
(93
|
)
|
|
|
(0.1
|
)%
|
Total income tax expense (benefit)
|
|
$
|
(16,390
|
)
|
|
|
7.9
|
%
|
|
$
|
71,865
|
|
|
|
34.8
|
%
|
The most significant temporary differences between
GAAP net income (loss) and taxable net income (loss) are the treatment of interest costs, policy premiums and servicing costs with respect
to the acquisition and maintenance of the life insurance policies and revenue recognition with respect to the fair value of the life insurance
portfolio.
As of both December 31, 2020 and 2019, valuation
allowances were recorded against the total amount of non-permanent deferred tax assets. Indefinite-lived deferred tax assets of $2.8 million
in 2020 were comprised of an interest expense limitation under Internal Revenue Code Section
163(j) and the tax-effected net operating loss (“NOL”) created beginning in 2019.
At December 31, 2020, we had federal NOL
carryforwards of $58.0 million resulting in related deferred tax assets of $12.2 million, and state NOL carryforwards of $24.3 million
resulting in related deferred tax assets of $1.9 million. At December 31, 2019, we had federal NOL carryforwards of $29.7 million
resulting in related deferred tax assets of $6.2 million, and state NOL carryforwards of $29.6 million resulting in related
deferred tax assets of $2.3 million. The NOL carryforwards subject to expiration (i.e., those generated prior to 2018) will begin
to expire in 2031. Future utilization of NOL carryforwards is subject to limitations under Section 382 of the Internal Revenue Code. This
section generally relates to a more than 50 percent change in ownership over a three-year period. As a result of the Exchange Transaction,
a change in ownership for tax purposes only has occurred as of December 28, 2018. As such, the annual utilization of our net operating
losses generated prior to the ownership change is limited. However, net unrealized built-in gains on our life insurance policies result
in an increase in the Section 382 limit over the five-year recognition period, which resulted in $0.5 million of current tax liability
in 2020 and a nominal amount in 2019.
After the change-of-control transaction with Ben
LP on December 31, 2019, GWG Holdings 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 were 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 associated with 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. 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 GWG Holdings’
preferred equity ownership in Ben LP, 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 Internal Revenue Code Section 163(j) limitations. As a result, we
recorded a large net deferred tax liability as of December 31, 2020. The effects of the reassessment of the valuation allowance
on the deferred tax liability as of December 31, 2019 are reflected in Note 21 to the consolidated financial statements. The net deferred
tax liability as of December 31, 2020 is specifically related to GWG Life’s investment in the Preferred Series A Subclass
1 Unit Accounts described in Note 1 to the consolidated financial statements. 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.
Revenue and Earnings before Tax by Reportable
Segment — 2020 Compared to 2019
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, and management and administrative services to support the overall
operations of the Company and GWG Holdings’ equity method investment in FOXO.
Comparison of revenue by reportable segment for
the periods indicated (in thousands):
|
|
Year Ended December 31,
|
|
Revenue:
|
|
2020
|
|
|
2019
|
|
|
Increase/
(Decrease)
|
|
Secondary Life Insurance
|
|
$
|
51,359
|
|
|
$
|
78,002
|
|
|
$
|
(26,643
|
)
|
Beneficient
|
|
|
72,950
|
|
|
|
13,738
|
|
|
|
59,212
|
|
Corporate & Other
|
|
|
62
|
|
|
|
536
|
|
|
|
(474
|
)
|
Total
|
|
$
|
124,371
|
|
|
$
|
92,276
|
|
|
$
|
32,095
|
|
The primary drivers of the changes from 2019 to
2020 were as follows:
|
●
|
Secondary Life Insurance revenue decreased by $26.6 million for the year ended December 31, 2020,
over the comparable period in 2019 primarily as a result of a $25.7 million decrease in gain
on life insurance policies driven by a combination of no gain on policy acquisitions, maturities of life insurance policies with a higher
cumulative cost basis, and higher premiums paid. Also contributing to the decrease in the Secondary Life Insurance segment revenues was
a decrease of $0.9 million in interest and other miscellaneous income during 2020 compared to 2019.
|
|
●
|
Beneficient segment revenue for the year ended December 31, 2020, represents the consolidated operations
of Beneficient, compared to an equity method investment in Beneficient during the same period in 2019. As such, the year ended 2020 includes
$61.7 million of investment income recognized related to repurchase options issued by certain of the ExAlt Trusts and a $17.6 million
downward adjustment to NAV of alternative assets held by certain of the ExAlt Trusts, which are consolidated subsidiaries of Ben LP, whereas
the year ended 2019 primarily includes $11.3 million of interest income on the Commercial Loan between GWG Life and Ben LP and $2.2 million
of interest income on the Promissory Note between GWG Life and the ExAlt Trusts, both of which were eliminated in consolidation beginning
December 31, 2019. Additionally, there was $36.3 million of income recognized during the second quarter 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. Finally, this
was offset by a $7.8 million decrease to the fair value of Beneficient’s put options during 2020.
|
|
●
|
Corporate & Other revenue was de minimis during the year ended December 31, 2020. The
year ended 2019 includes minimal revenue related to a legacy merchant cash advance subsidiary of GWG Holdings. GWG Holdings no longer
participates in the merchant cash advance industry.
|
Comparison of earnings (loss) before tax by reportable
segment for the periods indicated (in thousands):
|
|
Year Ended December 31,
|
|
Segment Earnings (Loss) Before Tax(1)
|
|
2020
|
|
|
2019
|
|
|
Increase/ (Decrease)
|
|
|
|
|
|
|
(As Restated)
|
|
|
|
|
Secondary Life Insurance
|
|
$
|
(59,684
|
)
|
|
$
|
(27,694
|
)
|
|
$
|
(31,990
|
)
|
Beneficient(1)
|
|
|
(139,575
|
)
|
|
|
222,443
|
|
|
|
(362,018
|
)
|
Corporate & Other(2)
|
|
|
(32,970
|
)
|
|
|
(35,470
|
)
|
|
|
2,500
|
|
Total
|
|
$
|
(232,229
|
)
|
|
$
|
159,279
|
|
|
$
|
(391,508
|
)
|
|
(1)
|
Includes
earnings from equity method investments and gain on consolidation of equity method investments
for the year ended December 31, 2019, as presented in our consolidated statements of operations,
related to GWG Holdings’ equity method investment in Beneficient prior to December
31, 2019.
|
|
(2)
|
Includes
loss from equity method investments for the year ended December 31, 2020, as presented in
our consolidated statements of operations, related to GWG Holdings’ investment in FOXO.
|
The primary drivers of the changes in earnings
(loss) before tax for the year ended December 31, 2020, compared to the same period of 2019 were as follows:
|
●
|
Secondary Life Insurance loss before tax increased by $32.0 million as a result of the following:
|
|
●
|
$25.7 million decrease in the gain on life insurance policies, net as described above in the revenue discussion;
and
|
|
●
|
$14.2 million increase in interest expense as a result of higher average debt outstanding; partially offset
by
|
|
●
|
A decrease in operating expenses of $8.9 million, primarily resulting from lower employee compensation
and benefits, lower business insurance costs, and lower legal fees.
|
|
●
|
Beneficient segment experienced a net loss of $139.6 million in 2020 compared to earnings of $222.4 million
in 2019, primarily due to the consolidation of Beneficient on December 31, 2019. During 2019, we accounted for Beneficient using the equity
method on a one-quarter lag, and the amount reported represents our proportionate share of the losses of Beneficient for the period presented.
The one-quarter lag was discontinued with the consolidation of Beneficient on December 31, 2019. The consolidation of Beneficient resulted
in a net gain of $243.0 million related to the remeasurement to fair value of GWG Holdings’ preexisting equity method investment
in Beneficient. The loss of Beneficient for the year ended December 31, 2020, was primarily driven by $107.8 million of non-cash
charges for equity incentive compensation. During the year ended December 31, 2020, Beneficient’s losses were partially offset
by $36.3 million of income recognized as a result of the forfeiture of vested equity-based compensation related to one former director
of Beneficient as described in the revenue comparison discussion above.
|
|
●
|
Corporate and Other operating loss was lower during December 31, 2020, compared to 2019, primarily
due to lower legal and consulting fees as we incurred higher fees in 2019 as a result of the Beneficient transactions.
|
Liquidity and Capital Resources
As of December 31, 2020 and 2019, we had
approximately $124.2 million and $115.8 million, respectively, in combined available cash, cash equivalents, and restricted
cash. We generated net losses from operations for the years ended December 31, 2020 and 2019 totaling $208.5 million and $151.5 million.
As of October 15, 2021, we had approximately $54.3 million in combined available cash, cash equivalents, and restricted cash. Besides
funding operating expenditures, we are obligated to pay other items such as interest payments and debt maturities, and preferred stock
dividends and redemptions.
We have historically financed our businesses primarily
through a combination of L Bond sales, preferred stock sales, the LNV Credit Facility, and the NF Credit Facility. We have also financed
our business through proceeds from life insurance policy benefit receipts, cash distributions from the ExAlt Trusts’ alternative
asset portfolio, dividends and interest on investments, and Beneficient’s debt due to related parties. 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 proceeds to allocate capital to Beneficient; however, if Ben LP becomes an
independent company per the Term Sheet discussed in the “Recent Developments” section above, the Company expects that Ben
LP would reduce its reliance on GWG Holdings to fund its operations and would raise future capital from other sources. Ben LP’s
capital raising efforts and participation in liquidity transactions may include the issuance of equity or debt of Ben LP or one of its
subsidiaries, and the newly issued securities may be dilutive to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH
and may include preferential terms relative to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH, as applicable.
We currently fund our business primarily with
debt that generally has a shorter duration than the duration of our long-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. Substantially all of our life insurance policies are pledged
as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance
with the terms of those credit facilities. We heavily rely on GWG Holdings’ L Bond offering to fund our business operations, including,
among other things, interest and principal payments on the existing L Bonds and capital allocations to Beneficient. We temporarily suspended
the offering of GWG Holdings’ L Bonds, commencing April 16, 2021, as a result of our delay in filing certain periodic reports with
the SEC, including this 2020 Form 10-K, and were required to seek alternative sources of capital.
As a result of the suspension of GWG Holdings’
L Bond offering, on June 28, 2021 (as described in more detail above), we pledged additional life insurance policies as collateral and
received an additional advance of $51.2 million under the Third Amended Facility. Subsequently, on August 11 2021, we entered into the
NF Credit Agreement (as described in more detail above and in Note 23 to the accompanying audited consolidated financial statements) and
received a one-time advance of $107.6 million. Approximately $56.7 million of such advanced amount was used to pay off the remaining amount
due, including interest and penalties, under the Third Amended Facility and the additional pledged life insurance policies used as collateral
for the Third Amended Facility were released and pledged under the NF Credit Facility. Further, on September 7, 2021, DLP IV entered into
the Fourth Amended Facility, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional
advance of $30.3 million from LNV Corporation, with no additional pledged collateral.
Primarily due to the current suspension of GWG
Holdings’ L Bond offering, the Company may require additional capital to continue its operations over the next twelve months if
our ability to sell L Bonds dissipates, or if we are forced to suspend the L Bond offering. However, the Company may not be able to obtain
additional borrowings 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, ii) exercise our right to decline requests for early L Bond redemptions or redemptions
of preferred stock, or iii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may
be diluted. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit
Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities.
We anticipate recommencing the offering of GWG
Holdings’ L Bonds once we become current with our filing obligations and satisfy applicable NASDAQ listing requirements. Once we
become current with our filing obligations with respect to the L Bonds, we may be limited in the origination channels in which we sell
our L Bonds in the event that we are unable to meet the applicable NASDAQ listing requirements in a timely manner, which could result
in the L Bonds no longer being “covered securities” for federal securities law purposes which would subject the offer and
sale of L Bonds to potentially extensive state “blue sky” securities law requirements. If for any reason we are forced to
suspend GWG Holdings’ L Bond offering, are limited in our origination channels in which we sell our L Bonds, or demand for GWG Holdings’
L bonds dissipates, 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 $97.4 million borrowing base capacity,
excluding any potential capacity for premiums and servicing costs, under the LNV Credit Facility as of December 31, 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 at the sole discretion
of the lender. The LNV Credit Facility has certain financial and nonfinancial covenants, and we were in compliance with these debt covenants
as of December 31, 2020, and December 31, 2019, and continue to be so as of the filing date of this report. Subsequent to December 31,
2020, we received additional advances through amendments to the LNV Credit Facility and entered in to the NF Credit Facility (as described
in more detail above and in Note 23 to the accompanying audited consolidated financial statements).
Beneficient is obligated to make debt payments
totaling $74.5 million on certain outstanding borrowings through May 30, 2022 under the terms of the Amendment No. 1 to the Second Amended
and Restated Credit Agreements as discussed further in Note 23 to the accompanying audited consolidated financial statements. Primarily
due to both the forthcoming debt payments under the Credit Agreement and Second Lien Credit Agreement and the anticipated deconsolidation
of Beneficient from GWG Holdings, as discussed previously and in Note 23 to the accompanying audited consolidated financial statements,
which is expected to result in reduced reliance by Beneficient on GWG Holdings to fund its operations, Beneficient will require additional
liquidity to continue its operations over the next twelve months. We expect Beneficient to satisfy these obligations and fund its operations
through anticipated operating cash flows, proceeds from distributions on the alternative assets portfolio, additional investments into
Beneficient by GWG Holdings and/or other parties and, potentially refinancing with other third-party lenders some or all of the existing
borrowings due prior to their maturity. Beneficient is currently in the process of raising additional equity, which is anticipated to
close during the fourth quarter of 2021 and/or the first quarter of 2022.
Beneficient may not be able to refinance or obtain
additional financing on terms favorable to the Company, or at all. To the extent that Beneficient raises additional capital through the
future sale of equity or debt, the ownership interest of its existing equity holders may be diluted. The terms of these future equity
or debt securities may include liquidation or other preferences that adversely affect the rights of its existing equity unitholders or
involve negative covenants that restrict Beneficient’s ability to take specific actions, such as incurring additional debt or making
additional investments in growing its operations. If Beneficient defaults on these borrowings, then it will be required to either i) sell
assets to repay these loans or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders
may be diluted. Moreover, if Beneficient were to sell assets to avoid a default of these borrowings, then the price at which Beneficient
sold such assets may not reflect the carrying value of those assets as reflected in our consolidated financial statements, especially
in the event of a bulk or distressed sale.
As noted in the “Results of Operations”
section above, on November 11, 2019, GWG Holdings contributed the common stock and membership interests of its then wholly-owned FOXO
Labs and FOXO Life subsidiaries to FOXO in exchange for a membership interest in the entity. On November 13, 2020, FOXO BioScience LLC
converted to a corporation and is now known as FOXO Technologies Inc. With the corporate conversion, GWG Holdings’ previous membership
interest in the LLC converted to preferred equity. GWG Holdings has contributed $16.2 million in cash to FOXO through December 31, 2020,
and is committed to contribute an additional $3.8 million to the entity through October 2021, all of which was contributed by such date.
The potential NASDAQ delisting and our current
inability to sell L Bonds as discussed above, in combination with significant recurring losses from operations, negative cash flows from
operations, delays in executing our business plans, and any potential negative outcome from the ongoing SEC investigation discussed elsewhere
in this Form 10-K, raise substantial doubt about our ability to continue as a going concern for the next 12 months following the filing
of this Form 10-K.
Financings Summary
We had the following outstanding debt balances
as of December 31, 2020 and 2019, with the following weighted average interest rate as calculated for the years ended December 31,
2020 and 2019 (dollars in thousands):
|
|
December 31, 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
|
|
$
|
202,611
|
|
|
|
9.12
|
%
|
|
$
|
184,586
|
|
|
|
9.57
|
%
|
GWG Holdings, Inc. – L Bonds
|
|
|
1,277,881
|
|
|
|
7.21
|
%
|
|
|
948,128
|
|
|
|
7.15
|
%
|
GWG Holdings, Inc. – Seller Trust L Bonds
|
|
|
272,104
|
|
|
|
7.50
|
%
|
|
|
366,892
|
|
|
|
7.50
|
%
|
Beneficient – Debt due to related parties
|
|
|
77,176
|
|
|
|
6.50
|
%
|
|
|
152,199
|
|
|
|
4.59
|
%
|
Total
|
|
$
|
1,829,772
|
|
|
|
7.43
|
%
|
|
$
|
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):
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Senior credit facility with LNV Corporation
|
|
|
|
|
|
|
Face amount outstanding
|
|
$
|
202,611
|
|
|
$
|
184,586
|
|
Unamortized deferred financing costs
|
|
|
(8,881
|
)
|
|
|
(10,196
|
)
|
Carrying amount
|
|
$
|
193,730
|
|
|
$
|
174,390
|
|
|
|
|
|
|
|
|
|
|
L Bonds and Seller Trust L Bonds:
|
|
|
|
|
|
|
|
|
Face amount outstanding
|
|
$
|
1,549,985
|
|
|
$
|
1,315,020
|
|
Subscriptions in process
|
|
|
17,978
|
|
|
|
15,839
|
|
Unamortized selling costs
|
|
|
(48,957
|
)
|
|
|
(37,329
|
)
|
Carrying amount
|
|
$
|
1,519,006
|
|
|
$
|
1,293,530
|
|
|
|
|
|
|
|
|
|
|
Debt due to related parties:
|
|
|
|
|
|
|
|
|
Face amount outstanding
|
|
$
|
77,176
|
|
|
$
|
152,199
|
|
Unamortized premium (discount)
|
|
|
(916
|
)
|
|
|
887
|
|
Carrying amount
|
|
$
|
76,260
|
|
|
$
|
153,086
|
|
In January 2015, GWG Holdings 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, GWG Holdings began publicly
offering up to $1.0 billion L Bonds as a follow-on to GWG Holdings’ earlier L Bond offering.
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 $231.2 million under
this offering since it was declared effective.
Through December 31, 2020, the total amount
of L Bonds sold under all offerings, including renewals, was $2.1 billion. As of December 31, 2020 and 2019, we had approximately
$1.3 billion and $0.9 billion, respectively, in principal amount of L Bonds outstanding (exclusive of Seller Trust L Bonds).
On August 10, 2018, GWG Holdings, GWG Life and
the Bank of Utah, as trustee, entered into the L Bond Supplemental Indenture to the Amended and Restated Indenture. GWG Holdings entered
into the L Bond 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. GWG Holdings issued Seller Trust L Bonds in the amount of $366.9 million to the Seller Trusts
in connection with the Exchange Transaction. As a result of the Collateral Swap discussed in Note 1 to the consolidated financial statements,
$94.8 million of the Seller Trust L Bonds are eliminated upon consolidation. 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 accompanying
audited 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 GWG Holdings with the ability to incur indebtedness (directly
or through a subsidiary of GWG Holdings) that is payable in capital stock of GWG Holdings or mandatorily convertible into or exchangeable
for capital stock of GWG Holdings that would be excluded from the calculation of the Debt Coverage Ratio. On December 31, 2020, we entered
into the Liquidity Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to
provide for the issuance of the Liquidity Bonds in a principal amount of up to $1.0 billion.
The weighted-average interest rate of GWG Holdings’
outstanding L Bonds (excluding the Seller Trust L Bonds) as of December 31, 2020 and 2019, was 7.21% and 7.15%, respectively, and
the weighted-average maturity at those dates was 3.19 and 3.21 years, respectively. GWG Holdings’ L Bonds (other than the Seller
Trust L Bonds and the Liquidity Bonds) have renewal features. Since we first issued GWG Holdings’ L Bonds, we have experienced $768.7
million in maturities, of which $406.3 million has renewed through December 31, 2020, for an additional term. This renewal activity
has provided us with an aggregate renewal rate of approximately 52.9% for investments in these securities.
Future contractual maturities of L Bonds (including
the Seller Trust L Bonds and Liquidity Bonds) at December 31, 2020 are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2021(1)
|
|
$
|
463,686
|
|
2022
|
|
|
293,038
|
|
2023
|
|
|
191,446
|
|
2024
|
|
|
121,105
|
|
2025
|
|
|
167,433
|
|
Thereafter
|
|
|
313,277
|
|
|
|
$
|
1,549,985
|
|
|
(1)
|
As of December 31, 2020, we had approximately $366.9 million in principal
amount of Seller Trust L Bonds outstanding, of which $94.8 million are held by the ExAlt Trusts and are eliminated in consolidation. Accordingly,
the net of these amounts, $272.1 million, is presented in the table above. As the second anniversary of the Final Closing Date has passed,
the holders of the Seller Trust L Bonds now have the right to cause GWG Holdings 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 Seller Trust L Bonds is in August 2023, their contractual
maturity is reflected in 2021, as that is the period in which they could become payable. The repurchase may be paid, at GWG Holdings’
option, 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 (including the Seller Trust L Bonds
and Liquidity Bonds) are secured by all of our assets and are subordinate to the LNV Credit Facility and the NF Credit Facility.
On September 27, 2017, we entered into a $300
million amended and restated senior credit facility with LNV Corporation in which DLP IV is the borrower. As of December 31, 2020,
we had approximately $202.6 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 the 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 $76.3 million and $153.1 million as of December 31, 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 $2.3 million and $72.3 million at December 31, 2020, and $77.5 million and $72.2 million as of December 31, 2019, respectively.
These amounts exclude an unamortized discount of $0.9 million as of December 31, 2020, and an unamortized premium of $0.9 million
as of December 31, 2019. 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 consolidated financial statements. 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%. Prior to the Second Amendments,
both loans accrued interest at a rate of 1-month LIBOR plus 3.95%, compounded daily. On March 10, 2021, and again on June 28, 2021, Beneficient
executed amendments to both credit agreements that, among other items, extended the maturity for both agreements to May 30, 2022, as discussed
in more detail in Note 23 to the consolidated financial statements. These loans are not currently guaranteed by GWG Holdings or GWG Life.
Beneficient has additional borrowings maturing
in 2023 and 2024 with an aggregate principal balance outstanding, including accrued interest, of $2.6 million and $2.5 million as of December 31,
2020 and December 31, 2019, respectively.
Future contractual maturities of Beneficient’s
debt due to related parties as of December 31, 2020 are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2021
|
|
$
|
74,548
|
|
2022
|
|
|
—
|
|
2023
|
|
|
750
|
|
2024
|
|
|
1,856
|
|
2025
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
77,154
|
|
We expect to meet our ongoing operational capital
needs for, among other things, GWG Holdings’ and GWG Life’s investments in Beneficient, alternative asset investments, policy
premiums and servicing costs, exploring opportunities to establish a life insurance company, 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 GWG Holdings’ L Bond offering, dividends and interest from investments, distributions from
the alternative assets held by certain of the ExAlt Trusts, future preferred and common equity offerings, and funding available from the
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 GWG Holdings’ 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 GWG Holdings’
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 in 2021.
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 December 31, 2020), and 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 (a substantial majority of the net assets of which are currently
represented by intangible assets and goodwill), 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 December 31, 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 accompanying audited consolidated 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 December 31, 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 the LNV Credit Facility. The net sale proceeds
remaining after satisfying all obligations under the 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%
|
|
|
12.00%
|
|
|
14.00%
|
|
|
16.12%
|
|
Value of life insurance portfolio
|
|
$
|
791,911
|
|
|
$
|
730,648
|
|
|
$
|
670,923
|
|
|
$
|
620,023
|
|
|
$
|
573,799
|
|
Common Units
|
|
|
438,194
|
|
|
|
438,194
|
|
|
|
438,194
|
|
|
|
438,194
|
|
|
|
438,194
|
|
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
|
|
|
195,578
|
|
|
|
195,578
|
|
|
|
195,578
|
|
|
|
195,578
|
|
|
|
195,578
|
|
Commercial Loan Agreement
|
|
|
180,080
|
|
|
|
180,080
|
|
|
|
180,080
|
|
|
|
180,080
|
|
|
|
180,080
|
|
Cash, cash equivalents and policy benefits receivable
|
|
|
120,616
|
|
|
|
120,616
|
|
|
|
120,616
|
|
|
|
120,616
|
|
|
|
120,616
|
|
Other assets
|
|
|
20,082
|
|
|
|
20,082
|
|
|
|
20,082
|
|
|
|
20,082
|
|
|
|
20,082
|
|
Total assets
|
|
|
2,065,491
|
|
|
|
2,004,228
|
|
|
|
1,944,503
|
|
|
|
1,893,603
|
|
|
|
1,847,379
|
|
Less: Senior credit facility(2)
|
|
|
202,611
|
|
|
|
202,611
|
|
|
|
202,611
|
|
|
|
202,611
|
|
|
|
202,611
|
|
Net after senior credit facility
|
|
|
1,862,880
|
|
|
|
1,801,617
|
|
|
|
1,741,892
|
|
|
|
1,690,992
|
|
|
|
1,644,768
|
|
Less: L Bonds(3)
|
|
|
1,644,773
|
|
|
|
1,644,773
|
|
|
|
1,644,773
|
|
|
|
1,644,773
|
|
|
|
1,644,773
|
|
Net remaining
|
|
$
|
218,107
|
|
|
$
|
156,844
|
|
|
$
|
97,119
|
|
|
$
|
46,219
|
|
|
$
|
(5
|
)
|
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 December 31,
2020.
|
|
(2)
|
This amount excludes unamortized deferred financing costs.
|
|
(3)
|
Amount represents aggregate outstanding principal balance of L Bonds and Seller Trust L Bonds prior to
eliminations as of December 31, 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 16.12% or higher at December 31, 2020. At December 31, 2019, the likely impairment occurred
at a discount rate of approximately 26.78% or higher. Based on a preliminary analysis, at September 30, 2021, management expects the likely
impairment, as calculated in accordance with the table above, to occur at a discount rate of approximately 8.50% or higher. The above
hypothetical analysis is included for informational purposes only, and the results of such analysis have no bearing on the current ability
of GWG Holdings to market and sell L Bonds or to satisfy amounts owing under the L Bonds and Seller Trust L Bonds.
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 also assumes GWG Holdings will realize
the full amounts 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. However, the ultimate value of GWG Holdings’ and GWG Life’s investments
in Beneficient depends on multiple factors, including the expected growth of new service offerings and products. Since predicting the
rate of growth attributable to newly launched products is inherently uncertain, there is no assurance that GWG Holdings will recover the
full book basis of its investments in Beneficient. Additionally, there is currently no market for the aforementioned assets, and a market
may not develop. Our Commercial Loan receivable and a portion of GWG Holdings’ and GWG Life’s 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 accompanying audited consolidated financial statements). This table also does not include the yield maintenance fee
we are required to pay in certain circumstances under the 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 Critical Accounting Policies — Valuation
of Life Insurance Policies and the notes to the accompanying audited consolidated financial statements.
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 1.50% or 12-month LIBOR, plus (b) 7.50%
per annum. The effective rate at December 31, 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 the 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 December 31, 2020, we were in compliance with all financial and non-financial covenants.
In addition, the LNV Credit Facility has certain
reporting obligations that require DLP IV to deliver audited annual financial statements no later than ninety days after the end of each
fiscal year. Due to the failure to issue GWG Life, LLC audited financial statements for 2020 to LNV Corporation within 90 days after the
end of the year, we were in violation of our financial reporting obligations under the LNV Credit Facility. CLMG Corp., as administrative
agent for LNV Corporation, has issued a limited deferral extending the delivery of these reports to May 17, 2021. We regained compliance
on May 17, 2021, when the audited annual financial statements of GWG Life were delivered to LNV Corporation.
On June 28, 2021, DLP IV entered into the Third
Amended Facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the agreement,
that replaced the aforementioned LNV Credit Facility. The Third Amended Facility resulted in an additional advance of $52.5 million from
LNV Corporation.
In conjunction with entering into the Third Amended
Facility, DLP V transferred life insurance policies having an aggregate face value of approximately $440.6 million to DLP IV which were
pledged as additional collateral to the Third Amended Facility, and DLP IV received proceeds of approximately $51.2 million (net of certain
fees and expenses incurred in connection with the negotiation and entry into the Third Amended Facility). The Third Amended Facility sets
forth interest and other terms and covenants similar those included in the previous LNV Credit Facility. The Third Amended Facility was
paid off on August 11, 2021, with a portion of the proceeds from the NF Credit Facility described below.
On September 7, 2021, DLP IV entered into the
Fourth Amended Facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the
agreement, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional advance of $30.3
million from LNV Corporation. The Fourth Amended Facility sets forth interest and other terms and covenants similar those included in
the previous LNV Credit Facility.
Credit Facility with National Founders LP
On August 11, 2021, DLP VI, entered into the NF
Credit Agreement with each lender from time to time party thereto and National Founders LP, as the administrative agent. On August 11,
2021, a one-time advance of approximately $107.6 million was made to the DLP VI under the NF Credit Facility with a scheduled maturity
date of August 11, 2031. Approximately $56.7 million of such advanced amount was used to pay off the remaining amount due, including interest
and penalties, under the Third Amended Facility. Amounts borrowed under the NF Credit Facility bear interest on each day on the outstanding
principal amount on such day at a per annum rate, determined on a daily basis, generally equal to 5.5% up to a 65% of the loan to value
percent as calculated in accordance with the NF Credit Agreement, and 7.0% on anything above that loan to value percent.
A portion of the proceeds from the funding under
the NF Credit Facility was used to purchase life insurance policies that were owned by DLP IV, which used the funds to repay the most
recent advance of $52.5 million plus interest and penalties under the LNV Credit Facility described above. At August 11, 2021, the aggregate
face value of life insurance policies owned by DLP VI, was approximately $433.1 million. As of such date, the aggregate face value of
life insurance policies owned by DLP IV was approximately $1.42 billion.
We are subject to various financial and non-financial
covenants under the NF 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 VI nor GWG Life become an investment company.
Additionally, we are required to maintain a Debt Coverage Ratio not to exceed 90%. As of August 31, 2021, we were in compliance with all
financial and non-financial covenants in the NF Credit Facility.
Cash Flows
Interest and Dividend Payments
We finance our businesses through a combination
of: life insurance policy benefit receipts; principal, dividends and interest receipts from investments; distributions from the alternative
assets held by the ExAlt Trusts; debt and equity offerings; and the LNV Credit Facility and the NF Credit Facility. We have historically
relied on debt (L Bonds and the LNV Credit Facility) 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 GWG Holdings and GWG Life 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 primarily finances its business through
repayments on ExAlt Loans. Such repayments are funded from a portion of the cash distributions the ExAlt Trusts receive from their alternative
assets and additional investments in Beneficient by GWG Holdings and/or other parties. See Note 10 to the accompanying audited consolidated
financial statements for details on the amendments of Beneficient’s credit agreements. Beneficient uses proceeds from these sources
to fund liquidity transactions 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 Texas
trust company charter is issued or the Kansas TEFFI trust company becomes operational. Additionally, Bermuda insurance statutes and regulations,
and the policies of the BMA, require that Pen, among other things, maintain a minimum level of capital and surplus, satisfy solvency standards,
and restrict dividends and distributions. Beneficient Capital Markets will also be subject to regulations of the SEC and FINRA that require,
among other things, Beneficient Capital Markets to maintain a minimum level of capital.
Our total interest expense of $154.6 million
and $114.8 million for the years ended December 31, 2020 and 2019, respectively, represent the largest cash expense in each
period. Preferred stock cash dividends were $14.6 million and $16.9 million for the years ended December 31, 2020 and 2019,
respectively. While reducing our cost of funds and increasing our common equity base 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 GWG Holdings’ L Bond offering, LNV Credit Facility 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 the LNV Credit Facility and NF Credit
Facility.
The amount of payments for anticipated premiums,
including the requirement under the LNV Credit Facility and NF 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
|
|
2021
|
|
$
|
72,445
|
|
|
$
|
1,655
|
|
|
$
|
74,100
|
|
2022
|
|
|
89,436
|
|
|
|
1,655
|
|
|
|
91,091
|
|
2023
|
|
|
100,953
|
|
|
|
1,655
|
|
|
|
102,608
|
|
2024
|
|
|
110,044
|
|
|
|
1,655
|
|
|
|
111,699
|
|
2025
|
|
|
122,438
|
|
|
|
1,655
|
|
|
|
124,093
|
|
|
|
$
|
495,316
|
|
|
$
|
8,275
|
|
|
$
|
503,591
|
|
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 COI increases on six policies during the year ended December 31,
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/
Premiums
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
|
%
|
December 31, 2020
|
|
|
1,900,715
|
|
|
|
125,109
|
|
|
|
69,734
|
|
|
|
179.4
|
%
|
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 have reduced capital allocated to acquiring a
larger, more diversified portfolio of life insurance policies.
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 consolidated financial statements.
Off-Balance Sheet Arrangements
Unfunded Capital Commitments
The ExAlt
Trusts had $35.6 million and $34.9 million of potential gross capital commitments as of December 31, 2020 and December 31,
2019, respectively, representing potential limited partner capital funding commitments on the interests in alternative asset funds.
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
within the ExAlt PlanTM created at the origination of each trust for up to $0.1 million. To the extent that the associated
ExAlt Trust cannot pay the capital funding commitment, Beneficient is obligated to lend sufficient funds to meet the commitment. Any amounts
advanced by Beneficient to the ExAlt Trusts for these limited partner capital funding commitments above the associated capital funding
commitment reserves held by the associated ExAlt Trusts are added to the ExAlt Loan balance between Beneficient and the ExAlt Trusts and
are expected to be recouped through the cash distributions from the interests in alternative asset fund that collateralizes such ExAlt
Loan.
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 of the investment on a case-by-case basis. At both December 31,
2020 and December 31, 2019, Beneficient had no reserves for losses on unused commitments
to fund potential limited partner capital funding commitments.
Unfunded Commitments
Beneficient had $1.1 million of unfunded commitments
on liquidity solution transactions as of December 31, 2020, related to liquidity transactions in process as of that date. There were
no reserves for unfunded commitments as of December 31, 2020, and all amounts in process were fully funded in the first quarter of
2021.
Equity Method Investee Commitments
GWG Holdings has contributed $16.2 million in
cash to FOXO to date through December 31, 2020, and is committed to contribute an additional $3.8 million to the entity through October
2021, all of which was contributed by such date.
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 December 31, 2020, 96.3% of our life
insurance policies, by face value benefits, were issued by companies that maintained an investment-grade credit rating (BBB or better)
by Standard & Poor’s.
The LNV Credit Facility, NF Credit Facility, and
Beneficient’s debt due to related parties 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 GWG Holdings’ 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.
The ExAlt Trusts hold investments in alternative
assets, which are exposed to risks related to markets, credit, currency, and interest rates. 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 and Western Europe, with the largest percentage, based on NAV,
operating in diversified financials, telecommunications services, food and staples retailing, and software and services industries.
As of December 31, 2020, and 2019, all of
the ExAlt Loans, which are eliminated upon consolidation, are collateralized by the cash flows originating from the ExAlt Trusts’
investments in alternative assets. These ExAlt Loans are a key determinant in income (loss) allocable to Beneficient’s equity holders,
and thus GWG Holdings. Beneficient has underwriting procedures and utilizes market rates. Additionally, Beneficient has purchased put
options to protect the net asset value of the interests in alternative assets held by certain of the ExAlt Trusts from impacts associated
with a broad market downturn. Finally, the ExAlt Trusts applicable trust agreements allow for excess cash flows from a collective pool
of alternative assets to be utilized to repay the ExAlt Loans they have with Beneficient when cash flows from the customer’s originally
alternative assets are not sufficient to repay the outstanding principal, interest, and fees.
Guarantee and Collateral Provisions of L Bonds
GWG Holdings’ L Bonds are offered and sold
under a registration statement declared effective by the SEC, and GWG Holdings has issued Seller Trust L Bonds under the L Bond Supplemental
Indenture, as described in Note 10 to the 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 Capital Markets, L.L.C.,
a limited liability company owned by an entity related to the Ben Initial Investors, including Brad K. Heppner (GWG Holdings’ former
Chairman, who served in such capacity from April 26, 2019 to June 14, 2021, and Beneficient's current Chief Executive Officer and Chairman),
and an entity related to Thomas O. Hicks (one of Beneficient’s current directors and a former director of GWG Holdings) (“AltiVerse”).
Together, BCC and AltiVerse represent approximately 12% of our outstanding common stock, and are guaranteed by GWG Life and a corresponding
grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed
the payment of principal and interest on the L Bonds and Seller Trust L Bonds. GWG Life’s equity in GWG Life Trust, DLP IV, and
DLP V Holdings serves as collateral for GWG Holdings’ L Bond and Seller Trust L Bond obligations. As of December 31, 2020, substantially
all of our life insurance policies were 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 under the LNV Credit Facility.
On December 31, 2020, GWG Holdings, GWG Life and
Bank of Utah, as trustee, entered into the Liquidity Bond Supplemental Indenture that provides for the issuance of two series of Liquidity
Bonds, as described in Note 10 to the consolidated financial statements. The Liquidity Bonds are issued by GWG Life and guaranteed by
GWG Holdings. The Liquidity Bonds are secured by the same collateral as the other L Bonds.
Furthermore, regarding the obligations of GWG
Holdings and its subsidiaries as of December 31, 2020:
|
(1)
|
The Seller Trust L Bonds are secured obligations of GWG Holdings, ranking junior to all senior debt of
GWG Holdings and pari passu in right of payment and in respect of collateral with all L Bonds of GWG Holdings (see Note 10 to the accompanying
audited consolidated financial statements). 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 Liquidity Bonds are secured obligations of GWG Life, ranking junior to all senior debt of GWG Holdings
or GWG Life and pari passu in right of payment and in respect of collateral with all L Bonds of GWG Holdings. Payments under the Liquidity
Bonds are guaranteed by GWG Holdings.
|
|
(3)
|
The terms of the 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 the
LNV Credit Facility is available as collateral for the L Bonds (including the Seller Trust L Bonds and Liquidity Bonds).
|
The following represents summarized financial
information as of December 31, 2020 and December 31, 2019, with respect to the
financial position, and for the year ended December 31, 2020, with respect to results of operations. The tables present summarized
financial information of GWG Holdings and GWG Life 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):
|
|
|
|
|
(As Restated)
|
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Assets(1)
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
65,556
|
|
|
$
|
60,365
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
67,153
|
|
Other assets
|
|
|
6,366
|
|
|
|
8,659
|
|
Total assets
|
|
$
|
71,922
|
|
|
$
|
136,177
|
|
Liabilities
|
|
|
|
|
|
|
|
|
L Bonds
|
|
$
|
1,246,902
|
|
|
$
|
926,638
|
|
Seller Trust L Bonds
|
|
|
366,892
|
|
|
|
366,892
|
|
Interest and dividends payable
|
|
|
12,086
|
|
|
|
12,491
|
|
Accounts payable and accrued expenses
|
|
|
7,347
|
|
|
|
3,093
|
|
Deferred tax liabilities
|
|
|
51,469
|
|
|
|
71,855
|
|
Total liabilities
|
|
$
|
1,684,696
|
|
|
$
|
1,380,969
|
|
Equity
|
|
|
|
|
|
|
|
|
Redeemable preferred stock and Series 2 redeemable preferred stock
|
|
$
|
156,833
|
|
|
$
|
201,891
|
|
|
(1)
|
Assets exclude: i) GWG Holdings’ investment in GWG Life
of $1.2 billion as of both December 31, 2020 and December 31, 2019; ii) GWG Holdings’
aggregate investments in non-obligor subsidiaries of $643.1 million and $439.4 million as of December 31, 2020 and December 31,
2019, respectively; and iii) GWG Life’s aggregate investments in and loans to non-obligor subsidiaries of $1.2 billion as
of both December 31, 2020 and December 31, 2019.
|
Summarized Statement of Operations Information
(in thousands):
|
|
Year Ended
December 31,
2020
|
|
Total revenues
|
|
$
|
100,518
|
|
|
|
|
|
|
Interest expense
|
|
|
125,012
|
|
Other expenses
|
|
|
38,155
|
|
Total expenses
|
|
|
163,167
|
|
Loss before income taxes and preferred dividends
|
|
|
(62,649
|
)
|
Income tax expense (benefit)
|
|
|
(19,849
|
)
|
Preferred dividends
|
|
|
14,630
|
|
Net loss
|
|
$
|
(57,430
|
)
|
Debt Coverage Ratio
GWG Holdings’ L Bond borrowing covenants
require us to maintain a Debt Coverage Ratio not to exceed 90%. The Debt Coverage Ratio is calculated by dividing the sum of our total
interest-bearing indebtedness (other than Excluded Indebtedness defined and described in note 5 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.
GWG Holdings’ and GWG Life’s investments
in Beneficient and GWG Life’s ownership interests in the holding companies that own DLP IV and DLP VI, which own substantially all
of the life insurance portfolio, secure our obligations under the L Bonds, and are illiquid assets. Although GWG Holdings and GWG Life
own debt and equity securities of Beneficient, a substantial majority of the net assets of Beneficient are currently represented by goodwill,
an intangible asset. The calculation of Beneficient’s goodwill required the utilization of significant estimates and management
judgment, as discussed elsewhere in this 2020 Form 10-K. As a result, the carrying value of those assets as reflected in our consolidated
financial statements may not necessarily reflect the current market price for those assets, especially in the event of a bulk or distressed
sale. Proceeds from L Bond sales will be primarily used for the repayment of L Bond maturities, interest payments and other operating
expenses of GWG Holdings, and as otherwise specified in the prospectus for the L Bonds. GWG Holdings may also continue to use a portion
of the proceeds from L Bond sales to make investments in Beneficient. Because advances may be used by Beneficient for working capital
purposes, such investments may not increase the tangible assets securing the L Bonds. If the trustee for the L Bonds were forced to sell
all or a portion of the collateral securing them, there can be no assurance that the trustee would be able to sell them for the prices
at which we have recorded them in our consolidated financial statements, and the trustee might be forced to sell them at significantly
lower prices.
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 (dollars in thousands):
|
|
|
|
|
(As Restated)
|
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Life insurance portfolio policy benefits
|
|
$
|
1,900,715
|
|
|
$
|
2,020,973
|
|
Discount rate of future cash flows(1)
|
|
|
7.46
|
%
|
|
|
7.55
|
%
|
Net present value of life insurance portfolio policy benefits
|
|
$
|
822,859
|
|
|
$
|
826,196
|
|
All cash and cash equivalents (including restricted cash)
|
|
|
106,282
|
|
|
|
81,780
|
|
Life insurance policy benefits receivable, net
|
|
|
14,334
|
|
|
|
23,031
|
|
Financing receivables from affiliates(2)
|
|
|
180,080
|
|
|
|
258,402
|
|
Investments in Common Units(2)(3)(4)
|
|
|
438,194
|
|
|
|
313,443
|
|
Investment in Preferred Series A Subclass 1 Unit Account(4)
|
|
|
319,030
|
|
|
|
319,030
|
|
Investment in Preferred Series C Unit Account(4)
|
|
|
195,578
|
|
|
|
—
|
|
Option Agreement and other assets (3)
|
|
|
20,082
|
|
|
|
54,365
|
|
Total Coverage (5)
|
|
$
|
2,096,439
|
|
|
$
|
1,876,247
|
|
|
|
|
|
|
|
|
|
|
Total Indebtedness (5)
|
|
$
|
1,519,107
|
|
|
$
|
1,146,646
|
|
|
|
|
|
|
|
|
|
|
Debt Coverage Ratio
|
|
|
72.46
|
%
|
|
|
61.10
|
%
|
|
(1)
|
Weighted-average interest rate paid on indebtedness, excluding that of Seller Trust L-Bonds, as required
under the indenture governing the L Bonds.
|
|
(2)
|
The Promissory Note, previously included in financing receivables from affiliates, was converted to Preferred
Series C on September 30, 2020.
|
|
(3)
|
The Option Agreement was exercised and converted to Common Units effective August 11, 2020.
|
|
(4)
|
Generally represents the value of the investment in Beneficient as of December 31, 2019 for investments
that existed at the time of the change-in-control transaction, or the value at the time of purchase for investments that were made subsequent
to December 31, 2019. As noted above, these are illiquid investments that are carried at book basis and not market value.
|
|
(5)
|
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 December 31, 2020, other than Excluded Indebtedness. “Excluded
Indebtedness” means indebtedness that is payable at GWG Holdings’ option in capital stock of GWG Holdings or securities mandatorily
convertible into or exchangeable for capital stock of GWG Holdings, or any indebtedness that is reasonably expected to be converted or
exchanged, directly or indirectly, into capital stock of GWG Holdings. 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 accompanying audited
consolidated financial statements).
|
As of December 31, 2020 and 2019, we were
in compliance with the Debt Coverage Ratio. Based on a preliminary analysis, the Company expects the Debt Coverage Ratio to be approximately
82% as of September 30, 2021.
FINANCIAL INFORMATION
GWG HOLDINGS, INC.
Set forth below are our consolidated financial
statements and the notes thereto that were included in the Annual Report. References to “this report” in the notes to our
consolidated financial statements refer to the Annual Report.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
GWG Holdings, Inc. and Subsidiaries
Opinion on the financial statements
We have audited the accompanying consolidated
balance sheet of GWG Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and
the related consolidated statements of operations, cash flows and changes in stockholders’ equity for the year ended December 31,
2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations
and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States
of America.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial
reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 5, 2021
expressed an adverse opinion.
Going concern
The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has
incurred significant losses from operations, experienced negative cash flows from operations and experienced delays in executing its business
plans. The Company expects to be dependent on raising equity or other financing to fund ongoing operations and to execute its business
plans. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about the Company’s ability to
continue as a going concern.
Management’s plans in regard to these matters
are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks
of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical audit matters
The critical audit matter communicated below arises
from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit
matter or on the accounts or disclosures to which they relate.
Fair value of investments in life insurance
policies
As described further in Note 5 and Note 7 to the
financial statements, the fair value of the Company’s investments in life insurance policies is determined as the net present value
of the life insurance portfolio’s future expected cash flows (policy benefits to be received and required future premium payments)
that incorporates life expectancy estimates obtained when the policy was purchased and current discount rate assumptions. We identified
fair value of investments in life insurance policies as a critical audit matter.
The principal considerations for our determination
that fair value of investments in life insurance policies is a critical audit matter are that this asset is valued using unobservable
inputs that require a high level of management judgment and fluctuations to such inputs could have a material impact on the financial
statements. As a result, obtaining sufficient appropriate audit evidence related to the fair value measurement required significant auditor
judgement to evaluate the reasonableness of unobservable inputs used in the valuation.
Our audit procedures related to the fair value
of investments in life insurance policies included the following, among others:
|
●
|
We tested the design and operating effectiveness of relevant controls over management’s process
relating to the fair value measurement of investments in life insurance policies.
|
|
●
|
With the assistance of external valuation specialists, we considered results of the Company’s actual-to-expected
(“A2E”) mortality cash flow experience, available third-party service provider reports for future premium streams, available
market information, other available information to further corroborate overall valuation and sampled life insurance policy information
in order to evaluate the following key fair value inputs:
|
|
○
|
Life expectancy, utilizing portfolio mortality multiplier methodology which is updated based on the A2E
analysis
|
|
○
|
Estimated premium payments
|
|
○
|
Face amount of policies
|
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Dallas, Texas
November
5, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders
GWG Holdings, Inc. and Subsidiaries
Opinion on internal control over financial
reporting
We have audited the internal control over financial
reporting of GWG Holdings, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on
criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weaknesses described in the following
paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over
financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control— Integrated Framework
issued by COSO.
A material weakness is a deficiency, or combination
of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material
weaknesses have been identified and included in management’s assessment.
As of December 31, 2020, the design and operating
effectiveness of controls over the selection, application and review of the implementation of accounting policies were not sufficient
to ensure amounts recorded and disclosed were fairly stated in accordance with GAAP. This material weakness resulted in the Restatement.
During the year ended December 31, 2020, the Company
identified a material weakness in internal controls over the quarterly income tax provision process, which included the measurement of
the valuation allowance against the Company’s deferred tax assets.
We also have audited, in accordance with the standards
of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company
as of and for the year ended December 31, 2020. The material weaknesses identified above were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report
dated November 5, 2021 which expressed a qualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control
over financial reporting
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
GRANT THORNTON LLP
Dallas, Texas
November 5, 2021
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
GWG Holdings, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of GWG Holdings, Inc. and Subsidiaries (the “Company”) as of December 31, 2019, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related
notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of their operations
and their cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States
of America.
Restatement and Other Corrections
As discussed in Notes 2 and 21 to the consolidated
financial statements, the 2019 consolidated financial statements have been restated to correct misstatements.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides
a reasonable basis for our opinion.
/s/ WHITLEY PENN LLP
We served as the Company’s auditor from
2019 to 2020.
Dallas, Texas
March 27, 2020, except for Notes 2, 6, and 21,
as to which the date is November 5, 2021.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
(As Restated)
|
|
Cash and cash equivalents
|
|
$
|
85,249
|
|
|
$
|
82,284
|
|
Restricted cash
|
|
|
38,911
|
|
|
|
33,506
|
|
Investment in life insurance policies, at fair value
|
|
|
791,911
|
|
|
|
796,039
|
|
Life insurance policy benefits receivable, net
|
|
|
14,334
|
|
|
|
23,031
|
|
Investment in alternative assets, at fair value
|
|
|
221,894
|
|
|
|
342,012
|
|
Equity method investments
|
|
|
8,582
|
|
|
|
1,761
|
|
Other assets
|
|
|
36,326
|
|
|
|
29,398
|
|
Goodwill
|
|
|
2,367,750
|
|
|
|
2,367,750
|
|
TOTAL ASSETS
|
|
$
|
3,564,957
|
|
|
$
|
3,675,781
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
$
|
193,730
|
|
|
$
|
174,390
|
|
L Bonds
|
|
|
1,246,902
|
|
|
|
926,638
|
|
Seller Trust L Bonds
|
|
|
272,104
|
|
|
|
366,892
|
|
Debt due to related parties
|
|
|
76,260
|
|
|
|
153,086
|
|
Interest and dividends payable
|
|
|
24,080
|
|
|
|
16,516
|
|
Repurchase option
|
|
|
—
|
|
|
|
61,664
|
|
Accounts payable and accrued expenses
|
|
|
26,505
|
|
|
|
27,892
|
|
Deferred tax liability, net
|
|
|
51,469
|
|
|
|
71,855
|
|
TOTAL LIABILITIES
|
|
|
1,891,050
|
|
|
|
1,798,933
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
|
|
1,233,093
|
|
|
|
1,269,654
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REDEEMABLE PREFERRED STOCK
|
|
|
|
|
|
|
|
|
(par value $0.001; shares authorized 100,000; shares outstanding 56,855 and 84,636; liquidation preference of $57,187 and $85,130 as of December 31, 2020 and 2019, respectively)
|
|
|
46,241
|
|
|
|
74,023
|
|
SERIES 2 REDEEMABLE PREFERRED STOCK
|
|
|
|
|
|
|
|
|
(par value $0.001; shares authorized 150,000; shares outstanding 129,887 and 147,164; liquidation preference of $130,645 and $148,023 as of December 31, 2020 and 2019, respectively)
|
|
|
110,592
|
|
|
|
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 December 31, 2020 and 2019, respectively)
|
|
|
33
|
|
|
|
33
|
|
Common stock in treasury, at cost, 12,337,264 shares as of December 31, 2020 and 2,500,000 shares as of December 31, 2019
|
|
|
(67,406
|
)
|
|
|
(24,550
|
)
|
Additional paid-in capital
|
|
|
274,023
|
|
|
|
233,106
|
|
Accumulated deficit
|
|
|
(251,111
|
)
|
|
|
(97,196
|
)
|
TOTAL GWG HOLDINGS STOCKHOLDERS’ EQUITY
|
|
|
112,372
|
|
|
|
313,284
|
|
Noncontrolling interests
|
|
|
328,442
|
|
|
|
293,910
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
440,814
|
|
|
|
607,194
|
|
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
3,564,957
|
|
|
$
|
3,675,781
|
|
The accompanying notes are an integral part of
these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
REVENUE
|
|
|
|
|
(As Restated)
|
|
Gain on life insurance policies, net
|
|
$
|
49,598
|
|
|
$
|
75,320
|
|
Investment income, net
|
|
|
44,106
|
|
|
|
—
|
|
Interest income
|
|
|
1,594
|
|
|
|
15,646
|
|
Other income
|
|
|
29,073
|
|
|
|
1,310
|
|
TOTAL REVENUE
|
|
|
124,371
|
|
|
|
92,276
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
154,616
|
|
|
|
114,844
|
|
Employee compensation and benefits
|
|
|
146,363
|
|
|
|
28,309
|
|
Legal and professional fees
|
|
|
30,075
|
|
|
|
12,824
|
|
Other expenses
|
|
|
18,227
|
|
|
|
15,896
|
|
TOTAL EXPENSES
|
|
|
349,281
|
|
|
|
171,873
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(224,910
|
)
|
|
|
(79,597
|
)
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(16,390
|
)
|
|
|
71,865
|
|
LOSS BEFORE LOSS FROM EQUITY METHOD INVESTMENTS
|
|
|
(208,520
|
)
|
|
|
(151,462
|
)
|
Loss from equity method investments
|
|
|
(7,319
|
)
|
|
|
(4,077
|
)
|
Gain on consolidation of equity method investment (see Note 4)
|
|
|
—
|
|
|
|
242,953
|
|
NET INCOME (LOSS)
|
|
|
(215,839
|
)
|
|
|
87,414
|
|
Net loss attributable to noncontrolling interests
|
|
|
61,924
|
|
|
|
—
|
|
Less: Preferred stock dividends
|
|
|
14,630
|
|
|
|
16,943
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(168,545
|
)
|
|
$
|
70,471
|
|
NET INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(6.01
|
)
|
|
$
|
2.13
|
|
Diluted
|
|
$
|
(6.01
|
)
|
|
$
|
2.06
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,063,268
|
|
|
|
33,016,007
|
|
Diluted
|
|
|
28,063,268
|
|
|
|
35,219,442
|
|
The accompanying notes are an integral part of
these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
(As Restated)
|
|
Net income (loss)
|
|
$
|
(215,839
|
)
|
|
$
|
87,414
|
|
Adjustments to reconcile net income (loss) to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of investment in life insurance policies
|
|
|
(34,114
|
)
|
|
|
(49,015
|
)
|
Investment income, net
|
|
|
(44,106
|
)
|
|
|
—
|
|
Amortization of deferred financing and issuance costs
|
|
|
19,760
|
|
|
|
13,804
|
|
Amortization and depreciation of long-lived assets
|
|
|
1,171
|
|
|
|
—
|
|
Accretion of discount on financing receivables from affiliate
|
|
|
—
|
|
|
|
(1,720
|
)
|
Provision for uncollectible policy benefit receivable
|
|
|
—
|
|
|
|
153
|
|
Return on investments in alternative assets
|
|
|
3,683
|
|
|
|
—
|
|
Non-cash interest income, including interest paid-in-kind and accretion of purchase discount
|
|
|
(283
|
)
|
|
|
—
|
|
Non-cash interest expense
|
|
|
2,343
|
|
|
|
—
|
|
Loss from equity method investments
|
|
|
7,319
|
|
|
|
4,077
|
|
Loss on fair value of put options
|
|
|
7,757
|
|
|
|
—
|
|
Equity-based compensation
|
|
|
110,840
|
|
|
|
1,732
|
|
Forfeiture of vested equity-based compensation
|
|
|
(36,267
|
)
|
|
|
—
|
|
Gain on consolidation of equity method investment
|
|
|
—
|
|
|
|
(242,953
|
)
|
Deferred income taxes
|
|
|
(16,927
|
)
|
|
|
71,855
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Life insurance policy benefits receivable
|
|
|
8,697
|
|
|
|
(6,683
|
)
|
Accrued interest on financing receivables
|
|
|
—
|
|
|
|
(6,913
|
)
|
Other assets
|
|
|
(599
|
)
|
|
|
(5,056
|
)
|
Accounts payable and accrued expenses
|
|
|
3,123
|
|
|
|
(8,297
|
)
|
Interest and dividends payable
|
|
|
1,042
|
|
|
|
(1,228
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(182,400
|
)
|
|
|
(142,830
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
|
—
|
|
|
|
(32,367
|
)
|
Return of investment for matured life insurance policies
|
|
|
38,186
|
|
|
|
33,265
|
|
Purchases of fixed assets
|
|
|
(3,281
|
)
|
|
|
—
|
|
Contributions to equity method investments
|
|
|
(14,140
|
)
|
|
|
(12,388
|
)
|
Business combination consideration, net of cash and restricted cash acquired
|
|
|
—
|
|
|
|
(45,020
|
)
|
Return of investments in alternative assets
|
|
|
20,394
|
|
|
|
—
|
|
Investments in alternative assets
|
|
|
(8,378
|
)
|
|
|
—
|
|
Financing receivables from affiliate issued
|
|
|
—
|
|
|
|
(65,000
|
)
|
Investment in put options
|
|
|
(14,775
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
18,006
|
|
|
|
(121,510
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings on senior debt
|
|
|
28,530
|
|
|
|
50,133
|
|
Repayments of senior debt and debt due to related parties
|
|
|
(85,505
|
)
|
|
|
(23,756
|
)
|
Payments for deferred financing and issuance costs for senior debt and debt due to related parties
|
|
|
(3,207
|
)
|
|
|
(2,042
|
)
|
Proceeds from issuance of L Bonds
|
|
|
440,195
|
|
|
|
403,397
|
|
Payments for L Bonds issuance costs
|
|
|
(27,904
|
)
|
|
|
(25,284
|
)
|
Payments for redemption of L Bonds
|
|
|
(110,691
|
)
|
|
|
(116,809
|
)
|
Payment of employee taxes on stock awards
|
|
|
(1,554
|
)
|
|
|
—
|
|
Purchase of noncontrolling interest
|
|
|
(1,195
|
)
|
|
|
—
|
|
Issuance of common stock
|
|
|
8
|
|
|
|
59
|
|
Payments for redemption of redeemable preferred stock
|
|
|
(45,058
|
)
|
|
|
(14,061
|
)
|
Payments for equity issuance costs
|
|
|
(633
|
)
|
|
|
—
|
|
Preferred stock dividends
|
|
|
(14,630
|
)
|
|
|
(16,943
|
)
|
Tax distribution to noncontrolling interest
|
|
|
(5,592
|
)
|
|
|
—
|
|
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
|
|
|
172,764
|
|
|
|
254,694
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
8,370
|
|
|
|
(9,646
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
115,790
|
|
|
|
125,436
|
|
END OF PERIOD
|
|
$
|
124,160
|
|
|
$
|
115,790
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS —
CONTINUED
(in thousands)
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
Interest paid
|
|
$
|
131,516
|
|
|
$
|
102,202
|
|
Premiums paid, including prepaid
|
|
$
|
70,243
|
|
|
$
|
68,467
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
L Bonds: Conversion of accrued interest and commissions payable to principal
|
|
$
|
1,911
|
|
|
$
|
1,760
|
|
Distribution payable to noncontrolling interest (see Note 12)
|
|
|
738
|
|
|
|
—
|
|
Noncash issuance of noncontrolling interest (see Note 12)
|
|
|
5,978
|
|
|
|
—
|
|
Liquidity Bonds, net of financing costs (see Note 10)
|
|
|
392
|
|
|
|
—
|
|
Collateral Swap (See Note 1):
|
|
|
|
|
|
|
|
|
Exchange of alternative assets for GWG Holdings’ Seller Trust L Bonds
|
|
|
94,788
|
|
|
|
—
|
|
Exchange of alternative assets for GWG Holdings’ common stock
|
|
|
42,856
|
|
|
|
—
|
|
Deemed capital contribution from related party
|
|
|
46,770
|
|
|
|
—
|
|
Adjustment to noncontrolling interest
|
|
|
3,444
|
|
|
|
—
|
|
The accompanying notes are an integral part of
these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (As Restated)
(in thousands, except per share data)
|
|
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, 2018
|
|
|
245,883
|
|
|
$
|
215,973
|
|
|
|
33,018,161
|
|
|
$
|
33
|
|
|
$
|
249,662
|
|
|
$
|
(184,610
|
)
|
|
$
|
—
|
|
|
$
|
281,058
|
|
|
$
|
—
|
|
|
$
|
281,058
|
|
|
$
|
—
|
|
Net income (As Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87,414
|
|
|
|
—
|
|
|
|
87,414
|
|
|
|
—
|
|
|
|
87,414
|
|
|
|
—
|
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
58,382
|
|
|
|
—
|
|
|
|
439
|
|
|
|
—
|
|
|
|
—
|
|
|
|
439
|
|
|
|
—
|
|
|
|
439
|
|
|
|
—
|
|
Repurchase of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(42,750
|
)
|
|
|
—
|
|
|
|
(362
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(362
|
)
|
|
|
—
|
|
|
|
(362
|
)
|
|
|
—
|
|
Common stock in treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,500,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24,550
|
)
|
|
|
(24,550
|
)
|
|
|
—
|
|
|
|
(24,550
|
)
|
|
|
—
|
|
Redemption of redeemable preferred stock
|
|
|
(14,083
|
)
|
|
|
(14,082
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,083
|
)
|
|
|
—
|
|
|
|
(14,083
|
)
|
|
|
—
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,943
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(16,943
|
)
|
|
|
—
|
|
|
|
(16,943
|
)
|
|
|
—
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
|
|
311
|
|
|
|
—
|
|
Recognition of noncontrolling interests (As Restated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
293,910
|
|
|
|
293,910
|
|
|
|
1,269,654
|
|
Balance, December 31, 2019 (As Restated)
|
|
|
231,800
|
|
|
$
|
201,891
|
|
|
|
30,533,793
|
|
|
$
|
33
|
|
|
$
|
233,106
|
|
|
$
|
(97,196
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
313,284
|
|
|
$
|
293,910
|
|
|
$
|
607,194
|
|
|
$
|
1,269,654
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(153,915
|
)
|
|
|
—
|
|
|
|
(153,915
|
)
|
|
|
(30,955
|
)
|
|
|
(184,870
|
)
|
|
|
(30,969
|
)
|
Issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
60,871
|
|
|
|
—
|
|
|
|
533
|
|
|
|
—
|
|
|
|
—
|
|
|
|
533
|
|
|
|
—
|
|
|
|
533
|
|
|
|
—
|
|
Common stock in treasury (Note 1)
|
|
|
—
|
|
|
|
—
|
|
|
|
(9,837,264
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(42,856
|
)
|
|
|
(42,856
|
)
|
|
|
—
|
|
|
|
(42,856
|
)
|
|
|
—
|
|
Redemption of redeemable preferred stock
|
|
|
(45,058
|
)
|
|
|
(45,058
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(45,058
|
)
|
|
|
—
|
|
|
|
(45,058
|
)
|
|
|
—
|
|
Preferred stock dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,630
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,630
|
)
|
|
|
—
|
|
|
|
(14,630
|
)
|
|
|
—
|
|
Deemed capital contribution from related party (Note 1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,770
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,770
|
|
|
|
—
|
|
|
|
46,770
|
|
|
|
—
|
|
Tax distribution to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,592
|
)
|
Equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180
|
|
|
|
110,738
|
|
|
|
110,918
|
|
|
|
—
|
|
Forfeiture of vested equity-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(36,267
|
)
|
|
|
(36,267
|
)
|
|
|
—
|
|
Tax withholding for employee restricted equity units
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,521
|
)
|
|
|
(1,521
|
)
|
|
|
—
|
|
Distributions payable to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(738
|
)
|
|
|
(738
|
)
|
|
|
—
|
|
Noncash issuance of noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,978
|
|
|
|
5,978
|
|
|
|
—
|
|
Adjustment to noncontrolling interest for change in ownership of Common Units (Note 1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,064
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,064
|
|
|
|
(8,064
|
)
|
|
|
—
|
|
|
|
—
|
|
Reduction to noncontrolling interest for Beneficient treasury (Note 1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,444
|
)
|
|
|
(3,444
|
)
|
|
|
—
|
|
Purchase of noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,195
|
)
|
|
|
(1,195
|
)
|
|
|
—
|
|
Balance, December 31, 2020
|
|
|
186,742
|
|
|
$
|
156,833
|
|
|
|
20,757,400
|
|
|
$
|
33
|
|
|
$
|
274,023
|
|
|
$
|
(251,111
|
)
|
|
$
|
(67,406
|
)
|
|
$
|
112,372
|
|
|
$
|
328,442
|
|
|
$
|
440,814
|
|
|
$
|
1,233,093
|
|
The accompanying notes are an integral part of
these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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”), GWG DLP Funding V Holdings, LLC
(“DLP V Holdings”), and GWG DLP Funding Holdings VI, LLC (“DLP VI Holdings”). DLP V Holdings is the sole member
of GWG DLP Funding V, LLC (“DLP V”). DLP VI Holdings is the sole member of GWG DLP Funding VI, LLC (“DLP VI”).
In addition, GWG Holdings has exposure to indirect
interests in loans collateralized by cash flows from alternative assets. Such loans are made and held by certain of the operating subsidiaries
of The Beneficient Company Group, L.P. (“Ben LP,” including all of the subsidiaries it may have from time to time —
“Beneficient”). These loans are made to certain of the ExAlt Trusts (defined below), which are consolidated subsidiaries of
Ben LP and thus, such loans are eliminated in consolidation for financial reporting purposes. The ExAlt Trusts are comprised of the Custody
Trusts, Collective Trusts, LiquidTrusts and Funding Trusts, (collectively, the “ExAlt Trusts”). Ben LP’s general partner
is 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. As also further described in Note 23, on August 13, 2021, GWG Holdings and Ben LP, and Beneficient
Company Holdings, L.P. (“BCH”) entered into a non-binding term sheet (the “Term Sheet”) that outlines a series
of transactions that, if completed, will result in, among other things, (i) GWG Holdings receiving certain proposed enhancements to its
investments in Beneficient; (ii) GWG Holdings no longer having the right to appoint directors of the Board of Directors of Beneficient
Management; and (iii) Beneficient no longer being a consolidated subsidiary of GWG Holdings. The Term Sheet is part of ongoing efforts
by management and the Board of Directors of GWG Holdings to maximize the value of GWG Holdings’ and GWG Life’s investment
in Beneficient.
Ben LP is the general partner of 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 partnership interests issued by BCH. As of December 31, 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, and Preferred Series C Unit Accounts. On July 15, 2020, BCH amended its
limited partnership agreement by executing that certain 5th Amended and Restated Limited Partnership Agreement (“LPA”) of
BCH to allow for the issuance of Preferred Series A Subclass 0 Unit Accounts (“Preferred A.0”), which are expected to be issued
once certain conditions are met (as discussed in more detail below).
GWG Holdings also has a financial interest in
FOXO Technologies Inc. (“FOXO”, formerly FOXO BioScience 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. Although we have a financial interest in FOXO, we do not have a controlling financial interest because another
party is the majority shareholder of the voting class of securities. Therefore, we account for GWG Holdings’ ownership interest
in FOXO as an equity method investment.
All of the aforementioned entities are legally
organized in the state of Delaware, other than GWG Life Trust, which was formed under the laws of the state of Utah, and certain of the
ExAlt Trusts, which were formed under the laws of the state of Texas. 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 GWG Holdings together, in each case, with its subsidiaries. Our headquarters are located at 325
N. St. Paul Street, Suite 2650, Dallas, Texas 75201.
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 consummated a series of transactions
with Beneficient as part of 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. GWG Holdings completed the transactions with Beneficient
to provide the Company with a significant increase in assets and common stockholders’ equity as well as the opportunity for a diversified
source of future earnings from our exposure to the alternative asset industry. We believe that GWG Holdings’ and GWG Life’s
investments in Beneficient and the other strategies we are pursuing, including continuing to pursue opportunities in the life insurance
industry, will transform GWG Holdings from a niche provider of liquidity to owners of life insurance policies to a diversified provider
of financial products and services with exposure to a broad range of alternative assets.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We believe that Beneficient’s operations
will generally produce higher risk-adjusted returns than those we can achieve from life insurance policies acquired in the secondary market;
however, returns on equity in life settlements, especially with the current availability of financings on favorable terms, appear to be
an attractive option to diversify our exposure to alternative assets, and we have begun exploring the feasibility of acquiring such policies.
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, recapitalization, partnership, reinsurance guarantees, life insurance operations or other transactions involving
of our life insurance portfolio, as well as pursuing other alternatives to increase our exposure to alternative assets. These operations
are in addition to allocating capital to provide liquidity to holders of a broader range of alternative assets, which we currently provide
through GWG Holdings’ and GWG Life’s investments in Beneficient.
Beneficient is a financial services company based
in Dallas, Texas that markets an array of liquidity and trust administration products to alternative asset investors primarily comprised
of mid-to-high-net-worth individuals having a net worth between $5 million and $30 million (“MHNW”) and small-to-midsize
institutional investors and family offices with less than $1 billion in investable assets (“STMIs”). One of Beneficient’s
founders, Brad K. Heppner (“Ben Founder”) serves as Chairman and Chief Executive Officer of Beneficient and previously served
from April 26, 2019 to June 14, 2021 as Chairman of GWG Holdings. Ben LP plans to offer its products and services through its five operating
subsidiaries, which include (i) Ben Liquidity, (ii) Ben Custody Admin, (iii) Ben Insurance, (iv) Ben Markets and (v) Beneficient USA (each
operating subsidiary is further defined below). Ben Liquidity plans to operate a trust company that is a Kansas Technology Enabled Fiduciary
Financial Institutions (“TEFFI”) authorized to serve as an alternative asset custodian, trustee and lender with statutory
powers granted for each of these activities and permitting Ben Liquidity to provide fiduciary financing for certain of its customer liquidity
transactions. Ben Custody Admin plans to operate a Texas trust company that is being organized to provide its customers with certain administrative,
custodial and trustee products and specialized services focused on alternative asset investors. Ben Insurance has been chartered as a
Bermuda based insurance company that plans to offer certain customized insurance products and services covering risks relating to owning,
managing and transferring alternative assets. Ben Markets is in the regulatory process for acquiring a captive registered broker-dealer
that would conduct certain of its activities attendant to offering a suite of products and services from the Beneficient family of companies.
Certain of Ben LP’s operating subsidiary products and services involve or are offered to certain of the ExAlt Trusts (defined below),
which are consolidated subsidiaries of Ben LP for financial reporting purposes (such trusts are and may individually be referred to as
Custody Trusts, Collective Trusts, LiquidTrusts, and Funding Trusts). Beneficient USA employs a substantial majority of the executives
and staff for Beneficient’s operating subsidiaries to which Beneficient USA provides administrative and technical services.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beneficient’s primary operations, which
commenced on September 1, 2017, consist of offering its liquidity and trust administration services to its customers, primarily through
certain of Ben LP’s operating subsidiaries, Ben Liquidity, L.L.C and its subsidiaries (collectively, “Ben Liquidity”)
and Ben Custody Admin, L.L.C. and its subsidiaries (collectively, “Ben Custody Admin”), respectively. Ben Liquidity offers
simple, rapid and cost-effective liquidity products to its customers through the use of customized trust vehicles, (such trusts, the
ExAlt Trusts), that facilitate the exchange of a customer’s alternative assets for consideration using a unique financing structure
(such structure and process, the “ExAlt PlanTM”). The ExAlt Plan trademark was developed by Beneficient as a brand
of liquidity and trust administration services designed for alternative asset investors, specifically MHNW and STMIs to “Ex”it
“Alt”ernatives. A subsidiary of Ben Liquidity makes loans (each, an “ExAlt Loan”) to certain of the ExAlt Trusts,
which employ the loan proceeds to acquire agreed upon consideration, which certain of the ExAlt Trusts deliver to customers in exchange
for their alternative assets. Ben Liquidity generates interest and fee income earned in connection with the ExAlt Loans, which are collateralized
by a portion of the cash flows from the exchanged alternative assets (the “Collateral”). Ben Custody Admin currently provides
trust administration services to the trustees of certain of the ExAlt Trusts that own the exchanged alternative asset following liquidity
transactions for fees payable quarterly. The Collateral supports the repayment of the ExAlt Loans plus any related interest and fees
and trust administration service fees. Under the applicable trust and other agreements, certain charities are the ultimate beneficiaries
of the ExAlt Trusts (the “Non-Controlling Interest Holders”). As ultimate beneficiaries of prior transactions, for every
$0.95 paid to the lender (e.g., subsidiaries of Ben LP) on the ExAlt Loans, $0.05 is also paid to certain of the Non-Controlling Interest
Holders. For periods following 2020, future Non-Controlling Interest Holders are structured to be paid $0.025 for every $0.975 paid to
the fiduciary financial lender (e.g., subsidiaries of Ben LP) of the ExAlt Loans. Since Ben LP consolidates the ExAlt Trusts, Ben LP’s
operating subsidiary’s ExAlt Loans and related interest and fee income are eliminated in the presentation of our consolidated financial
statements but are recognized for purposes of the allocation of income (loss) to Beneficient’s equity holders.
Prior to January 1, 2021, Ben LP operated primarily
through certain of its subsidiaries, that included (i) Beneficient Capital Company, L.L.C. (“BCC”), which offered liquidity
products; (ii) Beneficient Administration and Clearing Company, L.L.C. (“BACC”), which provided services for private fund
and trust administration; and (iii) other entities, including the ExAlt Trusts.
On December 31, 2020, a series of restructuring
transactions occurred to better position certain of Ben LP’s subsidiaries for ongoing operations and future products and services,
to capitalize PEN Indemnity Insurance Company, Ltd. (“Pen”) and to meet certain requirements of the Texas Department of Banking.
These transactions had no impact to the consolidated financial statements. In connection with these transactions, BCC transferred all
of its assets, which included, among other assets, its ExAlt Loans receivable, and liabilities, which included, among other liabilities,
loans payable with respect to secured loans with HCLP Nominees, L.L.C., held as of December 31, 2020, to BCH. In order to capitalize Pen
and enable it to offer insurance products and services to cover risks attendant to owning and managing alternative assets following approval
from the Bermuda Monetary Authority (the “BMA”), BCH contributed to Pen certain of such ExAlt Loans receivable with an aggregate
carrying value equal to $129.2 million. Likewise, BACC transferred all of its assets, which included its rights to perform fund trust
administration services under certain trust and other agreements, and liabilities to BCH, which will perform such services until a Texas
trust company charter is issued or the Kansas TEFFI trust company becomes operational.
Subsequent to December 31, 2020, Ben LP operates
primarily through its business line operating subsidiaries, which provide, or will provide, Beneficient’s existing and planned products
and services. These subsidiaries include (i) Ben Liquidity, which offers liquidity products; (ii) Ben Custody Admin, which provides services
for fund and trust administration; (iii) Ben Insurance L.L.C., including its subsidiaries (collectively, “Ben Insurance”),
which intends to offer insurance products and services covering risks attendant to owning, managing and transferring alternative assets;
(iv) Ben Markets, L.L.C., including its subsidiaries (collectively, “Ben Markets”), which intends to provide broker-dealer
services in connection with offering Beneficient’s liquidity products and services; and (vi) other entities, including the ExAlt
Trusts, which operate for the benefit of the Non-Controlling Interest Holders. Beneficient’s financial products and services are
presently offered through Ben Liquidity and Ben Custody Admin, and Beneficient plans to expand its capabilities under Ben Custody Admin
and provide products and services through Ben Insurance and Ben Markets in the future.
Beneficient’s existing and planned products
and services are designed to provide liquidity and trust solutions, support the tax and estate planning objectives of its MHNW customers,
facilitate asset diversification or provide administrative management and reporting solutions tailored to the goals of investors of alternative
investments.
Beneficient’s Regulatory Developments
In April 2021, the Kansas Legislature adopted,
and the governor of Kansas signed into law, a bill that would allow for the chartering and creation of Kansas trust companies, known as
TEFFIs, that provide fiduciary financing (e.g., lending to ExAlt Trusts), custodian and trustee services in all capacities pursuant to
statutory fiduciary powers, to investors and other participants in the alternative assets market, as well as the establishment of alternative
asset trusts. The legislation became effective on July 1, 2021, and designates an operating subsidiary of Ben LP, Beneficient Fiduciary
Financial (“BFF”), as the pilot trust company under the TEFFI legislation. A conditional trust charter was issued by the Kansas
Bank Commissioner to Beneficient on July 1, 2021 as discussed further in Note 23. Under the pilot program, Beneficient will not be authorized
to exercise its fiduciary powers as a TEFFI until the earlier of the date the Kansas Bank Commissioner promulgates applicable rules and
regulations or December 31, 2021. The bill also permits the Kansas Bank Commissioner to request a six-month extension of the pilot program
period, which could delay Beneficient’s permission to exercise its fiduciary powers under the charter until July 1, 2022. In order
to devote their time to serving as directors of the Beneficient TEFFI trust company, the directors of GWG Holdings who serve on the new
TEFFI trust company Board of Directors resigned their membership, effective June 14, 2021, on GWG Holdings’ Board of Directors,
which the Company believes is the highest and best use of their available time and skills and will support the development of the Beneficient
TEFFI trust company and the successful execution of Beneficient’s business plan.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also, Beneficient’s charter application
for custodian and trustee services remains in process at the Texas Department of Banking. If the charter is issued, the trust company
would serve as custodian and trustee to one or more ExAlt Trusts. Similar or the same services may also be provided by Beneficient’s
Kansas trust company TEFFI. Also, a subsidiary of Ben Insurance, Pen has applied for regulatory approval from the BMA to write fiduciary
liability policies for managers and investors in alternative asset funds to cover losses from contractual indemnification and exculpation
provisions arising under the governing documents of such funds. Further, on March 26, 2021, a Ben LP subsidiary, Beneficient Capital Markets,
L.L.C (“Beneficient Capital Markets”) filed a Form BD with the Securities and Exchange Commission (“SEC”) to commence
its application for broker-dealer registration. Upon registration and admittance as a Financial Industry Regulatory Authority (“FINRA”)
member, Beneficient Capital Markets will conduct activities attendant to offering Beneficient’s products and services.
When the Kansas TEFFI trust company is authorized
to exercise its fiduciary powers, Beneficient expects to be able to expand its operations and close an increased number of liquidity transactions.
Additionally, once BMA regulatory approval is obtained and Beneficient Capital Markets is admitted as a FINRA member, Beneficient anticipates
being able to offer its full suite of products and services.
The Exchange Transaction
On December 28, 2018 (the “Final Closing
Date”), we completed a series of strategic exchanges of assets among GWG Holdings, GWG Life, Ben LP and certain trusts, each identified
as an Exchange Trust formed during 2017 and 2018 (such trusts collectively, the “Seller Trusts”, which are a related party
but are not among Ben LP’s consolidated trusts), pursuant to a Master Exchange Agreement among the parties (the “Exchange
Transaction”). As a result of the Exchange Transaction, a number of securities were exchanged between the parties, including the
following securities as of the Final Closing Date: the Seller Trusts acquired GWG Holdings’ L Bonds due 2023 (the “Seller
Trust L Bonds”) in the aggregate principal amount of $366.9 million; the Seller Trusts acquired 27,013,516 shares of GWG Holdings’
common stock; GWG Holdings acquired 40,505,279 common units of Ben LP (the “Common Units”); and GWG Holdings acquired the
right to obtain additional Common Units or other property that would be received by a holder of Preferred Series A Subclass 1 Unit Accounts
of BCH pursuant to an option issued by Ben LP (the “Option Agreement”). In addition, in connection with the Exchange Transaction,
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 $192.5 million as of the Final Closing Date (the “Commercial Loan”).
Description of the Assets Exchanged
Seller Trust L Bonds
On August 10, 2018, in connection with the initial
transfer of the Exchange Transaction, GWG Holdings, GWG Life and Bank of Utah, as trustee, entered into a Supplemental Indenture (the
“L Bond Supplemental Indenture”) to the Amended and Restated Indenture dated as of October 23, 2017 (the “Amended and
Restated Indenture”). GWG Holdings entered into the L Bond 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.
As the second anniversary of the Final Closing
Date has passed, the holders of the Seller Trust L Bonds now 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, and senior in right of payment to all subordinated indebtedness of GWG Holdings. See Note 10
for additional discussion of the outstanding debt of GWG Holdings. Payments under the Seller Trust L Bonds are guaranteed by GWG Life
(see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations).
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As result of the Collateral Swap (discussed and
defined below) on September 30, 2020, $94.8 million of Seller Trusts L Bonds are eliminated upon consolidation.
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 L Bond 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.
Option Agreement
In connection with the Exchange Transaction, 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 or other property that would be received by the holder of Preferred Series A Subclass 1 Unit Accounts of BCH pursuant to an option
issued by Ben LP, if such holder were converting on that date. There was no exercise price and GWG Holdings could exercise the option
at any time until December 27, 2028, at which time the option automatically settled.
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 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 had no impact on the Company’s consolidated financial
statements as it is eliminated in consolidation.
Common Units of Ben LP
In connection with the Exchange Transaction, 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
initial investors (the “Ben Initial Investors”), including Brad K. Heppner (GWG Holdings’ former Chairman, who served
in such capacity from April 26, 2019 to June 14, 2021, and Beneficient’s current Chief Executive Officer and Chairman), and an entity
related to Thomas O. Hicks (one of Beneficient’s current directors and a former 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 CONSOLIDATED FINANCIAL STATEMENTS
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.
Promissory Note - ExAlt Trusts
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 certain 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 “Borrowers”). Pursuant to the terms of the Promissory Note, GWG Life funded a
term loan to the Borrowers in an aggregate principal amount of $65.0 million (the “Loan”). The Loan was made pursuant to GWG’s
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. As of December
31, 2019, the Borrowers became consolidated subsidiaries of GWG Holdings as a result of the Investment Agreement (described below). Accordingly,
the Promissory Note and related accrued interest, are eliminated upon consolidation as of that date.
On September 30, 2020, GWG Holdings, GWG Life,
BCH, Ben LP, BCC, and the 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 Borrowers. 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 Ben LP. As part of the agreement,
if Beneficient has not received a trust company charter as of the one-year anniversary of the Promissory Note conversion, or if no trust
company 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 carrying value of the Promissory Note on September 30, 2020, immediately prior to the transaction, net of a fair value adjustment
and with accrued and unpaid interest thereon, was $65.1 million.
Other than the $8.1 million decrease to noncontrolling
interest, which represents the required rebalancing of equity driven from the change in GWG Holdings’ ownership percentage, any
impacts of the Promissory Note conversion are eliminated upon consolidation.
The Investment and Exchange Agreements
On December 31, 2019, GWG Holdings obtained control
over Ben LP pursuant to a Preferred Series A Unit Account and Common Unit Investment Agreement, by and among GWG Holdings, Ben LP, BCH,
and Beneficient Management (the “Investment Agreement”), which resulted in the consolidation of GWG Holdings and Ben LP for
accounting and financial reporting purposes.
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 of GWG Holdings on December 31, 2019; or (2) was nominated for election or
elected to the board of directors of GWG Holdings with the approval of a majority of the Continuing Directors who were members of the
board of directors of GWG Holdings at the time of such nomination or election.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 an entity related to the Ben Initial Investors
and an entity related to one of Beneficient’s directors who is also a former director of GWG Holdings (the “Related Account
Holders”). The parties to the Investment Agreement agreed that 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 would be converted 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.
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 then constituted
independent 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 date of the UPA 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 Ben LP 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 of GWG Holdings on December 31, 2019;
or (2) was nominated for election or elected to the board of directors of GWG Holdings with the approval of a majority of the Continuing
Directors who were members of the board of directors of GWG Holdings 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 Ben LP, 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 GWG Holdings (exercised by a special committee of the Board of Directors or, if such committee is no longer in place, the appropriate
governing body of GWG Holdings); provided that, if GWG Holdings exchanges less than all of the Preferred Series C Unit Accounts purchased
under the UPA, then, immediately after giving effect to such exchange, GWG Holdings shall be required to continue to hold Preferred Series
C Unit Accounts with a capital account that is at least $10.0 million. The exchange price for such Beneficient Units shall be determined
by third-party valuation agents selected by GWG Holdings and Beneficient.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contribution and Exchange Agreement
On September 30, 2020, certain of the ExAlt Trusts
(collectively, the “Participating ExAlt Trusts”), at the sole direction of John A. Stahl, independent trustee of each such
trust, with the intention of protecting the value of certain assets of the Participating ExAlt Trusts underlying part of the Collateral
portfolio, the Participating ExAlt Trusts entered into that certain Contribution and Exchange Agreement with certain of the Seller Trusts,
(collectively, the Participating Exchange Trusts), each of which entered into such agreement at the direction of its applicable trust
advisor and by and through its applicable corporate trustee (the “Contribution and Exchange Agreement). Under the Contribution and
Exchange Agreement, the Participating Exchange Trusts agreed to exchange 9,837,264 shares of GWG Holdings’ common stock valued at
$84.6 million, 543,874 shares of Common Units valued at $6.8 million, and GWG Holdings’ L Bonds due 2023 in the aggregate
principal amount of $94.8 million to the Participating ExAlt Trusts for $94.3 million in net asset value of the alternative
asset investments held by the Participating ExAlt Trusts. This transaction (the “Collateral Swap”) resulted in GWG Holdings,
after the effects of eliminations upon consolidation, recognizing an additional $42.9 million of treasury stock, $3.4 million
of additional noncontrolling interest, and $46.8 million of a deemed capital contribution from a related party.
The Exchange Transaction, the Purchase and Contribution
Transaction, the Promissory Note, the Investment and Exchange Agreements, the UPA, and the Collateral Swap, are referred to collectively
as the “Beneficient Transactions.”
Going Concern
To meet the Company’s future capital needs,
the Company may need to raise additional debt or equity financing. While the Company has historically been able to raise additional capital
through issuance of debt and/or equity, the Company cannot guarantee that it will be able to secure additional financing or will otherwise
be able to meet is ongoing obligations. These factors, in combination with the potential NASDAQ delisting and our current inability to
sell L Bonds as discussed below under the heading “Liquidity and Capital Resources”, our significant recurring losses from
operations, negative cash flows from operations, delays in executing our business plans, and any potential negative outcome from the ongoing
SEC investigation discussed elsewhere in this Form 10-K and in Note 18 to these consolidated financial statements, raise substantial doubt
about the Company’s ability to continue as a going concern within one year after these financial statements are issued.
The accompanying consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Liquidity and Capital Resources
As of December 31, 2020, we had cash, cash
equivalents, and restricted cash of $124.2 million. We generated net losses from operations for the years ended December 31, 2020
and 2019 totaling $208.5 million and $151.5 million. As of October 15, 2021, we had combined cash, cash equivalents, and restricted cash
of $54.3 million. Besides funding operating expenditures, we are obligated to pay other items such as interest payments and debt maturities,
and preferred stock dividends and redemptions.
We have historically financed our businesses primarily
through a combination of L Bond sales, preferred stock sales, the LNV Credit Facility (as discussed further in Note 10) , and the NF Credit
Facility (as discussed further in Note 23). We have also financed our business through proceeds from life insurance policy benefit receipts,
cash distributions from the ExAlt Trusts’ alternative asset portfolio, dividends and interest on investments, and Beneficient’s
debt due to related parties. 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 proceeds to allocate
capital to Beneficient; however, if Ben LP becomes an independent company pursuant to the terms of the Term Sheet discussed above and
in Note 23, the Company expects that Ben LP would reduce its reliance on GWG Holdings to fund its operations and would raise future capital
from other sources. Ben LP’s capital raising efforts and participation in liquidity transactions may include the issuance of equity
or debt of Ben LP or one of its subsidiaries, and the newly issued securities may be dilutive to GWG Holdings’ and GWG Life’s
investments in Ben LP and BCH and may include preferential terms relative to GWG Holdings’ and GWG Life’s investments in Ben
LP and BCH, as applicable.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We currently fund our business primarily with
debt that generally has a shorter duration than the duration of our long-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. Substantially all of our life insurance policies are pledged
as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance
with the terms of those credit facilities. We heavily rely on GWG Holdings’ L Bond offering to fund our business operations, including,
among other things, interest and principal payments on the existing L Bonds and capital allocations to Beneficient. We temporarily suspended
the offering of GWG Holdings’ L Bonds, commencing April 16, 2021, as a result of our delay in filing certain periodic reports with
the SEC, including this 2020 Form 10-K, and were required to seek alternative sources of capital.
As a result of the suspension of GWG Holdings’
L Bond offering, on June 28, 2021, we pledged additional life insurance policies as collateral and received an additional advance of $51.2 million
under the Third Amended Facility. Subsequently, on August 11 2021, we entered into the NF Credit Agreement and received a one-time advance
of $107.6 million. Approximately $56.7 million of such advanced amount was used to pay off the remaining amount due, including
interest and penalties, under the Third Amended Facility and the additional pledged life insurance policies used as collateral for the
Third Amended Facility were released and pledged under the NF Credit Facility. Further, on September 7, 2021, DLP IV entered into the
Fourth Amended Facility, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional
advance of $30.3 million from LNV Corporation, with no additional pledged collateral. All of the aforementioned transactions that
occurred subsequent to December 31, 2020, are described in more detail in Note 23.
Primarily due to the current suspension of GWG
Holdings’ L Bond offering, the Company may require additional capital to continue its operations over the next twelve months if
our ability to sell L Bonds dissipates, or if we are forced to suspend the L Bond offering. However, the Company may not be able to obtain
additional borrowings 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, ii) exercise our right to decline requests for early L Bond redemptions or redemptions
of preferred stock, or iii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may
be diluted. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit
Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities.
We anticipate recommencing the offering of GWG
Holdings’ L Bonds once we become current with our filing obligations and satisfy applicable NASDAQ listing requirements. Once we
become current with our filing obligations with respect to the L Bonds, we may be limited in the origination channels in which we sell
our L Bonds in the event that we are unable to meet the applicable NASDAQ listing requirements in a timely manner, which could result
in the L Bonds no longer being “covered securities” for federal securities law purposes which would subject the offer and
sale of L Bonds to potentially extensive state “blue sky” securities law requirements. If for any reason we are forced to
suspend GWG Holdings’ L Bond offering, are limited in our origination channels in which we sell our L Bonds, or demand for GWG Holdings’
L bonds dissipates, 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 $97.4 million borrowing base capacity,
excluding any potential capacity for premiums and servicing costs, under the LNV Credit Facility as of December 31, 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 at the sole discretion
of the lender. The LNV Credit Facility has certain financial and nonfinancial covenants, and we were in compliance with these debt covenants
as of December 31, 2020, and December 31, 2019, and continue to be so as of the filing date of this report. Subsequent to December 31,
2020, we received additional advances through amendments to the LNV Credit Facility and entered in to the NF Credit Facility (as described
in more detail above and in Note 23).
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beneficient is obligated to make debt payments
totaling $74.5 million on certain outstanding borrowings through May 30, 2022 under the terms of the Amendment No. 1 to the Second
Amended and Restated Credit Agreements as discussed further in Note 23. Primarily due to both the forthcoming debt payments under the
Credit Agreement and Second Lien Credit Agreement and the anticipated deconsolidation of Beneficient from GWG Holdings, as discussed in
Note 23, which is expected to result in reduced reliance by Beneficient on GWG Holdings to fund its operations, Beneficient will require
additional liquidity to continue its operations over the next twelve months. We expect Beneficient to satisfy these obligations and fund
its operations through anticipated operating cash flows, proceeds from distributions on the alternative assets portfolio, additional investments
into Beneficient by GWG Holdings and/or other parties and, potentially refinancing with other third-party lenders some or all of the existing
borrowings due prior to their maturity. Beneficient is currently in the process of raising additional equity, which is anticipated to
close during the fourth quarter of 2021 and/or the first quarter of 2022.
Beneficient may not be able to refinance or obtain
additional financing on terms favorable to the Company, or at all. To the extent that Beneficient raises additional capital through the
future sale of equity or debt, the ownership interest of its existing equity holders may be diluted. The terms of these future equity
or debt securities may include liquidation or other preferences that adversely affect the rights of its existing equity unitholders or
involve negative covenants that restrict Beneficient’s ability to take specific actions, such as incurring additional debt or making
additional investments in growing its operations. If Beneficient defaults on these borrowings, then it will be required to either i) sell
assets to repay these loans or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders
may be diluted. Moreover, if Beneficient were to sell assets to avoid a default of these borrowings, then the price at which Beneficient
sold such assets may not reflect the carrying value of those assets as reflected in our consolidated financial statements, especially
in the event of a bulk or distressed sale.
On November 11, 2019, GWG Holdings contributed
the common stock and membership interests of its then wholly-owned FOXO Labs and FOXO Life subsidiaries to FOXO in exchange for a membership
interest in the entity. On November 13, 2020, FOXO BioScience LLC converted to a corporation and is now known as FOXO Technologies Inc.
With the corporate conversion, GWG Holdings’ previous membership interest in the LLC converted to preferred equity. GWG Holdings
has contributed $16.2 million in cash to FOXO through December 31, 2020, and is committed to contribute an additional $3.8 million
to the entity through October 2021, all of which was contributed by such date.
(2) Summary of Significant Accounting Policies
Restatement — The Company is restating
its previously issued (i) consolidated balance sheet as of December 31, 2019, (ii) the consolidated statement of operations, (iii) the
consolidated statement of changes in stockholders’ equity, and (iv) the consolidated statement of cash flows for the year ended
December 31, 2019, included in its Annual Report on Form 10-K for the year ended December 31, 2019, (the “Restatement”). The
Restatement also impacted each of the quarters for the periods beginning with GWG Holdings, Inc.’s consolidation with The Beneficient
Company Group, L.P. (“Ben LP,” including all of the subsidiaries it may have from time to time — “Beneficient”)
as of December 31, 2019 through the quarter ended September 30, 2020.
The impact of the Restatement is included in this
2020 Form 10-K, and is more specifically described in Notes 21 and 22. Additionally, the impacts of the Restatement have been reflected
throughout the financial statements, including the applicable footnotes.
Other Corrections — In addition to
the Restatement items, the Company has corrected other items, which had been previously identified and determined to be immaterial pursuant
to Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections and Staff Accounting
Bulletin (“SAB”) No. 99, Materiality. While these other adjustments are both quantitatively and qualitatively immaterial,
individually and in the aggregate, because we are correcting for the Restatement items, we have decided to correct these other adjustments
as well.
Specifically, the Company reassessed its valuation
allowance against its deferred tax assets 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. The net deferred tax
liability presented in the Company’s consolidated balance sheets is specifically related to GWG Life’s investment in the Preferred
Series A Subclass 1 Unit Accounts resulting from the Investment Agreement 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. The changes
in the valuation allowance are reflected in the restatement tables presented in Notes 21 and 22.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation — The consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation — The
consolidated financial statements include the accounts of GWG Holdings, Inc. and its subsidiaries. All material intercompany balances
and transactions have been eliminated upon consolidation. Noncontrolling interests have been recorded for minority ownership in entities
that are not wholly owned and are presented in compliance with the provisions of the Noncontrolling Interest in Subsidiary subsections
of the Accounting Standards Codification (“ASC”).
The Company has interests in various entities
including, but not limited to, corporations and limited partnerships. For each such entity, the Company evaluates its ownership interest
to determine whether the entity is a variable interest entity (“VIE”) and, if so, whether it is the primary beneficiary of
the VIE. The Company would consolidate any entity for which it was the primary beneficiary, regardless of its ownership or voting interests.
Upon inception of a variable interest or the occurrence of a reconsideration event, the Company makes judgments in determining whether
entities in which it invests are VIEs. If so, the Company makes judgments to determine whether it is the primary beneficiary and is thus
required to consolidate the entity. Ownership interests in entities for which the Company has significant influence that are not consolidated
under the Company’s consolidation policy are accounted for as equity method investments.
The entities for which the ExAlt Plan Trusts hold
an ownership interest are investment companies (i.e., funds) under ASC 946. Thus, the investments in non-investment companies made by
these funds are accounted for in accordance with ASC 946 and are not subject to consolidation or the disclosure requirements of ASC 810.
Moreover, further consolidation provisions of ASC 946 are not applicable to Beneficient since these investment companies do not have an
investment in an operating entity that provides services to the investment company or to Beneficient.
Related party transactions between the Company
and its equity method investees have not been eliminated.
Use of Estimates — The preparation
of our 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 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. Our actual
results may differ materially and adversely from our estimates. Material estimates that are particularly susceptible to change, in the
near term, relate to: (1) determining the assumptions used in estimating the fair value of our investments in life insurance policies,
(2) determining the grant date fair value for equity-based compensation awards, (3) determination of the allowance for loan losses as
an input to the allocation of income (loss) to Beneficient’s equity holders, and (4) evaluation of potential impairment of goodwill
and other intangibles. Periodically, we make significant estimates in assessing the fair value of assets acquired and consideration given
in return for those assets, which are used to establish the initial recorded values of such assets in accordance with ASC 805, Business
Combinations. Under ASC 805, the consideration paid in an asset acquisition is allocated among the assets acquired based on their
relative fair values at acquisition date. In relation to the Investment and Exchange Agreements, relative fair values obtained from a
third-party valuation firm were used to calculate the amounts recorded for the assets acquired and liabilities assumed at their acquisition
dates as more fully described in Note 4.
Cash and Cash Equivalents — We consider
cash in demand deposit accounts and temporary investments purchased with an original maturity of three months or less to be cash equivalents.
We maintain our cash and cash equivalents with highly rated financial institutions. The balances in our bank accounts may exceed Federal
Deposit Insurance Corporation limits. We periodically evaluate the risk of exceeding insured levels and may transfer funds as we deem
appropriate.
Cash, cash equivalents and restricted cash on
our consolidated statements of cash flows include cash and cash equivalents and restricted cash of $85.2 million and $38.9 million and
$82.3 million and $33.5 million as of December 31, 2020 and 2019, respectively. See Note 3 for a discussion of restrictions on cash.
Investment in Life Insurance Policies, at Fair
Value — ASC 325-30, Investments in Insurance Contracts, permits a reporting entity to account for its investments in
life insurance policies using either the investment method or the fair value method. We elected to use the fair value method to account
for our life insurance policies. We initially record our purchase of life insurance policies at the purchase price, which is the amount
paid for the policy, inclusive of all direct external fees and costs associated with the purchase. At each subsequent reporting period,
we re-measure the investment at fair value in its entirety and recognize the change in fair value as unrealized gain or loss in the current
period, net of premiums paid, within gain (loss) on life insurance policies, net in our consolidated statements of operations.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We also recognize realized gain (or loss) from
a life insurance policy upon one of the two following events: (1) our receipt of notice or verified mortality of the insured; or (2) our
sale of the policy (upon filing of change-of-ownership forms and receipt of payment). In the case of mortality, the gain (or loss) we
recognize is the difference between the policy benefits and the carrying value of the policy once we determine that collection of the
policy benefits is reasonably assured. In the case of a policy sale, the gain (or loss) we recognize is the difference between the sale
price and the carrying value of the policy on the date we receive sale proceeds.
Life insurance premium payments are considered
operating cash flows and are included in the net income (loss) line item in the consolidated statements of cash flows. The portion of
proceeds received from policy maturities that represents the carrying value of the policy is reported in return of investment for matured
life insurance policies in the consolidated statements of cash flows.
Life Insurance Policy Benefits Receivable,
Net — Our policy benefit receivables represent amounts due from insurance carriers for claims submitted on matured life insurance
policies. Policy benefit receivables are recorded at the policy benefit amounts less reserves for estimated uncollectible amounts. Uncollectible
policy benefits can result from challenges by the insurance carrier to the legal validity of the policy, typically related to the concept
of insurable interest, or from liquidity or solvency problems at the insurance carrier (although policy benefits are senior to any other
obligations of a carrier).
We reserve for policy benefits when it becomes
probable that we will not collect the full amount of the policy benefit. The reserve requirements are based on the best facts available
to us and are re-evaluated and adjusted as additional information becomes available. Uncollectible policy benefits are written off against
the reserves when it is deemed that a policy amount is uncollectible. As of December 31, 2020 and 2019, there was no allowance for
uncollectible life insurance policy benefits receivable.
Other Assets — Other assets consist
of investment in put options, fixed assets, intangible assets, prepaid expenses, operating lease right-of-use assets, and other receivables.
Investment in Alternative Assets, at Fair Value
— Investments in alternative assets represent the ownership interests in alternative assets, predominately private equity funds,
held by certain of the ExAlt Trusts, either through direct ownership or a beneficial interest. ASC Topic 820, Fair Value Measurement,
permits, as a practical expedient, to estimate the fair value of these types of investments based on the net asset value (“NAV”)
per share, or its equivalent, if the NAV of such investments is calculated in a manner consistent with the measurement principles of ASC
946, Financial Services – Investment Companies. The Company has elected to use NAV as a practical expedient to measure the
fair value of these investments. These investments are valued based on the most recent available information, which typically has a delay
due to the timing of financial information received from the individual investments. Accordingly, in determining the value of the investment,
we may consider whether adjustments to the NAV are necessary in certain circumstances in which management is aware of material events
that affect the value of the investments during the intervening period. Changes in NAV are recorded within investment income (loss) on
our consolidated statements of operations.
Equity Method Investments — Other
than the investments in alternative assets, which use NAV as a practical expedient, the Company accounts for investments in common stock
or in-substance common stock in which we have the ability to exercise significant influence, but do not own a controlling financial interest,
under the equity method of accounting. Investments within the scope of the equity method of accounting are initially measured at cost,
including the cost of the investment itself and direct transaction costs incurred to acquire the investment. After the initial recognition
of the investment at cost, we recognize income and losses from our investment by adjusting upward or downward the balance of our equity
method investment on our consolidated balance sheet with such adjustments, if any, flowing through earnings (loss) from equity method
investment on our consolidated statement of operations, in all cases adjusted to reflect amortization of basis differences, if any, and
the elimination of intercompany gains and losses, if any. Cash distributions received from equity method investees are recorded as reductions
to the investment balance and classified in the statement of cash flows using the cumulative earnings approach.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity method investments are reviewed for impairment
whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable. These circumstances
can include, but are not limited to evidence that we do not have the ability to recover the carrying amount, the inability of the investee
to sustain earnings, a current fair value of the investment that is less than the carrying amount, and other investors ceasing to provide
support or reducing their financial commitment to the investee. If the fair value of the investment is less than the carrying amount,
and the investment will not recover in the near term, an other-than-temporary impairment may exist. We recognize a loss in value of an
investment deemed other-than-temporary in the period the conclusion is made.
When we do not expect financial information of
our equity method partner companies to be consistently available on a timely basis, the Company reports its share of the income or loss
of the equity method investment on a one-quarter lag.
For more information on equity method investments,
see Note 8.
Leases — The Company adopted ASC
842, Leases, on January 1, 2019. The Company leases certain real estate for its office premises that are classified as operating
leases. We assess whether an arrangement is a lease at inception. Leases with an initial term of twelve months or less are not recorded
in the balance sheet. We have elected the practical expedient to not separate lease and non-lease components for all assets. Operating
lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over the lease
term at the lease start date. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information
available at the lease start date in determining the present value of future payments. The operating lease asset is increased by any lease
payments made at or before the lease start date and reduced by lease incentives and initial direct costs incurred. The lease term includes
options to renew or terminate the lease when it is reasonably certain that we will exercise that option. The exercise of lease renewal
options is at our sole discretion. The depreciable life of lease assets and leasehold improvements are limited by the lease term, unless
there is a transfer of title or purchase option reasonably certain of exercise. Lease expense for operating leases is recognized on a
straight-line basis over the lease term.
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. New shares of common are issued for stock option exercises. 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.
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.
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 consolidated statements of operations.
Deferred Financing and Issuance Costs —
Loans advanced to us under the second amended and restated senior credit facility with LNV Corporation (as amended from time to time,
“LNV Credit Facility”), as described in Note 10, are reported net of financing costs, including issuance costs, sales commissions
and other direct expenses, which are amortized using the straight-line method over the term of the facility. The L Bonds, as described
in Note 10, are reported net of financing costs, which are amortized using the effective interest method over the term of those borrowings.
Beneficient’s first and second lien credit agreements, as described in Note 10, are reported net of financing costs, which are amortized
using the effective interest method over the term of those borrowings.
Selling and issuance costs of Redeemable Preferred
Stock (“RPS”) and Series 2 Redeemable Preferred Stock (“RPS 2”), described in Note 11, are netted against additional
paid-in capital, until depleted, and then against the outstanding balance of the preferred stock. The offerings of GWG Holdings’
RPS and RPS 2 closed in March 2017 and April 2018, respectively. There were no issuance costs associated with the August 2018 issuance
of the Series B Convertible Preferred Stock.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business Combinations — The Company
includes the results of operations of the businesses that it acquires from the acquisition date. In allocating the purchase price of a
business combination, in accordance with ASC 805, Business Combinations, the Company records all assets acquired and liabilities
assumed at fair value, and the fair value of any noncontrolling interests, with the excess of the purchase price over the aggregate fair
values recorded as goodwill. ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company
determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market
prices and estimates made by management. The fair value assigned to identifiable intangible assets acquired is based on estimates and
assumptions made by management at the time of the acquisition. The Company adjusts the preliminary purchase price allocation, as necessary,
during the measurement period of up to one year after the acquisition closing date as it obtains more information as to facts and circumstances
existing as of the acquisition date. Acquisition-related costs are recognized separately from the business combination and are expensed
as incurred.
Goodwill and Other Intangibles —
Goodwill of $2.4 billion and intangible assets of $3.4 million were recognized as a result of the business combination related to the
Investment and Exchange Agreements on December 31, 2019 (see Note 4). Intangible assets are included in other assets in the Company’s
consolidated balance sheets. The Company accounts for goodwill and intangible assets in accordance with ASC Topic 350, Intangibles
– Goodwill and Other. The amount of goodwill recorded is based on the fair value of the acquired entity at the time of acquisition.
Management performs goodwill and intangible asset impairment testing annually, as of October 1, or when events occur, or circumstances
change that would more likely than not indicate impairment has occurred. Goodwill impairment exists when the carrying value of goodwill
exceeds its implied fair value.
For 2020, the annual goodwill impairment analysis
did not result in any impairment charges. Our impairment evaluation included a qualitative assessment, which considered whether there
were indicators of potential impairment following the recent completion of the business combination accounting. In addition, our evaluation
included a quantitative analysis, which included multiple assumptions, including estimated discounted cash flows and other estimates that
may change over time. For example, a key assumption in determining the fair value of our reporting units is forecasting free cash flow
generated by our business over the next five years and includes assumptions regarding expected growth of new service offerings and products.
While our assumption reflects management’s best estimates of future performance, the estimates assume Beneficient capturing a significant
market share of liquidity transactions during the next five years leading to a substantial rate of growth of new service offerings and
products, revenues and assets over the next five years ending December 31, 2025. These estimations are uncertain to occur, and to the
extent the Company falls short of achieving our expected growth in revenues and assets over the next four years, material impairments
of our goodwill may occur in the near term. For example, a 15% decline in our annual projected volume of liquidity transactions reflected
in the Company’s forecasts would require impairments to begin to be recorded assuming all other assumptions on which the forecasts
are built remain constant. Because the Company’s forecasts are predicated on estimating future volume for new service offerings
and products, the Company’s actual future volume of liquidity transactions reflected in the Company’s forecasts may fall short
of management’s forecasts by 15% or greater and may result in a partial or full write down of our goodwill balance, which totaled
$2.4 billion at December 31, 2020. In light of Beneficient’s significant recurring losses from operations, negative cash flows from
operations, and delays in executing its business plans, there could be potential triggering events identified and resulting impairment
of goodwill recorded during the annual impairment test during the fourth quarter of 2021. While management can and has implemented strategies
to address these events, changes in operating plans or adverse changes in the future could reduce the underlying cash flows used to estimate
fair values and could result in a decline in fair value that would trigger future impairment charges of the reporting unit's goodwill
balance.
Intangible assets include an insurance license
and a non-compete agreement. Finite-lived intangibles are stated at cost less accumulated amortization. Amortization is recorded using
the straight-line method, which approximates the expected pattern of economic benefit, over the estimated lives of the assets. The insurance
license intangible has an indefinite life and is evaluated for impairment annually. The non-compete agreement is amortized over its estimated
useful life of two years and is evaluated for impairment when indicators of impairment are present as outlined in the subsequent paragraph.
The Company reviews the carrying value of its
finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of the asset group may not
be recoverable. Factors that would require an impairment assessment include, among other things, a significant change in the extent or
manner in which an asset is used, a continual decline in the Company’s operating performance, or as a result of fundamental changes
in a subsidiary’s business condition.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Repurchase Option — Beneficient determined
that a provision of the Exchange Trust agreements, of which such trust is not among the consolidated trusts of Ben LP, executed as part
of its initial capitalization whereby the holder of the beneficial interest can repurchase the senior beneficial interest in a certain
ExAlt Trust from its holder, at any time up to 3 years from the initial transaction date, represents an equity contract liability that
it has elected to account for utilizing the fair value option in accordance with accounting standards applicable to financial instruments.
The repurchase options were provided to each Exchange Trust for no consideration. As of the date of establishment of these ExAlt Trusts
in 2017 and 2018, Beneficient measured the fair value of the repurchase options and recorded the amount of repurchase options in the consolidated
balance sheets with the recognition of transaction expense of a corresponding amount. The repurchase options are recorded at fair value
with changes in fair value recorded in net income (loss) in the consolidated statements of operations. Adjustments to the fair value of
the repurchase options are recognized within investment income in the consolidated statements of operations. ExAlt PlanTM transactions,
other than those executed in the initial capitalization, do not include a repurchase provision.
The primary reasons that management elected to
record the repurchase options at fair value included reflecting the economic events in earnings on a timely basis and mitigating volatility
in earnings from using different measurement attributes. Refer to Note 7 for additional information.
Income Taxes — GWG Holdings is a
corporation for tax purposes. Certain of GWG Holdings’ subsidiaries operate in the U.S. as partnerships for U.S. federal income
tax purposes. In addition, certain of the wholly-owned subsidiaries of GWG Holdings will be subject to federal, state, and local corporate
income taxes at the entity level and the related tax provision attributable to the Company’s share of this income tax is reflected
in the consolidated financial statements. Income taxes are accounted for using the asset and liability method of accounting. Under this
method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax basis, using tax rates in effect for the year in which the differences are
expected to reverse. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when
the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Current and deferred tax liabilities, if any, are recorded within accounts payable and
accrued expenses and other liabilities in the consolidated balance sheets. The Company analyzes its tax filing positions in all of the
U.S. federal, state, local and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax
years in these jurisdictions. The Company records uncertain tax positions on the basis of a two-step process: (a) determination is made
whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and (b) those
tax positions that meet the more likely than not threshold are recognized as the largest amount of tax benefit that is greater than 50
percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes accrued interest and penalties
related to uncertain tax positions in income tax expense (benefit) within the consolidated statements of operations.
Noncontrolling Interests – Redeemable
and Non-redeemable — Noncontrolling interests represent the portion of certain consolidated subsidiaries’ limited partnership
interests or the ExAlt Trusts that are held by third parties. Amounts are adjusted by the noncontrolling interest holder’s proportionate
share of the subsidiaries’ or VIEs’ earnings or losses each period and for any distributions that are paid.
Noncontrolling interests are reported as a component
of equity unless the noncontrolling interest is considered redeemable, in which case the noncontrolling interest is recorded between liabilities
and equity (mezzanine or temporary equity) in the Company’s consolidated balance sheets. The redeemable noncontrolling interest
is adjusted at each balance sheet date to its maximum redemption value if the amount is greater than the carrying value. Changes in the
Company’s redeemable noncontrolling interests are presented in the consolidated statements of changes in stockholders’ equity.
Noncontrolling interests include (i) holders of
Class S Ordinary Units issued by BCH, which consist of Ben Founder Affiliates (as defined below), an entity affiliated with a related
party, and third parties, and (ii) holders, which consists of unrelated charity organizations, of residual beneficial interests issued
by the ExAlt Trusts. “Ben Founder Affiliates” are defined as certain trusts and those entities held by such trusts that are
controlled by Ben Founder or in which Ben Founder and his family members are also among classes of economic beneficiaries whether or not
our founder is entitled to economic distributions from such trusts. Ben Founder is also the former Chairman of the board of directors
of GWG Holdings, serving is such capacity from April 26, 2019 to June 14, 2021.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Redeemable noncontrolling interests are held by
holders, which consist of a Ben Founder Affiliate, entities affiliated with a related party, and certain former directors, of Preferred
Series A Subclass 1 Unit Accounts issued by BCH.
Beneficient’s Income Allocation
Net income (loss) attributable to noncontrolling
interest holders is subject to Beneficient’s income allocation in accordance with the governing limited partnership agreement of
BCH as more fully described in Note 11.
The consolidated financial statements of Beneficient
reflect the assets, liabilities, revenues, expenses, investment income and cash flows of Beneficient, including, after December 31, 2019,
all of the trusts in the ExAlt PlanTM on a gross basis, and a portion of the economic interests of certain of the ExAlt Trusts,
held by the residual beneficiaries, are attributed to noncontrolling interests in the accompanying consolidated financial statements.
Interest income earned by Beneficient from the ExAlt Trusts is eliminated in its consolidation. However, because the eliminated amounts
are earned from, and funded by, its noncontrolling interests, Beneficient’s attributable share of the net income from the ExAlt
Trusts is increased by the amounts eliminated. Accordingly, the elimination in consolidation of interest income and, for periods after
December 31, 2019, certain fee revenue has no effect on net income (loss) attributable to Beneficient or to holders of Common Units.
For purposes of income allocation to Beneficient’s
equity holders, interest income is generally comprised of contractual interest, which is computed at a variable rate compounding monthly,
interest recognized on certain of the ExAlt Loans through the effective yield method, and an amortized discount that is recognized ratably
over the life of the ExAlt Loan.
As a result of the change-of-control event discussed
in Note 9 on December 31, 2019 and the resulting valuation performed under ASC 805, the existing loan portfolio between Ben and the ExAlt
Trusts was evaluated as of December 31, 2019, for credit deterioration based on the intentions of all parties that the income allocations
provisions of Ben operate under US GAAP as if the ExAlt Trusts were not consolidated for financial reporting purposes. Further, as required
under ASC 805, each ExAlt Loan between Beneficient and the ExAlt Trusts was evaluated and classified as either purchased credit impaired
(“PCI”) or non purchased credit impaired (“non-PCI”). 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. For non-PCI loans, the difference between the fair value and unpaid principal balance of the loan as of the
date of valuation 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, which is eliminated upon the consolidation
of the ExAlt Trusts for financial reporting purposes.
Allowance for Loan Losses
The allowance for loan losses is an input to Beneficient’s
allocation of income. 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. Currently, management individually
reviews all ExAlt Loans due to the low volume and non-homogenous nature of the current portfolio. Management relies heavily on statistical
analysis, current NAV and distribution performance of the underlying alternative asset interests 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 from the underlying alternative assets interests are the sole source of repayment for the loans
and related interest. Beneficient recognizes any charge-off in the period in which it is confirmed. Therefore, impaired ExAlt Loans are
written down to their estimated net present value.
Interest income, for purposes of determining income
allocations to Beneficient’s equity holders, is adjusted for any allowance for loan losses, which was approximately $5.4 million
for the year ended December 31, 2020.
Earnings (Loss) per Common Share —
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted-average
number of common shares outstanding during the reported period.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted earnings (loss) per share in net income
periods is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding
adjusted to include the number of additional common shares that would have been outstanding if the potential dilutive common shares resulting
from GWG Holdings’ RPS, RPS 2, restricted stock units, warrants (if applicable) and stock options were issued. The Company uses
the treasury stock method to calculate if potentially dilutive common shares were issued in the case of restricted stock units, warrants
and options, and the if-converted method in the case of RPS and RPS 2. During 2020 and 2019, RPS, RPS2, restricted stock units and stock
options were the potentially dilutive non-participating instruments issued by GWG Holdings.
Additionally, pursuant to the Exchange Agreement,
as discussed in Note 1, holders of Common Units have the right to exchange their Common Units for common stock of GWG. The Company uses
the if-converted method for these potentially dilutive instruments issued by Ben LP that are ultimately exchangeable into GWG Holdings’
common stock.
Diluted earnings (loss) per share does not reflect
an adjustment for potentially dilutive shares in periods in which a net loss attributable to common shareholders exists.
Newly Adopted Accounting Pronouncements
— On January 1, 2020, we adopted Accounting Standards Update (“ASU”) 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. The adoption of this standard did not have a material impact on the consolidated financial statements and related
disclosures.
On January 1, 2020, we adopted 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 adoption did not have a material impact
on the 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 7. 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 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
Accounting Pronouncements Issued But Not Yet
Adopted — In June 2016, the Financial Accounting Standards Board (“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 Topic 740 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. Topic 740 also clarifies and simplifies other aspects of the accounting for
income taxes. The standard 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 adoption of this standard
is not expected to have a material impact on the consolidated financial statements and disclosures.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASU 2020-04, Reference Rate Reform, (Topic
848) was issued in March 2020. The amendments in Topic 848 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. Topic 848 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 did not utilize the optional expedients and exceptions provided
by this standard during the year ended December 31, 2020. The Company is evaluating the impact of this standard 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 (ASU 2020-06) 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.
(3) Restrictions on Cash
Under the terms of the 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 December 31, 2020 and 2019, there was a balance of $33.5 million and $20.3 million, respectively, in these
collection and payment accounts.
Under the terms of the ExAlt PlanTM
trust agreements, the trusts are required to maintain capital call reserves and administration reserves. These reserves are used to satisfy
capital call obligations and pay fees and expenses for the trusts as required. The fees and expenses are primarily paid to Ben Custody
Admin for serving as the administrative agent to the current trustees of the ExAlt Trusts. These reserves represent cash held in banks.
At December 31, 2020 and 2019, there was a combined balance of $5.4 million and $13.2 million, respectively, in these reserves.
(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
Agreements 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 and consolidated
Ben LP as of December 31, 2019, under the guidance in ASC 805, Business Combinations.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 investment in Ben LP to be approximately $622.5 million, resulting in the recognition of a gain of $253.9
million during the fourth quarter of 2019. This gain is 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, the Promissory Note between GWG Life and the Borrowers, and the Option
Agreement between GWG Holdings and Ben LP which resulted in a net loss of $10.9 million. The net gain on consolidation of equity method
investment after remeasurement of these preexisting balances was $243.0 million. GWG Holdings’ proportionate share of the earnings
or losses from Ben LP was recognized in earnings (loss) from equity method investment in our 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.
The following table summarizes the fair value
measurement of the assets acquired and liabilities assumed as of December 31, 2019 (in thousands):
|
|
As Restated
|
|
|
|
Fair Value at Acquisition Date
|
|
ASSETS
|
|
|
|
Investments in alternative assets, at net asset value
|
|
$
|
342,012
|
|
Investment in public equity securities
|
|
|
24,550
|
|
Other assets
|
|
|
15,077
|
|
Intangible assets(1)
|
|
|
3,449
|
|
Total identifiable assets acquired
|
|
|
385,088
|
|
LIABILITIES
|
|
|
|
|
Debt due to related parties
|
|
|
153,086
|
|
Promissory note with related party
|
|
|
60,390
|
|
Commercial loan agreement from parent
|
|
|
168,420
|
|
Other liabilities and option agreement
|
|
|
64,421
|
|
Repurchase option
|
|
|
61,664
|
|
Accounts payable and accrued expenses
|
|
|
13,770
|
|
Total liabilities assumed
|
|
|
521,751
|
|
Net liabilities assumed
|
|
|
(136,663
|
)
|
NONCONTROLLING INTERESTS
|
|
|
|
|
Common Units not owned by GWG Holdings(2)
|
|
|
181,383
|
|
Class S Ordinary Units
|
|
|
85,448
|
|
Class S Preferred Units
|
|
|
17
|
|
Trusts’ Deficit
|
|
|
27,062
|
|
Preferred Series A Subclass 1 Unit Accounts
|
|
|
1,269,654
|
|
Total noncontrolling interests
|
|
|
1,563,564
|
|
ACQUISITION CONSIDERATION
|
|
|
|
|
Cash, less cash acquired
|
|
|
45,020
|
|
Fair value of preexisting investment in Common Units(3)
|
|
|
622,503
|
|
Fair value of noncontrolling interest
|
|
|
1,563,564
|
|
Total estimated consideration
|
|
|
2,231,087
|
|
Less: Net liabilities assumed
|
|
|
(136,663
|
)
|
Resulting goodwill
|
|
$
|
2,367,750
|
|
(1)
|
Includes an insurance license valued at $3.1 million and a non-compete agreement valued at $0.3 million.
|
(2)
|
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. Also includes $151.8 million of share-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.
|
(3)
|
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, with a nominal rounding adjustment.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 required the
utilization of significant estimates and management judgment in accounting for the change-of-control event.
Investments in alternative assets —
The investment in alternative assets was valued at fair value using the net asset value of each underlying investment as a practical expedient.
Cash and cash equivalents and restricted cash
— Cash and cash equivalents and restricted cash 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.
Debt due to related parties, promissory note
with related party, and commercial loan agreement from parent — The measurement of the fair value of debt due to related parties,
promissory note with related party, 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 Promissory Note between certain
of the ExAlt Trusts and GWG Life and the Commercial Loan Agreement between Ben LP and GWG Life were eliminated in consolidation.
Other liabilities — The carrying
amount of other liabilities approximates the fair value. The Option Agreement between Ben LP and GWG Holdings was eliminated in consolidation.
Repurchase options: Repurchase options
were fair valued using a Black-Scholes option pricing model with a time-dependent strike for the repurchase price. Other model assumptions
include i) a period of restricted exercise, ii) the dividend yield, iii) underlying NAVs, iv) alternative asset growth rates, v) volatilities,
and vi) market discount rate.
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 inputs include Level 3
inputs.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 management’s expectation of the potentially large and underserved market
that Beneficient is seeking to address, including the estimated demand from MHNW 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.
The following unaudited pro forma financial information
presents the combined results of operations of GWG Holdings as if the acquisition of Ben LP had occurred as of January 1, 2019:
(in
thousands, except shares and per share data)
|
|
(As Restated)
|
|
|
|
December 31,
2019
|
|
Total Revenue
|
|
|
|
Pro forma
|
|
$
|
62,636
|
|
As reported
|
|
$
|
92,276
|
|
Net Income (Loss) Attributable to Common Shareholders
|
|
|
|
|
Pro forma
|
|
$
|
(220,726
|
)
|
As reported
|
|
$
|
70,471
|
|
Net Earnings (Loss) per Diluted Common Share
|
|
|
|
|
Pro forma
|
|
$
|
(6.21
|
)
|
As reported
|
|
$
|
2.06
|
|
The unaudited pro forma financial information
is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually
would have been had the acquisition occurred at the beginning of the 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:
|
●
|
Consolidation of all ExAlt Trusts (only certain of the trusts
were consolidated until December 31, 2019)
|
|
●
|
Exclusion of the $243.0 million nonrecurring gain on consolidation of equity method investment
|
|
●
|
Reduction of Beneficient interest expense related to acquisition-date debt principal payments
|
|
●
|
Elimination of intercompany transactions, including the Promissory Note, Commercial Loan Agreement and
Option Agreement
|
|
●
|
Exclusion of nonrecurring acquisition-related transaction costs
|
(5) Investment in Life Insurance Policies
The Company’s investments in life insurance
policies are valued based on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these
policies, net of premiums paid, are recorded in gain (loss) on life insurance policies, net in our consolidated statements of operations.
The fair value of our life insurance policies
is determined as the net present value of the life insurance portfolio’s future expected cash flows (policy benefits received and
required premium payments) that incorporates life expectancy estimates obtained when the policy was purchased and current discount rate
assumptions. We refer to our valuation methodology as the Longest Life Expectancy methodology. This methodology utilizes a portfolio mortality
multiplier (“PMM”) that allows us to “fit” projections to actual results, which provides a basis to forecast future
performance more accurately.
The life expectancies used in our valuation were
obtained at the time of policy purchase and are 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). Our valuation methodology
also incorporates assumptions relating to cost-of-insurance (premium) rates and other assumptions, including a discount rate.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The discount rate we apply is primarily based
on information about the discount rates observed in recent portfolio purchase transactions in the life insurance tertiary market. The
discount rate also incorporates 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. In prior periods, the discount rate also incorporated information about the
discount rates observed in the life insurance secondary market through the Company’s internal competitive bidding to purchase policies.
However, the Company discontinued the use of this input as of December 31, 2020, as it is no longer actively purchasing policies in the
life insurance secondary market. The determination of the discount rate used in the valuation of the Company’s life insurance policies
requires management judgment and incorporates information that is reasonably available to management as of the date of the valuation.
As a result of management’s analysis, a discount rate of 8.25% was applied to our portfolio as of both December 31, 2020 and
2019.
Portfolio Information
Our portfolio of life insurance policies, owned
by GWG Holdings’ subsidiaries as of December 31, 2020 is summarized below:
Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in thousands)
|
|
$
|
1,900,715
|
|
Average face value per insured life (in thousands)
|
|
$
|
1,943
|
|
Average life expectancy estimate (years)*
|
|
|
6.9
|
|
Total number of policies
|
|
|
1,058
|
|
Number of unique lives
|
|
|
978
|
|
Demographics
|
|
|
74% Male; 26% Female
|
|
Number of smokers
|
|
|
40
|
|
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
|
|
|
3.8
|
%
|
(*)
|
Averages presented in the table are weighted averages by
face amount of policy benefits.
|
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 December 31, 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
|
|
2020
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
8
|
|
|
$
|
5,869
|
|
|
$
|
6,342
|
|
2021
|
|
|
15
|
|
|
|
19,429
|
|
|
|
22,298
|
|
|
|
55
|
|
|
|
62,061
|
|
|
|
79,879
|
|
2022
|
|
|
62
|
|
|
|
66,657
|
|
|
|
88,698
|
|
|
|
90
|
|
|
|
89,074
|
|
|
|
138,723
|
|
2023
|
|
|
106
|
|
|
|
113,926
|
|
|
|
178,983
|
|
|
|
128
|
|
|
|
123,352
|
|
|
|
222,369
|
|
2024
|
|
|
119
|
|
|
|
130,280
|
|
|
|
229,815
|
|
|
|
109
|
|
|
|
103,111
|
|
|
|
217,053
|
|
2025
|
|
|
111
|
|
|
|
85,842
|
|
|
|
187,042
|
|
|
|
113
|
|
|
|
74,223
|
|
|
|
171,961
|
|
2026
|
|
|
115
|
|
|
|
100,280
|
|
|
|
237,632
|
|
|
|
123
|
|
|
|
92,337
|
|
|
|
250,239
|
|
Thereafter
|
|
|
530
|
|
|
|
275,497
|
|
|
|
956,247
|
|
|
|
525
|
|
|
|
246,012
|
|
|
|
934,407
|
|
Totals
|
|
|
1,058
|
|
|
$
|
791,911
|
|
|
$
|
1,900,715
|
|
|
|
1,151
|
|
|
$
|
796,039
|
|
|
$
|
2,020,973
|
|
We recognized life insurance benefits of $125.1
million for each of the years ended December 31, 2020 and 2019, respectively, related to policies with a carrying value of $38.2
million and $33.2 million, respectively, and as a result recorded realized gains of $86.9 million and $91.9 million. 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 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 consolidated statements of
cash flows.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of gain (loss) on life insurance
policies is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Change in estimated probabilistic cash flows(1)
|
|
$
|
63,463
|
|
|
$
|
67,186
|
|
Unrealized gain on acquisitions(2)
|
|
|
—
|
|
|
|
6,921
|
|
Premiums and other annual fees
|
|
|
(71,439
|
)
|
|
|
(65,577
|
)
|
Change in life expectancy evaluation(3)
|
|
|
—
|
|
|
|
(2,332
|
)
|
Face value of matured policies
|
|
|
125,109
|
|
|
|
125,148
|
|
Fair value of matured policies
|
|
|
(67,535
|
)
|
|
|
(56,026
|
)
|
Gain on life insurance policies, net
|
|
$
|
49,598
|
|
|
$
|
75,320
|
|
(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.
|
(3)
|
The change in fair value due to updating life expectancy estimates on certain life insurance policies
in our portfolio.
|
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
|
|
2021
|
|
$
|
72,445
|
|
|
$
|
1,655
|
|
|
$
|
74,100
|
|
2022
|
|
|
89,436
|
|
|
|
1,655
|
|
|
|
91,091
|
|
2023
|
|
|
100,953
|
|
|
|
1,655
|
|
|
|
102,608
|
|
2024
|
|
|
110,044
|
|
|
|
1,655
|
|
|
|
111,699
|
|
2025
|
|
|
122,438
|
|
|
|
1,655
|
|
|
|
124,093
|
|
|
|
$
|
495,316
|
|
|
$
|
8,275
|
|
|
$
|
503,591
|
|
Management anticipates funding the majority of
the premium payments and servicing fees estimated above from cash flows realized from life insurance policy benefits, and to the extent
necessary, with additional borrowing capacity created as the premiums and servicing costs of pledged life insurance policies become due,
under the LNV Credit Facility and the net proceeds from our offering of L Bonds as described in Note 10. Management anticipates funding
premiums and servicing costs of non-pledged life insurance policies with cash flows realized from life insurance policy benefits from
our portfolio of life insurance policies and net proceeds from GWG Holdings’ offering of L Bonds. The proceeds of these capital
sources may also be used for; the purchase, policy premiums and servicing costs of additional life insurance policies; working capital;
and financing expenditures including paying principal, interest and dividends.
(6) Investments in Alternative Assets
The investments held, either through direct ownership
or through a beneficial interest, by certain of the ExAlt Trusts consist primarily of limited partnership interests in various alternative
assets, including private equity funds. These alternative investments are valued using NAV as a practical expedient. Changes in the NAV
of these investments are recorded in investment income, net in our consolidated statements of operations. The investments in alternative
assets provide the economic value that ultimately collateralizes the loan that Beneficient originates with the ExAlt Trusts in a liquidity
transaction.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The NAV calculation reflects the most current
report of NAV and other data received from firm/fund sponsors. If no such report has been received, Beneficient estimates NAV based upon
the last NAV calculation reported by the investment manager and adjusts it for capital calls and distributions made in the intervening
time frame. Beneficient also considers whether adjustments to the NAV are necessary in certain circumstances in which management is aware
of specific material events, changes in market conditions, and other relevant factors that have affected the value of an investment during
the period between the date of the most recent NAV calculation reported by the investment manager or sponsor and the measurement date.
Public equity securities known to be owned within an alternative investment fund, based on the most recent information reported by the
general partners, are marked to market using quoted market prices on the reporting date.
The underlying interests in alternative assets
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. The transfer of the investments in private
equity funds generally requires the consent of the corresponding private equity fund manager, and the transfer of certain fund investments
is subject to rights of first refusal or other preemptive rights, potentially further limiting the ExAlt PlanTM from transferring
an investment in a private equity fund. These investments can never be redeemed with the funds. Distributions from each fund will be received
as the underlying investments are liquidated. Timing of liquidation is currently unknown.
Portfolio Information
Our portfolio of alternative investments, held
by certain of the ExAlt Trust subsidiaries by asset class of each fund as of December 31, 2020 and 2019, is summarized below:
Alternative Investments Portfolio Summary(1)
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Asset Class
|
|
Value
|
|
|
Unfunded
Commitments
|
|
|
Value
|
|
|
Unfunded
Commitments
|
|
Venture Capital
|
|
$
|
123,021
|
|
|
$
|
1,659
|
|
|
$
|
267,662
|
|
|
$
|
8,915
|
|
Private Equity
|
|
|
92,316
|
|
|
|
33,387
|
|
|
|
34,614
|
|
|
|
22,187
|
|
Private Real Estate
|
|
|
2,118
|
|
|
|
269
|
|
|
|
27,151
|
|
|
|
3,584
|
|
Other(2)
|
|
|
4,439
|
|
|
|
294
|
|
|
|
12,585
|
|
|
|
260
|
|
Total
|
|
$
|
221,894
|
|
|
$
|
35,609
|
|
|
$
|
342,012
|
|
|
$
|
34,946
|
|
(1)
|
Amounts presented in the table exclude the collateral resulting from the Collateral Swap, including GWG
Holdings’ common stock valued at $84.6 million, 543,874 shares of Ben Common Units valued at $6.8 million, and GWG L Bonds
due 2023 in the aggregate principal amount of $94.8 million, all of which are eliminated in consolidation
|
(2)
|
“Other” includes private debt strategies, natural resources strategies, and hedge funds.
|
As of December 31,
2020, ExAlt Trusts’ portfolio had exposure to 117 professionally managed alternative investment funds, comprised of 327 underlying
investments, 91 percent of which are investments in private companies.
(7) Fair Value Measurements
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).
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value hierarchy is broken down into three
levels based on the observability of inputs as follows:
|
Level 1 —
|
Valuations based on quoted prices in active markets
for identical assets or liabilities that the Company has the ability to access 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 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. Investments
valued using NAV as a practical expedient are excluded from this hierarchy. At December 31, 2020 and December 31, 2019, the
fair value of these investments using the NAV per share practical expedient was $221.9 million and $342.0 million, respectively. During
the year ended December 31, 2020, $17.6 million of loss was recognized from changes in NAV, which is recorded within investment income
(loss) on our consolidated statements of operations.
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.
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 December 31, 2020 and December 31,
2019 are presented below (in thousands).
|
|
As of December 31, 2020
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in put options
|
|
$
|
7,017
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,017
|
|
Investments in life insurance policies
|
|
|
—
|
|
|
|
—
|
|
|
|
791,911
|
|
|
|
791,911
|
|
|
|
As of December 31, 2019 (As Restated)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in life insurance policies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
796,039
|
|
|
$
|
796,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase options
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
61,664
|
|
|
$
|
61,664
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a description of the valuation
methodologies used for financial instruments measured at fair value on a recurring basis:
Investments in put options
On July 17, 2020, Ben LP, 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 support the Collateral to 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 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 consolidated statements
of operations.
Repurchase options
Repurchase options were fair valued using a Black-Scholes
option pricing model with a time-dependent strike price for the repurchase price. The option pricing model has assumptions related to
a period of restricted exercise price, dividend yield, underlying NAVs, alternative asset growth rates, volatilities, and market discount
rate. The Company uses Level 3 inputs for its fair value estimates. The unrealized impact of this Level 3 measurement on earnings is reflected
in investment income (loss).
The following table reconciles the beginning and
ending fair value of our Level 3 repurchase options (in thousands). The year ended December 31, 2019, is not presented as the consolidation
of Beneficient occurred on December 31, 2019.
|
|
Year Ended
|
|
|
|
December 31,
2020
|
|
Beginning balance
|
|
$
|
61,664
|
|
Total gain in earnings(1)
|
|
|
(61,664
|
)
|
Purchases
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
Other
|
|
|
—
|
|
Ending balance
|
|
$
|
—
|
|
(1)
|
Net change in fair value.
|
The repurchase options, all of which were unexercised,
expired during the third and fourth quarters of 2020, which is recognized in the investment income (loss) line item of the consolidated
statements of operations. Additionally, during the year ended December 31, 2020, $17.6 million of loss on the investments in alternative
assets was recognized from changes in NAV, which is recorded within investment income (loss) on our consolidated statements of operations.
The following table provides quantitative information
about the significant unobservable inputs used in the fair value measurement of the Level 3 repurchase options as of December 31, 2019
(dollars in thousands):
Valuation Date
|
|
Fair Value
|
|
|
Valuation Methodology
|
|
Unobservable Inputs
|
|
Range of Targets
|
|
December 31, 2019
|
|
$
|
61,664
|
|
|
Option Pricing Model
|
|
Alternative asset market discount rate
|
|
|
0.085
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
.22 - .56
|
|
|
|
|
|
|
|
|
|
Net asset value growth rates
|
|
|
0.085
|
|
|
|
|
|
|
|
|
|
Net asset value volatilities
|
|
|
0.24 - 0.45
|
|
|
|
|
|
|
|
|
|
Restricted exercise period
|
|
|
1 year
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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. The determination of the discount rate used in the valuation of the Company's life insurance policies requires
management judgment and incorporates information that is reasonably available to management as of the date of the valuation.
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
at the time of purchase; 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.
The following table reconciles the beginning and
ending fair value of our Level 3 investments in our portfolio of life insurance policies (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Beginning balance
|
|
$
|
796,039
|
|
|
$
|
747,922
|
|
Total gain in earnings(1)
|
|
|
34,114
|
|
|
|
49,015
|
|
Purchases
|
|
|
—
|
|
|
|
32,367
|
|
Settlements(2)
|
|
|
(38,185
|
)
|
|
|
(33,265
|
)
|
Lapsed policy(3)
|
|
|
(57
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
791,911
|
|
|
$
|
796,039
|
|
(1)
|
Net change in fair value
|
(2)
|
Policy maturities at initial cost basis
|
(3)
|
Represents the cost basis of one policy with a face value of $0.5 million.
|
The net activity in the table above is reported
in gain on life insurance policies, net, in the consolidated statements of operations.
There have been no transfers between levels in
the fair value hierarchy 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 December 31, 2020 and December 31, 2019.
The following table summarizes the inputs utilized
in estimating the fair value of our portfolio of life insurance policies:
|
|
As of December 31,
2020
|
|
|
As of December 31,
2019
|
|
Weighted-average age of insured, years*
|
|
|
83.1
|
|
|
|
82.4
|
|
Age of insured range, years
|
|
|
63-100
|
|
|
|
62-101
|
|
Weighted-average life expectancy, months*
|
|
|
83.0
|
|
|
|
86.2
|
|
Life expectancy range, months
|
|
|
0-240
|
|
|
|
0-240
|
|
Average face amount per policy (in thousands)
|
|
$
|
1,797
|
|
|
$
|
1,756
|
|
Discount rate
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
(*)
|
Weighted-average by face amount of policy benefits
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
|
|
December 31, 2020
|
|
$
|
97,837
|
|
|
$
|
45,536
|
|
|
$
|
(61,713
|
)
|
|
$
|
(114,099
|
)
|
December 31, 2019
|
|
$
|
113,812
|
|
|
$
|
57,753
|
|
|
$
|
(55,905
|
)
|
|
$
|
(111,340
|
)
|
|
|
Change in Discount Rate
|
|
|
|
Minus 2%
|
|
|
Minus 1%
|
|
|
Plus 1%
|
|
|
Plus 2%
|
|
December 31, 2020
|
|
$
|
82,983
|
|
|
$
|
39,560
|
|
|
$
|
(36,151
|
)
|
|
$
|
(69,284
|
)
|
December 31, 2019
|
|
$
|
91,890
|
|
|
$
|
43,713
|
|
|
$
|
(39,790
|
)
|
|
$
|
(76,118
|
)
|
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 December 31, 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 December 31, 2020
|
|
|
|
Level in Fair Value Hierarchy
|
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
1
|
|
|
$
|
124,160
|
|
|
$
|
124,160
|
|
Life insurance policy benefits receivable, net
|
|
1
|
|
|
|
14,334
|
|
|
|
14,334
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility
|
|
2
|
|
|
$
|
193,730
|
|
|
$
|
202,611
|
|
L Bonds and Seller Trust L bonds
|
|
1
|
|
|
|
1,519,006
|
|
|
|
1,519,006
|
|
Debt due to related parties
|
|
2
|
|
|
|
76,260
|
|
|
|
78,081
|
|
Other liabilities
|
|
1
|
|
|
|
50,585
|
|
|
|
50,585
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
As of December 31, 2019 (As Restated)
|
|
|
|
Level in Fair Value Hierarchy
|
|
|
Carrying Amount
|
|
|
Estimated Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash
|
|
1
|
|
|
$
|
115,790
|
|
|
$
|
115,790
|
|
Life insurance policy benefits receivable, net
|
|
1
|
|
|
|
23,031
|
|
|
|
23,031
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Senior credit facility with LNV Corporation
|
|
2
|
|
|
$
|
174,390
|
|
|
$
|
184,587
|
|
L Bonds and Seller Trust L Bonds
|
|
1
|
|
|
|
1,293,530
|
|
|
|
1,293,530
|
|
Debt due to related parties
|
|
2
|
|
|
|
153,086
|
|
|
|
153,086
|
|
Other liabilities
|
|
1
|
|
|
|
44,408
|
|
|
|
44,408
|
|
Other liabilities is comprised of the interest
and dividends payable and accounts payable and accrued expenses line items on the consolidated balance sheets as of December 31,
2020 and December 31, 2019.
Certain assets are subject to periodic impairment
testing by comparing the respective carrying value of the asset to its estimated fair value. In the event we determine these assets to
be impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the impaired asset exceeds its estimated
fair value. These periodic impairment tests utilize company-specific assumptions involving significant unobservable inputs, or Level 3,
in the fair value hierarchy.
(8) Equity Method Investments
FOXO Technologies Inc. (formerly, FOXO BioScience LLC)
On November 11, 2019, GWG Holdings contributed
the common stock and membership interests of its wholly-owned subsidiaries, FOXO Labs and FOXO Life (“Insurtech Subsidiaries”)
to a legal entity, then known as FOXO BioScience LLC, in exchange for a membership interest in FOXO. On November 13, 2020, FOXO BioScience
LLC converted to a corporation and is now known as FOXO Technologies Inc. With the conversion to a corporation, GWG Holdings’ previous
membership interest in the LLC converted to preferred equity in FOXO. Although GWG Holdings has a financial interest in FOXO, GWG Holdings
does not have a controlling financial interest because another party is the majority shareholder of the voting class of securities. Therefore,
we account for GWG Holdings’ ownership interest in FOXO as an equity method investment.
The 2019 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.
The following table includes a rollforward of the equity method investment
in FOXO (in thousands):
|
|
Year Ended
December 31, 2020
|
|
|
Year Ended
December 31, 2019
|
|
Beginning balance
|
|
$
|
1,761
|
|
|
$
|
—
|
|
Contributions
|
|
|
14,436
|
|
|
|
3,378
|
|
Loss on equity method investment
|
|
|
(7,319
|
)
|
|
|
(1,617
|
)
|
Other
|
|
|
(296
|
)
|
|
|
—
|
|
Ending balance
|
|
$
|
8,582
|
|
|
$
|
1,761
|
|
In accordance with the subscription agreement
of FOXO, as of December 31, 2020, GWG Holdings was committed to contribute an additional $3.8 million to the entity through October
2021, all of which was contributed by such date. GWG Holdings’ investment in FOXO is presented in other assets in our consolidated
balance sheets. Our proportionate share of earnings or losses from our investee is recognized in earnings (loss) from equity method investments
in our consolidated statements of operations.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Beneficient Company Group, L.P.
During 2018, GWG Holdings acquired 40,505,279
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, GWG Holdings 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, GWG Holdings’
investment in Common Units was presented in equity method investment on our consolidated balance sheets. Our proportionate share of earnings
or losses from our investee was recognized in earnings (loss) from equity method investments in our consolidated statements of operations.
We recorded GWG Holdings’ share of the income or loss of Beneficient through September 30, 2019 on a one-quarter lag.
On December 31, 2019, GWG Holdings obtained control
of Beneficient and consolidated Beneficient as of that date under the guidance in 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.
Preconsolidation financial information after the
elimination of any intercompany transactions pertaining to Beneficient is summarized in the table below (in thousands):
|
|
Twelve months
ended
September 30,
2019
(unaudited)
|
|
Total revenues
|
|
$
|
93,921
|
|
Net loss
|
|
|
(32,133
|
)
|
Net loss attributable to holders of Common Units
|
|
|
(13,754
|
)
|
GWG Holdings’ portion
of net loss (1)
|
|
|
(2,460
|
)
|
(1)
|
GWG Holdings portion of Beneficient’s net loss for October 1, 2018 to September 31, 2019. This amount
was recognized during the year ended December 31, 2019, prior to the consolidation of Beneficient.
|
(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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VIEs for Which the Company is the Primary Beneficiary
ExAlt Trusts
The Company determined that the ExAlt Trusts used
in connection with Beneficient’s operations are VIEs of which Beneficient is the primary beneficiary. The Company concluded that
Beneficient is the primary beneficiary of the trusts as it has the power to direct the most significant activities and has an obligation
to absorb potential losses of the trusts. Accordingly, the results of the trusts are included in the Company’s consolidated financial
statements. The assets of the trusts may only be used to settle obligations of the trusts. Other than potentially funding capital calls
above the related reserve (refer to Note 18), there is no recourse to the Company for the trusts’ liabilities.
The cash flows generated by these VIEs subsequent
to December 31, 2019 are included within the Company’s consolidated statements of cash flows. The consolidated balance sheets include
the following amounts from these consolidated VIEs as of the dates presented (in thousands):
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,965
|
|
|
$
|
3,211
|
|
Restricted cash
|
|
|
5,386
|
|
|
|
13,248
|
|
Investments in alternative assets, at NAV
|
|
|
221,894
|
|
|
|
342,012
|
|
Other assets
|
|
|
1,273
|
|
|
|
1,335
|
|
Total Assets of VIE
|
|
$
|
234,518
|
|
|
$
|
359,806
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase obligation
|
|
$
|
—
|
|
|
$
|
61,664
|
|
Accounts payable and accrued expense
|
|
|
2,029
|
|
|
|
17
|
|
Total Liabilities of VIE
|
|
$
|
2,029
|
|
|
$
|
61,681
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
$
|
7,208
|
|
|
$
|
27,062
|
|
Total Equity of VIE
|
|
$
|
7,208
|
|
|
$
|
27,062
|
|
The consolidated statement of operations for the
year ended December 31, 2020 includes the following amounts from these consolidated VIEs (in thousands). The results of operations for
year ended December 31, 2019 are not inclusive of these consolidated VIEs as Beneficient was not a consolidated subsidiary of GWG Holdings
until December 31, 2019.
|
|
Year Ended
December 31,
2020
|
|
REVENUE
|
|
|
|
Investment income, net
|
|
$
|
44,106
|
|
Interest income
|
|
|
21
|
|
TOTAL REVENUE
|
|
|
44,127
|
|
EXPENSES
|
|
|
|
|
Other expenses
|
|
|
501
|
|
TOTAL EXPENSES
|
|
|
501
|
|
NET INCOME
|
|
|
43,626
|
|
Net loss attributable to noncontrolling interests
|
|
|
25,094
|
|
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
68,720
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CT Risk Management, L.L.C.
On March 20, 2020, CT Risk Management, L.L.C.
(“CT”) was created as a Delaware limited liability company to reduce the impact of a potential market downturn on the interests
in alternative assets that support the Collateral for receivables held by Beneficient by distributing any potential profits to the certain
of the ExAlt 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 consolidated balance sheet as of December 31, 2020.
CT is considered a VIE as the at-risk equity holder,
Ben LP, does not have all of the characteristics of a controlling financial interest due to Ben LP’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 consolidated financial statements.
As of December 31, 2020, the consolidated
balance sheets include assets of this consolidated VIE with a carrying value of $7.0 million, which is recorded in the other assets line
item. Additionally, the Company recorded a $7.8 million loss on investment for the year ended December 31, 2020, which is reported
in the other income (loss) line item of the consolidated statements of operations.
VIEs for Which the Company is Not the Primary
Beneficiary
Prior to December 31, 2019, we determined that
the Borrowers are VIEs, but that we are not the primary beneficiary of the variable interests. We do not have the power to direct any
activities of the Borrowers that most significantly impact the Borrower’s economic performance. The Company’s exposure to
risk of loss in the Borrowers is limited to its financing receivable from the Borrowers, which is eliminated upon consolidation with Beneficient
on December 31, 2019.
We determined that FOXO is a VIE, but that we
are not the primary beneficiary of the variable interests. 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
preferred equity 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 VIE (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Carrying Value
|
|
|
Maximum Exposure to Loss
|
|
|
Carrying Value
|
|
|
Maximum Exposure to Loss
|
|
Total equity method investment
|
|
$
|
8,582
|
|
|
$
|
12,332
|
|
|
$
|
1,761
|
|
|
$
|
19,661
|
|
(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 amended and restated by the Fourth Amended Facility (defined in Note
23) on September 7, 2021, the (“LNV Credit Facility”)), 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 1.5% or 12-month
LIBOR, plus (b) 7.50% per annum. The effective rate at December 31, 2020 was 9.00%. Interest payments are made on a quarterly basis.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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). The LNV Credit Facility has certain financial and nonfinancial covenants, and we were in compliance
with these covenants at December 31, 2020 and continue to be as of the date of this filing.
In addition, the LNV Credit Facility has certain
reporting obligations that require DLP IV to deliver audited annual financial statements no later than ninety days after the end of each
fiscal year. Due to the failure to issue GWG Life, LLC audited financial statements for 2020 to LNV Corporation within 90 days after the
end of the year, we were in violation of our financial reporting obligations under the LNV Credit Facility. CLMG Corp., as administrative
agent for LNV Corporation, issued a limited deferral extending the delivery of these reports to May 17, 2021. We regained compliance on
May 17, 2021, when the audited annual financial statements of GWG Life were delivered to LNV Corporation.
As of December 31, 2020, approximately 77.1%
of the total face value of our life insurance policies portfolio is pledged to LNV Corporation. The amount outstanding under this facility
was $202.6 million and $184.6 million at December 31, 2020 and 2019, respectively. There were unamortized deferred financing costs
of $8.9 million and $10.2 million as of December 31, 2020 and 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
consolidated balance sheets is due to netting of unamortized debt issuance costs.
L Bonds
GWG Holdings began publicly offering and selling
L Bonds in January 2012, which have been sold under various registration statements since that time. On December 1, 2017, an additional
public offering was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds on a continuous basis until
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’ relationship with Beneficient.
We were in compliance with the covenants of the
indenture at December 31, 2020 and as of the date of this filing, and no Events of Default (as defined in the Amended and Restated
Indenture) existed as of such dates.
GWG Holdings publicly offers and sells L Bonds
under a registration statement declared effective by the SEC and have issued Seller Trust L Bonds under the L Bond Supplemental Indenture,
as described below. We temporarily suspended the offering of GWG Holdings’ L Bonds, commencing April 16, 2021, as a result of our
delay in filing certain periodic reports with the SEC, including this 2020 Form 10-K. We anticipate recommencing the offering of GWG Holdings’
L Bonds when we regain compliance with SEC filing requirements.
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 December 31, 2020 and 2019, the weighted-average
interest rate of GWG Holdings’ L Bonds was 7.21% and 7.15%, respectively. The principal amount of L Bonds outstanding, including
Liquidity Bonds discussed below, was $1.3 billion and $0.9 billion at December 31, 2020 and 2019, respectively. The difference between
the amount of outstanding L Bonds and the carrying amount on our consolidated balance sheets is due to netting of unamortized deferred
issuance costs, cash receipts for new issuances, and payments of redemptions in process. There were $18.0 million and $15.8 million of
subscriptions in process as of December 31, 2020 and 2019, respectively. Amortization of deferred issuance costs was $17.0 million and
$12.7 million for the years ended December 31, 2020 and 2019, respectively. Future expected amortization of deferred financing costs
as of December 31, 2020 is $49.0 million in total over the next seven years.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future contractual maturities of L Bonds, including
Liquidity Bonds discussed below, but excluding Seller Trust L Bonds, and future amortization of their deferred financing costs, at December 31,
2020 (in thousands) are as follows:
Years Ending December 31,
|
|
Contractual Maturities
|
|
|
Unamortized Deferred Financing Costs
|
|
2021
|
|
$
|
191,582
|
|
|
$
|
2,116
|
|
2022
|
|
|
293,038
|
|
|
|
8,522
|
|
2023
|
|
|
191,446
|
|
|
|
7,616
|
|
2024
|
|
|
121,105
|
|
|
|
5,220
|
|
2025
|
|
|
167,433
|
|
|
|
8,251
|
|
Thereafter
|
|
|
313,277
|
|
|
|
17,232
|
|
|
|
$
|
1,277,881
|
|
|
$
|
48,957
|
|
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 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, 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.
GWG Holdings’ L Bonds are offered and sold
under a registration statement declared effective by the SEC, as described above, and GWG Holdings has issued Seller Trust L Bonds under
the L Bond Supplemental Indenture.
As a result of the Collateral Swap on September
30, 2020, as discussed in Note 1, $94.8 million of Seller Trust L Bonds are now held by certain trusts within the ExAlt Trusts, and
are eliminated in consolidation as of December 31, 2020.
The principal amount of Seller Trust L Bonds outstanding
reflected on the consolidated balance sheets was $272.1 million and $366.9 million as of December 31, 2020 and 2019, respectively.
Liquidity Bonds
On December 31, 2020, GWG Holdings, GWG Life,
and Bank of Utah, as trustee (the “Trustee”), entered into a supplemental indenture, dated as of December 31, 2020 (the “Liquidity
Bond Supplemental Indenture”), to that certain Amended and Restated Indenture, dated as of October 23, 2017 (as amended, the “Indenture”),
among GWG Holdings, GWG Life and the Trustee, providing for the issuance from time to time of up to $1.0 billion in aggregate principal
amount of two new series of L Bonds (the “Liquidity Bonds”). The Liquidity Bonds will be offered and sold to accredited investors
in transactions that are exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”),
pursuant to Regulation D under the Securities Act.
The Liquidity Bonds were issued as part of the
Company’s strategy to expand its exposure to a portfolio of loans collateralized by cash flows from illiquid alternative assets.
Holders of alternative assets will be able to contribute their alternative assets to trusts that are part of the ExAlt PlanTM
established by GWG Holdings’ subsidiary, Ben LP, in exchange for Liquidity Bonds. The Liquidity Bonds will be issued by GWG Life,
as issuer, and guaranteed by GWG Holdings, will bear interest rates determined by the Company and the holders of the alternative assets
being contributed and will generally have a maturity of four years from issuance. The Liquidity Bonds will be issued under the Indenture,
and will rank pari passu with respect to payment on and collateral securing all of the Company’s other L Bonds issued under the
Indenture.
The Liquidity Bond Supplemental Indenture provides
for the issuance of two series of Liquidity Bonds: Series A Liquidity Bonds and Series B Liquidity Bonds. The Company expects an exchange
of alternative assets for Series A Liquidity Bonds will be treated as a non-taxable exchange for U.S. federal and state income tax purposes,
and that an exchange of alternative assets for Series B Liquidity Bonds will be treated as a taxable exchange for U.S. federal and state
income tax purposes. In addition to interest payments, holders of Series A Liquidity Bonds will be entitled to an annual, cash participation
payment of up to 1.5% of the principal amount of their Series A Liquidity Bonds subject to GWG Life having net taxable income in a given
year, prorated for the portion of such year that the holder owned the Series A Liquidity Bond. To the extent that the net taxable income
of GWG Life is insufficient to provide holders of Series A Liquidity Bonds with the full participation payment for any given year, such
shortfall shall carry forward and be payable from net taxable income earned by GWG Life in subsequent years.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Six months after the issuance date of a Liquidity
Bond, the holder may elect to exchange the Liquidity Bond, at the beginning of each month and upon 30 days’ prior written notice
to GWG Holdings, for that number of shares of GWG Holdings’ common stock (the “GWG Common Stock”) as determined by dividing
the entire outstanding principal balance and accrued but unpaid interest of the Liquidity Bond by the Exchange Price (as defined below)
or, at GWG Holdings’ election, common securities of a subsidiary of GWG Holdings (the “Subsidiary Common Securities”)
if they are publicly traded on a national securities exchange, by dividing the entire outstanding principal balance and accrued but unpaid
interest of the Liquidity Bond by the Subsidiary Common Securities Exchange Price (as defined below). For purposes of the Liquidity Bond
Supplemental Indenture, (i) the Exchange Price will be set at a premium to the closing price of GWG Holdings’ Common Stock on the
Nasdaq Stock Market on the last trading day prior to the execution and delivery of the binding agreement for issuance of the Liquidity
Bond, and (ii) the Subsidiary Common Securities Exchange Price will be based on the Exchange Price multiplied by the exchange ratio of
GWG Common Stock to the Subsidiary Common Securities issued in connection with any transaction in which GWG Common Stock is converted
into, or exchanged for, Subsidiary Common Securities, or if there is no conversion or exchange, the Subsidiary Common Securities Exchange
Price will be determined by GWG Holdings’ board of directors in good faith taking into account differences in capital structure
and related matters between GWG Holdings and the issuer of such Subsidiary Common Securities.
The Liquidity Bonds are payable in cash at maturity;
provided that the Liquidity Bonds may be paid at maturity (in GWG Life’s sole discretion) in GWG Common Stock (at the Exchange Price)
or Subsidiary Common Securities if they are publicly traded on a national securities exchange (at the Subsidiary Common Security Exchange
Price), or a combination of cash and GWG Common Stock or Subsidiary Common Securities.
GWG Life may call and redeem the entire outstanding
principal balance and accrued but unpaid interest of any or all of the Liquidity Bonds for cash at any time without penalty or premium.
Liquidity Bond holders have no rights to require GWG Life to redeem any Liquidity Bond prior to maturity.
As of December 31, 2020, there was $0.5 million
in principal and $0.2 million of unamortized financing costs of Liquidity Bonds. The net of these amounts, $0.3 million, is
presented on the consolidated balance sheets in the L Bonds line item.
Debt Due to Related Parties
As of December 31, 2020 and December 31,
2019, Beneficient had borrowings that consisted of the following (in thousands):
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
First Lien Credit Agreement
|
|
$
|
2,288
|
|
|
$
|
77,477
|
|
Second Lien Credit Agreement
|
|
|
72,260
|
|
|
|
72,184
|
|
Other borrowings
|
|
|
2,628
|
|
|
|
2,538
|
|
Unamortized debt premiums (discounts)
|
|
|
(916
|
)
|
|
|
887
|
|
Total debt due to related parties
|
|
$
|
76,260
|
|
|
$
|
153,086
|
|
Beneficient First and Second Lien Credit Agreement
On May 15, 2020, Beneficient executed a Term Sheet
with HCLP Nominees, L.L.C (“HCLP” or the “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, 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 extended the maturity date of both loans to April 10, 2021, and increased 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. On March 10,
2021, and again on June 28, 2021, Beneficient executed subsequent amendments, among other items, to further extend the maturity date to
May 30, 2022, as more fully described below and in Note 23. Through December 31, 2020, all principal and interest due under the Second
Amendments have been paid.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Second Amendments provided 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 charter 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 Ben LP 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. The assumption of the loans by DLP V has not occurred and, as
described below, further amendments to the Second Amended and Restated Credit Agreement and the Second Amended and Restated Subordinate
Credit Agreement removed the assumption of the loans by DLP V.
In connection with the Ben Credit Agreements (as
defined in Note 23), (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) Beneficient Holdings,
Inc. (“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 Ben LP 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 December 31, 2020, as the transfer of Preferred Series A Subclass Unit Accounts
has not occurred.
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 December 31, 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.
As more fully described in Note 23, on March 10,
2021, Beneficient executed the Amendment No.1 to the Second Amended and Restated Credit Agreement and Amendment No. 1 to the Second Amended
and Restated Subordinate Credit Agreement with its lender. The amendments extend the maturity date of both loans to May 30, 2022. The
loans are payable in three installments of $5.0 million on each of September 10, 2021 (subsequently deferred as discussed below),
December 10, 2021, and March 10, 2022, with the remaining balance payable on May 30, 2022. The amendments also provide for an extension
fee equal to 1.5% of the amount outstanding under the Credit Agreements, which was added to the outstanding amount under the Credit Agreements
as provided for in the amendments. Further, as more fully described in Note 23, on June 28, 2021, Beneficient executed the Amendment No.
2 to the Second Amended and Restated Credit Agreement and Amendment No. 2 to the Second Amended and Restated Subordinate Credit Agreement
with its lender. The amendments eliminate the obligation of DLP V to assume the Ben Credit Agreements as provided for in the Second Amendments
and waive the daily fee payable upon the Trigger as provided for in the Amendment No. 1 to the Ben Credit Agreements. Finally, as also
discussed in Note 23, effective July 15, 2021, Beneficient executed Consent and Amendment No. 3 to the Second Amended and Restated Credit
Agreement and Amendment No. 2 to the Second Amended and Restated Subordinate Credit Agreement with its lender, which (i) deferred the
payment of all accrued and unpaid interest until December 10, 2021, and (ii) deferred the installment payment of $5.0 million due
on September 10, 2021, to December 10, 2021. Beneficient agreed to pay an amendment fee to the lender in an amount equal to 3% of the
then outstanding principal and interest on December 10, 2021.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beneficient’s Second Lien Credit Agreement
was originally issued to BHI, a Ben Founder Affiliate. During 2019, the Second Lien Credit Agreement was contributed to HCLP and thus,
all existing senior loan obligations are held by HCLP as of December 31, 2020 and 2019. Future transactions between these parties are
more fully described in Note 20.
HCLP is indirectly associated with Ben Founder.
Further, an indirect parent entity of HCLP had loans outstanding to Ben Founder Affiliates as of December 31, 2020. Neither GWG Holdings
nor Beneficient are a party to these loans, nor have they secured or guaranteed the loans. See Note 20 for further discussion of the relationship
between HCLP and Ben Founder.
Beneficient’s additional borrowings as detailed
in the table below mature in 2023 and 2024.
Future contractual maturities of Beneficient’s
debt due to related parties as of December 31, 2020 are as follows (in thousands):
Years Ending December 31,
|
|
|
|
2021
|
|
$
|
74,548
|
|
2022
|
|
|
—
|
|
2023
|
|
|
750
|
|
2024
|
|
|
1,856
|
|
2025
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
77,154
|
|
(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 Trusts 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 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 Common Units have been exchanged for common
stock of GWG Holdings through December 31, 2020.
On November 15, 2018, the Board of Directors of
GWG Holdings approved a stock repurchase program pursuant to which GWG Holdings 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 Company repurchased
42,750 shares under this program in the first quarter of 2019 at an average per share price of $8.43. The stock repurchase program did
not obligate the Company to purchase any shares and expired on April 30, 2019.
Redeemable Preferred Stock
On November 30, 2015, GWG Holdings’ 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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The RPS ranks senior to GWG Holdings’ common
stock and pari passu with GWG Holdings’ 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 presently convert
their RPS into GWG Holdings’ common stock at a conversion price equal to the volume-weighted average price of GWG Holdings’
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, GWG Holdings’ 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 GWG Holdings’ common stock at a conversion price equal to the volume-weighted average
price of GWG Holdings’ 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).
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 by the holder 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 December 31, 2020, Ben LP has issued
Common Units and 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 December 31, 2020. The 5th Amended and Restated LPA
of BCH governs the terms of these equity securities.
Common Units
As of December 31, 2020 and December 31,
2019, Ben LP has a total of 48,205,756 and 44,146,623 Common Units issued and outstanding, respectively. As of December 31, 2020
and December 31, 2019, GWG Holdings owns 46,887,915 and 42,171,946, Common Units, respectively, which are eliminated in consolidation.
The remaining issued and outstanding Common Units are recorded in the consolidated balance sheets in the noncontrolling interests line
item.
Preferred Series A Subclass 0 (Noncontrolling
Interests)
On July 15, 2020, BCH 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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The Preferred A.0
Unit Accounts have not been issued as of December 31, 2020.
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 charter by the Texas Department of Banking. The charter from the Texas Department of Banking was not issued as of December
31, 2019. In 2020, this forbearance agreement was extended through December 31, 2020.
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 LP receive a 1% annualized return on
the Common Unit account balance;
|
|
●
|
Third, after the 1% annualized return to the Common Unit issued by Ben LP 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
|
|
●
|
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 LP 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.
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2020, and any amounts earned
have been accrued and are included in the balance of redeemable noncontrolling interests line item of the consolidated balance sheets.
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.
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 interests in alternative assets supporting 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 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.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 December 31, 2020, the carrying value
of GWG Holdings’ investments in Preferred Series C Unit Accounts was $195.6 million. The Preferred Series C Unit Accounts are eliminated
upon consolidation.
Class S Ordinary Units
As of December 31, 2020 and 2019, BCH, a
subsidiary of Ben LP, had issued and outstanding 5.8 million and 5.7 million Class S Ordinary Units, respectively. 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
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 the 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.
As of December 31, 2020, a nominal number
of shares of Class S Preferred Units have been issued. No amounts have been paid to the Class S Preferred Unit holders related to the
preferred return from issuance through December 31, 2020, and any amounts earned have
been accrued and are included in the balance of Class S Preferred Units presented on the consolidated balance sheet in the noncontrolling
interests line item.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beneficiaries of the ExAlt Trusts
The ultimate beneficiary of the ExAlt Trusts is
an unrelated third party charity (the “Charitable Beneficiary”) that is entitled to i) approximately 5% of any amounts paid
to Beneficient as payment on amounts due under each ExAlt Loan, ii) approximately 10% of the amount of excess cash Collateral, if any,
following the full repayment of an ExAlt Loan; and (iii) all amounts accrued and held at the ExAlt Trusts once all amounts due to Beneficient
under the ExAlt Loans and any fees related to Beneficient’s services to the ExAlt Trusts are repaid. The Charitable Beneficiary’s
account balances with respect to its interest in such ExAlt Trusts cannot be reduced to below zero. Any losses allocable to the Charitable
Beneficiary in excess of its account balances are reclassified at each period end to the trusts deficit account which is included as part
of noncontrolling interest. During 2020, additional ExAlt Trusts were created arising from new liquidity transactions with customers.
These new ExAlt Trusts, which are consolidated by Beneficient, resulted in the recognition of additional noncontrolling interest of $6.0 million
representing the interests in these new ExAlt Trusts held by the Charitable Beneficiary.
The interest of the Charitable Beneficiary, including
the associated trust deficit (as applicable), in the ExAlt Trusts is recorded on the consolidated balance sheets in the noncontrolling
interests line item.
(12) Equity-Based Compensation
As of December 31, 2020 and 2019, 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 (the “BMP Equity Incentive Plan”), the Ben Equity Incentive Plan (as defined below), and Preferred Series
A Subclass 1 Unit Accounts, 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 GWG Holdings’ Board
of Directors, and consultants. Option awards generally expire 10 years from the date of grant. As of December 31, 2020, the Company
has granted stock options, stock appreciation rights (“SAR”), and restricted stock units (“RSU”) under this plan.
As of December 31, 2020, 6,000,000 awards are authorized under the plan, of which 2,507,924 shares were reserved for issuance under
outstanding incentive awards and 3,492,076 shares remain available for future grants.
Stock Options
As of December 31, 2020, GWG Holdings had
outstanding stock options for 695,117 shares of common stock to employees, officers, and directors under the plan. The options were issued
with an exercise price between $4.83 and $11.56, which is equal to the market price of the shares on the date of grant. Options vest over
varying terms of up to three years. There were no options granted during the year ended December 31, 2020. The weighted average grant
date fair value of options granted during the year ended December 31, 2019, was $2.73. The total intrinsic value of stock options exercised
during the year ended December 31, 2020 and 2019 was $31.6 thousand and $0.3 million, respectively. The aggregate intrinsic
value of stock options outstanding and exercisable at December 31, 2020 was $41.7 thousand and $40.1 thousand, respectively. 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. During the years ended December 31, 2020 and 2019, a total of 97,996 and 197,859 stock options held by employees vested
for a total fair value of $0.3 million and $0.5 million, respectively.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Appreciation Rights (SARs)
As of December 31, 2020, GWG Holdings had
535,657 SARs outstanding. The strike price of the SARs was between $6.75 and $11.55, which was equal to the market price of the common
stock at the date of issuance. SARs vest over varying terms of up to three years. On December 31, 2020, the market price of GWG’s
common stock was $6.99. The weighted average grant date fair value of SARs granted during the years ended December 31, 2020 and 2019,
was $2.51 and $2.66, respectively. During the years ended December 31, 2020 and 2019, a total of 98,536 and 102,102 SARs held by
employees vested for a total fair value of $0.2 million and $0.2 million, respectively.
Upon the exercise of SARs, the Company is obligated
to make cash payments equal to the positive difference between the market value of GWG Holdings’ 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 December 31, 2020 and 2019 was $0.5
million and $0.6 million, respectively, and was recorded within other accrued expenses in the consolidated balance sheets.
The following summarizes information concerning
outstanding options and SARs issued under the 2013 Stock Incentive Plan:
|
|
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
|
Stock Options
|
|
|
SARs
|
|
|
Stock Options
|
|
|
SARs
|
|
December 31, 2019
|
|
|
905,381
|
|
|
|
375,625
|
|
|
$
|
9.05
|
|
|
$
|
9.25
|
|
Granted
|
|
|
—
|
|
|
|
192,925
|
|
|
|
—
|
|
|
|
7.82
|
|
Exercised
|
|
|
(20,136
|
)
|
|
|
(1,284
|
)
|
|
|
8.27
|
|
|
|
7.24
|
|
Forfeited and expired
|
|
|
(190,128
|
)
|
|
|
(31,609
|
)
|
|
|
9.23
|
|
|
|
9.05
|
|
December 31, 2020
|
|
|
695,117
|
|
|
|
535,657
|
|
|
|
9.03
|
|
|
|
8.75
|
|
The following table provides information regarding
outstanding stock options and SARs which were fully vested and exercisable:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
Stock Options
|
|
|
SARs
|
|
|
Stock Options
|
|
|
SARs
|
|
Number outstanding and exercisable
|
|
|
629,530
|
|
|
|
293,455
|
|
|
|
673,341
|
|
|
|
200,745
|
|
Weighted-Average Remaining Life (years)
|
|
|
5.88
|
|
|
|
4.17
|
|
|
|
6.83
|
|
|
|
4.49
|
|
Weighted Average Exercise Price
|
|
$
|
8.91
|
|
|
$
|
8.93
|
|
|
$
|
8.88
|
|
|
$
|
8.81
|
|
Restricted Stock Units
A restricted stock unit (“RSU”) entitles
the holder thereof to receive one share of GWG Holdings’ common stock (or, in some circumstances, the cash value thereof) upon vesting.
RSUs are subject to forfeiture until they vest. On June 18, 2019, GWG Holdings granted an aggregate of 114,366 RSUs to its directors,
which vested in their entirety on the one year anniversary of the grant date. On May 31, 2019, GWG Holdings granted RSUs to its Chief
Executive Officer that are subject to performance-based vesting pursuant to a performance share unit agreement (“PSU Agreement”).
The PSU Agreement provides for a target award grant of 129,717 RSUs, and up to a maximum of 259,434 RSUs, with each representing the right
to receive one share of GWG Holdings’ common stock (or, following a Change-in-Control Transaction (as defined in the PSU Agreement),
the cash value thereof) upon vesting, which is generally subject to the satisfaction of performance goals over a performance period commencing
on April 26, 2019 and ending on December 31, 2021. The weighted average grant date fair value of awards granted during 2019 was $10.15.
In the third quarter of 2019, a total of 375,000
RSUs held by employees vested entitling the holders thereof, collectively, to cash payments totaling $4.5 million, all of which were
paid in the third and fourth quarters of 2019 and recognized in employee compensation and benefits in the consolidated statement of operations
for the year ended December 31, 2019. Additionally during 2019, 53,403 RSUs vested and 26,701 shares of common stock were issued to employees,
net of shares forfeited to satisfy tax withholding obligations.
During the year ended December 31, 2020,
57,183 of the RSUs held by directors vested for the same number of shares of common stock for a total fair value of $0.5 million. The
weighted-average grant date fair value for the unvested activity presented in the table below was $9.18 for the year ended December 31,
2020.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Beneficient 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”). As of December 31, 2020 and 2019,
the Board of Directors of Beneficient Management has authorized the issuance of up to 19,000,000 units each of the BMP Equity Units. All
awards are classified in equity upon issuance.
While providing services to Beneficient, if applicable,
certain of these awards are subject to minimum retained ownership rules requiring the award recipient to continuously hold BMP Equity
Units equivalents equal to at least 25% of their cumulatively granted awards that have the minimum retained ownership requirement. The
awards are generally non-transferable. Awards under the BMP Equity Incentive Plan that vest ultimately dilute holders of Common Units.
The BMP Equity Units awarded beginning in second
quarter 2019 and through December 31, 2020, included 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 associated with the vesting of these awards is based on
the fair value of the BMP Equity Units on the date of grant. As of December 31, 2020 and 2019, compensation cost has been recognized
for the granted awards using the straight-line method over the requisite service period. The remaining unrecognized compensation cost
for granted awards will be recognized prospectively over the remaining requisite service period, on a straight-line basis using the graded
vesting method and forfeitures will be accounted for at the time that such forfeitures occur. 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 the second quarter of 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).
The weighted-average grant date fair value was
$9.61 per unit as of December 31, 2020. The weighted-average grant date fair value for the unvested activity presented in the table
below was $9.61 per unit for the year ended December 31, 2020. The total fair value of shares vested during the year ended December 31,
2020, was $49.6 million.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Ben Equity Incentive Plan
The Board of Directors of Beneficient Management
adopted the Ben Equity Incentive Plan in September 2018 (the “Ben Equity Incentive Plan”). Under the Ben Equity Incentive
Plan, Ben LP is permitted to grant equity awards, in the form of restricted equity units (“REUs”) up to a maximum of 12,811,258,
representing ownership interests in Common Units. Settled awards under the Ben Equity Incentive Plan dilute holders of Common Units. 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. All awards are classified in equity upon issuance.
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 whereby 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 Beneficient, 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.
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.
REUs were awarded under the Ben Equity Incentive
Plan beginning in the second quarter of 2019. For the REUs awarded under the Ben Equity Incentive Plan, pre-combination expense associated
with the vesting of these awards is based on the fair value of the Common Units on the date of grant while post-combination expense is
based on the fair value of the Common Units on the change-in-control date. The remaining unrecognized compensation cost for granted awards
will be recognized prospectively over the remaining requisite service period, on a straight-line basis using the graded vesting method
and forfeitures will be accounted for at the time that such forfeitures occur.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As Ben LP’s equity is not publicly traded,
the fair value for substantially all of the REUs granted in 2020 was estimated by using the valuation techniques consistent with those
utilized to determine the acquisition date equity values arising from GWG Holdings obtaining a controlling financial interest in Beneficient.
These valuation techniques relied upon the OPM Backsolve approach under the market method as more fully described in Note 4. For the REUs
granted in the latter portion of 2020, which is a de minimis amount of the total 2020 REUs, we utilized valuation techniques consisting
of the income approach and market approach. For awards granted during 2019, the fair value of the REUs was estimated using recent equity
transactions involving third parties, which provided the Company with observable fair value information sufficient for estimating the
grant date fair value.
During the second quarter of 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 the third quarter of 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 December 31,
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 December 31, 2020.
The estimated weighted-average grant date fair
value date was $12.50 as of December 31, 2020. The weighted-average grant date fair value for the unvested activity presented in
the table below was $12.50 for the year ended December 31, 2020. The total fair value of shares vested during the year ended December 31,
2020, was $42.9 million.
Preferred Equity
On April 25, 2019, Preferred Series A Subclass
1 Unit Accounts in BCH, a subsidiary of Ben LP, were assigned to three directors, with each having a capital account balance of $4.0 million,
subject to a performance condition, in return for each of the directors providing to BCH their knowledge and abilities in helping with
the formation of and capital raising for the Company. BHI, a Ben Founder Affiliate, assigned the Preferred Series A Subclass 1 Unit Accounts
it holds in BCH to the directors for those individuals providing services to BCH. Accounting for services provided to the Company but
paid by a principal shareholder follows the substance of the transaction and is therefore accounted for similar to a share-based payment
in exchange for services rendered. The awards vest upon grant, subject to a performance condition whereby each of the directors must be
a board member at the time that a certain level of additional capital is raised. The fair value
of the awards at the grant date was estimated at $12.0 million in aggregate.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the fourth quarter of 2019, $4.0 million
of the capital account balance was forfeited back to the Company and reverted to BHI upon the departure of a certain director. The performance
condition was met during the fourth quarter of 2020 and expense of $11.4 million was recognized and specially allocated to certain Preferred
Series A Subclass 1 Unit Account holders on a pro-rata basis based on their capital account balance. The expense recognized upon vesting
is reflective of the value calculated after the determination of overall enterprise value in connection with the change of control event
discussed in Note 4.
The following table summarizes the award activity,
in number of units, during the year ended December 31, 2020:
|
|
Balance at
December 31,
2019
|
|
|
Granted
|
|
|
Vested
|
|
|
Exercised
|
|
|
Forfeited
|
|
|
Recovery
of Vested
Awards
|
|
|
Balance at December 31,
2020
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSU
|
|
|
—
|
|
|
|
—
|
|
|
|
57,183
|
|
|
|
(57,183
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
BMP Equity Units
|
|
|
7,980,037
|
|
|
|
4,580,888
|
|
|
|
578,678
|
|
|
|
—
|
|
|
|
(31,618
|
)
|
|
|
(1,963,969
|
)
|
|
|
11,144,016
|
|
REUs
|
|
|
2,164,742
|
|
|
|
3,033,956
|
|
|
|
401,598
|
|
|
|
—
|
|
|
|
(14,000
|
)
|
|
|
(507,500
|
)
|
|
|
5,078,796
|
|
Unvested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSU
|
|
|
244,083
|
|
|
|
—
|
|
|
|
(57,183
|
)
|
|
|
—
|
|
|
|
(57,183
|
)
|
|
|
—
|
|
|
|
129,717
|
|
BMP Equity Units
|
|
|
180,000
|
|
|
|
3,008,800
|
|
|
|
(578,678
|
)
|
|
|
—
|
|
|
|
(380,025
|
)
|
|
|
—
|
|
|
|
2,230,097
|
|
REUs
|
|
|
246,500
|
|
|
|
2,727,072
|
|
|
|
(401,598
|
)
|
|
|
—
|
|
|
|
(303,400
|
)
|
|
|
—
|
|
|
|
2,268,574
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSU
|
|
|
244,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(57,183
|
)
|
|
|
(57,183
|
)
|
|
|
—
|
|
|
|
129,717
|
|
BMP Equity Units
|
|
|
8,160,037
|
|
|
|
7,589,688
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(411,643
|
)
|
|
|
(1,963,969
|
)
|
|
|
13,374,113
|
|
REUs
|
|
|
2,411,242
|
|
|
|
5,761,028
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(317,400
|
)
|
|
|
(507,500
|
)
|
|
|
7,347,370
|
|
The following table presents the components of
equity-based compensation expense recognized in the consolidated statement of operations (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
$
|
180
|
|
|
$
|
408
|
|
Stock appreciation rights
|
|
|
(40
|
)
|
|
|
338
|
|
Restricted stock units
|
|
|
(38
|
)
|
|
|
986
|
|
BMP equity units
|
|
|
53,523
|
|
|
|
—
|
|
REUs
|
|
|
45,772
|
|
|
|
—
|
|
Preferred equity
|
|
|
11,443
|
|
|
|
—
|
|
Total equity-based compensation
|
|
$
|
110,840
|
|
|
$
|
1,732
|
|
Unrecognized equity-based compensation expense,
excluding the expense related to the performance award discussed above, totaled approximately $34.8 million as of December 31,
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 December 31, 2020 (in thousands):
|
|
Stock
Options
|
|
|
SAR
|
|
|
REU
|
|
|
BMP Equity
Units
|
|
|
Total
|
|
2021
|
|
$
|
107
|
|
|
$
|
287
|
|
|
$
|
7,805
|
|
|
$
|
7,965
|
|
|
$
|
16,164
|
|
2022
|
|
|
19
|
|
|
|
192
|
|
|
|
5,754
|
|
|
|
5,834
|
|
|
|
11,799
|
|
2023
|
|
|
—
|
|
|
|
91
|
|
|
|
2,993
|
|
|
|
2,555
|
|
|
|
5,639
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
|
|
674
|
|
|
|
518
|
|
|
|
1,192
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
126
|
|
|
$
|
570
|
|
|
$
|
17,226
|
|
|
$
|
16,872
|
|
|
$
|
34,794
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average period over which to be recognized
|
|
|
0.57 years
|
|
|
|
1.12 years
|
|
|
|
2.52 years
|
|
|
|
1.61 years
|
|
|
|
|
|
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Other Expenses
The components of other expenses in our consolidated
statements of operations are as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Insurance and regulatory
|
|
$
|
4,459
|
|
|
$
|
5,032
|
|
Information technology
|
|
|
3,596
|
|
|
|
2,024
|
|
Servicing and facility fees
|
|
|
2,423
|
|
|
|
1,833
|
|
Marketing
|
|
|
1,251
|
|
|
|
1,612
|
|
Premises and equipment
|
|
|
1,215
|
|
|
|
692
|
|
Depreciation and amortization
|
|
|
1,170
|
|
|
|
436
|
|
Contract labor
|
|
|
906
|
|
|
|
1,820
|
|
Travel and entertainment
|
|
|
2,004
|
|
|
|
1,218
|
|
General and administrative
|
|
|
1,203
|
|
|
|
1,076
|
|
Bad debt expense
|
|
|
—
|
|
|
|
153
|
|
Total other expenses
|
|
$
|
18,227
|
|
|
$
|
15,896
|
|
(14) Income Taxes
The Company’s income tax provision reflects
the activity of GWG Holdings and its subsidiaries and Beneficient Corporate Holdings, LLC, currently the sole entity in the Beneficient
consolidated group that is taxed as a corporation. GWG Holdings and its subsidiaries files a separate tax return from Beneficient Corporate
Holdings, LLC, but the tax provision information below as of and for the year ended December 31, 2020 is presented on a consolidated basis
for financial reporting purposes under applicable GAAP.
As the statements of operations of GWG Holdings
and Ben LP were presented on a consolidated basis beginning on January 1, 2020, the information below as of and for the year ended December
31, 2019 does not include the tax provision information of Beneficient Corporate Holdings, LLC.
The current and deferred components of our income
tax expense (benefit) and the reconciliation at the statutory federal tax rate to our actual income tax expense (benefit) consisted of
the following (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
(As Restated)
|
|
Current income tax expense
|
|
$
|
537
|
|
|
$
|
10
|
|
Deferred income tax expense (benefit)
|
|
|
(16,927
|
)
|
|
|
71,855
|
|
Total income tax expense (benefit)
|
|
$
|
(16,390
|
)
|
|
$
|
71,865
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
(As Restated)
|
|
Statutory federal income tax (benefit)
|
|
$
|
(43,339
|
)
|
|
$
|
33,449
|
|
State income taxes (benefit), net of federal benefit
|
|
|
(2,995
|
)
|
|
|
12,962
|
|
Change in valuation allowance
|
|
|
20,688
|
|
|
|
25,547
|
|
Noncontrolling interest
|
|
|
7,718
|
|
|
|
—
|
|
Other permanent differences, net
|
|
|
1,538
|
|
|
|
(93
|
)
|
Total income tax expense (benefit)
|
|
$
|
(16,390
|
)
|
|
$
|
71,865
|
|
The Company’s effective tax rate was 7.9%
and 45.1% for the years ended December 31, 2020 and 2019, respectively. The effective tax rate for the year ended December 31, 2020 primarily
reflects the effects of the remeasurement of deferred tax liabilities due to a change in state deferred tax rate, offset by current state
taxes and an increase in valuation allowance. The effective tax rate for the year ended December 31, 2019 was higher than the statutory
rate primarily due to the deferred tax liability resulting from the gain on consolidation of equity method investment.
After the change-of-control transaction with Ben
LP on December 31, 2019, GWG Holdings moved its headquarters from Minnesota to Texas. This move resulted in a change in the state deferred
tax rate from 9.8% to 0%.
The effects of temporary differences that give
rise to deferred income taxes were as follows (in thousands):
|
|
December 31
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
(As Restated)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Investment in life insurance policies
|
|
$
|
42,836
|
|
|
$
|
37,649
|
|
Net operating loss and business interest carryforwards
|
|
|
43,188
|
|
|
|
18,935
|
|
Other assets
|
|
|
4,940
|
|
|
|
9,348
|
|
Subtotal
|
|
|
90,964
|
|
|
|
65,932
|
|
Valuation allowance
|
|
|
(88,157
|
)
|
|
|
(65,932
|
)
|
Deferred tax assets
|
|
|
2,807
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Investment in partnership
|
|
|
(54,077
|
)
|
|
|
(71,855
|
)
|
Other liabilities
|
|
|
(199
|
)
|
|
|
—
|
|
Net deferred tax liability
|
|
$
|
(51,469
|
)
|
|
$
|
(71,855
|
)
|
At December 31, 2020, we had federal net
operating loss (“NOL”) carryforwards of $58.0 million resulting in related deferred tax assets of $12.2 million, and
state NOL carryforwards of $24.3 million resulting in related deferred tax assets of $1.9 million. At December 31, 2019, we
had federal NOL carryforwards of $29.7 million resulting in related deferred tax assets of $6.2 million, and state NOL carryforwards
of $29.6 million resulting in related deferred tax assets of $2.3 million. The NOL carryforwards will begin to expire in 2031.
Future utilization of NOL carryforwards is subject
to limitations under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership
over a three-year period. As a result of the Exchange Transaction, a change in ownership for income tax purposes occurred as of December
28, 2018. As such, the annual utilization of our net operating losses generated prior to the ownership change was limited. However, net
unrealized built-in gains on our life insurance policies result in an increase in the Section 382 limit over the five-year recognition
period, which resulted in $0.5 million of current tax liability in 2020 and a nominal amount in 2019. Included in the deferred tax
liability noted in the table above are our investments in various classes of equity in Beneficient, which are partnerships for federal
income tax purposes.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Also, as of December 31, 2020, we had a capital
loss carryforward of $14.2 million that, if unused, will expire in 2025.
We provide for a valuation allowance when it is
not considered “more likely than not” that our deferred tax assets will be realized. As of December 31, 2020, based on
all available evidence, we have provided a valuation allowance of $88.2 million against our deferred tax assets due to the uncertainty
as to the realization of our deferred tax assets during the carryforward periods. In 2020, valuation allowances were recorded against
the total amount of non-permanent deferred tax assets.
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. As previously discussed, 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 would no longer utilize the reversal of a temporary difference related to GWG Holdings’
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 Company recorded
a large net deferred tax liability as of December 31, 2020. The effects of the reassessment of the valuation allowance on the deferred
tax liability as of December 31, 2019 are reflected in Note 21 to these consolidated financial statements. The net deferred tax liability
as of December 31, 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.
ASC 740, Income Taxes, requires the reporting
of certain tax positions that do not meet a threshold of “more-likely-than-not” to be recorded as uncertain tax benefits.
It is management’s responsibility to determine whether it is “more-likely-than-not” that a tax position will be sustained
upon examination, including resolution of any related appeals or litigation, based upon the technical merits of the position. Management
has reviewed all income tax positions taken or expected to be taken and has determined that the income tax positions are appropriately
stated and supported. We do not anticipate that the total unrecognized tax benefits will significantly change prior to December 31, 2021.
Under our accounting policies, interest and penalties
on unrecognized tax benefits, as well as interest received from favorable tax settlements are recognized as components of income tax expense.
At December 31, 2020 and 2019, we recorded no accrued interest or penalties related to uncertain tax positions.
Our income tax returns for tax years ended December 31,
2017 through 2019, and 2020, when filed, remain open to examination by the Internal Revenue Service and various state taxing jurisdictions.
Our income tax return for tax year ended December 31, 2016 also remains open to examination by various state taxing jurisdictions.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Earnings (Loss) per Common Share
The computations of basic and diluted income (loss)
attributable to common shareholders per share for 2020 and 2019 are as follows (in thousands, except share data and per share data):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
(As Restated)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Basic – Net income (loss) attributable to common shareholders
|
|
$
|
(168,545
|
)
|
|
$
|
70,471
|
|
Add: Preferred dividends upon conversion
|
|
|
—
|
|
|
|
2,020
|
|
Diluted – Net income (loss) attributable to common shareholders
|
|
|
(168,545
|
)
|
|
|
72,491
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic – weighted average common shares outstanding
|
|
|
28,063,268
|
|
|
|
33,016,007
|
|
Effect of dilutive securities
|
|
|
—
|
|
|
|
2,203,435
|
|
Diluted – weighted average common shares outstanding
|
|
|
28,063,268
|
|
|
|
35,219,442
|
|
Basic earnings (loss) per common share
|
|
$
|
(6.01
|
)
|
|
$
|
2.13
|
|
Diluted earnings (loss) per common share
|
|
$
|
(6.01
|
)
|
|
$
|
2.06
|
|
For the year ended December 31, 2020, RPS,
RPS 2, restricted stock units, and stock options for a potential 2,313,748 shares were not included in the calculation of diluted earnings
per share because we recorded a net loss during this period and the effects were anti-dilutive. Potentially dilutive instruments issued
by Ben LP that are ultimately exchangeable into GWG Holdings’ common stock were also excluded from the calculation of diluted earnings
per share for the year ended December 31, 2020 because we recorded a net loss during this period and the effects were anti-dilutive.
RPS and RPS 2 (as described in Note 11) and restricted
stock units and stock options (as described in Note 12) were included in the calculation of diluted earnings per share for the year ended
December 31, 2019. Options to purchase 437,266 shares of common stock were outstanding during 2019 but were excluded from the calculation
of diluted earnings per share because their effects were anti-dilutive.
(16) Segment Reporting
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 GWG Holdings’ 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 for owners of alternative assets and illiquid investment funds, and
other financial services to MHNW individuals. The Corporate & Other category consists of unallocated corporate overhead and administrative
costs and the operations of operating segments that do not meet the quantitative criteria to be separately reported.
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.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 for the year ended December 31, 2019, the
gain on consolidation of equity method investment. Information on reportable segments is as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Secondary Life Insurance
|
|
$
|
51,359
|
|
|
$
|
78,002
|
|
Beneficient
|
|
|
72,950
|
|
|
|
13,738
|
|
Corporate & Other
|
|
|
62
|
|
|
|
536
|
|
Total
|
|
$
|
124,371
|
|
|
$
|
92,276
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Secondary Life Insurance
|
|
$
|
97,279
|
|
|
$
|
83,055
|
|
Beneficient
|
|
|
57,337
|
|
|
|
31,789
|
|
Corporate & Other
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
154,616
|
|
|
$
|
114,844
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
(As Restated)
|
|
Segment EBT:
|
|
|
|
|
|
|
|
|
Secondary Life Insurance
|
|
$
|
(59,684
|
)
|
|
$
|
(27,694
|
)
|
Beneficient
|
|
|
(139,575
|
)
|
|
|
222,443
|
|
Corporate & Other
|
|
|
(32,970
|
)
|
|
|
(35,470
|
)
|
Total Segment EBT
|
|
|
(232,229
|
)
|
|
|
159,279
|
|
Income tax expense (benefit)
|
|
|
(16,390
|
)
|
|
|
71,865
|
|
Net income (loss)
|
|
$
|
(215,839
|
)
|
|
$
|
87,414
|
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
(As Restated)
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Secondary Life Insurance
|
|
$
|
886,739
|
|
|
$
|
904,363
|
|
Beneficient
|
|
|
2,662,630
|
|
|
|
2,762,121
|
|
Corporate & Other
|
|
|
15,588
|
|
|
|
9,297
|
|
Total
|
|
$
|
3,564,957
|
|
|
$
|
3,675,781
|
|
The total assets of the Beneficient segment at
both December 31, 2020 and 2019, includes goodwill of $2.4 billion which represents all of the goodwill on our consolidated balance
sheet as of the end of each reporting period.
(17) Leases
The Company leases certain real estate for its
office premises under operating lease agreements, which expire in 2021 and 2025. Under these leases, we are obligated to pay base rent
plus common area maintenance and a share of building operating costs. The lease agreements contain extension options which we have not
included in our liability calculations. We lease various other facilities on a short-term basis. The lease assets and liabilities are
as follows (in thousands):
Leases
|
|
Classification
|
|
December 31,
2020
|
|
Operating lease right-of-use assets
|
|
Other assets
|
|
$
|
1,126
|
|
Operating lease liabilities
|
|
Accounts payable and accrued expenses
|
|
$
|
1,672
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total lease costs recognized for the years ended
December 31, 2020 and 2019 were as follows (in thousands):
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease costs
|
|
$
|
910
|
|
|
$
|
233
|
|
Variable lease costs
|
|
|
332
|
|
|
|
225
|
|
Short-term lease costs
|
|
|
87
|
|
|
|
60
|
|
Total lease costs
|
|
$
|
1,329
|
|
|
$
|
518
|
|
The weighted average remaining lease term at December 31,
2020 and 2019 was 3.9 years and 4.2 years, respectively, and the weighted average discount rate was 6.8% and 6.6%, respectively. For the
years ended December 31, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities and included
in operating cash flows totaled $1.0 million and $0.3 million respectively.
Maturities of operating lease liabilities as of
December 31, 2020 are as follows (in thousands):
2021
|
|
$
|
716
|
|
2022
|
|
|
302
|
|
2023
|
|
|
311
|
|
2024
|
|
|
320
|
|
2025
|
|
|
273
|
|
Thereafter
|
|
|
—
|
|
Total lease payments
|
|
|
1,922
|
|
Less: imputed interest
|
|
|
(250
|
)
|
Present value of lease liabilities
|
|
$
|
1,672
|
|
(18) Commitments and Contingencies
Litigation — In the normal course
of business, we are involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings
would not have a material adverse effect on our financial position, results of operations or cash flows.
Commitments — GWG Holdings is committed
to contribute an additional $3.8 million to FOXO through 2021. The ExAlt Trusts had $35.6 million and $34.9 million of potential gross
capital commitments as of December 31, 2020 and December 31, 2019, respectively, representing potential limited partner capital
funding commitments on the interests in alternative asset funds. This is the amount above any existing cash reserves for such capital
funding commitments. The ExAlt Trusts 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 within the ExAlt PlanTM created at the origination of each trust for up to $0.1 million.
To the extent that the associated ExAlt Trusts cannot pay the capital funding commitment, Beneficient is obligated to lend the associated
ExAlt Trust sufficient funds to meet the commitment pursuant to the terms of the respective ExAlt Loan. Any amounts advanced by Beneficient
to the ExAlt Trusts for these limited partner capital funding commitments pursuant to the terms of the respective ExAlt Loan above the
associated capital funding commitment reserves held by the associated ExAlt Trusts are added to the ExAlt Loan balance between Beneficient
and the ExAlt Trusts and are expected to be recouped through the cash distributions from the alternative asset fund that collateralizes
such ExAlt Loan.
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 of the investments on a case-by-case basis. At both December 31,
2020 and December 31, 2019, Beneficient had no reserves for losses on unused commitments
to fund potential limited partner capital funding commitments.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unfunded Commitments — Beneficient
had $1.1 million of unfunded commitments on liquidity solution transactions as of December 31, 2020 related to liquidity transactions
in process as of that date. There were no reserves for unfunded commitments as of December 31, 2020, and all amount in process were
fully funded in the first quarter of 2021.
Investigation — On October 6, 2020,
GWG Holdings received a subpoena to produce documents from the Chicago office of the SEC’s Division of Enforcement, informing the
Company of the existence of a non-public, fact-finding investigation into GWG Holdings. Since the initial subpoena, GWG Holdings has received
subsequent subpoenas from the SEC for additional information. The requested information from the SEC has primarily related to GWG Holdings’
investment products, including its L Bonds, as well as various accounting matters, among them, the consolidation for financial reporting
purposes of Beneficient by GWG Holdings, goodwill valuation, and the accounting related to the ExAlt Trusts, related party transactions,
life insurance policies, and the calculation of the debt-coverage ratio.
Until receipt of the initial subpoena on October
6, 2020, GWG Holdings had no previous communication with the SEC related to these issues and was unaware of this investigation. The Company
is fully cooperating with the SEC in this investigation. The Company is currently unable to predict when this matter will be resolved
or what further action, if any, the SEC may take in connection with it. As such, the Company cannot predict with certainty the outcome
or effect of any such investigation or whether it will lead to any claim or litigation.
(19) Concentration
Life Insurance Carriers
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 face value of insurance policies with specific life insurance companies exceeding 10% of the total face value
of our portfolio.
Life Insurance Company
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
John Hancock
|
|
|
14.72
|
%
|
|
|
14.23
|
%
|
Lincoln National
|
|
|
11.20
|
%
|
|
|
11.55
|
%
|
Equitable Financial
|
|
|
10.57
|
%
|
|
|
10.63
|
%
|
The following summarizes the number of insurance
policies held in specific states exceeding 10% of the total face value held by us:
State of Residence
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
California
|
|
|
18.05
|
%
|
|
|
17.46
|
%
|
Florida
|
|
|
14.93
|
%
|
|
|
14.86
|
%
|
Alternative Assets Industries
Beneficient’s underlying portfolio companies
primarily operate in the United States and Western Europe, with the largest percentage, based on NAV, operating in diversified financials,
telecommunications services, food and staples retailing, and software and services industries.
(20) Related Parties
Relationship with Beneficient Management Counselors, L.L.C.
Beneficient Management is the general partner
of Ben LP and is governed by a board of directors. The governing document of Beneficient Management provides that Beneficient Management
Counselors, L.L.C. (“BMC”), wholly owned by one of several Ben Founder Affiliates, determines the directors of Beneficient
Management who fill 30% of the seats on the Board of Directors of Beneficient Management. BMC is also entitled to select (a) 50% of the
membership of Beneficient Management’s Nominating Committee and Executive Committee and appoint the chair of each of these committees,
and (b) 50% of the membership of the Community Reinvestment Committee (CRC) and the CRC’s chairperson, vice-chairperson, and lead
committee member. Certain decisions with respect to Ben LP’s charitable giving program are delegated to the CRC. Decisions regarding
appointment and removal of Beneficient Management’s directors, other than directors appointed by BMC, and GWG Holdings, are delegated,
with certain exceptions, to the Nominating Committee of Beneficient Management, of which an executive of a Ben Founder Affiliate is a
member and Chairman. In the event of a tie vote of the Nominating Committee on a vote for the removal of a director, the Chairman of the
Nominating Committee may cast the tie-breaking vote.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Services Agreement with Bradley Capital Company, L.L.C.
Ben LP is the general partner of BCH and together
they entered into an agreement with Bradley Capital Company, L.L.C. (“Bradley Capital”) and BMC effective July 1, 2017 (the
“Bradley Capital Agreement”). Bradley Capital is indirectly owned by a Ben Founder Affiliate. Under the Bradley Capital Agreement,
Bradley Capital is entitled to a current base fee of $0.4 million per quarter for executive-level services provided by an executive
of Bradley Capital, who is Beneficient’s Chief Executive Officer, former Chairman of GWG Holdings’ board of directors (serving
from April 26, 2019 to June 14, 2021), and Chairman of Beneficient Management’s board of directors, together with a current supplemental
fee of $0.2 million per quarter for administrative and financial analysis, subject to an annual inflation adjustment. The base fee
may be increased up to two times the initial base fee per quarter if the scope of the services is expanded with the approval of the Executive
Committee of the board of Beneficient Management, of which an executive of a Ben Founder Affiliate is a member and Chairman. An executive
of a Ben Founder Affiliate receives an annual salary from the Company of $0.2 million and both an executive of a Ben Founder Affiliate
and other employees of Bradley Capital can participate in equity incentive plans sponsored by the Company. The Bradley Capital Agreement
also includes a payment from Ben LP of $0.2 million per year, paid quarterly, to cover ongoing employee costs for retired and/or
departed employees of predecessor entities prior to September 1, 2017, which on-going costs were assumed by Bradley Capital, as well as
a further payment to Bradley Capital in respect of the cost of health and retirement benefits for current employees of Bradley Capital
all of which are reimbursed by Ben LP. Ben LP is also required to reimburse Bradley Capital for out-of-pocket expenses incurred by Bradley
Capital employees, including reimbursement for private travel including the family members of a designated executive of a Ben Founder
Affiliate for both business and personal use. The Bradley Capital Agreement requires Ben LP to reimburse Bradley Capital or its affiliates
for taxes, fees, and expenses, including legal fees and related costs, relating to the contributions by affiliates of Bradley Capital
of equity or debt interests in Ben LP to public charitable trusts in connection with the Exchange Trusts, as well as the contribution
of beneficial interests in customer trusts administered by Beneficient. Additionally, the Company provides office space and access to
needed technology systems and telephony services. Payments by Ben LP to Bradley Capital and its affiliates are guaranteed and subject
to enforcement by the state courts in Delaware in the event of default. The Bradley Capital Agreement extends through December 31, 2021,
with an automatic annual one-year renewal provision thereafter. The Bradley Capital Agreement may be terminated by unanimous approval
of the Executive Committee of the board of Beneficient Management of which an executive of a Ben Founder Affiliate is a member, or without
such approval if the Ben Founder Affiliate no longer holds $10.0 million of Ben LP’s securities. During the year ended December 31,
2020, the Company recognized expenses totaling $3.8 million related to this services agreement.
Relationship with Beneficient Holdings, Inc.
The Beneficient Company Group (USA), L.L.C. (“Beneficient
USA”), a subsidiary of BCH, entered into a Services Agreement with BHI effective July 1, 2017 (the “BHI Services Agreement”).
BHI is indirectly owned by a Ben Founder Affiliate and is an affiliate of Beneficient. BHI pays an annual fee of $30 thousand to Ben LP
for the provision of trust administration services for a Ben Founder Affiliate and all trusts affiliated with its family trustee as that
term is defined in the governing documents for a Ben Founder Affiliate. Beneficient USA also is required to provide any other services
requested by BHI, subject to any restrictions in the operating agreement of BHI, at cost. The term of the BHI Services Agreement extends
for the longer of (i) five years past the expiration or termination of the Bradley Capital Agreement, or (ii) seven years after the family
trustee of the Ben Founder Affiliate is no longer a primary beneficiary of any trust affiliated with the family trustee. During the year
ended December 31, 2020, the Company recognized income in accordance with the agreement.
BHI owns the majority of the Class S Ordinary
Units, Class S Preferred Units, Preferred Series A Subclass 1 Unit Accounts, and FLP Subclass 1 Unit Accounts issued by BCH.
BHI expects to receive tax distributions from
HCLP arising from the repayment of the Second Lien Credit Agreement to cover any tax liability associated with the contribution of the
Second Lien Credit Agreement to HCLP (Note 10). Additionally, if HCLP is liquidated while the Second Lien Credit Agreement is still outstanding,
the Second Lien Credit Agreement will transfer back to BHI.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HCLP Nominees, LLC
During the years ended December 31, 2020 and 2019,
GWG Holdings invested $130.2 million and $79.0 million, respectively, of cash into equity investments in Beneficient. During
this same period, Beneficient made payments to HCLP, its Senior Lender, totaling $144.6 million in principal and interest on the
First and Second Lien Credit Agreements. The First Credit Agreement was issued in 2017, while the Second Lien Credit Agreement was issued
in 2018. HCLP is an indirect subsidiary of Highland Consolidated, L.L.C. (“Highland”).
A long-standing lending and investment relationship
of 25 years exists between Highland (and its affiliates or related parties), on the one hand, and certain trusts and entities held by
such trusts that are controlled by Ben Founder (“Ben Founder Affiliates”), on the other. From time to time, Highland or its
affiliates have advanced funds under various lending and investing arrangements to the Ben Founder Affiliates, and such Ben Founder Affiliates
have made repayments to Highland or its affiliates, as applicable, both in cash and in kind.
Such loans to and investments with or in the Ben
Founder Affiliates have been and may be made by Highland, or its affiliates, as applicable, using proceeds from loan repayments made by
Beneficient to HCLP in its capacity as Senior Lender to Beneficient, with such loan repayments made potentially using cash from GWG Holdings’
and GWG Life’s investments in Beneficient. Such loans and investments have ranged between no outstanding balance and $104.0 million.
As of June 30, 2021, Highland and the applicable
Ben Founder Affiliates mutually agreed to satisfy all obligations under all outstanding loans among Highland and the Ben Founder Affiliates
via full payment and satisfaction of the existing loan balances (the “Loan Balances”) by in-kind real property transfers (the
“In-Kind Property Payment”) from certain of the Ben Founder Affiliates to Highland. The terms of the In-Kind Property Payment
grants Highland the right to transfer the real property that was transferred pursuant to the In-Kind Property Payment back to certain
of the Ben Founder Affiliates, in exchange for a Preferred Series A Subclass 1 capital account balance in BCH in an amount equal to the
Loan Balances, with such exchange to be satisfied from existing Preferred Series A Subclass 1 Unit Accounts that are held by such Ben
Founder Affiliates. As of June 30, 2021, neither Highland nor any of its affiliates has any outstanding loans or investments with or in
any Ben Founder Affiliates.
Administrative Services Agreement between Constitution
Private Capital Company, L.L.C. (“Constitution”) and Beneficient USA
Constitution is an entity owned 50.5% by a Ben
Founder Affiliate and 49.5% by an entity controlled by the board of directors of Beneficient Management. It was founded in 1986 and acquired
by a Ben Founder Affiliate in 1996. Constitution currently manages three private equity fund-of-funds. Effective January 1, 2017, Constitution
entered into an Administrative Services Agreement (the “ASA”) with Beneficient USA, which is wholly owned by BACC and a subsidiary
of BCH, whereby Beneficient USA provides personnel to administer the portfolio assets advised by Constitution. Under the ASA, Constitution
pays to Beneficient USA a monthly fee equal to .01% of the month-end net assets of its portfolio. The ASA automatically renews on an annual
basis and may be terminated at any time by Constitution. Beneficient USA may only terminate the ASA in the event of a breach by Constitution.
The income recognized by the Company related to this services agreement was immaterial for the years ended December 31, 2020.
Preferred Liquidity Provider Agreement with Constitution
In May 2019, BCC entered into an agreement with
Constitution (the “Preferred Liquidity Provider Agreement”) under which at Constitution’s option, BCC will provide liquidity
to alternative asset funds sponsored by Constitution at an advance rate of not less than 82% of NAV, to the extent such funds meet certain
specified qualifications. For a fund to qualify for the liquidity option, it must, among other things, hold investments that were approved
or deemed approved by BCC at the time a fund makes such investments. BCC is required to provide liquidity in any combination, at its discretion,
of cash, U.S. exchange traded funds registered under the Investment Company Act of 1940, or securities traded on a national securities
exchange. BCC’s obligation under the Preferred Liquidity Provider Agreement is guaranteed by Ben LP and BCH. The Preferred Liquidity
Provider Agreement may be terminated solely by mutual consent of Beneficient and Constitution. Beneficient and Constitution have not contracted
for any liquidity under this agreement through December 31, 2020.
Relationship with The Heppner Endowment for Research Organizations,
L.L.C. (“HERO”) and Research Ranch Operating Company, L.L.C (“RROC”).
HERO and RROC are owned indirectly by a Ben Founder
Affiliate. HERO’s purposes are (i) to serve as an advisor to National Philanthropic Trust (“NPT”), an unrelated third-party
charitable organization, regarding the disbursement of research grants to qualifying organizations, and (ii) to serve as an advisor to
NPT regarding the administration of charitable contributions made for the benefit of such qualifying organizations. Although HERO can
advise on these matters, NPT has all final decision-making authority on the charitable contributions and complete control over the proceeds
received by the charitable organizations. The charitable organizations administered by NPT (the beneficiaries of which have historically
been multiple Texas universities) receive proceeds from trusts settled and funded by customers of Beneficient, in support of their charitable
initiatives. HERO does not receive any proceeds from trusts settled and funded by customers of Beneficient.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RROC’s purpose is to provide funding and
operational support for the research activities conducted by the qualified charities. The funding received by RROC, from proceeds of trusts
settled and funded by customers of Beneficient, may be used, in RROC’s discretion, to (i) provide appropriate facilities and properties
for the charitable organizations to utilize as part of their charitable initiatives (those properties and facilities being owned by a
Ben Founder Affiliate), and (ii) provide fee revenue to RROC. RROC is granted such rights and authority pursuant to trust instruments
entered into between a customer and subsidiaries of Ben LP as well as an agreement with NPT. Ben LP’s subsidiaries provide financing
to the ExAlt Trusts and Beneficient is paid as an agent of the trustees for administrative services it provides to the trusts. The Company
has certain outstanding payables, including accrued interest, of approximately $2.6 million and $2.5 million as of December 31, 2020
and 2019, respectively, to RROC and NPT (for the benefit of the Texas universities). There were no payments made during the year ended
December 31, 2020.
Relationship with Hicks Holdings L.L.C.
Hicks Holdings L.L.C. (“Hicks Holdings”),
an entity related to Thomas O. Hicks, who is a Beneficient Management director and a former GWG Holdings director, owns a Preferred Series
A Subclass 1 Unit Account and Class S Ordinary Units issued by BCH with a total initial balance of $60.4 million. Hicks Holdings
was granted its Preferred Series A Subclass 1 Unit Account and Class S Ordinary Units as compensation for services provided under a previous
advisory and consulting services agreement between Beneficient and Hicks Holdings, which terminated on June 30, 2018. The total balance
as of December 31, 2020 was $78.2 million.
Relationship with MHT Financial, L.L.C.
MHT Financial, L.L.C (“MHT”) is the
sole beneficiary of each of the Seller Trusts. MHT is an entity affiliated with the Chairman, President and Chief Executive Officer of
GWG Holdings (the “GWG Chairman”) and became a related party to Beneficient as a result of the December 31, 2019 transactions
between GWG Holdings and Ben LP. The GWG Chairman may be deemed to have an indirect interest in the assets held by the Seller Trusts as
a result of his ownership of 30% of the outstanding membership interests of MHT. The assets of the Seller Trusts currently include shares
of GWG Holdings’ common stock and Seller Trust L Bonds. Consequently, to the extent that MHT, as sole beneficiary of each of the
Seller Trusts, receives any proceeds from distributions on the GWG Holdings’ common stock, interest and principal payments on the
Seller Trust L Bonds or the sale or other disposition of GWG Holdings’ common stock and Seller Trust L Bonds in excess of MHT’s
contractual obligations to the former owners of alternative assets that were contributed to the Seller Trusts, the GWG Chairman would
have a right to receive his pro rata share of any distribution of such excess proceeds if made by MHT to its members. The GWG Chairman
does not have unilateral authority to effect the sale or other disposition of the assets of the Seller Trusts or cause MHT to make distributions
to its members. Following the satisfaction of MHT’s contractual obligations upon the sale or other disposition of the assets of
the Seller Trusts, (i) there may not be excess proceeds to distribute to MHT or (ii) even if there are excess proceeds, MHT may not distribute
such excess proceeds to its members.
Beneficient has amounts due under two promissory
note agreements with MHT for funds advanced outside of its normal liquidity arrangements. Aggregate principal and interest due for both
promissory notes as of December 31, 2020 and 2019, was $4.2 million and $3.9 million, respectively, which is recorded in other assets
in the consolidated balance sheets.
MHT also owns a Preferred Series A Subclass 1
Unit Account with a total account balance of $23.9 million and $24.5 million as of December 31, 2020 and 2019, respectively.
Promissory Note
On May 31, 2019, the Borrowers executed the Promissory
Note with GWG Life for a principal amount of $65.0 million that matures on June 30, 2023. An initial advance in the principal amount
of $50.0 million was funded on June 3, 2019, and a second advance in the principal amount of $15.0 million was funded on November
27, 2019.
The proceeds from the Promissory Note were used
by the Borrowers to purchase senior beneficial interests held by these certain other trusts of the ExAlt PlanTM. The aforementioned
trusts utilized the proceeds to repay loan amounts owed by certain of the trusts included within the ExAlt PlanTM to BCC, a
subsidiary of Ben LP.
As of December 31, 2019, the Borrowers became
consolidated subsidiaries of GWG Holdings as a result of the Investment Agreement (described in Note 1). Accordingly, the Promissory Note
and related accrued interest, are eliminated upon consolidation as of that date. Prior to any purchase accounting adjustments, the outstanding
principal balance was $65.0 million and accrued interest expense was $2.2 million as of December 31, 2019. The Promissory Note
was settled on September 30, 2020, as discussed further in Note 1.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(21) Restatement
As previously reported on Form 8-K filed with
the SEC on July 7, 2021, and as discussed throughout this 2020 Form 10-K, as part of the preparation of its 2020 Form 10-K, the Company
voluntarily submitted two questions to the OCA on February 15, 2021. The questions submitted by the Company to OCA were (1) whether a
December 31, 2019 transaction resulted in GWG Holdings, Inc. obtaining control of Ben LP in a transaction that constituted a change-in-control
of Beneficient by entities not under common control, and (2) whether Ben LP was required to consolidate any of the trusts created through
Beneficient’s ExAlt PlanTM established in connection with its business of providing liquidity to holders of alternative
assets. On July 26, 2021, the Company and OCA staff held a conference call in which OCA’s staff notified the Company of its conclusions
on the two accounting questions that were the subject of the consultation. During that call, OCA expressed that it would object to a conclusion
that Ben LP not consolidate the ExAlt Trusts as of December 31, 2019. Regarding question (1), OCA did not conclude on the common control
aspect of the transaction in question. However, after further analysis, including, among other things, consulting with legal counsel to
conclude that the common stock of GWG Holdings held by Beneficient were not voteable under Delaware law, the Company confirmed its original
conclusion that the entities were not under common control.
Prior to December 31, 2019, only certain trusts
created through Beneficient’s ExAlt PlanTM were considered variable interest entities for which Ben LP had a variable
interest and was considered the primary beneficiary. Thus, Ben LP was required to consolidate certain of such trusts. Due to changes to
both the governance structure and the underlying economics of the trust and other agreements pertaining to certain of the ExAlt Trusts
and the execution of new loan agreements between a subsidiary of Ben LP and certain of such trusts as of December 31, 2019, it was initially
concluded that Ben LP no longer had the power to direct the activities that most significantly impact the economic performance of any
of the ExAlt Trusts and therefore could no longer consolidate any of such trusts as of December 31, 2019, including those previously consolidated.
However, we have since determined that such conclusion was incorrect, and that the proper application of generally accepted accounting
principles is for Ben LP to consolidate all of the ExAlt Trusts. As a result of consolidating such trusts, Ben LP’s primary tangible
asset, which was acquired through loans a subsidiary of Ben LP made to certain of the ExAlt Trusts, was previously reported as a loan
receivable as of December 31, 2019, but is now being reported as an investment in alternative assets held by certain of the ExAlt Trusts.
The tables below illustrate the impact of the
Restatement, as well as other corrections as discussed in Note 2, on our historical Consolidated Balance Sheet, Consolidated Statement
of Operations, Consolidated Statement of Cash Flows, and Consolidated Statement of Changes in Stockholder’s Equity as of December
31, 2019, each as compared with the amounts presented in the original Form 10-K previously filed with the SEC.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effects of the Restatement - Annual Results
All adjustments presented in the tables below
reflect the impact of the consolidation of the ExAlt Trusts, unless otherwise specifically indicated in the footnotes to each table.
The following table sets forth the effects of
the Restatement on the affected line items within the Company’s previously reported Consolidated Balance Sheet as of December 31,
2019 (dollars in thousands).
|
|
December 31, 2019
|
|
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,073
|
|
|
$
|
3,211
|
|
|
$
|
82,284
|
|
Restricted cash
|
|
|
20,258
|
|
|
|
13,248
|
|
|
|
33,506
|
|
Investment in alternative assets, at net asset value
|
|
|
—
|
|
|
|
342,012
|
|
|
|
342,012
|
|
Loan receivables, net of discount
|
|
|
232,344
|
|
|
|
(232,344
|
)
|
|
|
—
|
|
Fees receivable
|
|
|
29,168
|
|
|
|
(29,168
|
)
|
|
|
—
|
|
Financing receivables from affiliates
|
|
|
67,153
|
|
|
|
(67,153
|
)
|
|
|
—
|
|
Other assets
|
|
|
28,374
|
|
|
|
1,024
|
|
|
|
29,398
|
|
Goodwill
|
|
|
2,358,005
|
|
|
|
9,745
|
|
|
|
2,367,750
|
|
TOTAL ASSETS
|
|
|
3,635,206
|
|
|
|
40,575
|
|
|
|
3,675,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
41,444
|
|
|
|
(41,444
|
)
|
|
|
—
|
|
Repurchase option
|
|
|
—
|
|
|
|
61,664
|
|
|
|
61,664
|
|
Accounts payable and accrued expenses
|
|
|
27,836
|
|
|
|
56
|
|
|
|
27,892
|
|
Deferred tax liability, net(1)
|
|
|
57,923
|
|
|
|
13,932
|
|
|
|
71,855
|
|
TOTAL LIABILITIES
|
|
|
1,764,725
|
|
|
|
34,208
|
|
|
|
1,798,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(76,501
|
)
|
|
|
(20,695
|
)
|
|
|
(97,196
|
)
|
TOTAL GWG HOLDINGS STOCKHOLDERS’ EQUITY
|
|
|
333,979
|
|
|
|
(20,695
|
)
|
|
|
313,284
|
|
Noncontrolling interests
|
|
|
266,848
|
|
|
|
27,062
|
|
|
|
293,910
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
600,827
|
|
|
|
6,367
|
|
|
|
607,194
|
|
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
$
|
3,635,206
|
|
|
$
|
40,575
|
|
|
$
|
3,675,781
|
|
(1)
|
Adjustment specifically reflects the impact of an immaterial
out-of-period adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated
financial statements for more details.
|
The following table sets forth the effects of
the Restatement on the affected line items within the Company’s previously reported Consolidated Statement of Operations for the
year ended December 31, 2019 (dollars in thousands).
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
INCOME TAX EXPENSE(1)
|
|
$
|
57,933
|
|
|
$
|
13,932
|
|
|
$
|
71,865
|
|
LOSS BEFORE EARNINGS FROM EQUITY METHOD INVESTMENTS
|
|
|
(137,530
|
)
|
|
|
(13,932
|
)
|
|
|
(151,462
|
)
|
Gain on consolidation of equity method investment (see Note 4) (2)
|
|
|
249,716
|
|
|
|
(6,763
|
)
|
|
|
242,953
|
|
NET INCOME (LOSS)
|
|
|
108,109
|
|
|
|
(20,695
|
)
|
|
|
87,414
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
|
91,166
|
|
|
|
(20,695
|
)
|
|
|
70,471
|
|
NET INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.76
|
|
|
$
|
(0.63
|
)
|
|
$
|
2.13
|
|
Diluted
|
|
$
|
2.65
|
|
|
$
|
(0.59
|
)
|
|
$
|
2.06
|
|
(1)
|
Adjustment reflects the impact of an immaterial out-of-period
adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated financial
statements for more details.
|
(2)
|
Adjustment is due to the fair value adjustment of the Promissory
Note, which was required as of December 31, 2019 upon consolidation of the ExAlt Trusts.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the effects of
the Restatement on the affected line items within the Company’s previously reported Consolidated Statement of Cash Flows for the
year ended December 31, 2019 (dollars in thousands).
|
|
As Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income (loss) (1) (2)
|
|
$
|
108,109
|
|
|
$
|
(20,695
|
)
|
|
$
|
87,414
|
|
Gain on consolidation of equity method investment
|
|
|
(249,716
|
)
|
|
|
6,763
|
|
|
|
(242,953
|
)
|
Deferred income taxes(1)
|
|
|
57,923
|
|
|
|
13,932
|
|
|
|
71,855
|
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(142,830
|
)
|
|
|
—
|
|
|
|
(142,830
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination consideration, net of cash and restricted cash acquired
|
|
|
(61,479
|
)
|
|
|
16,459
|
|
|
|
(45,020
|
)
|
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
(137,969
|
)
|
|
|
16,459
|
|
|
|
(121,510
|
)
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
(26,105
|
)
|
|
|
16,459
|
|
|
|
(9,646
|
)
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
END OF PERIOD
|
|
|
99,331
|
|
|
|
16,459
|
|
|
|
115,790
|
|
(1)
|
Adjustment reflects the impact of an immaterial out-of-period
adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated financial
statements for more details.
|
(2)
|
Adjustment is due to the fair value adjustment of the Promissory
Note, which was required as of December 31, 2019 upon consolidation of the ExAlt Trusts.
|
The following table sets forth the effects of
the Restatement on the affected line items and classes of stockholders’ equity within the Company’s previously reported Consolidated
Statement of Changes in Stockholder’s Equity as of December 31, 2019 (dollars in thousands).
|
|
Accumulated
Deficit
|
|
|
Total GWG
Holdings
Stockholders’
Equity
|
|
|
Noncontrolling
Interests
|
|
|
Total
Stockholders’
Equity
|
|
Balance, December 31, 2019 (As Previously Reported)
|
|
$
|
(76,501
|
)
|
|
$
|
333,979
|
|
|
$
|
266,848
|
|
|
$
|
600,827
|
|
Adjustment to recognition of noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
27,062
|
|
|
|
27,062
|
|
Adjustments to net income
|
|
|
(20,695
|
)
|
|
|
(20,695
|
)
|
|
|
—
|
|
|
|
(20,695
|
)
|
Balance, December 31, 2019 (As Restated)
|
|
$
|
(97,196
|
)
|
|
$
|
313,284
|
|
|
$
|
293,910
|
|
|
$
|
607,194
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(22) Effects of the Restatement - Quarterly Results (Unaudited)
The tables below illustrate the impact of the
Restatement, as well as other adjustments, on our historical Condensed Consolidated Balance Sheets, Condensed Consolidated Statements
of Operations, Condensed Consolidated Statements of Cash Flows, and Condensed Consolidated Statements of Changes in Stockholder’s
Equity for the interim quarters impacted, each as compared with the amounts presented in the original Form 10-Q previously filed with
the SEC. All adjustments presented in the tables below reflect the impact of the consolidation of the ExAlt Trusts, unless otherwise specifically
indicated in the footnotes to each table.
The following table sets forth the effects of
the Restatement on the affected line items within the Company’s previously reported Condensed Consolidated Balance Sheets as of
September 30, 2020, June 30, 2020, and March 31, 2020 (dollars in thousands).
|
|
September 30, 2020
|
|
|
June 30, 2020
|
|
|
March 31, 2020
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
93,766
|
|
|
$
|
588
|
|
|
$
|
94,354
|
|
|
$
|
149,233
|
|
|
$
|
454
|
|
|
$
|
149,687
|
|
|
$
|
116,432
|
|
|
$
|
776
|
|
|
$
|
117,208
|
|
Restricted cash
|
|
|
15,990
|
|
|
|
5,324
|
|
|
|
21,314
|
|
|
|
19,059
|
|
|
|
6,686
|
|
|
|
25,745
|
|
|
|
26,446
|
|
|
|
7,613
|
|
|
|
34,059
|
|
Investment in alternative assets, at net asset value
|
|
|
—
|
|
|
|
221,245
|
|
|
|
221,245
|
|
|
|
—
|
|
|
|
315,713
|
|
|
|
315,713
|
|
|
|
—
|
|
|
|
335,487
|
|
|
|
335,487
|
|
Loan receivables, net of discount
|
|
|
229,961
|
|
|
|
(229,961
|
)
|
|
|
—
|
|
|
|
218,448
|
|
|
|
(218,448
|
)
|
|
|
—
|
|
|
|
219,296
|
|
|
|
(219,296
|
)
|
|
|
—
|
|
Allowance for loan losses
|
|
|
(2,914
|
)
|
|
|
2,914
|
|
|
|
—
|
|
|
|
(7,900
|
)
|
|
|
7,900
|
|
|
|
—
|
|
|
|
(700
|
)
|
|
|
700
|
|
|
|
—
|
|
Loans receivable, net
|
|
|
227,047
|
|
|
|
(227,047
|
)
|
|
|
—
|
|
|
|
210,548
|
|
|
|
(210,548
|
)
|
|
|
—
|
|
|
|
218,596
|
|
|
|
(218,596
|
)
|
|
|
—
|
|
Fees receivable
|
|
|
31,571
|
|
|
|
(31,571
|
)
|
|
|
—
|
|
|
|
31,611
|
|
|
|
(31,611
|
)
|
|
|
—
|
|
|
|
30,453
|
|
|
|
(30,453
|
)
|
|
|
—
|
|
Financing receivables from affiliates
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69,428
|
|
|
|
(69,428
|
)
|
|
|
—
|
|
|
|
68,290
|
|
|
|
(68,290
|
)
|
|
|
—
|
|
Other assets
|
|
|
53,501
|
|
|
|
838
|
|
|
|
54,339
|
|
|
|
40,142
|
|
|
|
1,399
|
|
|
|
41,541
|
|
|
|
33,906
|
|
|
|
1,035
|
|
|
|
34,941
|
|
Goodwill
|
|
|
2,384,121
|
|
|
|
(16,371
|
)
|
|
|
2,367,750
|
|
|
|
2,384,121
|
|
|
|
(16,371
|
)
|
|
|
2,367,750
|
|
|
|
2,372,595
|
|
|
|
(4,845
|
)
|
|
|
2,367,750
|
|
TOTAL ASSETS
|
|
|
3,629,674
|
|
|
|
(46,994
|
)
|
|
|
3,582,680
|
|
|
|
3,718,637
|
|
|
|
(3,706
|
)
|
|
|
3,714,931
|
|
|
|
3,684,229
|
|
|
|
22,727
|
|
|
|
3,706,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seller Trust L Bonds (1)
|
|
$
|
366,892
|
|
|
$
|
(94,788
|
)
|
|
$
|
272,104
|
|
|
$
|
366,892
|
|
|
$
|
—
|
|
|
$
|
366,892
|
|
|
$
|
366,892
|
|
|
$
|
—
|
|
|
$
|
366,892
|
|
Deferred revenue
|
|
|
35,848
|
|
|
|
(35,848
|
)
|
|
|
—
|
|
|
|
37,858
|
|
|
|
(37,858
|
)
|
|
|
—
|
|
|
|
39,651
|
|
|
|
(39,651
|
)
|
|
|
—
|
|
Repurchase option
|
|
|
—
|
|
|
|
730
|
|
|
|
730
|
|
|
|
—
|
|
|
|
56,660
|
|
|
|
56,660
|
|
|
|
—
|
|
|
|
52,052
|
|
|
|
52,052
|
|
Accounts payable and accrued expenses
|
|
|
33,235
|
|
|
|
277
|
|
|
|
33,512
|
|
|
|
23,457
|
|
|
|
242
|
|
|
|
23,699
|
|
|
|
21,139
|
|
|
|
208
|
|
|
|
21,347
|
|
Deferred tax liability, net (2)
|
|
|
52,500
|
|
|
|
—
|
|
|
|
52,500
|
|
|
|
33,674
|
|
|
|
18,826
|
|
|
|
52,500
|
|
|
|
40,206
|
|
|
|
12,294
|
|
|
|
52,500
|
|
TOTAL LIABILITIES
|
|
|
1,970,900
|
|
|
|
(129,629
|
)
|
|
|
1,841,271
|
|
|
|
1,913,834
|
|
|
|
37,870
|
|
|
|
1,951,704
|
|
|
|
1,841,462
|
|
|
|
24,903
|
|
|
|
1,866,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock in treasury, at cost, 12,337,264 shares December 31, 2020 and 2,500,000 shares as of December 31, 2019 (1)
|
|
|
(24,550
|
)
|
|
|
(42,856
|
)
|
|
|
(67,406
|
)
|
|
|
(24,550
|
)
|
|
|
—
|
|
|
|
(24,550
|
)
|
|
|
(24,550
|
)
|
|
|
—
|
|
|
|
(24,550
|
)
|
Additional paid-in capital (1)
|
|
|
178,969
|
|
|
|
98,385
|
|
|
|
277,354
|
|
|
|
225,537
|
|
|
|
—
|
|
|
|
225,537
|
|
|
|
229,207
|
|
|
|
—
|
|
|
|
229,207
|
|
Accumulated deficit (2)
|
|
|
(200,935
|
)
|
|
|
(5,501
|
)
|
|
|
(206,436
|
)
|
|
|
(136,355
|
)
|
|
|
(24,752
|
)
|
|
|
(161,107
|
)
|
|
|
(121,933
|
)
|
|
|
(18,634
|
)
|
|
|
(140,567
|
)
|
TOTAL GWG HOLDINGS STOCKHOLDERS’ EQUITY
|
|
|
120,630
|
|
|
|
50,028
|
|
|
|
170,658
|
|
|
|
242,067
|
|
|
|
(24,752
|
)
|
|
|
217,315
|
|
|
|
269,415
|
|
|
|
(18,634
|
)
|
|
|
250,781
|
|
Noncontrolling interests (1)
|
|
|
291,391
|
|
|
|
32,607
|
|
|
|
323,998
|
|
|
|
298,705
|
|
|
|
(16,824
|
)
|
|
|
281,881
|
|
|
|
331,711
|
|
|
|
16,458
|
|
|
|
348,169
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
412,021
|
|
|
|
82,635
|
|
|
|
494,656
|
|
|
|
540,772
|
|
|
|
(41,576
|
)
|
|
|
499,196
|
|
|
|
601,126
|
|
|
|
(2,176
|
)
|
|
|
598,950
|
|
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
3,629,674
|
|
|
|
(46,994
|
)
|
|
|
3,582,680
|
|
|
|
3,718,637
|
|
|
|
(3,706
|
)
|
|
|
3,714,931
|
|
|
|
3,684,229
|
|
|
|
22,727
|
|
|
|
3,706,956
|
|
(1)
|
For September 30, 2020, adjustments reflect the impact of
the Collateral Swap discussed in Note 1.
|
(2)
|
Adjustments reflect the impact of an immaterial out-of-period
adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated financial
statements for more details.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the effects of
the Restatement on the affected line items within the Company’s previously reported Condensed Consolidated Statements of Operations
for the quarterly periods ended September 30, 2020, June 30, 2020, and March 31, 2020 (dollars in thousands).
|
|
Three Months Ended
September 30, 2020
|
|
|
Three Months Ended
June 30, 2020
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income (loss), net
|
|
$
|
—
|
|
|
$
|
56,705
|
|
|
$
|
56,705
|
|
|
$
|
—
|
|
|
$
|
(22,671
|
)
|
|
$
|
(22,671
|
)
|
|
$
|
—
|
|
|
$
|
7,556
|
|
|
$
|
7,556
|
|
Interest income
|
|
|
12,928
|
|
|
|
(12,650
|
)
|
|
|
278
|
|
|
|
12,671
|
|
|
|
(12,371
|
)
|
|
|
300
|
|
|
|
13,989
|
|
|
|
(13,274
|
)
|
|
|
715
|
|
Trust services revenues
|
|
|
4,556
|
|
|
|
(4,556
|
)
|
|
|
—
|
|
|
|
4,829
|
|
|
|
(4,829
|
)
|
|
|
—
|
|
|
|
5,027
|
|
|
|
(5,027
|
)
|
|
|
—
|
|
TOTAL REVENUE
|
|
|
28,513
|
|
|
|
39,499
|
|
|
|
68,012
|
|
|
|
68,789
|
|
|
|
(39,871
|
)
|
|
|
28,918
|
|
|
|
33,557
|
|
|
|
(10,745
|
)
|
|
|
22,812
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(4,986
|
)
|
|
|
4,986
|
|
|
|
—
|
|
|
|
7,200
|
|
|
|
(7,200
|
)
|
|
|
—
|
|
|
|
700
|
|
|
|
(700
|
)
|
|
|
—
|
|
Other expenses
|
|
|
4,550
|
|
|
|
162
|
|
|
|
4,712
|
|
|
|
4,895
|
|
|
|
168
|
|
|
|
5,063
|
|
|
|
3,612
|
|
|
|
—
|
|
|
|
3,612
|
|
TOTAL EXPENSES
|
|
|
81,963
|
|
|
|
5,148
|
|
|
|
87,111
|
|
|
|
68,720
|
|
|
|
(7,032
|
)
|
|
|
61,688
|
|
|
|
124,050
|
|
|
|
(700
|
)
|
|
|
123,350
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(53,450
|
)
|
|
|
34,351
|
|
|
|
(19,099
|
)
|
|
|
69
|
|
|
|
(32,839
|
)
|
|
|
(32,770
|
)
|
|
|
(90,493
|
)
|
|
|
(10,045
|
)
|
|
|
(100,538
|
)
|
INCOME TAX EXPENSE (BENEFIT) (1)
|
|
|
22,444
|
|
|
|
(18,826
|
)
|
|
|
3,618
|
|
|
|
(8,550
|
)
|
|
|
6,532
|
|
|
|
(2,018
|
)
|
|
|
(14,507
|
)
|
|
|
(1,638
|
)
|
|
|
(16,145
|
)
|
LOSS BEFORE LOSS FROM EQUITY METHOD INVESTMENTS
|
|
|
(75,894
|
)
|
|
|
53,177
|
|
|
|
(22,717
|
)
|
|
|
8,619
|
|
|
|
(39,371
|
)
|
|
|
(30,752
|
)
|
|
|
(75,986
|
)
|
|
|
(8,407
|
)
|
|
|
(84,393
|
)
|
NET INCOME (LOSS)
|
|
|
(77,325
|
)
|
|
|
53,177
|
|
|
|
(24,148
|
)
|
|
|
7,301
|
|
|
|
(39,371
|
)
|
|
|
(32,070
|
)
|
|
|
(77,516
|
)
|
|
|
(8,407
|
)
|
|
|
(85,923
|
)
|
Net (income) loss attributable to noncontrolling interests
|
|
|
12,745
|
|
|
|
(33,926
|
)
|
|
|
(21,181
|
)
|
|
|
(21,723
|
)
|
|
|
33,253
|
|
|
|
11,530
|
|
|
|
32,084
|
|
|
|
10,468
|
|
|
|
42,552
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(68,149
|
)
|
|
$
|
19,251
|
|
|
$
|
(48,898
|
)
|
|
$
|
(18,136
|
)
|
|
$
|
(6,118
|
)
|
|
$
|
(24,254
|
)
|
|
$
|
(49,384
|
)
|
|
$
|
2,061
|
|
|
$
|
(47,323
|
)
|
NET INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.23
|
)
|
|
$
|
0.63
|
|
|
$
|
(1.60
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(1.62
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.55
|
)
|
Diluted
|
|
$
|
(2.23
|
)
|
|
$
|
0.63
|
|
|
$
|
(1.60
|
)
|
|
$
|
(0.59
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.79
|
)
|
|
$
|
(1.62
|
)
|
|
$
|
0.07
|
|
|
$
|
(1.55
|
)
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,584,719
|
|
|
|
(106,927
|
)
|
|
|
30,477,792
|
|
|
|
30,536,830
|
|
|
|
—
|
|
|
|
30,536,830
|
|
|
|
30,534,977
|
|
|
|
—
|
|
|
|
30,534,977
|
|
Diluted
|
|
|
30,584,719
|
|
|
|
(106,927
|
)
|
|
|
30,477,792
|
|
|
|
30,536,830
|
|
|
|
—
|
|
|
|
30,536,830
|
|
|
|
30,534,977
|
|
|
|
—
|
|
|
|
30,534,977
|
|
(1)
|
Adjustments reflect the impact of an immaterial out-of-period
adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated financial
statements for more details.
|
(2)
|
For September 30, 2020, adjustments reflect the impact of
the Collateral Swap discussed in Note 1.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the effects of
the Restatement on the affected line items within the Company’s previously reported Condensed Consolidated Statements of Operations
for the year-to-date periods ended September 30, 2020 and June 30, 2020 (dollars in thousands).
|
|
Nine Months Ended
September 30, 2020
|
|
|
Six Months Ended
June 30, 2020
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income (loss), net
|
|
$
|
—
|
|
|
$
|
41,590
|
|
|
$
|
41,590
|
|
|
$
|
—
|
|
|
$
|
(15,115
|
)
|
|
$
|
(15,115
|
)
|
Interest income
|
|
|
39,588
|
|
|
|
(38,295
|
)
|
|
|
1,293
|
|
|
|
26,660
|
|
|
|
(25,645
|
)
|
|
|
1,015
|
|
Trust services revenues
|
|
|
14,412
|
|
|
|
(14,412
|
)
|
|
|
—
|
|
|
|
9,856
|
|
|
|
(9,856
|
)
|
|
|
—
|
|
TOTAL REVENUE
|
|
|
130,859
|
|
|
|
(11,117
|
)
|
|
|
119,742
|
|
|
|
102,346
|
|
|
|
(50,616
|
)
|
|
|
51,730
|
|
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
2,914
|
|
|
|
(2,914
|
)
|
|
|
—
|
|
|
|
7,900
|
|
|
|
(7,900
|
)
|
|
|
—
|
|
Other expenses
|
|
|
13,057
|
|
|
|
330
|
|
|
|
13,387
|
|
|
|
8,507
|
|
|
|
168
|
|
|
|
8,675
|
|
TOTAL EXPENSES
|
|
|
274,733
|
|
|
|
(2,584
|
)
|
|
|
272,149
|
|
|
|
192,770
|
|
|
|
(7,732
|
)
|
|
|
185,038
|
|
LOSS BEFORE INCOME TAXES
|
|
|
(143,874
|
)
|
|
|
(8,533
|
)
|
|
|
(152,407
|
)
|
|
|
(90,424
|
)
|
|
|
(42,884
|
)
|
|
|
(133,308
|
)
|
INCOME TAX EXPENSE (BENEFIT)(1)
|
|
|
(613
|
)
|
|
|
(13,932
|
)
|
|
|
(14,545
|
)
|
|
|
(23,057
|
)
|
|
|
4,894
|
|
|
|
(18,163
|
)
|
LOSS BEFORE LOSS FROM EQUITY METHOD INVESTMENTS
|
|
|
(143,261
|
)
|
|
|
5,399
|
|
|
|
(137,862
|
)
|
|
|
(67,367
|
)
|
|
|
(47,778
|
)
|
|
|
(115,145
|
)
|
NET INCOME (LOSS)
|
|
|
(147,540
|
)
|
|
|
5,399
|
|
|
|
(142,141
|
)
|
|
|
(70,215
|
)
|
|
|
(47,778
|
)
|
|
|
(117,993
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
23,106
|
|
|
|
9,795
|
|
|
|
32,901
|
|
|
|
10,361
|
|
|
|
43,721
|
|
|
|
54,082
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(135,669
|
)
|
|
$
|
15,194
|
|
|
$
|
(120,475
|
)
|
|
$
|
(67,520
|
)
|
|
$
|
(4,057
|
)
|
|
$
|
(71,577
|
)
|
NET INCOME (LOSS) PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.44
|
)
|
|
$
|
0.49
|
|
|
$
|
(3.95
|
)
|
|
$
|
(2.21
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(2.34
|
)
|
Diluted
|
|
$
|
(4.44
|
)
|
|
$
|
0.49
|
|
|
$
|
(3.95
|
)
|
|
$
|
(2.21
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(2.34
|
)
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,552,233
|
|
|
|
(35,902
|
)
|
|
|
30,516,331
|
|
|
|
30,535,811
|
|
|
|
—
|
|
|
|
30,535,811
|
|
Diluted
|
|
|
30,552,233
|
|
|
|
(35,902
|
)
|
|
|
30,516,331
|
|
|
|
30,535,811
|
|
|
|
—
|
|
|
|
30,535,811
|
|
(1)
|
Adjustments reflect the impact of an immaterial out-of-period
adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated financial
statements for more details.
|
(2)
|
For September 30, 2020, adjustments reflect the impact of
the Collateral Swap discussed in Note 1.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the effects of
the Restatement on the affected line items within the Company’s previously reported Condensed Consolidated Statements of Cash Flows
for the year-to-date periods ended September 30, 2020, June 30, 2020, and March 31, 2020 (dollars in thousands).
|
|
Nine Months Ended
September 30, 2020
|
|
|
Six Months Ended
June 30, 2020
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
As
Previously
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(147,540
|
)
|
|
$
|
5,399
|
|
|
$
|
(142,141
|
)
|
|
$
|
(70,215
|
)
|
|
$
|
(47,778
|
)
|
|
$
|
(117,993
|
)
|
|
$
|
(77,516
|
)
|
|
$
|
(8,407
|
)
|
|
$
|
(85,923
|
)
|
Adjustments to reconcile net income (loss) to net cash flows used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income (loss), net
|
|
|
—
|
|
|
|
(41,590
|
)
|
|
|
(41,590
|
)
|
|
|
—
|
|
|
|
15,115
|
|
|
|
15,115
|
|
|
|
—
|
|
|
|
(7,556
|
)
|
|
|
(7,556
|
)
|
Amortization of upfront fees
|
|
|
(5,356
|
)
|
|
|
5,356
|
|
|
|
—
|
|
|
|
(3,586
|
)
|
|
|
3,586
|
|
|
|
—
|
|
|
|
(1,793
|
)
|
|
|
1,793
|
|
|
|
—
|
|
Return on investments in alternative assets
|
|
|
—
|
|
|
|
1,577
|
|
|
|
1,577
|
|
|
|
—
|
|
|
|
1,180
|
|
|
|
1,180
|
|
|
|
—
|
|
|
|
374
|
|
|
|
374
|
|
Non-cash interest income, including interest paid-in-kind and accretion of purchase discount
|
|
|
(38,530
|
)
|
|
|
38,315
|
|
|
|
(215
|
)
|
|
|
(25,811
|
)
|
|
|
25,665
|
|
|
|
(146
|
)
|
|
|
(13,374
|
)
|
|
|
13,295
|
|
|
|
(79
|
)
|
Provision for loan losses
|
|
|
2,914
|
|
|
|
(2,914
|
)
|
|
|
—
|
|
|
|
7,900
|
|
|
|
(7,900
|
)
|
|
|
—
|
|
|
|
700
|
|
|
|
(700
|
)
|
|
|
—
|
|
Deferred income taxes (1)
|
|
|
(4,621
|
)
|
|
|
(13,932
|
)
|
|
|
(18,553
|
)
|
|
|
(24,250
|
)
|
|
|
4,894
|
|
|
|
(19,356
|
)
|
|
|
(17,717
|
)
|
|
|
(1,638
|
)
|
|
|
(19,355
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees receivable
|
|
|
(2,643
|
)
|
|
|
2,643
|
|
|
|
—
|
|
|
|
(2,443
|
)
|
|
|
2,443
|
|
|
|
—
|
|
|
|
(1,285
|
)
|
|
|
1,285
|
|
|
|
—
|
|
Other assets
|
|
|
(2,634
|
)
|
|
|
184
|
|
|
|
(2,450
|
)
|
|
|
(2,869
|
)
|
|
|
(377
|
)
|
|
|
(3,246
|
)
|
|
|
368
|
|
|
|
(12
|
)
|
|
|
356
|
|
Accounts payable and accrued expenses
|
|
|
8,306
|
|
|
|
58
|
|
|
|
8,364
|
|
|
|
2,592
|
|
|
|
21
|
|
|
|
2,613
|
|
|
|
(1,103
|
)
|
|
|
15
|
|
|
|
(1,088
|
)
|
NET CASH FLOWS USED IN OPERATING ACTIVITIES
|
|
|
(142,905
|
)
|
|
|
(4,904
|
)
|
|
|
(147,809
|
)
|
|
|
(83,669
|
)
|
|
|
(3,151
|
)
|
|
|
(86,820
|
)
|
|
|
(40,632
|
)
|
|
|
(1,551
|
)
|
|
|
(42,183
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in loans receivable
|
|
|
11,169
|
|
|
|
(11,169
|
)
|
|
|
—
|
|
|
|
11,169
|
|
|
|
(11,169
|
)
|
|
|
—
|
|
|
|
10,614
|
|
|
|
(10,614
|
)
|
|
|
—
|
|
Investments in alternative assets
|
|
|
—
|
|
|
|
(226
|
)
|
|
|
(226
|
)
|
|
|
—
|
|
|
|
(169
|
)
|
|
|
(169
|
)
|
|
|
—
|
|
|
|
(78
|
)
|
|
|
(78
|
)
|
Return of investments in alternative assets
|
|
|
—
|
|
|
|
5,752
|
|
|
|
5,752
|
|
|
|
—
|
|
|
|
5,169
|
|
|
|
5,169
|
|
|
|
—
|
|
|
|
4,173
|
|
|
|
4,173
|
|
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES
|
|
|
16,007
|
|
|
|
(5,643
|
)
|
|
|
10,364
|
|
|
|
19,049
|
|
|
|
(6,169
|
)
|
|
|
12,880
|
|
|
|
10,751
|
|
|
|
(6,519
|
)
|
|
|
4,232
|
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
10,425
|
|
|
|
(10,547
|
)
|
|
|
(122
|
)
|
|
|
68,962
|
|
|
|
(9,320
|
)
|
|
|
59,642
|
|
|
|
43,547
|
|
|
|
(8,070
|
)
|
|
|
35,477
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING OF PERIOD
|
|
|
99,331
|
|
|
|
16,459
|
|
|
|
115,790
|
|
|
|
99,331
|
|
|
|
16,459
|
|
|
|
115,790
|
|
|
|
99,331
|
|
|
|
16,459
|
|
|
|
115,790
|
|
END OF PERIOD
|
|
$
|
109,756
|
|
|
$
|
5,912
|
|
|
$
|
115,668
|
|
|
$
|
168,293
|
|
|
$
|
7,139
|
|
|
$
|
175,432
|
|
|
$
|
142,878
|
|
|
$
|
8,389
|
|
|
$
|
151,267
|
|
(1)
|
Adjustment reflects the impact of an immaterial out-of-period
adjustment to correct the valuation allowance against the Company’s deferred tax assets. See Note 2 to the consolidated financial
statements for more details.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Nine Months Ended
September 30, 2020
|
|
|
Six Months Ended
June 30, 2020
|
|
|
Three Months Ended
March 31, 2020
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Promissory Note
|
|
|
70,565
|
|
|
|
(70,565
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Collateral Swap (see Note 1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange of alternative assets for Seller Trust L Bonds (1)
|
|
|
—
|
|
|
|
94,788
|
|
|
|
94,788
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exchange of alternative assets for common stock (1)
|
|
|
—
|
|
|
|
42,856
|
|
|
|
42,856
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Deemed capital contribution from related party (1)
|
|
|
—
|
|
|
|
46,770
|
|
|
|
46,770
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment to noncontrolling interest as a result of Collateral Swap (1)
|
|
|
—
|
|
|
|
3,444
|
|
|
|
3,444
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Distribution payable to noncontrolling interest
|
|
|
—
|
|
|
|
165
|
|
|
|
165
|
|
|
|
—
|
|
|
|
165
|
|
|
|
165
|
|
|
|
—
|
|
|
|
136
|
|
|
|
136
|
|
Business combination measurement period adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction in loans receivable
|
|
|
26,116
|
|
|
|
(26,116
|
)
|
|
|
—
|
|
|
|
26,116
|
|
|
|
(26,116
|
)
|
|
|
—
|
|
|
|
14,590
|
|
|
|
(14,590
|
)
|
|
|
—
|
|
(1)
|
For September 30, 2020, adjustments reflect the impact of
the Collateral Swap discussed in Note 1.
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the effects of
the Restatement on the affected line items and classes of stockholders’ equity within the Company’s previously reported Condensed
Consolidated Statements of Changes in Stockholder’s Equity for the quarters ended March 31, 2020 through September 30, 2020 (dollars
in thousands). There was no impact to the redeemable noncontrolling interest.
|
|
Common Shares
|
|
|
Additional Paid-in Capital
|
|
|
Accumulated Deficit
|
|
|
Treasury Stock
|
|
|
Total GWG Holdings Stockholders’ Equity
|
|
|
Noncontrolling Interests
|
|
|
Total Stockholders’ Equity
|
|
Balance, December 31, 2019 (As Previously Reported)
|
|
|
30,533,793
|
|
|
$
|
233,106
|
|
|
$
|
(76,501
|
)
|
|
$
|
(24,550
|
)
|
|
$
|
333,979
|
|
|
$
|
266,848
|
|
|
$
|
600,827
|
|
Adjustments to recognition of noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
27,062
|
|
|
|
27,062
|
|
Adjustments to net income
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,695
|
)
|
|
|
—
|
|
|
|
(20,695
|
)
|
|
|
—
|
|
|
|
(20,695
|
)
|
Balance, December 31, 2019 (As Restated)
|
|
|
30,533,793
|
|
|
|
233,106
|
|
|
|
(97,196
|
)
|
|
|
(24,550
|
)
|
|
|
313,284
|
|
|
|
293,910
|
|
|
|
607,194
|
|
Adjustments to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,604
|
)
|
|
|
(10,604
|
)
|
Adjustments to net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
2,061
|
|
|
|
—
|
|
|
|
2,061
|
|
|
|
—
|
|
|
|
2,061
|
|
Total other activity as previously reported
|
|
|
1,456
|
|
|
|
(3,899
|
)
|
|
|
(45,432
|
)
|
|
|
—
|
|
|
|
(64,564
|
)
|
|
|
64,863
|
|
|
|
299
|
|
Balance, March 31, 2020 (As Restated)
|
|
|
30,535,249
|
|
|
|
229,207
|
|
|
|
(140,567
|
)
|
|
|
(24,550
|
)
|
|
|
250,781
|
|
|
|
348,169
|
|
|
|
598,950
|
|
Adjustments to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(33,282
|
)
|
|
|
(33,282
|
)
|
Adjustments to net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,118
|
)
|
|
|
—
|
|
|
|
(6,118
|
)
|
|
|
—
|
|
|
|
(6,118
|
)
|
Total other activity as previously reported
|
|
|
2,232
|
|
|
|
(3,670
|
)
|
|
|
(14,422
|
)
|
|
|
—
|
|
|
|
(27,348
|
)
|
|
|
(33,006
|
)
|
|
|
(60,354
|
)
|
Balance, June 30, 2020 (As Restated)
|
|
|
30,537,481
|
|
|
|
225,537
|
|
|
|
(161,107
|
)
|
|
|
(24,550
|
)
|
|
|
217,315
|
|
|
|
281,881
|
|
|
|
499,196
|
|
Adjustments to noncontrolling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,926
|
|
|
|
33,926
|
|
Adjustments to net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
19,251
|
|
|
|
—
|
|
|
|
19,251
|
|
|
|
—
|
|
|
|
19,251
|
|
Deemed capital contribution from related party
|
|
|
—
|
|
|
|
46,770
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,770
|
|
|
|
—
|
|
|
|
46,770
|
|
Recognition of shares in treasury
|
|
|
(9,837,264
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(42,856
|
)
|
|
|
(42,856
|
)
|
|
|
—
|
|
|
|
(42,856
|
)
|
Adjustment for change in ownership
|
|
|
—
|
|
|
|
8,039
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,039
|
|
|
|
(8,039
|
)
|
|
|
—
|
|
Reduction to noncontrolling interest for Beneficient treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,444
|
)
|
|
|
(3,444
|
)
|
Total other activity as previously reported
|
|
|
57,183
|
|
|
|
(2,992
|
)
|
|
|
(64,580
|
)
|
|
|
—
|
|
|
|
(77,861
|
)
|
|
|
19,674
|
|
|
|
(58,187
|
)
|
Balance, September 30, 2020 (As Restated)
|
|
|
20,757,400
|
|
|
$
|
277,354
|
|
|
$
|
(206,436
|
)
|
|
$
|
(67,406
|
)
|
|
$
|
170,658
|
|
|
$
|
323,998
|
|
|
$
|
494,656
|
|
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(23) Subsequent Events and Other Matters
Amendment
of Beneficient Credit Agreements
On March 10, 2021, Beneficient Capital Company
II, L.L.C. (formerly known as Beneficient Capital Company, L.L.C.) and Beneficient Company Holdings, L.P. (the “New Borrower”),
both of which are subsidiaries of Ben LP, entered into Amendment No. 1 to the Second Amended and Restated Credit Agreement (the “First
Lien Amendment”) and Amendment No. 1 to the Second Amended and Restated Second Lien Credit Agreement (the “Second Lien Amendment”
and, together with the First Lien Amendment, the “Amendments”) with HCLP Nominees, L.L.C. (the “Lender”). The
Second Amended and Restated Credit Agreement is referred to herein as the “First Lien Credit Agreement” and the Second Amended
and Restated Second Lien Credit Agreement is referred to herein as the “Second Lien Credit Agreement” and, together with the
First Lien Credit Agreement, the “Ben Credit Agreements.” As of March 10, 2021, the principal amount outstanding under the
First Lien Credit Agreement was $2.3 million and the principal amount outstanding under the Second Lien Credit Agreement was $72.0 million.
The Amendments extend the scheduled maturity date
under the Ben Credit Agreements from April 10, 2021 to May 30, 2022. The Amendments also provide that the New Borrower shall repay $5.0 million
of the outstanding principal amount under the Ben Credit Agreements on each of September 10, 2021, December 10, 2021 and March 10, 2022.
The Amendments also provide for the payment by the New Borrower to the Lender of an extension fee equal to 1.5% of the outstanding principal
amounts under the Ben Credit Agreements, which was added to the outstanding amount under the Ben Credit Agreements as provided for in
the amendments.
On June 28, 2021, the New Borrower and the Lender
entered into Amendment No. 2 to the Ben Credit Agreements. The amendments eliminate the obligation of DLP V to assume the Ben Credit Agreements
as provided for in the Second Amendments and waive the daily fee payable upon the Trigger as defined and provided for in the Amendment
No. 1 to the Ben Credit Agreements. The eliminated provisions are discussed in further detail in Note 10.
Effective July 15, 2021, Beneficient executed
Consent and Amendment No. 3 to the Second Amended and Restated Credit Agreement and Amendment No. 2 to the Second Amended and Restated
Subordinate Credit Agreement with its lender, which (i) deferred the payment of all accrued and unpaid interest until December 10, 2021,
and (ii) deferred the installment payment of $5.0 million due on September 10, 2021, to December 10, 2021. Beneficient agreed to
pay an amendment fee to the lender in an amount equal to 3% of the then outstanding principal and interest on December 10, 2021.
Third Amended and Restated Senior Credit Facility
with LNV Corporation
On June 28, 2021, DLP IV entered into the Third
Amended and Restated Credit Facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders
under the agreement (the "Third Amended Facility"), which replaced the LNV Credit Facility described in Note 10 to the consolidated
financial statements. The Third Amended Facility resulted in an additional advance of $52.5 million from LNV Corporation.
In conjunction with entering into the Third Amended
Facility, DLP V transferred life insurance policies having an aggregate face value of approximately $440.6 million to DLP IV, which
were pledged as additional collateral to the Third Amended Facility, and DLP IV received proceeds of approximately $51.2 million
(net of certain fees and expenses incurred in connection with the negotiation and entry into the Third Amended Facility). The Third Amended
Facility sets forth interest and other terms and covenants similar those included in the previous LNV Credit Facility.
Beneficient’s Conditional Kansas Charter
In April 2021, the Kansas Legislature adopted,
and the governor of Kansas signed into law, a bill that would allow for the chartering and creation of Kansas trust companies, known as
TEFFIs, that provide fiduciary financing (e.g., lending to ExAlt Trusts), custodian and trustee services, in all capacities pursuant to
statutory fiduciary powers, to investors and other participants in the alternative assets market, as well as the establishment of alternative
asset trusts. The legislation became effective on July 1, 2021 and designates BFF as the pilot trust company under the TEFFI legislation.
A conditional trust charter was issued by the Kansas Bank Commissioner to a subsidiary of Ben LP
on July 1, 2021. Under the pilot program, BFF will not be authorized to exercise its fiduciary powers as a TEFFI until the earlier
of the date the Kansas Bank Commissioner promulgates applicable rules and regulations or December 31, 2021 or. The bill also permits the
Kansas Bank Commissioner to request a six-month extension of the pilot program period, which could delay Beneficient’s permission
to exercise of fiduciary powers under the charter until July 1, 2022.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
National Founders LP Credit Agreement
On August 11, 2021, GWG DLP Funding VI, LLC, a
Delaware limited liability company (“DLP VI”), entered into a Credit Agreement (the “NF Credit Agreement”) with
each lender from time to time party thereto and National Founders LP, a Delaware limited partnership, as the administrative agent (the
credit facility evidenced by such NF Credit Agreement, the “NF Credit Facility”). DLP VI is a wholly owned subsidiary of GWG
DLP Funding Holdings VI, LLC, a Delaware limited liability company (the “DLP Holdings VI”). DLP Holdings VI is a wholly owned
subsidiary of GWG Life.
On August 11, 2021, a one-time advance of approximately
$107.6 million was made to the DLP VI under the NF Credit Facility with a scheduled maturity date of August 11, 2031. Amounts borrowed
under the NF Credit Facility bear interest on each day on the outstanding principal amount on such day at a per annum rate, determined
on a daily basis, generally equal to 5.5% up to 65% of the loan to value percent as calculated in accordance with the NF Credit Agreement,
and 7.0% on anything above that loan to value percent. In particular, amounts borrowed under the NF Credit Facility bear interest on each
day on the outstanding principal amount on such day at a per annum rate equal to the Interest Rate as of such day, or the Default Rate
as of such day if an event of default has occurred and is continuing. The “Interest Rate” as of such day is equal to the sum
of: (a) the percentage equal to (i) the Non-Higher Rate Factor as of such date of determination multiplied by (ii) 5.50%; and (b) the
percentage equal to (i) the Higher Rate Factor as of such date of determination multiplied by (ii) 7.00%. “Non-Higher Rate Factor”
means, as of any date of determination, the percentage equal to (i) 100% minus (ii) the Higher Rate Factor as of such date of determination,
and “Higher Rate Factor” means, as of any date of determination, the percentage equal to (i) the greater of (a) the amount
equal to (1) the LTV Percentage (as defined in the NF Credit Agreement) as of such date of determination minus (2) 65% and (b) zero percent
divided by (ii) the LTV Percentage as of such date of determination. The “Default Rate” as of such day is equal to the sum
of: (a) the Interest Rate as of such day and (b) 2.00%. Interest payments are made on a monthly basis.
Under the NF Credit Facility, each of DLP VI and
DLP Holdings VI has granted the administrative agent, for the benefit of the lenders under the agreement, a security interest in substantially
all of GWG Holdings’ remaining life insurance policy assets not pledged by DLP IV under its LNV Credit Facility. In addition, amounts
owing under the NF Credit Facility have been guaranteed by GWG Holdings upon the occurrence of a Guarantee Trigger Event (as defined in
the guarantee), including certain bankruptcy events related to the DLP VI or DLP Holdings VI or a Change in Control (as defined in the
NF Credit Agreement).
A portion of the proceeds from the funding under
the NF Credit Facility was used to purchase life insurance policies that were owned by DLP IV, which used the funds to repay the most
recent advance of $52.5 million plus interest and penalties under the LNV Credit Facility described above. At August 11, 2021, the
aggregate face value of life insurance policies owned by DLP VI, was approximately $433.1 million. As of such date, the aggregate
face value of life insurance policies owned by DLP IV was approximately $1.42 billion.
With the exception of assets pledged by DLP IV
under the LNV Credit Facility, and the assets pledged under the NF Credit Facility, GWG Holdings secures L Bonds with a pledge of collateral
security in its ownership interests in GWG Life and GWG Holdings’ other direct subsidiaries; GWG Life’s ownership in its direct
subsidiaries that own directly or indirectly a large actuarially diverse portfolio of life insurance policies of highly rated insurance
companies; and investments in Beneficient. Furthermore, L Bonds are secured by a pledge of approximately 4.0 million shares of GWG
Holdings’ common stock. GWG Holdings’ most significant assets are cash and its investments in subsidiaries. These assets were
not pledged under the NF Credit Facility.
The NF Credit Facility has certain financial and
nonfinancial covenants, and we were in compliance with these covenants as of the date of this filing. In addition, the NF Credit Facility
has certain reporting obligations that require DLP VI to deliver audited annual consolidated financial statements of DLP Holdings VI no
later than 150 days after the end of each fiscal year (beginning with the fiscal year ending December 31, 2021) and unaudited quarterly
consolidated financial statements of DLP Holdings VI no later than 90 days after the end of each of DLP VI’s first three fiscal
quarters (beginning with the fiscal quarter ending September 30, 2021). The NF Credit Facility also has customary events of default for
a facility of this type.
DLP VI may voluntarily prepay amounts owing under
the NF Credit Facility upon payment of all accrued and unpaid interest on such prepaid amounts and payment of the applicable Prepayment
Premium (as defined in the NF Credit Agreement).
The NF Credit Facility permits DLP VI to pay dividends
and distributions from the proceeds of the one-time advance. As a result, the funding under the NF Credit Facility, less amounts used
to purchase the life insurance policies from DLP IV, will be available to GWG Holdings and will improve GWG Holdings’ cash position
while it works to complete this 2020 Form 10-K, and its Current Reports on Form 10-Q for the quarters ended March 31, 2021 and June 30,
2021, which GWG Holdings expects will permit it to resume the issuance of its L Bonds.
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Binding Term Sheet with Beneficient
On August 13, 2021, GWG Holdings, Ben LP, and
BCH entered into a non-binding term sheet (the “Term Sheet”) that contemplates a series of transactions which, if completed,
will result in, among other things, (i) GWG Holdings receiving certain proposed enhancements to its investments in Beneficient; (ii) GWG
Holdings no longer having the right to appoint directors of the board of directors of Beneficient Management; and (iii) Beneficient no
longer being a consolidated subsidiary of GWG Holdings. The Term Sheet and related negotiations are a part of ongoing efforts by management
and the Board of Directors of GWG Holdings to maximize the value of GWG Holdings’ and GWG Life’s investment in Beneficient.
The Company believes that returning control of
Beneficient is a necessary step for Ben LP to establish one of its operating subsidiaries as a TEFFI under the Kansas Technology-Enabled
Fiduciary Financial Institutions Act (the “TEFFI Act”), which is important to Beneficient’s long-term business objective
of providing liquidity and other services to holders of alternative assets.
Until the definitive documentation is finalized
and executed, each of these provisions is non-binding and is subject to change in all respects, including as a result of additional diligence,
the further discharge of fiduciary duties, and the negotiation of definitive documentation. The Company has begun working on definitive
documentation to implement the Term Sheet with Ben LP and is working to complete such definitive documentation within the fourth quarter
of 2021, although there can be no assurance definitive documentation will be completed by then, or at all.
If Ben LP becomes an independent company pursuant
to the terms of the Term Sheet, the Company expects that Ben LP would reduce its reliance on GWG Holdings to fund its operations and would
raise future capital from other sources. Beneficient’s capital raising efforts may include the issuance of equity or debt of Ben
LP or one of its subsidiaries, and the newly issued securities may be dilutive to GWG Holdings’ and GWG Life’s investment
in Ben LP and BCH and may include preferential terms relative to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH.
GWG Holdings and GWG Life would still retain a substantial investment in Beneficient.
Fourth Amended and Restated Senior Credit Facility
with LNV Corporation
On September 7, 2021, DLP IV entered into a Fourth
Amended and Restated Loan and Security Agreement with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf
of the lenders under the agreement (the “Fourth Amended Facility”). The Fourth Amended Facility replaced the Third Amended
Facility, that previously governed the Company’s senior credit facility. The Fourth Amended Facility resulted in an additional advance
of $30.3 million from LNV Corporation, paid on September 7, 2021.
Under the Fourth Amended Facility, all advances
bear interest at a rate of the Benchmark Rate plus the Applicable Margin, or the Default Rate if an event of default has occurred and
is continuing. For purposes of the Fourth Amended Facility, (i) the Benchmark Rate is the greater of (a) the sum of (i) the Federal Funds
Rate plus (ii) one-half of one percent (0.50%) and (b) one and one half of one percent (1.50%); (ii) the Applicable Margin is seven and
one half percent (7.50%); and (iii) the Default Rate is the Benchmark Rate plus nine and one half percent (9.50%).
GWG
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COVID-19
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 distributions from alternative assets 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.
Policy Benefits and L Bonds
Subsequent to December 31, 2020 through October
15, 2021, policy benefits on 81 policies covering 74 individuals have been realized. The face value of insurance benefits of these policies
was $106.2 million.
Subsequent to December 31, 2020 through April
16, 2021, the date we temporarily suspended GWG Holdings’ L Bond offering, GWG Holdings issued approximately $191.6 million
of L Bonds. No L Bonds have been sold since April 16, 2021.
Beneficient’s Liquidity Transactions
Subsequent to December 31, 2020 through the
date of this filing, we executed 10 transactions pursuant to which customers sold interests in private equity funds with an aggregate
net asset value of $5.6 million to certain of the ExAlt Trusts in exchange for agreed upon consideration.
2,000,000 Units
($2,000,000,000)
GWG HOLDINGS, INC.
L Bonds
PROSPECTUS SUPPLEMENT
November 24, 2021