Net offering proceeds not immediately applied to the uses summarized above will be invested short-term investments such as money market funds, commercial paper, U.S. Treasury Bills and similar securities investments pending their use.
The actual use of proceeds from the sale of Renewable Secured Debentures from January 31, 2012 to December 31, 2013 is as follows:
The payment of premiums and servicing costs to maintain life insurance policies represents our most significant requirement 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; however, the probability of actually needing to pay the premiums decreases since mortality becomes more likely. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling described herein. Beyond premiums, we incur policy servicing costs, including annual trustee and tracking costs, and debt servicing costs, including principal and interest payments. Until we receive a stable amount of proceeds from the policy benefits, we intend to pay these costs from our credit facility, when permitted, and through the issuance of debt securities, including Renewable Secured Debentures.
The amount of payments for anticipated premiums 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.
The life insurance policies owned by DLP II are subject to a collateral arrangement with the agent to our revolving credit lender, as described in note 6 to the consolidated financial statements. Under this arrangement, collection and escrow accounts are used to fund purchases and premiums of the insurance policies and to pay interest and other charges under our revolving credit facility. The lender and its agent must authorize all disbursements from these accounts, including any distributions to GWG Life or Holdings. Distributions are limited to an amount that would result in the borrowers (DLP II, GWG Life, and Holdings) realizing an annualized rate of return on the equity funded amount for such assets of not more than 18%, as determined by the agent. After such amount is reached, the credit agreement requires that excess funds be used to fund repayments or a reserve account in a certain amount before any additional distributions may be made. In the future, these arrangements may restrict the cash flows available for payment of principal and interest on our debt obligations.
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.
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, 2013, 99.09% of our life insurance policies, by face value benefits, were issued by companies that maintained an investment grade rating (BBB- or better) by Standard & Poor’s.
Our credit facility is floating-rate financing. In addition, our ability to offer interest rates that attract capital (including in the offer and sale of Renewable Secured Debentures) is generally impacted by prevailing interest rates. Furthermore, while our other indebtedness provides us with fixed-rate financing, our debt coverage ratio is calculated in relation to our total cost of financing. Therefore, fluctuations in interest rates impact our business by increasing our borrowing costs, and reducing availability under our debt financing arrangements. Furthermore, we calculate our portfolio earnings based upon the spread generated between the return on our life insurance portfolio and the cost of our financing. As a result, increases in interest rates will reduce the earnings we expect to achieve from our investments in life insurance policies.
We use non-GAAP financial measures when evaluating our financial results, for planning and forecasting purposes, and for maintaining compliance with covenants contained in our borrowing agreements. Non-GAAP financial measures disclosed by management are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These non-GAAP financial measures are not in accordance with GAAP and may be different from non-GAAP measures used by other companies, including other companies within our industry. This presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for comparable amounts prepared in accordance with GAAP. See the notes to our consolidated financial statements and our audited financial statements contained herein.
GAAP-based fair value requires us to mark-to-market our investments in life insurance policies, which by its nature, is based upon Level 3 measurements that are unobservable. As a result, this accounting treatment imports financial market volatility and subjective inputs into our financial reporting. We believe this type of accounting reporting is at odds with one of the key attractions for purchasing and owning a portfolio life insurance policies: the non-correlated nature of the returns to be derived from such policies. Therefore, in contrast to a GAAP-based fair valuation, we seek to measure the accrual of the actuarial gain occurring within the portfolio of life insurance policies at their expected internal rate of return based on statistical mortality probabilities for the insureds (using primarily the insured’s age, sex and smoking status). The expected internal rate of return tracks actuarial gain occurring within the policies according to a mortality table as the insureds’ age increases. By comparing the actuarial gain accruing within our portfolio of life insurance policies against our costs during the same period, we can estimate, manage and evaluate the overall financial profitability of our business without regard to mark-to-market volatility. We use this information to balance our life insurance policy purchasing and manage our capital structure, including the issuance of debt and utilization of our other sources of capital, and to monitor our compliance with borrowing covenants. We believe that these non-GAAP financial measures provide information that is useful for investors to understand period-over-period operating results separate and apart from fair value items that may, or could, have a disproportionately positive or negative impact on results in any particular period.
Our credit facility requires us to maintain a “positive net income” and “tangible net worth” each of which are calculated on an adjusted non-GAAP basis on the method described above, without regard to GAAP-based fair value measures. In addition, our revolving credit facility requires us to maintain an “excess spread,” which is the difference between (i) the weighted average of our expected internal rate of return of our portfolio of life insurance policies and (ii) the weighted average of our credit facility’s interest rate. These calculations are made using non-GAAP measures in the method described below, without regard to GAAP-based fair value measures.
In addition, our Renewable Secured Debentures and Series I Secured notes require us to maintain a “debt coverage ratio” designed to ensure that the expected cash flows from our portfolio of life insurance policies is able to adequately service our total outstanding indebtedness. In addition, our Renewable Secured Debentures requires us to maintain a “subordination ratio” which limits the total amount of indebtedness that can be issued senior in rank to the Renewable Secured Debentures and Series I Secured notes. These ratios are calculated using non-GAAP measures in the method described below, without regard to GAAP-based fair value measures.
As of December 31, 2013, we were in compliance with both the debt coverage ratio and the subordination ratio as required under our related financing agreements for Renewable Secured Debentures and Series I Secured notes.
Not applicable.
| ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors
GWG Holdings, Inc.
Minneapolis, MN
We have audited the accompanying consolidated balance sheet of GWG Holdings, Inc. as of December 31, 2013, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the year then ended. 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 conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GWG Holdings, Inc. as of December 31, 2013 and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Baker Tilly Virchow Krause, LLP
Minneapolis, Minnesota
March 19, 2014
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
GWG HOLDINGS, INC. AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheets of GWG Holdings, Inc. and Subsidiaries (Company) as of December 31, 2012, and the related consolidated statements of operations, changes in equity, and cash flows for the year then ended. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GWG Holdings, Inc. and Subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
/s/ Mayer Hoffman McCann P.C.
Minneapolis, MN
March 30, 2013
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | December 31, 2013 | | | December 31, 2012 | |
| A S S E T S | |
| Cash and cash equivalents | | $ | 33,449,793 | | | $ | 27,497,044 | |
| Restricted cash | | | 5,832,970 | | | | 2,093,092 | |
| Due from related parties | | | - | | | | 8,613 | |
| Investment in life settlements, at fair value | | | 234,672,794 | | | | 164,317,183 | |
| Deferred financing costs, net | | | 357,901 | | | | 97,040 | |
| Death benefits receivable | | | - | | | | 2,850,000 | |
| Other assets | | | 1,067,018 | | | | 1,085,063 | |
| TOTAL ASSETS | | $ | 275,380,476 | | | $ | 197,948,035 | |
| | | | | | | | | |
| L I A B I L I T I E S & S T O C K H O L D E R S’ E Q U I T Y (DEFICIT) | |
| LIABILITIES | | | | | | | | |
| Revolving credit facility | | $ | 79,000,000 | | | $ | 71,000,000 | |
| Series I Secured notes payable | | | 29,275,202 | | | | 37,844,711 | |
| Renewable Secured Debentures | | | 131,646,062 | | | | 55,718,950 | |
| Accounts payable | | | 839,869 | | | | 470,059 | |
| Interest payable | | | 7,209,408 | | | | 3,477,320 | |
| Other accrued expenses | | | 504,083 | | | | 1,291,499 | |
| Deferred taxes, net | | | 7,675,174 | | | | 5,501,407 | |
| TOTAL LIABILITIES | | | 256,149,798 | | | | 175,303,946 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES (NOTES 14 AND 15) | | | | | | | | |
| | | | | | | | | |
| CONVERTIBLE, REDEEMABLE PREFERRED STOCK | | | | | | | | |
| (par value $0.001; shares authorized 40,000,000; shares issued and outstanding 3,368,109 and 3,361,076; liquidation preference of $25,261,000 and $25,208,000 on December 31, 2013 and 2012, respectively) | | | 24,722,693 | | | | 23,905,878 | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | |
| Common stock (par value $0.001: shares authorized 210,000,000; shares issued and outstanding 9,124,000 and 9,989,000 on December 31, 2013 and 2012) | | | 9,124 | | | | 9,989 | |
| Additional paid-in capital | | | 2,937,438 | | | | 6,971,844 | |
| Accumulated deficit | | | (8,438,577 | ) | | | (8,243,622 | ) |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | | | (5,492,015 | ) | | | (1,261,789 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES & EQUITY (DEFICIT) | | $ | 275,380,476 | | | $ | 197,948,035 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year Ended | |
| | | December 31, 2013 | | | December 31, 2012 | |
| REVENUE | | | | | | |
| Gain on life settlements, net | | $ | 29,513,642 | | | $ | 17,436,743 | |
| Interest and other income | | | 3,551,132 | | | | 89,055 | |
| TOTAL REVENUE | | | 33,064,774 | | | | 17,525,798 | |
| | | | | | | | | |
| EXPENSES | | | | | | | | |
| Interest expense | | | 20,762,644 | | | | 10,878,627 | |
| Employee compensation and benefits | | | 5,043,848 | | | | 2,903,373 | |
| Legal and professional fees | | | 1,754,209 | | | | 1,076,694 | |
| Other expenses | | | 3,525,261 | | | | 2,486,813 | |
| TOTAL EXPENSES | | | 31,085,962 | | | | 17,345,507 | |
| | | | | | | | | |
| INCOME BEFORE INCOME TAXES | | | 1,978,812 | | | | 180,291 | |
| INCOME TAX EXPENSE | | | 2,173,767 | | | | 1,193,190 | |
| | | | | | | | | |
| NET LOSS | | | (194,955 | ) | | | (1,012,899 | ) |
| Accretion of preferred stock to liquidation value | | | (806,624 | ) | | | (1,578,405 | ) |
| LOSS ATTRIBUTABE TO COMMON SHAREHOLDERS | | $ | (1,001,579 | ) | | $ | (2,591,304 | ) |
| | | | | | | | | |
NET LOSS PER COMMON SHARE (BASIC AND DILUTED) | | | | | | | | |
| Net loss | | $ | (0.02 | ) | | $ | (0.10 | ) |
| Accretion of preferred stock to liquidation value | | $ | (0.09 | ) | | $ | (0.16 | ) |
| Net loss per share attributable to common shareholders | | $ | (0.11 | ) | | $ | (0.26 | ) |
| | | | | | | | | |
| WEIGHTED AVERAGE SHARES OUTSTANDING | | | | | | | | |
| Basic and diluted | | | 9,517,397 | | | | 9,989,000 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| | | Common | | | Common Stock | | | Additional Paid-in | | | Accumulated | | | Total | |
| | | Shares | | | (par) | | | Capital | | | Deficit | | | Equity | |
| | | | | | | | | | | | | | | | |
| Balance, December 31, 2011 | | | 9,989,000 | | | $ | 9,989 | | | $ | 8,169,303 | | | $ | (7,230,723 | ) | | $ | 948,569 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | - | | | | - | | | | - | | | | (1,012,899 | ) | | | (1,012,899 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Issuance of warrants to purchase common stock | | | - | | | | - | | | | 380,946 | | | | - | | | | 380,946 | |
| | | | | | | | | | | | | | | | | | | | | |
| Accretion of preferred stock to liquidation value | | | - | | | | - | | | | (1,578,405 | ) | | | - | | | | (1,578,405 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2012 | | | 9,989,000 | | | | 9,989 | | | | 6,971,844 | | | | (8,243,622 | ) | | | (1,261,789 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | (194,955 | ) | | | (194,955 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Repurchase of common stock | | | (865,000 | ) | | | (865 | ) | | | (3,251,535 | ) | | | - | | | | (3,252,400 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Stock-based compensation | | | | | | | | | | | 23,753 | | | | - | | | | 23,753 | |
| | | | | | | | | | | | | | | | | | | | | |
| Accretion of preferred stock to liquidation value | | | | | | | | | | | (806,624 | ) | | | - | | | | (806,624 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2013 | | | 9,124,000 | | | $ | 9,124 | | | $ | 2,937,438 | | | $ | (8,438,577 | ) | | $ | (5,492,015 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | Year Ended | |
| | | December 31, 2013 | | | December 31, 2012 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (194,955 | ) | | $ | (1,012,899 | ) |
Adjustments to reconcile net loss to net cash flows used in operating activities: | | | | | | | | |
| Gain on life settlements | | | (39,337,542 | ) | | | (27,856,374 | ) |
| Amortization of deferred financing and issuance costs | | | 2,470,390 | | | | 1,908,930 | |
| Deferred income taxes | | | 2,173,767 | | | | 1,193,190 | |
| Convertible, redeemable preferred stock issued in lieu of cash dividends | | | 623,899 | | | | 567,478 | |
| Convertible, redeemable preferred stock dividends payable | | | 255 | | | | 338,695 | |
| Repurchase of common stock | | | (3,252,400 | ) | | | - | |
| (Increase) decrease in operating assets: | | | | | | | | |
| Due from related parties | | | 8,613 | | | | (6,348 | ) |
| Death benefits receivable | | | 2,850,000 | | | | (2,850,000 | ) |
| Other assets | | | (566,418 | ) | | | (869,165 | ) |
| Increase (decrease) in operating liabilities: | | | | | | | | |
| Accounts payable | | | 369,809 | | | | (257,708 | ) |
| Interest payable | | | 3,418,432 | | | | 1,744,599 | |
| Other accrued expenses | | | 50,642 | | | | (69,292 | ) |
| | | | | | | | | |
| NET CASH FLOWS USED IN OPERATING ACTIVITIES | | | (31,385,508 | ) | | | (27,168,894 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Investment in life settlements | | | (34,997,500 | ) | | | (15,067,495 | ) |
| Proceeds from settlement of life settlements | | | 4,563,896 | | | | 1,067,210 | |
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | | | (30,433,604 | ) | | | (14,000,285 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Net proceeds from revolving credit facility | | | 8,000,000 | | | | 11,000,000 | |
| Payments for redemption of Series I Secured notes payable | | | (8,671,624 | ) | | | (7,477,197 | ) |
| Proceeds from issuance of Renewable Secured Debentures | | | 85,260,976 | | | | 58,553,280 | |
| Payment of deferred issuance costs for Renewable Secured Debentures | | | (4,320,542 | ) | | | (3,024,545 | |
| Payments for redemption of Renewable Secured Debentures | | | (8,143,363 | ) | | | (112,500 | ) |
| Proceeds from (uses of) restricted cash | | | (3,739,878 | ) | | | 2,701,210 | |
| Issuance (redemption) of convertible, redeemable preferred stock | | | (613,708 | ) | | | 6,414,273 | |
| Payments of issuance cost for convertible, redeemable preferred stock | | | - | | | | (1,266,647 | ) |
| NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | | 67,771,861 | | | | 66,787,874 | |
| | | | | | | | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 5,952,749 | | | | 25,618,695 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS | | | | | | | | |
| BEGINNING OF PERIOD | | | 27,497,044 | | | | 1,878,349 | |
| END OF PERIOD | | $ | 33,449,793 | | | $ | 27,497,044 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS – CONTINUED
| | | Year Ended | |
| | | December 31, 2013 | | | December 31, 2012 | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | |
| Interest and preferred dividends paid | | $ | 13,627,000 | | | $ | 6,280,000 | |
| | | | | | | | | |
| NON-CASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | |
| Non-cash conversion of Series I Secured notes | | $ | 912,000 | | | $ | 4,220,000 | |
| Non-cash conversion of accrued interest payable on Series I Secured notes | | $ | - | | | $ | 6,000 | |
| Warrants issued to purchase common stock | | $ | - | | | $ | 381,000 | |
| Options issued to purchase common stock | | $ | 24,000 | | | $ | - | |
| Accrued interest payable on Series I Secured notes added to principal | | $ | 185,000 | | | $ | 142,000 | |
| Accrued interest payable on Renewable Secured Debentures added to principal | | $ | 141,000 | | | $ | 13,000 | |
| Unsettled life settlements included in accounts payable | | $ | - | | | $ | 292,000 | |
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 and summary of significant accounting policies
Nature of business - GWG Holdings, Inc. and subsidiaries, located in Minneapolis, Minnesota, facilitates the purchase of life insurance policies for its own investment portfolio through its wholly owned subsidiary, GWG Life Settlements, LLC (GWG Life), and its subsidiaries, GWG Trust (Trust), GWG DLP Funding II, LLC (DLP II) and its wholly owned subsidiary, GWG DLP Master Trust II (the Trust II). Our wholly owned subsidiary, GWG Broker Services, LLC (Broker Services), was formed to earn fees for brokering policy transactions between market participants. Our wholly owned subsidiary United Lending, LLC (United Lending) and its wholly owned subsidiary United Lending SPV, LLC (United Lending SPV) were formed to finance life settlement premiums and policy loans. All of these entities are legally organized in Delaware. Unless the context otherwise requires or we specifically so indicate, all references in this report to "we", "us", "our", "our Company", "GWG", or the "Company" refer to these entities collectively. GWG Member, LLC, a wholly owned subsidiary formed November 2010 to facilitate the acquisition of policies, has not commenced operations as of December 31, 2013. The entities were legally organized in Delaware and are collectively referred herein to as GWG, or the Company.
Use of estimates - The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. The most significant estimates with regard to these consolidated financial statements relates to (1) the determination of the assumptions used in estimating the fair value of the investment in life insurance policies, and (2) the value of deferred tax assets and liabilities.
Cash and cash equivalents - The Company considers cash in demand deposit accounts and temporary investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash and cash equivalents with highly rated financial institutions. From time to time, the Company’s balances in its bank accounts exceed Federal Deposit Insurance Corporation limits. The Company periodically evaluates the risk of exceeding insured levels and may transfer funds as it deems appropriate. The Company has not experienced any losses with regards to balances in excess of insured limits or as a result of other concentrations of credit risk.
Life settlements - ASC 325-30, Investments in Insurance Contracts, allows a reporting entity the election to account for its investments in life settlements using either the investment method or the fair value method. The election shall be made on an instrument-by-instrument basis and is irrevocable. Under the investment method, an investor shall recognize the initial investment at the purchase price plus all initial direct costs. Continuing costs (policy premiums and direct external costs, if any) to keep the policy in force shall be capitalized. Under the fair value method, an investor shall recognize the initial investment at the purchase price. In subsequent periods, the investor shall re-measure the investment at fair value in its entirety at each reporting period and shall recognize the change in fair value in current period income net of premiums paid. The Company uses the fair value method to account for all life settlements.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company recognizes realized gains (revenue) from life settlement contracts upon one of the two following events:
1) Receipt of death notice or verified obituary of insured
2) Sale of policy and filing of change of ownership forms and receipt of payment
The Company recognizes the difference between the death benefits and carrying values of the policy when an insured event has occurred and the Company determines that settlement and ultimate collection of the death benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. In an event of a sale of a policy the Company recognizes gain or loss as the difference between the sale price and the carrying value of the policy on the date of the receipt of payment on such sale.
Deposits and initial direct costs advanced on unsettled policy acquisitions are recorded as other assets until policy ownership has been transferred to the Company. Such deposits and direct cost advances were $201,000 and $785,000 at December 31, 2013 and 2012 respectively.
Deferred financing and issuance costs – Costs incurred to obtain financing under the revolving credit facility, as described in note 6, have been capitalized and are amortized using the straight-line method over the term of the revolving credit facility. Amortization of deferred financing costs was $455,000 and $233,000 for the years ended December 31, 2013 and 2012, respectively. The future amortization is expected to be $358,000 for the year ending December 31, 2014. The Series I Secured notes payable, as described in note 7, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of each respective borrowing. The Renewable Secured debentures, as described in note 8, are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of each respective borrowing. The Series A preferred stock, as described in note 9, is reported net of issuance costs, sales commissions, including the fair value of warrants issued, and other direct expenses, which are amortized using the interest method as interest expense over the three-year redemption period.
Earnings (loss) per share - Basic per share earnings (loss) attributable to non-redeemable interests is calculated using the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated based on the potential dilutive impact, if any, of the Company’s convertible, redeemable preferred stock, and outstanding warrants, and stock options.
Subsequent events - Subsequent events are events or transactions that occur after the balance sheet date but before consolidated financial statements are issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the consolidated financial statements. The Company’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before the consolidated financial statements are available to be issued. The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements are filed for potential recognition or disclosure.
Recently adopted pronouncements - Pronouncements issued by the FASB or other authoritative accounting standards groups with future effective dates are either not applicable or are not expected to be significant to the Company.
( 2 ) Restrictions on cash
The Company is required by its lenders to maintain collection and escrow accounts. These accounts are used to fund the acquisition, pay annual premiums of insurance policies, pay interest and other charges under the revolving credit facility, and collect policy benefits. DZ Bank AG, as agent for Autobahn Funding Company, LLC, the lender for the revolving credit facility as described in note 6, authorizes the disbursements from these accounts. At December 31, 2013 and 2012 there was a balance of $5,833,000, and $2,093,000, respectively, maintained in these restricted cash accounts.
( 3 ) Investment in life insurance policies
The life insurance policies (Level 3 fair value measurements) are valued based on unobservable inputs that are significant to the overall fair value measurement. Changes in the fair value of these instruments are recorded in gain or loss on life insurance policies in the consolidated statements of operations (net of the cash premiums paid on the policies). The fair value is determined on a discounted cash flow basis that incorporates life expectancy assumptions. Life expectancy reports have been obtained from widely accepted life expectancy providers. The discount rate incorporates current information about market interest rates, the credit exposure to the insurance company that issued the life insurance policy and our estimate of the risk premium an investor in the policy would require. As a result of management’s analysis, discount rates of 11.69% and 12.08% were applied to the portfolio as of December 31, 2013 and 2012, respectively.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s life insurance policies accounted for under the fair value method and their estimated maturity dates, based on remaining life expectancy is as follows:
| | | As of December 31, 2013 | | | As of December 31, 2012 | |
| Years Ending December 31, | | Number of Contracts | | | Estimated Fair Value | | | Face Value | | | Number of Contracts | | | Estimated Fair Value | | | Face Value | |
| 2014 | | | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | |
| 2015 | | | 4 | | | | 5,065,000 | | | | 6,750,000 | | | | - | | | | - | | | | - | |
| 2016 | | | 8 | | | | 8,174,000 | | | | 13,750,000 | | | | 2 | | | | 1,163,000 | | | | 2,000,000 | |
| 2017 | | | 25 | | | | 33,345,000 | | | | 63,916,000 | | | | 13 | | | | 11,608,000 | | | | 22,229,000 | |
| 2018 | | | 33 | | | | 37,243,000 | | | | 80,318,000 | | | | 17 | | | | 21,155,000 | | | | 53,439,000 | |
| 2019 | | | 34 | | | | 32,844,000 | | | | 89,295,000 | | | | 31 | | | | 28,252,000 | | | | 75,668,000 | |
| 2020 | | | 34 | | | | 27,741,000 | | | | 75,644,000 | | | | 35 | | | | 26,947,000 | | | | 84,579,000 | |
| Thereafter | | | 125 | | | | 90,261,000 | | | | 410,975,000 | | | | 113 | | | | 75,192,000 | | | | 334,331,000 | |
| Totals | | | 263 | | | $ | 234,673,000 | | | $ | 740,648,000 | | | | 211 | | | $ | 164,317,000 | | | $ | 572,246,000 | |
The Company recognized death benefits of $16,600,000 and $7,350,000 during 2013 and 2012, respectively, related to policies with a carrying value of $4,564,000 and $1,067,000, respectively. The Company recorded realized gains of $12,036,000 and $6,283,000 on such policies.
Reconciliation of gain on life settlements:
| | | 2013 | | | 2012 | |
| Change in fair value | | $ | 39,338,000 | | | $ | 27,856,000 | |
| Premiums and other annual fees | | | (21,860,000 | ) | | | (16,702,000 | ) |
| Policy maturities | | | 12,036,000 | | | | 6,283,000 | |
| Gain on life settlements, net | | $ | 29,514,000 | | | $ | 17,437,000 | |
The estimated expected premium payments to maintain the above life insurance policies in force for the next five years, assuming no mortalities, are as follows:
| Years Ending December 31, | | | |
| 2014 | | $ | 22,739,000 | |
| 2015 | | | 25,056,000 | |
| 2016 | | | 27,508,000 | |
| 2017 | | | 30,653,000 | |
| 2018 | | | 33,509,000 | |
| | | $ | 139,465,000 | |
Management anticipates funding the estimated premium payments as noted above with proceeds from the DZ Bank revolving credit facility and through additional debt and equity financing as well as from cash proceeds from maturities of life insurance policies. The proceeds of these capital sources are also intended to be used for the purchase, financing, and maintenance of additional life insurance policies.
( 4 ) Fair value definition and hierarchy
ASC 820 establishes a hierarchical disclosure framework which prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. ASC 820 establishes a three-level valuation hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The hierarchy is broken down into three levels based on the observability of inputs as follows:
| ● | Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. |
| ● | Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. |
| ● | Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
The availability of observable inputs can vary by types of assets and liabilities and is affected by a wide variety of factors, including, for example, whether an instrument is established in the marketplace, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for assets and liabilities categorized in Level 3.
Level 3 Valuation Process
The estimated fair value of the Company’s portfolio of life settlements is determined on a quarterly basis by the Company’s portfolio management committee, taking into consideration changes in discount rate assumptions, estimated premium payments and life expectancy estimate assumptions, as well as any changes in economic and other relevant conditions. These inputs are then used to estimate the discounted cash flows using the Model Actuarial Pricing System (MAPS), probabilistic portfolio pricing model, which estimates the cash flows using various probabilities and scenarios. The valuation process includes a review by senior management as of each valuation date. Management has also engaged a third party expert to independently test the accuracy of the valuations using the inputs provided by management on a quarterly basis.
Life insurance policies, as well as the portfolio taken as a whole, represent financial instruments recorded at fair value on a recurring basis. The following table reconciles the beginning and ending fair value of the Company’s Level 3 investments in its portfolio of life insurance policies for the years ending December 31, as follows:
| | | | 2013 | | | | 2012 | |
| Beginning balance | | $ | 164,317,000 | | | $ | 122,169,000 | |
| Purchases | | | 35,582,000 | | | | 15,359,000 | |
| Maturities (acquisition cost) | | | (4,564,000 | ) | | | (1,067,000 | ) |
| Gross unrealized gains | | | 39,338,000 | | | | 28,055,000 | |
| Gross unrealized losses | | | - | | | | (199,000 | ) |
| Ending balance | | $ | 234,673,000 | | | $ | 164,317,000 | |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of a portfolio of life insurance policies is based on information available to the Company at the reporting date. Fair value is based upon a discounted cash flow model that incorporates life expectancy estimate assumptions. Life expectancy estimates are obtained from independent, third-party widely accepted life expectancy estimate providers at policy acquisition. The life expectancy values of each insured, as determined at policy acquisition, are rolled down monthly for the passage of time by the MAPS actuarial software the Company uses for ongoing valuation of its portfolio of life insurance policies. The discount rate incorporates current information about discount rates applied by other reporting companies owning portfolios of life insurance policies, discount rates observed in the life insurance secondary market, market interest rates, the credit exposure to the insurance company that issued the life insurance policy and management’s estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio of life insurance policies.
On January 22, 2013, one of the independent medical actuarial underwriting firms we utilize, 21st Services, announced advancements in its underwriting methodology, resulting in revised estimated life expectancy mortality tables for life settlement transactions. We have been advised by 21st Services that the changes are very granular and relate to both specific medical conditions and lifestyles of insureds. These changes are the result of the application of additional medical information that has been gathered by 21st Services over a period of time, and which has now been applied to the inputs and methodologies used to develop the actuarial life expectancies. While we do not believe these revised methodologies indicate the previous estimated life expectancies were inaccurate, we believe the revised methodologies provide additional information that should be considered in updating our estimate of the life expectancies of the insureds within our portfolio of life settlement contracts as of December 31, 2012. Based upon our evaluation and analysis of data made available by 21st Services, as well as information regarding the insureds within our portfolio, we have estimated the impact of the changes in 21st Services’ methodologies for determining life expectancies on a policy-by-policy basis within our portfolio as of December 31, 2012 and applied such changes to the life expectancy inputs used to estimate fair value. We have adjusted the original life expectancies provided by 21st Services based on four factors, the impact of each analyzed individually for each insured in the GWG portfolio. The four factors are gender, anti-selection, age, and primary impairment. GWG applied this set of adjustments to all 21st Services LEs used in valuation of the portfolio as of December 31, 2012. At that time, the portfolio contained 211 policies on 194 insured lives. Of those 211 policies, 199 were valued using a 21st Services LE as part of the pricing LE calculation. While the analysis and adjustments were applied on an individual policy basis, the result was an average overall increase in the original life expectancy estimates of 8.67%. We have a standard practice of obtaining two third-party life expectancy estimates for each policy in our portfolio. As a result, the effective change in life expectancy on the portfolio was an average of approximately 4.33%, which resulted in an aggregate decrease in the fair value of our life settlements portfolio of $12.4 million. Life expectancy reports by their very nature are estimates.
The fair value of life insurance policies is estimated using present value calculations of estimated cash flows based on the data specific to each individual life insurance policy. Estimated future policy premium payments are calculated based on the terms of the policy and the premium payment history. The following summarizes the unobservable inputs utilized in estimating the fair value of the portfolio of life insurance policies:
| | | As of December 31, | | | As of December 31, | |
| | | 2013 | | | 2012 | |
| Weighted average age of insured | | | 82.1 | | | | 81.3 | |
| Weighted average life expectancy, months* | | | 87.0 | | | | 91.6 | |
| Average face amount per policy | | $ | 2,816,000 | | | $ | 2,712,064 | |
| Discount rate | | | 11.69 | % | | | 12.08 | % |
* Standard life expectancy as adjusted for insured’s specific circumstances.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These assumptions are, by their nature, inherently uncertain and the effect of changes in estimates may be significant. The techniques used in estimating the present value of estimated cash flows are derived from valuation techniques generally used in the industry that include inputs for the asset that are not based on observable market data. The extent to which the fair value could reasonably vary in the near term has been quantified by evaluating the effect of changes in significant underlying assumptions used to estimate the fair value. If the life expectancy estimates were increased or decreased by four and eight months on each outstanding policy and the discount factors were increased or decreased by 1% and 2%, while all other variables are held constant, the fair value of the investment in life insurance policies would increase or (decrease) by the amounts summarized below:
| | | Change in life expectancy | |
| | | plus 8 months | | | minus 8 months | | plus 4 months | | minus 4 months | |
| Investment in life policies | | | | | | | | | | | | | | |
| December 31, 2013 | | $ | (34,382,000 | ) | | $ | 36,152,000 | | $ | (17,417,000 | ) | $ | 17,865,000 | |
| | | | | | | | | | | | | | | |
| December 31, 2012 | | $ | (24,072,000 | ) | | $ | 25,268,000 | | $ | (12,185,000 | ) | $ | 12,484,000 | |
| | | | | | | | | | | | | | | |
| | | Change in discount rate | |
| | | plus 2% | | | minus 2% | | plus 1% | | minus 1% | |
| Investment in life policies | | | | | | | | | | | | | | |
| December 31, 2013 | | $ | (22,944,000 | ) | | $ | 27,063,000 | | $ | (11,933,000 | ) | $ | 12,959,000 | |
| | | | | | | | | | | | | | | |
| December 31, 2012 | | $ | (16,811,000 | ) | | $ | 19,978,000 | | $ | (8,759,000 | ) | $ | 9,547,000 | |
Other Fair Value Considerations
Carrying value of receivables, prepaid expenses, accounts payable and accrued expenses approximate fair value due to their short-term maturities and low credit risk. The estimated fair value of the Company’s Series I Secured notes payable is approximately $33,067,000 based on a weighted-average market interest rate of 7.51% based on an income approach. The Company began issuing Renewable Secured Debentures in the first quarter of 2012. The current interest rates on the Renewable Secured Debentures approximate market rates. The carrying value of the Renewable Secured Debentures approximates fair value. The carrying value of the revolving credit facility reflects interest charged at the commercial paper rate plus an applicable margin. The margin represents our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall rate reflects market, and the carrying value of the revolver approximates fair value. All of the financial instruments are level 3 fair value measurements.
The Company has issued warrants to purchase common stock in connection with the issuance of its convertible, redeemable preferred stock. Warrants were determined by the Company as permanent equity. The fair value measurements associated with the warrants, measured at issuance represent level 3 instruments.
As of December 31, 2013:
| Month issued | | Warrants issued | | | Fair value per share | | | Risk free rate | | | Volatility | | Term |
| December 2011 | | | 137,874 | | | $ | 0.11 | | | | 0.42 | % | | | 25.25 | % | 3 years |
| March 2012 | | | 76,260 | | | $ | 0.26 | | | | 0.38 | % | | | 36.20 | % | 3 years |
| June 2012 | | | 323,681 | | | $ | 0.58 | | | | 0.41 | % | | | 47.36 | % | 3 years |
| July 2012 | | | 289,093 | | | $ | 0.58 | | | | 0.41 | % | | | 47.36 | % | 3 years |
| September 2012 | | | 5,000 | | | $ | 0.36 | | | | 0.31 | % | | | 40.49 | % | 3 years |
| | | | 831,908 | | | | | | | | | | | | | | |
Volatility is based upon the weekly percentage change in the stock price of selected comparable insurance companies. In June 2012, we evaluated the comparable companies used, and made certain changes to those used. The percentage change is calculated on the average price of those selected stocks at the weekly close of business for the year preceding the balance sheet date. We compare annual volatility based on this weekly information.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( 5 ) Notes receivable from related parties
As of December 31, 2013 and December 31, 2012, the Company had receivables totaling $5,000,000 due from an affiliate, Opportunity Finance, LLC, which were fully reserved. Opportunity Finance ceased operations in 2008.
( 6 ) Credit facilities
Revolving credit facility – Autobahn Funding Company LLC
On July 15, 2008, DLP II and United Lending entered into a revolving credit facility pursuant to a Credit and Security Agreement (Agreement) with Autobahn Funding Company LLC (Autobahn), providing the Company with a maximum borrowing amount of $100,000,000. Autobahn is a commercial paper conduit that issues commercial paper to investors to provide funding to DLP II and United Lending. DZ Bank AG acts as the agent for Autobahn. The original Agreement was to expire on July 15, 2013. On January 29, 2013, Holdings, together with GWG Life and DLP II, entered into an Amended and Restated Credit and Security Agreement with Autobahn, extending the facility expiration date to December 31, 2014, and removing United Lending as a party to the amended and restated Agreement. The amount outstanding under this facility as of December 31, 2013 and 2012, was $79,000,000 and $71,000,000, respectively.
The Agreement requires DLP II to pay, on a monthly basis, interest at the commercial paper rate plus an applicable margin, as defined in the Agreement. The effective rate was 6.19% and 2.02% at December 31, 2013 and December 31, 2012, respectively. The weighted average effective interest rate (excluding the unused line fee) was 6.14% and 2.14% for the years ended December 31, 2013 and 2012, respectively. The Agreement also requires payment of an unused line fee of 0.30% on the unfunded amount under the revolving credit facility. The note is secured by substantially all of DLP II assets which consist primarily of life settlement policies.
The Agreement has certain financial and nonfinancial covenants. The Company was in compliance with these covenants at December 31, 2013 and 2012. The Agreement generally prohibits the Company from:
| ● | changing its corporate name, offices, and jurisdiction of incorporation |
| ● | changing any deposit accounts or payment instructions to insurers; |
| ● | changing any operating policies and practices such that it would be reasonably likely to adversely affect the collectability of any asset in any material respect; |
| ● | merging or consolidating with, or selling all or substantially all of its assets to, any third party; |
| ● | selling any collateral or creating or permitting to exist any adverse claim upon any collateral; |
| ● | engaging in any other business or activity than that contemplated by the Agreement; |
| ● | incurring or guaranteeing any debt for borrowed money; |
| ● | amending the Company’s certificate of incorporation or bylaws, making any loans or advances to, investments in, or paying any dividends to, any person unless both before and after any such loan, advance, investment or dividend there exists no actual event of default, potential event of default or termination event; |
| ● | removing an independent director on the board of directors except for cause or with the consent of the lender; or |
| ● | making payment on or issuing any subsidiary secured notes or debentures, or amending any agreements respecting such notes or debentures, if an event of default, potential event of default or termination event exists or would arise from any such action. |
In addition, the Company has agreed to maintain (i) a positive consolidated net income (as defined and calculated under the Agreement) for each complete fiscal year and (ii) a tangible net worth (again, as defined and calculated under the Agreement) of not less than $15 million, and (iii) maintain a borrowing base surplus or cash cushion sufficient to pay three to twelve months (increasing throughout 2013) of premiums and facility fees.
Consolidated net income and tangible net worth as of and for the year ended December 31, 2013, as calculated under the agreement, was $20,916,000 and $54,286,000 respectively.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advances under the Agreement are subject to a borrowing base formula, which limits the availability of advances on the borrowing base calculation based on attributes of policies pledged to the facility. Over-concentration of policies by insurance carrier, over-concentration of policies by insurance carriers with ratings below a AA- rating, and the premiums and facility fees reserve are the three primary factors with the potential of limiting availability of funds on the facility. Total funds available for additional borrowings under the borrowing base formula criteria at December 31, 2013 and 2012, were $3,937,000 and $15,043,000 respectively.
On July 15, 2008, Holdings delivered a performance guaranty in favor of Autobahn pursuant to which it guaranteed the obligations of GWG Life, in its capacity as the seller and master servicer, under the Credit and Security Agreement and related documents. On January 29, 2013 and in connection with the Amended and Restated Credit and Security Agreement, Holdings delivered a reaffirmation of its performance guaranty. The obligations of Holdings under the performance guaranty and subsequent reaffirmation do not extend to the principal and interest owed by DLP II as the borrower under the credit facility.
( 7 ) Series I Secured notes payable
Series I Secured notes payable have been issued in conjunction with the GWG Series I Secured notes private placement memorandum dated August 25, 2009 (last revised November 15, 2010). On June 14, 2011 the Company closed the offering to additional investors, however, existing investors may elect to continue advancing amounts outstanding upon maturity subject to the Company’s option. Series I Secured notes have maturity dates ranging from six months to seven years with fixed interest rates varying from 5.65% to 9.55% depending on the term of the note. Interest is payable monthly, quarterly, annually or at maturity depending on the terms of the note. At December 31, 2013 and 2012 the weighted average interest rates of Series I Secured notes were 8.35% and 8.22%, respectively. The notes are secured by assets of GWG Life. The principal amount outstanding under these Series I Secured notes was $29,744,000 and $38,570,000 at December 31, 2013, and December 31, 2012, respectively. The difference between the amount outstanding on the Series I Secured notes and the carrying amount on the consolidated balance sheet is due to netting of unamortized deferred issuance costs. Overall, interest expense includes amortization of deferred financing and issuance costs of $606,000 and $1,170,000 in 2013 and 2012, respectively. Future expected amortization of deferred financing costs is $468,000 over the next six years.
On November 15, 2010, Jon Sabes and Steve Sabes pledged their ownership interests in the Company to the Series I Trust as security for advances under the Series I Trust arrangement.
The use of proceeds from the issuances of Series I Secured notes was limited to the following: (1) payment of commissions of Series I Secured note sales, (2) purchase life insurance policies, (3) pay premiums of life insurance policies, (4) pay principal and interest to Senior Liquidity Provider (DZ Bank), (5) pay portfolio or note operating fees or costs, (6) pay trustee (Wells Fargo Bank, N.A.), (7) pay servicer and collateral fees, (8) pay principal and interest on Series I Secured notes, (9) make distributions to equity holders for tax liability related to portfolio, (10) purchase interest rate caps, swaps, or hedging instruments, (11) pay GWG Series I Trustee fees, and (12) pay offering expenses.
On November 1, 2011, GWG entered into a Third Amended and Restated Note Issuance and Security Agreement with Lord Securities Corporation after receiving majority approval from the holders of Series I Secured notes. Among other things, the amended and restated agreement modified the use of proceeds and certain provisions relating to the distribution of collections and subordination of cash flow. Under the amended and restated agreement, GWG is no longer restricted as to its use of proceeds or subject to restrictions on certain distributions of collections and subordination of cash flows. Under the amended and restated agreement, GWG may extend the maturity of Series I Secured notes of a six month term for up to two additional six month terms, and Series I Secured notes of a one year term for up to six months.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future contractual maturities of Series I Secured notes payable at December 31, 2013 are as follows:
| Years Ending December 31, | | | |
| 2014 | | $ | 16,111,000 | |
| 2015 | | | 6,700,000 | |
| 2016 | | | 2,030,000 | |
| 2017 | | | 4,085,000 | |
| 2018 | | | 754,000 | |
| Thereafter | | | 64,000 | |
| | | $ | 29,744,000 | |
( 8 ) Renewable Secured Debentures
The Company has registered with the Securities and Exchange Commission, effective January 2012, the offer and sale of $250,000,000 of secured debentures. Renewable Secured Debentures have maturity dates ranging from six months to seven years with fixed interest rates varying from 4.75% to 9.50% depending on the term of the note. Interest is payable monthly, annually or at maturity depending on the terms of the debenture. At December 31, 2013 and 2012, the weighted average interest rate of Renewable Secured Debentures was 7.53% and 7.65%, respectively. The debentures are secured by assets of GWG Life and GWG Holdings. The amount outstanding under these Renewable Secured Debentures was $134,891,000 and $57,609,000 at December 31, 2013 and 2012, respectively. The difference between the amount outstanding on the Renewable Secured Debentures and the carrying amount on the consolidated balance sheet is due to netting of unamortized deferred issuance costs and cash receipts for new issuances in process at December 31, 2013 and 2012. Amortization of deferred issuance costs was $1,843,000 and $506,000 in 2013 and 2012, respectively. Future expected amortization of deferred financing costs is $5,147,000. Subsequent to December 31, 2013, the Company has issued approximately an additional $17,715,000 in principal amount of these Renewable Secured Debentures.
The use of proceeds from the issuances of Renewable Secured Debentures is limited to the following: (1) payment of commissions on sales of Renewable Secured Debentures, (2) payment of offering expenses, (3) purchase of life insurance policies, (4) Payment of premiums on life insurance policies, (5) payment of principal and interest on Renewable Secured Debentures, (6) payment of portfolio operations expenses, and (7) for general working capital.
Future contractual maturities of Renewable Secured Debentures at December 31, 2013 are as follows:
| Years Ending December 31, | | | |
| 2013 | | $ | 34,258,000 | |
| 2014 | | | 41,509,000 | |
| 2015 | | | 29,152,000 | |
| 2016 | | | 7,667,000 | |
| 2017 | | | 5,381,000 | |
| Thereafter | | | 16,924,000 | |
| | | $ | 134,891,000 | |
The Company entered into an Indenture effective October 19, 2011 with Holdings as obligor, GWG Life as guarantor, and Bank of Utah as trustee for the benefit of the debenture holders. The Indenture has certain financial and nonfinancial covenants. The Company was in compliance with these covenants at December 31, 2013 and 2012.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( 9 ) Convertible, redeemable preferred stock
The Company began offering 3,333,333 shares of convertible redeemable preferred stock (Series A preferred stock) for sale to accredited investors in a private placement on July 31, 2011. The offering of Series A preferred stock concluded on September 2, 2012 and resulted in 3,278,000 shares being issued for gross consideration of $24,582,000. As of December 31, 2013, 166,000 shares have been issued as a result of conversion of $1,163,000 in dividends into shares of Series A preferred stock. The Series A preferred stock was sold at an offering price of $7.50 per share. Series A preferred stock has a preferred dividend yield of 10% per annum, and each share has the right to convert into 1.5 shares of the Company’s common stock. The Company may elect to automatically convert the Series A preferred stock to common stock as described below. Series A preferred shareholders also received three-year warrants to purchase, at an exercise price per share of $6.25, one share of common stock for every 20 shares of Series A preferred stock purchased. The warrants are exercisable immediately. In the Certificate of Designations for the Series A preferred stock dated July 31, 2011, the Company agreed to permit preferred shareholders to sell their shares back to the Company for the stated value of $7.50 per share, plus accrued dividends, according to the following schedule:
| ● | Up to 33% of the holder’s unredeemed shares one year after issuance: |
| ● | Up to 66% of the holder’s unredeemed shares two years after issuance; and |
| ● | Up to 100% of the holder’s unredeemed shares three years after issuance. |
The Company’s obligation to redeem Series A preferred shares will terminate upon the Company completing a registration of its common stock with the SEC. The Company may redeem the Series A preferred shares at a price equal to 110% of their liquidation preference ($7.50 per share) at any time after December 15, 2012.
At the election of the Company, the Series A preferred shares may be automatically converted into the common stock of the Company in the event of either (1) a registered offering of the Company’s common stock with the SEC aggregating gross proceeds of at least $5.0 million at a price equal to or greater than $5.50 per share of common stock, or (2) the consent of shareholders holding at least a majority of the then-outstanding shares of Series A preferred stock. As of December 31, 2013, the Company had issued 3,450,000 preferred shares resulting in gross consideration of $25,799,000 (including cash proceeds, conversion of Series I Secured notes and accrued interest on Series I notes, and conversion of preferred dividends payable). In 2013, the Company redeemed 82,000 shares valued at $614,000 resulting in 3,368,000 shares outstanding with the gross value of $25,176,000. The Company incurred Series A preferred stock issuance costs of $2,838,000, of which $2,385,000 was amortized to additional paid in capital as of December 31, 2013, resulting in a carrying amount of $24,723,000.
The Company determined that the grant date fair value of the outstanding warrants attached to the Series A preferred stock was $395,000 for warrants issued through December 31, 2013. The Company may redeem outstanding warrants prior to their expiration, at a price of $0.01 per share upon 30 days written notice to the investors at any time after (i) the Company has completed a registration of its common stock with the SEC and (ii) the weighted-average sale price per share of common stock equals or exceeds $7.00 per share for ten consecutive trading days ending on the third business day prior to proper notice of such redemption. Total warrants outstanding as of December 31, 2013, were 831,909 with a weighted-average remaining life of 1.34 years. Total warrants outstanding at December 31, 2012, were 831,909 with a weighted-average remaining life of 2.34 years.
Dividends on the Series A preferred stock may be paid in either cash or additional shares of Series A preferred stock at the election of the holder and approval of the Company. The dividends are reported as an expense and included in the caption interest expense in the consolidated statements of operations.
The Company declared and accrued dividends of $2,528,000 and $2,227,000 in 2013 and 2012, respectively, pursuant to a board resolution declaring the dividend. 89,000 and 81,000 shares of Series A preferred stock were issued in lieu of cash dividends in 2013 and 2012. The shares issued in lieu of cash dividends were issued at $7.00 per share. As of December 31, 2013, Holdings has $629,000 of accrued preferred dividends which were paid or converted to shares of Series A preferred stock on January 15, 2014.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Income taxes
The Company did not have any current income taxes for the years ended December 31, 2013 or 2012. The components of deferred income tax expense for the years ended December 31, 2013 and 2012, respectively, consisted of the following:
| Income tax provision: | | 2013 | | | 2012 | |
| Deferred: | | | | | | |
| Federal | | $ | 1,826,000 | | | $ | 1,002,000 | |
| State | | | 348,000 | | | | 191,000 | |
| Total income tax expense | | $ | 2,174,000 | | | $ | 1,193,000 | |
The following table provides a reconciliation of our income tax expense at the statutory federal tax rate to our actual income tax expense:
| | | 2013 | | | 2012 | |
| Statutory federal income tax | | $ | 673,000 | | 34.0 | % | | $ | 61,000 | | 34.0 | % |
| State income taxes, net of federal benefit | | | 298,000 | | 15.1 | % | | | 165,000 | | 91.2 | % |
| Series A preferred stock dividends | | | 860,000 | | 43.4 | % | | | 757,000 | | 420.1 | % |
| Other permanent differences | | | 343,000 | | 17.3 | % | | | 210,000 | | 116.5 | % |
| Total income tax expense | | $ | 2,174,000 | | 109.8 | % | | $ | 1,193,000 | | 661.8 | % |
The most significant temporary differences between GAAP net income and taxable net income are the treatment of interest costs with respect to the acquisition of the life insurance policies and revenue recognition with respect to the mark-to-market of life insurance portfolio.
The tax effects of temporary differences that give rise to deferred income taxes were as follows:
| | | 2013 | | | 2012 | |
| Deferred tax assets : | | | | | | |
| | | | | | | |
| Athena Securities Group, LTD, advisory services | | $ | - | | | $ | 1,455,000 | |
| Note receivable from related party | | | 2,023,000 | | | | 2,023,000 | |
| Net operating loss carryforwards | | | 2,596,000 | | | | 1,671,000 | |
| Other assets | | | 164,000 | | | | 20,000 | |
| Subtotal | | | 4,783,000 | | | | 5,169,000 | |
| Valuation allowance | | | (2,164,000 | ) | | | (2,023,000 | ) |
| Net deferred tax asset | | | 2,619,000 | | | | 3,146,000 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Investment in life settlements | | | (10,294,000 | ) | | | (8,647,000 | ) |
| Net deferred tax assets | | $ | (7,675,000 | ) | | $ | (5,501,000 | ) |
At December 31, 2013 and 2012, the Company had federal net operating loss (NOL) carryforwards of $4,182,000 and $4,129,000, respectively, which will begin to expire in 2031. Future utilization of NOL carryforwards is subject to limitation under Section 382 of the Internal Revenue Code. This section generally relates to a more than 50 percent change in ownership over a three-year period. We currently do not believe that any issuance of common stock has resulted in an ownership change under Section 382.
The Company provides for a valuation allowance when it is not considered more likely than not that our deferred tax assets will be realized. At December 31, 2013 and 2012, based upon all available evidence, the Company has provided a valuation allowance of $2,164,000, and 2,023,000, respectively, against deferred tax assets related to the likelihood of recovering the tax benefit of a capital loss on a note receivable from a related entity. The change was $141,000 and $0 for the years ended December 31, 2013 and 2012, respectively. Management believes all other deferred tax assets are recoverable.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ASC 740, Income Taxes, requires the reporting of certain tax positions which do not meet a threshold of "more-likely-than-not" to be recorded as uncertain tax benefits. It is management's responsibility to determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation, based upon the technical merits of the position. Management has reviewed all income tax positions taken or expected to be taken for all open years and determined that the income tax positions are appropriately stated and supported. The Company does not anticipate that the total unrecognized tax benefits will significantly change prior to December 31, 2014.
Under the Company’s 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, 2013 and 2012, the Company has recorded no accrued interest or penalties related to uncertain tax positions.
The Company’s income tax returns for tax years ended December, 31 2013, 2012 and 2011 remain open to examination by the Internal Revenue Service and various state taxing jurisdictions.
(11) Common Stock
On July 11, 2011, the Company entered into a Purchase and Sale Agreement with Athena Securities Group, LTD and Athena Structured Funds PLC. Under this agreement, Holdings issued to Athena Securities Group, LTD (Athena) 989,000 shares of common stock, which was equal to 9.9% of the outstanding shares in the Company, in exchange for shares equal to 9.9% of the outstanding shares in Athena Structured Funds, PLC (Athena Funds) and cash of $5,000. In accordance with Accounting Standards Codification (ASC) 505-50, the Company recorded the share-based payment transaction with Athena at the fair value of the Company’s 989,000 shares of common stock issued as it was the most reliable measurable form of consideration in this exchange the total value ascribed to the common stock issued to Athena was $3.6 million. The $5,000 cash paid by Athena, which represents the fair value of the shares of Athena Funds, is included in financing activities of the Consolidated Statement of Cash Flows.
On June 28, 2013, GWG Holdings, Inc. entered into a new Purchase and Sale Agreement with Athena Securities Limited and Athena Securities Group Limited. The June 28, 2013 agreement terminated the parties’ original Purchase and Sale Agreement dated July 11, 2011. Under the new agreement, Holdings appointed Athena Securities Group Limited (i) as Holdings’ exclusive representative for the offer and sale of Holdings’ Renewable Secured Debentures in Ireland, and (ii) as a distributor for the offer and sale of those debentures in Europe and the Middle East, in each case until May 8, 2014. Any compensation payable to Athena Securities Group Limited will be in accordance with the compensation disclosures set forth in Holdings’ prospectus for the offering filed with the SEC on dated June 4, 2013, as the same may be supplemented or amended from time to time. In addition, the new agreement effected the sale by Athena Securities Limited to Holdings of 865,000 shares of Holdings’ common stock, and Holdings’ sale back to Athena Securities Group Limited of certain shares of GWG Securities International Public Limited Company (formerly known as Athena Structured Funds PLC) originally transacted under the original July 11, 2011 agreement. The Company recorded a non-cash gain on the transaction of $3,252,000.
(12) Stock Incentive Plan
The Company adopted the GWG Holdings, Inc. 2013 Stock Incentive Plan on March 27, 2013. The plan shall be administered by Compensation Committee of the Board of Directors of the Company. The Company’s Chief Executive Officer may, on a discretionary basis and without committee review or approval, grant incentives to new employees of the Company who are not Officers of the Company. Incentives under the plan may be granted in one or a combination of the following forms: (a) incentive stock options and non-statutory stock options; (b) stock appreciation rights; (c) stock awards; (d) restricted stock; (e) restricted stock units; and (f) performance shares. Eligible participants include officers and employees of the company, members of the Board of Directors, and consultants or other independent contractors. 2,000,000 shares are issuable under the plan. No person shall receive grants of stock options and SARs under the plan that exceed, in the aggregate 400,000 shares of common stock in any one year. The term of each stock option shall be determined by the committee but shall not exceed ten years. Vested stock options may be exercised in whole or part by the holder giving notice to the Company. The holder of the option may provide payment for the exercise price or surrender shares equal to the exercise price.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company issued stock options for 830,000 shares of common stock to employees, officers, and directors of the Company in 2013. Options for 403,000 shares vested immediately, and the remaining options vested over three years. The shares were issued with an exercise price of $3.76, which is equal to the estimated market price of the shares on the date of grant valued using Black-Scholes Binomial option pricing model. The expected volatility used in the Black-Scholes model valuation of options issued during the year was 19.73% annualized. The annual volatility rate is based on the standard deviation of the average continuously compounded rate of return of five selected comparable companies over the previous 52 weeks. Forfeiture rate of 15% is based on historical company information and expected future trend. In 2013 stock options for 106,500 shares were forfeited.
Stock options granted during the year ended December 31, 2013:
| | | Exercise | | | | | | | Binomial | | | Forfeiture | | | Compensation | |
| Grant Date | | Price | | | Shares | | Vesting | | Value | | | Factor | | | Expense | |
| 9/5/2013 | | $ | 3.76 | | | | 335,000 | | Immediate | | | 0.18 | | | | 0.8700 | | | $ | 52,461 | * |
| 9/5/2013 | | $ | 3.76 | | | | 94,333 | | 1 year | | | 0.18 | | | | 0.8500 | | | $ | 14,433 | |
| 9/5/2013 | | $ | 3.76 | | | | 94,333 | | 2 years | | | 0.30 | | | | 0.7225 | | | $ | 20,447 | |
| 9/5/2013 | | $ | 3.76 | | | | 94,334 | | 3 years | | | 0.41 | | | | 0.6141 | | | $ | 23,752 | |
| 9/30/2013 | | $ | 3.76 | | | | 8,000 | | Immediate | | | 0.33 | | | | 0.8700 | | | $ | 2,297 | * |
| 10/28/2013 | | $ | 3.76 | | | | 34,000 | | 1 year | | | 0.33 | | | | 0.8500 | | | $ | 3,927 | |
| 10/28/2013 | | $ | 3.76 | | | | 34,000 | | 2 years | | | 0.46 | | | | 0.7225 | | | $ | 4,653 | |
| 10/28/2013 | | $ | 3.76 | | | | 34,000 | | 3 years | | | 0.57 | | | | 0.6141 | | | $ | 4,901 | |
| 11/12/2013 | | $ | 3.76 | | | | 14,000 | | 1 year | | | 0.33 | | | | 0.8500 | | | $ | 9,537 | |
| 11/12/2013 | | $ | 3.76 | | | | 14,000 | | 2 years | | | 0.46 | | | | 0.7225 | | | $ | 11,300 | |
| 11/12/2013 | | $ | 3.76 | | | | 14,000 | | 3 years | | | 0.57 | | | | 0.6141 | | | $ | 11,901 | |
| 12/12/2013 | | $ | 3.76 | | | | 60,000 | | Immediate | | | 0.33 | | | | 0.8700 | | | $ | 17,226 | * |
| | | | | | | | 830,000 | | | | | | | | | | | | | | |
* Amounts reflected in current period earnings.
Outstanding stock options:
| | | Vested | | | Un-vested | | | Total | |
| Balance as of December 31, 2012 | | | - | | | | - | | | | - | |
| Granted during the year | | | 403,000 | | | | 427,000 | | | | 830,000 | |
| Exercised during the year | | | - | | | | - | | | | - | |
| Forfeited during the year | | | (27,500 | ) | | | (28,500 | ) | | | (56,000 | ) |
| Expired during the year | | | - | | | | - | | | | - | |
| Balance as of December 31, 2013 | | | 375,500 | | | | 398,500 | | | | 774,000 | |
Compensation expense related to un-vested options not yet recognized is $104,851. We expect to recognize this compensation expense over the next 2.7 years.
( 13 ) Net loss per common share
The Company began issuing Series A preferred stock September, 1, 2011, as described in note 9. The Series A preferred stock is anti-dilutive to the net loss per common share calculation at December 31, 2013 and 2012. The Company has also issued warrants to purchase common stock in conjunction with the sale of convertible preferred stock, as discussed in note 9. The warrants are anti-dilutive at December 31, 2013 and 2012 and have not been included in the fully diluted net loss per common share calculation.
| | | December 31, 2013 | | | December 31, 2011 | |
| NET LOSS | | $ | (194,955 | ) | | $ | (1,012,899 | ) |
| Accretion of preferred stock to liquidation value | | | (806,624 | ) | | | (1,578,405 | ) |
| LOSS ATTRIBUTABE TO COMMON SHAREHOLDERS | | $ | (1,001,579 | ) | | $ | (2,591,304 | ) |
| | | | | | | | | |
| Basic and diluted weighted average shares outstanding | | | 9,517,397 | | | | 9,989,000 | |
| NET LOSS PER COMMON SHARE (BASIC AND DILUTED) | | | | | | | | |
| Net loss | | $ | (0.02 | ) | | $ | (0.10 | ) |
| Accretion of value to preferred stock | | $ | (0.09 | ) | | $ | (0.16 | ) |
| Net loss attributable to common shareholders | | $ | (0.11 | ) | | $ | (0.26 | ) |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( 14 ) Commitments
The Company entered into an office lease with U.S. Bank National Association as the landlord. The lease was effective April 22, 2012 with a term through August 31, 2015. The lease is for 11,695 square feet of office space located at 220 South Sixth Street, Minneapolis, Minnesota. The Company is obligated to pay base rent plus common area maintenance and a share of the building operating costs. Rent expenses under this and previous agreements were $200,000 and $162,000 in years ended December 31, 2013 and 2012, respectively. Minimum lease payments under the lease agreement effective April 22, 2012 are as follows:
| 2014 | | | 104,000 | |
| 2015 | | | 70,000 | |
| Total | | $ | 174,000 | |
( 15 ) Contingencies
Litigation - In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Opportunity Finance, LLC, owned by Jon Sabes and Steven Sabes, is subject to litigation clawback claims by the bankruptcy trustee for third-party matters for payments that may have been deemed preference payments. In addition, Jon Sabes and Steven Sabes are subject to litigation clawback claims by the bankruptcy trustee for third-party matters for payments received from Opportunity Finance that may have been deemed preference payments. If the parties are unsuccessful in defending against these claims, their equity ownership in the Company may be sold or transferred to other parties to satisfy such claims. In addition, the Company loaned $1,000,000 to Opportunity Finance, LLC, and was repaid in full plus interest of $177,000. This investment amount may also be subject to clawback claims by the bankruptcy court.
( 16 ) Guarantees of secured debentures
Holdings has registered with the SEC the offer and sale $250,000,000 of secured debentures as described in note 8. The secured debentures are secured by the assets of Holdings as described in note 8 and a pledge of all the common stock by the largest shareholders. Obligations under the debentures are guaranteed by GWG Life. This guarantee involves the grant of a security interest in all the assets of GWG Life. The payment of principal and interest on the secured debentures is fully and unconditionally guaranteed by GWG Life. Substantially all of the Company’s life insurance policies are held by DLP II and the Trust. The policies held by DLP II are not collateral for the debenture obligations as such policies are collateral for the credit facility.
The consolidating financial statements are presented in lieu of separate financial statements and other related disclosures of the subsidiary guarantors and issuer because management does not believe that separate financial statements and related disclosures would be material to investors. There are currently no significant restrictions on the ability of Holdings or GWG Life, the guarantor subsidiary, to obtain funds from its subsidiaries by dividend or loan, except as follows. DLP II is a borrower under a credit agreement with Autobahn, with DZ Bank AG as agent, as described in note 6. The significant majority of insurance policies owned by the Company are subject to a collateral arrangement with DZ Bank AG described in notes 3 and 6. Under this arrangement, collection and escrow accounts are used to fund premiums of the insurance policies and to pay interest and other charges under the revolving credit facility. DZ Bank AG and Autobahn must authorize all disbursements from these accounts, including any distributions to GWG Life. Distributions are limited to an amount that would result in the borrowers (DLP II, GWG Life and Holdings) realizing an annualized rate of return on the equity funded amount for such assets of not more than 18%, as determined by DZ Bank AG. After such amount is reached, the credit agreement requires that excess funds be used for repayments of borrowings before any additional distributions may be made.
The following represents consolidating financial information as of December 31, 2013 and 2012, with respect to the financial position, and for the years ended December 31, 2013 and 2012 with respect to results of operations and cash flows of Holdings and its subsidiaries. The parent column presents the financial information of Holdings, the primary obligor of the secured debentures. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the secured debentures, presenting its investment in DLP II and Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries including DLP II, United Lending, GWG Broker Services and the Trust.
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating Balance Sheets
| | | | | | Non-Guarantor Subsidiaries | | | | | |
| | | | | | | | | | | | |
| A S S E T S | |
| | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 32,711,636 | | $ | 738,157 | | $ | - | | $ | - | | $ | 33,449,793 | |
| Restricted cash | | | - | | | 1,420,000 | | | 4,412,970 | | | - | | | 5,832,970 | |
| Investment in life settlements, at fair value | | | - | | | - | | | 234,672,794 | | | - | | | 234,672,794 | |
| Deferred financing costs, net | | | - | | | - | | | 357,901 | | | - | | | 357,901 | |
| Other assets | | | 381,883 | | | 484,510 | | | 200,625 | | | - | | | 1,067,018 | |
| Investment in subsidiaries | | | 129,839,241 | | | 159,798,490 | | | - | | | (289,637,731 | ) | | - | |
| | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | $ | 162,932,760 | | $ | 162,441,157 | | $ | 239,644,290 | | $ | (289,637,731 | ) | $ | 275,380,476 | |
| | | | | | | | | | | | | | | | | |
| L I A B I L I T I E S & S T O C K H O L D E R S' E Q U I T Y (D E F I C I T) | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES | | | | | | | | | | | | | | | | |
| Revolving credit facility | | $ | - | | $ | - | | $ | 79,000,000 | | $ | - | | $ | 79,000,000 | |
| Series I Secured notes payable | | | - | | | 29,275,202 | | | - | | | - | | | 29,275,202 | |
| Renewable Secured Debentures | | | 131,646,062 | | | - | | | - | | | - | | | 131,646,062 | |
| Accounts payable | | | 233,214 | | | 106,655 | | | 500,000 | | | - | | | 839,869 | |
| Interest payable | | | 3,806,820 | | | 3,065,465 | | | 337,123 | | | - | | | 7,209,408 | |
| Other accrued expenses | | | 340,812 | | | 154,594 | | | 8,677 | | | - | | | 504,083 | |
| Deferred taxes | | | 7,675,174 | | | - | | | - | | | - | | | 7,675,174 | |
| TOTAL LIABILITIES | | | 143,702,082 | | | 32,601,916 | | | 79,845,800 | | | - | | | 256,149,798 | |
| | | | | | | | | | | | | | | | | |
| CONVERTIBLE, REDEEMABLE PREFERRED STOCK | | | 24,722,693 | | | - | | | - | | | - | | | 24,722,693 | |
| | | | | | | | | | | | | | | | | |
| STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | | | | | | | | | |
| Member capital | | | - | | | 129,839,241 | | | 159,798,490 | | | (289,637,731 | ) | | - | |
| Common stock | | | 9,124 | | | - | | | - | | | - | | | 9,124 | |
| Additional paid-in capital | | | 2,937,438 | | | - | | | - | | | - | | | 2,937,438 | |
| Accumulated deficit | | | (8,438,577 | ) | | - | | | - | | | - | | | (8,438,577 | ) |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | | | (5,492,015 | ) | | 129,839,241 | | | 159,798,490 | | | (289,637,731 | ) | | (5,492,015 | ) |
| | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | $ | 162,932,760 | | $ | 162,441,157 | | $ | 239,644,290 | | $ | (289,637,731 | ) | $ | 275,380,476 | |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating Balance Sheets (continued)
| | | | | | Non-Guarantor Subsidiaries | | | | | |
| | | | | | | | | | | | |
| A S S E T S | |
| | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 25,035,579 | | $ | 2,461,465 | | $ | - | | $ | - | | $ | 27,497,044 | |
| Restricted cash | | | - | | | 1,748,700 | | | 344,392 | | | - | | | 2,093,092 | |
| Due from related parties | | | - | | | 8,613 | | | - | | | - | | | 8,613 | |
| Investment in life settlements, at fair value | | | - | | | - | | | 164,317,183 | | | - | | | 164,317,183 | |
| Deferred financing costs, net | | | - | | | - | | | 97,040 | | | - | | | 97,040 | |
| Death benefits receivable | | | - | | | - | | | 2,850,000 | | | - | | | 2,850,000 | |
| Other assets | | | 96,994 | | | 202,979 | | | 785,090 | | | - | | | 1,085,063 | |
| Investment in subsidiaries | | | 60,608,585 | | | 96,914,613 | | | - | | | (157,523,198 | ) | | - | |
| | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | $ | 85,741,158 | | $ | 101,336,370 | | $ | 168,393,705 | | $ | (157,523,198 | ) | $ | 197,948,035 | |
| | | | | | | | | | | | | | | | | |
| L I A B I L I T I E S & S T O C K H O L D E R S' E Q U I T Y (D E F I C I T) | |
| | | | | | | | | | | | | | | | | |
| LIABILITIES | | | | | | | | | | | | | | | | |
| Revolving credit facility | | $ | - | | $ | - | | $ | 71,000,000 | | $ | - | | $ | 71,000,000 | |
| Series I Secured notes payable | | | - | | | 37,844,711 | | | - | | | - | | | 37,844,711 | |
| Renewable Secured Debentures | | | 55,718,950 | | | - | | | - | | | - | | | 55,718,950 | |
| Accounts payable | | | 73,084 | | | 104,975 | | | 292,000 | | | - | | | 470,059 | |
| Interest payable | | | 905,017 | | | 2,444,097 | | | 128,206 | | | - | | | 3,477,320 | |
| Other accrued expenses | | | 898,611 | | | 382,522 | | | 10,366 | | | - | | | 1,291,499 | |
| Deferred taxes | | | 5,501,407 | | | - | | | - | | | - | | | 5,501,407 | |
| TOTAL LIABILITIES | | | 63,097,069 | | | 40,776,305 | | | 71,430,572 | | | - | | | 175,303,946 | |
| | | | | | | | | | | | | | | | | |
| CONVERTIBLE, REDEEMABLE PREFERRED STOCK | | | 23,905,878 | | | - | | | - | | | - | | | 23,905,878 | |
| | | | | | | | | | | | | | | | | |
| STOCKHOLDERS’ EQUITY (DEFICIT) | | | | | | | | | | | | | | | | |
| Member capital | | | - | | | 60,560,065 | | | 96,963,133 | | | (157,523,198 | ) | | - | |
| Common stock | | | 9,989 | | | - | | | - | | | - | | | 9,989 | |
| Additional paid-in capital | | | 6,971,844 | | | - | | | - | | | - | | | 6,971,844 | |
| Accumulated deficit | | | (8,243,622 | ) | | - | | | - | | | - | | | (8,243,622 | ) |
| TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | | | (1,261,789 | ) | | 60,560,065 | | | 96,963,133 | | | (157,523,198 | ) | | (1,261,789 | ) |
| | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | | $ | 85,741,158 | | $ | 101,336,370 | | $ | 168,393,705 | | $ | (157,523,198 | ) | $ | 197,948,035 | |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating Statements of Operations
| For the year ended December 31, 2013 | | Parent | | | Guarantor Subsidiary | | | Non-Guarantor Subsidiaries | | | Eliminations | | | Consolidated | |
| REVENUE | | | | | | | | | | | | | | | |
| Contract servicing fees | | $ | - | | | $ | 3,710,737 | | | $ | - | | | $ | (3,710,737 | ) | | $ | - | |
| Gain on life settlements, net | | | - | | | | - | | | | 29,513,642 | | | | - | | | | 29,513,642 | |
| Interest and other income | | | 3,334,331 | | | | 2,612,420 | | | | 79,767 | | | | (2,475,386 | ) | | | 3,551,132 | |
| TOTAL REVENUE | | | 3,334,331 | | | | 6,323,157 | | | | 29,593,409 | | | | (6,186,123 | ) | | | 33,064,774 | |
| | | | | | | | | | | | | | | | | | | | | |
| EXPENSES | | | | | | | | | | | | | | | | | | | | |
| Origination and servicing fees | | | - | | | | - | | | | 3,710,737 | | | | (3,710,737 | ) | | | - | |
| Interest expense | | | 11,800,718 | | | | 3,684,811 | | | | 5,277,115 | | | | - | | | | 20,762,644 | |
| Employee compensation and benefits | | | 3,424,383 | | | | 1,619,465 | | | | - | | | | - | | | | 5,043,848 | |
| Legal and professional fees | | | 1,206,520 | | | | 514,728 | | | | 32,961 | | | | - | | | | 1,754,209 | |
| Other expenses | | | 2,004,636 | | | | 1,463,084 | | | | 2,532,927 | | | | (2,475,386 | ) | | | 3,525,261 | |
| TOTAL EXPENSES | | | 18,436,257 | | | | 7,282,088 | | | | 11,553,740 | | | | (6,186,123 | ) | | | 31,085,962 | |
| | | | | | | | | | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE EQUITY IN | | | | | | | | | | | | | | | | | | | | |
| INCOME OF SUBSIDIARIES | | | (15,101,926 | ) | | | (958,931 | ) | | | 18,039,669 | | | | - | | | | 1,978,812 | |
| | | | | | | | | | | | | | | | | | | | | |
| EQUITY IN INCOME OF SUBSIDIARIES | | | 17,080,738 | | | | 18,088,189 | | | | - | | | | (35,168,927 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| NET INCOME BEFORE INCOME TAXES | | | 1,978,812 | | | | 17,129,258 | | | | 18,039,669 | | | | (35,168,927 | ) | | | 1,978,812 | |
| | | | | | | | | | | | | | | | | | | | | |
| INCOME TAX EXPENSE | | | 2,173,767 | | | | - | | | | - | | | | - | | | | 2,173,767 | |
| NET INCOME (LOSS) | | | (194,955 | ) | | | 17,129,258 | | | | 18,039,669 | | | | (35,168,927 | ) | | | (194,955 | ) |
| Accretion of preferred stock to liquidation value | | | (806,624 | ) | | | - | | | | - | | | | - | | | | (806,624 | ) |
| LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $ | (1,001,579 | ) | | $ | 17,129,258 | | | $ | 18,039,669 | | | $ | (35,168,927 | ) | | $ | (1,001,579 | ) |
| For the year ended December 31, 2012 | | Parent | | | Guarantor Subsidiary | | | Non-Guarantor Subsidiaries | | | Eliminations | | | Consolidated | |
| REVENUE | | | | | | | | | | | | | | | |
| Contract servicing fees | | $ | - | | | $ | 2,539,437 | | | $ | - | | | $ | (2,539,437 | ) | | $ | - | |
| Gain on life settlements, net | | | - | | | | - | | | | 17,436,743 | | | | - | | | | 17,436,743 | |
| Interest and other income | | | 42,668 | | | | 223,311 | | | | 42,747 | | | | (219,671 | ) | | | 89,055 | |
| TOTAL REVENUE | | | 42,668 | | | | 2,762,748 | | | | 17,479,490 | | | | (2,759,108 | ) | | | 17,525,798 | |
| | | | | | | | | | | | | | | | | | | | | |
| EXPENSES | | | | | | | | | | | | | | | | | | | | |
| Origination and servicing fees | | | - | | | | - | | | | 2,539,437 | | | | (2,539,437 | ) | | | - | |
| Interest expense | | | 4,311,719 | | | | 4,833,058 | | | | 1,953,521 | | | | (219,671 | ) | | | 10,878,627 | |
| Employee compensation and benefits | | | - | | | | 2,903,373 | | | | - | | | | - | | | | 2,903,373 | |
| Legal and professional fees | | | 899,588 | | | | 162,323 | | | | 14,783 | | | | - | | | | 1,076,694 | |
| Other expenses | | | 937,562 | | | | 1,496,752 | | | | 52,499 | | | | - | | | | 2,486,813 | |
| TOTAL EXPENSES | | | 6,148,869 | | | | 9,395,506 | | | | 4,560,240 | | | | (2,759,108 | ) | | | 17,345,507 | |
| | | | | | | | | | | | | | | | | | | | | |
| INCOME (LOSS) BEFORE EQUITY IN | | | | | | | | | | | | | | | | | | | | |
| INCOME OF SUBSIDIARIES | | | (6,106,201 | ) | | | (6,632,758 | ) | | | 12,919,250 | | | | - | | | | 180,291 | |
| | | | | | | | | | | | | | | | | | | | | |
| EQUITY IN INCOME OF SUBSIDIARIES | | | 6,286,492 | | | | 13,035,698 | | | | - | | | | (19,322,190 | ) | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| NET INCOME BEFORE INCOME TAXES | | | 180,291 | | | | 6,402,940 | | | | 12,919,250 | | | | (19,322,190 | ) | | | 180,291 | |
| | | | | | | | | | | | | | | | | | | | | |
| INCOME TAX EXPENSE | | | 1,193,190 | | | | - | | | | - | | | | - | | | | 1,193,190 | |
| NET INCOME (LOSS) | | | (1,012,899 | ) | | | 6,402,940 | | | | 12,919,250 | | | | (19,322,190 | ) | | | (1,012,899 | ) |
| Accretion of preferred stock to liquidation value | | | (1,578,405 | ) | | | - | | | | - | | | | - | | | | (1,578,405 | ) |
| LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS | | $ | (2,591,304 | ) | | $ | 6,402,940 | | | $ | 12,919,250 | | | $ | (19,322,190 | ) | | $ | (2,591,304 | ) |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating Statements of Cash Flows
| For the year ended December 31, 2013 | | Parent | | | Guarantor Subsidiary | | | Non-Guarantor Subsidiaries | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (194,955 | ) | | $ | 17,129,258 | | | $ | 18,039,669 | | | $ | (35,168,927 | ) | | $ | (194,955 | ) |
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
| Equity of subsidiaries | | | (17,080,738 | ) | | | (18,088,189 | ) | | | - | | | | 35,168,927 | | | | - | |
| Gain on life settlements | | | - | | | | - | | | | (39,337,542 | ) | | | - | | | | (39,337,542 | ) |
| Amortization of deferred financing and issuance costs | | | 1,908,248 | | | | 823,004 | | | | (260,861 | ) | | | - | | | | 2,470,391 | |
| Deferred income taxes | | | 2,173,767 | | | | - | | | | - | | | | - | | | | 2,173,767 | |
| Preferred stock issued for dividends | | | 623,899 | | | | - | | | | - | | | | - | | | | 623,899 | |
| Convertible, redeemable preferred stock dividends payable | | | 255 | | | | - | | | | - | | | | - | | | | 255 | |
| Repurchase of common stock | | | (3,252,400 | ) | | | | | | | | | | | | | | | (3,252,400 | ) |
| (Increase) decrease in operating assets: | | | | | | | | | | | | | | | | | | | | |
| Due from related parties | | | - | | | | 8,613 | | | | - | | | | - | | | | 8,613 | |
| Death benefits receivable | | | - | | | | - | | | | 2,850,000 | | | | - | | | | 2,850,000 | |
| Other assets | | | (51,522,808 | ) | | | (45,077,218 | ) | | | - | | | | 96,033,606 | | | | (566,420 | ) |
| Increase (decrease) in operating liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | 160,130 | | | | 1,680 | | | | 208,000 | | | | - | | | | 369,810 | |
| Interest payable | | | 2,399,975 | | | | 809,540 | | | | 208,918 | | | | - | | | | 3,418,433 | |
| Other accrued expenses | | | 277,321 | | | | (224,990 | ) | | | (1,690 | ) | | | - | | | | 50,641 | |
| NET CASH FLOWS USED IN OPERATING ACTIVITIES | | | (64,507,306 | ) | | | (44,618,302 | ) | | | (18,293,506 | ) | | | 96,033,606 | | | | (31,385,508 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
| Investment in life settlements | | | - | | | | - | | | | (34,997,500 | ) | | | - | | | | (34,997,500 | ) |
| Proceeds from settlement of life settlements | | | - | | | | - | | | | 4,563,896 | | | | - | | | | 4,563,896 | |
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | | | - | | | | - | | | | (30,433,604 | ) | | | - | | | | (30,433,604 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
| Net proceeds from revolving credit facility | | | - | | | | - | | | | 8,000,000 | | | | - | | | | 8,000,000 | |
| Payments for redemption of Series I Secured notes payable | | | - | | | | (8,671,624 | ) | | | - | | | | - | | | | (8,671,624 | ) |
| Proceeds from issuance of debentures | | | 85,260,976 | | | | - | | | | - | | | | - | | | | 85,260,976 | |
| Payments for issuance of debentures | | | (4,320,542 | ) | | | - | | | | - | | | | - | | | | (4,320,542 | ) |
| Payments for redemption of debentures | | | (8,143,363 | ) | | | - | | | | - | | | | - | | | | (8,143,363 | ) |
| Proceeds (payments) from restricted cash | | | - | | | | 328,700 | | | | (4,068,578 | ) | | | - | | | | (3,739,878 | ) |
| Issuance of member capital | | | - | | | | 51,237,918 | | | | 44,795,688 | | | | (96,033,606 | ) | | | - | |
| Payments for redemption of preferred stock | | | (613,708 | ) | | | - | | | | - | | | | - | | | | (613,708 | ) |
| NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | | 72,183,363 | | | | 42,894,994 | | | | 48,727,110 | | | | (96,033,606 | ) | | | 67,771,861 | |
| | | | | | | | | | | | | | | | | | | | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 7,676,057 | | | | (1,723,308 | ) | | | - | | | | - | | | | 5,952,749 | |
| | | | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS | | | | | | | | | | | | | | | | | | | | |
| BEGINNING OF THE YEAR | | | 25,035,579 | | | | 2,461,465 | | | | - | | | | - | | | | 27,497,044 | |
| | | | | | | | | | | | | | | | | | | | | |
| END OF THE YEAR | | $ | 32,711,636 | | | $ | 738,157 | | | $ | - | | | $ | - | | | $ | 33,449,793 | |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidating Statements of Cash Flows (continued)
| For the year ended December 31, 2012 | | Parent | | | Guarantor Subsidiary | | | Non-Guarantor Subsidiaries | | | Eliminations | | | Consolidated | |
| | | | | | | | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | | |
| Net income (loss) | | $ | (1,012,899 | ) | | $ | 6,402,940 | | | $ | 12,919,250 | | | $ | (19,322,190 | ) | | $ | (1,012,899 | ) |
| Adjustments to reconcile net income (loss) to cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | |
| Equity of subsidiaries | | | (6,286,492 | ) | | | (13,035,698 | ) | | | - | | | | 19,322,190 | | | | - | |
| Gain on life settlements | | | - | | | | - | | | | (27,856,374 | ) | | | - | | | | (27,856,374 | ) |
| Amortization of deferred financing and issuance costs | | | 506,279 | | | | 1,169,755 | | | | 232,896 | | | | - | | | | 1,908,930 | |
| Deferred income taxes | | | 1,193,190 | | | | - | | | | - | | | | - | | | | 1,193,190 | |
| Preferred stock issued for dividends | | | 567,478 | | | | - | | | | - | | | | - | | | | 567,478 | |
| Convertible, redeemable preferred stock dividends payable | | | 338,695 | | | | - | | | | - | | | | - | | | | 338,695 | |
| (Increase) decrease in operating assets: | | | | | | | | | | | | | | | | | | | | |
| Due from related parties | | | - | | | | (6,348 | ) | | | - | | | | - | | | | (6,348 | ) |
| Death benefits receivable | | | - | | | | - | | | | (2,850,000 | ) | | | - | | | | (2,850,000 | ) |
| Other assets | | | (33,137,100 | ) | | | (22,587,090 | ) | | | (772,090 | ) | | | 55,627,115 | | | | (869,165 | ) |
| Increase (decrease) in operating liabilities: | | | | | | | | | | | | | | | | | | | | |
| Accounts payable | | | (306,373 | ) | | | 48,665 | | | | - | | | | - | | | | (257,708 | ) |
| Interest payable | | | 918,374 | | | | 806,058 | | | | 20,167 | | | | - | | | | 1,744,599 | |
| Other accrued expenses | | | (55,890 | ) | | | (16,352 | ) | | | 2,950 | | | | - | | | | (69,292 | ) |
| NET CASH FLOWS USED IN OPERATING ACTIVITIES | | | (37,274,738 | ) | | | (27,218,070 | ) | | | (18,303,201 | ) | | | 55,627,115 | | | | (27,168,894 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
| Investment in life settlements | | | - | | | | - | | | | (15,067,495 | ) | | | - | | | | (15,067,495 | ) |
| Proceeds from settlement of life settlements | | | - | | | | - | | | | 1,067,210 | | | | - | | | | 1,067,210 | |
| NET CASH FLOWS USED IN INVESTING ACTIVITIES | | | - | | | | - | | | | (14,000,285 | ) | | | - | | | | (14,000,285 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | | | |
| Net proceeds from revolving credit facility | | | - | | | | - | | | | 11,000,000 | | | | - | | | | 11,000,000 | |
| Payments for redemption of Series I Secured notes payable | | | - | | | | (7,477,197 | ) | | | - | | | | - | | | | (7,477,197 | ) |
| Proceeds from issuance of debentures | | | 58,553,280 | | | | - | | | | - | | | | - | | | | 58,553,280 | |
| Payments for issuance of debentures | | | (3,024,545 | ) | | | - | | | | - | | | | - | | | | (3,024,545 | ) |
| Payments for redemption of debentures | | | (112,500 | ) | | | - | | | | - | | | | - | | | | (112,500 | ) |
| Proceeds (payments) from restricted cash | | | - | | | | (926,473 | ) | | | 3,627,683 | | | | - | | | | 2,701,210 | |
| Issuance of member capital | | | - | | | | 37,951,312 | | | | 17,675,803 | | | | (55,627,115 | ) | | | - | |
| Issuance of preferred stock | | | 6,414,273 | | | | - | | | | - | | | | - | | | | 6,414,273 | |
| Payments for issuance of preferred stock | | | (1,266,647 | ) | | | - | | | | - | | | | - | | | | (1,266,647 | ) |
| NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | | | 60,563,861 | | | | 29,547,642 | | | | 32,303,486 | | | | (55,627,115 | ) | | | 66,787,874 | |
| | | | | | | | | | | | | | | | | | | | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 23,289,123 | | | | 2,329,572 | | | | - | | | | - | | | | 25,618,695 | |
| | | | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS | | | | | | | | | | | | | | | | | | | | |
| BEGINNING OF THE YEAR | | | 1,746,456 | | | | 131,893 | | | | - | | | | - | | | | 1,878,349 | |
| | | | | | | | | | | | | | | | | | | | | |
| END OF THE YEAR | | $ | 25,035,579 | | | $ | 2,461,465 | | | $ | - | | | $ | - | | | $ | 27,497,044 | |
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( 17 ) Concentration
GWG purchases life insurance policies written by life insurance companies having investment grade ratings by independent rating agencies. As a result there may be certain concentrations of contracts with life insurance companies. The following summarizes the face value of insurance contracts with specific life insurance companies exceeding 10% of the total face value held by the Company.
| | | December 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| Life insurance company | | % | | | % | |
| | | | | | | |
| Company A | | | 16.58 | | | | 16.96 | |
| Company B | | | 11.34 | | | | 13.80 | |
| Company C | | | * | | | | 11.36 | |
* - percentage does not exceed 10% of the total face value.
The following summarizes the number of insurance contracts held in specific states exceeding 10% of the total face value held by the Company:
| | | December 31, | | | December 31, | |
| | | 2013 | | | 2012 | |
| State of residence | | % | | | % | |
| | | | | | | |
| California | | | 28.14 | | | | 28.44 | |
| Florida | | | 15.59 | | | | 13.27 | |
| New York | | | 10.65 | | | | 11.85 | |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
There have been no changes in or disagreements with accountants on accounting and financial disclosure.
| ITEM 9A. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the control system are met.
As of December 31, 2013, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 as amended, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). 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. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only with proper authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our 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.
Our management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2013 based on criteria for effective control over financial reporting set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control—Integrated Framework.” Based on this assessment, our management concluded that, as of the evaluation date, we maintained effective internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION. |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
Directors and Executive Officers
The name, age and positions of our current executive officers and directors are as follows:
| Name | | Age | | Positions |
| Jon R. Sabes | | 47 | | Chief Executive Officer and Director |
| Paul A. Siegert | | 74 | | President and Director (Chairman of the Board) |
| Steven F. Sabes | | 45 | | Chief Operating Officer, Secretary and Director |
| Jon Gangelhoff | | 55 | | Chief Financial Officer |
| Jeffrey L. McGregor | | 60 | | Director |
| Charles H. Maguire III | | 70 | | Director |
| David H. Abramson | | 72 | | Director |
Jon R. Sabes, co-founder and Chief Executive Officer of our company, is a financial professional with over 20 years of experience in the fields of finance, venture capital, business development, managerial operations, and federal taxation. Since 1999, Mr. Sabes has served as Chief Executive Officer of Opportunity Finance, LLC, a family investment company specializing in structured finance. Over his career, Mr. Sabes has been active in receivable financing, life insurance financing, and casualty insurance financing, structuring over $900 million in financing commitments for his related businesses. Mr. Sabes’ experience includes co-founding and leading the development of two leading insurance-related finance companies: GWG Life, a company in the life insurance finance industry founded in 2006, and MedFinance, an innovator in casualty insurance and healthcare finance founded in 2005. Through these companies, Mr. Sabes has developed and applied financial structuring techniques, underwriting algorithms, and business modeling aspects to the insurance industry. Mr. Sabes’ education includes a Juris Doctor degree cum laude from the University of Minnesota Law School; and a Bachelor of Arts degree in Economics, from the University of Colorado. Over his career, Mr. Sabes has held several licenses and professional association memberships including FINRA Series 7, Series 63, Minnesota State Bar Association, and American Bar Association. In addition to being an active father of three, Mr. Sabes serves on the boards of Saving Children and Building Families, and the Insurance Studies Institute. Mr. Sabes is the brother of Steven F. Sabes. Mr. Sabes has served as our Chief Executive Officer, and a director, since 2006.
Steven F. Sabes, co-founder and Chief Operating Officer and Secretary of our company, is responsible for various managerial aspects of our business, with a specific focus on treasury and financial operations, life insurance policy purchasing, and specialty finance operations. Since 1998, Mr. Sabes has served as a Managing Director of Opportunity Finance, LLC, a family investment company specializing in structured finance. Mr. Sabes holds a Master of Science and Doctor of Philosophy in organic chemistry from the University of Minnesota, as well as a Bachelor of Arts degree from The Colorado College. Mr. Sabes is the brother of Jon Sabes. Mr. Sabes has served as our Chief Operating Officer and Secretary, and a director, since 2006.
Paul A. Siegert, co-founder of our company, has over 50 years of experience in national and international business with focus on general business, financial and investment strategies, management practices, fiscal controls, profit incentives, systems and corporate structuring and governance. Over his career, Mr. Siegert has consulted to Fortune 500 corporations, regional firms, emerging businesses, government and education, and has served as director, general partner and advisor to partnerships and corporations, including restructuring of economically troubled businesses. Mr. Siegert has provided written testimony to the Senate Finance Committee regarding SEC practices and created two companies registered under the Investment Advisors Act of 1940. Mr. Siegert was an active participant in the formation and direction of the Colorado Institute for Artificial Intelligence at the University of Colorado. Mr. Siegert’s education includes studies toward a Master of Business Administration, University of Chicago; and Bachelor of Science and Industrial Management, Purdue University. His insurance-related experiences include the creation of one of the nation’s first employer self-funded life, medical and disability insurance programs; designing medical, life insurance and social security opt-out programs for educational institutions; incorporation of financial analysis disciplines in life insurance and estate planning; and strategizing of key-man insurance plans and life insurance in business continuation planning for corporations and senior executives. From 1979 to 1986, Mr. Siegert was nationally recognized as a tax and estate planning expert. In 1999, Mr. Siegert retired from active business to engage in various personal financial and investment endeavors. In 2004, he founded Great West Growth, LLC, a Nevada limited liability company and a predecessor to GWG Life, to purchase life insurance policies. In his capacities with GWG Life, he created an insurance policy valuation and pricing model, created life insurance policy purchase documentation, undertook state licensing and compliance and developed operating and marketing systems. Mr. Siegert currently serves as the President and Chief Executive Officer of the Insurance Studies Institute, which he founded in 2007, and also serves on the Board of Directors of the Life Insurance Settlement Association. Mr. Siegert currently serves as President, Director and Chairman of the Board of GWG Holdings, Inc. He has been active in a variety of charities and foundations, including Rotary International.
Jon Gangelhoff has served rapidly growing businesses in several industries as chief financial officer with a strong focus on business operations since 1986. Prior to joining our company in March 2009, he served as chief financial officer for Northern Metal Recycling, a metal recycling firm the sales of which exceeded $500 million annually, from 2006 to 2008. Mr. Gangelhoff’s responsibilities at Northern Metal Recycling included acquisition and related integration operations focused on finance, information systems, and human resources functions. Prior to that, from 2003 to 2006, Mr. Gangelhoff served as the chief financial officer of Kuhlman Company, formerly a public reporting company, where he established corporate infrastructure, developed financial reporting and internal control systems, and managed the SEC reporting process. During his 25-year career, Mr. Gangelhoff has used an integrated hands-on and financial management approach to improve the performance of the companies he served in a variety of industries. Mr. Gangelhoff holds a bachelor of Bachelor of Arts degree from Mankato State University.
Jeffrey L. McGregor has had an extensive career in the insurance and financial services industry, serving as President for three major financial sales and distribution companies. Mr. McGregor has 34 years of experience in sales, distribution strategies and leadership with a proven track record in sales and growth of annuity, life insurance, and mutual fund products. Mr. McGregor has been a quoted industry source for Ignites, Foxfire, Dalbar, Mutual Fund Forum and Investment News, and has served on numerous industry boards and associations, including the Life and Annuity Advisory Board, the Mutual Fund Forum, and the International Association for Financial Planning. Mr. McGregor has written, published and presented a number of papers focused on the insurance and financial industry. Throughout his career, Mr. McGregor’s primary focus has been to promote successful collaboration with employees, clients and colleagues to create respectful, profitable, and long-term relationships.
Mr. McGregor has lead teams that represented all traditional life insurance products—term, whole life, universal life, disability insurance, long-term care, along with high-net worth and estate planning strategies that maximize the protection and tax advantages that life insurance products provide. Mr. McGregor has worked closely with product development teams in determining the risk and required sales results necessary to meet profitability targets. Mr. McGregor professional career encompasses the oversight and creation of marketing, sales presentations and advisor/only materials, seeking a balanced approached to the risks and rewards of the insurance, annuity and asset management products offered.
From 2005 to 2010, Mr. McGregor served as the President of RiverSource Distributors and Senior Vice President of Ameriprise Financial, Inc. During his tenure as the President of RiverSource Distributors, he was responsible for the sales and distribution of all insurance, annuity and asset management product lines of Ameriprise through existing and new channels. In this position, Mr. McGregor identified and greatly influenced strategy, compliance, profitability and the success of multiple insurance and investment products offered by Ameriprise. Mr. McGregor led the effort that resulted in RiverSource annuities being rated the fastest growing annuity company in 2006 and 2007 according to VARDS.
From 2001 to 2004, Mr. McGregor was President of AXA Distributors, where he was responsible for the sales and distribution of insurance and annuity products manufactured by AXA Financial. In 2003, Mr. McGregor’s sales team achieved annuity sales of $7.0 billion. This record sales year resulted in AXA Distributors’ market share position going from number six in 2002 to number two in 2003.
From 1988 to 1998, Mr. McGregor served in a variety of senior leadership positions for Colonial Investment Services. Mr. McGregor was named President of Colonial Investment Services in 1990 and joined Colonial’s Board of Directors. During his tenure, assets under management grew from $9.0 billion to $24.0 billion. Mr. McGregor’s hands on leadership led Colonial to a number one rating in wholesaler and marketing support three times, according to Dalbar Survey.
Over his career, Mr. McGregor has also worked with American Capital, Prudential-Bache Securities, Planco and IDS, where he began his career as a financial advisor in 1978. Mr. McGregor has earned numerous industry degrees and certifications, including LUTC CFP, CLU, and NASD licenses Series 7 and 24. Mr. McGregor received his B.S. and M.B.A. from California Coast University. In 2012, Mr. McGregor authored a life experience and motivational book—A Spirit Never Tires—which echoes his results driven style to inspire others through passion, energy, courage and a positive attitude.
Charles H. Maguire III a registered FINRA Arbitrator, has over 35 years of experience in the financial services industry. The core of Mr. Maguire’s career has been with Merrill Lynch and Company from 1969 to 2004. In one of his last positions with Merrill Lynch, Mr. Maguire served as Director of Financial Institutions Services Group, where he had complete responsibility for the Merrill Lynch’s institutional client services within its domestic branch office system. In addition, Mr. Maguire oversaw the professional teams responsible for product creation and had oversight of an institutional trading desk in New York City. Mr. Maguire’s most notable contribution to Merrill Lynch was the creation of the Consults Product, which to this day is one of the most profitable products at Merrill Lynch. In addition to serving as Director of Financial Institutions Services Group, Mr. Maguire held a variety of sales and management roles at Merrill Lynch, including Sales Manager, Resident Vice President, Regional Sales Manager, Senior Resident Vice President, and Managing Director.
From 2009 to 2011, Mr. Maguire served as a leadership consultant for both the University of Cincinnati School of Medicine and the Economic Center, University of Cincinnati. From 2005 to 2007, Mr. Maguire also served as the Senior Advisor on Staff to the Governor of the State of South Carolina, the Director of Cabinet Affairs, and the Chief of Staff of the Department of Commerce for the State of South Carolina. During his tenure as Director of Cabinet Affairs for the Governor of the State of Carolina, Mr. Maguire was fully responsible for overseeing the operations of all agencies that reported to the Governor of South Carolina. In his role as Chief of Staff of the South Carolina Department of Commerce, Mr. Maguire was responsible for the daily operations of the Department of Commerce. During his tenure with the Department of Commerce, Mr. Maguire led the restructuring of the Department of Commerce, which led to South Carolina becoming one of the top three states for job creation and corporate relocations.
Mr. Maguire has served on the boards (or similar functions) of over 25 nonprofit organizations, including services as a trustee for Centre College, trustee for The Seven Hills School, member of the Charter Review Committee of Cincinnati, trustee for the Queen City Foundation, trustee and executive committee member for St. Elizabeth Medical Center, and President for the Joy Outdoor Education Center. Mr. Maguire holds a B.A. from Centre College.
David H. Abramson a certified public accountant, is presently the Chairman and Chief Executive Officer of David Abramson & Associates, LLC, an executive search and leadership development and financial consulting firm that he founded in 2002. The firm provides retained executive search services at the senior leadership levels as well as senior leadership mentoring and coaching. In addition, the firm provides financial and other consulting services to clients.
In 2001, Mr. Abramson was a Senior Vice President of AXA Financial/Equitable Life Insurance based in New York City, and served as Chairman and Chief Executive Officer of Grant Thornton Advisors, a joint venture of AXA Financial and Grant Thornton Required by his responsibility, Mr. Abramson held NASD series 7, 24 and 66 licenses during his tenure at Grant Thornton Advisors. From 1999 to 2001 Mr. Abramson was Grant Thornton’s National Managing Partner of Financial Advisory Services where he led the design of the vision, strategy, governance and operational planning for Grant Thornton Advisors. Grant Thornton Advisors was designed to offer personal financial and estate planning, and investment and insurance products and services to middle-market companies, their owners and officers and other high net worth individuals.
The core of Mr. Abramson’s career was as a Partner in Grant Thornton from 1972 until 2001. In 1972, Mr. Abramson became an Audit Partner and the Minneapolis Office Managing Partner, and he continued serving in those roles throughout most of his time at Grant Thornton. Mr. Abramson also became a member of Grant Thornton’s National Senior Leadership Team in 1982 and continued in that role until 2001. In this regard, his primary responsibility was Regional Managing Partner with direct line responsibility over assigned operating offices throughout the country. From 1988 to 1990, Mr. Abramson was Grant Thornton’s National Managing Director of Client Services directly responsible for Accounting, Tax, Management Consulting, Human Resources, Marketing and Strategic Planning. During the 1990s, Mr. Abramson also led the development and implementation of the Manufacturing/Distribution Services practice. Mr. Abramson’s partners at Grant Thornton elected him to serve on Grant Thornton’s 11-person Partnership Board for three terms from 1982 to 1990. This board provided oversight and direction related to governance, partner admission and compensation, financial and strategic issues.
Mr. Abramson previously served on the Board of Directors of Southwest Casino Corporation, and served as Chairman of that board’s Audit Committee and a member of its Governance and Nominating Committee from 2006 to 2009. Mr. Abramson has also served as a board member, Chairman or President of a number of nonprofit organizations, including President of the Minnesota Society of CPAs, Chairman of The Greater Minneapolis Chamber of Commerce, and President of Temple Israel. He currently is a Member of the University of Minnesota Carlson School Of Management Alumni Board, and an Advisory Board Member of the University of Minnesota Carlson Consulting Enterprise.
Mr. Abramson received his B.S. degree (Accounting) from the University of Minnesota and his M.B.A. from the University of Michigan.
Board of Directors
When considering whether directors have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily on the information discussed in each of the directors’ individual biographies set forth above. With regard to Mr. Jon R. Sabes, the board considered his significant experience, expertise and background with regard to financial matters, and his demonstrated experience and skills in managing the Company’s business. With regard to Mr. Steven F. Sabes, the board considered his background and experience with the Company and its business. With respect to Mr. Siegert, the board considered his significant experience in securities and finance, and his background in secondary life insurance market. With regard to Mr. McGregor, the board considered his experience in the financial and insurance industries, and in particular his sales, marketing and leadership experience relative to those industries. In the case of Mr. Maguire, the board considered his extensive background in the financial services industry and service in various leadership positions for multiple organizations. With regard to Mr. Abramson, the board considered his extensive background and knowledge of accounting and finance, his focus on wealth management, and prior leadership positions.
The Board of Directors periodically reviews relationships that directors have with the Company to determine whether the directors are independent. Directors are considered “independent” as long as they do not accept any consulting, advisory or other compensatory fee (other than director fees) from the Company, are not an affiliated person of the Company or its subsidiaries (e.g., an officer or a greater-than-10% stockholder) and are independent within the meaning of applicable laws, regulations and the NASDAQ listing rules. In this regard, the Board of Directors has determined that Messrs. McGregor, Maguire and Abramson are independent within the meaning of those standards.
Board Committees
Our Board of Directors has an Audit Committee, Compensation Committee and Corporate Governance and Nomination Committee. The Audit Committee is composed of Messrs. Abramson (Chair), McGregor and Maguire. The Compensation Committee is composed of Messrs. Maguire (Chair) and Abramson. The Nomination and Corporate Governance Committee is composed of Messrs. McGregor (Chair) and Abramson.
Our Audit Committee, Compensation Committee, and Nomination and Corporate Governance Committee each comply with the listing requirements of The NASDAQ Marketplace rules. At least one member of the Audit Committee, Mr. Abramson, is an “audit committee financial expert,” as that term is defined in Item 401(h)(2) of Regulation S-K, and is “independent” as that term is defined in Rule 5605(a) of the NASDAQ Marketplace Rules.
Indemnification of Directors and Executive Officers
Section 145 of the Delaware General Corporation Law provides for, under certain circumstances, the indemnification of our officers, directors, employees and agents against liabilities that they may incur in such capacities. A summary of the circumstances in which such indemnification provided for is contained herein, but that description is qualified in its entirety by reference to the relevant Section of the Delaware General Corporation Law.
In general, the statute provides that any director, officer, employee or agent of a corporation may be indemnified against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement, actually and reasonably incurred in a proceeding (including any civil, criminal, administrative or investigative proceeding) to which the individual was a party by reason of such status. Such indemnity may be provided if the indemnified person’s actions resulting in the liabilities: (i) were taken in good faith; (ii) were reasonably believed to have been in or not opposed to our best interest; and (iii) with respect to any criminal action, such person had no reasonable cause to believe the actions were unlawful. Unless ordered by a court, indemnification generally may be awarded only after a determination of independent members of the Board of Directors or a committee thereof, by independent legal counsel or by vote of the stockholders that the applicable standard of conduct was met by the individual to be indemnified.
The statutory provisions further provide that to the extent a director, officer, employee or agent is wholly successful on the merits or otherwise in defense of any proceeding to which he was a party, he is entitled to receive indemnification against expenses, including attorneys’ fees, actually and reasonably incurred in connection with the proceeding.
Indemnification in connection with a proceeding by or in the right of GWG Holdings, Inc. in which the director, officer, employee or agent is successful is permitted only with respect to expenses, including attorneys’ fees actually and reasonably incurred in connection with the defense. In such actions, the person to be indemnified must have acted in good faith, in a manner believed to have been in our best interest and must not have been adjudged liable to us unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expense which the Court of Chancery or such other court shall deem proper. Indemnification is otherwise prohibited in connection with a proceeding brought on behalf of GWG Holdings, Inc. in which a director is adjudged liable to us, or in connection with any proceeding charging improper personal benefit to the director in which the director is adjudged liable for receipt of an improper personal benefit.
Delaware law authorizes us to reimburse or pay reasonable expenses incurred by a director, officer, employee or agent in connection with a proceeding in advance of a final disposition of the matter. Such advances of expenses are permitted if the person furnishes to us a written agreement to repay such advances if it is determined that he is not entitled to be indemnified by us.
The statutory section cited above further specifies that any provisions for indemnification of or advances for expenses does not exclude other rights under our Certificate of Incorporation, corporate bylaws, resolutions of our stockholders or disinterested directors, or otherwise. These indemnification provisions continue for a person who has ceased to be a director, officer, employee or agent of the corporation and inure to the benefit of the heirs, executors and administrators of such persons.
The statutory provision cited above also grants the power to GWG Holdings, Inc. to purchase and maintain insurance policies that protect any director, officer, employee or agent against any liability asserted against or incurred by him in such capacity arising out of his status as such. Such policies may provide for indemnification whether or not the corporation would otherwise have the power to provide for it.
Article 6 of our corporate bylaws provides that we shall indemnify our directors, officers, employees and agents to the fullest extent permitted by the Delaware General Corporation Law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling GWG Holdings, Inc. pursuant to the foregoing provisions, we understand that in the opinion of the SEC such indemnification is against public policy as expressed in that Act and is therefore unenforceable.
We have purchased directors’ and officers’ liability insurance in order to limit the exposure to liability for indemnification of directors and officers, including liabilities under the Securities Act of 1933.
| ITEM 11. | EXECUTIVE AND DIRECTOR COMPENSATION. |
Summary Compensation Table
The following table sets forth the cash and non-cash compensation awarded to or earned by: (i) each individual who served as the principal executive officer and principal financial officer of GWG Holdings during the years ended December 31, 2013 and 2012; and (ii) each other individual that served as an executive officer of either GWG Holdings or GWG Life Settlements, Inc. at the conclusion of the years ended December 31, 2013 and 2012 and who received more than $100,000 in the form of salary and bonus during such fiscal year. For purposes of this document, these individuals are collectively the “named executives” of the Company.
| Name and Principal Position | | | Salary | | | Bonus (1) | | | All Other Compensation (2) | | | Total | |
| Jon R. Sabes | 2013 | | $ | 350,000 | | | $ | 544,581 | | | $ | 16,905 | | | $ | 911,486 | |
| Chief Executive Officer | 2012 | | $ | 350,000 | | | $ | 163,182 | | | $ | 0 | | | $ | 513,182 | |
| | | | | | | | | | | | | | | | | | |
| Jon Gangelhoff | 2013 | | $ | 120,000 | | | $ | 57,276 | | | $ | 13,244 | | | $ | 190,520 | |
| Chief Financial Officer | 2012 | | $ | 120,000 | | | $ | 28,244 | | | $ | 0 | | | $ | 148,244 | |
| | | | | | | | | | | | | | | | | | |
| Paul A. Siegert | 2013 | | $ | 150,000 | | | $ | 54,236 | | | $ | 2,631 | | | $ | 206,867 | |
| President and Chairman of the Board | 2012 | | $ | 150,000 | | | $ | 113,967 | | | $ | 0 | | | $ | 263,967 | |
| | | | | | | | | | | | | | | | | | |
| Steven F. Sabes | 2013 | | $ | 150,000 | | | $ | 426,836 | | | $ | 11,063 | | | $ | 587,899 | |
| COO and Secretary | 2012 | | $ | 150,000 | | | $ | 35,591 | | | $ | 0 | | | $ | 185,591 | |
(1) In 2013, Messrs. Jon R. Sabes, Steven F. Sabes, and Paul A. Siegert each received a discretionary bonus related to the tax impact of the conversion of the Company from a limited liability company to a corporation. In this regard, Mr. Jon R. Sabes received a discretionary tax-related bonus of $436,700, Mr. Steven F. Sabes received a discretionary tax-related bonus of $380,600, and Mr. Paul A. Siegert received a discretionary tax-related bonus of $8,000. In addition, each named executive received a cash bonus under the Company’s incentive compensation plan. Mr. Jon R. Sabes received a $107,881 cash bonus, Mr. Gangelhoff received a $57,276 cash bonus, Mr. Siegert received a $46,236 cash bonus, and Mr. Steven F. Sabes received a $46,236 cash bonus, under that incentive compensation plan.
(2) All Other Compensation includes payment of unused and accrued vacation, and premiums paid by the Company that are reported on the named executives’ W-2 forms as a component of gross income.
Employment Agreements and Change-in-Control Provisions
In June 2011, we entered into employment agreements with each of Messrs. Jon R. Sabes, Steven F. Sabes, Paul A. Siegert and Jon Gangelhoff. Mr. Jon R. Sabes is our Chief Executive Officer; Mr. Steven F. Sabes is our Chief Operating Officer and Secretary; Mr. Siegert is our President (and also our Chairman of the Board); and Mr. Gangelhoff is our Chief Financial Officer. These employment agreements establish key employment terms (including reporting responsibilities, base salary, discretionary and bonus opportunity and other benefits), provide for severance benefits in certain situations, and contain non-competition, non-solicitation and confidentiality covenants.
Under their respective employment agreements, Mr. Jon R. Sabes receives an annual base salary of $350,000, Messrs. Steven F. Sabes and Paul A. Siegert receive an annual base salary of $150,000, and Mr. Gangelhoff receives an annual base salary of $120,000. The employment agreements contain customary provisions prohibiting the executives from soliciting our employees for one year after any termination of employment, and from competing with the Company for either two years (if the executive is terminated for good cause or if he resigns without good reason) or one year (if we terminate the executive’s employment without good cause or if he resigns with good reason). If an executive’s employment is terminated by us without “good cause” or if the executive voluntarily resigns with “good reason,” then the executive will be entitled to (i) severance pay for a period of 12 months and (ii) reimbursement for health insurance premiums for his family if he elects continued coverage under COBRA.
The employment agreements for Messrs. Jon R. Sabes, Steve F. Sabes and Paul A. Siegert also provide that we will reimburse them for any legal costs they incur in enforcing their rights under the employment agreement and, to the fullest extent permitted by applicable law, indemnify them for claims, costs and expenses arising in connection with their employment, regardless of the outcome of any such legal contest, as well as interest at the prime rate on any payments under the employment agreements that are determined to be past due, unless prohibited by law.
All of the executive employment agreements include a provision allowing us to reduce their severance payments and any other payments to which the executive becomes entitled as a result of our change in control to the extent needed for the executive to avoid paying an excise tax under Code Section 280G, unless, the named executive officer is better off, on an after-tax basis, receiving the full amount of such payments and paying the excise taxes due.
Outstanding Equity Awards at Fiscal Year End
As of December 31, 2013 we had the following outstanding equity awards for named executives:
Stock Options – Common Stock:
| | | Vested | | | Un-Vested | | | Total | |
| | | Shares | | | Shares | | | Shares | |
| Jon Sabes | | | - | | | | 12,000 | | | | 12,000 | |
| Steve Sabes | | | 50,000 | | | | 5,000 | | | | 55,000 | |
| Paul Siegert | | | 50,000 | | | | 5,000 | | | | 55,000 | |
| Jon Gangelhoff | | | 100,000 | | | | 54,000 | | | | 154,000 | |
| | | | 200,000 | | | | 76,000 | | | | 276,000 | |
Compensation of Directors
The following table sets forth the cash and non-cash compensation awarded to or earned by each individual who served as member of the board of directors of GWG Holdings during the year ended December 31, 2013. For purposes of this document, these individuals are collectively the “named executives” of the Company.
| | | Fees Earned or Paid in Cash | |
| Director’s Name | | 2013 | |
| Paul A. Siegert (Chairman) | | $ | 30,000 | |
| Jon R. Sabes | | $ | 30,000 | |
| Steven F. Sabes | | $ | 30,000 | |
| Brian Tyrell | | $ | 25,000 | |
| Laurence Zipkin | | $ | 25,000 | |
| Kenneth Fink | | $ | 25,000 | |
| David H. Abramson | | $ | 11,000 | |
| Charles H. Maguire III | | $ | 8,000 | |
| Jeffrey L. McGregor | | $ | 8,000 | |
On October 28, 2013, Messrs. Tyrell, Zipkin, and Fink voluntarily resigned from the board and three new directors, Messrs. David H. Abramson, Jeffrey L. McGregor, and Charles H. Maguire III, were appointed to the board. Each independent board member receives base compensation of $5,000 and an option to purchase 2,000 shares of the Company’s common stock per quarter. In addition, the chairman of the audit committee receives $4,000 and an option to purchase 2,000 shares of the Company’s common stock per quarter. The chairmen of the compensation committee and the corporate governance committee each receive $2,000 and an option to purchase 1,000 shares of the Company’s common stock per quarter. Also each non-chair member of committees receive $1,000 and an option to purchase 500 shares of the Company’s common stock per quarter.
On December 12, 2013, Messrs. Zipkin and Fink each received an option with a ten year term to purchase 30,000 shares of the Company’s common stock for their service as board members.
2013 Stock Incentive Plan
In April 2013, our Board of Directors and our stockholders adopted the 2013 Stock Incentive Plan and reserved 2,000,000 shares of common stock for issuance under that plan. The 2013 Stock Incentive Plan permits the grant of both incentive and non-statutory stock options. As of the date of this report, there are 635,000 common shares issuable upon exercise of outstanding incentives granted under the plan. The Board of Directors adopted the 2013 Stock Incentive Plan to provide a means by which our employees, directors, officers and consultants may be granted an opportunity to purchase our common stock, to assist in retaining the services of such persons, to secure and retain the services of persons capable of filling such positions and to provide incentives for such persons to exert maximum efforts for our success.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS. |
The following table sets forth the number and percentage of outstanding common shares beneficially owned as of the date set forth above, by:
| | · | each person known by us to be the beneficial owner of more than five percent of our outstanding common stock |
| | · | each of our current directors |
| | · | each our current executive officers and any other persons identified as a “named executive” in the Summary Compensation Table above, and |
| | · | all our current executive officers and directors as a group. |
Shares beneficially owned and percentage ownership is based on 9,124,000 shares of common stock outstanding. Beneficial ownership is determined in accordance with the rules of the SEC, and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of the record rate, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under the applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares of the Company. In any case where an individual has beneficial ownership over securities that are not outstanding, but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage of Common Shares” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%. Unless otherwise indicated, the address of each of the following persons is 220 South Sixth Street, Suite 1200, Minneapolis, Minnesota 55402, and each such person has sole voting and investment power with respect to the shares set forth opposite his, her or its name.
| Name and Address | | Shares Beneficially Owned | | Percentage of Shares Beneficially Owned |
| Jon R. Sabes (1) | | | 4,854,788 | | 47.6% |
| Steven S. Sabes (2) | | | 4,772,494 | | 46.8% |
| Paul A. Siegert (3) | | | 450,890 | | 4.4% |
| Jon Gangelhoff (4) | | | 100,000 | | 1.0% |
| Jeffrey L. McGregor (5) | | | 3,500 | | * |
| David H. Abramson (6) | | | 5,000 | | * |
| Charles H. Maguire III (7) | | | 3,500 | | * |
| All current directors and officers as a group (8) | | | 10,190,172 | | 99.8% |
| (1) | Mr. Sabes is our Chief Executive Officer and a director of the Company. Shares reflected in the table include 2,184,552 shares held individually, 978,172 shares held by Opportunity Finance, LLC, a Minnesota limited liability company of which Mr. Sabes is a manager and member, 339,342 shares held by Jon Sabes 1992 Trust No.1, a trust of which Mr. Sabes is the beneficiary, 337,602 shares held by Jon Sabes 12.30.92 Trust, a trust of which Mr. Sabes is a beneficiary, 483,263 shares held by Jon Sabes 1982 Trust, a trust of which Mr. Sabes is a beneficiary, and 327,475 shares held by Jon Sabes 1976 Trust, a trust of which Mr. Sabes is a beneficiary. Also 204,382 shares held by Mr. Sabes’ immediate family members. The trustees of each of the trusts are Robert W. Sabes, Steve F. Sabes and Ross A. Sabes. |
| (2) | Mr. Sabes is our Chief Operating Officer, Secretary and a director of the Company. Shares reflected in the table include 1,599,558 shares held individually, 978,172 shares held by Opportunity Finance, LLC, a Minnesota limited liability company of which Mr. Sabes is a manager and member, 1,042,316 shares held by SFS Trust 1982, a trust of which Mr. Sabes is the beneficiary, 701,558 shares held by SFS Trust 1992 Esther, a trust of which Mr. Sabes is a beneficiary, and 400,890 shares held by SFS Trust 1976, a trust of which Mr. Sabes is a beneficiary. The trustees of each of the trusts are Robert W. Sabes, Jon R. Sabes and Ross A. Sabes. The number of shares also include 50,000 of vested stock options granted pursuant to stock option agreement dated 9/5/2013 for 55,000 shares at exercise price of $3.76 vesting over a three-year period. |
| (3) | Mr. Siegert is our President and a director of the Company (Chairman). Shares reflected in the table include 400,890 shares held individually and 50,000 of vested stock options granted pursuant to stock option agreement dated 9/5/2013 for 55,000 shares at exercise price of $3.76 vesting over a three-year period. |
| (4) | Mr. Gangelhoff is our Chief Financial Officer. Shares reflected in the table include 100,000 of vested stock options granted pursuant to stock option agreement dated 9/5/2013 for 154,000 shares at exercise price of $3.76 vesting over a three-year period. |
| (5) | Mr. McGregor is a director of the Company. Shares reflected in the table include 3,500 of vested stock options granted pursuant to stock option agreement dated 11/12/2013 for 42,000 shares at exercise price of $3.76 vesting quarterly over a three-year period. |
| (6) | Mr. Abramson is a director of the Company. Shares reflected in the table include 5,000 of vested stock options granted pursuant to stock option agreement dated 10/28/2013 for 60,000 shares at exercise price of $3.76 vesting quarterly over a three-year period. |
| (7) | Mr. Maguire is a director of the Company. Shares reflected in the table include 3,500 of vested stock options granted pursuant to stock option agreement dated 11/12/2013 for 42,000 shares at exercise price of $3.76 vesting quarterly over a three-year period. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
Related-Party Transactions
As explained above under “—Employment Agreements and Change-in-Control Provisions,” we were party to an arrangement with each of Jon R. Sabes, Paul A. Siegert and Steven F. Sabes whereby those individuals received loan advances that accrued interest at rates ranging from 4.2% to 5.0% per annum. Under this arrangement, made during the time when GWG Holdings was a limited liability company, these advance amounts were to be repaid upon or in connection with operating distributions made by us. From inception through June 13, 2011, advances aggregating approximately $981,167 were made to Jon R. Sabes with cumulative interest owed of $114,496, $287,500 to Paul A. Siegert with cumulative interest owed of $22,708, and $861,976 were made to Steven F. Sabes with cumulative interest owed of $94,438. On July 27, 2011, Messrs. Jon R. Sabes, Steven F. Sabes and Paul A. Siegert repaid their loan balances.
In May 2008, our affiliate, Insurance Strategies Fund, LLC, a Delaware limited liability company beneficially owned by Mr. Jon R. Sabes, our Chief Executive Officer, agreed to make discretionary unsecured general working capital loans to GWG Holdings for short-term working capital needs. As of December 31, 2013 and 2012, we owed no amounts to Insurance Strategies Fund. Nevertheless, an Amended and Restated Investment Agreement with Insurance Strategies Fund, dated as of September 3, 2009, remains in place. That agreement permits Insurance Strategies Fund to make additional discretionary unsecured short-term work capital loans in the future.
Effective July 14, 2008, the Company entered into an Addendum No. 1 to Sub-Sublease Agreement with Opportunity Finance, LLC, a limited liability company of which Jon R. Sabes, our Chief Executive Officer, also serves as Chief Executive Officer. Pursuant to the Addendum, Opportunity Finance, LLC assigned to the Company, and the Company assumed, all of Opportunity Finance’s rights and obligations under a Sub-Sublease Agreement between Opportunity Finance and an unrelated third party. The Sub-Sublease Agreement relates to the facilities in which we conduct our business operations. Under the Sub-Sublease Agreement, as assigned, the Company assumed the obligation to make monthly payments of base rent that range from $7,310 (from the commencement date through July 31, 2009) to $8,770 (for the period from August 1, 2011 through the April 20, 2012 expiration of the Sub-Sublease Agreement). In addition, the Sub-Sublease Agreement, as assigned, requires that the Company pay additional monthly amounts in respect of operating costs as additional rent. The Company made aggregate payments under the Sub-Sublease Agreement of $0 and $50,000 for the calendar years ended December 31, 2013 and 2012, respectively.
On July 11, 2011, the Company entered into a Purchase and Sale Agreement with Athena Securities Group, LTD and Athena Structured Funds PLC. Under this agreement, Holdings issued to Athena Securities Group, LTD (Athena) 989,000 shares of common stock, which was equal to 9.9% of the outstanding shares in the Company, in exchange for shares equal to 9.9% of the outstanding shares in Athena Structured Funds, PLC (Athena Funds) and cash of $5,000. In accordance with Accounting Standards Codification (ASC) 505-50, the Company recorded the share-based payment transaction with Athena at the fair value of the Company’s 989,000 shares of common stock issued as it was the most reliable measurable form of consideration in this exchange the total value ascribed to the common stock issued to Athena was $3.6 million. The $5,000 cash paid by Athena, which represents the fair value of the shares of Athena Funds, is included in financing activities of the Consolidated Statement of Cash Flows. At the time of the execution of the Agreement, during 2011, the Company recorded an asset in the amount of $3,600,000 reflecting the consideration received in exchange for the issuance of 989,000 shares at a fair value of $3.64 per share. This exchange of shares established certain rights and responsibilities, principally related to the distribution of certain publicly-registered debt securities in European capital markets. Shortly after the execution of the Agreement, due to changes in the regulatory environment in those capital markets concerning the life settlements industry, it became evident that the counterparty to the Agreement would not be able to execute its responsibilities under such Agreement. Because the proposed offering of the debt securities was to occur more than 90 days subsequent to the date of the Agreement, at such time that it was determined the distribution plan could not be executed, the Company believe it was appropriate to expense the amount calculated as the fair value of the consideration in the exchange. This amount was reflected in Investment Banking Expense during 2011.
On June 28, 2013, GWG Holdings, Inc. entered into a new Purchase and Sale Agreement with Athena Securities Limited and Athena Securities Group Limited. The June 28, 2013 agreement terminated the parties’ original Purchase and Sale Agreement dated July 11, 2011. Under the new agreement, Holdings appointed Athena Securities Group Limited (i) as Holdings’ exclusive representative for the offer and sale of Holdings’ Renewable Secured Debentures in Ireland, and (ii) as a distributor for the offer and sale of those debentures in Europe and the Middle East, in each case until May 8, 2014. Any compensation payable to Athena Securities Group Limited will be in accordance with the compensation disclosures set forth in Holdings’ prospectus for the offering filed with the SEC on dated June 4, 2013, as the same may be supplemented or amended from time to time. In addition, the new agreement effected the sale by Athena Securities Limited to Holdings of 865,000 shares of Holdings’ common stock, and Holdings’ sale back to Athena Securities Group Limited of certain shares of GWG Securities International Public Limited Company (formerly known as Athena Structured Funds PLC) originally transacted under the original July 11, 2011 agreement. The Company recorded a non-cash gain on the transaction of $3,252,000.
Related-Party Transaction Policy and Related Matters
In all cases, the Company abides by applicable state corporate law when approving all transactions, including transactions involving officers, directors or affiliates. More particularly, the Company’s policy is to have any related-party transactions (i.e., transactions involving a director, an officer or an affiliate of the Company) be approved solely by a majority of the disinterested and independent directors serving on the board. Presently, the Company has three independent directors serving on the board, and intends to maintain a board consisting of at least three independent directors.
The Company does not anticipate making any future loans or advances for non-business purposes to directors, officers, affiliates or other persons who might be considered “promoters” under state laws. Any such loans or advances would violate of Section 402 of the federal Sarbanes-Oxley Act of 2002. The Company may in the future engage in transactions with Insurance Strategies Fund, LLC, pursuant to the Amended and Restated Investment Agreement described above under the “Related Party Transactions caption.” In addition, the Company may in the future engage in transactions with Athena Structured Funds as described above under the “Related Party Transactions caption.” Any such transactions with Insurance Strategies Fund or Athena Structured Funds will be effected on terms no less favorable to the Company than those that can be obtained from unaffiliated third parties. The Company and its legal counsel have determined that there is a reasonable basis for these representations and disclosures, and may in the future determine to incorporate into board committee charters or other written governance policies or documents some or all of the policies of the Company described herein.
Director Independence
The Board of Directors periodically reviews relationships that directors have with the Company to determine whether the directors are independent. Directors are considered “independent” as long as they do not accept any consulting, advisory or other compensatory fee (other than director fees) from the Company, are not an affiliated person of the Company or its subsidiaries (e.g., an officer or a greater-than-ten-percent stockholder) and are independent within the meaning of applicable laws, regulations and the Nasdaq listing rules. In this latter regard, the Board of Directors uses the Nasdaq listing rules (specifically, Section 5605(a)(2) of such rules) as a benchmark for determining which, if any, of its directors are independent, solely in order to comply with applicable SEC disclosure rules. However, this is for disclosure purposes only. It should be understood that, as a corporation whose shares are not listed for trading on any securities exchange or listing service, the Company is not required to have any independent directors at all on its Board of Directors, or any independent directors serving on any particular committees of the Board of Directors.
The Board of Directors has determined that, of its current directors, Messrs. Abramson, McGregor and Maguire III are independent within the meaning of the Nasdaq listing rule cited above. In the case of Mr. Siegert, his position as an executive officer of the Company precludes him from being considered independent. In the case of both Messrs. Jon R. and Steven F. Sabes, their positions as executive officers of the Company, together with their beneficial ownership of more than ten percent of the common stock of the Company, similarly precludes them from being considered independent within the meaning of the cited Nasdaq listing rule.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
Fees Billed to the Company by Its Independent Registered Public Accounting Firm
The following table presents fees for professional audit services, tax services and other services rendered by Baker Tilly Virchow Krause, LLP. and Mayer Hoffman McCann P.C. during fiscal years 2013 and 2012:
| | | 2013 | | | 2012 | |
| Audit Fees (1) | | $ | 253,000 | | | $ | 163,000 | |
| Tax Fees (2) | | | 130,000 | | | | 55,000 | |
| All Other Fees (3) | | | 39,000 | | | | 189,000 | |
| Total Fees | | $ | 422,000 | | | $ | 407,000 | |
| (1) | Audit Fees consist of fees for professional services rendered for the audit of the Company’s consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided in connection with statutory and regulatory filings or engagements. |
| | |
| (2) | Tax Fees consist of fees for tax compliance, tax advice, and tax planning. |
| | |
| (3) | All Other Fees typically consist of fees for permitted non-audit products and services provided. |
Pre-Approval Policy
The written charter of the audit committee provides that all audit and non-audit accounting services that are permitted to be performed by the Company’s independent registered certified public accounting firm under applicable rules and regulations must be pre-approved by the audit committee or by designated members of the audit committee, other than with respect to de minimum exceptions permitted under the Sarbanes-Oxley Act of 2002. All services performed by our independent registered public account firm during the fiscal years ended December 31, 2013 and 2012 were pre-approved in accordance with the written charter.
Prior to or as soon as practicable following the beginning of each fiscal year, a description of the audit, audit-related, tax, and other services expected to be performed by the independent registered certified public accounting firm in the following fiscal year will be presented to the audit committee for approval. Following such approval, any requests for audit, audit-related, tax, and other services not presented and pre-approved must be submitted to the audit committee for specific pre-approval and cannot commence until such approval has been granted. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the Chairman of the audit committee. The Chairman then updates the audit committee at the next regularly scheduled meeting of any services that were granted specific pre-approval.
PART IV
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
Documents filed as part of this Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2013 and 2012
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012
Consolidated Statements of Changes in Equity for the years ended December 31, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Consolidated Financial Statements
Financial Statement Schedule:
Not applicable.
Exhibit Index
| Exhibit | | Description |
| 3.1 | | Certificate of Incorporation (1) |
| 3.2 | | Bylaws (1) |
| 3.3 | | Certificate of Amendment of Certificate of Incorporation (3) |
| 3.4 | | Certificate of Designations for Series A Convertible Preferred Stock (3) |
| 4.1 | | Indenture with Bank of Utah, dated October 19, 2011 (5) |
| 4.2 | | Form of Debenture (3) |
| 4.3 | | Form of Subscription Agreement (revised November 2013) (11) |
| 4.4 | | Pledge and Security Agreement by and among GWG Holdings, Inc., GWG Life Settlements, LLC, Jon R. Sabes, Steven F. Sabes, and Bank of Utah, dated October 19, 2011 (5) |
| 4.5 | | Intercreditor Agreement by and among Bank of Utah, and Lord Securities Corporation, dated October 19, 2011 (5) |
| 4.6 | | Amendment No. 1 to Indenture with Bank of Utah, dated December 15, 2011 (6) |
| 4.7 | | Amendment No. 1 to Pledge and Security Agreement, dated December 15, 2011 (6) |
| 10.1 | | Amended and Restated Credit and Security Agreement with DZ Bank AG Deutsche Zentral-Genossenschaftsbank (as agent), and Autobahn Funding Company LLC (as lender), dated effective January 25, 2013 (7) * |
| 10.2 | | Performance Guaranty of GWG Holdings, LLC dated as of July 15, 2008, delivered in favor of DZ Bank AG Deutsche Zentral-Genossenschaftsbank (as agent) and Autobahn Funding Company LLC (as lender) (3) |
| 10.3 | | General Reaffirmation and Modification Agreement dated effective January 25, 2013 delivered in favor of DZ Bank AG Deutsche Zentral-Genossenschaftsbank (as agent), and Autobahn Funding Company LLC (as lender) (7) ** |
| 10.4 | | Third Amended and Restated Note Issuance and Security Agreement dated November 1, 2011, with Lord Securities Corporation (as trustee), GWG LifeNotes Trust (as secured party), and noteholders (11) |
| 10.5 | | Pledge Agreement dated November 15, 2010, among Jon R. Sabes, Steven F. Sabes, Opportunity Finance, LLC, SFS Trust 1976, SFS Trust 1992 Esther, SFS Trust 1982, Mokeson, LLC (collectively as pledgors), and Lord Securities Corporation (as trustee and pledgee) (3) |
| 10.6 | | Fourth Amended and Restated Managing Broker-Dealer Agreement with Arque Capital dated effective April 5, 2013 (11) *** |
| 10.7 | | Amended and Restated Investment Agreement with Insurance Strategies Fund, LLC, dated as of September 3, 2009 (3) |
| 10.8 | | Addendum No. 1 to Sub-Sublease Agreement effective as of July 14, 2008 by Opportunity Finance, LLC and GWG Life, LLC (2) |
| 10.9 | | Employment Agreement with Jon R. Sabes, dated June 14, 2011 (4) |
| 10.10 | | Employment Agreement with Steven F. Sabes, dated June 14, 2011 (4) |
| 10.11 | | Employment Agreement with Paul A. Siegert, dated June 14, 2011 (4) |
| 10.12 | | Purchase and Sale Agreement with Athena Securities Group Ltd. and Athena Structured Funds PLC, dated July 11, 2011 (3) |
| 10.13 | | Shareholders’ Agreement with respect to Athena Structured Funds PLC, dated July 11, 2011 (3)(8) |
| 10.14 | | Amendment to Third Amended and Restated Note Issuance and Security Agreement, dated as of November 18, 2013, with Lord Securities Corporation (as trustee for the GWG LifeNotes Trust) (11) |
| 10.15 | | Purchase and Sale Agreement with GWG Securities International PLC, Athena Securities Group Limited, and Athena Securities Limited, dated as of June 28, 2013 (9) |
| 10.16 | | 2013 Stock Incentive Plan dated March 27, 2013 (filed herewith) |
| 10.17 | | Form of Stock Option Agreement used under 2013 Stock Incentive Plan (filed herewith) |
| 10.18 | | Addendum to Third Amended and Restated Managing Broker-Dealer Agreement with Arque Capital dated effective February 28, 2013 (10) |
Exhibit | | Description |
| 21.1 | | List of Subsidiaries (filed herewith) |
| 23.1 | | Consent of Mayer Hoffman McCann P.C. (filed herewith) |
| 31.1 | | Section 302 Certification of the Chief Executive Officer (filed herewith) |
| 31.2 | | Section 302 Certification of the Chief Financial Officer (filed herewith) |
| 32.1 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| 99.1 | | Letter from Model Actuarial Pricing Systems, dated March 19, 2013 (filed herewith) |
| | | |
| 101.INS** | | XBRL Instance Document |
| 101.SCH** | | XBRL Schema Document |
| 101.CAL** | | XBRL Calculation Linkbase Document |
| 101.DEF** | | XBRL Definition Linkbase Document |
| 101.LAB** | | XBRL Label Linkbase Document |
| 101.PRE** | | XBRL Presentation Linkbase Document |
| (1) | Incorporated by reference to Form S-1 Registration Statement filed on June 14, 2011 (File No. 333-174887). |
| (2) | Incorporated by reference to Form S-1/A Registration Statement filed on July 26, 2011 (File No. 333-174887). |
| (3) | Incorporated by reference to Form S-1/A Registration Statement filed on August 23, 2011 (File No. 333-174887). |
| (4) | Incorporated by reference to Form S-1/A Registration Statement filed on September 20, 2011 (File No. 333-174887). |
| (5) | Incorporated by reference to Form S-1/A Registration Statement filed on October 20, 2011 (File No. 333-174887). |
| (6) | Incorporated by reference to Post-Effective Amendment No. 1 to Form S-1/A filed on April 30, 2012 (File No. 333-174887). |
| (7) | Incorporated by reference to Current Report on Form 8-K filed on February 1, 2013. |
| (8) | Agreement was terminated effective June 28, 2013. |
| (9) | Incorporated by reference to Current Report on Form 8-K filed on July 8, 2013. |
| (10) | Incorporated by reference to Post-Effective Amendment No. 6 to Form S-1/A filed on April 4, 2013 (File No. 333-174887). |
| (11) | Incorporated by reference to Post-Effective Amendment No. 8 to Form S-1/A filed on November 12, 2013 (File No. 333-174887). |
| * | The registrant has earlier filed the original Credit and Security Agreement dated July 15, 2008, Consent and Amendment No. 1 to the Credit and Security Agreement dated December 14, 2010, and Consent and Amendment No. 2 to the Credit and Security Agreement dated June 10, 2011. These documents were filed as Exhibits 10.1, 10.2 and 10.3, respectively, to the Form S-1/A Registration Statement filed on August 23, 2011. |
| ** | The registrant has earlier filed a Reaffirmation of Guaranty dated as of June 10, 2011, which was filed as Exhibit 10.7 to the Form S-1/A Registration Statement filed on August 23, 2011. |
| *** | The registrant has earlier filed a Managing Broker-Dealer Agreement dated August 14, 2011, an amended Managing Broker-Dealer Agreement dated October 19, 2011, an Amended and Restated Managing Broker-Dealer Agreement dated November 16, 2011, and a Second Amended and Restated Managing Broker-Dealer Agreement dated effective as of November 16, 2011. These documents were filed as Exhibits 10.8 to the Form S-1/A Registration Statements filed on August 23, October 20, November 28 and December 15, 2011, respectively. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | GWG HOLDINGS, INC. | |
| | | | |
Date: March 20, 2014 | By: | /s/ Jon R. Sabes | |
| | | Chief Executive Officer | |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below, as of March 20, 2014, by the following persons on behalf of the registrant and in the capacities indicated below.
| Signature | | Title | |
| | | | |
| /s/ Jon R. Sabes | | Chief Executive Officer and Director | |
| Jon R. Sabes | | (Principal Executive Officer) | |
| | | | |
| /s/ Steven F. Sabes | | Chief Operating Officer, Secretary and Director | |
| Steven F. Sabes | | |
| | | | |
| /s/ Paul A. Siegert | | President and Director | |
| Paul A. Siegert | | | |
| | | | |
| /s/ Jon Gangelhoff | | Chief Financial Officer | |
| Jon Gangelhoff | | (Principal Financial and Accounting Officer) |
| | | | |
/s/ Jeffrey L. McGregor | | Director | |
| Jeffrey L. McGregor | | | |
| | | | |
/s/ David H. Abramson | | Director | |
| David H. Abramson | | | |
| | | | |
/s/ Charles H. Maguire III | | Director | |
| Charles H. Maguire III | | | |
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