UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2020

2021

or

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

For the transition period from _________ to ________

Commission File Number: 001-36615

GWG HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware26-2222607
Delaware26-2222607
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)

325 North St. Paul Street, Suite 2650

Dallas, TX 75201

(Address of principal executive offices, including zip code)

(612) 746-1944

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)
Name of each exchange
on which registered
Common StockGWGHNASDAQ Capital Market

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

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

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

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

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

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

As of May 11, 2020October 15, 2021, GWG Holdings, Inc. had 33,036,64933,098,631 shares of common stock outstanding.




GWG HOLDINGS, INC.

Index to Form 10-Q

for the Quarter Ended March 31, 2020

2021
Page No.
Page No.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
1
Condensed Consolidated Balance Sheets as of March 31 2020,2021, and December 31, 20192020
1
Condensed Consolidated Statements of Operations for the three months ended March 31, 20202021 and 20192020
2
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 20202021 and 20192020
3
Condensed Consolidated Statements of Changes in Stockholders’ (Deficit) Equity for the three months ended March 31, 20202021 and 20192020
5
Notes to Condensed Consolidated Financial Statements
7
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
51
48
Item 4.
Controls and Procedures
73
74
PART II. OTHER INFORMATION
76
Item 5.Other Information74
Item 6.
Exhibits
74
76
SIGNATURES
75
76

i

i

Table Of Contents
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

  March 31,
2020
(unaudited)		  December 31,
2019		 
ASSETS      
Cash and cash equivalents $116,432  $79,073 
Restricted cash  26,446   20,258 
Investment in life insurance policies, at fair value  802,181   796,039 
Life insurance policy benefits receivable, net  15,330   23,031 
Loans receivable, net of unearned income  219,296   232,344 
Allowance for loan losses  (700)  — 
Loans receivable, net  218,596   232,344 
Fees receivable  30,453   29,168 
Financing receivables from affiliates  68,290   67,153 
Other assets  33,906   30,135 
Goodwill  2,372,595   2,358,005 
TOTAL ASSETS $3,684,229  $3,635,206 
         
LIABILITIES & STOCKHOLDERS’ EQUITY        
LIABILITIES        
Senior credit facility with LNV Corporation $188,793  $174,390 
L Bonds  1,009,781   926,638 
Seller Trust L Bonds  366,892   366,892 
Other borrowings  152,597   153,086 
Interest and dividends payable  22,403   16,516 
Deferred revenue  39,651   41,444 
Accounts payable and accrued expenses  21,139   27,836 
Deferred tax liability, net  40,206   57,923 
TOTAL LIABILITIES  1,841,462   1,764,725 
         
Redeemable noncontrolling interests  1,241,641   1,269,654 
         
STOCKHOLDERS’ EQUITY        
         
REDEEMABLE PREFERRED STOCK        
(par value $0.001; shares authorized 100,000; shares outstanding 69,756 and 84,636; liquidation preference of $70,163 and $85,130 as of March 31, 2020 and December 31, 2019, respectively)  59,142   74,023 
SERIES 2 REDEEMABLE PREFERRED STOCK        
(par value $0.001; shares authorized 150,000; shares outstanding 146,812 and 147,164; liquidation preference of $147,668 and $148,023 as of March 31, 2020 and December 31, 2019, respectively)  127,516   127,868 
COMMON STOCK        
(par value $0.001; shares authorized 210,000,000; shares issued and outstanding 30,535,249 and 30,533,793 as of March 31, 2020 and December 31, 2019, respectively)  33   33 
Common stock in treasury, at cost (2,500,000 shares as of both March 31, 2020 and December 31, 2019)  (24,550)  (24,550)
Additional paid-in capital  229,207   233,106 
Accumulated deficit  (121,933)  (76,501)
TOTAL GWG HOLDINGS STOCKHOLDERS’ EQUITY  269,415   333,979 
Noncontrolling interests  331,711   266,848 
TOTAL STOCKHOLDERS’ EQUITY  601,126   600,827 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY $3,684,229  $3,635,206 

March 31, 2021 (Unaudited)December 31, 2020
ASSETS
Cash and cash equivalents$85,077 $85,249 
Restricted cash29,075 38,911 
Investment in life insurance policies, at fair value791,499 791,911 
Life insurance policy benefits receivable, net18,238 14,334 
Investment in alternative assets, at fair value219,429 221,894 
Equity method investments6,318 8,582 
Other assets28,386 36,326 
Goodwill2,367,750 2,367,750 
TOTAL ASSETS$3,545,772 $3,564,957 
LIABILITIES & STOCKHOLDERS’ EQUITY
LIABILITIES
Senior credit facility with LNV Corporation$165,455 $193,730 
L Bonds1,345,091 1,246,902 
Seller Trust L Bonds272,104 272,104 
Debt due to related parties76,955 76,260 
Interest and dividends payable23,548 24,080 
Accounts payable and accrued expenses19,190 26,505 
Deferred tax liability, net51,272 51,469 
TOTAL LIABILITIES1,953,615 1,891,050 
Redeemable noncontrolling interests1,230,755 1,233,093 
STOCKHOLDERS’ EQUITY
Redeemable preferred stock
(par value $0.001; shares authorized 100,000; shares outstanding 53,943 and 56,855; liquidation preference of $54,258 and $57,187 as of March 31, 2021 and December 31, 2020, respectively)43,330 46,241 
Series 2 redeemable preferred stock
(par value $0.001; shares authorized 150,000; shares outstanding 117,438 and 129,887; liquidation preference of $118,124 and $130,645 as of March 31, 2021 and December 31, 2020, respectively)98,142 110,592 
Common stock
(par value $0.001; shares authorized 210,000,000; shares issued and outstanding, 33,094,664 as of both March 31, 2021 and December 31, 2020, respectively)33 33 
Common stock in treasury, at cost (12,337,264 shares as of both March 31, 2021 and December 31, 2020)(67,406)(67,406)
Additional paid-in capital270,901 274,023 
Accumulated deficit(302,351)(251,111)
TOTAL GWG HOLDINGS STOCKHOLDERS’ (DEFICIT) EQUITY42,649 112,372 
Noncontrolling interests318,753 328,442 
TOTAL STOCKHOLDERS’ EQUITY361,402 440,814 
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY$3,545,772 $3,564,957 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 1

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

  Three Months Ended
March 31,		 
  2020  2019 
REVENUE      
Gain on life insurance policies, net $14,445  $21,496 
Interest and other income  19,112   3,721 
TOTAL REVENUE  33,557   25,217 
         
EXPENSES        
Interest expense  35,871   26,975 
Employee compensation and benefits  77,704   5,154 
Legal and professional fees  6,163   2,947 
Provision for loan losses  700   — 
Other expenses  3,612   2,828 
TOTAL EXPENSES  124,050   37,904 
         
LOSS BEFORE INCOME TAXES  (90,493)  (12,687)
INCOME TAX BENEFIT  (14,507)  — 
         
NET LOSS BEFORE LOSS FROM EQUITY METHOD INVESTMENT  (75,986)  (12,687)
         
Loss from equity method investment  (1,530)  (1,927)
         
NET LOSS  (77,516)  (14,614)
         
Net loss attributable to noncontrolling interests  32,084   — 
         
Less: Preferred stock dividends  3,952   4,296 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(49,384) $(18,910)
NET LOSS PER COMMON SHARE        
Basic $(1.62) $(0.57)
Diluted $(1.62) $(0.57)
         
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING        
Basic  30,534,977   32,984,741 
Diluted  30,534,977   32,984,741 

Three Months Ended
March 31,
20212020
REVENUE
Gain on life insurance policies, net$6,912 $14,445 
Investment income, net2,090 7,556 
Interest income317 715 
Other (loss) income(1,560)96 
TOTAL REVENUE7,759 22,812 
EXPENSES
Interest expense41,382 35,871 
Employee compensation and benefits15,024 77,704 
Legal and professional fees8,128 6,163 
Other expenses7,003 3,612 
TOTAL EXPENSES71,537 123,350 
LOSS BEFORE INCOME TAXES(63,778)(100,538)
INCOME TAX BENEFIT(286)(16,145)
NET LOSS BEFORE LOSS FROM EQUITY METHOD INVESTMENT(63,492)(84,393)
Loss from equity method investment(3,514)(1,530)
NET LOSS(67,006)(85,923)
Net loss attributable to noncontrolling interests15,766 42,552 
Less: Preferred stock dividends3,192 3,952 
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS$(54,432)$(47,323)
NET LOSS PER COMMON SHARE
Basic$(2.62)$(1.55)
Diluted$(2.62)$(1.55)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic20,757,400 30,534,977 
Diluted20,757,400 30,534,977 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 2

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except per share data)

thousands)

(unaudited)

  Three Months Ended
March 31,		 
  2020  2019 
CASH FLOWS FROM OPERATING ACTIVITIES        
Net loss $(77,516) $(14,614)
Adjustments to reconcile net loss to net cash flows from operating activities:        
Change in fair value of life insurance policies  (12,177)  (15,571)
Amortization of deferred financing and issuance costs  4,211   3,100 
Amortization of upfront fees  (1,793)  — 
Amortization of debt premiums  (473)  — 
Amortization and depreciation on long-lived assets  172   — 
Accretion of discount on financing receivable from affiliate  —   (419)
Non-cash interest income  (13,374)  — 
Non-cash interest expense  676   — 
Loss from equity method investment  1,530   1,927 
Provision for loan losses  700   — 
Deferred income tax  (17,717)  — 
Equity-based compensation  69,448   834 
(Increase) decrease in operating assets:        
Life insurance policy benefits receivable  7,701   7,261 
Fees receivable  (1,285)  — 
Accrued interest on financing receivable  —   (1,551)
Other assets  368   (3,942)
Decrease in operating liabilities:        
Accounts payable and other accrued expenses  (1,103)  (3,328)
NET CASH FLOWS USED IN OPERATING ACTIVITIES  (40,632)  (26,303)
         
CASH FLOWS FROM INVESTING ACTIVITIES        
Investment in life insurance policies  —   (27,392)
Carrying value of matured life insurance policies  6,035   8,701 
Purchases of fixed assets  (481)  — 
Equity method investments  (5,417)  — 
Net change in loans receivable  10,614   — 
NET CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES  10,751   (18,691)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Borrowings on senior debt  14,074   — 
Repayments of senior debt  —   (2,373)
Proceeds from issuance of L Bonds  109,053   125,985 
Payments for issuance and redemption of L Bonds  (30,532)  (23,974)
Issuance (repurchase) of common stock  18   (269)
Payments for redemption of preferred stock  (15,233)  (819)
Preferred stock dividends  (3,952)  (4,296)
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES  73,428   94,254 
         
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  43,547   49,260 
         
CASH, CASH EQUIVALENTS AND RESTRICTED CASH        
BEGINNING OF PERIOD  99,331   125,436 
END OF PERIOD $142,878  $174,696 

Three Months Ended
March 31,
20212020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss$(67,006)$(85,923)
Adjustments to reconcile net loss to net cash flows used in operating activities:
Change in fair value of life insurance policies(8,162)(12,177)
Investment income(2,090)(7,556)
Amortization of deferred financing and issuance costs6,142 3,738 
Amortization and depreciation on long-lived assets542 172 
Return on investments in alternative assets551 374 
Non-cash interest income(67)(79)
Non-cash interest expense531 676 
Loss from equity method investment3,514 1,530 
Loss on change in fair value of put options2,180 — 
Deferred income tax(470)(19,355)
Write-off of other equity investment2,037 — 
Equity-based compensation5,352 69,448 
Change in operating assets and liabilities
Life insurance policy benefits receivable(3,904)7,701 
Other assets4,358 356 
Accounts payable and other accrued expenses(9,306)(1,088)
NET CASH FLOWS USED IN OPERATING ACTIVITIES(65,798)(42,183)
CASH FLOWS FROM INVESTING ACTIVITIES
Return of investment for matured life insurance policies8,574 6,035 
Purchases of fixed assets(720)(481)
Equity method investments(1,250)(5,417)
Investments in alternative assets(4,457)(78)
Return of investments in alternative assets9,481 4,173 
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES11,628 4,232 
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on senior debt— 14,074 
Repayments of senior debt(28,605)— 
Payments for deferred financing costs for debt due to related parties(100)— 
Proceeds from issuance of L Bonds134,941 109,053 
Payments for issuance costs of L Bonds(7,690)(7,877)
Payments for redemption of L Bonds(34,418)(22,655)
Issuance of common stock— 18 
Payments for redemption of preferred stock(15,361)(15,233)
Payment for equity issuance costs(185)— 
Preferred stock dividends(3,192)(3,952)
Payment of employee taxes on equity based awards(1,228)— 
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES44,162 73,428 
NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH(10,008)35,477 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
BEGINNING OF PERIOD124,160 115,790 
END OF PERIOD$114,152 $151,267 
Page 3
GWG HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
20212020
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid$34,998 $32,532 
Premiums paid, including prepaid14,923 16,825 
NON-CASH INVESTING AND FINANCING ACTIVITIES
L Bonds: Conversion of accrued interest and commissions payable to principal$357 $660 
Liquidity Bonds, net of financing costs (see Note 9)246 — 
Debt due to related parties: Capitalization of deferred financing costs to principal1,014— 
Noncash issuance of noncontrolling interest (Note 10)374 — 
Distribution payable to noncontrolling interest (Note 10)621 136 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Page 3

4

GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED

CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(unaudited)

  Three Months Ended
March 31,		 
  2020  2019 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION      
Interest paid $32,532  $23,604 
Premiums paid, including prepaid $16,825  $19,113 
         
NON-CASH INVESTING AND FINANCING ACTIVITIES        
L Bonds:        
Conversion of accrued interest and commissions payable to principal $660  $634 
Investment in life insurance policies included in accounts payable $—  $2,914 
Business combination measurement period adjustment:        
Reduction in loans receivable (see Note 4) $14,590  $— 


For the three months ended March 31, 2021:
Redeemable Preferred Stock SharesRedeemable Preferred StockCommon SharesCommon Stock (par)Additional Paid-in CapitalAccumulated DeficitTreasury StockTotal GWG Holdings Stockholders’ EquityNoncontrolling InterestsTotal Stockholders’ EquityRedeemable noncontrolling interests
Balance, December 31, 2020 (audited)186,742 $156,833 20,757,400 $33 $274,023 $(251,111)$(67,406)$112,372 $328,442 $440,814 $1,233,093 
Net loss— — — — — (51,240)— (51,240)(13,428)(64,668)(2,338)
Redemption of redeemable preferred stock(15,361)(15,361)— — — — — (15,361)— (15,361)— 
Preferred stock dividends— — — — (3,192)— — (3,192)— (3,192)— 
Tax withholding on employee equity awards— — — — — — — — (1,228)(1,228)— 
Equity-based compensation— — — — 70 — — 70 5,214 5,284 — 
Distributions payable to noncontrolling interest— — — — — — — — (621)(621)— 
Noncash issuance of noncontrolling interest— — — — — — — — 374 374 — 
Balance, March 31, 2021 (unaudited)171,381 $141,472 20,757,400 $33 $270,901 $(302,351)$(67,406)$42,649 $318,753 $361,402 $1,230,755 


For the three months ended March 31, 2020:
Redeemable Preferred Stock SharesRedeemable Preferred StockCommon SharesCommon Stock (par)Additional Paid-in CapitalAccumulated DeficitTreasury StockTotal GWG Holdings Stockholders’ EquityNoncontrolling InterestsTotal Stockholders’ EquityRedeemable noncontrolling interests
Balance, December 31, 2019 (audited)231,800 $201,891 30,533,793 $33 $233,106 $(97,196)$(24,550)$313,284 $293,910 $607,194 $1,269,654 
Net loss— — — — — (43,371)— (43,371)(14,539)(57,910)(28,013)
Issuance of common stock— — 1,456 — 18 — — 18 — 18 — 
Redemption of redeemable preferred stock(15,233)(15,233)— — — — — (15,233)— (15,233)— 
Preferred stock dividends— — — — (3,952)— — (3,952)— (3,952)— 
Equity-based compensation— — — — 35 — — 35 68,934 68,969 — 
Distributions payable to noncontrolling interest— — — — — — — — (136)(136)— 
Balance, March 31, 2020 (unaudited)216,567 $186,658 30,535,249 $33 $229,207 $(140,567)$(24,550)$250,781 $348,169 $598,950 $1,241,641 



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

Page 4

5

Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(unaudited)

  Preferred
Stock
Shares		  Preferred
Stock		  Common
Shares		  Common
Stock
(par)		  Additional
Paid-in
Capital		  Accumulated
Deficit		  Total Stockholders’
Equity		 
Balance, December 31, 2018 (audited)  245,883  $215,973   33,018,161  $33  $249,662  $(184,610) $281,058 
                             
Net loss  —   —   —   —   —   (14,614)  (14,614)
                             
Issuance of common stock  —   —   17,135   —   93   —   93 
                             
Repurchase of common stock  —   —   (42,690)  —   (361)  —   (361)
                             
Redemption of redeemable preferred stock  (819)  (819)  —   —   —   —   (819)
                             
Preferred stock dividends  —   —   —   —   (4,296)  —   (4,296)
                             
Equity-based compensation  —   —   —   —   198   —   198 
                             
Balance, March 31, 2019  245,064  $215,154   32,992,606  $33  $245,296  $(199,224) $261,259 

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

Page 5

  Preferred
Stock
Shares		  Preferred
Stock		  Common
Shares		  Common
Stock
(par)		  Additional
Paid-in
Capital		  Accumulated
Deficit		  

Treasury

Stock

  

Total GWG Holdings

Stockholders’

Equity

  

Noncontrolling

Interests

  Total Stockholders’
Equity		  Redeemable noncontrolling interests 
Balance, December 31, 2019 (audited)  231,800  $201,891   30,533,793  $33  $233,106  $(76,501) $(24,550) $333,979  $266,848  $600,827  $1,269,654 
                                             
Net loss  —   —   —   —   —   (45,432)  —   (45,432)  (4,071)  (49,503)  (28,013)
                                             
Issuance of common stock  —   —   1,456   —   18   —   —   18   —   18   — 
                                             
Redemption of redeemable preferred stock  (15,233)  (15,233)  —   —   —   —   —   (15,233)  —   (15,233)  — 
                                             
Preferred stock dividends  —   —   —   —   (3,952)  —   —   (3,952)  —   (3,952)  — 
                                             
Equity-based compensation  —   —   —   —   35   —   —   35   68,934   68,969   — 
                                             
Balance, March 31, 2020  216,567  $186,658   30,535,249  $33  $229,207  $(121,933) $(24,550) $269,415  $331,711  $601,126  $1,241,641 

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

Page 6

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


(1) Nature of Business

Organizational Structure

GWG Holdings, Inc. (“GWG Holdings”) conducts its life insurance secondary market business through a wholly-owned subsidiary, GWG Life, LLC (“GWG Life”), and GWG Life’s wholly-owned subsidiaries, GWG Life Trust, and GWG DLP Funding IV, LLC (“DLP IV”).

, GWG Holdings’DLP Funding V Holdings, LLC (“DLP V Holdings”), and GWG DLP Funding Holdings VI, LLC (“DLP VI Holdings”). DLP V Holdings is the sole member of GWG DLP Funding V, LLC (“DLP V”). DLP VI Holdings is the sole member of GWG DLP Funding VI, LLC (“DLP VI”).


In addition, GWG Holdings has exposure to indirect interests in loans collateralized by cash flows from other alternative assetsassets. Such loans are made and held by certain of the operating subsidiaries of The Beneficient Company Group, L.P. (“Ben LP,” including all of the subsidiaries it may have from time to time — “Beneficient”). These loans are made to certain of the ExAlt Trusts (as defined below), which are consolidated subsidiaries of Ben LP and itsthus, such loans are eliminated in consolidation for financial reporting purposes. The ExAlt Trusts are comprised of the Custody Trusts, Collective Trusts, LiquidTrusts and Funding Trusts (collectively, the “ExAlt Trusts”). Ben LP’s general partner is Beneficient Management, L.L.C. (“Beneficient Management”). Prior to December 31, 2019, GWG Holdings’ investment in Beneficient was accounted for as an equity method investment. On December 31, 2019, as more fully described below, Beneficient became a consolidated subsidiary of GWG Holdings.

As also further described in Note 17, on August 13, 2021, GWG Holdings and Ben LP, and Beneficient Company Holdings, L.P. (“BCH”) entered into a non-binding term sheet (the “Term Sheet”) that outlines a series of transactions that, if completed, will result in, among other things, (i) GWG Holdings receiving certain proposed enhancements to its investments in Beneficient; (ii) GWG Holdings no longer having the right to appoint directors of the Board of Directors of Beneficient Management; and (iii) Beneficient no longer being a consolidated subsidiary of GWG Holdings. The Term Sheet is part of ongoing efforts by management and the Board of Directors of GWG Holdings to maximize the value of GWG Holdings’ and GWG Life’s investment in Beneficient.

Ben LP is the general partner to Beneficient Company Holdings, L.P. (“BCH”)of BCH and owns 100% of the Class A Subclass A-1 and A-2 Units of BCH. BCH is the holding company that directly or indirectly receives all active and passive income of Beneficient and allocates that income among the unitspartnership interests issued by BCH. As of March 31, 2020,2021, BCH has issued general partnership Class A Units (Subclass A-1 and A-2), Class S Ordinary Units, Class S Preferred Units, FLP Units (Subclass 1 and Subclass 2), Preferred Series A Subclass 1 Unit Accounts, and Preferred Series A Subclass 2 Units.C Unit Accounts. On July 15, 2020, BCH issuedamended its limited partnership agreement by executing that certain 5th Amended and Restated Limited Partnership Agreement (“LPA”) of BCH to Ben LPallow for the issuance of Preferred Series A Subclass 2 Units as part0 Unit Accounts (“Preferred A.0”), which are expected to be issued once certain conditions are met (as discussed in more detail below). Effective March 31, 2021, BCH amended its limited partnership agreement by executing that certain 6th Amended and Restated LPA of BCH to allow for the transaction with GWG Holdings discussed below.issuance of Preferred Series AC Subclass 2 Units hold the same rights and privileges as the 0 Unit Accounts (“Preferred Series A Subclass 1 Unit Accounts.

C.0”), which are wholly owned by GWG Holdings.

GWG Holdings also has a controlling financial interest in FOXO BioScience LLCTechnologies Inc. (“FOXO”, formerly InsurTech Holdings,FOXO BioScience LLC), which through its wholly-owned subsidiaries FOXO Labs Inc. (“FOXO Labs”, formerly, Life Epigenetics Inc. (“Life Epigenetics”) and FOXO Life LLC (“FOXO Life”, formerly, youSurance General Agency, LLC (“youSurance”)LLC), seeks to commercialize epigenetic technology for the longevity industry and offer life insurance directly to customers utilizing epigenetic technology.

Although we have a financial interest in FOXO, we do not have a controlling financial interest because another party is the majority shareholder of the voting class of securities. Therefore, we account for GWG Holdings’ ownership interest in FOXO as an equity method investment.

All of the aforementioned legal entities are legally organized in the state of Delaware, other than GWG Life Trust, which is governed bywas formed under the laws of the state of Utah.Utah, and certain of the ExAlt Trusts, which were formed under the laws of the state of Texas. Unless the context otherwise requires or we specifically so indicate, all references in this report to “we,” “us,” “our,” “our Company,” “GWG,” or the “Company” refer to these entities collectively.GWG Holdings together, in each case, with its subsidiaries. Our headquarters are located inat 325 N. St. Paul Street, Suite 2650, Dallas, Texas. 

Texas 75201.

Nature of Business

GWG Holdings, through its wholly-owned subsidiary GWG Life, purchased life insurance policies in the secondary market and has built a large, actuarially diverse portfolio of life insurance policies backed by highly rated life insurance companies. These policies were purchased between April 2006 and November 2019 and were funded primarily through sales of L Bonds, as discussed in Note 10.9. Beginning in 2018, GWG Holdings madeconsummated a series of transactions with Beneficient as part of a
Page 6
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

strategic decision to reorient its business and increase capital allocated toward providing liquidity products to a broader range of alternative assets through investments in Beneficient. GWG Holdings completed the transactions with Beneficient to provide the Company with a significant increase in assets and common stockholders’ equity as well as the opportunity for a diversified source of future earnings from our exposure to the alternative asset industry. We believe that theGWG Holdings’ and GWG Life’s investments in Beneficient and the other strategies we are pursuing, including continuing to pursue opportunities in the life insurance industry, will transform GWG Holdings from a niche provider of liquidity to owners of life insurance policies to a full-scalediversified provider of trust and liquidityfinancial products and trust services with exposure to a broad range of alternative assets.

As a result of such strategic decision, GWG Holdings’ business today is focused on raising capital from securities offerings and using the proceeds from such offerings to grow GWG Holdings’ alternative asset exposure through investments in Beneficient in the form of equity investments and/or loans to Beneficient or related entities. GWG Holdings believes funding

We believe that Beneficient’s operations will generally produce higher risk-adjustedrisk adjusted returns than those we can generally achieve from life insurance policies acquired in the secondary market.

market; however, returns on equity in life settlements, especially with the current availability of financings on favorable terms, appear to be an attractive option to diversify our exposure to alternative assets, and we have begun exploring the feasibility of acquiring such policies. Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified alternative asset portfolio, we do not anticipate purchasing additional life insurance policies in the secondary market, and we will continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing, recapitalization, partnership, reinsurance guarantees, life insurance operations or recapitalizationother transactions involving our life insurance portfolio, as well as pursuing other alternatives to increase our exposure to alternative assets. These operations are in addition to allocating capital to provide liquidity to holders of the portfolio.

a broader range of alternative assets, which we currently provide through GWG Holdings’ and GWG Life’s investments in Beneficient.

Beneficient is a financial services firmcompany based in Dallas, Texas that providesmarkets an array of liquidity solutions for mid-to-highand trust administration products to alternative asset investors primarily comprised of mid-to-high-net-worth individuals having a net worth between $5 million and $30 million (“MHNW”) individuals and small-to-mid-small-to-midsize institutional investors and family offices with less than $1 billion in investable assets (“STM”STMIs”). One of Beneficient’s founders, Brad K. Heppner (“Ben Founder”), serves as Chairman and Chief Executive Officer of Beneficient and previously served from April 26, 2019 to June 14, 2021 as Chairman of GWG Holdings. Ben LP plans to offer its products and services through its five operating subsidiaries, which include (i) Ben Liquidity, (ii) Ben Custody Admin, (iii) Ben Insurance, (iv) Ben Markets and (v) Beneficient USA (each operating subsidiary is further defined below). Ben Liquidity plans to operate a trust company that is a Kansas Technology Enabled Fiduciary Financial Institutions (“TEFFI”) sized institutions,authorized to serve as an alternative asset custodian, trustee and lender with statutory powers granted for each of these activities and permitting Ben Liquidity to provide fiduciary financing for certain of its customer liquidity transactions. Ben Custody Admin plans to operate a Texas trust company that is being organized to provide its customers with certain administrative, custodial and trustee products and specialized services focused on alternative asset investors. Ben Insurance has been chartered as a Bermuda based insurance company that plans to offer certain customized insurance products and services covering risks relating to owning, managing and transferring alternative assets. Ben Markets is in the regulatory process for acquiring a captive registered broker-dealer that would conduct certain of its activities attendant to offering a suite of products and services from the Beneficient family of companies. Certain of Ben LP’s operating subsidiary products and services involve or are offered to certain of the ExAlt Trusts (defined below), which previously had few optionsare consolidated subsidiaries of Ben LP for financial reporting purposes (such trusts are and may individually be referred to obtain earlyas Custody Trusts, Collective Trusts, LiquidTrusts, and Funding Trusts). Beneficient USA employs a substantial majority of the executives and staff for Beneficient’s operating subsidiaries to which Beneficient USA provides administrative and technical services.
Beneficient’s primary operations, which commenced on September 1, 2017, consist of offering its liquidity and trust administration services to its customers, primarily through certain of Ben LP’s operating subsidiaries, Ben Liquidity, L.L.C and its subsidiaries (collectively, “Ben Liquidity”) and Ben Custody Admin, L.L.C. and its subsidiaries (collectively, “Ben Custody Admin”), respectively. Ben Liquidity offers simple, rapid and cost-effective liquidity products to its customers through the use of customized trust vehicles, (such trusts, the ExAlt Trusts), that facilitate the exchange of a customer’s alternative assets for consideration using a unique financing structure (such structure and process, the “ExAlt PlanTM”). The ExAlt trademark was developed by Beneficient as a brand of liquidity and trust administration services designed for alternative asset investors, specifically MHNW and STMIs to “Ex”it “Alt”ernatives. A subsidiary of Ben Liquidity makes loans (each, an “ExAlt Loan”) to certain of the ExAlt Trusts, which employ the loan proceeds to acquire agreed upon consideration, upon which certain of the ExAlt Trusts deliver to customers in exchange for their alternative assets holdings. On September 25, 2018, Beneficient’s capital companies applied for trust chartersassets. Ben Liquidity generates interest and fee income earned in connection with the ExAlt Loans, which are collateralized by a portion of the cash flows from the Texas Departmentexchanged alternative assets (the “Collateral”). Ben Custody Admin currently provides trust administration services to the trustees of Bankingcertain of the ExAlt Trusts that own the exchanged alternative asset following liquidity transactions for fees payable quarterly. The Collateral supports the repayment of the ExAlt Loans plus any related interest and fees and trust administration service fees. Under the applicable trust and other agreements, certain charities are the ultimate beneficiaries of the ExAlt Trusts (the “Non-Controlling Interest Holders”). As ultimate beneficiaries of prior transactions, for every $0.95 paid to merge into to-be organized limited trust associations. Beneficient submitted revised charter applicationsthe lender (e.g.,
Page 7
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

subsidiaries of Ben LP) on March 6, 2020. Asthe ExAlt Loans, $0.05 is also paid to certain of May 15,the Non-Controlling Interest Holders. For periods following 2020, future Non-Controlling Interest Holders are structured to be paid $0.025 for every $0.975 paid to the trust charters had not been issuedfiduciary financial lender (e.g., subsidiaries of Ben LP) of the ExAlt Loans. Since Ben LP consolidates the ExAlt Trusts, Ben LP’s operating subsidiary’s ExAlt Loans and related interest and fee income are eliminated in the presentation of our condensed consolidated financial statements but are recognized for purposes of the allocation of income (loss) to Beneficient. As such, Beneficient has closed a limited number of transactionsBeneficient’s equity holders.
Prior to date, but intends to significantly expand its operations if and when the trust charters are issued.

Beneficient was formed in 2003 but began its current operations in September 2017. Beneficient operatesJanuary 1, 2021, Ben LP operated primarily through certain of its subsidiaries, which provide Beneficient’s products and services. These subsidiaries include:that included (i) Beneficient Capital Company, L.L.C. (“BCC”), through which Beneficient offers loans andoffered liquidity products; (ii) Beneficient AdministrativeAdministration and Clearing Company, L.L.C. (“BACC”), which provided services for private fund and trust administration; and (iii) other entities, including the ExAlt Trusts.

On December 31, 2020, a series of restructuring transactions occurred to better position certain of Ben LP’s subsidiaries for ongoing operations and future products and services, to capitalize PEN Indemnity Insurance Company, Ltd. (“Pen”) and to meet certain requirements of the Texas Department of Banking. These transactions had no impact on the consolidated financial statements. In connection with these transactions, BCC transferred all of its assets, which included, among other assets, its ExAlt Loans receivable, and liabilities, which included, among other liabilities, loans payable with respect to secured loans with HCLP Nominees, L.L.C., held as of December 31, 2020, to BCH. In order to capitalize Pen and enable it to offer insurance products and services to cover risks attendant to owning and managing alternative assets following approval from the Bermuda Monetary Authority (the “BMA”), BCH contributed to Pen certain of such ExAlt Loans receivable with an aggregate carrying value equal to $129.2 million. Likewise, BACC transferred all of its assets, which included its rights to perform fund trust administration services under certain trust and other agreements, and liabilities to BCH, which will perform such services until a Texas trust company charter is issued or the Kansas TEFFI trust company becomes operational.
Subsequent to December 31, 2020, Ben LP operates primarily through its business line operating subsidiaries, which Beneficientprovide, or will provide, Beneficient’s existing and planned products and services. These subsidiaries include (i) Ben Liquidity, which offers liquidity products; (ii) Ben Custody Admin, which provides services for fund and trust administrationadministration; (iii) Ben Insurance L.L.C., including its subsidiaries (collectively, “Ben Insurance”), which intends to offer insurance products and plansservices covering risks attendant to owning, managing, and transferring alternative assets; (iv) Ben Markets, L.L.C., including its subsidiaries (collectively, “Ben Markets”), which intends to provide custodybroker-dealer services in connection with offering Beneficient’s liquidity products and services; (iii) Pen Indemnity Insurance Company, LTD (“Pen”),and (vi) other entities, including the ExAlt Trusts, which operate for the benefit of the Non-Controlling Interest Holders. Beneficient’s financial products and services are presently offered through whichBen Liquidity and Ben Custody Admin, and Beneficient plans to offer insurance services;expand its capabilities under Ben Custody Admin and (iv)provide products and services through Ben Insurance and Ben Markets Management Holdings, L.P., formerly called ACE Portal, L.L.C. (“Ben Markets”), through which Beneficient plansin the future.
Beneficient’s existing and planned products and services are designed to provide liquidity and trust solutions, support the tax and estate planning objectives of its MHNW customers, facilitate asset diversification or provide administrative management and reporting solutions tailored to the goals of investors of alternative investments.
Beneficient’s Regulatory Developments
In April 2021, the Kansas Legislature adopted, and the governor of Kansas signed into law, a bill that would allow for the chartering and creation of Kansas trust companies, known as TEFFIs, that provide fiduciary financing (e.g., lending to ExAlt Trusts), custodian and trustee services in all capacities pursuant to statutory fiduciary powers, to investors and other participants in the alternative assets market, as well as the establishment of alternative asset trusts. The legislation became effective on July 1, 2021, and designates an online portaloperating subsidiary of Ben LP, Beneficient Fiduciary Financial (“BFF”), as the pilot trust company under the TEFFI legislation. A conditional trust charter was issued by the Kansas Bank Commissioner to Beneficient on July 1, 2021 as discussed further in Note 17. Under the pilot program, Beneficient will not be authorized to exercise its fiduciary powers as a TEFFI until the earlier of the date the Kansas Bank Commissioner promulgates applicable rules and regulations or December 31, 2021. The bill also permits the Kansas Bank Commissioner to request a six-month extension of the pilot program period, which could delay Beneficient’s permission to exercise its fiduciary powers under the charter until July 1, 2022. In order to devote their time to serving as directors of the Beneficient TEFFI trust company, the directors of GWG Holdings who serve on the new TEFFI trust company Board of Directors resigned their membership, effective June 14, 2021, on GWG Holdings’ Board of Directors, which the Company believes is the highest and best use of their available time and skills and will support the development of the Beneficient TEFFI trust company and the successful execution of Beneficient’s business plan.
Additionally, Beneficient’s charter application for direct accesscustodian and trustee services remains in process at the Texas Department of Banking. If the charter is issued, the trust company would serve as custodian and trustee to Beneficient’s financial services and products.

one or more ExAlt Trusts. Similar or

Page 7

8
Table Of Contents

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


the same services may also be provided by Beneficient’s primary operations pertainKansas trust company TEFFI. Also, a subsidiary of Ben Insurance, Pen has applied for regulatory approval from the BMA to write fiduciary liability policies for managers and investors in alternative asset funds to cover losses from contractual indemnification and exculpation provisions arising under the governing documents of such funds. Further, on March 26, 2021, a Ben LP subsidiary, Beneficient Capital Markets, L.L.C (“Beneficient Capital Markets”) filed a Form BD with the Securities and Exchange Commission (“SEC”) to commence its liquidity products wherebyapplication for broker-dealer registration. Upon registration and admittance as a Financial Industry Regulatory Authority (“FINRA”) member, Beneficient extends loans collateralized by cash flows from illiquid alternative assets and provides servicesCapital Markets will conduct activities attendant to the trustees who administer the collateral.offering Beneficient’s core business products are its Exchange Trust, LiquidTrust and the InterChange Trust (introduced in 2020). Beneficient’s clients select one of these products and place their alternative assets intoservices.
When the custodyKansas TEFFI trust thatcompany is authorized to exercise its fiduciary powers, Beneficient expects to be able to expand its operations and close an increased number of liquidity transactions. Additionally, once BMA regulatory approval is obtained and Beneficient Capital Markets is admitted as a constituentFINRA member, Beneficient anticipates being able to offer its full suite of a trust structure called the “ExAlt PlanTM” (comprised of theproducts and services.
The Exchange Trusts, LiquidTrusts, Custody Trusts, Collective Trusts, and Funding Trusts). The ExAlt PlanTM then delivers to Beneficient’s clients the consideration required by the specific product selected by Beneficient’s clients. At the same time, Beneficient, extends a loan to the ExAlt PlanTM. The proceeds (cash, securities of Ben LP or its affiliates, or other forms of consideration, as applicable) of that loan to the ExAlt PlanTM are ultimately paid to the client. The cash flows from the client’s alternative asset support the repayment of the loans plus any related interest and fees.

InTransaction

On December 28, 2018 and 2019, GWG Holdings and GWG Life consummated(the “Final Closing Date”), we completed a series of transactions (as more fully described below) with Beneficient that has resulted in a significant reorientationstrategic exchanges of the Company’s business and capital allocation strategy in addition to changes in the Company’s Board of Directors and executive management team.

The Exchange Transaction

On August 10, 2018 (the “Initial Transfer Date”), the first of two closings was completed (the “Initial Transfer”) as contemplated by a Master Exchange Agreement betweenassets among GWG Holdings, GWG Life, Ben LP and certain other parties (thetrusts, each identified as an Exchange Trust formed during 2017 and 2018 (such trusts collectively, the “Seller Trusts”), which governs the strategic exchange of assetsare a related party but are not among Ben LP’s consolidated trusts), pursuant to a Master Exchange Agreement among the parties (the “Exchange Transaction”). On the Initial Transfer Date:

●GWG Holdings issued to the Seller Trusts Seller Trust L Bonds due 2023 (the “Seller Trust L Bonds”) in an aggregate principal amount of $403.2 million, as more fully described below;

●Beneficient purchased 5,000,000 shares of GWG Holdings’ Series B Convertible Preferred Stock, par value $0.001 per share and having a stated value of $10 per share (“Series B”), for cash consideration of $50.0 million, which shares were subsequently transferred to the Seller Trusts;

●in consideration for GWG Holdings and GWG Life entering into the Master Exchange Agreement and consummating the transactions contemplated thereby, Ben LP, as borrower, entered into a commercial loan agreement (the “Commercial Loan Agreement”) with GWG Life, as lender, providing for a loan in a principal amount of $200.0 million (the “Commercial Loan”);

●Ben LP delivered to GWG Life a promissory note (the “Exchangeable Note”) in the principal amount of $162.9 million; and

●the Seller Trusts delivered to GWG Holdings 4,032,349 common units of Ben LP (“Common Units”) at an assumed value of $10 per unit.

On December 28, 2018, the final closingAs a result of the above transaction occurred, andExchange Transaction, a number of securities were exchanged between the parties, including the following actions took place (the “Final Closing” and the date upon whichsecurities as of the Final Closing occurred,Date: the “FinalSeller Trusts acquired GWG Holdings’ L Bonds due 2023 (the “Seller Trust L Bonds”) in the aggregate principal amount of $366.9 million; the Seller Trusts acquired 27,013,516 shares of GWG Holdings’ common stock; GWG Holdings acquired 40,505,279 common units of Ben LP (the “Common Units”); and GWG Holdings acquired the right to obtain additional Common Units or other property that would be received by a holder of Preferred Series A Subclass 1 Unit Accounts of BCH pursuant to an option issued by Ben LP (the “Option Agreement”). In addition, in connection with the Exchange Transaction, Ben LP, as borrower, entered into a commercial loan agreement (the “Commercial Loan Agreement”) with GWG Life, as lender, providing for a loan in a principal amount of $192.5 million as of the Final Closing Date”Date (the “Commercial Loan”):

●in accordance with the Master Exchange Agreement, and based on the net asset value of alternative asset financings as of the Final Closing Date, effective as of the Initial Transfer Date, (i) the principal amount of the Commercial Loan was reduced to $182.0 million, (ii) the principal amount of the Exchangeable Note was reduced to $148.2 million, and (iii) the principal amount of the Seller Trust L Bonds was reduced to $366.9 million;

●the Seller Trusts refunded to GWG Holdings $0.8 million in interest paid on the Seller Trust L Bonds related to the Seller Trust L Bonds that were issued as of the Initial Transfer Date but cancelled, effective as of the Initial Transfer Date, on the Final Closing Date;

Page 8

.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

●the accrued interest on the Commercial Loan and the Exchangeable Note was added to the principal amount of the Commercial Loan, as a result of which the principal amount of the Commercial Loan as of the Final Closing Date was $192.5 million;

●the Seller Trusts transferred to GWG Holdings an aggregate of 21,650,087 Common Units and GWG Holdings received 14,822,843 Common Units in exchange for the Exchangeable Note, upon completion of which GWG Holdings owned (including the 4,032,349 Common Units received by GWG Holdings on the Initial Transfer Date) 40,505,279 common units of Ben LP;

●Ben LP issued to GWG Holdings an option (the “Option Agreement”) to acquire the number of Common Units, interests or other property that would be received by a holder of Preferred Series A Subclass 1 Unit Accounts of BCH; and

●GWG Holdings issued to the Seller Trusts 27,013,516 shares of GWG Holdings common stock (including 5,000,000 shares issued upon conversion of the Series B).

Description of the Assets Exchanged

Seller Trust L Bonds

On August 10, 2018, in connection with the Initial Transfer,initial transfer of the Exchange Transaction, GWG Holdings, GWG Life and Bank of Utah, as trustee, entered into a Supplemental Indenture (the “Supplemental“L Bond Supplemental Indenture”) to the Amended and Restated Indenture dated as of October 23, 2017 (the “Amended and Restated Indenture”). GWG Holdings entered into the L Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Seller Trust L Bonds. The maturity date of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.5% per year. Interest is payable monthly in cash.

After

As the second anniversary of the Final Closing Date has passed, the holders of the Seller Trust L Bonds willnow have the right to cause GWG Holdings to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at GWG Holdings’ option, in the form of cash, a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan, and (ii) Common Units, or a combination of cash and such property.

The Seller Trust L Bonds are senior secured obligations of GWG Holdings, ranking junior only to all senior debt of GWG Holdings, pari passu in right of payment and in respect of collateral with all “L Bonds” of GWG Holdings, (see Note 10), and senior in right of payment to all subordinated indebtedness of GWG Holdings. See Note 9 for additional discussion of the outstanding debt of GWG Holdings. Payments under the Seller Trust L Bonds are guaranteed by GWG Life (see Note 18).

Series B Convertible Preferred Stock

The Series B converted into 5,000,000 sharesItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations).

As result of the Collateral Swap (discussed and defined below) on September 30, 2020, $94.8 million of Seller Trusts L Bonds are eliminated upon consolidation.
Page 9
Table Of Contents
GWG Holdings common stock at a conversion price of $10 per share upon the Final Closing.

HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Commercial Loan

The $192.5 million principal amount under the Commercial Loan is due on August 9, 2023; however, it is extendable for two2 five-year terms. Ben LP’s obligations under the Commercial Loan are unsecured.

The principal amount of the Commercial Loan bears interest at 5.0% per year. From and after the Final Closing Date, one-half of the interest, or 2.5% per year, is due and payable monthly in cash, and one-half of the interest, or 2.5% per year, accrues and compounds annually on each anniversary date of the Final Closing Date and becomes due and payable in full in cash on the maturity date.

Page 9

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In accordance with the L Bond Supplemental Indenture governing the issuance of the Seller Trust L Bonds, upon a redemption event or at the maturity date of the Seller Trust L Bonds, GWG Holdings, at its option, may use the outstanding principal amount of the Commercial Loan, and accrued and unpaid interest thereon, as repayment consideration of the Seller Trust L Bonds.

The Commercial Loan and its related interest are eliminated upon consolidation.

Exchangeable Note

At the Final Closing date, the principal amount of the Exchangeable Note was exchanged for 14,822,843 Common Units, and the accrued interest on the Exchangeable Note was added to the principal balance of the Commercial Loan.

Option Agreement

In connection with the Final Closing,Exchange Transaction, GWG Holdings entered into the Option Agreement with Ben LP. The Option Agreement givesgave GWG Holdings the option to acquire the number of Common Units or other property that would be received by the holder of Preferred Series A Subclass 1 Unit Accounts of BCH pursuant to an option issued by Ben LP, if such holder were converting on that date. There iswas no exercise price and the Company mayGWG Holdings could exercise the option at any time until December 27, 2028, at which time the option will automatically settle.settled.
Effective August 11, 2020, as a result of the Exchange Agreement entered into by the parties on December 31, 2019 (discussed below), and the mutual agreement of the parties, the Option Agreement was exercised under the provisions of the Option Agreement. As such, GWG Holdings received $57.5 million of Common Units at a price per unit equal to $12.50 per unit. The carrying valueexercise of the Option Agreement eliminates uponhad no impact on the Company’s condensed consolidated financial statements as it is eliminated in consolidation.

Common Units of Ben LP

In connection with the Initial Transfer and Final Closing,Exchange Transaction, the Seller Trusts and Beneficient delivered to GWG Holdings 40,505,279 Common Units. These units represented an approximate 89.9% interest in the Common Units as of the Final Closing Date (although, on a fully diluted basis, GWG Holdings’ ownership interest in Common Units would be reduced significantly below a majority of those issued and outstanding). These amounts eliminate upon consolidation.

Purchase and Contribution Agreement

On April 15, 2019, Jon R. Sabes, the former Chief Executive Officer and a former director of GWG Holdings, and Steven F. Sabes, the former Executive Vice President and a former director of GWG Holdings, entered into a Purchase and Contribution Agreement (the “Purchase and Contribution Agreement”) with, among others, Ben LP. Under the Purchase and Contribution Agreement, Jon and Steven Sabes agreed to transfer all 3,952,155 of the shares of GWG Holdings’ outstanding common stock held directly or indirectly by them to BCC (a subsidiary of Ben LP) and AltiVerse Capital Markets, L.L.C. (“AltiVerse”). AltiVerse is a limited liability company owned by an entity related to Beneficient’s founders,initial investors (the “Ben Initial Investors”), including Brad K. Heppner (GWG Holdings’ former Chairman, who served in such capacity from April 26, 2019 to June 14, 2021, and Beneficient’s current Chief Executive Officer and Chairman), and an entity related to Thomas O. Hicks (one of Beneficient’s current directors and a former director of GWG Holdings). GWG Holdings was not a party to the Purchase Agreement; however, the closing of the transactions contemplated by the Purchase and Contribution Agreement (the “Purchase and Contribution Transaction”) were subject to certain conditions that were dependent upon GWG Holdings taking, or refraining from taking, certain actions.

The closing of the Purchase and Contribution Transaction occurred on April 26, 2019. Prior to or in

In connection with such closing:

●GWG Holdings’ bylaws were amended to increase the maximum number of directors of GWG Holdings from nine to 13, and the actual number of directors comprising the Board of Director was increased from seven to 11. The size of the Board has since been reduced and currently consists of nine directors.

●All seven members of GWG Holdings’ Board of Directors prior to the closing resigned as directors of GWG, and 11 individuals designated by Beneficient were appointed as directors of GWG Holdings, leaving two board seats vacant after the closing.

closing, BCC and AltiVerse executed and delivered a Consent and Joinder to the Amended and Restated Pledge and Security Agreement dated October 23, 2017 by and among GWG Holdings, GWG Life, Messrs. Jon and Steven Sabes and the Bank of Utah, which provides that the shares of GWG Holdings’ common stock acquired by BCC and

Page 10

Table Of Contents

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

●Jon R. Sabes resigned from all officer positions he held with GWG Holdings or any of its subsidiaries prior to the closing, other than his position as Chief Executive Officer of Life Epigenetics and youSurance.

●Steven F. Sabes resigned from all officer positions he held with GWG Holdings or any of its subsidiaries prior to the closing, except as Chief Operating Officer of Life Epigenetics.

●The resignations of Messrs. Jon and Steven Sabes included a full waiver and forfeit of (i) any severance that may be payable by GWG Holdings or any of its subsidiaries in connection with such resignations or the Purchase and Contribution Transaction, and (ii) all equity awards of GWG Holdings held by either of them.

●Murray T. Holland was appointed as Chief Executive Officer of GWG Holdings.

●GWG Holdings entered into performance share unit agreements with certain of its employees pursuant to which such employees will collectively receive up to $4.5 million in cash compensation under certain terms and conditions, including, among others, that such employees remain employed by GWG Holdings or one of its subsidiaries (or, if no longer employed, such employment was terminated by GWG Holdings other than for cause, as such term is defined in the performance share unit agreement) for a period of 120 days following the closing.

●The stockholders agreement that was entered into on the Final Closing Date was terminated by mutual consent of the parties thereto.

●BCC and AltiVerse executed and delivered a Consent and Joinder to the Amended and Restated Pledge and Security Agreement dated October 23, 2017 by and among GWG Holdings, GWG Life, Messrs. Jon and Steven Sabes and the Bank of Utah, which provides that the shares of GWG Holdings’ common stock acquired by BCC and AltiVerse pursuant to the Purchase and Contribution Agreement will continue to be pledged as collateral security for GWG Holdings’ obligations owing in respect of the L Bonds and Seller Trust L Bonds.

Indemnification Agreements


AltiVerse pursuant to the Purchase and Contribution Agreement will continue to be pledged as collateral security for GWG Holdings’ obligations owing in respect of the L Bonds and Seller Trust L Bonds.
Promissory Note - ExAlt Trusts
On April 26,May 31, 2019, GWG HoldingsLife entered into Indemnification Agreementsa Promissory Note (the “Indemnification Agreements”“Promissory Note”), made by Jeffrey S. Hinkle and Dr. John A. Stahl, not in their individual capacity but solely as trustees of certain of The LT-1 LiquidTrust, The LT-2 LiquidTrust, The LT-5 LiquidTrust, The LT-7 LiquidTrust, The LT-8 LiquidTrust, and The LT-9 LiquidTrust, (collectively, the “Borrowers”). Pursuant to the terms of the Promissory Note, GWG Life funded a term loan to the Borrowers in an aggregate principal amount of $65.0 million (the “Loan”). The Loan was made pursuant to GWG’s strategy to further diversify into alternative assets (beyond life insurance) and ancillary businesses and was intended to better position Beneficient’s balance sheet, working capital and liquidity profile to satisfy anticipated Texas Department of Banking regulatory requirements. The Loan bears interest at 7.0% per annum, with eachinterest payable at maturity, and matures on June 30, 2023. As of its executive officersDecember 31, 2019, the Borrowers became consolidated subsidiaries of GWG Holdings as a result of the Investment Agreement (described below). Accordingly, the Promissory Note and related accrued interest, are eliminated upon consolidation as of that date.
On September 30, 2020, GWG Holdings, GWG Life, BCH, Ben LP, BCC, and the directors appointedBorrowers entered into an agreement (the “Promissory Note Repayment”) by which the parties agreed to repay the Promissory Note and any related accrued interest for a $75.0 million Preferred Series C Unit Account (the “Preferred C”) of BCH that Ben LP issued to the BoardBorrowers. The $75.0 million of Directors on such date. On May 13, 2019,Preferred C received by GWG Life was transferred to GWG Holdings entered into Indemnification Agreement withupon execution of the threePromissory Note conversion, which increased GWG Holdings’ ownership percentage in Ben LP. As part of the agreement, if Beneficient has not received a trust company charter as of the one-year anniversary of the Promissory Note conversion, or if no trust company charter filing is still pending or in the process of being refiled, GWG Holdings would receive an additional directors appointed$5.0 million of Preferred C. The carrying value of the Promissory Note on September 30, 2020, immediately prior to the Boardtransaction, net of Directors on such date (collectivelya fair value adjustment and with accrued and unpaid interest thereon, was $65.1 million.

Other than the executive officers and directors appointed on April 26, 2019,required rebalancing of equity driven from the “Indemnitees”). The Indemnification Agreements clarify and supplement indemnification provisions already containedchange in GWG Holdings’ bylaws and generally provide that GWG Holdings shall indemnifyHolding’s ownership percentage, any impacts of the indemnitees to the fullest extent permitted by applicable law, subject to certain exceptions, against expenses, judgments, fines and other amounts actually and reasonably incurred in connection with their service as a director or officer and also provide for rights to advancement of expenses and contribution.

Promissory Note conversion are eliminated upon consolidation.


The Investment and Exchange Agreements

On December 31, 2019, GWG Holdings obtained control over Ben LP BCH, and Beneficient Management entered intopursuant to a Preferred Series A Unit Account and Common Unit Investment Agreement, by and among GWG Holdings, Ben LP, BCH, and Beneficient Management (the “Investment Agreement”).

, which resulted in the consolidation of GWG Holdings and Ben LP for accounting and financial reporting purposes.

Pursuant to the Investment Agreement, GWG Holdings transferred $79.0 million to Ben LP in return for 666,667 Common Units and a Preferred Series A Subclass 1 Unit Account of BCH.

Page 11

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In connection with the Investment Agreement, GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management, the general partner of Ben LP. As a result, GWG Holdings obtained control of Ben LP and began reporting the results of Ben LP and its subsidiaries on a consolidated basis beginning on the transaction date of December 31, 2019. See Note 4 forFor more details on the accounting for the consolidation.consolidation, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on November 5, 2021 (“2020 Form 10-K”). GWG Holdings’ right to appoint a majority of the board of directors of Beneficient Management will terminate in the event (i) GWG Holdings’ ownership of the fully diluted equity of Ben LP (excluding equity issued upon the conversion or exchange of Preferred Series A Unit Accounts of BCH held as of December 31, 2019 by parties other than GWG Holdings) is less than 25%, (ii) the Continuing Directors of GWG Holdings cease to constitute a majority of the board of directors of GWG Holdings, or (iii) certain bankruptcy events occur with respect to GWG Holdings. The term “Continuing Directors” means, as of any date of determination, any member of the board of directors of GWG Holdings who: (1) was a member of the board of directors of GWG Holdings on December 31, 2019; or (2) was nominated for election or elected to the board of directors of GWG Holdings with the approval of a majority of the Continuing Directors who were members of the board of directors of GWG Holdings at the time of such nomination or election.

Following the transaction, and as agreed upon in the Investment Agreement, GWG Holdings was issued an initial capital account balance for the Preferred Series A Subclass 1 Unit Account of $319.0 million. The other holders of the Preferred Series
Page 11
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

A Subclass 1 Unit Accounts are principally an entity related to the founders of Ben LPInitial Investors and an entity related to one of theBeneficient’s directors who is also a former director of both GWG Holdings and Beneficient (the “Related Account Holders”), and. The parties to the Investment Agreement agreed that the aggregate capital accounts of all holders of the Preferred Series A Subclass 1 Unit Accounts after giving effect to the investment by GWG Holdings was $1.6 billion. GWG Holdings’ Preferred Series A Subclass 1 Unit Account is the same class of preferred security as held by the Related Account Holders. If the Related Account Holders exchange their Preferred Series A Subclass 1 Unit Accounts for securities of GWG Holdings, the Preferred Series A Subclass 1 Unit Account of GWG Holdings will also convertwould be converted into Common Units (so neither GWG Holdings nor the founders would hold Preferred Series A Subclass 1 Unit Accounts).

Also, on December 31, 2019, in a transaction related to the Investment Agreement, GWG Holdings transferred its interest in the Preferred Series A Subclass 1 Unit Account to its wholly-ownedwholly owned subsidiary, GWG Life.

In addition, on December 31, 2019, GWG Holdings, Ben LP and the holders of Common Units entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which the holders of Common Units from time to time have the right, on a quarterly basis, to exchange their Common Units for common stock of GWG Holdings. The exchange ratio in the Exchange Agreement is based on the ratio of the capital account associated with the Common Units to be exchanged to the market price of GWG HoldingsHoldings’ common stock based on the volume weighted average price of GWG HoldingsHoldings’ common stock for the five consecutive trading days prior to the quarterly exchange date. The Exchange Agreement is intended to facilitate the marketing of Ben LP’s products to holders of alternative assets.

Preferred Series C Unit Purchase Agreement
On July 15, 2020, GWG Holdings entered into a Preferred Series C Unit Purchase Agreement (“UPA”) with Ben LP and BCH. The UPA was reviewed and approved by the then constituted independent Special Committee of the Board of Directors of GWG Holdings.
Pursuant to the UPA, and provided it has adequate liquidity, GWG Holdings has agreed to make capital contributions from time to time to BCH in exchange for Preferred Series C Unit Accounts of BCH during a purchasing period commencing on the date of the UPA and continuing until the earlier of (i) the occurrence of a Change of Control Event (as defined below) and (ii) the mutual agreement of the parties (the “Purchasing Period”). A “Change of Control Event” shall mean (A) the occurrence of an event that results in GWG Holdings’ ownership of the fully diluted equity of Ben LP is less than 25%, the Continuing Directors (as defined below) of GWG Holdings cease to constitute a majority of the board of directors of GWG Holdings, or certain bankruptcy events occur with respect to GWG Holdings, and (B) the listing of Common Units on a national securities exchange (a “Public Listing”). The term “Continuing Directors” means, as of any date of determination, any member of the board of directors of GWG Holdings who: (1) was a member of the board of directors of GWG Holdings on December 31, 2019; or (2) was nominated for election or elected to the board of directors of GWG Holdings with the approval of a majority of the Continuing Directors who were members of the board of directors of GWG Holdings at the time of such nomination or election.
If, on or prior to the end of the Purchasing Period, a Public Listing occurs, the BCH Purchased Units shall be automatically exchanged for Common Units, or another unit of Ben LP, as the parties may mutually agree (the “Beneficient Units”), at the lower of (i) the volume-weighted average of the Beneficient Units for the 20 trading days following the Public Listing, and (ii) $12.75.
In addition, at any time following the Effective Date, all or some of the Preferred Series C Unit Accounts purchased under the UPA may be exchanged for Beneficient Units at the option of GWG Holdings (exercised by a special committee of the Board of Directors or, if such committee is no longer in place, the appropriate governing body of GWG Holdings); provided that, if GWG Holdings exchanges less than all of the Preferred Series C Unit Accounts purchased under the UPA, then, immediately after giving effect to such exchange, GWG Holdings shall be required to continue to hold Preferred Series C Unit Accounts with a capital account that is at least $10.0 million. The exchange price for such Beneficient Units shall be determined by third-party valuation agents selected by GWG Holdings and Beneficient.
Contribution and Exchange Agreement
On September 30, 2020, certain of the ExAlt Trusts (collectively, the “Participating ExAlt Trusts”) at the sole direction of John A. Stahl, independent trustee of each such trust, with the intention of protecting the value of certain assets of the Participating ExAlt Trusts underlying part of the Collateral portfolio, the Participating ExAlt Trusts entered into that certain Contribution and
Page 12
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Exchange Agreement with certain of the Seller Trusts, (collectively, the “Participating Exchange Trusts”), each of which entered into such agreement at the direction of its applicable trust advisor and by and through its applicable corporate trustee (the “Contribution and Exchange Agreement). Under the Contribution and Exchange Agreement, the Participating Exchange Trusts agreed to exchange 9,837,264 shares of GWG Holdings’ common stock valued at $84.6 million, 543,874 shares of Common Units valued at $6.8 million, and GWG Holdings’ L Bonds due 2023 in the aggregate principal amount of $94.8 million to the Participating ExAlt Trusts for $94.3 million in net asset value of the alternative asset investments held by the Participating ExAlt Trusts. This transaction (the “Collateral Swap”) resulted in GWG Holdings, after the effects of eliminations upon consolidation, recognizing an additional $42.9 million of treasury stock, $3.4 million of additional noncontrolling interest, and $46.8 million of a capital contribution from a related party.
The Exchange Transaction, the Purchase and Contribution Transaction, andthe Promissory Note, the Investment and Exchange Agreements, the UPA, and the Collateral Swap, are referred to collectively as the “Beneficient Transactions.”

Going Concern
To meet the Company’s future capital needs, the Company may need to raise additional debt or equity financing. While the Company has historically been able to raise additional capital through issuance of debt and/or equity, the Company cannot guarantee that it will be able to secure additional financing or will otherwise be able to meet is ongoing obligations. These factors, in combination with the potential NASDAQ delisting and our current inability to sell L Bonds as discussed below under the heading “Liquidity and Capital Resources”, our significant recurring losses from operations, negative cash flows from operations, delays in executing our business plans, and any potential negative outcome from the ongoing SEC investigation discussed in Note 15 to these condensed consolidated financial statements, raise substantial doubt about the Company’s ability to continue as a going concern within one year after these financial statements are issued.
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Liquidity and Capital Resources
As of March 31, 2021, we had cash, cash equivalents and restricted cash of $114.2 million. We generated net losses attributable to common shareholders of $54.4 million and $47.3 million for the three months ended March 31, 2021 and 2020, respectively. As of October 15, 2021, we had cash, cash equivalents, and restricted cash of approximately $54.3 million. Besides funding operating expenditures, we are obligated to pay other items such as interest payments and debt maturities, and preferred stock dividends and redemptions.
We have historically financed our businesses primarily through a combination of L Bond sales, preferred stock sales, the LNV Credit Facility, and the NF Credit Facility. We have also financed our business through proceeds from life insurance policy benefit receipts, cash distributions from the ExAlt Trusts’ alternative asset portfolio, dividends and interest on investments, and Beneficient’s debt due to related parties. We have traditionally used proceeds from these sources for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal, interest and dividends. We have also used proceeds to allocate capital to Beneficient; however, if Ben LP becomes an independent company per the Term Sheet discussed above and in Note 17, the Company expects that Ben LP would reduce its reliance on GWG Holdings to fund its operations and would raise future capital from other sources. Ben LP’s capital raising efforts and participation in liquidity transactions may include the issuance of equity or debt of Ben LP or one of its subsidiaries, and the newly issued securities may be dilutive to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH and may include preferential terms relative to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH, as applicable.

We currently fund our business primarily with debt that generally has a shorter duration than the duration of our long-term assets. The resulting asset/liability mismatch can result in a liquidity shortfall if we are unable to renew maturing short term debt or secure suitable additional financing. In such a situation, we could be forced to sell assets at less than optimal (distressed) prices. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities. We heavily rely on GWG Holdings’ L Bond offering to fund our business operations, including, among other things, interest and principal payments on the existing L Bonds and capital allocations to Beneficient. We temporarily suspended the offering of GWG
Page 13
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Holdings’ L Bonds, commencing April 16, 2021, as a result of our delay in filing certain periodic reports with the SEC, including this Quarterly Report on Form 10-Q, and were required to seek alternative sources of capital.

As a result of the suspension of GWG Holdings’ L Bond offering, on June 28, 2021, we pledged additional life insurance policies as collateral and received an additional advance of $51.2 million under the Third Amended Facility. Subsequently, on August 11 2021, we entered into the NF Credit Agreement and received a one-time advance of $107.6 million. Approximately $56.7 million of such advanced amount was used to pay off the remaining amount due, including interest and penalties, under the Third Amended Facility and the additional pledged life insurance policies used as collateral for the Third Amended Facility were released and pledged under the NF Credit Facility. Further, on September 7, 2021, DLP IV entered into the Fourth Amended Facility, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional advance of $30.3 million from LNV Corporation, with no additional pledged collateral. All of the aforementioned transactions that occurred subsequent to March 31, 2021, are described in more detail in Note 17.

Primarily due to the current suspension of GWG Holdings’ L Bond offering, the Company may require additional capital to continue its operations over the next twelve months if our ability to sell L Bonds dissipates, or if we are forced to suspend the L Bond offering. However, the Company may not be able to obtain additional borrowings under existing debt facilities or new borrowings with other third-party lenders. To the extent that GWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of those debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve negative covenants that restrict GWG Holdings’ ability to take specific actions, such as incurring additional debt or making additional investments in growing the operations of the Company. If GWG Holdings is unable to fund its operations and other obligations, or defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding, ii) exercise our right to decline requests for early L Bond redemptions or redemptions of preferred stock, or iii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities.

We anticipate recommencing the offering of GWG Holdings’ L Bonds once we become current with our filing obligations and satisfy applicable NASDAQ listing requirements. Once we become current with our filing obligations with respect to the L Bonds, we may be limited in the origination channels in which we sell our L Bonds in the event that we are unable to meet the applicable NASDAQ listing requirements in a timely manner, which could result in the L Bonds no longer being “covered securities” for federal securities law purposes which would subject the offer and sale of L Bonds to potentially extensive state “blue sky” securities law requirements. If for any reason we are forced to suspend GWG Holdings’ L Bond offering, are limited in our origination channels in which we sell our L Bonds, or demand for GWG Holdings’ L bonds dissipates, our business would be adversely impacted and our ability to service and repay our debt obligations, much of which is short term, would be compromised, thereby negatively affecting our business prospects and viability.

Beneficient is obligated to make debt payments totaling $75.6 million on certain outstanding borrowings through May 30, 2022 under the terms of the Amendment No. 1 to the Second Amended and Restated Credit Agreements as discussed in more detail in Note 9. Primarily due to both the forthcoming debt payments under the Credit Agreement and Second Lien Credit Agreement and the anticipated deconsolidation of Beneficient from GWG Holdings, as discussed above and in Note 17, which is expected to result in reduced reliance by Beneficient on GWG Holdings to fund its operations, Beneficient will require additional liquidity to continue its operations over the next twelve months. We expect Beneficient to satisfy these obligations and fund its operations through anticipated operating cash flows, proceeds from distributions on the alternative assets portfolio, additional investments into Beneficient by GWG Holdings and/or other parties and, potentially refinancing with other third-party lenders some or all of the existing borrowings due prior to their maturity. Beneficient is currently in the process of raising additional equity, which is anticipated to close during the fourth quarter of 2021 and/or the first quarter of 2022.

Beneficient may not be able to refinance or obtain additional financing on terms favorable to the Company, or at all. To the extent that Beneficient raises additional capital through the future sale of equity or debt, the ownership interest of its existing equity holders may be diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of its existing equity unitholders or involve negative covenants that restrict Beneficient’s ability to take specific actions, such as incurring additional debt or making additional investments in growing its operations. If Beneficient defaults on these borrowings, then it will be required to either i) sell assets to repay these loans or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Moreover, if Beneficient were to sell assets to avoid a default of these borrowings, then the price at which Beneficient sold such assets may
Page 14
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

not reflect the carrying value of those assets as reflected in our condensed consolidated financial statements, especially in the event of a bulk or distressed sale.

On November 11, 2019, GWG Holdings contributed the common stock and membership interests of its then wholly-owned FOXO Labs and FOXO Life subsidiaries to FOXO in exchange for a membership interest in the entity. On November 13, 2020, FOXO BioScience LLC converted to a corporation and is now known as FOXO Technologies Inc. With the corporate conversion, GWG Holdings’ previous membership interest in the LLC converted to preferred equity. As of March 31, 2021, GWG Holdings was committed to contribute an additional $2.5 million to FOXO, all of which was contributed by October 2021.
(2) Summary of Significant Accounting Policies

Restatement — The Company restated its previously issued (i) consolidated balance sheet as of December 31, 2019, included in its Annual Report on Form 10-K for the year ended December 31, 2019 and (ii) the consolidated statement of operations, (iii) the consolidated statement of changes in stockholders’ equity, and (iv) the consolidated statement of cash flows for the year ended December 31, 2019, included in its Annual Report on Form 10-K for the year ended December 31, 2019, (the “Restatement”) as part of its 2020 Form 10-K. The Restatement also impacted each of the quarters for the periods beginning with GWG Holdings, Inc.’s consolidation with The Beneficient Company Group, L.P. (“Ben LP,” including all of the subsidiaries it may have from time to time — “Beneficient”) as of December 31, 2019 through the quarter ended September 30, 2020.

The historical interim periods included in this Form 10-Q have been restated to reflect the Restatement.

Basis of Presentation— The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for interim reporting, which allows certain footnotes and other financial information normally required by Generally Accepted Accounting Principles in the United States of America ("GAAP"(“GAAP”) to be condensed or omitted. In our opinion, the condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of the Company’s financial position and results of operations. These statements should be read in conjunction with the condensed consolidated financial statements and notes included in our Annual Report on2020 Form 10-K for the year ended December 31, 2019, filed with the SEC on March 27, 2020 (“2019 Form 10-K”).10-K. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

Significant accounting policies are detailed in Note 2 to the condensed consolidated financial statements included in the Company’s 20192020 Form 10-K. Summarized belowThere are thoseno new or revised significant accounting policies including those that resulted from the consolidationas of Beneficient on DecemberMarch 31, 2019.

Page 12

2021.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Use of Estimates — The preparation of the Company’sour condensed consolidated financial statements in conformity with GAAP requires management to make significant estimates and assumptions affecting the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue during the reporting period. Management regularly evaluates estimates and assumptions, which are based on current facts, historical experience, management’s judgment, and various other factors that we believe to be reasonable under the circumstances. ActualOur actual results may differ materially and adversely from our estimates. Material estimates that are particularly susceptible to change, in the near term, relate to: the determination of the fair values of assets acquired, liabilities assumed and noncontrolling interests under business combinations accounting guidance; the determination of(1) determining the assumptions used in estimating the fair value of our investments in life insurance policies;policies, (2) determining the grant date fair value for equity-based compensation awards;awards, (3) determining our allowance for loan losses;the allocation of income (loss) to Beneficient’s equity holders, and (4) evaluation of potential impairment of goodwill and other intangibles;intangibles.

As it relates to the goodwill intangible asset, in light of Beneficient’s significant recurring losses from operations, negative cash flows from operations, and delays in executing its business plans, management plans to engage a third-party valuation firm to assist in performing a quantitative goodwill impairment test in the valuefourth quarter of 2021. The valuation work related to the goodwill intangible is not complete, and we expect the work to be completed before the filing of our deferred tax assets and liabilities.

Loans Receivable — Loans are recorded at their fair value at the acquisition date, change-of-control date,2021 annual financial statements. While management has implemented strategies to execute its business plans, a failure to execute our business plans or other liquidation event. Credit discounts are includedadverse market changes in the determination of fair value; therefore, an allowance for loan losses is not recorded as of the date of valuation. Purchased loans are evaluated upon acquisition and classified as either purchased credit impaired (“PCI”) or non-purchased credit impaired (“non-PCI”).

PCI loans reflect credit deterioration since origination such that it is probable as of the date of valuation that Beneficient will be unable to collect all contractually required payments. For PCI loans, expected cash flows as of the date of valuationfuture could result in excess of thechanges in management’s forecasts, which could result in a decline in estimated fair value of loans are recordedthe Beneficient reporting unit and would result in an impairment of our goodwill intangible. Key assumptions in our quantitative goodwill impairment test include assumptions regarding Ben LP’s ability to raise substantial amounts of capital as interest income overdisclosed in the life2020 Form 10-K. Beneficient is actively engaged in capital raising efforts that may include the issuance of the loans using a level yield method if the timingequity or debt of Ben LP or one of its subsidiaries and amount of the future cash flows is reasonably estimable. Subsequently, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan loss. Beneficient does not report PCI loans as nonperforming due to the accretionhas received non-binding indications of interest income.

For non-PCI loans, the difference between the fair value and unpaid principal balance (“UPB”)from potential investors. The outcome of the loan as of the date of valuation is amortized or accreted to interest income over the contractual life of the loans using the effective interest method. In the event of prepayment, the remaining unamortized amount is recognized in interest income.

Equity-Based Compensation — The Company measures and recognizes compensation expense for all equity-based payments at fair valueBen LP’s capital raising efforts will have a direct impact on the grant date over the requisite service period. GWG Holdings uses the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights. For restricted stock grants (including restricted stock units), fair value is determined as of the closing price of GWG Holdings’ common stock on the date of grant. As it is not publicly traded, Beneficient uses various methods to determine the grant date fair value of its equity-based compensation awards, as more fully described in Note 12.

Equity-based compensation expense is recorded in employee compensation and benefits in the condensed consolidated statements of operations. The determination of fair value of equity-based payment awards on the date of grant is affected by our stock price and a number of subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, the expected duration of the awards, the results of a probability-weighted discounted cash flow analysis and observable transactions. We account for the effects of forfeitures as they occur.

management’s forecasts

Page 13

15
Table Of Contents

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The risk-free interest rate is based


and consequently, have a direct impact on the U.S. Treasury rates at the datemagnitude of grant with maturity dates approximately equal to the expected life at grant date. Volatilityfuture goodwill intangible impairment losses, if any. The outcome of Ben LP’s capital raising efforts is based on the standard deviation of the average continuously compounded rate of return of five selected companies.

Earnings (Loss) per Common Share — Basic earnings (loss) per share attributable to common shareholders are calculated using the weighted-average number of shares outstanding during the reported period. Diluted earnings (loss) per share are calculated based onuncertain, and it is not certain that the potential dilutive impactinvestors that have submitted non-binding indications of interest ultimately will invest in Ben LP, or the amount of any such investments. As a result, our redeemable preferred stock (“RPS”), Series 2 redeemable preferred stock (“RPS 2”), restricted stock units, warrants (if applicable) and stock options.

Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated to common stock. Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares.

Diluted earnings per common share is computedquantitative goodwill intangible impairment analysis, once complete, could result in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock methodmaterial goodwill intangible impairment in the case of restricted stock units, warrants and options, or the if-converted method in the case of RPS and RPS 2. Our dilution calculation also takes into account the weighted average number of shares of a subsidiary that are exchangeable for shares of GWG Holdings common stock.

near future.

Reclassification— Certain prior year amounts have been reclassified for consistency with the current year presentation. Specifically, our equity method investment in FOXO aspayments for issuances of December 31, 2019, was reclassified to other assetsL Bonds were previously combined with payments for redemptions of L Bonds in the condensed consolidated balance sheets to maintain consistency withstatements of cash flows. These payments are now presented separately within the current year presentation.cash flows from financing activities section. This reclassificationchange had no effect on the reported resultsnet cash flows provided by financing activities. Additionally, amortization of operations.

debt premiums were previously presented separately. This is now combined with amortization of deferred financing and issuance costs. This change had no effect on the reported net cash flows used by operating activities.

Newly Adopted Accounting Pronouncements — On January 1, 2021, we adopted Accounting Standards Update (“ASU”) No. 2017-04,Goodwill,2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (Topic 350) was issued740). The amendments in January 2017. This standardASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the new guidance, goodwill impairment loss will be measured on the basisother aspects of the fair valueaccounting for income taxes. The adoption of the reporting unit relative to the reporting unit’s carrying amount rather than on the basis of the implied amount of goodwill relative to the goodwill balance of the reporting unit. ASU 2017-04 is effective for annual periods beginning after December 15, 2019, including interim periods within those periods, for public business entities. The Company adopted this ASU on January 1, 2020, and itstandard did not have a material impact on its condensedthe consolidated financial statements and related disclosures.

Accounting Pronouncements Issued But Not Yet Adopted — In August 2018,June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The guidance is effective for fiscal years and interim periods beginning after December 15, 2019. Certain of the amendments require prospective application, while the remainder require retrospective application. The Company adopted this ASU on January 1, 2020, and it did not have a material impact on its condensed consolidated financial statements and related disclosures.

Accounting Pronouncements Issued But Not Yet Adopted — In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments — Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans. There have been numerous codification improvements and technical corrections issued through subsequent ASUs since the issuance of ASU No. 2016-13. The standard requires entities to use a new, forward-looking “expected loss” model that is expected to generally result in the earlier recognition of allowances for losses. The guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those years, for smaller reporting companies, as defined by the SEC, but early adoption is permitted. The Company is evaluating the potential impact of this guidance on our condensed consolidated financial statements.

Page 14

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

ASU 2019-12,Income Taxes: Simplifying the Accounting for Income Taxes (Topic 740), was issued in December 2019. The amendments in ASU 2019-12 eliminate certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, for public business entities. Early adoption is permitted, including adoption in any interim period. The Company is evaluating the impact of this ASU on the condensed consolidated financial statements and disclosures.

ASU 2020-04,Reference Rate Reform(Topic (Topic 848) was issued in March 2020. The amendments in ASU 2020-04Topic 848 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04Topic 848 can be applied by all entities as of the beginning of the interim period that includes March 12, 2020, or any date thereafter, and entities may elect to apply the amendments prospectively through December 31, 2022. The Company did not utilize the optional expedients and exceptions provided by this standard during the three months ended March 31, 2021. The Company is evaluating the impact of this standard on its consolidated financial statements and disclosures.

ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06) was issued in August 2020. The amendments in ASU 2020-06 simplify the accounting for convertible instruments by removing major separation models and removing certain settlement condition qualifiers for the derivatives scope exception for contracts in an entity’s own equity, and simplify the related diluted net income per share calculation for both Subtopics. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023, for smaller reporting companies, as defined by the SEC. The Company is evaluating the impact of this ASU on the condensedits consolidated financial statements and disclosures.

(3) Restrictions on Cash

Under the terms of ourthe second amended and restated senior credit facility with LNV Corporation (discussed(as amended from time to time, “LNV Credit Facility”, discussed further in Note 10)9), we are required to maintain collection and payment accounts that are used to collect policy benefits from pledged policies, pay annual policy premiums, interest and other charges under the facility, distribute funds to pay down the facility, and distribute excess funds to the borrower (GWG DLP Funding IV, LLC).

The agents for the lender authorize the disbursements from these accounts. At March 31, 20202021 and December 31, 2019,2020, there was a balance of $26.4$23.8 million and $20.3$33.5 million, respectively, in these collection and payment accounts.

(4) Business Combination

Prior to December 31, 2019, GWG Holdings owned 41,505,279 Common Units, for a total limited partnership interest in the common units of Ben LP of approximately 90.2%. This investment was historically accounted for using the equity method (see Note 8). On December 31, 2019, GWG Holdings entered into the Investment Agreement and Exchange Agreement as described in Note 1.

Pursuant to the Investment Agreement, GWG Holdings transferred $79.0 million to Ben LP in return for 666,667 additional Common Units and a Preferred Series A Subclass 1 Unit Account of BCH, which increased GWG Holdings’ ownership of Common Units to approximately 95.5%. Also, on December 31, 2019, in a transaction related to the Investment Agreement, GWG Holdings transferred its interest in the Preferred Series A Subclass 1 Unit Account to its wholly-owned subsidiary, GWG Life. In connection with the Investment Agreement, GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management, the general partner of Ben LP. As a result, GWG Holdings obtained control of Ben LP, resulting in the consolidation of Ben LP as of December 31, 2019, in accordance with ASC 805,Business Combinations.

As a result of the change-of-control, GWG Holdings was required to remeasure its existing equity investment at fair value prior to consolidation. At December 31, 2019, GWG Holdings’ equity investment in Common Units had a carrying value of $368.6 million, prior to the additional investment noted above. GWG Holdings estimated the fair value of its preexisting investment in Ben LP to be approximately $622.5 million, resulting in the recognition of a gain of $253.9 million during the fourth quarter of 2019. This gain was included in gain on consolidation of equity method investment in the Company’s consolidated statement of operations for the year ended December 31, 2019. This gain was partially offset by the remeasurement to fair value of the Commercial Loan Agreement between GWG Life and Ben LP and the Option Agreement between GWG Holdings and Ben LP, which resulted in a net loss of $4.2 million. The net gain on consolidation of equity method investment after remeasurement of these preexisting balances was $249.7 million. GWG Holdings’ proportionate share of the earnings or losses from Ben LP was recognized in earnings (loss) from equity method investment in the consolidated statement of operations from August 10, 2018 until December 31, 2019 (see Note 8 for further information) and was previously recorded on a one-quarter lag basis. In connection with the consolidation of Beneficient, the one-quarter lag was required to be discontinued.

Page 15

16
Table Of Contents

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table summarizes


Under the fair value measurementterms of the assets acquiredExAlt PlanTM trust agreements, the trusts are required to maintain capital call reserves and liabilities assumed (in thousands):

  Fair Value at Acquisition Date  Measurement Period Adjustment(1)  Adjusted Fair Value at Acquisition Date 
ASSETS         
Loans receivable(1) $232,344  $(14,590) $217,754 
Fees receivable  29,168   —   29,168 
Investment in public equity securities  24,550   —   24,550 
Other assets  14,053   —   14,053 
Intangible assets(2)  3,449   —   3,449 
Total identifiable assets acquired  303,564   (14,590)  288,974 
             
LIABILITIES            
Other borrowings  153,086   —   153,086 
Commercial loan agreement from parent  168,420   —   168,420 
Other liabilities and deferred revenue  105,866   —   105,866 
Accounts payable and accrued expenses  13,713   —   13,713 
Total liabilities assumed  441,085   —   441,085 
Net liabilities assumed  (137,521)  (14,590)  (152,111)
             
NONCONTROLLING INTERESTS            
Common Units not owned by GWG Holdings(3)  181,383   —   181,383 
Class S Ordinary Units  85,448   —   85,448 
Class S Preferred Units  17   —   17 
Preferred Series A Subclass 1 Unit Accounts  1,269,654   —   1,269,654 
Total noncontrolling interests  1,536,502   —   1,536,502 
             
ACQUISITION CONSIDERATION            
Cash, less cash acquired  61,479   —   61,479 
Fair value of preexisting investment in Common Units(4)    622,503   —   622,503 
Fair value of noncontrolling interest  1,536,502   —   1,536,502 
Total estimated consideration  2,220,484   —   2,220,484 
Less: Net liabilities assumed  (137,521)  (14,590)  (152,111)
Resulting preliminary goodwill $2,358,005  $14,590  $2,372,595 

(1)As a result of additional information obtained about the collateral valueadministration reserves. These reserves are used in the valuation of the loan portfolio for certain collateral dependent loans, the Company recorded a measurement period adjustment during the first quarter of 2020, which resulted in a decrease to loans receivable of $14.6 million with a corresponding adjustment to goodwill.
(2)Includes an insurance license valued at $3.1 million and a non-compete agreement valued at $0.3 million.
(3)Calculated as 1,974,677 Common Units not owned by GWG Holdings at December 31, 2019, multiplied by the $15.00 per unit derived from the enterprise valuation of Beneficient. Also includes $151.8 million of equity-based payment awards that were granted by Beneficient prior to the change in control but were not replaced by awards of GWG Holdings upon the change in control. These awards were treated as noncontrolling interests in accordance with ASC 805,Business Combinations.
(4)Calculated as 41,505,279 Common Units owned by GWG Holdings prior to the change in control multiplied by the $15.00 per unit derived from the enterprise valuation of Beneficient.

Page 16

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Methods Used to Determine Equity Valuesatisfy capital call obligations and pay fees and expenses for the trusts as required. The fees and expenses are primarily paid to Fair Value Assets and Liabilities

The following is a descriptionBen Custody Admin for serving as the administrative agent to the current trustees of the valuation methodologies used to estimate the fair value of equity and the fair values of major categories of assets acquired and liabilities assumed. In many cases, determining the fair value of equity and the acquired assets and assumed liabilities required management to estimateExAlt Trusts. These reserves represent cash flows expected from those assets and liabilities and to discount those cash flows at appropriate rates of interest. This determination required the utilization of significant estimates and management judgmentheld in accounting for the 2019 change-of-control event.

Loans receivable — The loan portfolio was valued using current accounting guidance that defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the loan portfolio and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values, specifically market interest rate and general credit fair value assumptions. In instances where reliable market information was not available, management used assumptions in an effort to determine reasonable fair value. There was no carryover related allowance for loan losses.

Cash and cash equivalents and fees receivable— Cash and cash equivalents and fees receivable were valued using their current carrying amounts which approximate fair value.

Investment in public equity securities— The fair value of the investments in public equity securities was determined using quoted market prices. As these were investments by Beneficient in the common stock of GWG Holdings, these amounts were eliminated in consolidation and treated as treasury stock.

Other assets — Other assets include miscellaneous receivables that were valued using the current carrying amount as that amount approximates fair value due to the relatively short time between their origination date and the fair value date. Miscellaneous intercompany receivables were eliminated in consolidation.

Intangible assets — Intangible assets include an insurance license and a non-compete agreement. Both assets were valued using their current carrying amount which approximates fair value.

Other borrowings and commercial loan agreement from parent — The measurement of the fair value of other borrowings and Commercial Loan Agreement from parent was based on market prices that generally are observable for similar liabilities at commonly quoted intervals and is considered a level 2 fair value measurement. The Commercial Loan Agreement between Beneficient and GWG Life was eliminated in consolidation.

Other liabilities and deferred revenue — The carrying amounts of other liabilities and deferred revenue approximate their fair value. The Option Agreement between Beneficient and GWG Holdings was eliminated in consolidation.

Accounts payable and accrued expenses — Due to their short-term nature, the carrying amounts of accounts payable and accrued expenses approximate the fair value. Miscellaneous intercompany payables were eliminated in consolidation.

Noncontrolling interests — The values for each noncontrolling interest component were calculated after determination of an overall enterprise value for the Company. The enterprise value of the Company was determined using the Option Pricing Model (“OPM”) Backsolve approach under the market method. The OPM Backsolve approach uses a Black-Scholes option pricing model to calculate the implied equity value of the firm. Once an overall equity value was determined, amounts were allocated to the various classes of equity based on the security class preferences. The inputs to the OPM Backsolve approach are the equity value for one component of the capital structure, expected time to exit, the risk-free interest rate and an assumed volatility based on the volatility of similar publicly traded companies. The OPM Backsolve inputs include Level 3 inputs.

Goodwill— The resulting excess of the overall enterprise value after deducting the fair values of assets acquired and liabilities assumed is recognized as goodwill. The goodwill recognized is the result of the inherent value associated with the assembled business after all separately identifiable assets acquired and liabilities assumed are deducted from the enterprise value. The excess estimated enterprise value of Beneficient over the fair value of its net assets is primarily attributable to the potentially large and underserved market that Beneficient is seeking to address, including the estimated demand from MHNW individuals and STM size institutions seeking liquidity for their professionally managed alternative assets. None of the goodwill is expected to be deductible for income tax purposes. The goodwill is allocated to our Beneficient reporting unit.

Page 17

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The initial accounting for the estimates of equity values, which includes noncontrolling interests, the fair value of loans receivable, and any separately identifiable intangibles was based on the facts and circumstances that existed as of the acquisition date. Should management obtain new information during the measurement period, in addition to that discussed above, about facts and circumstances that existed at the acquisition date, further adjustments to the fair values assigned to these items could occur during the measurement period of one year from the acquisition date. Any such adjustment will result in corresponding adjustments to goodwill.

The following unaudited pro forma financial information presents the combined results of operations of GWG Holdings for the three months endedbanks. At March 31, 2019, as if the acquisition2021 and December 31, 2020, there was a combined balance of Ben LP had occurred as of January 1, 2019 (in thousands, except per share data):

Total Revenue   
Pro forma $43,935 
As reported  25,217 
     
Net Loss Attributable to Common Shareholders    
Pro forma $(15,459)
As reported  (18,910)
     
Net Loss per Diluted Common Share    
Pro forma $(0.41)
As reported  (0.57)

The unaudited pro forma financial information is presented for informational purposes only. It is not necessarily indicative of what our consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year, nor does it attempt to project the future results of operations of the combined company.

The unaudited pro forma financial information above gives effect to the following:

●Deconsolidation of certain Beneficient trusts included in the ExAlt PlanTM;
●Reduction of Beneficient interest expense related to acquisition-date debt principal payments; and
●Elimination of intercompany transactions, including the Commercial Loan Agreement and Option Agreement.

(5)$5.3 million and $5.4 million, respectively, in these reserves.

(4) Investment in Life Insurance Policies

The Company’s investments in life insurance policies includeare valued based on unobservable inputs that are significant to their overall fair value. Changes in the fair value of these policies, net of premiums paid, are recorded in gain (loss) on life insurance policies, net in our condensed consolidated statements of operations. Fair
The fair value of our life insurance policies is determined on a discountedas the net present value of the life insurance portfolio’s future expected cash flow basisflows (policy benefits received and required premium payments) that incorporates life expectancy assumptionsestimates obtained when the policy was purchased and current discount rate assumptions. We refer to our valuation methodology as the Longest Life Expectancy methodology. This methodology utilizes a portfolio mortality multiplier (“PMM”) that allows us to “fit” projections to actual results, which provides a basis to forecast future performance more accurately.
The life expectancies used in our valuation were obtained at the time of policy purchase and are generally derived from reports obtained from widely accepted life expectancy providers (other than insured lives covered under small face amount policies — those with $1$1.0 million in face value benefits or less — which utilize either a single fully underwritten, or simplified report based on self-reported medical interview),. Our valuation methodology also incorporates assumptions relating to cost-of-insurance (premium) rates and other assumptions. assumptions, including a discount rate.

The discount rate we apply incorporates currentis primarily based on information about the discount rates observed in recent portfolio purchase transactions in the life insurance secondary market through competitive bidding observations (which have recently declined for us as a result of our decreased purchase activity) and other means,tertiary market. The discount rate also incorporates fixed income market interest rates, the estimated credit exposure to the insurance companies that issued the life insurance policies and management’s estimate of the operational risk yield premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. Management has significant discretion regarding the combination of these and other factors when determiningIn prior periods, the discount rate.rate also incorporated information about the discount rates observed in the life insurance secondary market through the Company’s internal competitive bidding to purchase policies. However, the Company discontinued the use of this input as of December 31, 2020, as it is no longer actively purchasing policies in the life insurance secondary market. The determination of the discount rate used in the valuation of the Company’s life insurance policies requires management judgment and incorporates information that is reasonably available to management as of the date of the valuation. As a result of management’s analysis, a discount rate of 8.25% was applied to our portfolio as of both March 31, 20202021 and December 31, 2019.

Page 18

2020.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Portfolio Information

Our portfolio of life insurance policies, owned by ourGWG Holdings’ subsidiaries as of March 31, 2020,2021, is summarized below:

Life Insurance Portfolio Summary
Total life insurance portfolio face value of policy benefits (in thousands)$1,879,895
Average face value per insured life (in thousands)$1,973
Average life expectancy estimate (years)*6.9
Total number of policies1,032
Number of unique lives953
Demographics74% Male; 26% Female
Number of smokers40
Largest policy as % of total portfolio face value0.7 %
Average policy as % of total portfolio face value0.1 %
Average annual premium as % of face value3.9 %

Total life insurance portfolio face value of policy benefits (in thousands) $2,000,680 
Average face value per policy (in thousands) $1,769 
Average face value per insured life (in thousands) $1,900 
Weighted average age of insured (years)  82.6 
Weighted average life expectancy estimate (years)  7.2 
Total number of policies  1,131 
Number of unique lives  1,053 
Demographics  74% Male; 26% Female 
Number of smokers  47 
Largest policy as % of total portfolio face value  0.7%
Average policy as % of total portfolio face value  0.1%
Average annual premium as % of face value  3.5%

(*) Averages presented in the table are weighted averages by face amount of policy benefits.
Page 17
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

  As of March 31, 2020  As of December 31, 2019 
Years Ending December 31, Number of
Policies		  

Estimated
Fair Value

(in thousands)

  

Face Value
(in thousands)

  Number of
Policies		  

Estimated
Fair Value
(in thousands)

  

Face Value
(in thousands)

 
2020  6   5,325   5,644   8   5,869   6,342 
2021  41   49,578   61,040   55   62,061   79,879 
2022  91   91,241   137,197   90   89,074   138,723 
2023  123   120,539   212,493   128   123,352   222,369 
2024  116   116,681   230,260   109   103,111   217,053 
2025  112   77,648   179,796   113   74,223   171,961 
Thereafter  642   341,169   1,174,250   648   338,349   1,184,646 
Totals  1,131  $802,181  $2,000,680   1,151  $796,039  $2,020,973 

follows (dollars in thousands):

As of March 31, 2021As of December 31, 2020
Years Ending December 31,Number of PoliciesEstimated Fair ValueFace ValueNumber of PoliciesEstimated Fair ValueFace Value
Nine months ending December 31, 20214$4,385 $4,588 15$19,429 $22,298 
20225664,906 82,258 6266,657 88,698 
2023100111,424 168,410 106113,926 178,983 
2024116127,431 219,793 119130,280 229,815 
202510697,319 203,745 11185,842 187,042 
202611998,406 223,932 115100,280 237,632 
Thereafter531287,628 977,169 530275,497 956,247 
Totals1,032$791,499 $1,879,895 1,058$791,911 $1,900,715 
We recognized life insurance benefits of $25.5$26.0 million and $30.5$25.5 million during the three months ended March 31, 20202021 and 2019,2020, respectively, related to policies with a carrying value of $6.0$8.6 million and $8.7$6.0 million, respectively, and as a result recorded realized gains of $19.5$17.4 million and $21.8$19.5 million, respectively.

The aforementioned carrying value, which represents the aggregate cost basis in the policies that matured during the period, is considered a return of investment within the investing section of the condensed consolidated statements of cash flows. Changes in fair value of policies and the other components of the net gain on life insurance policies, as detailed below, are included in the operating section of the condensed consolidated statements of cash flows.

A reconciliation of gain (loss) on life insurance policies is as follows (in thousands):

  Three Months Ended
March 31,		 
  2020  2019 
Change in estimated probabilistic cash flows(1) $17,851  $17,131 
Unrealized gain on acquisitions(2)  —   4,459 
Premiums and other annual fees  (17,199)  (15,832)
Face value of matured policies  25,502   30,459 
Fair value of matured policies  (11,709)  (14,721)
Gain on life insurance policies, net $14,445  $21,496 

Three Months Ended
March 31,
20212020
Change in estimated probabilistic cash flows(1)
$13,247 $17,851 
Premiums and other annual fees(18,635)(17,199)
Face value of matured policies25,960 25,502 
Fair value of matured policies(13,660)(11,709)
Gain on life insurance policies, net$6,912 $14,445 

(1)Change in fair value of expected future cash flows relating to our investment in life insurance policies that are not specifically attributable to changes in life expectancy, discount rate changes or policy maturity events.
(2)Gain resulting from fair value in excess of the purchase price for life insurance policies acquired during the reporting period. There were no policy acquisitions during the three months ended March 31, 2020.

Page 19

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

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Estimated premium payments and servicing fees required to maintain our current portfolio of life insurance policies in force for the next five years, assuming no mortalities, are as follows (in thousands):

Years Ending December 31, Premiums  Servicing  Total 
Nine months ending December 31, 2020 $49,708  $1,222  $50,930 
2021  83,813   1,630   85,443 
2022  96,636   1,630   98,266 
2023  108,749   1,630   110,379 
2024  118,269   1,630   119,899 
2025  131,528   1,630   133,158 
  $588,703  $9,372  $598,075 

Years Ending December 31,PremiumsServicingTotal
Nine months ending December 31, 2021$52,652 $1,098 $53,750 
202287,374 1,463 88,837 
202399,346 1,463 100,809 
2024108,838 1,463 110,301 
2025121,088 1,463 122,551 
2026133,556 1,463 135,019 
$602,854 $8,413 $611,267 
Management anticipates funding the majority of the premium payments and servicing fees estimated above from cash flows realized from life insurance policy benefits, and to the extent necessary, with additional borrowing capacity created as the
Page 18
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

premiums and servicing costs of pledged life insurance policies become due, under the second amended and restated senior credit facility with LNV CorporationCredit Facility and the net proceeds from our offering of L Bonds as described in Note 10.9. Management anticipates funding premiums and servicing costs of non-pledged life insurance policies with cash flows realized from life insurance policy benefits from our portfolio of life insurance policies and net proceeds from ourGWG Holdings’ offering of L Bonds. The proceeds of these capital sources may also be used for: additional allocations to Beneficient; the purchase, policy premiums and servicing costs of additional life insurance policies; working capital; and financing expenditures including paying principal, interest and dividends.

(6) Loans Receivable

(5) Investments in Alternative Assets
The investments held, either through direct ownership or through a beneficial interest, by certain of the ExAlt Trusts consist primarily of limited partnership interests in various alternative assets, including private equity funds. These alternative investments are valued using NAV as a practical expedient. Changes in the NAV of these investments are recorded in investment income, net in our consolidated statements of operations. The investments in alternative assets provide the economic value that ultimately collateralizes the loan that Beneficient Loans Receivable

Loans receivableoriginates with the ExAlt Trusts in a liquidity transaction.


The NAV calculation reflects the most current report of NAV and other data received from firm/fund sponsors. If no such report has been received, Beneficient estimates NAV based upon the last NAV calculation reported by the investment manager and adjusts it for capital calls and distributions made in the intervening time frame. In some instances, current available valuation information may indicate that the valuations that are available from third-party sources are not reliable. In these instances, Beneficient may perform model-based analytical valuations that could be used as an input to value these investments. Public equity securities known to be owned within an alternative investment fund, based on the most recent information reported by the general partners, are marked to market using quoted market prices on the reporting date.

The underlying interests in alternative assets are primarily limited partnership interests, and the limited partnership agreements governing those interests generally include restrictions on disclosure of fund-level information, including fund names and company names in the funds. The transfer of the investments in private equity funds generally requires the consent of the corresponding private equity fund manager, and the transfer of certain fund investments is subject to rights of first refusal or other preemptive rights, potentially further limiting the ExAlt PlanTM from transferring an investment in a private equity fund. These investments can never be redeemed with the funds. Distributions from each fund will be received as the underlying investments are liquidated. Timing of liquidation is currently unknown.

Portfolio Information

Our portfolio of alternative investments, held by certain of the CompanyExAlt Trust subsidiaries by asset class of each fund as of March 31, 20202021 and December 31, 2019, were originated primarily through the initial capitalization transactions of Beneficient in 2017 and 2018. These loans are collateralized by the portfolio of alternative assets held2020, is summarized below:

Alternative Investments Portfolio Summary(1)
March 31, 2021December 31, 2020
Asset ClassValueUnfunded CommitmentsValueUnfunded Commitments
Venture Capital$109,293 $1,520 $123,021 $1,659 
Private Equity104,324 33,401 92,316 33,387 
Private Real Estate2,003 270 2,118 269 
Other(2)
3,809 294 4,439 294 
Total$219,429 $35,485 $221,894 $35,609 
(1)Amounts presented in the custodytable exclude the collateral resulting from the Collateral Swap, including GWG Holdings’ common stock valued at $84.6 million, 543,874 shares of certain trusts of the ExAlt PlanTM. The outstanding principal balance was $430.1Ben Common Units valued at $6.8 million, and $425.9GWG L Bonds due 2023 in the aggregate principal amount of $94.8 million, asall of which are eliminated in consolidation.
(2)“Other” includes private debt strategies, natural resources strategies, and hedge funds.
As of March 31, 2020 and December 31, 2019, respectively,2021, ExAlt Trusts’ portfolio had exposure to 115 professionally managed alternative investment funds, comprised of 321 underlying investments, 97 percent of which included $169.5 million and $154.7 million of interest income paid-in-kind, respectively.

Components of the carrying value of loans receivable were as follows for the periods presented below (in thousands):

  As of
March 31,
2020		  As of
December 31,
2019		 
Loans receivable, net of unearned income $219,296  $232,344 
Allowance for loan losses  (700)  — 
Loans receivable, net $218,596  $232,344 

As describedare investments in Note 4, on December 31, 2019, a change-of-control event occurred that resulted in the application of push-down accounting, and all of Beneficient’s assets and liabilities were recorded at fair value. Certain of the purchased loans were determined to be PCI loans under ASC 310-30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, as defined in Note 2, with the remaining loans accounted for under ASC 310-20,Nonrefundable Fees and Other Costs. For loans accounted for under ASC 310-20, the discount arising due to the difference between each loan’s carrying value and the estimated fair value at the time of acquisition will be accreted into interest income over its remaining contractual life. Should management obtain new information about facts and circumstances that existed at the acquisition date, additional adjustments to the fair values assigned to acquired loans could occur during the measurement period of one year from the acquisition date.

private companies.

Page 20

19

Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table reflects the fair value of non-PCI and PCI loans as of the date of the change-of control (in thousands):

Fair value of non-PCI loans$86,436

Fair value of PCI loans$145,908

The fair value of PCI loans above does not include the downward measurement period adjustment to PCI loans of $14.6 million discussed in Note 4.

The following table reflects the outstanding principal balance and carrying amounts of the non-PCI loans (in thousands):

  March 31, 2020  December 31, 2019 
  Carrying Value  Unpaid Balance  Carrying Value  Unpaid Balance 
Loans receivable $89,135  $131,925  $86,436  $129,304 

The following table reflects the outstanding principal balance and carrying amounts of the PCI loans (in thousands):

  March 31, 2020  December 31, 2019 
  Carrying Value  Unpaid Balance  Carrying Value  Unpaid Balance 
Loans receivable $129,461  $298,127  $145,908  $296,627 

Total contractually required payments receivable on PCI loans over the remaining contract period as of December 31, 2019 was $772.2 million. Cash flows expected to be collected at the acquisition date totaled $235.6 million. The difference between total cash flows expected to be collected and the fair value of the loans represents accretable yield.

The following table presents a rollforward of the accretable yield for the three months ended March 31, 2020 (in thousands):

Balance, beginning of period $89,647 
Accretion  (7,537)
Decrease in accretable yield(a)  (581)
Balance, end of period $81,529 


(a)Includes changes in the accretable yield due to both transfers from the nonaccretable difference and the impact of changes in the expected timing of cash flows.

As of March 31, 2020, the allowance for loan losses related to PCI loans was $0.7 million. The loan loss provision expense related to PCI loans during the three months ended March 31, 2020 was $0.7 million.

Page 21

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The changes in the allowance for loan losses for the three months ended March 31, 2020 are as follows (in thousands):

Beginning balance $     — 
Provision  700 
Charge-offs and other, net  — 
Ending balance $700 

As a result of the push-down accounting described in Note 4, the loans were recorded at fair value and there was no carryover allowance for loan losses recorded as of December 31, 2019.

Beneficient recognizes charge-offs in the period in which they arise for its collateral-dependent loans. Therefore, impaired collateral-dependent loans are written down to their estimated net realizable value, based on disposition value.

Promissory Note-LiquidTrusts

On May 31, 2019, GWG Life entered into a Promissory Note (the “Promissory Note”), made by Jeffrey S. Hinkle and Dr. John A. Stahl, not in their individual capacity but solely as trustees of The LT-1 LiquidTrust, The LT-2 LiquidTrust, The LT-5 LiquidTrust, The LT-7 LiquidTrust, The LT-8 LiquidTrust and The LT-9 LiquidTrust (collectively, the “LiquidTrust Borrowers”) in the principal amount of $65.0 million. Pursuant to the terms of the Promissory Note, GWG Life funded a term loan to the LiquidTrust Borrowers in an aggregate principal amount of $65.0 million (the “Loan”), which Loan was funded in two installments as described below. The Loan was made pursuant to GWG Holdings’ strategy to further diversify into alternative assets (beyond life insurance) and ancillary businesses and was intended to better position Beneficient’s balance sheet, working capital and liquidity profile to satisfy anticipated Texas Department of Banking regulatory requirements.

The LiquidTrust Borrowers are common law trusts established as part of alternative asset financings extended by a subsidiary of Ben LP, of which the GWG Holdings owns approximately 95% of the issued and outstanding Common Units (although, on a fully diluted basis, GWG Holdings’ ownership interest in Common Units would be reduced significantly below a majority of those issued and outstanding). Although each Borrower is allocated a portion of the Loan equal to approximately 16.7% of the aggregate outstanding principal of the Loan, the Loan constitutes the joint and several obligations of the LiquidTrust Borrowers.

An initial advance in the principal amount of $50.0 million was funded on June 3, 2019 and, subsequent to satisfaction of certain customary conditions, the second advance in the principal amount of $15.0 million was funded on November 22, 2019. The Loan bears interest at 7.0% per annum, with interest payable at maturity, and matures on June 30, 2023. The loan is reported in financing receivables from affiliates in the consolidated balance sheets and included accrued interest receivable of $3.3 million and $2.2 million as of March 31, 2020 and December 31, 2019, respectively. Subject to the Intercreditor Agreements (as defined below), the Loan can be prepaid at the LiquidTrust Borrowers’ election without premium or penalty.

The Loan is unsecured and is subject to certain covenants (including a restriction on the incurrence of any indebtedness senior to the Loan other than existing senior loan obligations to HCLP Nominees, L.L.C. (“HCLP”), as Senior Lender) and events of default. HCLP is indirectly associated with one of Beneficient’s founders, who is also Chairman of the Board of Directors of GWG Holdings.

Page 22

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Intercreditor Agreements

In connection with the Promissory Note, GWG Life also entered into two intercreditor and subordination agreements: (1) an Intercreditor Agreement between GWG Life and HCLP and (2) an Intercreditor Agreement between GWG Life and Beneficient Holdings, Inc. (“BHI”) (the “Intercreditor Agreements”). Under the Intercreditor Agreements, GWG Life agrees to subordinate the Loan to the secured obligations of Beneficient and its affiliates outstanding to the Senior Lender (the “Senior Loan Obligations”), agrees to not take any liens to secure the Loan (and to subordinate such liens, if any, to the liens of the Senior Lender), and agrees not to take enforcement actions under the Promissory Note until such Senior Loan Obligations are paid in full. The Intercreditor Agreements establish various other inter-lender and subordination terms, including, without limitation, with respect to permitted actions by each party, permitted payments, waivers, voting arrangements in bankruptcy, application of certain proceeds and limitations on amendments of the respective loan obligations of the parties. The Senior Lender has agreed not to extend the maturity of its loan obligations beyond June 30, 2023 or increase the outstanding principal of the loans made by the Senior Lender without the written consent of GWG Life. GWG Life has agreed not to transfer, assign, pledge, grant a security interest in or otherwise dispose of (including, without limitation, pursuant to a foreclosure) the Promissory Note except with the written consent of the Senior Lender (such consent not to be unreasonably withheld) or to the Company or direct or indirect wholly-owned subsidiaries thereof.

(7)(6) Fair Value Definition and Hierarchy

Measurements

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

ASC 820 maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring the use of observable inputs whenever available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from third-party sources. Unobservable inputs are inputs that reflect assumptions about how market participants price an asset or liability based on the best available information. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date (a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction). A sale of the portfolio or a portion of the portfolio in an other than orderly transaction would likely occur at less than the fair value of the respective life insurance policies.

The fair value hierarchy prioritizes the inputsis broken down into three levels based on the observability of inputs as follows:

Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Valuations are based on quoted prices that are readily and regularly available in an active market.
Level 2 —Valuations based quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable market data.
Level 3 —Valuations based on inputs that are unobservable, are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such instruments.

Level 1 —    Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date. Valuations are based on quoted prices that are readily and regularly available in an active market.
Level 2 —    Valuations based quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable market data.
Level 3 —    Valuations based on inputs that are unobservable, are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such instruments.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Page 23

Investments valued using NAV as a practical expedient are excluded from this hierarchy. At March 31, 2021 and December 31, 2020, the fair value of these investments using the NAV per share practical expedient was $219.4 million and $221.9 million, respectively. During both the three months ended March 31, 2021 and 2020, $2.1 million was recognized from changes in NAV, which is recorded within investment income (loss) on our consolidated statements of operations.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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.

Page 20
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Financial instruments measured at fair value on a recurring basis

The Company’s financial assets and liabilities carried at fair value on a recurring basis, including the level in the fair value hierarchy, on March 31, 20202021 and December 31, 20192020 are presented below (in thousands).

  As of March 31, 2020 
  Level 1  Level 2  Level 3  Total 
Assets:            
Investments in life insurance policies $—  $—  $802,181  $802,181 
                 
  As of December 31, 2019 
  Level 1  Level 2  Level 3  Total 
Assets:            
Investments in life insurance policies $—  $—  $796,039  $796,039 

As of March 31, 2021
Level 1Level 2Level 3Total
Assets:
Investments in put options$4,837 $— $— $4,837 
Investments in life insurance policies— — 791,499 791,499 
As of December 31, 2020
Level 1Level 2Level 3Total
Assets:
Investments in put options$7,017 $— $— $7,017 
Investments in life insurance policies— — 791,911 791,911 
The following is a description of the valuation methodologies used for financial instruments measured at fair value on a recurring basis:

Investments in put options
On July 17, 2020, Ben LP, through its subsidiary CT Risk Management, L.L.C., made aggregate payments of $14.8 million to purchase put options against a decrease in the S&P 500 Index. The options have an aggregate notional amount of $300.0 million and are designed to protect the net asset value of the interests in alternative assets that support the Collateral to Beneficient’s loan portfolio against market risk. One-half of the put options expire in July 2022 with the remaining put options expiring in July 2023. Changes in the fair value of the options are recognized directly in earnings. The fair value of the options is recorded in the other assets line item of the condensed consolidated balance sheets, and changes in the fair value of the options are recognized directly in earnings in the other income (loss) line item of the condensed consolidated statements of operations.
Repurchase options
Repurchase options were fair valued using a Black-Scholes option pricing model with a time-dependent strike price for the repurchase price. The option pricing model has assumptions related to a period of restricted exercise price, dividend yield, underlying NAVs, alternative asset growth rates, volatilities, and market discount rate. The Company uses Level 3 inputs for its fair value estimates. The unrealized impact of this Level 3 measurement on earnings is reflected in investment income (loss).
Page 21
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table reconciles the beginning and ending fair value of our Level 3 repurchase options (in thousands). The three months ended March 31, 2021, is not presented as the repurchase options, all of which were unexercised, expired during the third and fourth quarters of 2020, which is recognized in the investment income (loss) line item of the condensed consolidated statement of operations. Additionally, during the three months ended March 31, 2020, $2.1 million of loss was recognized from changes in NAV, which is recorded within investment income (loss) on our consolidated statements of operations.
Three Months Ended
March 31, 2020
Beginning balance$61,664 
Total gain in earnings(1)
(9,612)
Purchases— 
Settlements— 
Ending balance$52,052 
_______________________________________
(1)Net change in fair value.

The following table provides quantitative information about the significant unobservable inputs used in the fair value measurement of the Level 3 repurchase options as of March 31, 2020 (dollars in thousands):

Valuation DateFair ValueValuation MethodologyUnobservable InputsRange of Targets
March 31, 2020$52,052 Option Pricing ModelAlternative asset market discount rate0.085
Dividend yield.11 - .54
Net asset value growth rates0.085
Net asset value volatilities0.24 - 0.45
Restricted exercise period1 year
Investments in life insurance policies

The estimated fair value of our portfolio of life insurance policies is determined on a quarterly basis by management taking into consideration a number of factors, including changes in discount rate assumptions, estimated premium payments and life expectancy estimate assumptions, as well as any changes in economic and other relevant conditions. The discount rate incorporates current information about discount rates observed in the life insurance secondary market through competitive bidding observations (which have declined recently as a result of our decreased purchase activity) and other means, fixed income market interest rates, the estimated credit exposure to the insurance companycompanies that issued the life insurance policypolicies and management’s estimate of the operational risk yield premium a purchaser would require to receive the future cash flows derived from our portfolio as a whole. Management has significant discretion regarding the combinationThe determination of these and other factors when determining the discount rate.

rate used in the valuation of the Company’s life insurance policies requires management judgment and incorporates information that is reasonably available to management as of the date of the valuation.

Under our Longest Life Expectancy portfolio valuation methodology, we: i) utilize life expectancy reports from third-party life expectancy providers for the pricing of all life insurance policies;policies at the time of purchase; ii) apply a stable valuation methodology driven by the experience of our life insurance portfolio, which is re-evaluated if experience deviates by a specified margin; and iii) use relevant market observations that can be validated and mapped to the discount rate used to value the life insurance portfolio.

These inputs are then used to estimate the discounted cash flows from the portfolio using the ClariNet LS probabilistic and stochastic portfolio pricing model from ClearLife Limited, which estimates the expected cash flows using various mortality probabilities and scenarios. The valuation process includes a review by senior management as of each quarterly valuation date. We also engage ClearLife Limited to prepare a net present value calculation of our life insurance portfolio using the inputs we provide on a quarterly basis.

Page 24

22
Table Of Contents

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


The following table reconciles the beginning and ending fair value of our Level 3 investments in our portfolio of life insurance policies (in thousands):

  Three Months Ended
March 31,		 
  2020  2019 
Beginning balance $796,039  $747,922 
Total gain in earnings(1)  12,177   15,571 
Purchases  —   27,393 
Settlements(2)  (6,035)  (8,701)
Transfers into Level 3  —   — 
Transfers out of Level 3  —   — 
Ending balance $802,181  $782,185 

Three Months Ended
March 31,
20212020
Beginning balance$791,911 $796,039 
Total gain in earnings(1)
8,162 12,177 
Settlements(2)
(8,574)(6,035)
Ending balance$791,499 $802,181 

(1)Net change in fair value
(2)Policy maturities at initial cost basis

(1)Net change in fair value
(2)Policy maturities at initial cost basis
The net activity in the table above is reported in gain on life insurance policies, net, in the condensed consolidated statements of operations. There were no net unrealized gains/losses for Level 3 assets included in other comprehensive income as of March 31, 2020 and 2019.

There have been no transfers between levels in the fair value hierarchy for any assets or liabilities recorded at fair value on a recurring basis or any changes in the valuation techniques used for measuring the fair value as of March 31, 20202021 and December 31, 2019. 2020.

The following table provides quantitative information aboutsummarizes the significant unobservable inputs usedutilized in estimating the fair value measurement of the Company’s Level 3 fair value assets:our portfolio of life insurance policies:
As of March 31, 2021As of December 31, 2020
Weighted-average age of insured, years*83.283.1
Age of insured range, years64-10163-100
Weighted-average life expectancy, months*83.283.0
Life expectancy range, months0-2400-240
Average face amount per policy (in thousands)$1,822 $1,797 
Discount rate8.25 %8.25 %

  As of
March 31,
2020		  As of
December 31,
2019		 
Weighted-average age of insured, years*  82.6   82.4 
Age of insured range, years�� 63-101   62-101 
Weighted-average life expectancy, months*  86.6   86.2 
Life expectancy range, months  0-240   0-240 
Average face amount per policy (in thousands) $1,769  $1,756 
Discount rate  8.25%  8.25%

(*)Weighted-average by face amount of policy benefits

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

  Change in Life Expectancy Estimates 
  minus
8 months		  minus
4 months		  plus
4 months		  plus
8 months		 
March 31, 2020 $112,668  $57,263  $(55,449) $(110,453)
December 31, 2019 $113,812  $57,753  $(55,905) $(111,340)
                 
  Change in Discount Rate 
  minus 2%  minus 1%  plus 1%  plus 2% 
March 31, 2020 $89,558  $42,637  $(38,865) $(74,399)
December 31, 2019 $91,890  $43,713  $(39,790) $(76,118)

Page 25

Change in Life Expectancy Estimates
Minus
8 Months		Minus
4 Months		Plus
4 Months		Plus
8 Months
March 31, 2021$96,582 $44,985 $(61,342)$(113,303)
December 31, 2020$97,837 $45,536 $(61,713)$(114,099)
Change in Discount Rate
Minus 2%Minus 1%Plus 1%Plus 2%
March 31, 2021$81,019 $38,645 $(35,351)$(67,782)
December 31, 2020$82,983 $39,560 $(36,151)$(69,284)

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Financial instruments measured at fair value on a non-recurring basis

There were no assets or liabilities measured at fair value on a non-recurring basis as of March 31, 2020. As of2021 and December 31, 2019, Beneficient’s assets and liabilities were recorded at fair value in the consolidated balance sheet due to the application of purchase accounting in accordance with ASC 805 as described in Note 4.

2020, respectively.

Page 23
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Carrying amounts and estimated fair values

The Company is required to disclose the estimated fair value of financial instruments, whether or not recognized in the condensed consolidated balance sheets, for which it is practicable to estimate those values. These fair value estimates are determined based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or the price at which a liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, estimates of fair values are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. Nonfinancial instruments are excluded from disclosure requirements.

The carrying amounts and estimated fair values of the Company’s financial instruments not recorded at fair value were as noted in the tables below (in thousands).

  As of March 31, 2020 
  Level in Fair
Value
Hierarchy		  Carrying
Amount		  Estimated
Fair Value		 
Financial assets:         
Cash, cash equivalents and restricted cash  1  $142,878  $142,878 
Life insurance policy benefits receivable, net  1   15,330   15,330 
Fees receivable  1   30,453   30,453 
Loans receivable, net of allowance for loan losses  3   218,596   206,531
Financing receivables from affiliates  2   68,290   61,042 
             
Financial liabilities:            
Senior credit facility  2  $188,793  $198,661 
L Bonds and Seller Trust L bonds  2   1,376,673   1,492,433 
Other borrowings  2   152,597   152,597 

Page 26

As of March 31, 2021
Level in Fair Value HierarchyCarrying AmountEstimated Fair Value
Financial assets:
Cash, cash equivalents and restricted cash1$114,152 $114,152 
Life insurance policy benefits receivable, net118,238 18,238 
Financial liabilities:
Senior credit facility with LNV Corporation2$165,455 $174,007 
L Bonds and Seller Trust L Bonds11,617,195 1,617,195 
Debt due to related parties276,955 86,085 
Other liabilities142,738 42,738 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  As of December 31, 2019
  Level in Fair
Value
Hierarchy		 Carrying
Amount		  Estimated
Fair Value		 
Financial assets:          
Cash, cash equivalents and restricted cash 1 $99,331  $99,331 
Life insurance policy benefits receivable, net 1  23,031   23,031 
Fees receivable 1  29,168   29,168 
Loans receivable, net of allowance for loan losses 3  232,344   232,344 
Financing receivables from affiliates 2  67,153   59,608 
           
Financial liabilities:          
Senior credit facility with LNV Corporation 2 $174,390  $184,587 
L Bonds and Seller Trust L Bonds 2  1,293,530   1,390,288 
Other borrowings 2  153,086   153,086 

The following methods and assumptions were used in estimating the fair values of each

As of December 31, 2020
Level in Fair Value HierarchyCarrying AmountEstimated Fair Value
Financial assets:
Cash, cash equivalents and restricted cash1$124,160 $124,160 
Life insurance policy benefits receivable, net114,334 14,334 
Financial liabilities:
Senior credit facility with LNV Corporation2$193,730 $202,611 
L Bonds and Seller Trust L Bonds11,519,006 1,519,006 
Debt due to related parties276,260 78,081 
Other liabilities150,585 50,585 
Other liabilities is comprised of the assetsinterest and liabilities individends payable and accounts payable and accrued expenses line items on the tables above:

Cash, Cash Equivalents and Restricted Cash

The carrying amounts reported in thecondensed consolidated balance sheets for cash, cash equivalents and restricted cash approximate their fair values.

Life Insurance Policy Benefits Receivable

The carrying value of life insurance policy benefits receivable approximate fair value due to their short-term maturities and low credit risk.

Fees Receivable

The carrying value of fees receivable generally approximates fair value.

Loans Receivable, Net of Allowance for Loan Losses

The loan portfolio was valued using current accounting guidance that defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. Level 3 inputs were utilized to value the loan portfolio and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values, specifically market interest rate and general credit fair value assumptions. In instances where reliable market information was not available, management used assumptions in an effort to determine reasonable fair value.

As discussed in Note 4, Beneficient’s assets and liabilities, including loans receivable, were recorded at fair value as a result of the change-of-control event on December 31, 2019. Accordingly, there was no carryover related allowance for loan losses.

Financing Receivables from Affiliates

The fair value of the Promissory Note receivable from the LiquidTrusts (see Note 6) was measured utilizing an implied yield of 10.0% based on a market yield analysis for similar instruments with similar credit profiles.

Senior Credit Facility with LNV Corporation

The carrying value of the LNV Credit Facility reflects interest charged at 12-month LIBOR plus an applicable margin, net of unamortized deferred financing costs. The margin represents our credit risk, and the strength of the portfolio of life insurance policies collateralizing the debt. The overall rate reflects the current interest rate market, and the outstanding principal balance of the facility approximates its fair value.

Page 27

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

L Bonds and Seller Trust L Bonds

The measurement of the fair values of L Bonds and Seller Trust L Bonds, largely containing the same terms, were determined using weighted-average market interest rates of 6.21% and 6.34% as of March 31, 20202021 and December 31, 2019, respectively.

Other Borrowings

The measurement of the fair values of these debt instruments is based on market prices that generally are observable for similar liabilities at commonly quoted intervals and are considered a Level 2 fair value measurement. The carrying value approximates fair value as of March 31, 2020.

As discussed in Note 4, Beneficient’s assets and liabilities, including these other borrowings, were recorded at fair value as a result of the change-of-control event on December 31, 2019.

Other Fair Value Considerations

GWG MCA Capital, Inc. (“GWG MCA”) participated in the merchant cash advance industry by directly advancing sums to merchants and lending money, on a secured basis, to companies that advance sums to merchants. Each quarter, we review the carrying value of these cash advances, determine if an impairment exists and establish or adjust an allowance for loan loss as necessary. At both March 31, 2020 and December 31, 2019, we fully reserved for the entire $2.2 million of GWG MCA’s outstanding loans based on the low likelihood of collectibility on these loans. GWG MCA no longer participates in the merchant cash advance industry.

Certain assets are subject to periodic impairment testing by comparing the respective carrying value of the asset to its estimated fair value. In the event we determine these assets to be impaired, we would recognize an impairment loss equal to the amount by which the carrying value of the impaired asset exceeds its estimated fair value. These periodic impairment tests utilize company-specific assumptions involving significant unobservable inputs, or Level 3, in the fair value hierarchy.

(8)

(7) Equity Method Investments

FOXO Technologies Inc. (formerly, FOXO BioScience LLC (formerly, InsurTech Holdings, LLC)

On November 11, 2019, GWG Holdings contributed the common stock and membership interests of its wholly-owned subsidiaries, Life EpigeneticsFOXO Labs and youSurance,FOXO Life (“Insurtech Subsidiaries”), to a legal entity then known as FOXO BioScience LLC, in exchange for a membership interest in FOXO. On November 13, 2020, FOXO BioScience LLC converted to a corporation and is now known as FOXO Technologies Inc. With the conversion to a corporation, GWG Holdings’ previous membership interest
Page 24
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

in the LLC converted to preferred equity in FOXO. Although GWG Holdings currently owns 100% of FOXO’s equity, we dohas a financial interest in FOXO, GWG Holdings does not have a controlling financial interest in FOXO because another party is the managing member has substantive participating rights.majority shareholder of the voting class of securities. Therefore, we account for ourGWG Holdings’ ownership interest in FOXO as an equity method investment.

The transaction resulted infollowing table includes a loss of controlrollforward of the Insurtech Subsidiaries and, as a result, we deconsolidated the subsidiaries and recorded an equity method investment balance during the fourth quarter of 2019. The loss of control required us to measure the equity investment at fair value. We determined the fair value of our investment in FOXO approximated(in thousands):
Three Months Ended March 31,
20212020
Beginning balance$8,582 $1,761 
Contributions1,250 5,417 
Loss on equity method investment(3,514)(1,530)
Ending balance$6,318 $5,648 
In accordance with the carrying valuesubscription agreement of $3.4 million, which was primarily comprised of cash and fixed assets contributed to the entity during the fourth quarter of 2019. We recognized a loss on equity method investment of $1.6 million during the fourth quarter of 2019, resulting in an ending balance of $1.8 million as of December 31, 2019. We made additional cash contributions of $5.4 million and recognized a loss on equity method investment of $1.5 million during the three months ended March 31, 2020, resulting in an ending balance of $5.6 millionFOXO, as of March 31, 2020.

In accordance with the operating agreement of FOXO,2021, GWG Holdings iswas committed to contribute an additional $12.5$2.5 million to the entity through October 2021. Our2021, all of which has been contributed through such date. GWG Holdings’ investment in the membership interest of FOXO is presented in other assets in our condensed consolidated balance sheets. Our proportionate share of earnings or losses from our investee is recognized in earnings (loss) from equity method investments in our condensed consolidated statements of operations.

Page 28

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Beneficient Company Group, L.P.

During 2018, we acquired 40.5 million Common Units for a total limited partnership interest in the common units of Ben LP of approximately 89.9% as of December 31, 2018. On June 12, 2019, we acquired an additional 1,000,000 Common Units from a third party for a cash investment of $10.0 million. On December 31, 2019, we acquired an additional 666,667 newly-issued Common Units for a cash investment of $10.0 million. The Common Units are not publicly traded on a stock exchange.

Prior to December 31, 2019, our investment in Common Units was presented in equity method investment on our consolidated balance sheets. Our proportionate share of earnings or losses from our investee was recognized in earnings (loss) from equity method investments in our consolidated statements of operations. We recorded our share of the income or loss of Beneficient through September 30, 2019, on a one-quarter lag.

On December 31, 2019, we obtained control of Beneficient and consolidated Beneficient as of that date in accordance with ASC 805,Business Combinations. See Note 4 for further information on the business combination. In connection with the consolidation, we discontinued the one-quarter reporting lag.

Financial information pertaining to Beneficient is summarized in the table below (in thousands):

  October 1 to
December 31,
2018
(unaudited)		 
Total revenues $25,306 
Net loss  (41,644)
Net loss attributable to Ben LP common unitholders  (13,192)
GWG portion of net earnings (loss)(1)  (1,927)

(1)Our portion of Beneficient’s net earnings (loss) for the period noted. This amount was recognized during the three months ended March 31, 2019, in accordance with our one-quarter lag election.

We eliminated the effects of any intercompany transactions in the summarized information presented above. Our historical ownership percentage of our investment in Common Units is as follows:

DatePercentage of outstanding Common UnitsReason
August 10, 201813.9%Purchase of units
December 28, 201889.9%Purchase of units
March 31, 201988.1%Change in investee outstanding units
June 12, 201990.2%Purchase of units
December 31, 201995.5%Purchase of units

There was no change in GWG Holdings’ percentage ownership in Beneficient during the three months ended March 31, 2020.

Page 29

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(9)(8) Variable Interest Entities

In accordance with ASC 810,Consolidation, the Company assesses whether it has a variable interest in legal entities in which it has a financial relationship and, if so, whether or not those entities are variable interest entities (“VIEs”). For those entities that qualify as VIEs, ASC 810 requires the Company to determine if the Company is the primary beneficiary of the VIE, and if so, to consolidate the VIE.

Prior to December 31, 2019, we determined that Beneficient was a VIE, but that we were not

VIEs for Which the primary beneficiary ofCompany is the VIE. GWG Holdings did not have the power to direct any activities of Beneficient, or any of its related parties, that most significantly impacted Beneficient’s economic performance. GWG Holdings had no board representation at Ben LP or at its general partner. Primary Beneficiary
ExAlt Trusts
The general partner was exclusively assigned all management powers over the business and affairs of Beneficient, and the limited partners did not have the ability to remove the general partner. Therefore, GWG Holdings did not consolidate the results of Beneficient in our condensed consolidated financial statements until the change-of-control occurred on December 31, 2019. Prior to the change-of-control, GWG Holdings’ exposure to risk of loss in Beneficient was generally limited to its investment in Common Units, its financing receivable from Beneficient and its equity security investment in the Option Agreement to purchase additional common units of Ben LP. Effective December 31, 2019, GWG Holdings obtained the ability to appoint a majority of the board of directors of the general partner of Ben LP. As a result, GWG Holdings became the primary beneficiary of Ben LP on December 31, 2019, and consolidated Beneficient on that date.

WeCompany determined that the LiquidTrust Borrowers are VIEs, but that we are not the primary beneficiary of these VIEs. We do not have the power to direct any activities of the LiquidTrust Borrowers that most significantly impact the Borrower’s economic performance. The Company’s exposure to risk of loss in the LiquidTrust Borrowers is limited to its financing receivable from the LiquidTrust Borrowers.

The Company also determined that certain other trusts included within the ExAltTMPlans Trusts used in connection with Beneficient’s operations are VIEs butof which Beneficient is the primary beneficiary. The Company concluded that we are notBeneficient is the primary beneficiary of these VIEs. The Company does not have boththe trusts as it has the power to direct the most significant activities and has an obligation to absorb potential losses of the trusts. Accordingly, the results of the trusts are included in the Company’s condensed consolidated financial statements. The assets of the trusts may only be used to settle obligations of the trusts. Other than potentially funding capital calls above the related reserve (refer to Note 15), there is no recourse to the Company for the trusts’ liabilities.

Page 25
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The cash flows generated by these VIEs are included within the Company’s consolidated statements of cash flows. The consolidated balance sheets include the following amounts from these consolidated VIEs as of the dates presented (in thousands):
March 31, 2021December 31, 2020
Assets:
Cash and cash equivalents$5,188 $5,965 
Restricted cash5,253 5,386 
Investments in alternative assets, at NAV219,428 221,894 
Other assets1,390 1,273 
Total Assets of VIE$231,259 $234,518 
Liabilities:
Accounts payable and accrued expense$1,958 $2,029 
Total Liabilities of VIE$1,958 $2,029 
Equity (Deficit):
Noncontrolling interest$(5,871)$7,208 
Total Equity of VIE$(5,871)$7,208 
The consolidated statement of operations for the three months ended March 31, 2021 and 2020, includes the following amounts from these consolidated VIEs (in thousands):
Three Months Ended March 31,
20212020
REVENUE
Investment income, net$2,090 $7,556 
Interest income— 20 
TOTAL REVENUE2,090 7,576 
EXPENSES
Other expenses211 1 
TOTAL EXPENSES211 1 
NET INCOME1,879 7,575 
Net loss attributable to noncontrolling interests12,832 10,468 
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS$14,711 $18,043 
CT Risk Management L.L.C.
On March 20, 2020, CT Risk Management, L.L.C. (“CT”) was created as a Delaware limited liability company to reduce the impact of a potential market downturn on the interests in alternative assets that support the Collateral for receivables held by Beneficient by distributing any potential profits to certain of the ExAlt Trusts thereby offsetting any reduction in the value of the alternative assets. The LLC agreement was amended and restated on April 16, 2020. There was no activity of CT until July 2020 when Beneficient made a capital contribution of $14.8 million, which was used to purchase the put options reflected in the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020.
CT is considered a VIE as the at-risk equity holder, Ben LP, does not have all of the characteristics of a controlling financial interest due to Ben LP’s receipt of returns being limited to its initial investment in CT. The Company concluded that Beneficient is the primary beneficiary of CT as it has the power to direct the most significant activities and has an obligation to absorb potential losses or right to receive benefits that could potentially be significant toof CT. Accordingly, the trusts. The Company’s investmentsresults of CT are included in the trusts are carried in loans receivableCompany’s condensed consolidated financial statements.
As of March 31, 2021 and December 31, 2020, the condensed consolidated balance sheets include assets of this consolidated VIE with a carrying value of $4.8 million and $7.0 million, respectively, which is recorded in the consolidated balance sheets. The Company’s exposure to risk ofother assets line item. Additionally, the Company recorded a $2.2 million loss was determined ason investment for the amortized costthree months ended March 31, 2021, which is reported in the other income (loss) line item of the loans tocondensed consolidated statements of operations.
Page 26
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

VIEs for Which the trusts, any earned but unpaid fees or expenses plus any remaining potential contributions for unfunded capital commitments and cash reserve commitments.

Company is Not the Primary Beneficiary

We determined that FOXO is a VIE, but that we are not the primary beneficiary of the VIE.variable interests. We do not have the power to direct any activities of FOXO that most significantly impact its economic performance. The Company’s exposure to risk of loss in FOXO is limited to its equity method investment in the membership interestspreferred equity of FOXO and its remaining unfunded capital commitments.

The following table shows the classification, carrying value and maximum exposure to loss with respect to the Company’s unconsolidated VIEs (in thousands):

  March 31, 2020  December 31, 2019 
  Carrying
Value		  Maximum
Exposure to
Loss		  Carrying
Value		  Maximum
Exposure
to Loss		 
Loans receivable $218,596  $322,748  $232,344  $335,255 
Financing receivables from affiliates  68,290   68,290   67,153   67,153 
Equity method investment  5,648   18,148   1,761   19,661 
Accounts payable and accrued expenses  (2,538)  —   (2,515)  — 
Total $289,996  $409,186  $298,743  $422,069 

(10)

March 31, 2021December 31, 2020
Carrying ValueMaximum Exposure to LossCarrying ValueMaximum Exposure to Loss
Total equity method investment$6,318 $8,818 $8,582 $12,332 
(9) Debt

Senior Credit Facility with LNV Corporation

On November 1, 2019, DLP IV entered into a second amended and restated senior credit facility with LNV Corporation (as amended and restated by the Fourth Amended Facility (defined in Note 17) on September 7, 2021, the (“LNV Credit Facility”)), as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the agreement, (the “LNV Credit Facility”), which replaced the amended and restated senior credit facility dated September 27, 2017 that previously governed DLP IV’s senior credit facility. The LNV Credit Facility makes available a total of up to $300.0 million in credit to DLP IV with a maturity date of September 27, 2029. Subject to available borrowing base capacity, additional advances are available under the LNV Credit Facility at the LIBOR rate described below. Such advances are available to pay the premiums and servicing costs of pledged life insurance policies as such amounts become due. Interest will accrue on amounts borrowed under the LNV Credit Facility at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (a) the greater of 1.50% or 12-month LIBOR, plus (b) 7.50% per annum. The effective rate at March 31, 20202021 was 9.50%9.00%. Interest payments are made on a quarterly basis.

Page 30

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Under the LNV Credit Facility, DLP IV has granted the administrative agent, for the benefit of the lenders under the agreement, a security interest in all of DLP IV’s assets.

In conjunction with entering into the LNV Credit Facility, DLP IV pledged life insurance policies having an aggregate face value of approximately $298.3 million as additional collateral and received an advance of approximately $37.1 million (inclusive of certain fees and expenses incurred in connection with the negotiation and entry into the LNV Credit Facility). The LNV Credit Facility has certain financial and nonfinancial covenants, and we were in compliance with these covenants at March 31, 20202021, and continue to be as of the date of this filing.

filing, except as discussed below.

In addition, the LNV Credit Facility has certain reporting obligations that require DLP IV to deliver audited annual financial statements no later than ninety days after the end of each fiscal year. Due to the failure to issue GWG Life, LLC audited financial statements for 2020 to LNV Corporation within 90 days after the end of the year, we were in violation of our financial reporting obligations under the LNV Credit Facility. CLMG Corp., as administrative agent for LNV Corporation, issued a limited deferral extending the delivery of these reports to May 17, 2021. We regained compliance on May 17, 2021, when the audited annual financial statements of GWG Life were delivered to LNV Corporation.
As of March 31, 2020,2021, approximately 77.1%77.0% of the total face value of our life insurance policies portfolio is pledged to LNV Corporation. The principal amount outstanding under this facility was $198.7$174.0 million and $184.6$202.6 million at March 31, 20202021 and December 31, 2019,2020, respectively. There were unamortized deferred financing costs of $8.6 million and $8.9 million as of March 31, 2021 and December 31, 2020, respectively. Obligations under the LNV Credit Facility are secured by a security interest in DLP IV’s assets, for the benefit of the lenders, through an arrangement under which Wells Fargo Bank, N.A. serves as securities intermediary. The life insurance policies owned by DLP IV do not serve as direct collateral for the obligations of GWG Holdings under the L Bonds and Seller Trust L Bonds. The difference between the amount outstanding and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized debt issuance costs.

Page 27
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

L Bonds

We

GWG Holdings began publicly offering and selling L Bonds in January 2012, which have been sold under the name “Renewable Secured Debentures”. These debt securities were re-named “L Bonds” in January 2015. L Bonds were publicly offered and sold on a continuous basis under avarious registration statementstatements since that time. On December 1, 2017, an additional public offering was declared effective permitting us to sell up to $1.0 billion in principal amount of L Bonds through January 2018. on a continuous basis until December 2020. We reached the maximum capacity on this offering during the third quarter of 2020.
On December 1, 2017,June 3, 2020, a registration statement relating to an additional public offering was declared effective permitting us to sell up to an additional $1.0 billion in principal amount of L Bonds on a continuous basis until December 2020. This offering contains the same terms and features as the previous offering. As of May 11, 2020, we had remaining capacity of approximately $70.0 million under our current registered L Bond offering.

On March 30, 2020, we filed a registration statement to offer up to $2.0 billion in principal amount of L Bonds on a continuous basis until the third anniversary of the effective date of the registration statement.through June 2023. These bonds contain the same terms and features as our previous offerings.

We are party to an indenture governing the L Bonds dated October 19, 2011, as amended (“Indenture”), under which GWG Holdings is obligor, GWG Life is guarantor, and Bank of Utah serves as indenture trustee. Effective December 31, 2019, we entered into Amendment No. 2 to the indenture, which primarily modified the calculation of the debt coverage ratio to allow the Company greater flexibility to finance and to anticipate the potential impacts of GWG Holdings’ expanding relationship with Beneficient.

We were in compliance with the covenants of the indenture at March 31, 2020,2021, and as of the date of this filing, and no eventsEvents of defaultDefault (as defined in the Amended and Restated Indenture) existed as of such dates.

We


GWG Holdings publicly offeroffers and sellsells L Bonds under a registration statement declared effective by the SEC and have issued Seller Trust L Bonds under athe L Bond Supplemental Indenture, as described below. We temporarily suspended the offering of ourGWG Holdings’ L Bonds, on May 1, 2019commencing April 16, 2021, as a result of our delay in filing certain periodic reports with the SEC.SEC, including this Quarterly Report on Form 10-Q. We recommenced our L Bondanticipate recommencing the offering on August 8, 2019.

The collateral and guarantee provisions of theGWG Holdings’ L Bonds and Seller Trust L Bonds are described in Note 18. 

when we regain compliance with SEC filing requirements.


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

Page 31

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

At both March 31, 20202021 and December 31, 2019,2020, the weighted-average interest rate of ourGWG Holdings’ L Bonds was 7.18% and 7.15%, respectively.7.21%. The principal amount of L Bonds outstanding, including Liquidity Bonds discussed below, was $1.0$1.4 billion and $948.1 million$1.3 billion at March 31, 20202021 and December 31, 2019,2020, respectively. The difference between the amount of outstanding L Bonds and the carrying amount on our condensed consolidated balance sheets is due to netting of unamortized deferred issuance costs, cash receipts for new issuances, and payments of redemptions in process. There were $24.8 million and $18.0 million of subscriptions in process as of March 31, 2021 and December 31, 2020, respectively. Amortization of deferred issuance costs was $3.9$5.0 million and $2.8$3.9 million for the three months ended March 31, 20202021 and 2019,2020, respectively. Future expected amortization of deferred financing costs as of March 31, 20202021 is $41.2$52.0 million in total over the next seven years.

Seller Trust L Bonds

On August 10, 2018, in connection with the Initial Transferinitial transfer of the Exchange Transaction described in Note 1, GWG Holdings issued Seller Trust L Bonds in the amount of $366.9 million to the Seller Trusts. The maturity date of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.50% per year. Interest is payable monthly in cash.

After December 28, 2020, the holders of the Seller Trust L Bonds will have the right to cause GWG Holdings to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder. The repurchase may be paid, at the option of GWG Holdings, in the form of cash, and/or a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the commercial loan between GWG Life and Ben LP entered into on August 10, 2018Commercial Loan Agreement and (ii) Common Units, or a combination of cash and such property.

GWG Holdings’ L Bonds are offered and sold under a registration statement declared effective by the SEC, as described above, and GWG Holdings has issued Seller Trust L Bonds under the L Bond Supplemental Indenture.

As a result of the Collateral Swap on September 30, 2020, as discussed in Note 1, $94.8 million of Seller Trust L Bonds are now held by certain trusts within the ExAlt Trusts, and are eliminated in consolidation.

The principal amount of Seller Trust L Bonds outstanding reflected on the condensed consolidated balance sheets was $366.9$272.1 million at both March 31, 20202021 and December 31, 2019.

Other Borrowings

2020.

Page 28
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Liquidity Bonds
On December 31, 2020, GWG Holdings, GWG Life, and Bank of Utah, as trustee (the “Trustee”), entered into a supplemental indenture, dated as of December 31, 2020 (the “Liquidity Bond Supplemental Indenture”), to that certain Amended and Restated Indenture, dated as of October 23, 2017 (as amended, the “Indenture”), among GWG Holdings, GWG Life and the Trustee, providing for the issuance from time to time of up to $1.0 billion in aggregate principal amount of two new series of L Bonds (the “Liquidity Bonds”). The Liquidity Bonds will be offered and sold to accredited investors in transactions that are exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Regulation D under the Securities Act.
The Liquidity Bonds were issued as part of the Company’s strategy to expand its exposure to a portfolio of loans collateralized by cash flows from illiquid alternative assets. Holders of alternative assets are able to contribute their alternative assets to trusts that are part of the ExAlt PlanTM established by GWG Holdings’ subsidiary, Ben LP, in exchange for Liquidity Bonds. The Liquidity Bonds are issued by GWG Life, as issuer, and guaranteed by GWG Holdings, bear interest rates determined by the Company and the holders of the alternative assets being contributed and generally have a maturity of four years from issuance. The Liquidity Bonds are issued under the Indenture, and rank pari passu with respect to payment on and collateral securing all of the Company’s other L Bonds issued under the Indenture.
The Liquidity Bond Supplemental Indenture provides for the issuance of two series of Liquidity Bonds: Series A Liquidity Bonds and Series B Liquidity Bonds. The Company expects an exchange of alternative assets for Series A Liquidity Bonds will be treated as a non-taxable exchange for U.S. federal and state income tax purposes, and that an exchange of alternative assets for Series B Liquidity Bonds will be treated as a taxable exchange for U.S. federal and state income tax purposes. In addition to interest payments, holders of Series A Liquidity Bonds will be entitled to an annual, cash participation payment of up to 1.5% of the principal amount of their Series A Liquidity Bonds subject to GWG Life having net taxable income in a given year, prorated for the portion of such year that the holder owned the Series A Liquidity Bond. To the extent that the net taxable income of GWG Life is insufficient to provide holders of Series A Liquidity Bonds with the full participation payment for any given year, such shortfall shall carry forward and be payable from net taxable income earned by GWG Life in subsequent years.
Six months after the issuance date of a Liquidity Bond, the holder may elect to exchange the Liquidity Bond, at the beginning of each month and upon 30 days’ prior written notice to GWG Holdings, for that number of shares of GWG Holdings’ common stock (the “GWG Common Stock”) as determined by dividing the entire outstanding principal balance and accrued but unpaid interest of the Liquidity Bond by the Exchange Price (as defined below) or, at GWG Holdings’ election, common securities of a subsidiary of GWG Holdings (the “Subsidiary Common Securities”) if they are publicly traded on a national securities exchange, by dividing the entire outstanding principal balance and accrued but unpaid interest of the Liquidity Bond by the Subsidiary Common Securities Exchange Price (as defined below). For purposes of the Liquidity Bond Supplemental Indenture, (i) the Exchange Price will be set at a premium to the closing price of GWG Holdings’ Common Stock on the Nasdaq Stock Market on the last trading day prior to the execution and delivery of the binding agreement for issuance of the Liquidity Bond, and (ii) the Subsidiary Common Securities Exchange Price will be based on the Exchange Price multiplied by the exchange ratio of GWG Common Stock to the Subsidiary Common Securities issued in connection with any transaction in which GWG Common Stock is converted into, or exchanged for, Subsidiary Common Securities, or if there is no conversion or exchange, the Subsidiary Common Securities Exchange Price will be determined by GWG Holdings’ board of directors in good faith taking into account differences in capital structure and related matters between GWG Holdings and the issuer of such Subsidiary Common Securities.

The Liquidity Bonds are payable in cash at maturity, provided that the Liquidity Bonds may be paid at maturity (in GWG Life’s sole discretion) in GWG Common Stock (at the Exchange Price) or Subsidiary Common Securities if they are publicly traded on a national securities exchange (at the Subsidiary Common Security Exchange Price), or a combination of cash and GWG Common Stock or Subsidiary Common Securities.
GWG Life may call and redeem the entire outstanding principal balance and accrued but unpaid interest of any or all of the Liquidity Bonds for cash at any time without penalty or premium. Liquidity Bond holders have no rights to require GWG Life to redeem any Liquidity Bond prior to maturity.
As of March 31, 2021 and December 31, 2020, there was $0.8 million and $0.5 million in principal and, as of both dates, $0.2 million of unamortized financing costs of Liquidity Bonds, respectively. The net of these amounts is presented on the condensed consolidated balance sheets in the L Bonds line item.
Page 29
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Debt Due to Related Parties
As of March 31, 2021 and December 31, 2020, Beneficient had borrowings that consisted of the following (in thousands):
March 31, 2021December 31, 2020
First Lien Credit Agreement$2,319 $2,288 
Second Lien Credit Agreement73,242 72,260 
Other borrowings2,652 2,628 
Unamortized debt discounts(1,258)(916)
Total debt due to related parties$76,955 $76,260 
Beneficient First and Second Lien Credit Agreement
On May 15, 2020, Beneficient executed a Term Sheet with HCLP Nominees, L.L.C (“HCLP” or the “Lender”) to amend its then senior credit agreement and subordinated credit agreement. The resulting Second Amended and Restated First Lien Credit Agreement and Second Amended and Restated Second Lien Credit Agreement (collectively, the “Second Amendments”) was executed on August 13, 2020, with terms and conditions substantially consistent with the Term Sheet, as further described below. Prior to the execution of the Second Amendments, other amendments extended the June 30, 2020 maturity dates of both loans to August 13, 2020, while Beneficient and the Lender finalized the amended and restated credit agreements. Additional agreements were entered into on June 10, 2020, and on June 19, 2020, consistent with the Term Sheet, whereby Beneficient agreed to repay $25.0 million of the then outstanding principal balance and pay an extension fee of 2.5% of the outstanding aggregate carrying valueprincipal balance of $152.6the loans, calculated after the $25.0 million repayment, on July 15, 2020. A total of $28.6 million was paid on July 15, 2020, which included the $25.0 million principal payment, related accrued interest thereon, and $153.1the extension fee described above.
GWG Holdings, GWG Life, and a newly formed entity, DLP V, also entered into the credit agreements with respect to provisions related to the potential future assumption of the loans by DLP V as described below. The amendments extended the maturity date of both loans to April 10, 2021, and increased the interest rate on each loan to 1-month LIBOR plus 8.0%, with a maximum interest rate of 9.5%. The loans were payable in 3 installments of $25.0 million on each of September 10, 2020, December 10, 2020, and March 10, 2021, with the remaining balance payable on April 10, 2021. On March 10, 2021, and again on June 28, 2021, Beneficient executed subsequent amendments, among other items, to further extend the maturity date to May 30, 2022, as more fully described below and in Note 23. Through March 31, 2021, all principal and interest due under the Second Amendments have been paid.

The Second Amendments provided for the assumption of the loans by DLP V pursuant to a Third Amended and Restated First Lien Credit Agreement, upon satisfaction of certain conditions precedent, including the issuance of Beneficient’s trust company charter by the Texas Department of Banking. The amendments provide that DLP V will receive Preferred C interests in exchange for assuming Beneficient’s amended loans in an amount equal to 110% of the then outstanding loan balance. Upon assumption of the loans, the Lender will receive a fee of 2.0% of the then outstanding balance of the loans. Furthermore, upon assumption of the loans, the Commercial Loan Agreement between GWG Life and Ben LP will be assumed by GWG Life USA, LLC, a wholly owned subsidiary of GWG Holdings, in exchange for Class A Subclass A-2 Units of BCH equivalent to the outstanding principal balance of the debt evidenced by the Commercial Loan Agreement. In connection with the assumption of the loans by DLP V, the Lender will be granted a security interest in the Preferred Series A Subclass 1 Unit Accounts of BCH held by GWG Life and the life insurance policies held by DLP V, which are to be contributed to DLP V from GWG Life Trust. The assumption of the loans by DLP V has not occurred and, as described below, further amendments to the Second Amended and Restated Credit Agreement and the Second Amended and Restated Subordinate Credit Agreement removed the assumption of the loans by DLP V.
On March 10, 2021, Beneficient executed Amendment No.1 to the Second Amended and Restated Credit Agreement and Amendment No. 1 to the Second Amended and Restated Subordinate Credit Agreement (collectively, the “Ben Credit Agreements”) with its Lender. The amendments extend the maturity date of both loans to May 30, 2022. The loans are payable in 3 installments of $5.0 million on each of September 10, 2021 (subsequently deferred as discussed below), December 10, 2021, and March 10, 2022, with the remaining balance payable on May 30, 2022. The amendments also provide for an extension fee equal to 1.5% of the amount outstanding under the Credit Agreements, which was added to the outstanding amount under the Credit Agreements as provided for in the amendments.
Page 30
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

In connection with the Ben Credit Agreements, (i) the Lender will be permitted to make capital contributions of up to $152.0 million in exchange for a Preferred Series A Subclass 1 Unit Account of BCH for an equal amount of cash for two years after the assumption of the loans; should the Lender elect to make such a capital contribution, GWG Holdings or one of its subsidiaries will be allowed to exchange an amount of Preferred C into Preferred Series A Subclass 1 Unit Accounts or contribute cash for Preferred Series A Subclass 1 Unit Accounts, in certain circumstances, in order to maintain its relative ownership percentage of the Preferred Series A Subclass 1 Unit Accounts; (ii) Beneficient Holdings, Inc. (“BHI”), which owns a majority of the Class S Ordinary Units, Preferred Series A Subclass 1 Unit Accounts, and FLP Subclass 1 Unit Accounts issued by BCH, will grant certain tax-related concessions related to the transaction to the Lender as may be mutually agreed upon between the parties, and (iii) in exchange for the tax-related concessions to be agreed between the parties, (a) 5% of BHI’s Preferred Series A Sub Class 1 Unit Account, which will be held by the Lender, may convert, upon delivery of notice by BHI or its designee, to a Preferred A.0 Unit Account of BCH, and (b) recipients of a grant of Preferred Series A Subclass 1 Unit Accounts from BHI will have the right to put an amount of Preferred Series A Subclass 1 Unit Accounts to Ben LP equal to any associated tax liability stemming from any such grant; provided that the aggregated associated tax liability shall not relate to more than $30 million of grants of Preferred Series A Subclass 1 Unit Accounts from BHI; and provided, further, that such a put cannot be exercised prior to July 1, 2021. There has been no liability recorded for the put right as of March 31, 2021, as the transfer of Preferred Series A Subclass Unit Accounts has not occurred.

The Ben Credit Agreements contain covenants that (i) prevent Beneficient from issuing any securities senior to the Preferred Series A Subclass 1 or Preferred A.0 Unit Accounts; (ii) prevent Beneficient from incurring additional debt or borrowings greater than $10.0 million, other than trade payables, while the loans are outstanding; (iii) prevent, without the written consent of the Lender, GWG Life Trust or DLP V from selling, transferring or otherwise disposing any of the life insurance policies held by GWG Life Trust as of May 15, 2020, except that life insurance policies may be sold, transferred, or otherwise disposed of, provided that concurrent with the assumption of the loans by DLP V, a prepayment of the loans would be required, if necessary, to maintain certain loan-to-value percentages, after giving effect to such sale, transfer or disposal; and December 31, 2019, respectively. This aggregate outstanding balance includes a senior credit agreement(iv) prevent, without the written consent of the Lender, GWG Holdings from selling, transferring, or otherwise disposing of any Preferred Series A Subclass 1 Unit Accounts held as of May 15, 2020, other than to DLP V. These covenants are materially similar to the terms under the Third Amended and a subordinate credit agreement with respective balances, including accrued interest, of $77.5 million and $72.2 million at both March 31, 2020 and December 31, 2019. These amounts exclude an aggregate unamortized premium of $0.4 million and $0.9 million asRestated First Lien Credit Agreement once assumed by DLP V. As of March 31, 2020 and December 31, 2019, respectively. Both loans accrue interest at a rate2021, Beneficient was in compliance with all covenants.
The assumption set forth in the Second Amendments are subject to, among other things, the satisfaction of 1-month LIBOR plus 3.95%, compounded daily, with interest due bycertain closing conditions, some of which may be outside of the 15th of each month. The senior credit agreement and the subordinate credit agreement both mature on June 30, 2020.parties’ control. These loans are not currently guaranteed by GWG.
Further, as more fully described in Note 17, on June 28, 2021, Beneficient executed the Amendment No. 2 to the Second Amended and Restated Credit Agreement and Amendment No. 2 to the Second Amended and Restated Subordinate Credit Agreement with its Lender. The loans contain customary covenantsamendments eliminate the obligation of DLP V to assume the Ben Credit Agreements as provided for in the Second Amendments and eventswaive the daily fee payable upon the Trigger as provided for in Amendment No. 1 to the Ben Credit Agreements. Finally, as also discussed in Note 17, effective July 15, 2021, Beneficient executed Consent and Amendment No. 3 to the Second Amended and Restated Credit Agreement and Amendment No. 2 to the Second Amended and Restated Subordinate Credit Agreement with its Lender, which (i) deferred the payment of defaultall accrued and termination, including cross-default provisions. Asunpaid interest until December 10, 2021, and (ii) deferred the installment payment of $5.0 million due on September 10, 2021, to December 10, 2021. Beneficient agreed to pay an amendment fee to the Lender in an amount equal to 3% of the then outstanding principal and interest on December 10, 2021.
Beneficient’s Second Lien Credit Agreement was originally issued to BHI, a Ben Founder Affiliate. “Ben Founder Affiliates” are defined as certain trusts and those entities held by such trusts that are controlled by Ben Founder. During 2019, the Second Lien Credit Agreement was contributed to HCLP and thus, all existing senior loan obligations are held by HCLP as of March 31, 2020, Beneficient was in compliance with all covenants. As discussed in Note 20, on May 15, 2020, Beneficient and the lender signed a Binding Term Sheet to Amend the Credit Agreement (“Term Sheet”) which would amend the terms of the loans.

Beneficient has additional borrowings maturing in 2023 and 2024 with an aggregate carrying value of $2.5 million as of both March 31, 20202021 and December 31, 2019.

(11)2020.

HCLP is indirectly associated with Ben Founder. Further, an indirect parent entity of HCLP had loans outstanding to Ben Founder Affiliates as of December 31, 2020.
Beneficient's other borrowings as detailed in the table above mature in 2024 and 2025.
Page 31
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(10) Stockholders’ Equity

GWG Holdings Equity
Common Stock

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

Page 32

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The 2018 transactions between GWG Holdings, GWG Life, Beneficient and the Seller Trusts described in Note 1 ultimately resulted in the issuance of 27,013,516 shares of GWG HoldingsHoldings’ common stock to the Seller TrustTrusts in exchange for Common Units. The shares were offered and sold in reliance upon the exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended. Also, the Purchase and Contribution Agreement described in Note 1 ultimately resulted in the sale of 2,500,000 shares of GWG Holdings common stock to BCC, and the contribution of 1,452,155 shares of GWG Holdings common stock to AltiVerse.

Pursuant to the Exchange Agreement described in Note 1, commencing on December 31, 2019, holders of Ben LP common unitsCommon Units have the right to exchange their common unitsCommon Units for common stock of GWG Holdings. The exchange ratio in the Exchange Agreement is based on the ratio of the capital account associated with the common unitsCommon Units to be exchanged to the market price of the common stock of GWG Holdings based on the volume weighted average price of GWG Holdings’ common stock for the five consecutive trading days prior to the quarterly exchange date. No Ben LP common unitsCommon Units have been exchanged for common stock of GWG Holdings through March 31, 2020.

On November 15, 2018, the Board of Directors of GWG Holdings approved a stock repurchase program pursuant to which the Company was permitted, from time to time, to purchase shares of its common stock for an aggregate purchase price not to exceed $1.5 million. Stock repurchases were able to be executed through various means, including, without limitation, open market transactions, privately negotiated transactions or otherwise. The stock repurchase program did not obligate the Company to purchase any shares, and expired on April 30, 2019.

The following table includes information about the stock repurchase program for the three months ended March 31, 2019 (dollar amounts in thousands, except per share data): 

2019 Monthly Period Number of
Shares
Purchased		  Average Price
Paid per
Share		  Total Number
of Shares
Purchased as
Part of the
Program		  Maximum
Dollar Value of Shares
that Remained
Under the
Program		 
January 2019  42,488  $8.47   52,523  $1,072 
February 2019  202   8.88   52,725   1,070 

(1)No stock was repurchased after February 2019, and the stock repurchase program expired on April 30, 2019.

2021.

Redeemable Preferred Stock

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

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

Page 33

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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

In March 2017, we closed the RPS offering to additional investors having sold 99,127 shares of RPS for an aggregate gross consideration of $99.1 million and incurred approximately $7.0 million of related selling costs.

At the time of its issuance, we determined that the RPS contained two embedded features: (1) optional redemption by the holder, and (2) optional conversion by the holder. We determined that each of the embedded features met the definition of a derivative; however, based on our assessment under ASC 470,Debt, (“ASC 470”) and ASC 815,Derivatives and Hedging, (“ASC 815”), we do not believe bifurcation of either the holder’s redemption or conversion feature is appropriate.

Page 32
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Series 2 Redeemable Preferred Stock

On February 14, 2017, ourGWG Holdings’ public offering of up to 150,000 shares of RPS 2 at $1,000 per share was declared effective. The terms of the RPS 2 are largely consistent with those of the RPS, other than the conversion and redemption features discussed below.

Holders of RPS 2 may, less an applicable conversion discount, if any, convert their RPS 2 into ourGWG Holdings’ common stock at a conversion price equal to the volume-weighted average price of ourGWG Holdings’ common stock for the 20 trading days immediately prior to the date of conversion, subject to a minimum conversion price of $12.75 and in an aggregate amount limited to 10% of the stated value of RPS 2 originally purchased from us and still held by such purchaser. We may, at our option, call and redeem shares of RPS 2 at a price equal to their liquidation preference (subject to a minimum redemption price, in the event of redemptions occurring less than one year after issuance, of 107% of the stated value of the shares being redeemed).

In April 2018, we closed the RPS 2 offering to additional investors having sold 149,979 shares of RPS 2 for an aggregate gross consideration of $150.0 million and incurred approximately $10.3 million of related selling costs.

The RPS 2 was determined to have the same two embedded features discussed in the RPS section above (optional redemption by the holder and optional conversion by the holder). We do not believe bifurcation of either the holder’s redemption or conversion feature is appropriate.

Beneficient Equity
As of March 31, 2021, Ben LP has issued Common Units and BCH, a consolidated subsidiary of Ben LP, has issued general partnership Class A Units (Subclass A-1 and A-2), Class S Ordinary Units, Class S Preferred Units, FLP Units (Subclass 1 and Subclass 2), Preferred Series A Subclass 1 Unit Accounts, Preferred Series A Subclass 2 Unit Accounts, and Preferred Series C Subclass 1 Unit Accounts. The Preferred Series A Subclass 0 Unit Accounts were created under the 5th Amended and Restated LPA while the Preferred Series C Subclass 0 Unit Accounts were created under the 6th Amended and Restated LPA; however, neither security has been issued as of March 31, 2021. The 6th Amended and Restated LPA of BCH governs the terms of these equity securities.
Common Units
As of both March 31, 2021 and December 31, 2020, Ben LP has a total of 48,205,756 Common Units issued and outstanding, respectively. As of both March 31, 2021 and December 31, 2020, GWG Holdings owns 46,887,915 Common Units, respectively, which are eliminated in consolidation. The remaining issued and outstanding Common Units are recorded in the condensed consolidated balance sheet in the noncontrolling interests line item.
Preferred Series A Subclass 0 (Noncontrolling Interests)
On July 15, 2020, BCH amended its limited partnership agreement in a 5th Amended and Restated LPA, which created a new subclass of Preferred Series A Unit Accounts, the Preferred A.0.
As a subclass of the Preferred Series A Unit Accounts, the Preferred A.0 receives the same preferred return on a quarterly basis as the other Preferred Series A subclasses. However, the Preferred A.0 is senior to all other classes of preferred equity, including the other subclasses of Preferred Series A in terms of allocations of profits, distributions, and liquidation. The Preferred A.0 can be converted into Class S Units at the election of the holder, at a price equal to (x) prior to the initial public listing, the per Common Unit fair market value as determined by the general Partner and (y) following the initial public listing, the lesser of (i) $10 and (ii) if the Common Units are listed on a national securities exchange, the volume-weighted average closing price of a Common Unit as reported on the exchange on which the Common Units are traded for the twenty (20) days immediately prior to the applicable exchange date, or if the Common Units are not listed on a national securities exchange, then the volume-weighted average closing price of a security traded on a national securities exchange or quoted in an automated quotation system into which the Common Units are convertible or exchangeable for the twenty (20) days immediately prior to the applicable exchange date.
The Preferred A.0 Unit Accounts have not been issued as of March 31, 2021.
Page 33
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Preferred Series A Subclass 1 (Redeemable noncontrolling interest)

Noncontrolling Interest)

BCH, a consolidated subsidiary of Ben LP, has non-unitized equity outstanding. The Preferred Series A Subclass 1 Unit accountsAccounts are non-participating and convertible on a dollar basis. The 4th Amended and Restated Limited Partnership Agreement (“LPA”) of BCH governs the terms of BCH’s equity securities.

Beginning June 1, 2018, the Preferred Series A Subclass 1 Unitholders agreed to temporarily reduce the preferred return rate. On March 31,

In 2019, Preferred Series A Subclass 1 Unit Account holders signed an agreement to forbear the right to receive an annualized preferred return in excess of a rate determined materially consistent with the methodology below until, initially, the earlier of December 31, 2019 or three months following the issuance of the limited trust association charterscharter by the Texas Department of Banking. The charterscharter from the Texas Department of Banking werewas not issued as of December 31, 2019. In 2020, thisThe forbearance agreement was extended through March 31, 2020. 2021.
The income allocation methodology under this forbearance agreement was as follows:

●First, Ben, as the sole holder of Class A Units issued by BCH is allocated income from BCH to cover the expenses incurred solely by Ben;

●Second, the remaining income at BCH is allocated 50% to the aggregate of Class A Units and Class S Ordinary Units and 50% to Preferred Series A Subclass 1 Unit Accounts, until the Common Units issued by Ben receive a 1% annualized return on the Common Unit account balance;

●Third, after the 1% annualized return to the Common Unit issued by Ben is achieved, additional income is allocated to the Preferred Series A until the Preferred Series A is allocated the amount required under the LPA, (as amended); and
●

Finally, any remaining income is allocated under the terms of the current LPA (pro-rata between the Class A Units and Class S Ordinary Units).

•First, Ben, as the sole holder of Class A Units issued by BCH is allocated income from BCH to cover the expenses incurred solely by Ben;
•Second, the remaining income at BCH is allocated 50% to the aggregate of Class A Units and Class S Ordinary Units and 50% to Preferred Series A Subclass 1 Unit Accounts, until the Common Units issued by Ben LP receive a 1% annualized return on the Common Unit account balance;
•Third, after the 1% annualized return to the Common Unit issued by Ben LP is achieved, additional income is allocated to the Preferred Series A until the Preferred Series A is allocated the amount required under the LPA, (as amended); and
•Finally, any remaining income is allocated under the terms of the current LPA (pro-rata between the Class A Units and Class S Ordinary Units).
If and when the forbearance agreement expires, account holders will be entitled to a compounded quarterly preferred return. The preferred return to be paid to Preferred Series A Unitholders is limited by a quarterly preferred return rate cap that is based on the annualized revenues of BCH. Annualized revenues are defined as four times the sum of total quarterly interest, fee and dividend income plus total noninterest revenues. This quarterly rate cap is defined as follows:

●0.25% if annualized revenues are $80 million or less;

●0.50% if annualized revenues are greater than $80 million but equal to or less than $105 million;

●0.75% if annualized revenues are greater than $105 million but equal to or less than $125 million;

Page 34

•0.25% if annualized revenues are $80 million or less;

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

●1.00% if annualized revenues are greater than $125 million but equal to or less than $135 million;

●1.25% if annualized revenues are greater than $135 million but equal to or less than $140 million; and

●If over $140 million, the preferred return calculation is based on a fraction (i) the numerator of which is (A) the positive percentage rate change, if any, to the seasonally adjusted CPI-U covering the period from the date of the last allocation of profits to such holders, plus (B) (x) 2% prior to an Initial Public Offering (as defined in the BCH LPA) by Ben and (y) 3% thereafter, and (ii) the denominator of which is one minus the highest effective marginal combined U.S. federal, state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually allocated in respect of the quarterly preferred return for the fiscal year reflected in the BCH’s most recently filed Internal Revenue Service Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax.

•0.50% if annualized revenues are greater than $80 million but equal to or less than $105 million;
•0.75% if annualized revenues are greater than $105 million but equal to or less than $125 million;
•1.00% if annualized revenues are greater than $125 million but equal to or less than $135 million;
•1.25% if annualized revenues are greater than $135 million but equal to or less than $140 million; and
•If over $140 million, the preferred return calculation is based on a fraction (i) the numerator of which is (A) the positive percentage rate change, if any, to the seasonally adjusted CPI-U covering the period from the date of the last allocation of profits to such holders, plus (B) (x) 2% prior to an Initial Public Offering (as defined in the BCH LPA) by Ben LP and (y) 3% thereafter, and (ii) the denominator of which is 1 minus the highest effective marginal combined U.S. federal, state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually allocated in respect of the quarterly preferred return for the fiscal year reflected in the BCH’s most recently filed Internal Revenue Service Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax.
The definition of Initial Public Offering includes an event, transaction or agreement pursuant to which the Common Units are convertible or exchangeable into equity securities listed on a national securities exchange or quotation in an automated quotation system.

No amounts have been paid to the Preferred Series A Subclass 1 Unit Account holders related to the preferred return from inception through March 31, 2020. In connection with2021, and any amounts earned have been accrued and are included in the issuancebalance of Preferred Series A Subclass 2 Units as partredeemable noncontrolling interests line item of the Option Agreement, the preferred return ofcondensed consolidated balance sheets. Certain Preferred Series A Subclass 1 Unit
Page 34
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Account holders is reduced byagreed to be specially allocated any income or losses associated with the preferred return allocated to the Preferred Series A Subclass 2 Units during the period the Option Agreement remains outstanding.

Beneficient Management Partners, L.P. Equity Incentive Plan and certain other costs.

Upon election by a holder, the Preferred Series A Unit Accounts (other than Preferred Series A Subclass 2 Unit Accounts) are, at any time on or after January 1, 2021, convertible in an amount of Preferred Series A Unit Accounts (other than Preferred Series A Subclass 2 Unit Accounts), equal to 20% of their Sub-Capital Accounts into Class S Ordinary Units (with the right to convert any unconverted amount from previous years in any subsequent years). Upon an election, a holder of Preferred Series A Subclass 1 Unit Accounts will be issued Class S Ordinary Units necessary to provide the holder with a number of Class S Ordinary Units that, in the aggregate, equal (a) the balance of the holder’s capital account associated with the Preferred Series A Subclass 1 Unit Accounts being converted divided by (b) either (x) prior to an initial public offering, the appraised per Class A Unit fair market value as determined by Beneficient or (y) following an initial public offering, the average price of a Common Unit for the thirty (30) day period ended immediately prior to the applicable conversion date. The holder of such newly issued Class S Ordinary Units may immediately convert them into Common Units. Additionally, effective December 31, 2030, if the Preferred Series A Subclass 1 Unit Accounts have not been converted, they will redeem for cash in an amount equal to the then outstanding capital account balance of the accounts. If available redeeming cash (as defined in the LPA) is insufficient to satisfy any such redemption requirements, BCH, on a quarterly basis, will redeem additional Preferred Series A Units until all such Preferred Series A Units have been redeemed. The Preferred Series A Subclass 1 Unit Accounts are subject to certain other conversion and redemption provisions.

The current LPA of BCH also includes certain limitations of BCH, without the consent of a majority-in-interest of the Preferred Series A Unit Account holders, to (i) issue any new equity securities and (ii) except as otherwise provided, incur indebtedness that is senior to or pari passu with any right of distribution, redemption, repayment, repurchase or other payments relating to the Preferred Series A Unit accounts. Further, BCH cannot, prior to the conversion of all the Preferred Series A Unit accounts, incur any additional long-term debt unless (i) after giving effect to the incurrence of the new long-term debt on a pro forma basis, the sum of certain preferred stock, existing debt and any new long-term indebtedness would not exceed 55% of BCH’s net asset value (“NAV”) plus cash on hand, and (ii) at the time of incurrence of any new long-term indebtedness, the aggregate balance of BCH’s (including controlled subsidiaries) debt plus such new long-term debt does not exceed 40% of the sum of the NAV of the collateralinterests in alternative assets supporting the Collateral underlying the loan portfolio of BCH and its subsidiaries plus cash on hand at Ben LP, BCH and its subsidiaries.

Page 35

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Preferred Series A Subclass 1 Unit Accounts are recorded in the condensed consolidated balance sheet in the redeemable noncontrolling interest line item.

Preferred Series C Subclass 0 Unit Accounts
The 6th Amended and Restated LPA allowed for the issuance of Preferred Series C Subclass 0 Unit Accounts. The Preferred Series C Subclass 0 Unit Accounts are non-participating and convertible on a basis consistent with the UPA discussed in Note 1. Account holders are entitled to a compounded quarterly preferred return based on a fraction, the numerator of which is (a) the sum of an inflation adjustment amount, plus (1) 0.5% prior to the initial public listing and (2) 0.75% following the initial public listing, and the denominator of which is (b) 1 minus the means of the highest effective marginal combined U.S. federal, state and local income tax rate (including the rate of taxes under Section 1411 of the Code) for a Fiscal Year prescribed for an individual resident in New York, New York (taking into account (a) the nondeductibility of expenses subject to the limitations described in Sections 67 and 68 of the Code, (b) the character (e.g., long-term or short-term capital gain or ordinary or exempt income) of the applicable income, but not taking into account the deductibility of state and local income taxes for U.S. federal income tax purposes), based on the Partnership’s most recently filed IRS form 1065, and (c) multiplied by 80%.
The Preferred Series C Subclass 0 Unit Accounts are senior to all other classes of preferred equity other than the Preferred Series A Subclass 0 Unit Accounts in terms of allocations of profits, distributions, and liquidation.
The only conversion, redemption, or exchange rights available to the Preferred Series C Subclass 0 Unit Accounts are those rights afforded in accordance with the UPA, described in Note 1, or such similar agreement.
While any amount of Preferred Series C (Subclass 0 or 1) Unit Accounts is outstanding, BCH cannot make any distributions, other than tax distributions and redemptions, distributions upon a liquidation of BCH, and distributions of net consideration received from a sale of BCH, without the prior consent of a majority in interest of the holders of the Preferred Series C (Subclass 0 or 1) Unit Accounts.
Page 35
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The Preferred Series C Subclass 0 Unit Accounts have not been issued as of March 31, 2021.
Preferred Series C Subclass 1 Unit Accounts
The 5th Amended and Restated LPA also created a new class of preferred equity, the Preferred Series C Subclass 1 Unit Accounts. The Preferred Series C Subclass 1 Unit Accounts are non-participating and convertible on a basis consistent with the UPA discussed in Note 1. Account holders are entitled to a compounded quarterly preferred return based on a fraction, the numerator of which is (a) the sum of an inflation adjustment amount, plus (1) 0.5% prior to the initial public listing and (2) 0.75% following the initial public listing, and the denominator of which is (b) 1 minus the means of the highest effective marginal combined U.S. federal, state and local income tax rate (including the rate of taxes under Section 1411 of the Code) for a Fiscal Year prescribed for an individual resident in New York, New York (taking into account (a) the nondeductibility of expenses subject to the limitations described in Sections 67 and 68 of the Code and (b) the character (e.g., long-term or short-term capital gain or ordinary or exempt income) of the applicable income, but not taking into account the deductibility of state and local income taxes for U.S. federal income tax purposes), based on the Partnership’s most recently filed IRS form 1065.
BCH calculates two Preferred Series C Subclass 1 Unit Accounts capital accounts: the Liquidation Capital Account and the Conversion Capital Account. In calculating the Conversion Capital Account, the Preferred Series C Subclass 1 Unit Accounts are allocated profits and losses junior to the Preferred Series A Unit Accounts. In calculating the Liquidation Capital Account, the Preferred Series C Subclass 1 Unit Accounts are allocated profits and losses pari passu with the Preferred Series A Unit Accounts.
Following the exchange of any Preferred Series C Subclass 1 Unit Accounts into Common Units under the UPA described in Note 1, the excess of the profits and losses allocated to the Preferred Series C Subclass 1 Unit Accounts under the Liquidation Capital Account will be deemed the “Excess Amount.” This Excess Amount will be specially allocated at each tax period in accordance with the principals of Treasury Regulation Section 1.704-1(b)(4)(x), to the Preferred Series A Subclass 1 Units Accounts, prior to any amount of profit, income or gain being allocated to any other class of units (other than the Preferred A.0) or limited partners until such special allocations equal, in the aggregate, such Excess Amount.
The only conversion, redemption, or exchange rights available to the Preferred Series C Subclass 1 Unit Accounts are those rights afforded in accordance with the UPA, described in Note 1, or such similar agreement.
While any amount of Preferred Series C (Subclass 0 or 1) Unit Accounts is outstanding, BCH cannot make any distributions, other than tax distributions and redemptions, distributions upon a liquidation of BCH, and distributions of net consideration received from a sale of BCH, without the prior consent of a majority in interest of the holders of the Preferred Series C (Subclass 0 or 1) Unit Accounts.
As of March 31, 2021 and December 31, 2020, the aggregate carrying value of GWG Holdings’ investments in Preferred Series C Subclass 1 Unit Accounts was $210.6 million and $195.6 million, respectively. The Preferred Series C Subclass 1 Unit Accounts are eliminated upon consolidation.
Class S Ordinary Units

As of both March 31, 20202021 and December 31, 2019,2020, BCH, a consolidated subsidiary of Ben LP, had issued and outstanding 5.8 million Class S Ordinary Units.Units, respectively. The Class S Ordinary Units participate on an as-converted basis pro-rata in the share of the profits or losses of BCH and subsidiaries following all other allocations made by BCH and its subsidiaries. As limited partner interests, these units have limited voting rights and do not entitle participation in the management of BCH’s business and affairs. The Class S Ordinary Units are exchangeable for Common Units on a one-for-one1-for-one basis, subject to customary conversion rate adjustments for splits, distributions and reclassifications, as well as compliance with any applicable vesting and transfer restrictions. Each conversion also results in the issuance to Ben LP of a Class A Unit of BCH for each common unitCommon Unit issued.

The Class S Ordinary Units are recorded in the condensed consolidated balance sheet in the noncontrolling interests line item.

Class S Preferred Units

Page 36
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The limited partnership agreement of BCH allows it to issue Class S Preferred Units. The Class S Preferred Units are entitled to a quarterly preferred return that is limited by the quarterly preferred return rate cap described above for Preferred Series A Subclass 1 except for when annualized revenues exceed $140 million, the Class S Preferred return is based on a fraction (i) the numerator of which is (A) the positive percentage rate change, if any, to the seasonally adjusted CPI-U covering the period from the date of the last allocation of profits to such holders, plus (B) 0.75 percent, and (ii) the denominator of which is one1 minus the highest effective marginal combined U.S. federal, state and local income tax rate in effect as of the beginning of the fiscal quarter for which such determination is being made for an individual resident in New York City, New York, assuming (1) that the aggregate gross income allocable with respect to the quarterly preferred return for such fiscal year will consist of the same relative proportion of each type or character (e.g., long term or short term capital gain or ordinary or exempt income) of gross income item included in the aggregate gross income actually allocated in respect of the quarterly preferred return for the fiscal year reflected in the Ben Group Partnership’s most recently filed IRS Form 1065 and (2) any state and local income taxes are not deductible against U.S. federal income tax. The Class S Preferred Units also participate on an as-converted basis pro-rata in the share of the profits or losses of BCH and subsidiaries following all other allocations made by BCH and its subsidiaries. As limited partner interests, these units are generally non-voting and do not entitle participation in the management of BCH’s business and affairs. Generally, the Class S Preferred Units are exchangeable for Common Units in Ben LP on a 1.2-for-1 basis, subject to customary conversion rate adjustments for splits, distributions and reclassifications, as well as compliance with any applicable vesting and transfer restrictions. Each conversion also results in the issuance to Ben LP of a Class A Unit for each Common Unit issued. Holders of Class S Preferred Units may elect to convert into Class S Ordinary Units in connection with a sale or dissolution of BCH.

As of March 31, 2021, a nominal number of shares of Class S Preferred Units have been issued. No amounts have been paid to the Class S Preferred Unit holders related to the preferred return from inceptionissuance through March 31, 2020. The2021, and any amounts earned have been accrued and are included in the balance of Class S Preferred Units are recorded inpresented on the condensed consolidated balance sheet in the noncontrolling interests line item.

(12)

Beneficiaries of the ExAlt Trusts

The ultimate beneficiary of the ExAlt Trusts is an unrelated third party charity (the “Charitable Beneficiary”) that is entitled to i) approximately 5% of any amounts paid to Beneficient as payment on amounts due under each ExAlt Loan, ii) approximately 10% of the amount of excess cash Collateral, if any, following the full repayment of an ExAlt Loan; and (iii) all amounts accrued and held at the ExAlt Trusts once all amounts due to Beneficient under the ExAlt Loans and any fees related to Beneficient’s services to the ExAlt Trusts are repaid. The Charitable Beneficiary’s account balances with respect to its interest in such ExAlt Trusts cannot be reduced to below zero. Any losses allocable to the Charitable Beneficiary in excess of its account balances are reclassified at each period end to the trusts deficit account, which is included as part of noncontrolling interest. Additional ExAlt Trusts are created with each new liquidity transaction with customers. These new ExAlt Trusts, which are consolidated by Beneficient, result in the recognition of additional noncontrolling interest representing the interests in these new ExAlt Trusts held by the Charitable Beneficiary. For the three months ended March 31, 2021 and 2020, $0.4 million and nil, respectively, of such noncontrolling interest was created.
The interest of the Charitable Beneficiary, including the associated trust deficit (as applicable), in the ExAlt Trusts is recorded on the consolidated balance sheets in the noncontrolling interests line item.
(11) Equity-Based Compensation

As of March 31, 2021 and December 31, 2020, the Company has outstanding equity-based awards under the GWG Holdings 2013 Stock Incentive Plan, the Beneficient Management Partners, L.P. (“BMP”) Equity Incentive Plan and(the “BMP Equity Incentive Plan”, the Ben Equity Incentive Plan (as defined below), and Preferred Series A Subclass 1 Unit Accounts, as more fully described in the sections below.

Page 36

The holders of certain of the units issued under the BMP Equity Incentive Plan and the Ben Equity Incentive Plan, upon vesting, have the right to convert the units to shares of GWG Holdings common stock per the Exchange Agreement discussed in Note 1. As such, units vested and issued under Beneficient’s equity incentive plans may result in dilution of the common stock of GWG Holdings.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

2013 Stock Incentive Plan

GWG Holdings adopted the 2013 Stock Incentive Plan in March 2013, as amended on June 1, 2015, May 5, 2017 and May 8, 2018. Participants under the plan may be granted incentive stock options and non-statutory stock options; stock appreciation
Page 37
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

rights; stock awards; restricted stock; restricted stock units; and performance shares. Eligible participants include officers and employees of GWG Holdings and its subsidiaries, members of ourGWG Holdings’ Board of Directors, and consultants. Option awards generally expire 10 years from the date of grant. As of March 31, 2020,2021, the Company has granted stock options, stock appreciation rights (“SAR”), and restricted stock units (“RSU”) under this plan.

During the three months ended March 31, 2020, a total of 20,751 stock options held by employees vested. Additionally, as a result of stock option exercises, 1,456 shares of common stock were issued to employees, net of shares forfeited to satisfy tax withholding obligations.

Upon the exercise of SARs, the Company is obligated to make cash paymentpayments equal to the positive difference between the market value of the Company’sGWG Holdings’ common stock on the date of exercise less the market value of the common stock on the date of grant. The liability for the SARs as of both March 31, 20202021 and December 31, 20192020 was $0.8 million and $0.6 million, respectively, and was recorded within accounts payable and accrued expenses in the condensed consolidated balance sheets.

A RSU entitles the holder thereof to receive one share of GWG Holdings’ common stock (or, in some circumstances, the cash value thereof) upon vesting. RSUs are subject to forfeiture until they vest. During the three months ended March 31, 2020, none2021, 3,189 of the RSUs held by employees haveand directors vested.


BMP Equity Incentive Plan

The Board of Directors of Beneficient Management, Ben LP’s general partner, adopted the BMP Equity Incentive Plan in 2019. Under the BMP Equity Incentive Plan, certain directors and employees of BenBeneficient are eligible to receive equity units in BMP, an entity affiliated with the board of directors of Beneficient Management, in return for their services to Ben. The BMP equity units eligible to be awarded to employees are comprised of BMP’s Class A Units and/or BMP’s Class B Units (collectively, the “BMP Equity Units”). The BMP Equity Units awardedAll awards are classified in 2019 and during the three months ended March 31, 2020, included some awards that were fully vestedequity upon grant date, and some awards that areissuance.
Awards will generally be subject to service-based vesting over a four-year period from the recipient’s date of hire.

hire, though some awards fully vest upon grant date. Expense associated with the vesting of these awards is based on the fair value of the BMP Equity Units on the date of grant. Expense recognized for these awards is specially allocated to certain holders of redeemable noncontrolling interests. While providing services to Beneficient, if applicable, certain of these awards are subject to minimum retained ownership rules requiring the award recipient to continuously hold BMP Equity Units equivalents equal to at least 25% of their cumulatively granted awards that have the minimum retained ownership requirement. The awards are generally non-transferable. Awards under the BMP Equity Incentive Plan that vest ultimately dilute holders of Common Units.

As BMP’s equity is not publicly traded, the fair value of the BMP Equity Units is determined on each grant date using a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The resultant probability-weighted cash flows are then discounted using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption.

Ben Equity Incentive Plan

The Board of Directors of Beneficient Management adopted the Ben Equity Incentive Plan in September 2018.2018 (the “Ben Equity Incentive Plan”). Under the Ben Equity Incentive Plan, Ben LP is permitted to grant equity awards, in the form of restricted equity units (“REUs”), among others, representing ownership interests in Common Units. Settled awards under the Ben Equity Incentive Plan dilute Ben’sholders of Common Unitholders.Units. The total number of Common Units that may be issued under the Ben Equity Incentive Plan is equivalent to 15% of the number of fully diluted Common Units outstanding, subject to annual adjustment.

All awards are classified in equity upon issuance.

All REUs are subject to two performance conditions, both of which were met during 2019. Additionally, if a change-of-control event occurs prior to July 1, 2021, then all units, vested and unvested, will settle within 60 days. Any transaction wherewhereby GWG Holdings obtains the right to appoint a majority of the members of Beneficient Management’s Board of Directors is expressly excluded from the definition of change-of-control for the REUs.
Page 38
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Awards will generally be subject to service-based vesting over a multi-year period from the recipient’s date of hire, though some awards fully vest upon grant date. While providing services to Ben,Beneficient, if applicable, certain of these awards are subject to minimum retained ownership rules requiring the award recipient to continuously hold Common Unit equivalents equal to at least 15% of their cumulatively granted awards that have the minimum retained ownership requirement.

Page 37

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

As Ben LP’s equity is not publicly traded, the fair value of the REUs is estimated on the grant date using recent equity transactions involving third parties, which provides the Company with observable fair value information sufficient for estimating the grant date fair value.

The following table summarizes the award activity, in number of units, for each plan during the three months ended March 31, 2020:

  

Balance at

December 31,
2019

  

Granted
during

the period

  Vested
during the
period		  

Exercised
during

the period

  

Forfeited
during

the period

  Balance at
March 31,
2020		 
Vested                  
Stock Options  673,341   —   20,751   (19,304)  (55,917)  618,871 
SAR  200,745   —   —   (1,284)  (2,051)  197,410 
RSU  —   —   —   —   —   — 
BMP Equity Units  7,980,037   3,451,017   —   —   —   11,431,054 
REU  2,164,742   2,281,681   7,500   —   —   4,453,923 
                         
Unvested                        
Stock Options  232,040   —   (20,751)  —   (44,858)  166,431 
SAR  174,880   —   —   —   (25,317)  149,563 
RSU  244,083   —   —   —   —   244,083 
BMP Equity Units  180,000   2,649,200   —   —   (70,000)  2,759,200 
REU  246,500   1,902,472   (7,500)  —   (77,500)  2,063,972 
                         
Total                        
Stock Options  905,381   —   —   (19,304)  (100,775)  785,302 
SAR  375,625   —   —   (1,284)  (27,368)  346,973 
RSU  244,083   —   —   —   —   244,083 
BMP Equity Units  8,160,037   6,100,217   —   —   (70,000)  14,190,254 
REU  2,411,242   4,184,153   —   —   (77,500)  6,517,895 

The holders of certain of the units issued under the BMP Equity Incentive Plan and the Ben Equity Incentive Plan, upon vesting, have the right to convert the units to shares of GWG Holdings common stock per the Exchange Agreement discussed in Note 1. As such, units vested and issued under Beneficient’s equity incentive plans may result in dilution of the common stock of GWG Holdings.

As Ben LP’s equity is not publicly traded, the fair value for substantially all of the REUs granted in 2020 was estimated by using the valuation techniques consistent with those utilized to determine the acquisition date equity values arising from GWG Holdings obtaining a controlling financial interest in Beneficient. These valuation techniques relied upon the OPM Backsolve approach under the market method as more fully described in the 2020 Form 10-K. For the REUs granted in the latter portion of 2020 and through March 31, 2021, we utilized valuation techniques consisting of the income approach and market approach.
During third quarter 2020, 515,000 units were granted to a senior partner director subject to a performance condition. The performance condition has not been met as of March 31, 2021. As the performance condition of the grant is based on a liquidity event, recognition of the related compensation cost is deferred until the condition has been met. Total unrecognized compensation cost related to this award is approximately $6.4 million as of March 31, 2021.
Preferred Equity
On April 25, 2019, Preferred Series A Subclass 1 Unit Accounts in BCH, a subsidiary of Ben LP, were assigned to 3 directors, with each having a capital account balance of $4.0 million, subject to a performance condition, in return for each of the directors providing to BCH their knowledge and abilities in helping with the formation of and capital raising for the Company. BHI, a Ben Founder Affiliate, assigned the Preferred Series A Subclass 1 Unit Accounts it holds in BCH to the directors for those individuals providing services to BCH. Accounting for services provided to the Company but paid by a principal shareholder follows the substance of the transaction and is therefore accounted for similar to a share-based payment in exchange for services rendered. The awards vest upon grant, subject to a performance condition whereby each of the directors must be a board member at the time that a certain level of additional capital is raised. The fair value of the awards at the grant date was estimated at $12.0 million in aggregate.
During the fourth quarter of 2019, $4.0 million of the capital account balance was forfeited back to the Company and reverted to BHI upon the departure of a certain director. The performance condition was met during the fourth quarter of 2020 and expense of $11.4 million was recognized and specially allocated to certain Preferred Series A Subclass 1 Unit Account holders on a pro-rata basis based on their capital account balance. The expense recognized upon vesting is reflective of the value calculated after the determination of overall enterprise value in connection with the change of control event discussed in the 2020 Form 10-K.
Page 39
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table summarizes the award activity, in number of units, for each plan during the three months ended March 31, 2021:
Balance at December 31, 2020GrantedVestedForfeitedBalance at March 31, 2021
Vested
Stock Options629,530 �� — — 629,530 
SAR293,455 7,750 — — 301,205 
RSU— 3,189 — — 3,189 
BMP Equity Units11,144,016 12,696 248,314 — 11,405,026 
REUs5,078,796 12,696 218,758 — 5,310,250 
Unvested
Stock Options65,587 — — — 65,587 
SAR242,202 49,950 — — 292,152 
RSU129,717 3,189 — (3,189)129,717 
BMP Equity Units2,230,097 50,784 (248,314)— 2,032,567 
REUs2,268,574 50,784 (218,758)— 2,100,600 
Total
Stock Options695,117 — — — 695,117 
SAR535,657 57,700 — — 593,357 
RSU129,717 6,378 — (3,189)132,906 
BMP Equity Units13,374,113 63,480 — — 13,437,593 
REUs7,347,370 63,480 — — 7,410,850 
The following table presents the components of equity-based compensation expense recognized in the condensed consolidated statement of operations (in thousands):

  Three Months Ended
March 31,		 
  2020  2019 
Stock options $48  $262 
Stock appreciation rights  206   413 
Restricted stock units  260   159 
BMP equity units  38,024   — 
REU  30,910   — 
Total equity-based compensation $69,448  $834 

Three Months Ended
March 31,
20212020
Stock options$40 $48 
Stock appreciation rights69 206 
Restricted stock units31 260 
BMP equity units2,105 38,024 
REUs3,107 30,910 
Total equity-based compensation$5,352 $69,448 
Unrecognized equity-based compensation expense, excluding the expense related to the performance award discussed above, totaled approximately $45.2$32.0 million as of March 31, 2020.2021. We currently expect to recognize equity-based compensation expense of $13.0$12.4 million during the remainder of 2020,2021, and the remainder thereafter based on scheduled vesting of awards outstanding as of March 31, 2020. 2021.
Page 40
Table Of Contents
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

The following table presents the equity-based compensation expense expected to be recognized over the next five years based on scheduled vesting of awards outstanding, excluding the award subject to the performance condition discussed above, as of March 31, 20202021 (in thousands):

  Stock Options  SAR  RSU  REU  BMP Equity Units  Total 
Nine months ending 2020 $202  $81  $226  $6,169  $6,301  $12,979 
2021  142   132   —   8,027   8,363   16,664 
2022  20   81   —   5,306   5,705   11,112 
2023  —   6   —   2,148   1,904   4,058 
2024  —   —   —   262   139   401 
Total $364  $300  $226  $21,912  $22,412  $45,214 

Page 38

Stock OptionsSARREUsBMP Equity UnitsTotal
Nine months ending 2021$67 $205 $6,000 $6,103 $12,375 
202219 231 5,913 5,969 12,132 
2023— 131 3,152 2,690 5,973 
2024— 5 833 654 1,492 
2025— — 32 27 59 
2026— — — — — 
Total$86 $572 $15,930 $15,443 $32,031 

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(13)


(12) Income Taxes

The Company’s income tax provision reflects the activity of GWG Holdings and its subsidiaries, Beneficient Corporate Holdings, LLC and Ben Markets Corporate Holdings, LLC. GWG Holdings and its subsidiaries files a separate tax return from the aforementioned Beneficient entities, but the tax provision information below as of and for the three months ended March 31, 2021 is disclosed on a consolidated basis for financial reporting purposes under applicable GAAP.
The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods.

Income

The Company’s effective tax rate was 0.43% for the three months ended March 31, 2021. The income tax benefit for the three months ended March 31, 2021 was $14.5$0.3 million, compared to $16.1 million for the three months ended March 31, 2020, compared2020. The effective tax rate differs from the statutory U.S. federal income tax rate of 21% primarily due to $0.0 millionvaluation allowances recorded on the current year losses, offset by a current state tax expense. The income tax benefit for the three months ended March 31, 2019. The Company’s effective tax rate was 16.03% and 0% for the same periods. Our tax benefit for the year2021 primarily reflects the effect of a change in state taxing jurisdictions,downward adjustment to the reduction of a naked credit (described below) and current tax expense.

In late 2019, the Company moved its headquarters from Minnesota to Texas. This move resulted in a change in the state deferred tax rate from 9.8%liability for specific expense allocations to 0%. The tax effectsthe holders of this move has been recorded as a discrete item during the period.

Preferred Series A Subclass 1 Unit Accounts.

The Company currently records a valuation allowance against its deferred tax assets tothat cannot be realized solely by the extent there are indefinite lived intangibles related to investments, business interest expense and net operating losses.future reversal of existing temporary differences. Due to the uncertain timing of the reversal of certain of these taxable temporary differences due to the constraint described below, they cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the vast majority of the existing deferred tax liability cannot offsetbe utilized in determining the realizability of the deferred tax assets. This is often referred to as a “naked credit.” Due to a prior deemed ownership change, net operating loss carryforwards are subject to Section 382 of the Internal Revenue Code.

We continue

The Company determined it cannot utilize the reversal of a taxable temporary difference related to monitor and evaluateGWG Life’s ownership in the rationale for recordingPreferred Series A Subclass 1 Unit Accounts described in Note 1, until such time as the preferred equity is no longer constrained, as a full valuation allowance for the net amountsource of theincome to realize existing deferred tax assets which are in excess ofrelated to the indefinite-lived deferred tax assetsnet operating loss and liabilities. We intend to continue maintainingInternal Revenue Code Section 163(j) limitations. As a full valuation allowance on theseresult, the Company recorded a large net deferred tax assets until thereliability on December 31, 2019, the majority of which remained as of March 31, 2021 and December 31, 2020. The disposition of this investment is sufficient evidenceconstrained by the Pledge and Security Agreement in favor of the holders of the L Bonds of GWG Holdings. As such, the timing of recognition of the necessary taxable income related to supportthis investment and the future reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which included significant changes to U.S. Federal income tax law. However, the only change that is expected to affect the Company is the modification to Section 163(j), which increased the allowable business interest deduction from 30% of adjustedthis taxable income to 50% of adjusted taxable income.

(14)temporary difference cannot be predicted.

Page 41
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

(13) Loss per Common Share

The computations of basic and diluted income (loss) attributable to common shareholders per share for the three months ended March 31, 20202021 and 20192020 are as follows (in thousands, except share data and per share data):

  Three Months Ended
March 31,		 
  2020  2019 
Numerator:      
 Net loss attributable to common shareholders $(49,384) $(18,910)
         
Denominator:        
Basic – weighted average common shares outstanding  30,534,977   32,984,741 
Effect of dilutive securities  —   — 
Diluted – weighted average common shares outstanding  30,534,977   32,984,741 
Basic loss per common share $(1.62) $(0.57)
Diluted loss per common share $(1.62) $(0.57)

Three Months Ended
March 31,
20212020
Numerator:
Net loss attributable to common shareholders$(54,432)$(47,323)
Denominator:
Basic – weighted average common shares outstanding20,757,400 30,534,977 
Effect of dilutive securities— — 
Diluted – weighted average common shares outstanding20,757,400 30,534,977 
Basic loss per common share$(2.62)$(1.55)
Diluted loss per common share$(2.62)$(1.55)
For the three months ended March 31, 20202021 and 2019,2020, RPS, RPS 2, restricted stock units, and stock options for a potential 2,543,6652,122,480 and 2,814,6352,543,665 shares, respectively, were not included in the calculation of diluted earnings per share because we recorded a net loss during these periods and the effects were anti-dilutive. Potentially dilutive instruments issued by Ben LP that are ultimately exchangeable into GWG common stock were also excluded from the calculation of diluted earnings per share for the three months ended March 31, 2021 and 2020 because we recorded a net loss during this periodthese periods and the effects were anti-dilutive.

Page 39

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(15)

(14) Segment Reporting

The Company has two2 reportable segments consisting of Secondary Life Insurance and Beneficient. Corporate & Other includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company, and from November 1, 2019, include ourGWG Holdings’ equity method investment in FOXO.

The Secondary Life Insurance segment seeks to earn non-correlated yield from our portfolio of life insurance policies. Our Beneficient segment consists of the assets and operations of Ben LP and its subsidiaries. Beneficient became a consolidated subsidiary of GWG Holdings as of December 31, 2019, as described in Note 4. Ben LP provides a variety of trust services, liquidity products and loans for owners of alternative assets and illiquid investment funds, and other financial services to mid-to-high net worthMHNW individuals. PriorThe Corporate & Other category consists of unallocated corporate overhead and administrative costs and the operations of operating segments that do not meet the quantitative criteria to December 31, 2019, we accounted for our investment in the common units of Beneficient under the equity method.

be separately reported.

These segments are differentiated by the products and services they offer as well as by the information used by the Company’s chief operating decision maker to determine allocation of resources and assess performance.

Earnings before taxes (“EBT”) is the measure of profitability used by management to assess performance of its segments and allocate resources. Segment EBT represents net income (loss) excluding income taxes and includes earnings (loss) from equity method investments and gaininvestments. Information on consolidation of equity method investment.

  Three Months Ended
March 31,		 
Revenue: 2020  2019 
Secondary Life Insurance $15,148  $22,183 
Beneficient  18,409   2,870 
Corporate & Other  —   164 
Total $33,557  $25,217 

  Three Months Ended
March 31,		 
Interest Expense: 2020  2019 
Secondary Life Insurance $22,693  $20,096 
Beneficient  13,178   6,879 
Corporate & Other  —   — 
Total $35,871  $26,975 

  Three Months Ended
March 31,		 
Interest Income: 2020  2019 
Secondary Life Insurance $615  $631 
Beneficient  13,374   2,825 
Corporate & Other  —   4 
Total $13,989  $3,460 

  Three Months Ended
March 31,		 
Segment EBT: 2020  2019 
Secondary Life Insurance $(14,721) $(1,623)
Beneficient  (70,149)  (5,936)
Corporate & Other  (7,153)  (7,055)
Total  (92,023)  (14,614)
Income tax benefit  14,507   — 
Net loss $(77,516) $(14,614)

reportable segments is as follows (in thousands):

Three Months Ended
March 31,
Revenue:20212020
Secondary Life Insurance$7,172 $15,148 
Beneficient587 7,664 
Total$7,759 $22,812 

Page 40

42

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Total Assets: March 31,
2020		  December 31,
2019		 
Secondary Life Insurance $952,447  $904,363 
Beneficient  2,719,387   2,721,546 
Corporate & Other  12,395   9,297 
Total $3,684,229  $3,635,206 


Three Months Ended
March 31,
Interest Expense:20212020
Secondary Life Insurance$27,620 $22,693 
Beneficient13,762 13,178 
Total$41,382 $35,871 
 Three Months Ended
March 31,
Segment EBT:20212020
Secondary Life Insurance$(22,389)$(14,721)
Beneficient(31,593)(80,194)
Corporate & Other(13,310)(7,153)
Total Segment EBT(67,292)(102,068)
Income tax benefit(286)(16,145)
Net loss$(67,006)$(85,923)
Total Assets:March 31, 2021December 31, 2020
Secondary Life Insurance$876,829 $886,739 
Beneficient2,654,336 2,662,630 
Corporate & Other14,607 15,588 
Total$3,545,772 $3,564,957 
The total assets of the Beneficient segment at both March 31, 20202021 and December 31, 2019,2020 includes goodwill of $2.4 billion, and $2.4 billion, respectively, which represents all of the goodwill on ourthe Company’s condensed consolidated balance sheet as of the end of each reporting period.

(16) Leases

The Company leases certain real estate for its office premises under operating lease agreements which expire in 2021 and 2025. Under these leases, we are obligated to pay base rent plus common area maintenance and a share of building operating costs. The lease agreements contain extension options that we have not included in our liability calculations. We lease various other facilities on a short-term basis.

The lease assets and liabilities are as follows (in thousands):

    March 31, 
Leases Classification 2020 
      
Operating lease right-of-use assets Other assets $1,714 
       
Operating lease liabilities Other accrued expenses $2,320 

Total lease costs recognized for the three months ended March 31, 2020 and 2019 were $0.3 million and $0.1 million, respectively. These amounts included operating lease costs of $0.2 million and $50 thousand, variable lease costs of $53 thousand and $55 thousand, and short term lease costs of $49 thousand and $26 thousand for the three months ended March 31, 2020 and 2019, respectively. The weighted average remaining lease term at March 31, 2020 was 4.1 years and the weighted average discount rate was 6.6%. For the three months ended March 31, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities and included in operating cash flows totaled $0.3 million and $0.1 million, respectively.

Maturities of operating lease liabilities as of March 31, 2020 are as follows (in thousands):

2020 $751 
2021  715 
2022  302 
2023  311 
2024  320 
Thereafter  273 
Total lease payments  2,672 
Less: imputed interest  (352)
Present value of lease liabilities $2,320 

(17)

(15) Commitments and Contingencies

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

Commitments— GWG Holdings is committed to contribute an additional $12.5$2.5 million to FOXO through October 2021, with an additional $8.4 million in the nine months ending December 31, 2020 and $4.1 million in 2021. Beneficientall of which has been contributed through such date. The ExAlt Trusts had $73.7$35.5 million and $73.8$35.6 million of potential gross potential capital commitments as of March 31, 20202021 and December 31, 2019,2020, respectively, representing potential limited partner capital funding commitments on the interests in alternative asset fund collateral to its loansfunds. This is the amount above any existing cash reserves.reserves for such capital funding commitments. The trustExAlt Trusts holding the interest in the limited partnership for the alternative asset fund is required to fund these limited partner capital commitments per the terms of the limited partnership agreement. Capital funding commitment reserves are maintained by the associated trusts within the ExAlt PlanTM created at the origination of each trust for up to $0.1 million. To the extent that the associated trustExAlt Trusts cannot pay the capital funding commitment, Beneficient is obligated to lend the associated ExAlt Trust sufficient funds to meet the commitment. commitment, pursuant to the terms of the respective ExAlt Loan. Any amounts advanced by Beneficient to the ExAlt Trusts for these limited partner capital funding commitments, pursuant to the terms of the respective ExAlt Loan, above the associated capital funding commitment reserves held by the associated ExAlt Trusts are added to the ExAlt Loan balance between Beneficient and the ExAlt Trusts and are expected to be recouped through the cash distributions from the alternative asset fund that collateralizes such ExAlt Loan.
Capital commitments generally originate from limited partner agreements having fixed or expiring expiration dates. The total limited partner capital funding commitment amounts may not necessarily represent future cash requirements.

Beneficient considers the creditworthiness of the investments on a case-by-case basis. At both March 31, 2021 and December 31, 2020, Beneficient had no reserves for losses on unused commitments to fund potential limited partner capital funding commitments.

Page 41

43

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(18) Guarantee and Collateral Provisions


Investigation — On October 6, 2020, GWG Holdings received a subpoena to produce documents from the Chicago office of the SEC’s Division of Enforcement, informing the Company of the existence of a non-public, fact-finding investigation into GWG Holdings. Since the initial subpoena, GWG Holdings has received subsequent subpoenas from the SEC for additional information. The requested information from the SEC has primarily related to GWG Holdings’ investment products, including its L Bonds, and Seller Trust L Bonds

Our L Bonds are offered and sold under a registration statement declared effectiveas well as various accounting matters. among them, the consolidation for financial reporting purposes of Beneficient by the SEC, as described in Note 10, and we have issued Seller Trust L Bonds under a Supplemental Indenture, as described in Note 10. The L Bonds and Seller Trust L Bonds are secured by substantially all the assets of GWG Holdings, a pledge of all our common stock held by BCCgoodwill valuation, and AltiVerse (which together represent approximately 12% of our outstanding common stock), and by a guarantee and corresponding grant of a security interest in substantially all the assets of GWG Life(1). As a guarantor, GWG Life has fully and unconditionally guaranteedaccounting related to the payment of principal and interest on the L Bonds and Seller Trust L Bonds. GWG Life’s equity in DLP IV(2) serves as collateral for our L Bond and Seller Trust L Bond obligations. Substantially all of ourExAlt Trusts, related party transactions, life insurance policies, are held by DLP IV or GWG Life Trust. The policies held by DLP IV are not direct collateral forand the L Bonds as such policies are pledged tocalculation of the LNV Credit Facility.

​(1)The Seller Trust L Bonds are senior secured obligations of GWG, ranking junior to all senior debt of GWG and pari passu in right of payment and in respect of collateral with all L Bonds of GWG (see Note 10). Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in the in connection with the Beneficent transaction are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Common Units of Ben LP are held by GWG Holdings and the Commercial Loan is held by GWG Life.

​(2)The terms of our LNV Credit Facility require that we maintain a significant excess of pledged collateral value over the amount outstanding on the LNV Credit Facility at any given time. Any excess after satisfying all amounts owing under our LNV Credit Facility is available as collateral for the L Bonds (including the Seller Trust L Bonds).

The following represents consolidating financial information asdebt-coverage ratio.

Until receipt of March 31,the initial subpoena on October 6, 2020, and December 31, 2019, with respect to the financial position, and for the three months ended March 31, 2020 and 2019, with respect to results of operations and cash flows of GWG Holdings had no previous communication with the SEC related to these issues and its subsidiaries.was unaware of this investigation. The parent column presentsCompany is fully cooperating with the financial informationSEC in this investigation. The Company is currently unable to predict when this matter will be resolved or what further action, if any, the SEC may take in connection with it. As such, the Company cannot predict with certainty the outcome or effect of GWG Holdings, the primary obligor for the L Bonds and Seller Trust L Bonds. The guarantor subsidiary column presents the financial information of GWG Life, the guarantor subsidiary of the L Bonds and Seller Trust L Bonds, presenting its investment in DLP IV and GWG Life Trust under the equity method. The non-guarantor subsidiaries column presents the financial information of all non-guarantor subsidiaries, including DLP IV, GWG Life Trust and Beneficient.

Page 42

any such investigation or whether it will lead to any claim or litigation.

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets (in thousands)

March 31, 2020 Parent  Guarantor
Subsidiary		  Non-
Guarantor
Subsidiaries		  Eliminations  Consolidated 
ASSETS               
                
Cash and cash equivalents $101,529  $1,753  $13,150  $—  $116,432 
Restricted cash  —   512   25,934   —   26,446 
Investment in life insurance policies, at fair value  —   344   801,837   —   802,181 
Life insurance policy benefits receivable, net  —   200   15,130   —   15,330 
Loans receivable, net of unearned income  —   —   219,296   —   219,296 
Allowance for loan losses  —   —   (700)  —   (700)
Loans receivable, net  —   —   218,596   —   218,596 
Fees receivable  —   —   30,453   —   30,453 
Financing receivable from affiliate  —   239,564   —   (171,274)  68,290 
Investment in GWG stock  —   —   25,400   (25,400)  — 
Other assets  67,792   320,460   23,471   (377,817)  33,906 
Goodwill  —   —   2,372,595   —   2,372,595 
Investment in subsidiaries  1,569,254   653,926   —   (2,223,180)  — 
                     
TOTAL ASSETS $1,738,575  $1,216,759  $3,526,566  $(2,797,671) $3,684,229 
                     
LIABILITIES & STOCKHOLDERS’ EQUITY                    
                     
LIABILITIES                    
Senior credit facility with LNV Corporation $—  $—  $188,793  $—  $188,793 
L Bonds  1,009,781   —   —   —   1,009,781 
Seller Trust L Bonds  366,892   —   —   —   366,892 
Other borrowings  —   —   152,597   —   152,597 
Intercompany debt – Commercial loan  —   —   171,329   (171,329)  — 
Interest and dividends payable  12,162   —   10,241   —   22,403 
Deferred revenue  —   —   39,651   —   39,651 
Accounts payable and accrued expenses  8,532   2,071   69,238   (58,702)  21,139 
Deferred tax liability, net  40,206   —   —   —   40,206 
TOTAL LIABILITIES  1,437,573   2,071   631,849   (230,031)  1,841,462 
                     
Redeemable noncontrolling interests  —   —   1,553,554   (311,913)  1,241,641 
                     
STOCKHOLDERS’ EQUITY                    
Member capital  —   1,214,688   655,073   (1,869,761)  — 
Common units  —   —   603,417   (603,417)  — 
Redeemable preferred stock and Series 2 redeemable preferred stock  186,658   —   —   —   186,658 
Common stock  33   —   —   —   33 
Common stock in treasury  —   —   —   (24,550)  (24,550)
Additional paid-in-capital  229,207   —   —   —   229,207 
Accumulated deficit  (114,896)  —   —   (7,037)  (121,933)
Noncontrolling interests  —   —   82,673   249,038   331,711 
TOTAL STOCKHOLDERS’ EQUITY  301,002   1,214,688   1,341,163   (2,255,727)  601,126 
                     
TOTAL LIABILITIES AND EQUITY $1,738,575  $1,216,759  $3,526,566  $(2,797,671) $3,684,229 

Page 43

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Balance Sheets (in thousands) (continued)

December 31, 2019 Parent  Guarantor
Subsidiary		  Non-
Guarantor
Subsidiaries		  Eliminations  Consolidated 
ASSETS                    
                     
Cash and cash equivalents $57,721  $2,644  $18,708  $—  $79,073 
Restricted cash  —   —   20,258   —   20,258 
Investment in life insurance policies, at fair value  —   340   795,699   —   796,039 
Life insurance policy benefits receivable, net  —   200   22,831   —   23,031 
Investment in GWG stock  —   —   24,550   (24,550)  — 
Loans receivable, net of unearned income  —   —   232,344   —   232,344 
Allowance for loan losses  —   —   —   —   — 
Loans receivable, net  —   —   232,344   —   232,344 
Fees receivable  —   —   29,168   —   29,168 
Financing receivable from affiliates  —   235,573   —   (168,420)  67,153 
Other assets  446,618   320,490   22,163   (759,136)  30,135 
Goodwill  —   —   2,358,005   —   2,358,005 
Investment in subsidiaries  1,221,227   664,723   —   (1,885,950)  — 
                     
TOTAL ASSETS $1,725,566  $1,223,970  $3,523,726  $(2,838,056) $3,635,206 
                     
LIABILITIES & STOCKHOLDERS’ EQUITY                    
                     
LIABILITIES                    
Senior credit facility with LNV Corporation $—  $—  $174,390  $—  $174,390 
L Bonds  926,638   —   —   —   926,638 
Seller Trust L Bonds  366,892   —   —   —   366,892 
Other borrowings  —   —   153,086   —   153,086 
Intercompany debt – commercial loan  —   —   168,420   (168,420)  — 
Interest and dividends payable  12,491   —   4,025   —   16,516 
Deferred revenue  —   —   41,444   —   41,444 
Account payable and accrued expenses  3,093   3,891   78,455   (57,603)  27,836 
Deferred tax liability  57,923   —   —   —   57,923 
TOTAL LIABILITIES  1,367,037   3,891   619,820   (226,023)  1,764,725 
                     
Redeemable noncontrolling interests  —   —   1,588,604   (318,950)  1,269,654 
                     
STOCKHOLDERS’ EQUITY                    
Member capital  —   1,220,079   665,871   (1,885,950)  — 
Common units  —   —   563,966   (563,966)  — 
Redeemable preferred stock and Series 2 redeemable preferred stock  201,891   —   —   —   201,891 
Common stock  33   —   —   —   33 
Treasury stock  —   —   —   (24,550)  (24,550)
Additional paid-in capital  233,106   —   —   —   233,106 
Accumulated deficit  (76,501)  —   —   —   (76,501)
Noncontrolling interests  —   —   85,465   181,383   266,848 
TOTAL STOCKHOLDERS’ EQUITY  358,529   1,220,079   1,315,302   (2,293,083)  600,827 
                     
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,725,566  $1,223,970  $3,523,726  $(2,838,056) $3,635,206 

Page 44

(16) Concentration

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations (in thousands)

For the three months ended March 31, 2020 Parent  Guarantor
Subsidiary		  Non-
Guarantor
Subsidiaries		  Eliminations  Consolidated 
REVENUE               
Gain on life insurance policies, net $—  $3  $14,442  $—  $14,445 
Interest and other income  365   5,237   18,447   (4,937)  19,112 
TOTAL REVENUE  365   5,240   32,889   (4,937)  33,557 
                     
EXPENSES                    
Interest expense  28,737   —   11,221   (4,087)  35,871 
Employee compensation and benefits  7,391   100   70,213   —   77,704 
Legal and professional fees  1,947   134   4,082   —   6,163 
Provision for loan losses  —   —   700   —   700 
Other expenses  2,461   423   728   —   3,612 
TOTAL EXPENSES  40,536   657   86,944   (4,087)  124,050 
                     
INCOME (LOSS) BEFORE EQUITY IN INCOME (LOSS) OF SUBSIDIARIES  (40,171)  4,583   (54,055)  (850)  (90,493)
                     
EQUITY IN INCOME (LOSS) OF SUBSIDIARIES  (11,128)  9,561   —   1,567   — 
                     
INCOME (LOSS) BEFORE INCOME TAXES  (51,299)  14,144   (54,055)  717   (90,493)
                     
INCOME TAX BENEFIT  (14,434)  —   (73)  —   (14,507)
NET INCOME (LOSS) BEFORE EARNINGS (LOSS) FROM EQUITY METHOD INVESTMENT  (36,865)  14,144   (53,982)  717   (75,896)
                     
Loss from equity method investment  (1,530)  —   —   —   (1,530)
                     
NET INCOME (LOSS)  (38,395)  14,144   (53,982)  717   (77,516)
                     
Net loss attributable to noncontrolling interests  —   —   37,842   (5,758)  32,084 
                     
Less: Preferred stock dividends  3,952   —   —   —   3,952 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $(42,347) $14,144  $(16,140) $(5,041) $(49,384)

Page 45

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Operations (in thousands) (continued) 

For the three months ended March 31, 2019 Parent  Guarantor
Subsidiary		  Non-
Guarantor
Subsidiaries		  Eliminations  Consolidated 
REVENUE               
Gain (loss) on life insurance policies, net $—  $2,067  $19,429  $—  $21,496 
Interest and other income  614   2,833   274   —   3,721 
TOTAL REVENUE  614   4,900   19,703   —   25,217 
                     
EXPENSES                    
Interest expense  22,607   —   4,368   —   26,975 
Employee compensation and benefits  3,224   1,855   75   —   5,154 
Legal and professional fees  1,280   580   1,087   —   2,947 
Other expenses  1,692   473   663   —   2,828 
TOTAL EXPENSES  28,803   2,908   6,193   —   37,904 
                     
INCOME (LOSS) BEFORE EQUITY IN INCOME OF SUBSIDIARIES  (28,189)  1,992   13,510   —   (12,687)
                     
EQUITY IN INCOME OF SUBSIDIARIES  15,502   14,885   —   (30,387)  — 
                     
INCOME (LOSS) BEFORE INCOME TAXES  (12,687)  16,877   13,510   (30,387)  (12,687)
                     
INCOME TAX EXPENSE (BENEFIT)  —   —   —   —   — 
NET INCOME (LOSS) BEFORE LOSS FROM EQUITY METHOD INVESTMENT  (12,687)  16,877   13,510   (30,387)  (12,687)
                     
Loss from equity method investment  (1,927)  —   —   —   (1,927)
                     
NET INCOME (LOSS)  (14,614)  16,877   13,510   (30,387)  (14,614)
                     
Preferred stock dividends  4,296   —   —   —   4,296 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS $(18,910) $16,877  $13,510  $(30,387) $(18,910)

Page 46

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Cash Flows (in thousands) 

For the three months ended March 31, 2020 Parent  Guarantor
Subsidiary		  Non-
Guarantor
Subsidiary		  Eliminations  Consolidated 
CASH FLOWS FROM OPERATING ACTIVITIES               
Net income (loss) $(38,395) $14,144  $(53,982) $717  $(77,516)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:                    
Equity of subsidiaries  11,128   (9,561)  —   (1,567)  — 
Change in fair value of life insurance policies  —   (4)  (12,173)  —   (12,177)
Amortization of deferred financing and issuance costs  3,882   —   329   —   4,211 
Amortization of upfront fees  —   —   (1,793)  —   (1,793)
Amortization of debt premiums  —   —   (473)  —   (473)
Amortization and depreciation on long-lived assets  31   1   140   —   172 
Accretion of discount on financing receivable from affiliate  —   (1,620)  1,620   —   — 
Non-cash interest income  —   (1,138)  (12,236)  —   (13,374)
Non-cash interest expense  —   —   676   —   676 
Loss from equity method investment  1,530   —   —   —   1,530 
Provision for loan losses  —   —   700   —   700 
Deferred income tax  (17,717)  —   —   —   (17,717)
Equity-based compensation  4,303   —   65,145   —   69,448 
(Increase) decrease in operating assets:                    
Life insurance policy benefits receivable  —   —   7,701   —   7,701 
Fees receivable  —   —   (1,285)  —   (1,285)
Accrued interest on financing receivable  —   (1,234)  1,234   —   — 
Other assets  270   29   (1,880)  1,949   368 
Increase (decrease) in operating liabilities:                    
Accounts payable and other accrued expenses  5,372   (1,821)  (3,555)  (1,099)  (1,103)
NET CASH FLOWS USED IN OPERATING ACTIVITIES  (29,596)  (1,204)  (9,832)  —   (40,632)
                     
CASH FLOWS FROM INVESTING ACTIVITIES                    
Carrying value of matured life insurance policies  —   —   6,035   —   6,035 
Purchases of fixed assets  (60)  —   (421)  —   (481)
Equity method investments  (5,417)  —   —   —   (5,417)
Net change of loans receivable  —   —   10,614   —   10,614 
Payment of capital contributions  19,528   20,359   —   (39,887)  — 
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES  14,051   20,359   16,228   (39,887)  10,751 
                     
CASH FLOWS FROM FINANCING ACTIVITIES                    
Borrowings on senior debt  —   —   14,074   —   14,074 
Proceeds from issuance of L Bonds  109,053   —   —   —   109,053 
Payments for issuance and redemptions of L Bonds  (30,532)  —   —   —   (30,532)
Issuance of common stock  18   —   —   —   18 
Payments for redemption of preferred stock  (15,233)  —   —   —   (15,233)
Preferred stock dividends  (3,952)  —   —   —   (3,952)
Issuance of member capital  —   (19,534)  (20,353)  39,887   — 
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES  59,354   (19,534)  (6,279)  39,887   73,428 
                     
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  43,809   (379)  117   —   43,547 
                     
CASH, CASH EQUIVALENTS AND RESTRICTED CASH                    
BEGINNING OF PERIOD  57,720   2,644   38,967   —   99,331 
END OF PERIOD $101,529  $2,265  $39,084  $—  $142,878 

Page 47

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Condensed Consolidating Statements of Cash Flows (in thousands) (continued)

For the three months ended March 31, 2019 Parent  Guarantor
Subsidiary		  Non-
Guarantor
Subsidiary		  Eliminations  Consolidated 
CASH FLOWS FROM OPERATING ACTIVITIES               
Net income (loss) $(14,614) $16,877  $13,510  $(30,387) $(14,614)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:                    
Equity of subsidiaries  (15,502)  (14,885)  —   30,387   — 
Change in fair value of life insurance policies  —   (3,620)  (11,951)  —   (15,571)
Amortization of deferred financing and issuance costs  2,836   —   264   —   3,100 
Accretion of discount on financing receivable from affiliate  —   (419)  —   —   (419)
Loss from equity method investment  1,927   —   —   —   1,927 
Equity-based compensation  834   —   —   —   834 
(Increase) decrease in operating assets:                    
Life insurance policy benefits receivable  —   5,000   2,261   —   7,261 
Accrued interest on financing receivable  —   (1,551)  —   —   (1,551)
Other assets  (416)  72   (3,598)  —   (3,942)
Increase (decrease) in operating liabilities:                    
Accounts payable and other accrued expenses  1,404   (481)  (4,251)  —   (3,328)
NET CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES  (23,531)  993   (3,765)  —   (26,303)
                     
CASH FLOWS FROM INVESTING ACTIVITIES                    
Investment in life insurance policies  —   (8,681)  (18,711)  —   (27,392)
Carrying value of matured life insurance policies  —   169   8,532   —   8,701 
Payment of capital contributions  (33,724)  (28,498)      62,222   — 
NET CASH FLOWS USED IN INVESTING ACTIVITIES  (33,724)  (37,010)  (10,179)  62,222   (18,691)
                     
CASH FLOWS FROM FINANCING ACTIVITIES                    
Repayments of senior debt  —   —   (2,373)  —   (2,373)
Proceeds from issuance of L Bonds  125,985   —   —   —   125,985 
Payments for issuance and redemptions of L Bonds  (23,974)  —   —   —   (23,974)
Repurchase of common stock  (269)  —   —   —   (269)
Payments for redemption of preferred stock  (819)  —   —   —   (819)
Preferred stock dividends  (4,296)  —   —   —   (4,296)
Issuance of member capital  —   31,713   30,509   (62,222)  — 
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES  96,627   31,713   28,136   (62,222)  94,254 
                     
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  39,372   (4,304)  14,192   —   49,260 
                     
CASH, CASH EQUIVALENTS AND RESTRICTED CASH                    
BEGINNING OF PERIOD  113,294   7,449   4,693   —   125,436 
END OF PERIOD $152,666  $3,145  $18,885  $—  $174,696 

Page 48

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(19) Concentration

Life Insurance Carriers

We primarily purchase

Our portfolio consists of purchased life insurance policies written by life insurance companies rated investment-grade by third-party rating agencies, including A.M. Best Company, Standard & Poor’s, and Moody’s. As a result, there may be concentrations of policies with certain life insurance companies. The following summarizes the aggregate face value of insurance policies with specific life insurance companies exceeding 10% of the total face value held byof our portfolio.

Life Insurance Company March 31,
2020		  December 31,
2019		 
John Hancock Life Insurance Company  14.24%  14.23%
The Lincoln National Life Insurance Company  10.91%  11.55%
AXA Equitable Life Insurance Company  10.83%  10.63%

Life Insurance CompanyMarch 31, 2021December 31, 2020
John Hancock Life Insurance Company13.96 %14.72 %
The Lincoln National Life Insurance Company11.15 %11.20 %
Equitable Financial Life Insurance Company10.70 %10.57 %

The following summarizes the number of insureds’ state of residenceinsurance policies held in specific states exceeding 10% of the total face value held by us:

State of Residence March 31,
2020		  December 31,
2019		 
California  17.68%  17.46%
Florida  14.68%  14.86%

our portfolio:

State of ResidenceMarch 31, 2021December 31, 2020
California17.64 %18.05 %
Florida15.21 %14.93 %
Alternative Assets Industries
Beneficient’s underlying portfolio companies primarily operate in the United States and Western Europe, with the largest percentage, based on NAV, operating in healthcare technology, bio-technology, and diversified financials, telecommunications services, industries.

(20)food and staples retailing, and software and services and utilities.

(17) Subsequent Events and Other Matters

L Bond Suspension
We temporarily suspended the offering of GWG Holdings’ L Bonds, commencing April 16, 2021, as a result of our delay in filing certain periodic reports with the SEC, including this Quarterly Report on Form 10-Q. We anticipate recommencing the offering of GWG Holdings’ L Bonds when we regain compliance with SEC filing requirements.
Amendments to Beneficient Credit Agreements
On June 28, 2021, BCH. and HCLP entered into Amendment No. 2 to the Ben Credit Agreements. The amendments eliminate the obligation of DLP V to assume the Ben Credit Agreements as provided for in the Ben Credit Agreements and waive the daily fee payable upon the Trigger as defined and provided for in the Amendments.
Page 44
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Effective July 15, 2021, Beneficient executed Consent and Amendment No. 3 to the Second Amended and Restated Credit Agreement and Amendment No. 2 to the Second Amended and Restated Subordinate Credit Agreement with its lender, which (i) deferred the payment of all accrued and unpaid interest until December 10, 2021, and (ii) deferred the installment payment of $5.0 million due on September 10, 2021, to December 10, 2021. Beneficient agreed to pay an amendment fee to the lender in an amount equal to 3% of the then outstanding principal and interest on December 10, 2021.
Third Amended and Restated Senior Credit Facility with LNV Corporation
On June 28, 2021, DLP IV entered into the Third Amended and Restated Credit Facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the agreement (the "Third Amended Facility"), which replaced the LNV Credit Facility described in Note 9. The Third Amended Facility resulted in an additional advance of $52.5 million from LNV Corporation.
In conjunction with entering into the Third Amended Facility, DLP V transferred life insurance policies having an aggregate face value of approximately $440.6 million to DLP IV, which were pledged as additional collateral to the Third Amended Facility, and DLP IV received proceeds of approximately $51.2 million (net of certain fees and expenses incurred in connection with the negotiation and entry into the Third Amended Facility). The Third Amended Facility sets forth interest and other terms and covenants similar those included in the previous LNV Credit Facility.
Beneficient’s Conditional Kansas Charter
In April 2021, the Kansas Legislature adopted, and the governor of Kansas signed into law, a bill that would allow for the chartering and creation of Kansas trust companies, known as TEFFIs, that provide fiduciary financing (e.g., lending to ExAlt Trusts), custodian and trustee services, in all capacities pursuant to statutory fiduciary powers, to investors and other participants in the alternative assets market, as well as the establishment of alternative asset trusts. The legislation became effective on July 1, 2021 and designates BFF as the pilot trust company under the TEFFI legislation. A conditional trust charter was issued by the Kansas Bank Commissioner to a subsidiary of Ben LP on July 1, 2021. Under the pilot program, BFF will not be authorized to exercise its fiduciary powers as a TEFFI until the earlier of the date the Kansas Bank Commissioner promulgates applicable rules and regulations or December 31, 2021 or. The bill also permits the Kansas Bank Commissioner to request a six-month extension of the pilot program period, which could delay Beneficient’s permission to exercise of fiduciary powers under the charter until July 1, 2022.
National Founders LP Credit Agreement
On August 11, 2021, GWG DLP Funding VI, LLC, a Delaware limited liability company (“DLP VI”), entered into a Credit Agreement (the “NF Credit Agreement”) with each lender from time to time party thereto and National Founders LP, a Delaware limited partnership, as the administrative agent (the credit facility evidenced by such NF Credit Agreement, the “NF Credit Facility”). DLP VI is a wholly owned subsidiary of GWG DLP Funding Holdings VI, LLC, a Delaware limited liability company (the “DLP Holdings VI”). DLP Holdings VI is a wholly owned subsidiary of GWG Life.

On August 11, 2021, a one-time advance of approximately $107.6 million was made to the DLP VI under the NF Credit Facility with a scheduled maturity date of August 11, 2031. Amounts borrowed under the NF Credit Facility bear interest on each day on the outstanding principal amount on such day at a per annum rate, determined on a daily basis, generally equal to 5.5% up to a 65% of the loan to value percent as calculated in accordance with the NF Credit Agreement, and 7.0% on anything above that loan to value percent. In particular, amounts borrowed under the NF Credit Facility bear interest on each day on the outstanding principal amount on such day at a per annum rate equal to the Interest Rate as of such day, or the Default Rate as of such day if an event of default has occurred and is continuing. The “Interest Rate” as of such day is equal to the sum of: (a) the percentage equal to (i) the Non-Higher Rate Factor as of such date of determination multiplied by (ii) 5.50%; and (b) the percentage equal to (i) the Higher Rate Factor as of such date of determination multiplied by (ii) 7.00%. “Non-Higher Rate Factor” means, as of any date of determination, the percentage equal to (i) 100% minus (ii) the Higher Rate Factor as of such date of determination, and “Higher Rate Factor” means, as of any date of determination, the percentage equal to (i) the greater of (a) the amount equal to (1) the LTV Percentage (as defined in the NF Credit Agreement) as of such date of determination minus (2) 65% and (b) zero percent divided by (ii) the LTV Percentage as of such date of determination. The “Default Rate” as of such day is equal to the sum of: (a) the Interest Rate as of such day and (b) 2.00%. Interest payments are made on a monthly basis.

Page 45
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Under the NF Credit Facility, each of DLP VI and DLP Holdings VI has granted the administrative agent, for the benefit of the lenders under the agreement, a security interest in substantially all of GWG Holdings’ remaining life insurance policy assets not pledged by DLP IV under its LNV Credit Facility. In addition, amounts owing under the NF Credit Facility have been guaranteed by GWG Holdings upon the occurrence of a Guarantee Trigger Event (as defined in the guarantee), including certain bankruptcy events related to the DLP VI or DLP Holdings VI or a Change in Control (as defined in the NF Credit Agreement).

A portion of the proceeds from the funding under the NF Credit Facility was used to purchase life insurance policies that were owned by DLP IV, which used the funds to repay the most recent advance of $52.5 million plus interest and penalties under the LNV Credit Facility described above. At August 11, 2021, the aggregate face value of life insurance policies owned by DLP VI, was approximately $433.1 million. As of such date, the aggregate face value of life insurance policies owned by DLP IV was approximately $1.42 billion.

GWG Holdings secures L Bonds with a pledge of collateral security in its ownership interests in GWG Life and GWG Holdings’ other direct subsidiaries; GWG Life’s ownership in its direct subsidiaries that own directly or indirectly a large actuarially diverse portfolio of life insurance policies of highly rated insurance companies; and investments in Beneficient. Subsequent to entering into the NF Credit Facility, substantially all of our life insurance policies are held by DLP IV or DLP VI. The policies held by DLP IV and DLP VI are not direct collateral for the L Bonds as such policies are pledged under the LNV Credit Facility and NF Credit Facility, respectively. Furthermore, L Bonds are secured by a pledge of approximately 4.0 million shares of GWG Holdings’ common stock. GWG Holdings’ most significant assets are cash and its investments in subsidiaries. These assets were not pledged under the NF Credit Facility.

The NF Credit Facility has certain financial and nonfinancial covenants, and we were in compliance with these covenants as of the date of this filing. In addition, the NF Credit Facility has certain reporting obligations that require DLP VI to deliver audited annual consolidated financial statements of DLP Holdings VI no later than 150 days after the end of each fiscal year (beginning with the fiscal year ending December 31, 2021) and unaudited quarterly consolidated financial statements of DLP Holdings VI no later than 90 days after the end of each of DLP VI’s first three fiscal quarters (beginning with the fiscal quarter ending September 30, 2021). The NF Credit Facility also has customary events of default for a facility of this type.
DLP VI may voluntarily prepay amounts owing under the NF Credit Facility upon payment of all accrued and unpaid interest on such prepaid amounts and payment of the applicable Prepayment Premium (as defined in the NF Credit Agreement).
The NF Credit Facility permits DLP VI to pay dividends and distributions from the proceeds of the one-time advance. As a result, the funding under the NF Credit Facility, less amounts used to purchase the life insurance policies from DLP IV, will be available to GWG Holdings and will improve GWG Holdings’ cash position while it works to complete its periodic reporting requirements with the SEC, including this Form 10-Q, which GWG Holdings expects will permit it to resume the issuance of its L Bonds.
Non-Binding Term Sheet with Beneficient
On August 13, 2021, GWG Holdings, Ben LP, and BCH entered into a non-binding term sheet (the “Term Sheet”) that contemplates a series of transactions, which, if completed, will result in, among other things, (i) GWG Holdings receiving certain proposed enhancements to its investments in Beneficient; (ii) GWG Holdings no longer having the right to appoint directors of the board of directors of Beneficient Management; and (iii) Beneficient no longer being a consolidated subsidiary of GWG Holdings. The Term Sheet and related negotiations are a part of ongoing efforts by management and the Board of Directors of GWG Holdings to maximize the value of GWG Holdings’ and GWG Life’s investment in Beneficient.
The Company believes that returning control of Beneficient is a necessary step for Ben LP to establish one of its operating subsidiaries as a TEFFI under the Kansas Technology-Enabled Fiduciary Financial Institutions Act (the “TEFFI Act”), which is important to Beneficient’s long-term business objective of providing liquidity and other services to holders of alternative assets.
Until the definitive documentation is finalized and executed, each of these provisions is non-binding and is subject to change in all respects, including as a result of additional diligence, the further discharge of fiduciary duties, and the negotiation of definitive documentation. The Company has begun working on definitive documentation to implement the Term Sheet with Ben LP and is working to complete such definitive documentation during the fourth quarter of 2021, although there can be no assurance definitive documentation will be completed by then, or at all.
Page 46
GWG HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
If Ben LP becomes an independent company pursuant to the terms of the Term Sheet, the Company expects that Ben LP would reduce its reliance on GWG Holdings to fund its operations and would raise future capital from other sources. Beneficient’s capital raising efforts may include the issuance of equity or debt of Ben LP or one of its subsidiaries, and the newly issued securities may be dilutive to GWG Holdings’ and GWG Life’s investment in Ben LP and BCH and may include preferential terms relative to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH. GWG Holdings and GWG Life would still retain a substantial investment in Beneficient.
Fourth Amended and Restated Senior Credit Facility with LNV Corporation
On September 7, 2021, DLP IV entered into a Fourth Amended and Restated Loan and Security Agreement with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the agreement (the “Fourth Amended Facility”). The Fourth Amended Facility replaced the Third Amended Facility, that previously governed the Company’s senior credit facility. The Fourth Amended Facility resulted in an additional advance of $30.3 million from LNV Corporation, paid on September 7, 2021.

Under the Fourth Amended Facility, all advances bear interest at a rate of the Benchmark Rate plus the Applicable Margin, or the Default Rate if an event of default has occurred and is continuing. For purposes of the Fourth Amended Facility, (i) the Benchmark Rate is the greater of (a) the sum of (i) the Federal Funds Rate plus (ii) one-half of one percent (0.50%) and (b) one and one half of one percent (1.50%); (ii) the Applicable Margin is seven and one half percent (7.50%); and (iii) the Default Rate is the Benchmark Rate plus nine and one half percent (9.50%).

COVID-19

In December 2019, a novel strain of coronavirus and the associated respiratory disease (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on futurecontinuing developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. AsAlthough a result, it issubstantial majority of our employees continue to work remotely, we have maintained our operations at or near normal levels. We have not currently possibleexperienced any significant disruptions due to ascertain the overall impactoperational issues, loss of COVID-19 on the Company’s business.communication capabilities, technology failure or cyber-attacks. The Company continues to raise capital, receive interest incomedistributions from alternative assets and insurance policy benefits, pay interest and dividends and otherwise meet its ongoing obligations. However, depending on the extent of the ensuingongoing economic crisis resulting from the pandemic and its impact on the Company’s business, the diseasepandemic could have a material adverse effect on our results of operations, financial condition and cash flows.

As discussed in our 2019 Form 10-K, management performs goodwill and intangible asset impairment testing annually, during the fourth quarter, or when events occur, or circumstances change that would more likely than not indicate impairment has occurred. The Company recorded goodwill on December 31, 2019, as a result of the transactions with Beneficient discussed in Note 4 to the condensed consolidated financial statements. Due to the significance of the COVID-19 pandemic, management performed a qualitative assessment of the goodwill of the Beneficient reporting unit. Management concluded that the potentially large and underserved market that Beneficient is seeking to address, including the estimated demand from MHNW individuals and STM size institutions seeking liquidity for their professionally managed alternative assets, has not been negatively affected by the COVID-19 pandemic such that it is more likely than not that the fair value of the Beneficient reporting unit would exceed its carrying value as of March 31, 2020. Therefore, the impact of the COVID-19 pandemic through the end of the first quarter of 2020 was not a triggering event to perform a quantitative test. We will continue to monitor the impact of COVID-19 on the economy and our business and will perform an interim quantitative goodwill impairment test if necessary.

Page 49

GWG HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Liquidity and Capital Resources

As of March 31, 2020, we had cash, cash equivalents and restricted cash of $142.9 million. We generated net losses attributable to common shareholders of $49.4 million and $18.9 million for the three months ended March 31, 2020 and 2019, respectively. As of May 13, 2020, we had cash, cash equivalents and restricted cash of approximately $140 million. Besides funding operating expenditures and having sufficient cash to fund anticipated additional investments in Beneficient primarily for its lending products and working capital needs, we are obligated to pay other items such as interest payments and debt redemptions, and preferred stock dividends and redemptions. We expect to satisfy these obligations and fund our operations through anticipated operating cash flows, receipt of proceeds from our insurance policies, sales of additional L Bonds, and, potentially, additional borrowings under existing debt facilities or new borrowings with other third-party lenders.

GWG Holdings has a history of selling L Bonds dating back to January 2012. GWG Holdings may not be able sell additional L Bonds on terms as favorable to the Company as past transactions or in quantities sufficient to fund all of the Company’s operating requirements. Additionally, the Company may not be able to obtain additional borrowing under existing debt facilities or new borrowings with other third-party lenders. To the extent that GWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of those debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve negative covenants that restrict GWG Holdings’ ability to take specific actions, such as incurring additional debt or making additional investments in growing the operations of the Company. If GWG Holdings is unable to fund its operations and other obligations, or defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted.

Based on projections of anticipated operating cash flows, receipt of proceeds from our insurance policies, sales of additional L-Bonds, and, potentially, additional borrowings under existing debt facilities or new borrowings with other third-party lenders, we believe that we will have sufficient cash resources to finance our operations, satisfy our other obligations, and to fund anticipated additional investments in Beneficient through May 15, 2021.

Amendment of Beneficient Credit Agreements

On May 15, 2020, Beneficient signed the Term Sheet with its lender to amend its senior credit agreement and subordinated credit agreement (described in Note 10). The amendment would extend the maturity date of both loans to April 10, 2021, and includes an extension fee of 2.5% of the outstanding aggregate principal balance of the loans. The amendment would also increase the interest rate on each loan to 1-month LIBOR plus 8.0%, with a maximum interest rate of 9.5%. The loans would be payable in four installments of $25.0 million on each of June 1, 2020, September 10, 2020, December 10, 2020, and March 10, 2021, with the remaining balance payable on April 10, 2021.

The amendment also would provide for the assignment of the loans from Beneficient to GWG Life Trust, if permitted, or GWG Life upon issuance of Beneficient’s trust company charters by the Texas Department of Banking. GWG Holdings or GWG Life will receive additional Common Units in exchange for assuming Beneficient’s amended loans. Upon transfer of the loans, GWG Holdings or GWG Life will pay a fee of 2.0% of the then-remaining outstanding balance to the lender. Furthermore, upon transfer of the loans, the Commercial Loan Agreement between GWG Life and Beneficient will convert to Common Units in full satisfaction of the Commercial Loan Agreement.

In connection with the transfer of the loans from Beneficient, the lender would be granted a security interest in the Preferred Series A Subclass 1 Unit Accounts of BCH held by GWG Life and the life insurance policies held by GWG Life Trust. Furthermore, the lender will be permitted to purchase up to $152.0 million of Preferred Series A Subclass 1 units from BCH for cash for two years after the amendment of the loans. The Term Sheet also provides that, in connection with the transfer of the loans, (i) BHI, which owns a majority of the Class S Ordinary Units, Preferred Series A Subclass 1 Unit Accounts, and FLP Subclass 1 Unit Accounts issued by BCH, will grant certain tax-related concessions related to the transaction as may be mutually agreed upon between the parties, and (ii) in exchange for the tax-related concessions to be agreed between the parties, (a) 5% of BHI’s Preferred Series A Sub Class 1 Unit Account will become senior in allocations, distributions, redemption rights, and liquidation (potentially as a different class) (the “Senior Preferred Series A Sub Class 1 Unit Accounts”) to all other Preferred Series A Sub Class 1 Unit Accounts or any other securities issued by Beneficient or a subsidiary thereof, and (b) recipients of a grant of Preferred Series A Sub Class 1 Unit Accounts from BHI will have the right to put an amount of Preferred Series A Sub Class 1 Unit Accounts to Beneficient equal to any associated tax liability stemming from any such grant; provided that the aggregated associated tax liability shall not relate to more than $30 million of grants of Preferred Series A Sub Class 1 Unit Accounts from BHI; and provided, further, that such a put cannot be exercised prior to July 1, 2021. The agreed upon amended loan terms would contain covenants that would i) prevent Beneficient from issuing any securities senior to the Preferred Series A Subclass 1 Unit Accounts or the Senior Preferred Series A Sub Class 1 Unit Accounts, and ii) prevent Beneficient from incurring additional debt or borrowings, other than trade payables, while the loans are outstanding.

The amendments set forth in the Term Sheet are subject to, among other things, the negotiation and execution of definitive agreements governing the amendments and the satisfaction of closing conditions to be set forth therein, some of which may be outside of the parties’ control. The parties have agreed to use their reasonable best efforts to enter into definitive agreements by June 1, 2020.

Policy Benefits and L Bonds

Subsequent to March 31, 20202021 through May 6, 2020,October 15, 2021, policy benefits benefits on 1355 policies covering 1249 individuals have been realized. The face value of insurance benefits of these policies was $14.8$80.3 million.

Subsequent to March 31, 20202021 through May 12, 2020,April 16, 2021, the date we havetemporarily suspended GWG Holdings’ L Bond offering, GWG Holdings issued approximately $41.6$44.5 million of L Bonds.

No L Bonds have been sold since April 16, 2021.



Page 50

47

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to GWG Holdings Inc. and its direct and indirect wholly-owned and consolidated subsidiaries, references to “GWG Holdings” refer solely to GWG Holdings Inc., references to “GWG Life” refer to GWG Life, LLC (a wholly-owned subsidiary of GWG Holdings), references to “DLP IV” refer to GWG DLP Funding IV, LLC (a wholly-owned subsidiary of GWG Life), references to “DLP V Holdings” refer to GWG DLP Funding V Holdings, LLC (a wholly-owned subsidiary of GWG Life), references to “DLP V” refer to GWG DLP Funding V, LLC (a wholly-owned subsidiary of DLP V Holdings), references to “DLP VI Holdings” refer to GWG DLP Funding Holdings VI, LLC (a wholly-owned subsidiary of GWG Life), references to “DLP VI” refer to GWG DLP Funding VI, LLC (a wholly-owned subsidiary of DLP VI Holdings), references to “Ben LP” refer to The Beneficient Company Group, L.P. (a consolidated subsidiary of GWG Holdings), references to “Beneficient” refer to Ben LP and all of its consolidated subsidiaries, references to "BCH" refer to Beneficient Company Holdings, L.P. (of which Ben LP is the general partner), references to “Beneficient Management” refer to Beneficient Management, L.L.C. (the general partner of Ben LP), references to “BCC” refer to Beneficient Capital Company, L.L.C. (a subsidiary of Ben LP), references to “BACC” refer to Beneficient Administrative and Clearing Company, L.L.C. (a subsidiary of Ben LP), references to “Pen” refer to Pen Indemnity Insurance Company, LTD (a subsidiary of Ben LP), references to “Ben Markets” refer to Ben Markets Management Holdings, L.P.L.L.C. (a subsidiary of Ben LP), and references to “FOXO” refer to FOXO BioScience LLCTechnologies Inc. (formerly, InsurTech Holdings,FOXO BioScience LLC, an equity investee of GWG Holdings), references to “FOXO Labs” refer to FOXO Labs Inc. (formerly, Life Epigenetics Inc., a wholly-owned subsidiary of FOXO), references to “FOXO Life” refer to FOXO Life LLC (formerly, youSurance General Agency, LLC, a wholly-owned subsidiary of FOXO), and references to the “ExAlt PlanTM” refer to a trust structure comprising customized trust vehicles (the “ExAlt Trusts” and each, an “ExAlt Trust”) .

Risk Relating to Forward-Looking Statements

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

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

Such risks and uncertainties include, but are not limited to:

●the valuation of assets reflected on our financial statements;
●the illiquidity of our life insurance investments and receivables from affiliates;
●the continued success of the alternative assets industry;
●our ability to realize the anticipated benefits from our consolidation of Beneficient;
●Beneficient’s financial performance and ability to execute on its business plan;
●Beneficient’s ability to obtain the trust charters from the Texas Department of Banking necessary to implement its business plan;
●changes resulting from the evolution of our business model and strategy with respect to Beneficient and the life insurance secondary market;
●our reliance on debt financing and continued access to the capital markets;
●our significant and ongoing financing requirements;
●our predominant use of short-term debt to fund a portfolio of long-term assets could result in a liquidity shortage;
●our ability to make cash distributions in satisfaction of dividend obligations and redemption requests;

•substantial doubt about our ability to continue as a going concern;

•the valuation of assets reflected on our financial statements;
•the illiquidity of our life insurance investments and receivables from affiliates;
•the continued success of the alternative assets industry;
•our ability to realize the anticipated benefits from our consolidation of Beneficient;
•Beneficient’s financial performance and ability to execute on its business plan;
•Beneficient’s ability to obtain the trust company charter from the Texas Department of Banking and its trust bank charter from the Kansas State Bank Commissioner necessary to implement its business plan;
•changes resulting from the evolution of our business model and strategy with respect to Beneficient and the life insurance secondary market;
•our reliance on debt financing and continued access to the capital markets;
•our significant and ongoing financing requirements;
•our predominant use of short-term debt to fund a portfolio of long-term assets could result in a liquidity shortage;
Page 51

48

•our ability to make cash distributions in satisfaction of dividend obligations and redemption requests;

●our ability to satisfy our debt obligations if we were to sell our assets;
●our history of operating losses;
●general economic outlook, including prevailing interest rates;
●the novel coronavirus pandemic, the ensuing economic downturn and its impact on our business;
●federal, state, FINRA and other regulatory matters;
●litigation risks;

●our ability to comply with financial and non-financial covenants contained in borrowing agreements;
●the reliability of assumptions underlying our actuarial models, including life expectancy (“LE”) estimates and our projections of mortality events and the realization of policy benefits;
●risks relating to the validity and enforceability of the life insurance policies we purchase;
●our reliance on information provided and obtained by third parties, including changes in underwriting tables and underwriting methodology;
●life insurance company credit exposure;
●cost-of-insurance (premium) increases on our life insurance policies;
●performance of our investments in life insurance policies; and
●risks associated with our investment in FOXO BioScience LLC (formerly InsurTech Holdings, LLC).

•our ability to satisfy our debt obligations if we were to sell our assets;
•general economic outlook, including prevailing interest rates;
•the novel coronavirus pandemic, the ongoing economic downturn and its impact on our business;
•federal, state, FINRA and other regulatory matters;
•litigation risks;
•our ability to comply with financial and non-financial covenants contained in borrowing agreements;
•the reliability of assumptions underlying our actuarial models, including life expectancy (“LE”) estimates and our projections of mortality events and the realization of policy benefits;
•risks relating to the validity and enforceability of the life insurance policies we purchase;
•our reliance on information provided and obtained by third parties, including changes in underwriting tables and underwriting methodology;
•life insurance company credit exposure;
•cost-of-insurance (premium) increases on our life insurance policies;
•performance of our investments in life insurance policies; and
•risks associated with our investment in FOXO Technologies Inc. (formerly FOXO BioScience LLC).
We caution you that the foregoing list of factors is not exhaustive. Forward-looking statements are only estimates and predictions, or statements of current intent. Actual results, outcomes or actions that we ultimately undertake could differ materially from those anticipated in the forward-looking statements due to risks, uncertainties or actual events differing from the assumptions underlying these statements.

We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Overview

We are an innovative financial services firm based in Dallas, Texas that is a leader in providing unique liquidity solutions and services for the owners of illiquid investments. In 2018 and 2019, GWG Holdings and GWG Life consummated a series of transactions with The Beneficient Company Group, L.P. (“Ben LP” including all of the subsidiaries it may have from time to time — “Beneficient”), as more fully described in Note 1 to our condensed consolidated financial statements in this Form 10-Q. On December 31, 2019, GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management. As a result of this change-of-control event, GWG Holdings reported the results of Beneficient on a consolidated basis beginning on the transaction date of December 31, 2019.

As further described in Note 17 to the condensed consolidated financial statements, on August 13, 2021, GWG Holdings, Ben LP, and BCH entered into a non-binding term sheet (the “Term Sheet”), which, if completed, is expected to result in, among other things, the deconsolidation of Beneficient from GWG Holdings.

Beneficient is a financial services firm,company, based in Dallas, Texas, that providesmarkets an array of liquidity solutions for professionally managedand trust administration products to alternative assets for mid-to-highasset investors primarily comprised of mid-to-high-net-worth individuals having a net worth between $5 million and $30 million (“MHNW”) individuals and small-to-midsmall-to-midsize institutional investors and family offices with less than $1 billion in investable assets (“STM”STMIs”). Ben LP plans to offer its products and services through its five operating subsidiaries, which include (i) Ben Liquidity, L.L.C. and its subsidiaries (collectively, “Ben Liquidity”), (ii) Ben Custody, L.L.C. and its subsidiaries (collectively, “Ben Custody Admin”), (iii) Ben Insurance, L.L.C. and its subsidiaries (collectively, “Ben Insurance”), (iv) Ben Markets, L.L.C., and its subsidiaries (collectively, “Ben Markets”) size institutions, which previously had few options to obtain early liquidity for their alternative asset holdings.and (v) The Beneficient has closed a limited number of these transactions to date, but intends to significantly expand its operations going forward. As part of the Company’s reorientation, we also changed our Board of Directors and executive management team. Company Group (USA), L.L.C (“Beneficient USA”). Ben Liquidity plans to operate three potentially high value, high margin linesa trust company that is a Kansas Technology Enabled Fiduciary Financial Institutions (“TEFFI”) authorized to serve as an alternative asset custodian, trustee and lender with statutory powers granted for each of business:

●Private Trust Lending &these activities and permitting Ben Liquidity Products. Through BCC, Beneficient provides a unique suite of private trust, lending and liquidity products focused on bringing liquidity to owners of professionally managed alternative assets. Beneficient’s innovative liquidity solutions are designed to serve MHNW individuals, STM institutions, and asset managers who have historically possessed few attractive options to access early liquidity from their alternative assets. Beneficient targets MHNW clients with $5 million to $30 million in net worth and STM institutional clients typically holding less than $1 billion in assets.

Page 52

●Trust and Custody Services. Through BACC, and (subject to capitalization) through Pen, Beneficient plans, in the future, to market retirement funds, custody and clearing of alternative assets, and trustee and insurance services for covering risks attendant to owning or managing alternative assets.
●Financial Technology. Through Ben Markets, Beneficient plans to provide online portals and financial technologies for the trading and financing of alternative assets. Beneficient’s existing and planned products and services are designed to support the tax and estate planning objectives of its MHNW clients, facilitate a diversification of assets or simply provide administrative management and reporting solutions tailored to the goals of the investor who owns alternative investments.

While we are continuing our work to maximize the valueprovide fiduciary financing for certain of our secondary lifeits customer liquidity transactions. Ben Custody Admin plans to operate a Texas trust company that is being organized to provide its customers with certain administrative, custodial and trustee products and specialized services focused on alternative asset investors. Ben Insurance has been chartered as a Bermuda based insurance business, we do not anticipate purchasing additional lifecompany that plans to offer certain customized insurance policiesproducts and services covering risks relating to owning, managing and transferring alternative assets. Ben Markets is in the secondary marketregulatory process for acquiring a captive registered broker-dealer that would conduct certain of its activities attendant to offering a suite of products and have increased capital allocated toward providing liquidityservices from the Beneficient family of companies. Certain of Ben LP’s operating subsidiary products and services involve or are offered to certain of the ExAlt Trusts, which operate for the benefit of the Non-Controlling Interest Holders, and are consolidated subsidiaries of Ben LP for financial reporting purposes (such trusts are and may

Page 49
individually be referred to as Custody Trusts, Collective Trusts, LiquidTrusts, and Funding Trusts). Beneficient USA employs a broader rangesubstantial majority of alternative assets through Beneficient. the executives and staff for Beneficient’s operating subsidiaries to which Beneficient USA provides administrative and technical services.
We believe that Beneficient’s operations will generally produce higher risk-adjustedrisk adjusted returns than those we can generally achieve from life insurance policies acquired in the secondary market.market; however, returns on equity in life settlements, especially with the current availability of financings on favorable terms, appear to be an attractive option to diversify our exposure to alternative assets, and we have begun exploring the feasibility of acquiring such policies. Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified alternative asset portfolio, we will continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing, recapitalization, partnership, reinsurance guarantees, life insurance operations or recapitalization ofother transactions involving our life insurance portfolio.

portfolio, as well as pursuing other alternatives to increase our exposure to alternative assets. These operations are in addition to allocating capital to provide liquidity to holders of a broader range of alternative assets, which we currently provide through GWG Holdings’ and GWG Life’s investments in Beneficient.

GWG Holdings completed the transactions with Beneficient, in part, to provide the Company with a significant increase in assets and common shareholders’stockholders’ equity. In addition, the transactions with Beneficient may provide the Companyus with the opportunity for a diversified source of future earnings within the alternative asset industry. As the combined organization expands, weWe believe the Beneficient transactions and the other strategies we are pursuing will transform GWG Holdings from a niche provider of liquidity to owners of life insurance to a full-scalediversified provider of trust and liquidityfinancial products and trust services with exposure to owners of a broad range of alternative assets.

Restatement
The Company restated its previously issued (i) consolidated balance sheet as of December 31, 2019, included in its Annual Report on Form 10-K for the year ended December 31, 2019 and (ii) the consolidated statement of operations, (iii) the consolidated statement of changes in stockholders’ equity, and (iv) the consolidated statement of cash flows for the year ended December 31, 2019, included in its Annual Report on Form 10-K for the year ended December 31, 2019, (the “Restatement”) as part of its 2020 Form 10-K. The Restatement also impacted each of the quarters for the periods beginning with GWG Holdings, Inc.’s consolidation with The Beneficient Company Group, L.P. (“Ben LP,” including all of the subsidiaries it may have from time to time — “Beneficient”) as of December 31, 2019 through the quarter ended September 30, 2020.

The historical interim periods included in this Form 10-Q have been restated to reflect the Restatement.
Critical Accounting Policies and Estimates

Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) requires us to make significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our judgments, estimates, and assumptions on historical experience and on various other factors believed to be reasonable under the circumstances. Actual results could differ materially from these estimates. We evaluate our judgments, estimates, and assumptions on a regular basis and make changes accordingly.

Material estimates that are particularly susceptible to change, in the near term, relate to: the determination of the fair values of assets acquired, liabilities assumed and noncontrolling interests under business combinations accounting guidance; the determination ofdetermining the assumptions used in estimating the fair value of our investments in life insurance policies; determining the grant date fair value for equity-based compensation awards; determining our allowance for loan losses;the allocation of income (loss) to Beneficient’s equity holders; and evaluation of potential impairment of goodwill and other intangibles; and the value of our deferred tax assets and liabilities.intangibles. We believe these estimates are likely to have the greatest potential impact on our condensed consolidated financial statements and accordingly believe these to be our critical accounting estimates.

As it relates to the goodwill intangible asset, in light of Beneficient’s significant recurring losses from operations, negative cash flows from operations, and delays in executing its business plans, management plans to engage a third-party valuation firm to assist in performing a quantitative goodwill impairment test in the fourth quarter of 2021. The valuation work related to the goodwill intangible is not complete, and we expect the work to be completed before the filing of our 2021 annual financial statements. While management has implemented strategies to execute its business plans, a failure to execute our business plans or adverse market changes in the future could result in changes in management’s forecasts, which could result in a decline in
Page 50
estimated fair value of the Beneficient reporting unit and would result in an impairment of our goodwill intangible. Key assumptions in our quantitative goodwill impairment test include assumptions regarding Ben LP’s ability to raise substantial amounts of capital as disclosed in the 2020 Form 10-K (as defined below). Beneficient is actively engaged in capital raising efforts that may include the issuance of equity or debt of Ben LP or one of its subsidiaries and has received non-binding indications of interest from potential investors. The outcome of Ben LP’s capital raising efforts will have a direct impact on management’s forecasts and consequently, have a direct impact on the magnitude of future goodwill intangible impairment losses, if any. The outcome of Ben LP’s capital raising efforts is uncertain, and it is not certain that the potential investors that have submitted non-binding indications of interest ultimately will invest in Ben LP, or the amount of any such investments. As a result, our quantitative goodwill intangible impairment analysis, once complete, could result in material goodwill intangible impairment in the near future.
Critical Accounting Policies
Refer to our Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC on March 27, November 5, 2021 (“2020 (“2019 Form 10-K”) for a discussion of our critical accounting policies and estimates. As discussed in Note 2 to our condensed consolidated financial statements in this Form 10-Q, we have revised and added accounting policies as necessary to incorporate those accounting policies of Beneficient. There have been no significant changes to our critical accounting policies during the quarterthree months ended March 31, 2020, other than the additional policies noted below.

Loans Receivable and Allowance for Loan Losses

Loans receivable are carried at the principal amount outstanding, plus interest paid-in-kind. The loans do not have scheduled principal2021.

Recent Developments
We define “recent developments” as material transactions or interest payments due prior to their maturity date, which is generally 12 years from the date of origination. Prepayment of the loans, in whole or in part, is permitted without premium or penalty. Loans bear contractual interest at the greater of 14% or 1-month LIBOR plus 10% compounded daily. The primary source of repayment for the loans and related fees is cash flows from the alternative assets collateralizing the loans. Interest income on loans is accrued on the principal amount outstanding.

Page 53

The allowance for loan losses is a valuation allowance for probable incurred credit lossesmatters that occurred in the portfolio. Management’s determination of the allowance is based upon an evaluation of the loan portfolio, impaired loans, economic conditions, volume, growth and composition of the collateral to the loan portfolio, and other risks inherent in the portfolio. Management applies risk factors to categories of loans and individually reviews all impaired loans above a de minimis threshold. Management relies heavily on statistical analysis, current net asset value (“NAV”) and distribution performance of the underlying alternative asset collateral and industry trends related to alternative asset investments to estimate losses. Management evaluates the adequacy of the allowance by reviewing relevant internal and external factors that affect credit quality. As the collateral is the sole source of repayment of the loans and related interest, these loans are considered to be collateral dependent. Beneficient recognizes the charge-offmost recent fiscal quarter or in the period between the end of the fiscal quarter and the filing of the quarterly or annual financial statements with the SEC. The following recent developments are described in which it arises for its collateral dependent loans. Therefore, impaired collateral dependent loans are written down to their estimated net realizable value based on disposition value.

Purchased Loans

Purchased loans are recorded at their fair value at the acquisition date. Credit discounts are includedmore detail in the determination of fair value; therefore, an allowance for loan losses is not recorded at the acquisition date. Purchased loans are evaluated upon acquisition and classified as either purchased credit impaired (“PCI”) or non-purchased credit impaired (“non-PCI”).

PCI loans reflect credit deterioration since origination such that it is probable at acquisition that Beneficient will be unable to collect all contractually required payments. For PCI loans, expected cash flows at the acquisition date in excess of the fair value of loans are recorded as interest income over the life of the loans using a level yield method if the timing and amount of the future cash flows is reasonably estimable. Subsequent to the acquisition date, increases in cash flows over those expected at the acquisition date are recognized prospectively as interest income. Decreases in expected cash flows due to credit deterioration are recognized by recording an allowance for loan loss. Beneficient does not report PCI loans as nonperforming due to the accretion of interest income.

For non-PCI loans, the difference between the fair value and unpaid principal balance (“UPB”) of the loan at the acquisition date is amortized or accreted to interest income over the contractual life of the loans using the effective interest method. In the event of prepayment, the remaining unamortized amount is recognized in interest income.

Goodwill and Identifiable Intangible Assets

Goodwill and other identifiable intangible assets are initially recorded at their estimated fair values at the date of acquisition. Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. In the event that facts and circumstances indicate that the goodwill or other identifiable intangible assets may be impaired, an interim impairment test would be required. Intangible assets with finite lives are amortized over their useful lives. We perform required annual impairment tests of our goodwill and other intangible assets during the fourth quarter for our reporting units.

The goodwill impairment test requires us to make judgments and assumptions. The test consists of estimating the fair value of each reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples of our peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of each reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, we will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, any loss recognized will not exceed the total amount of goodwill allocated to that reporting unit.

This evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates that may change over time. If future discounted cash flows become less than those projected by us, future impairment charges may become necessary that could have a materially adverse impact on our results of operations and financial condition in the period in which the write-off occurs.

Equity-Based Compensation

The Company measures and recognizes compensation expense for all equity-based payments at fair value on the grant date over the requisite service period. GWG Holdings uses the Black-Scholes option pricing model to determine the fair value of stock options and stock appreciation rights. For restricted stock grants (including restricted stock units), fair value is determined as of the closing price of GWG Holdings’ common stock on the date of grant. As it is not publicly traded, Beneficient uses various methods to determine the grant date fair value of its equity-based compensation awards.

The fair value of the Beneficient Management Partners, L.P. (“BMP”) Equity Units is determined on the grant date using a probability-weighted discounted cash flow analysis. This fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The resultant probability-weighted cash flows are then discounted using a rate that reflects the uncertainty surrounding the expected outcomes, which the Company believes is appropriate and representative of a market participant assumption.

The fair value of Ben LP’s restricted equity units (“REUs”) is estimated on the grant date using recent equity transactions involving third parties, which provides the Company with observable fair value information sufficient for estimating the grant date fair value.

Page 54

Recent Developments

COVID-19 and the CARES Act

In December 2019, a novel strain of coronavirus (“COVID-19”) was first reported in Wuhan, China. Less than four months later, on March 11, 2020, the World Health Organization declared COVID-19 a pandemic. The extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. As a result, it is not currently possible to ascertain the overall impact of COVID-19 on the Company’s business. The Company continues to raise capital, receive interest income and insurance policy benefits and meet its ongoing obligations. However, depending on the extent of the ensuing economic crisis resulting from the pandemic and its impact on the Company’s business, the disease could have a material adverse effect on our results of operations, financial condition and cash flows.

As discussed in our 2019 Form 10-K, management performs goodwill and intangible asset impairment testing annually, during the fourth quarter, or when events occur, or circumstances change that would more likely than not indicate impairment has occurred. The Company recorded goodwill on December 31, 2019, as a result of the transactions with Beneficient discussed in Note 4notes to the condensed consolidated financial statements. DueA reference to the significancecorresponding note is included below:

•The amendment of Beneficient’s Credit Agreements (Note 17).
•During the first quarter of 2021, Beneficient executed 10 liquidity transactions, pursuant to which customers sold interests in private equity funds with an aggregate net asset value of $5.6 million to certain of the COVID-19 pandemic, management performedExAlt Trusts in exchange for agreed upon consideration. In connection with these transactions, GWG Life issued an aggregate of $0.3 million of principal in Liquidity Bonds on January 8, 2021 and January 15, 2021.
•In addition, on March 25, 2021, Beneficient filed provisional patent applications pending on certain of its systems and processes underlying its liquidity products and trust services. These patent applications cover the following aspects of Beneficient’s business:
◦Ben ExAlt PlanTM Patent Application.
▪ExAlt Plan. System and process for providing liquidity to customers for their alternative assets.
◦Underwriting Systems Patent Applications.
▪AltScore. Alternative asset quality scoring system.
▪ValueAlt. Method to value interests in alternative asset funds.
▪AltRating. Method to assign credit ratings to structured debt that is backed by alternative assets.
◦Risk Assessment and Risk Reduction Patent Applications.
▪AltC. Tool to measure portfolio concentration relative to an established limit or target.
▪OptimumAlt. Portfolio optimization and allocation tool specifically designed for alternative asset funds.
▪AlphaAlt. Proprietary forecast of expected returns and cash flows for alternative asset fund types.
▪AltQuote. Real-time indicator of liquidity solutions for holders of alternative assets.
Page 51
•In April 2021, the Kansas Legislature adopted, and the governor of Kansas signed into law, a qualitative assessmentbill that would allow for the chartering and creation of Kansas trust companies, known as TEFFIs, that provide fiduciary financing (e.g., lending to ExAlt Trusts), custodian and trustee services in all capacities pursuant to statutory fiduciary powers, to investors and other participants in the alternative assets market, as well as the establishment of alternative asset trusts. The legislation became effective on July 1, 2021 and designates BFF as the pilot trust company under the TEFFI legislation. A conditional trust charter was issued by the Kansas Bank Commissioner to a subsidiary of Ben LP on July 1, 2021. Under the pilot program, BFF will not be authorized to exercise its fiduciary powers as a TEFFI until the earlier of the goodwilldate the Kansas Bank Commissioner promulgates applicable rules and regulations or December 31, 2021 or. The bill also permits the Kansas Bank Commissioner to request a six-month extension of the pilot program period, which could delay Beneficient’s exercise of fiduciary powers under the charter until July 1, 2022. As a result, the directors of GWG Holdings who serve on the new TEFFI trust company Board of Directors resigned their membership, effective June 14, 2021, on GWG Holdings’ Board of Directors to devote their time to serving as directors of the Beneficient reporting unit. Management concluded thatTEFFI trust company, which the potentially largeCompany believes is the highest and underserved market that Beneficient is seeking to address, includingbest use of their available time and skills and will support the estimated demand from MHNW individuals and STM size institutions seeking liquidity for their professionally managed alternative assets, has not been negatively affected by the COVID-19 pandemic such that it is more likely than not that the fair valuedevelopment of the Beneficient reporting unit would exceedTEFFI trust company and the successful execution of Beneficient’s business plan (Note 17).
•On June 28, 2021, DLP IV entered into a Third Amended and Restated Loan and Security Agreement with LNV Corporation (the “Third Amended Facility”) that resulted in a $52.5 million advance from LNV Corporation, or $51.2 million including certain fees and expenses incurred in connection with the entry into the Third Amended Facility (Note 17).
•On August 11, 2021, GWG DLP Funding VI, LLC, a Delaware limited liability company (“DLP VI”), entered into a Credit Agreement (the “NF Credit Agreement”) with each lender from time to time party thereto and National Founders LP, a Delaware limited partnership, as the administrative agent (the credit facility evidenced by such NF Credit Agreement, the “NF Credit Facility”) that resulted in a one-time $107.6 million advance with a scheduled maturity date of August 11, 2031 (Note 17). Approximately $56.7 million of such advanced amount was used to pay off the remaining amount due under the Third Amended Facility.
•On August 13, 2021, GWG Holdings, Ben LP, and BCH entered into a Term Sheet that contemplates a series of transactions, which, if completed, will result in, among other things, (i) GWG Holdings receiving certain proposed enhancements to its carrying valueinvestments in Beneficient; (ii) GWG Holdings no longer having the right to appoint directors of the board of directors of Beneficient Management; and (iii) Beneficient no longer being a consolidated subsidiary of GWG Holdings (Note 17).
•On September 7, 2021, DLP IV entered into a Fourth Amended and Restated Loan and Security Agreement with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of March 31, 2020. Therefore, the lenders under the agreement (the “Fourth Amended Facility”) that resulted in a $30.3 million advance from LNV Corporation, with such advance including amounts to cover certain fees and expenses incurred in connection with the entry into the Fourth Amended Facility (Note 17).
•An update on the current state of the Company and potential impact of the COVID-19 pandemic through the end of the first quarter of 2020 was not a triggering event to perform a quantitative test. We will continue to monitor the impact of COVID-19 on the economy and our business and will perform an interim quantitative goodwill impairment test if necessary.

Trust Charter Applications

On September 25, 2018, Beneficient’s capital companies, BCC and BACC, applied for trust charters from the Texas Department of Banking to merge into to-be organized limited trust associations. Beneficient submitted revised charter applications on March 6, 2020. As of May 15, 2020, the trust charters had not been issued to Beneficient. As such, Beneficient has closed a limited number of transactions to date, but intends to significantly expand its operations if and when the trust charters are issued.

Amendment of Beneficient Credit Agreements

On May 15, 2020, Beneficient signed a Binding Term Sheet to Amend the Credit Agreement (“Term Sheet”)with its lender to amend its senior credit agreement and subordinated credit agreement (described in Note 10)(Note 17). The amendment would extend the maturity date of both loans to April 10, 2021, and includes an extension fee of 2.5% of the outstanding aggregate principal balance of the loans. The amendment would also increase the interest rate on each loan to 1-month LIBOR plus 8.0%, with a maximum interest rate of 9.5%. The loans would be payable in four installments of $25.0 million on each of June 1, 2020, September 10, 2020, December 10, 2020, and March 10, 2021, with the remaining balance payable on April 10, 2021.

The amendment also would provide for the assignment of the loans from Beneficient to GWG Life Trust, if permitted, or GWG Life upon issuance of Beneficient’s trust company charters by the Texas Department of Banking. GWG Holdings or GWG Life will receive additional Common Units in exchange for assuming Beneficient’s amended loans. Upon transfer of the loans, GWG Holdings or GWG Life will pay a fee of 2.0% of the then-remaining outstanding balance to the lender. Furthermore, upon transfer of the loans, the Commercial Loan Agreement between GWG Life and Beneficient will convert to Common Units in full satisfaction of the Commercial Loan Agreement.

In connection with the transfer of the loans from Beneficient, the lender would be granted a security interest in the Preferred Series A Subclass 1 Unit Accounts of BCH held by GWG Life and the life insurance policies held by GWG Life Trust. Furthermore, the lender will be permitted to purchase up to $152.0 million of Preferred Series A Subclass 1 units from BCH for cash for two years after the amendment of the loans. The Term Sheet also provides that, in connection with the transfer of the loans, (i) BHI, which owns a majority of the Class S Ordinary Units, Preferred Series A Subclass 1 Unit Accounts, and FLP Subclass 1 Unit Accounts issued by BCH, will grant certain tax-related concessions related to the transaction as may be mutually agreed upon between the parties, and (ii) in exchange for the tax-related concessions to be agreed between the parties, (a) 5% of BHI’s Preferred Series A Sub Class 1 Unit Account will become senior in allocations, distributions, redemption rights, and liquidation (potentially as a different class) (the “Senior Preferred Series A Sub Class 1 Unit Accounts”) to all other Preferred Series A Sub Class 1 Unit Accounts or any other securities issued by Beneficient or a subsidiary thereof, and (b) recipients of a grant of Preferred Series A Sub Class 1 Unit Accounts from BHI will have the right to put an amount of Preferred Series A Sub Class 1 Unit Accounts to Beneficient equal to any associated tax liability stemming from any such grant; provided that the aggregated associated tax liability shall not relate to more than $30 million of grants of Preferred Series A Sub Class 1 Unit Accounts from BHI; and provided, further, that such a put cannot be exercised prior to July 1, 2021. The agreed upon amended loan terms would contain covenants that would i) prevent Beneficient from issuing any securities senior to the Preferred Series A Subclass 1 Unit Accounts or the Senior Preferred Series A Sub Class 1 Unit Accounts, and ii) prevent Beneficient from incurring additional debt or borrowings, other than trade payables, while the loans are outstanding.

The amendments set forth in the Term Sheet are subject to, among other things, the negotiation and execution of definitive agreements governing the amendments and the satisfaction of closing conditions to be set forth therein, some of which may be outside of the parties’ control. The parties have agreed to use their reasonable best efforts to enter into definitive agreements by June 1, 2020.

Page 55

Asset Diversification

As of March 31, 2020,2021, we held a combined portfolio of assets consisting of approximately 70%78% of fair value secondary life insurance policies and 30%22% of loans collateralizedindirect interests in alternative assets held by cash flows from alternative assets.certain of the ExAlt Trusts. The table presented below reflects classifications based on GWG Holdings’ and Beneficient’s current exposure types as of March 31, 20202021 (dollar amounts in thousands).

Exposure Type Value  Percent of Total 
Intermediate-Duration Life Insurance Policies(1) $329,394   28.6%
Near-Duration Life Insurance Policies(1)  295,242   25.6%
Long-Duration Life Insurance Policies(1)  177,545   15.4%
Late Stage(2)  134,821   11.7%
Growth(2)  77,980   6.8%
Buyout(2)  65,663   5.7%
Other(2)  37,404   3.2%
Early Stage(2)  34,786   3.0%
Total $1,152,835   100.00%

Additional information regarding the Collateral portfolio is available on its website at www.trustben.com. The information on Beneficient’s website is not part of, or incorporated by reference in, this report.
Page 52
Exposure TypeValuePercent of Total
Near-Duration Life Insurance Policies (1)
$329,128 32.6 %
Intermediate-Duration Life Insurance Policies (1)
313,811 31.0 %
Long-Duration Life Insurance Policies (1)
148,560 14.7 %
Growth Stage Private (2)
83,124 8.2 %
Late Stage Venture Backed (2)
52,096 5.2 %
Other (2)
29,933 2.9 %
Early Stage Venture Backed (2)
28,149 2.8 %
Corporate Buyouts (2)
26,127 2.6 %
Total$1,010,928 100.0 %

(1)Represents fair value of life insurance polices

(2)Represents the net asset value (“NAV”) of the interests in alternative assets that provide cash flows that comprise the collateral of Beneficient’s loan portfolio. NAV calculation reflects the most current report of NAV and other data received from firm/fund sponsors. If no such report has been received, Beneficient estimates NAV based upon the last NAV calculation reported by the investment manager and adjusts it for capital calls and distributions made in the intervening time frame.

(1)Represents fair value of life insurance policies.
(2)Represents the net asset value (“NAV”) of the interests in alternative assets that provide cash flows, which comprise the Collateral of the ExAlt Loans (defined in section below entitled ExAlt Trusts’ Investment in Alternative Assets). Excludes collateral exchanged in the Collateral Swap, which are eliminated in consolidation. These ExAlt Loans eliminate upon consolidation in the presentation of our condensed consolidated financial statements. The Net Asset Value (“NAV”) calculation reflects the most current report of NAV and other data received from firm/fund sponsors. If no such report has been received, Beneficient estimates NAV based upon the last NAV calculation reported by the investment manager and adjusts it for capital calls and distributions made in the intervening time frame.
The underlying exposure data represents GWG Holdings’ exposure to life insurance policies included in its portfolio and its exposure to the underlying collateralCollateral of Beneficient’s loan portfolio.portfolio to the ExAlt Trusts. Exposure type reflects classifications based on each company’s portfolio as determined by management. Figures are based on third-party information and other relevant information as determined by management. “Other” includes private debt strategies, natural resources strategies, and hedge funds. “Near-Term”, “Intermediate-Term”, and “Long-Term” life insurance policies represent policies with life expectancies between 0 – 47 months, 48 – 95 months, and 96 – 240 months, respectively.

The following sections contain information on each of the secondary life insurance assets and Beneficient loans receivablethe interests in alternative assets held by certain of the ExAlt Trusts separately.

Secondary Life Insurance Assets

Our portfolio of life insurance policies, owned by ourGWG Holdings’ subsidiaries as of March 31, 2020,2021, is summarized below:

Life Insurance Portfolio Summary

Total life insurance portfolio face value of policy benefits (in thousands) $2,000,680 
Average face value per policy (in thousands) $1,769 
Average face value per insured life (in thousands) $1,900 
Average age of insured (years)*  82.6 
Average life expectancy estimate (years)*  7.2 
Total number of policies  1,131 
Number of unique lives  1,053 
Demographics  74% Males; 26% Females 
Number of smokers  47 
Largest policy as % of total portfolio face value  0.7%
Average policy as % of total portfolio  0.1%
Average annual premium as % of face value  3.5%

*Averages presented in the table are weighted averages.

Total life insurance portfolio face value of policy benefits (in thousands)$1,879,895
Average face value per policy (in thousands)$1,822
Average face value per insured life (in thousands)$1,973
Weighted average age of insured (years)83.2
Weighted average life expectancy estimate (years)6.9
Total number of policies1,032
Number of unique lives953
Demographics74% Male; 26% Female
Number of smokers40
Largest policy as % of total portfolio face value0.7 %
Average policy as % of total portfolio0.1 %
Average annual premium as % of face value3.9 %
Page 53
Our portfolio of life insurance policies, owned by ourGWG Holdings’ subsidiaries as of March 31, 2020,2021, organized by the insured’s current age and the associated number of policies and policy benefits, is summarized below:

Page 56

Distribution of Policies and Policy Benefits by Current Age of Insured

          Percentage of Total    
Min Age Max Age Number of
Policies		  Policy
Benefits		  Number of
Policies		  Policy
Benefits		  Wtd. Avg.
LE (yrs.)		 
95 101  20  $42,602   1.7%  2.1%  2.1 
90 94  147   289,269   13.0%  14.5%  3.2 
85 89  232   544,264   20.5%  27.2%  5.0 
80 84  247   439,948   21.9%  22.0%  7.2 
75 79  223   369,024   19.7%  18.4%  9.9 
70 74  199   247,346   17.6%  12.4%  11.1 
60 69  63   68,227   5.6%  3.4%  11.3 
Total    1,131  $2,000,680   100.0%  100.0%  7.2 

Percentage of Total
Min AgeMax AgeNumber of PoliciesPolicy Benefits (in thousands)Number of PoliciesPolicy BenefitsWeighted Average LE (Years)
646933$33,436 3.3 %1.8 %11.1
7074183229,808 17.7 %12.2 %10.4
7579210349,775 20.3 %18.6 %9.3
8084204360,035 19.8 %19.2 %7.5
8589220532,925 21.3 %28.3 %4.7
9094157320,539 15.2 %17.1 %3.2
951012553,377 2.4 %2.8 %1.9
Total1,032$1,879,895 100.0 %100.0 %6.9
Our portfolio of life insurance policies, owned by ourGWG Holdings’ subsidiaries as of March 31, 2020,2021, organized by the insured’s estimated life expectancy estimates and associated policy benefits, is summarized below:

Distribution of Policies by Current Life Expectancies of Insured

          Percentage of Total 
Min LE
(Months)		 Max LE
(Months)		 Number of
Policies		  

Policy
Benefits

(in
thousands)

  Number
of
Policies		  Policy
Benefits		 
0 47  285  $470,414   25.2%  23.5%
48 71  238   406,698   21.0%  20.3%
72 95  208   389,939   18.4%  19.5%
96 119  171   299,116   15.1%  15.0%
120 143  117   184,886   10.4%  9.2%
144 179  93   180,871   8.2%  9.0%
180 240  19   68,756   1.7%  3.5%
Total    1,131  $2,000,680   100.0%  100.0%

Percentage of Total
Min LE (Months)Max LE (Months)Number of PoliciesPolicy Benefits (in Thousands)Number of PoliciesPolicy Benefits
047296$513,334 28.6 %27.4 %
4871230434,338 22.3 %23.1 %
7295193342,562 18.7 %18.2 %
96119139244,181 13.5 %13.0 %
12014398160,624 9.5 %8.5 %
14417968162,581 6.6 %8.6 %
180240822,275 0.8 %1.2 %
Total1,032$1,879,895 100.0 %100.0 %
We rely on the payment of policy benefit claims by life insurance companies as a significant source of cash inflow. The life insurance assets we own represent obligations of third-party life insurance companies to pay the benefit amount under the policy upon the mortality of the insured. As a result, we manage this credit risk exposure by generally purchasing policies issued by insurance companies with investment-grade credit ratings from Standard & Poor’s, and diversifying our life insurance portfolio among a number of insurance companies.

The yield to maturity on bonds issued by life insurance carriers reflects, among other things, the credit risk (risk of default) of such insurance carrier. We follow the yields on certain publicly traded life insurance company bonds because this information is part of the data we consider when valuing our portfolio of life insurance policies for our financial statements.

The average yield to maturity of publicly traded life insurance company bonds data we consider as inputs to our life insurance portfolio valuation process was 3.09%1.48% as of March 31, 2020.2021. We believe that this average yield to maturity reflects, in part, the financial market’s judgment that credit risk is low with regard to these carriers’ financial obligations. The obligations of life insurance carriers to pay life insurance policy benefits ranks senior to all of their other financial obligations, including the senior bonds they issue. As of March 31, 2020, approximately 95.6%2021, 95.7% of the face value of policy benefits inof our life insurance portfoliopolicies were issued by insurance companies withinsurers having an investment-grade credit ratings fromrating (BBB or better) by Standard & Poor’s.

Page 57

54

As of March 31, 2020,2021, our ten largest life insurance company credit exposures and the Standard & Poor’s credit rating of their respective financial strength and claims-paying ability is set forth below:

Distribution of Policy Benefits by Top 10 Insurance Companies

Rank Policy
Benefits (in thousands)		  Percentage of
Policy Benefit
Amount		  Insurance Company Ins. Co.
S&P Rating
1 $285,092   14.2% John Hancock Life Insurance Company AA-
2  218,386   10.9% Lincoln National Life Insurance Company AA-
3  216,799   10.8% AXA Equitable Life Insurance Company A+
4  189,639   9.5% Transamerica Life Insurance Company AA-
5  158,390   7.9% Brighthouse Life Insurance Company A+
6  90,339   4.5% American General Life Insurance Company A+
7  85,998   4.3% Pacific Life Insurance Company AA-
8  70,376   3.5% ReliaStar Life Insurance Company A+
9  64,095   3.2% Massachusetts Mutual Life Insurance Company AA+
10  60,558   3.0% Security Life of Denver Insurance Company A+
  $1,439,672   71.9%    

Beneficient Loans Receivable

RankPolicy Benefits (in Thousands)Percentage of Policy Benefit AmountInsurance CompanyS&P Insurer Financial Strength Rating
1$262,493 14.0 %John Hancock Life Insurance CompanyAA-
2209,614 11.2 %Lincoln National Life Insurance CompanyAA-
3201,236 10.7 %Equitable Financial Life Insurance CompanyA+
4164,491 8.8 %Transamerica Life Insurance CompanyA+
5157,244 8.4 %Brighthouse Life Insurance CompanyAA-
686,339 4.6 %American General Life Insurance CompanyA+
784,998 4.5 %Pacific Life Insurance CompanyAA-
863,876 3.4 %ReliaStar Life Insurance CompanyA+
957,862 3.1 %Security Life of Denver Insurance CompanyA+
1054,969 2.9 %Protective Life Insurance CompanyAA-
$1,343,122 71.6 %
ExAlt Trusts’ Investment in Alternative Assets
Beneficient’s primary operations, pertainwhich commenced on September 1, 2017, consist of offering its liquidity and trust administration services to its customers, primarily through certain of Ben LP’s operating subsidiaries, Ben Liquidity (as defined below) and Ben Custody Admin (as defined below), respectively. Ben Liquidity offers simple, rapid and cost-effective liquidity products wherebyto its customers through the use of customized trust vehicles, the ExAlt Trusts, that facilitate the exchange of a customer’s alternative assets for consideration using a unique financing structure. A subsidiary of Ben LP, through its subsidiaries, extends loansLiquidity makes ExAlt Loans to certain of the ExAlt Trusts. Ben Liquidity generates interest and fee income earned in connection with such ExAlt Loans to certain of the ExAlt Trusts, which are collateralized by the cash flows from illiquidthe exchanged alternative assets and(the “Collateral”). Ben Custody Admin provides trust administration services to the trustees who administer the collateral. Beneficient’s core business products are its Exchange Trust, LiquidTrust and the InterChange Trust (introduced in 2020). Beneficient’s clients select one of these products and place their alternative assets into the custody trust that is a constituent membercertain of a trust structure called the “ExAlt PlanTM” (comprised of Exchange Trusts, LiquidTrusts, Custody Trusts, Collective Trusts, and Funding Trusts). The ExAlt PlanTMthen delivers to Beneficient’s clients the consideration required by the specific product selected by Beneficient’s clients. At the same time, Beneficient, through a subsidiary, extends a loan to the ExAlt PlanTM. The proceeds (cash or securities of Ben LP or its affiliates) ofTrusts that loan toown the ExAlt PlanTM are ultimately paid to the client. The cash flows from the client’sexchanged alternative asset supportfollowing a liquidity transaction for fees payable quarterly. The Collateral supports the repayment of the loans plus any related interest and fees.

Beneficient Since the ExAlt Trusts are consolidated, Ben LP’s operating subsidiary ExAlt Loans and interest and fee income are eliminated in the presentation of our condensed consolidated financial statements.


The ExAlt Trusts’ investments in alternative assets are the source of the Collateral supporting the ExAlt Loans. These assets consist primarily of limited partnership interests in various alternative investments, including private equity funds. These alternative investments are valued using NAV as a practical expedient. Changes in the NAV of these investments are recorded in investment income, net in our consolidated statements of operations. The ExAlt Trusts’ investments in alternative assets provide the economic value creating the Collateral to the ExAlt Loans made in connection with each liquidity transaction.

The ExAlt Trusts held loans receivableinterests in alternative assets with a carryingnet asset value of $218.6$219.4 million and $232.3$221.9 million at March 31, 20202021 and December 31, 2019. Loans are carried at the principal amount outstanding, plus interest paid in kind, less allowance for loan loss. Loans bear contractual interest at the greater of 14% or 1-month LIBOR plus 10%, compounded daily. In the event an alternative reference rate is required, the Secured Overnight Financing Rate (“SOFR”) would replace LIBOR, as contemplated in our loan agreements. The primary source of repayment for the loans and related fees is cash flows from the alternative assets collateralizing the loans. Interest income on loans is accrued on the principal amount outstanding and interest compounds on a daily basis.

2020, respectively. As of March 31, 2020, Beneficient’s loan2021, the ExAlt Trusts’ portfolio had exposure to 118115 professionally managed alternative investment funds, comprised of 350321 underlying investments, and approximately 9297 percent of Beneficient’s loan portfolio (based on NAV) was collateralized bywhich are investments in private companies. Beneficient’s loan

Page 55
The portfolio diversification spans across theseof alternative assets, excluding the collateral exchanged in the Collateral Swap, which is eliminated in consolidation, covers the following industry sectors and geographic regions as of the dates shown below (dollar amounts in thousands):

Industry Sector Value  Percent of Total 
Health Care Equipment and Services $93,575   26.7%
Pharmaceuticals, Biotechnology and Life Sciences  46,438   13.2%
Telecommunication Services  39,567   11.3%
Other(1)  38,131   10.9%
Diversified Financials  28,033   8.0%
Not Applicable (e.g., Escrow, Earnouts)  24,177   6.9%
Software and Services  20,945   6.0%
Semiconductors and Semiconductor Equipment  20,553   5.9%
Food and Staples Retailing ��20,507   5.8%
Utilities  18,728   5.3%
Total $350,654   100.00%

Geography Value  Percent of Total 
North America $210,976   60.2%
Western Europe  62,429   17.8%
Asia  36,006   10.3%
Latin & South America  22,263   6.3%
Other(2)  18,980   5.4%
Total $350,654   100.00%

March 31, 2021December 31, 2020
Industry SectorValuePercent of TotalValuePercent of Total
Diversified Financials28,923 13.2 %28,462 12.8 %
Food and Staples Retailing28,556 13.0 %24,450 11.0 %
Software and Services26,728 12.2 %23,310 10.5 %
Telecommunication Services26,274 12.0 %27,401 12.3 %
Utilities20,963 9.6 %21,740 9.8 %
Not Applicable (e.g., Escrow, Earnouts)(1)
18,985 8.7 %18,138 8.2 %
Semiconductors and Semiconductor Equipment13,154 6.0 %21,271 9.6 %
Health Care Equipment and Services12,243 5.6 %14,682 6.6 %
Other(1)
43,603 19.7 %42,440 19.2 %
Total$219,429 100.0 %$221,894 100.0 %

March 31, 2021December 31, 2020
GeographyValuePercent of TotalValuePercent of Total
North America$100,670 45.8 %$95,569 43.1 %
Western Europe46,235 21.1 %50,219 22.6 %
Latin & South America29,318 13.4 %25,255 11.4 %
Asia28,671 13.1 %36,436 16.4 %
Other(2)
14,535 6.6 %14,415 6.5 %
Total$219,429 100.0 %$221,894 100.0 %

(1)Industries in this category each comprise less than 5 percent.
(2)Locations in this category each comprise less than 5 percent.

Page 58

(1)Industries in this category each comprise less than 5 percent as of March 31, 2021.

Values represent the NAV of the interests(2)Locations in alternative assets, the cash flows of whichthis category each comprise the collateral of Beneficient’s loan portfolio. less than 5 percent.

Assets in the collateral portfolio consist primarily of interests in alternative investment vehicles (also referred to as “funds”) that are managed by a group of U.S. and non-U.S. based alternative asset management firms that invest in a variety of financial markets and utilize a variety of investment strategies. The vintages of the funds in the collateral portfolio as of March 31, 20202021 ranged from 1998 1993 to 2011.

2018.

As Beneficient grows its loanthe ExAlt Trusts grow their portfolio, Beneficientthey will monitor the diversity of its collateralthe portfolio through the use of concentration guidelines. These guidelines were established, and will be periodically updated, through a data driven approach based on asset type, fund manager, vintage of fund, industry segment and geography to manage portfolio risk. Beneficient will refer to these guidelines when making decisions about new financing opportunities; however, these guidelines will not restrict Beneficient from entering into financing opportunities that would result in Beneficient having exposure outside of its concentration guidelines. In addition, changes to Beneficient's collateralthe ExAlt Trusts’ portfolio may lag changes to the concentration guidelines. As such, Beneficient’s collateralthe ExAlt Trusts’ portfolio may, at any given time, have exposures that are outside of its concentration guidelines to reflect, among other things, attractive financing opportunities, limited availability of assets, or other business reasons. Given Beneficient’sthe ExAlt Trusts’ limited operating history, its collateralthe portfolio as of March 31, 20202021 had exposure to certain alternative investment vehicles and investments in private companies that were outside of those guidelines.

Classifications by industry sector, exposure type and geography reflect classification of investments held in funds or companies held directly in the collateral portfolio. Investments reflect the assets listed by the general partner of a fund as held by the fund and have a positive or negative net asset value. Typical assets include portfolio companies, limited partnership interests in other funds, and net other assets, which are a fund’s cash and other current assets minus liabilities. The underlying interests in alternative assets that serve as collateral for Beneficient’s loan portfolio
Page 56
are primarily limited partnership interests, and the limited partnership agreements governing those interests generally include restrictions on disclosure of fund-level information, including fund names and company names in the funds.

Industry sector is based on Global Industry Classification Standard (GICS®) Level 2 classification (also known as “Industry Group”) of companies held in the collateral portfolio by funds or directly, subject to certain adjustments by us. “Other” classification is not a GICS® classification. “Other” classification reflects companies in the GICS® classification categories of Automobiles & Components, Banks, Capital Goods, Commercial & Professional Services, Consumer Durables & Apparel, Consumer Services, Energy, Food, Beverage & Tobacco, Household & Personal Products, Insurance, Materials, Media & Entertainment, Pharmaceutical, Biotechnology & Life Sciences, Real Estate, Retailing, Semiconductors & Semiconductors Equipment, Tech Hardware & Equipment, and Transportation. N/A includes investments assets that we have determined do not have an applicable GICSGICS® Level 2 classification, such as Net Other Assets and investments that are not operating companies.

Investment exposure type reflects classifications based on each fund’s current investment strategy stage as determined by us. “Other” includes private debt strategies, natural resources strategies and hedge funds.

Geography reflects classifications determined by us based on each underlying investment. “Other” geography classification includesincludes Israel, Australia, Northern Europe, and Eastern Europe.

Principal Revenue and Expense Items

During the three months ended March 31, 20202021 and 2019,2020, we earned revenues from the following primary sources:

●Revenue realized from maturities of life insurance policies. We recognize the difference between the face value of the policy benefits and carrying value when an insured event has occurred and determine that collection of the policy benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. We generally collect the face value of the life insurance policy from the insurance company within 45 days of our notification of the insured’s mortality.
●Change in Fair Value of Life Insurance Policies. We value our life insurance portfolio investments for each reporting period in accordance with the fair value principles discussed herein, which reflects the expected receipt of policy benefits in future periods, net of premium costs, as shown in our condensed consolidated financial statements.

Page 59

•Revenue Realized from Maturities of Life Insurance Policies. We recognize the difference between the face value of the policy benefits and carrying value when an insured event has occurred and determine that collection of the policy benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized. We generally collect the face value of the life insurance policy from the insurance company within 45 days of our notification of the insured’s mortality, but this collection time varies depending on the insurance company and individual policy.

●Interest Income. Includes interest income on Beneficient’s loan portfolio and on the LiquidTrust promissory note, including discount amortization as applicable. See the discussion above under “Critical Accounting Policies and Estimates – Purchased Loans” for further information on our accounting for PCI and non-PCI loans.
●Trust Services. Trust administration fees are earned for providing administrative services to trustees for existing liquidity solution clients. The performance obligation under these agreements is satisfied over time as the administration and management services are provided. Fees are recognized monthly based upon the beginning of quarter (in advance) net asset value plus any remaining unfunded loan commitments and the applicable fee rate of the account as outlined in the agreement. Payment frequency is defined in the individual contracts, which primarily stipulate billings on a quarterly basis in advance. Fees that have been billed in advance are reflected as Deferred Income until earned.

•Change in Fair Value of Life Insurance Policies. We value our life insurance portfolio investments for each reporting period in accordance with the fair value principles discussed herein, which reflects the expected receipt of policy benefits in future periods, net of premium costs, as shown in our condensed consolidated financial statements.
•Investment Income. Includes the change in NAV of the alternative assets held by certain of the ExAlt Trusts.
•Interest Income. Primarily includes interest earned from policy benefits receivable and cash held in banks.
•Other Income. Includes changes in the fair value of Beneficient’s investment in put options, L Bond redemption fees, and other miscellaneous income.
During the three months ended March 31, 20202021 and 2019,2020, our main components of expense are summarized below:

●Interest Expense.We recognize and record interest expenses associated with the costs of financing our life insurance portfolio and our investment in Beneficient. These expenses include interest paid to our senior lenders under our second amended and restated senior credit facility with LNV Corporation (“LNV Credit Facility”), as well as interest paid on our L Bonds, Seller Trust L Bonds and other outstanding indebtedness, including Beneficient’s other borrowings. When we issue debt, we amortize the financing costs (commissions and other fees) associated with such indebtedness over the outstanding term of the financing and classify it as interest expense.
●Employee Compensation and Benefits. Employee compensation and benefits includes salaries, bonuses and other incentives and costs of employee benefits. Also included are significant non-cash expenses related to Beneficient’s equity incentive plans for the three months ended March 31, 2020.
●Selling, General and Administrative Expenses. We recognize and record expenses in our business operations as incurred, including operations related to the servicing of life insurance policies, the origination and servicing of loans and costs associated with trust administration. These expenses include legal and professional fees, sales, marketing, occupancy and other expenditures.

•Interest Expense. Includes interest incurred under the second amended and restated senior credit facility with LNV Corporation (as amended from time to time, “LNV Credit Facility”), as well as interest paid on GWG Holdings’ L Bonds, Seller Trust L Bonds and other outstanding indebtedness, including Beneficient’s debt due to related parties. When we issue debt, we amortize the financing costs (commissions and other fees) associated with such indebtedness over the outstanding term of the financing and classify it as interest expense.
•Employee Compensation and Benefits. Employee compensation and benefits includes salaries, bonuses and other incentives and costs of employee benefits. Also included are significant non-cash compensation expenses totaling $5.2 million and $68.9 million for the three months ended March 31, 2021 and 2020, respectively, related to Beneficient’s equity incentive plans.
•Selling, General and Administrative Expenses. We recognize and record expenses incurred in our business operations, including operations related to the servicing of life insurance policies, the origination and servicing of ExAlt Loans and costs associated with trust administration. These expenses include legal and professional fees, sales, marketing, occupancy and other expenditures.
Page 57
Additional components of our net earnings include:

●Earnings (Loss) from Equity Method Investment. Prior to the Investment and Exchange Agreements on December 31, 2019, we accounted for our investment in the common units of Ben LP (“Common Units”) using the equity method. Under this method, we recorded our share of the net earnings or losses attributable to Ben LP common unitholders, on a one quarter lag, as a separate line on our consolidated statements of operations. We also account for our investment in FOXO as an equity method investment, which is also included in earnings (loss) from equity method investment in our consolidated statements of operations. We had losses of $1.5 million and $1.9 million from equity method investments during the three months ended March 31, 2020 and 2019, respectively.

•Earnings (Loss) from Equity Method Investment. We account for GWG Holdings’ investment in FOXO as an equity method investment, which is included in earnings (loss) from equity method investment in our condensed consolidated statements of operations. We had losses from equity method investments of $3.5 million and $1.5 million during the three months ended March 31, 2021 and 2020, respectively.
Results of Operations — Three—Three Months Ended March 31, 20202021 Compared to the Same Period in 2019

2020

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

Net Loss Attributable to Common Shareholders
Net loss attributable to common shareholders was $54.4 million and $47.3 million for the three months ended March 31, 2021 and 2020, respectively. The results of operations for the three months ended March 31, 2021 reflect higher interest expense as result of increased average debt balances and higher operating expenses as a result of increased headcount and ongoing transactions and other business initiatives, combined with a lower gain on life insurance policies. More details regarding revenue and expenses for the three months ended March 31, 2021 and 2020 are included in the discussion below.
Revenue from Secondary Life Insurance

  Three Months Ended
March 31,		 
  2020  2019 
Revenue realized from maturities of life insurance policies $19,467  $21,757 
Revenue recognized from change in fair value of life insurance policies  12,177   15,571 
Premiums and other annual fees paid  (17,199)  (15,832)
Gain on life insurance policies, net $14,445  $21,496 
         
Attribution of gain on life insurance policies, net:        
Change in estimated probabilistic cash flows, net of premium and other annual fees paid $652  $1,299 
Net revenue recognized at maturity  13,793   15,738 
Unrealized gain on acquisitions  —   4,459 
Gain on life insurance policies, net $14,445  $21,496 
         
Number of policies acquired  —   60 
Face value of purchases $—  $80,211 
Purchases (initial cost basis) $—  $27,393 
Unrealized gain on acquisition (% of face value)  n/a   5.6%
         
Number of policies matured  20   20 
Face value of matured policies $25,502  $30,459 
Net revenue recognized at maturity event (% of face value matured)  54.1%  51.7%

Page 60

Three Months Ended March 31,
20212020
Revenue realized from maturities of life insurance policies$17,385 $19,467 
Revenue recognized from change in fair value of life insurance policies8,162 12,177 
Premiums and other annual fees paid(18,635)(17,199)
Gain on life insurance policies, net$6,912 $14,445 
Attribution of gain on life insurance policies, net:  
Change in estimated probabilistic cash flows, net of premium and other annual fees paid$(5,388)$652 
Net revenue recognized at maturity12,300 13,793 
Gain on life insurance policies, net$6,912 $14,445 
Number of policies matured26 20 
Face value of matured policies$25,960 $25,502 
Net revenue recognized at maturity event (% of face value matured)47.4 %54.1 %

Revenue from changes in estimated probabilistic cash flows, net of premiums paid was a charge of $5.4 million compared to a return of $0.7 million and $1.3 million induring the three months ended March 31, 20202021 and 2019,2020, respectively. The decrease of $7.1$7.5 million in gain on life insurance policies for the three months ended March 31, 2020,2021, over the comparable prior year period, was driven by a decrease in the face value of matured life insurance policies and by higher premiums paid in the first quarter of 2020.

The Company did not purchase any life insurance policies in the first quarter of 2020. The face valuelower revenue realized from maturities of life insurance policies purchased(see more details in the first quarterfollowing paragraph), a lower amount of 2019 was $80.2 million. The resulting unrealized gain on acquisition was $0 and $4.5 millionrevenue recognized from changes in the first quarter of 2020 and 2019, respectively. Decreased unrealized gain on acquisition in the current period is the result of a strategic decision to significantly reduce capital allocated to purchasing additional life insurance policies in the secondary market and to increase capital allocated toward providing liquidity to a broader range of alternative assets through additional investments in Beneficient. On December 31, 2019, we obtained the right to appoint a majorityfair value of the board of directorspolicies still in force at March 31, 2021, and higher premium costs due to the aging of the general partner of Ben LP. As a result of this change-of-control event, we reported the results of Ben LP and its subsidiaries on a consolidated basis beginning on the transaction date of December 31, 2019. We believe Beneficient can finance investments in alternative assets that will generally produce higher risk-adjusted returns than those we can generally achieve from life insurance policies acquired in the secondary market. Furthermore, although we believe that our portfolio of life insurance policies is a meaningful component of a growing diversified alternative asset portfolio, we continue to explore strategic alternatives for our life insurance portfolio aimed at maximizing its value, including a possible sale, refinancing or recapitalization of our life insurance portfolio.

The face value of matured policies was $26.0 million and $25.5 million and $30.5 million infor the three months ended March 31, 20202021 and 2019,2020, respectively, reflecting a decrease ofan increase in face value of matured policies of $5.0$0.5 million. The resulting revenue recognizedrealized at maturity was $13.8$17.4 million and $15.7 million, respectively. Revenue changes from maturity events of ($1.9) million primarily resulted from the changes of face value of policies matured during those same periods.

Interest Income, Trust Services Revenues and Other Income (in thousands)

  Three Months Ended
March 31,		 
  2020  2019 
Interest income $13,989  $3,501 
Trust services revenues  5,027   — 
Other income  96   220 
Total $19,112  $3,721 

Interest income increased $10.5$19.5 million during the three months ended March 31, 2021 and 2020, respectively. The decreased revenue realized at maturity during the comparable periods was due to the higher carrying value of the policies that matured during the first quarter of 2021 compared to the same period in 2019, primarily due to the consolidationfirst quarter of Beneficient, which added $8.12020.

Page 58
Investment Income, Interest Income, and Other Income (in thousands)
Three Months Ended March 31,
20212020Variance
Investment income$2,090 $7,556 $(5,466)
Interest income317 715 (398)
Other (loss) income(1,560)96 (1,656)
Total$847 $8,367 $(7,520)
Investment income decreased $5.5 million to interest income. We also added $1.1 million of interest income from the promissory note between GWG Life and the LiquidTrusts entered into on May 31, 2019, as discussed in Note 6 to the condensed consolidated financial statements. These increases were partially offset by $2.8 million of interest on the commercial loan between GWG Life and Beneficient, which was reported in interest income during the three months ended March 31, 2019, prior2021, compared to the consolidation of Beneficient on December 31, 2019. This intercompany interest was eliminatedsame period in consolidation beginning January 1, 2020.

Page 61

Trust services revenues related2020, primarily due to Beneficient’s trust administration services were added beginning January 1, 2020, as a resultdecrease in the NAV of the consolidationalternative assets held by certain of Beneficient on Decemberthe ExAlt Trusts.

Interest income decreased $0.4 million during the three months ended March 31, 2019.

2021, compared to the same period in 2020, primarily due to a decrease in average cash balances and corresponding bank interest earned.

Other loss during the three months ended March 31, 2021, includes a $2.2 million decrease to the fair value of Beneficient's investment in put options, compared to L Bond early redemption fees and other miscellaneous income items recorded in the comparable period in 2020.
Interest and Operating Expenses (in thousands)

  Three Months Ended March 31, 
  2020  2019  Increase/
(Decrease)		 
Interest expense (including amortization of deferred financing costs) $35,871  $26,975  $8,896 
Employee compensation and benefits  77,704   5,154   72,550 
Legal and professional fees  6,163   2,947   3,216 
Other expenses  4,312   2,828   1,484 
Total expenses $124,050  $37,904  $86,146 

The increase

Three Months Ended March 31,
20212020Variance
Interest expense (including amortization of deferred financing costs)$41,382 $35,871 $5,511 
Employee compensation and benefits15,024 77,704 (62,680)
Legal and professional fees8,128 6,163 1,965 
Other expenses7,003 3,612 3,391 
Total expenses$71,537 $123,350 $(51,813)
Interest expense, including amortization of deferred financing costs, increased $5.5 million during the three months ended March 31, 2021, compared to the same period in interest expense was2020, primarily due to the increase in the average balance of outstanding L Bonds from $729.3 million in three months ended March 31, 2019 to $1.0 billion in the same period of 2020, contributing $6.1 million of increased interest expense, including amortization of deferred financing costs. Also, the consolidation of Beneficient beginning December 31, 2019 increased interest expense by $2.3 million related to Beneficient’s other borrowings. Additionally, $0.5 million of interest expense increase was attributed to interest paid on our LNV Credit Facility due to the higher principal balance outstanding.

Bonds.

The increasedecrease in employee compensation and benefits in the three months ended March 31, 2020,2021, compared to the same period of 2019,2020, was primarily related to the consolidation of Beneficient on December 31, 2019.Beneficient’s equity incentive plans. Specifically, the Company recognized $5.2 million compared to $68.9 million of equity-based compensation expense related to Beneficient’s equity incentive plans during the three months ended March 31, 2021 and 2020, relatedrespectively. The decrease is due to Beneficient’s equity incentive plans. Beneficient’s Boardthe full vesting of Directors approved the granting of equity incentivesome awards upon grant during the first quarter of 2020 compared to certain employees and directors. Awards are generally subject topredominately service-based vesting over a multi-year period fromduring the recipient’s datefirst quarter of hire, though some awards fully vested upon the grant date. As of March 31, 2020, over 77% of the awards granted under Beneficient’s equity incentive plans had vested.

The Company expects to recognize an additional $12.5 million of equity-based compensation expense under Beneficient’s plans in the nine months ended December 31, 2020, related to awards outstanding as of March 31, 2020. Expense associated with these awards is based on the fair value of the equity on the date of grant. As Ben LP’s equity is not publicly traded, the fair value of the equity awards is estimated on the grant date using internal valuations or recent equity transactions involving third parties, which provides the Company with observable fair value information sufficient for estimating the grant date fair value.

2021. In addition to Beneficient’s equity-based compensation expense, we recognized additional retention, severance and other costs in the first quarter of 2020 related to the relocation of ourGWG Holdings’ principal offices from Minneapolis to Dallas in late 2019.

Finally, these decreases were partially offset by higher salary and benefit costs recognized as a result of higher headcount for the comparable periods.

The increase in legal and professional fees in the three months ended March 31, 20202021, compared to the same periodperiods of 20192020, is primarily the result of recent transactions, the consolidationengagement of Beneficient on Decembercertain service providers subsequent to first quarter 2020, and other ongoing initiatives.
The increase in other expenses, in the three months ended March 31, 2019, which added $4.12021 compared to the same periods of 2020, is primarily due to the $2.0 million write-off of an investment related to legacy business initiatives of GWG Holdings combined with a $1.3 million partial expense reversal of a service provider accrual by Beneficient during the first quarter of 2020. This increase is partially offset by $0.9 million of lower legal and consulting fees as the first quarter of 2019 included additional expenses related to the Beneficient transactions that closed in the second quarter of 2019.

Page 59
Income Taxes

The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods.

Income

The Company’s effective tax rate was 0.43% for the three months ended March 31, 2021. The income tax benefit for the three months ended March 31, 2021 was $14.5$0.3 million, compared to $16.1 million for the three months ended March 31, 2020, compared2020. The effective tax rate differs from the statutory U.S. federal income tax rate of 21% primarily due to $0.0 millionvaluation allowances recorded on the current year losses, offset by a current state tax expense. The income tax benefit for the three months ended March 31, 2019. The Company’s effective tax rate was 16.03% and 0% for the same periods. Our tax benefit for the year2021 primarily reflects the effect of a change in state taxing jurisdictions,downward adjustment to the reduction of a naked credit (described below), and current tax expense.

In late 2019, the Company moved its headquarters from Minnesota to Texas. This move resulted in a change in the state deferred tax rate from 9.8%liability for specific expense allocations to 0%. The tax effectsthe holders of this move has been recorded as a discrete item during the period.

Preferred Series A Subclass 1 Unit Accounts.

The Company currently records a valuation allowance against its deferred tax assets tothat cannot be realized solely by the extent there are indefinite lived intangibles related to investments, business interest expense and net operating losses.future reversal of existing temporary differences. Due to the uncertain timing of the reversal of certain of these taxable temporary differences due to the constraint described below, they cannot be considered as a source of future taxable income for purposes of determining a valuation allowance; therefore, the vast majority of the existing deferred tax liability cannot offsetbe utilized in determining the realizability of the deferred tax assets. This is often referred to as a “naked credit.” Due to a prior deemed ownership change, net operating loss carryforwards are subject to Section 382 of the Internal Revenue Code.

We continue

The Company determined it cannot utilize the reversal of a taxable temporary difference related to monitor and evaluateGWG Life’s ownership in the rationale for recordingPreferred Series A Subclass 1 Unit Accounts described in Note 1, until such time as the preferred equity is no longer constrained, as a full valuation allowance for the net amountsource of theincome to realize existing deferred tax assets which are in excess ofrelated to the indefinite-lived deferred tax assetsnet operating loss and liabilities. We intend to continue maintainingInternal Revenue Code Section 163(j) limitations. As a full valuation allowance on theseresult, the Company recorded a large net deferred tax assets until thereliability on December 31, 2019, the majority of which remained as of March 31, 2021 and December 31, 2020. The disposition of this investment is sufficient evidenceconstrained by the Pledge and Security Agreement in favor of the holders of the L Bonds of GWG Holdings. As such, the timing of recognition of the necessary taxable income related to supportthis investment and the future reversal of all or some portion of these allowances. Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change on the basis of the level of profitability that we are able to actually achieve.

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which included significant changes to U.S. Federal income tax law. However, the only change that is expected to affect the Company is the modification to Section 163(j), which increased the allowable business interest deduction from 30% of adjustedthis taxable income to 50% of adjusted taxable income.

Page 62

temporary difference cannot be predicted.

Revenue and Earnings before Tax by Reportable Segment — Three Months Ended March 31, 20202021 Compared to the Same Period of 2019

in 2020

We have two reportable segments: 1) BeneficientSecondary Life Insurance and 2) Secondary Life Insurance.Beneficient. Corporate & Other includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, management and administrative services to support the overall operations of the Company, and ourGWG Holdings’ equity method investment in FOXO.

Comparison of revenue by reportable segment for the periods indicated (in thousands):

  Three Months Ended March 31, 
Revenue: 2020  2019  

Increase/

(Decrease)

 
Secondary Life Insurance $15,148  $22,183  $(7,035)
Beneficient  18,409   2,870   15,539 
Corporate & Other  —   164   (164)
Total $33,557  $25,217  $8,340 

Three Months Ended March 31,
Revenue:20212020Variance
Secondary Life Insurance$7,172 $15,148 $(7,976)
Beneficient587 7,664 (7,077)
Total$7,759 $22,812 $(15,053)
The primary driverscomponents of the changes in revenue during the first quarterthree months ended March 31, 2021 compared to the same periods in 2020 were as follows:
•Secondary Life Insurance revenue decreased by $8.0 million during the three months ended March 31, 2021, compared to the comparable period in 2020, primarily as a result of 2020a decrease of $4.6 million in the change in estimated probabilistic cash flows, a decrease of $1.5 million in net revenue recognized at maturity and an increase of $1.4 million in premium expense.

•Beneficient segment revenue decreased for the three months ended March 31, 2021 compared to the same period in 2019 were as follows:

●Secondary Life Insurance revenue decreased by $7.0 million during, the three months ended March 31, 2020, compared to the comparable period in 2019, primarily as a result of lower net gain on life insurance policies. During the three months ended March 31, 2020, compared to the same period in 2019, we experienced $2.3 million lower net revenue recognized at maturity due to few maturities at lower face values, and $4.8 million lower unrealized gain on policy acquisitions as we have not acquired any policies in 2020.
●Beneficient segment revenue for the three months ended March 31, 2020 represents the consolidated operations of Beneficient, compared to an equity method investment in Beneficient during the same period in 2019, and also includes interest income on the LiquidTrust promissory note entered into in May 2019. As such, the first quarter of 2020 includes $13.4 million of interest income and $5.0 million of trust services revenues, whereas the first quarter of 2019 primarily includes interest income on the Commercial Loan between GWG Life and Beneficient, which was eliminated in consolidation beginning December 31, 2019.
●Corporate & Other revenue during the first quarter of 2019 includes minimal revenue related to a legacy merchant cash advance subsidiary of GWG Holdings. GWG holdings no longer participates in the merchant cash advance industry.

2020, due to a $5.5 million decrease in investment income driven by the decrease in NAV combined with a $2.2 million loss on investment in put option during the first quarter of 2021.

Page 60

Comparison of earningsloss before tax by reportable segment for the periods indicated (in thousands):

  Three Months Ended March 31, 
Segment Loss Before Tax(1) 2020  2019  Change 
Secondary Life Insurance $(14,721) $(1,623) $(13,098)
Beneficient  (70,149)  (5,936)  (64,213)
Corporate & Other  (7,153)  (7,055)  (98)
Total $(92,023) $(14,614) $(77,409)

 Three Months Ended March 31,
Segment Loss Before Tax20212020Variance
Secondary Life Insurance$(22,389)$(14,721)$(7,668)
Beneficient(31,593)(80,194)48,601 
Corporate & Other(1)
(13,310)(7,153)(6,157)
Total$(67,292)$(102,068)$34,776 

(1)Includes loss from equity method investments as presented in our consolidated statements of operations.

(1)Includes loss from equity method investments as presented in our condensed consolidated statements of operations, related to GWG Holdings’ investment in FOXO.
The primary drivers of the changes in loss before tax during the first quarter of 2020three months ended March 31, 2021, compared to the same period in 20192020 were as follows:

●Secondary Life Insurance loss before tax increased by $13.1 million as a result of the following:

●$7.0 million decrease in the gain on life insurance policies, net as described above in the revenue discussion.

Page 63

•Secondary Life Insurance loss before tax increased by $7.7 million for the three months ended March 31, 2021 compared to the same period in 2020, as a result of the following:

●$1.6 million increase in interest expense as a result of higher average debt outstanding; and

●An increase in operating expenses of $3.5 million, primarily resulting from higher employee compensation and benefits, professional fees and insurance costs.

●Beneficient segment loss before tax increased by $64.2 million during the first quarter of 2020 compared to the same period in 2019, primarily due to the consolidation of Beneficient on December 31, 2019. The earnings of Beneficient in the first quarter of 2020 were affected by a $65.1 million non-cash charge for equity incentive compensation.  In the first quarter of 2019, we accounted for Beneficient using the equity method on a one-quarter lag, and the amount reported represents our proportionate share of the losses of Beneficient for the period presented. The one-quarter lag was required to be discontinued with the consolidation of Beneficient on December 31, 2019.

●Corporate and Other operating loss was relatively unchanged during the first quarter of 2020 compared to the same period in 2019.

•$7.5 million decrease in gain on life insurance policies, net for the comparative period as described above in the revenue comparison discussion;
•$4.9 million increase in interest expense during the comparative periods as a result of higher average debt outstanding; and
•$5.2 million decrease in operating expenses during the comparative period, primarily resulting from lower employee compensation and benefits.
•Beneficient segment loss before tax decreased by $48.6 million for the three months ended March 31, 2021, respectively, compared to the same period in 2020, primarily due to:
•a decrease of $60.1 million in non-cash charges for equity incentive compensation;
•a decrease in investment income of $5.5 million combined with an increase in loss on put option of $2.2 million as described above in the revenue comparison discussion; and
•increases in interest and other operating expenses of approximately $3.6 million.
•Corporate and Other operating loss was higher during the three months ended March 31, 2021 compared to the same period in 2020, primarily due to an increase in loss from equity method investment of $2.0 million, the write-off of a $2.0 million investment related to legacy business initiatives, and higher legal fees and other expenses of approximately $2.0 million.
Liquidity and Capital Resources

As of March 31, 2021 and December 31, 2020, we had approximately $114.2 million and $124.2 million, respectively, in combined available cash, cash equivalents, and restricted cash. We financegenerated net losses attributable to common shareholders of $54.4 million and $47.3 million for the three months ended March 31, 2021 and 2020, respectively. As of October 15, 2021, we had cash, cash equivalents, and restricted cash of approximately $54.3 million. Besides funding operating expenditures, we are obligated to pay other items, such as interest payments. debt maturities, and preferred stock dividends and redemptions.
We have historically financed our businesses primarily through a combination of L Bond sales, preferred stock sales, the LNV Credit Facility, and the NF Credit Facility. We have also financed our business through proceeds from life insurance policy benefit receipts; receipt of principal, interest and related fees on loans receivable;receipts, cash distributions from the ExAlt Trusts’ alternative asset portfolio, dividends and interest on investments; equity offerings;investments, and Beneficient’s debt offerings; and our LNV Credit Facility and other borrowings.due to related parties. We have traditionally used proceeds from these sources for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal, interest and dividends. We have also used and intend to continue to use, proceeds to allocate capital to Beneficient.

AsBeneficient; however, if Ben LP becomes an independent company pursuant to the terms of March 31, 2020the Term Sheet, the Company expects that Ben LP would reduce its reliance on GWG Holdings to fund its

Page 61
operations and December 31, 2019, we had approximately $188.7 millionwould raise future capital from other sources. Ben LP’s capital raising efforts and $151.5, respectively,participation in combined available cash, cash equivalents, restricted cash, policy benefits receivableliquidity transactions may include the issuance of equity or debt of Ben LP or one of its subsidiaries, and fees receivable.

the newly issued securities may be dilutive to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH and may include preferential terms relative to GWG Holdings’ and GWG Life’s investments in Ben LP and BCH, as applicable.

We currently fund our business primarily with debt that generally has a shorter duration than the duration of our longer-termlong-term assets. The resulting asset/liability mismatch can result in a liquidity shortfall if we are unable to renew maturing short termshort-term debt or secure suitable additional financing. In such a situation, we could be forced to sell assets at less than optimal (distressed) prices. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities. We heavily rely on ourGWG Holdings’ L Bond offering to fund our business operations, including, among other things, interest and principal payments on existing L Bonds and capital allocations to Beneficient. We were unable to offer ourtemporarily suspended the offering of GWG Holdings’ L Bonds, commencing April 16, 2021, as a result of our primary source of debt capital, for the approximately three month period commencing May 1, 2019 due to delaysdelay in filing certain periodic reports with the SEC. We drew down our cash balances during that period as L Bonds matured butSEC, including this Quarterly Report on Form 10-Q, and were unablerequired to be renewed, and we were unable to offer new L Bonds. We recommenced ourseek alternative sources of capital.

As a result of the suspension of GWG Holdings’ L Bond offering, on June 28, 2021 (as described in more detail below), we pledged additional life insurance policies as collateral and received an additional advance of $51.2 million under the Third Amended Facility. Subsequently, on August 8, 2019. If11 2021, we entered into the NF Credit Agreement (as described in more detail above and in Note 17 to the condensed consolidated financial statements) and received a one-time advance of $107.6 million under this agreement. Approximately $56.7 million of such advanced amount was used to pay off the remaining amount due, including interest and penalties, under the Third Amended Facility and the additional pledged life insurance policies used as collateral for the Third Amended Facility were released and pledged under the NF Credit Facility. Further, on September 7, 2021, DLP IV entered into the Fourth Amended Facility, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional advance of $30.3 million from LNV Corporation, with no additional pledged collateral.

Primarily due to the current suspension of GWG Holdings’ L Bond offering, the Company may require additional capital to continue its operations over the next twelve months if our ability to sell L Bonds dissipates, or if we are again forced to suspend the L Bond offering. However, the Company may not be able to obtain additional borrowings under existing debt facilities or new borrowings with other third-party lenders. To the extent that GWG Holdings or its subsidiaries raise additional capital through the future issuance of debt, the terms of those debt securities may include terms that adversely affect the rights of our existing debt and/or equity holders or involve negative covenants that restrict GWG Holdings’ ability to take specific actions, such as incurring additional debt or making additional investments in growing the operations of the Company. If GWG Holdings is unable to fund its operations and other obligations, or defaults on its debt, then the Company will be required to either i) sell assets to provide sufficient funding, ii) exercise our right to decline requests for early L Bond redemptions or redemptions of preferred stock, or iii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Substantially all of our life insurance policies are pledged as collateral under the LNV Credit Facility and the NF Credit Facility and we would not be able to dispose of them without compliance with the terms of those credit facilities.

We anticipate recommencing the offering of GWG Holdings’ L Bonds once we become current with our filing obligations and satisfy applicable NASDAQ listing requirements. Once we become current with our filing obligations with respect to the L Bonds, we may be limited in the origination channels in which we sell our L Bond offeringBonds in the future for any significant length of time, andevent that we are unable to obtain replacement financing,meet the applicable NASDAQ listing requirements in a timely manner, which could result in the L Bonds no longer being “covered securities” for federal securities law purposes which would subject the offer and sale of L Bonds to potentially extensive state “blue sky” securities law requirements. If for any reason we are forced to suspend GWG Holdings’ L Bond offering, are limited in our origination channels in which we sell our L Bonds, or demand for GWG Holdings’ L bonds dissipates, our business would be adversely impacted and our ability to service and repay our debt obligations, much of which is short term, would be compromised, thereby negatively affecting our business prospects and viability.

We had $126.0 million of borrowing base capacity, excluding any potential capacity for premiums and servicing costs, under the LNV Credit Facility as of March 31, 2021. Additional future borrowing base capacity for premiums and servicing costs, created as the premiums and servicing costs of pledged life insurance policies become due and by additional policy pledges to the facility, if any, exists under the LNV Credit Facility.Facility at the sole discretion of the lender. The LNV Credit Facility has certain financial and nonfinancial covenants. Wecovenants, and we were in compliance with thethese debt covenants as of March 31, 20202021 and are in compliancecontinue to be so as of the filing date of this report.

Subsequent to March 31, 2021, we received additional advances through

Page 62
amendments to the LNV Credit Facility and entered into the NF Credit Facility (as described above and more fully in Note 17 to the condensed consolidated financial statements).
Beneficient is obligated to make debt payments totaling $75.6 million on certain outstanding borrowings through May 30, 2022 under the terms of the Amendment No. 1 to the Second Amended and Restated Credit Agreements as discussed further in Note 17 to the condensed consolidated financial statements. Primarily due to both the forthcoming debt payments under the Credit Agreement and Second Lien Credit Agreement and the anticipated deconsolidation of Beneficient from GWG Holdings, as discussed previously and in Note 17, which is expected to result in reduced reliance by Beneficient on GWG Holdings to fund its operations, Beneficient will require additional liquidity to continue its operations over the next twelve months. Beneficient expects to satisfy these obligations and fund its operations through anticipated operating cash flows, proceeds from distributions on the alternative assets portfolio, additional investments into Beneficient by GWG Holdings and/or other parties and, potentially refinancing with other third-party lenders some or all of the existing borrowings due prior to their maturity. Beneficient is currently in the process of raising additional equity, which is anticipated to close during the fourth quarter of 2021 and/or the first quarter of 2022.
Beneficient may not be able to refinance or obtain additional financing on terms favorable to the Company, or at all. To the extent that Beneficient raises additional capital through the future sale of equity or debt, the ownership interest of its existing equity holders may be diluted. The terms of these future equity or debt securities may include liquidation or other preferences that adversely affect the rights of its existing equity unitholders or involve negative covenants that restrict Beneficient’s ability to take specific actions, such as incurring additional debt or making additional investments in growing its operations. If Beneficient defaults on these borrowings, then it will be required to either i) sell assets to repay these loans or ii) to raise additional capital through the sale of equity and the ownership interest of our equity holders may be diluted. Moreover, if Beneficient were to sell assets to avoid a default of these borrowings, then the price at which Beneficient sold such assets may not reflect the carrying value of those assets as reflected in our consolidated financial statements, especially in the event of a bulk or distressed sale.
As noted in the “Results of Operations” section above, on November 11, 2019, GWG Holdings contributed the common stock and membership interests of its then wholly-owned Life EpigeneticsFOXO Labs and youSuranceFOXO Life subsidiaries to a legal entity, FOXO in exchange for a membership interest in the entity. In connection withOn November 13, 2020, FOXO BioScience LLC converted to a corporation and is now known as FOXO Technologies Inc. With the transaction,corporate conversion, GWG Holdings’ previous membership interest in the LLC converted to preferred equity. GWG Holdings has contributed $2.1$1.2 million in cash to FOXO during the fourth quarter of 2019three months ended March 31, 2021, and is committed to contribute an additional $12.5$2.5 million to the entity through October 2021. 

2021, all of which has been contributed through such date.

The potential NASDAQ delisting and our current inability to sell L Bonds as discussed above, in combination with significant recurring losses from operations, negative cash flows from operations, delays in executing our business plans, and any potential negative outcome from the ongoing SEC investigation discussed elsewhere in this Form 10-Q, raise substantial doubt about our ability to continue as a going concern for the next 12 months following the filing of this Form 10-Q.
Financings Summary

We had the following outstanding debt balances as of March 31, 20202021 and December 31, 2019:

  As of March 31, 2020  As of December 31, 2019 
Issuer/Borrower 

Principal
Amount
Outstanding

(in thousands)

  Weighted
Average
Interest Rate		  

Principal
Amount
Outstanding

(in thousands)

  Weighted
Average
Interest Rate		 
GWG DLP Funding IV, LLC – LNV senior credit facility (see Note 10) $198,661   9.53% $184,586   9.57%
GWG Holdings, Inc. – L Bonds  1,035,827   7.18%  948,128   7.15%
GWG Holdings, Inc. – Seller Trust L Bonds  366,892   7.50%  366,892   7.50%
Beneficient – Other borrowings  152,183   5.35%  152,199   4.59%
Total $1,753,563   7.36% $1,651,805   7.26%

2020, with the following weighted average interest rates as calculated for the three months ended March 31, 2021, and the year ended December 31, 2020 (dollars in thousands):

March 31, 2021December 31, 2020
Issuer/BorrowerPrincipal Amount OutstandingWeighted Average Interest RatePrincipal Amount OutstandingWeighted Average Interest Rate
GWG DLP Funding IV, LLC – LNV senior credit facility$174,007 9.00 %$202,611 9.12 %
GWG Holdings, Inc. – L Bonds1,372,305 7.21 %1,277,881 7.21 %
GWG Holdings, Inc. – Seller Trust L Bonds272,104 7.50 %272,104 7.50 %
Beneficient – Debt due to related parties78,213 7.87 %77,176 6.50 %
Total$1,896,629 7.44 %$1,829,772 7.43 %

Page 64

63

The table below reconciles the face amount of our outstanding debt to the carrying value shown on our balance sheets:

  

As of
March 31,
2020

(in thousands)

  

As of
December 31,
2019

(in thousands)

 
Senior credit facility with LNV Corporation      
Face amount outstanding $198,661  $184,586 
Unamortized selling costs  (9,868)  (10,196)
Carrying amount $188,793  $174,390 
         
L Bonds and Seller Trust L Bonds:        
Face amount outstanding $1,402,719  $1,315,020 
Subscriptions in process  15,197   15,839 
Unamortized selling costs  (41,243)  (37,329)
Carrying amount $1,376,673  $1,293,530 
         
Other borrowings:        
Face amount outstanding $152,183  $152,199 
Unamortized premium  414   887 
Carrying amount $152,597  $153,086 

sheets (dollars in thousands):

March 31, 2021December 31, 2020
Senior credit facility with LNV Corporation
Face amount outstanding$174,007 $202,611 
Unamortized deferred financing costs(8,552)(8,881)
Carrying amount$165,455 $193,730 
L Bonds and Seller Trust L Bonds:
Face amount outstanding$1,644,409 $1,549,985 
Subscriptions in process24,762 17,978 
Unamortized selling costs(51,976)(48,957)
Carrying amount$1,617,195 $1,519,006 
Debt due to related parties: 
Face amount outstanding$78,213 $77,176 
Unamortized discount(1,258)(916)
Carrying amount$76,955 $76,260 
In January 2015, weGWG Holdings began publicly offering up to $1.0 billion of L Bonds as a follow-on to our earlier $250.0 million public debt offering. In January 2018, weGWG Holdings began publicly offering up to $1.0 billion L Bonds under an additionalas a follow-on to its earlier offering. Through March 31,
On June 3, 2020, the total amount of L Bonds sold under these L Bond offerings, including renewals, was $1.7 billion. As of March 31, 2020 and December 31, 2019, respectively, we had approximately $1.0 billion and $948.1 million in principal amount of L Bonds outstanding (exclusive of Seller Trust L Bonds).

On March 30, 2020, we filed a registration statement relating to offeran additional public offering was declared effective permitting us to sell up to $2.0 billion in principal amount of L Bonds on a continuous basis the third anniversary of the effective date of the registration statement.through June 2023. These bonds contain the same terms and features as our previous offerings.

In February 2017, Through March 31, 2021, we began publiclyhave raised $408.6 million under this offering, up to 150,000 sharesincluding renewals, since it was declared effective.

Through March 31, 2021, the total amount of our Series 2 Redeemable Preferred Stock (“RPS 2”) at a per-share price of $1,000.L Bonds sold under all offerings, including renewals, was $2.3 billion. As of March 31, 2021 and December 31, 2018,2020, respectively, we had issued approximately $150 million stated value$1.4 billion and $1.3 billion in principal amount of RPS 2 and terminated that offering.

Page 65

L Bonds outstanding (exclusive of Seller Trust L Bonds).

On August 10, 2018, GWG Holdings, GWG Life and the Bank of Utah, as trustee, entered into the L Bond Supplemental Indenture to the Amended and Restated Indenture. GWG Holdings entered into the L Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Seller Trust L Bonds. WeGWG Holdings issued Seller Trust L Bonds in the amount of $366.9 million to the Seller Trusts in connection with the Exchange TransactionTransaction. As a result of the Collateral Swap discussed in detail in Note 1 to the condensed consolidated financial statements.statements, $94.8 million of the Seller Trust L Bonds are eliminated upon consolidation. The maturity date of the Seller Trust L Bonds is August 9, 2023. The Seller Trust L Bonds bear interest at 7.5% per annum. Interest is payable monthly in cash (see Note 109 to the condensed consolidated financial statements).The. The Amended and Restated Indenture was subsequently amended on December 31, 2019, primarily to modify the calculation of the Debt Coverage Ratio in the Indenture to provide the CompanyGWG Holdings with the ability to incur indebtedness (directly or through a subsidiary of the Company)GWG Holdings) that is payable in capital stock of the CompanyGWG Holdings or mandatorily convertible into or exchangeable for capital stock of the CompanyGWG Holdings that would be excluded from the calculation of the Debt Coverage Ratio.

On December 31, 2020, we entered into the Liquidity Bond Supplemental Indenture to add and modify certain provisions of the Amended and Restated Indenture necessary to provide for the issuance of the Liquidity Bonds in a principal amount of up to $1.0 billion.

The weighted-average interest rate of ourGWG Holdings’ outstanding L Bonds (excluding the Seller Trust L Bonds) as of both March 31, 20202021 and December 31, 20192020 was 7.18% and 7.15%7.21%, respectively, and the weighted-average maturity at those dates was 3.243.16 years and 3.213.19 years, respectively. OurGWG Holdings’ L Bonds (other than the Seller Trust L Bonds and Liquidity Bonds) have renewal features. Since we first issued ourGWG Holdings’ L Bonds, we have experienced $677.3experienced $801.3 million in maturities, of which $357.7$424.1 million has renewed through March 31, 20202021, for an additional term. This renewal activity has provided us with an aggregate renewal rate of approximately 52.8%52.9% for investments in these securities.

securities.

Page 64
Future contractual maturities of L Bonds and(including the Seller Trust L Bonds and Liquidity Bonds) at March 31, 20202021 are as follows (in thousands):

Years Ending December 31,   
2020 $117,173 
2021(1)  566,939 
2022  192,133 
2023  107,884 
2024  118,042 
Thereafter  300,548 
  $1,402,719 

(1)After
Years Ending December 31,
Nine months ending 2021(1)
$414,695 
2022292,084 
2023235,831 
2024159,779 
2025166,413 
Thereafter375,607 
 $1,644,409 
(1)As of March 31, 2021, we had approximately $366.9 million in principal amount of Seller Trust L Bonds outstanding, of which $94.8 million are held by the ExAlt Trusts and are eliminated in consolidation. Accordingly, the net of these amounts, $272.1 million, is presented in the table above. As the second anniversary of the Final Closing Date has passed, the holders of the Seller Trust L Bonds will have the right to cause GWG to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder within 45 days. As such, while the maturity date of the $366.9 million of Seller Trust L Bonds is in August 2023, their contractual maturity is reflected in 2021, as that is the first period in which they could become payable. The repurchase may be paid, at the option of GWG Holdings, in the form of cash, and/or a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan Agreement, and (ii) Common Units, or a combination of cash and such property.

Page 66

The L Bonds and the Seller Trust L Bonds now have the right to cause GWG Holdings to repurchase, in whole but not in part, the Seller Trust L Bonds held by such holder within 45 days. As such, while the maturity date of the Seller Trust L Bonds is in August 2023, their contractual maturity is reflected in 2021, as that is the first period in which they could become payable. The repurchase may be paid, at the option of GWG Holdings, in the form of cash, and/or a pro rata portion of (i) the outstanding principal amount and accrued and unpaid interest under the Commercial Loan Agreement, and (ii) Common Units, or a combination of cash and such property.

The L Bonds (including the Seller Trust L Bonds and Liquidity Bonds) are secured by all of our assets and are subordinate to ourthe LNV Credit Facility and the NF Credit Facility.

On September 27, 2017, we entered into a $300 million amended and restated senior credit facility with LNV Corporation in which DLP IV is the borrower. As of March 31, 2020,2021, we had approximately $198.7$174.0 million outstanding under the senior credit facility. On November 1, 2019, we entered into the LNV Credit Facility, which replaced the prior agreement governing the facility. A description of the agreement governing ourthe LNV Credit Facility is set forth below under the caption “Amendment of Credit Facility with LNV Corporation.” We intend to use the proceeds from this facility to maintain our portfolio of life insurance policies, for liquidity and for general corporate purposes.

Beneficient had borrowings with an aggregate carrying value of $152.6$77.0 million and $153.1$76.3 million as of March 31, 20202021 and December 31, 2019,2020, respectively. This aggregate outstanding balance includes a seniorfirst lien credit agreement and a subordinatesecond lien credit agreement with respective balances, including accrued interest, of $77.5$2.3 million and $72.2$73.2 million as of March 31, 20202021 and $2.3 million and $72.3 million as of December 31, 2019,2020, respectively. These amounts exclude an aggregate unamortized premiumdiscount of $0.4$1.3 million and $0.9 million as of March 31, 20202021 and December 31, 2019,2020, respectively. Both credit agreements were amended and restated on August 13, 2020, which extended the maturity for both to April 10, 2021, as discussed in detail in Note 9 to the condensed consolidated financial statements. In accordance with the terms of the Second Amendments, dated August 13, 2020, both loans accrue interest at a rate of 1-month LIBOR plus 8.0%, with a maximum rate of 9.5%. Prior to the Second Amendments, both loans accrued interest at a rate of 1-month LIBOR plus 3.95%, compounded daily, with interest due bydaily. On March 10, 2021, the 15th of each month. The senior credit agreement andBen Credit Agreements were amended to extend the subordinate credit agreementmaturity for both mature on Juneagreements to May 30, 2020.2022, as discussed in detail in Note 17 to the condensed consolidated financial statements. These loans are not currently guaranteed by GWG Holdings as of March 31, 2020. On May 15, 2020, Beneficient and the lender signed the Term Sheet which would amend the loan terms as discussed in detail in the “Recent Developments” section.

2021.

Beneficient has additional borrowings maturing in 2023 and 2024 with an aggregate balancesprincipal balance of $2.5$2.7 million and $2.6 million as of both March 31, 20202021 and December 31, 2019.

2020, respectively.

We expect to meet our ongoing operational capital needs for, among other things, GWG Holdings’ investments in Beneficient, alternative asset investments, policy premiums and servicing costs, new policy acquisitions, exploring opportunities to establish a life insurance company, working capital and financing expenditures including paying principal, interest and dividends through a combination of the receipt of policy benefits from our portfolio of life insurance policies, net proceeds from ourGWG Holdings’ L Bond offering, dividends and interest from investments, including Beneficient’s feedistributions from the alternative assets held by certain of the ExAlt
Page 65
Trusts, future preferred and loans receivable,common equity offerings, and funding available from ourthe LNV Credit Facility. We estimate that our liquidity and capital resources are sufficient for our current and projected financial needs for at least the next twelve months given current assumptions. However, if we are unable to continue ourGWG Holdings’ L Bond offeringor preferred stock offerings for any reason, and we are unable to obtain capital from other sources, our business will be materially and adversely affected. In addition, our business will be materially and adversely affected if we do not receive the policy benefits we forecast and if holders of ourGWG Holdings’ L Bonds fail to renew with the frequency we have historically experienced. In such a case, we could be forced to sell our investments in life insurance policies to service or satisfy our debt-related and other obligations. A sale under such circumstances may result in significant impairment of the recognized value of our portfolio.

Capital expenditures have historically not been material and we do not anticipate making material capital expenditures through the remainder of 2020.

2021.

Alternative Assets and Secured Indebtedness

The following information is specifically related to GWG Holdings, Inc. and its subsidiaries (not including the assets and liabilities held by Beneficient or any eliminations in consolidation).

The following table seeks to illustrate the impact that a hypothetical sale of our portfolio of life insurance assets (at various discount rates, including the discount rate used to value our portfolio at March 31, 2020)2021), and the realization of the financing receivables from affiliates, investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH (a substantial majority of the net assets of which are currently represented by intangible assets and goodwill), investment in Preferred Series A Subclass 1 Unit Account of BCH, and equity security investment in the OptionCommercial Loan Agreement (in each case, at their respective carrying amounts and assuming no discount for lack of marketability or transaction costs, which could be substantial) would have on our ability to satisfy our debt obligations as of March 31, 2020.2021. The financing receivables from affiliates, investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, investment in Preferred Series C Unit Account of BCH, and OptionCommercial Loan Agreement are discussed in detail in Note 1 and other applicable notes to the consolidationcondensed consolidated financial statements. The amounts in the table below do not include the consolidation of the assets and liabilities of Beneficient and related eliminations as of March 31, 2020.2021. In all cases, the sale of the life insurance assets owned by DLP IV will be used first to satisfy all amounts owing under ourthe LNV Credit Facility. The net sale proceeds remaining after satisfying all obligations under ourthe LNV Credit Facility would be applied to the L Bonds and Seller Trust L Bonds on a pari passu basis. All dollar amounts in the table below are in thousands.

Page 67

Life Insurance Portfolio Discount Rate
8.25%(1)
9.00%10.00%12.00%13.48%
Value of life insurance portfolio$791,499 $764,699 $731,570 $673,041 $635,435 
Common Units437,990 437,990 437,990 437,990 437,990 
Preferred Series A Subclass 1 Unit Account of BCH319,030 319,030 319,030 319,030 319,030 
Preferred Series C Unit Account of BCH210,624 210,624 210,624 210,624 210,624 
Commercial Loan Agreement183,187 183,187 183,187 183,187 183,187 
Cash, cash equivalents and policy benefits receivable114,641 114,641 114,641 114,641 114,641 
Other assets12,055 12,055 12,055 12,055 12,055 
Total assets2,069,026 2,042,226 2,009,097 1,950,568 1,912,962 
Less: Senior credit facility(2)
174,007 174,007 174,007 174,007 174,007 
Net after senior credit facility1,895,019 1,868,219 1,835,090 1,776,561 1,738,955 
Less: L Bonds(3)
1,739,197 1,739,197 1,739,197 1,739,197 1,739,197 
Net remaining$155,822 $129,022 $95,893 $37,364 $(242)
Impairment to L Bonds No impairmentNo impairmentNo impairmentNo ImpairmentImpairment

Life Insurance

Portfolio Discount Rate 8.25%(1)  10.00%  15.00%  20.00%  23.62% 
Value of life insurance portfolio $802,181  $736,375  $594,234  $496,814  $443,983 
Common Units of Ben LP and Preferred Series A Subclass 1 Unit Account of BCH  697,714   697,714   697,714   697,714   697,714 
Financing receivables from affiliates  239,564   239,564   239,564   239,564   239,564 
Cash, cash equivalents and policy benefits receivable  146,225   146,225   146,225   146,225   146,225 
Option Agreement and other assets  73,894   73,894   73,894   73,894   73,894 
Total assets  1,959,578   1,893,772   1,751,631   1,654,211   1,601,380 
Senior credit facility  198,661   198,661   198,661   198,661   198,661 
Net after senior credit facility  1,760,917   1,695,111   1,552,970   1,455,550   1,402,719 
L Bonds(2)  1,402,719   1,402,719   1,402,719   1,402,719   1,402,719 
Net remaining (in thousands) $358,198  $292,392  $150,251  $52,831  $(0)
Impairment to L Bonds   No impairment   No impairment   No impairment   No Impairment   Impairment 

(1)The discount rate used to calculate the fair value of our life insurance portfolio as of March 31, 2020
(2)Amount represents L Bonds and Seller Trust L Bonds

(1)The discount rate used to calculate the fair value of our life insurance portfolio as of March 31, 2021.
(2)This amount excludes unamortized deferred financing costs.
(3)Amount represents aggregate outstanding principal balance of L Bonds and Seller Trust L Bonds prior to eliminations as of March 31, 2021.
The above table illustrates that our ability to fully satisfy amounts owing under the L Bonds and Seller Trust L Bonds would likely be impaired upon the sale or the realization of the financing receivables from affiliates, investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, and equity security investment in the OptionPreferred Series C Unit Account of BCH and Commercial Loan Agreement at their respective carrying amounts, plus all our life insurance assets at a price equivalent to a discount rate of approximately 23.62%13.48% or higher at March 31, 2020.2021. At December 31, 2019,2020, the likely impairment occurred at a discount rate of approximately 27.41%
Page 66
16.12% or higher.

Based on a preliminary analysis, at September 30, 2021, management expects the likely impairment, as calculated in accordance with the table above, to occur at a discount rate of approximately 8.50% or higher. The above hypothetical analysis is included for informational purposes only, and the results of such analysis have no bearing on the current ability of GWG Holdings to market and sell L Bonds or to satisfy amounts owing under the L Bonds and Seller Trust L Bonds.

The table does not include any allowance for transactional fees and expenses (which expenses and fees could be substantial) nor any discount for lack of marketability associated with a portfolio sale or the realization of the financing receivables from affiliates, investment in Common Units, of Ben LP, investment in Preferred Series A Subclass 1 Unit Account of BCH, and equity security investment in the OptionPreferred Series C Unit Account of BCH, and Commercial Loan Agreement, respectively, and is provided to demonstrate how various discount rates used to value our portfolio of life insurance assets could affect our ability to satisfy amounts owing under our debt obligations in light of our senior secured lender’s right to priority payments under our senior credit facility with LNV Corporation.

The table also assumes weGWG Holdings will realize the full amounts of financing receivables from affiliates,the investment in Common Units, investment in Preferred Series A Subclass 1 Unit Account of BCH, and equity security investment in Preferred Series C Unit Account of BCH, and Commercial Loan Agreement. However, the Option Agreement. Thereultimate value of these investments in Beneficient depends on multiple factors, including the expected growth of new service offerings and products. Since predicting the rate of growth attributable to newly launched products is inherently uncertain, there is no assurance that GWG Holdings will recover the full book basis of its investments in Beneficient. Additionally, there is currently no market for the aforementioned assets, and a market may not develop. Our Commercial Loan receivable and a portion of ourGWG Holdings’ investment in the Common Units may be used as consideration for retiring the Seller Trust L Bonds upon a redemption event or at the maturity of the Seller Trust L Bonds (see Note 109 to the condensed consolidated financial statements). This table also does not include the yield maintenance fee we are required to pay in certain circumstances under ourthe LNV Credit Facility, which could be substantial. The above table should be read in conjunction with the information contained in other sections of this report, including the notes to the condensed consolidated financial statements in this Form 10-Q and our 20192020 Form 10-K.

Page 68

AmendmentAmendments of Senior Credit Facility with LNV Corporation

Effective November 1, 2019, DLP IV entered into the LNV Credit Facility. The LNV Credit Facility makes available a total of up to $300.0 million in credit to DLP IV with a maturity date of September 27, 2029. Subject to available borrowing base capacity, additional advances are available under the LNV Credit Facility at the LIBOR rate described below. Such advances are available to pay premiums and servicing costs of pledged life insurance policies as such amounts become due. Interest will accrue on amounts borrowed under the LNV Credit Facility at an annual interest rate, determined as of each date of borrowing or quarterly if there is no borrowing, equal to (a) the greater of 1.50% or 12-month LIBOR, plus (b) 7.50% per annum. The effective rate at March 31, 20202021 was 9.50%9.00%. Interest payments are made on a quarterly basis. As of March 31, 2020,2021, we had future borrowing capacity of $101.3approximately $174.0 million outstanding under the LNV Credit Facility.

senior credit facility.

Under the LNV Credit Facility, DLP IV has granted the administrative agent, for the benefit of the lenders under the facility, a security interest in all of DLP IV’s assets. As with prior collateral arrangements relating to the senior secured debt of GWG Holdings and its subsidiaries (on a consolidated basis), GWG Life’s excess equity value of DLP IV after satisfying all amounts owing under ourthe LNV Credit Facility is available as collateral for the obligations of GWG Holdings under the L Bonds and Seller Trust L Bonds (although the life insurance assets owned by DLP IV do not themselves serve as direct collateral for those obligations).

We are subject to various financial and non-financial covenants under the LNV Credit Facility, including, but not limited to, compliance with laws, preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP IV nor GWG Life become an investment company. As of March 31, 2020,2021, we were in compliance with all financial and non-financial covenants.

covenants, except as discussed below.

In addition, the LNV Credit Facility has certain reporting obligations that require DLP IV to deliver audited annual financial statements no later than ninety days after the end of each fiscal year. Due to the failure to issue GWG Life, LLC audited financial statements for 2020 to LNV Corporation within 90 days after the end of the year, we were in violation of our financial reporting obligations under the LNV Credit Facility. CLMG Corp., as administrative agent for LNV Corporation, has issued a limited deferral extending the delivery of these reports to May 17, 2021. We regained compliance on May 17, 2021, when the audited annual financial statements of GWG Life were delivered to LNV Corporation.
Page 67
On June 28, 2021, DLP IV entered into the Third Amended Facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the agreement, that replaced the aforementioned LNV Credit Facility. The Third Amended Facility resulted in an additional advance of $52.5 million from LNV Corporation.
In conjunction with entering into the Third Amended Facility, DLP V transferred life insurance policies having an aggregate face value of approximately $440.6 million to DLP IV, which were pledged as additional collateral to the Third Amended Facility, and DLP IV received proceeds of approximately $51.2 million (net of certain fees and expenses incurred in connection with the negotiation and entry into the Third Amended Facility). The Third Amended Facility sets forth interest and other terms and covenants similar those included in the previous LNV Credit Facility. The Third Amended Facility was paid off on August 11, 2021, with a portion of the proceeds from the NF Credit Facility described below.
On September 7, 2021, DLP IV entered into the Fourth Amended Facility with LNV Corporation, as lender, and CLMG Corp., as the administrative agent on behalf of the lenders under the agreement, that replaced the aforementioned Third Amended Facility. The Fourth Amended Facility resulted in an additional advance of $30.3 million from LNV Corporation. The Fourth Amended Facility sets forth interest and other terms and covenants similar those included in the previous LNV Credit Facility.

Credit Facility with National Founders LP

On August 11, 2021, DLP VI, entered into the NF Credit Agreement with each lender from time to time party thereto and National Founders LP, as the administrative agent. On August 11, 2021, a one-time advance of approximately $107.6 million was made to the DLP VI under the NF Credit Facility with a scheduled maturity date of August 11, 2031. Approximately $56.7 million of such advanced amount was used to pay off the remaining amount due under the Third Amended Facility. Amounts borrowed under the NF Credit Facility bear interest on each day on the outstanding principal amount on such day at a per annum rate, determined on a daily basis, generally equal to 5.5% up to a 65% of the loan to value percent as calculated in accordance with the NF Credit Agreement, and 7.0% on anything above that loan to value percent.
A portion of the proceeds from the funding under the NF Credit Facility was used to purchase life insurance policies that were owned by DLP IV, which used the funds to repay the most recent advance of $52.5 million plus interest and penalties under the LNV Credit Facility described above. At August 11, 2021, the aggregate face value of life insurance policies owned by DLP VI, was approximately $433.1 million. As of such date, the aggregate face value of life insurance policies owned by DLP IV was approximately $1.42 billion.
We are subject to various financial and non-financial covenants under the NF Credit Facility, including, but not limited to, compliance with laws, preservation of existence, financial reporting, keeping of proper books of record and account, payment of taxes, and ensuring that neither DLP VI nor GWG Life become an investment company. Additionally, we are required to maintain a Debt Coverage Ratio not to exceed 90%. As of August 31, 2021, we were in compliance with all financial and non-financial covenants in the NF Credit Facility.
Cash Flows

Interest and Dividend Payments

We finance our businesses through a combination of: life insurance policy benefit receipts; principal, dividends and interest receipt on investments, including Ben LP fee and loans receivable;receipts from investments; distributions from the alternative assets held by the ExAlt Trusts; debt and equity offerings; and our senior credit facility withthe LNV Corporation.Credit Facility and the NF Credit Facility. We have historically relied on debt (L Bonds and our senior credit facility withthe LNV Corporation)Credit Facility) and equity (preferred stock) financing for the majority of our cash expenditures (for policy acquisition, policy premiums and servicing costs, working capital and financing expenditures including paying principal and interest on existing debt, and for GWG Holdings and GWG Life making investments in Beneficient) as the amount of cash flows from the realization of life insurance policy benefits and cash flows from our other investments has been insufficient to meet all of our needs. This has resulted in the Company incurring substantial indebtedness (much of it being of a short term nature) and, to a lesser extent, obligations to make dividend payments on our classes of preferred stock.

Beneficient primarily finances its business through paymentsrepayments on outstanding loans receivableExAlt Loans. Such repayments are funded from a portion of the cash distributions the ExAlt Trusts receive from their alternative assets and fees receivable, additional investments intoin Beneficient by GWG Holdings and/or other parties, and, potentially, refinancing with other third-party lenders some or allparties. See Note 9 to the condensed consolidated financial statements for details on the amendments of the existing borrowings due on June 30, 2020 prior to their maturity.Beneficient’s credit agreements. Beneficient uses proceeds from these sources to fund loan originationsliquidity transactions and potential unfunded capital commitments, working capital, debt service payments, and costs associated with potential future products.
Page 68
Beneficient also anticipates the need to establish sufficient regulatory capital if and when its Texas trust charters are issued.

company charter is issued or the Kansas TEFFI trust company becomes operational. Additionally, Bermuda insurance statutes and regulations, and the policies of the BMA, require that Pen, among other things, maintain a minimum level of capital and surplus, satisfy solvency standards, and restrict dividends and distributions. Beneficient Capital Markets will also be subject to regulations of the SEC and FINRA that require, among other things, Beneficient Capital Markets to maintain a minimum level of capital.

Our total interest expense of $35.9$41.4 million and $27.0$35.9 million for the three months ended March 31, 2021 and 2020, and 2019, respectively, representrepresents the largest cash expense item in each period. Preferred stock cash dividends were $3.2 million and $4.0 million for the three months ended March 31, 20202021 and 2019 were $4.0 million and $4.3 million,2020, respectively. While reducing our cost of funds and increasing our common equity base (at valuations accretive to our book value) are primary goals of the Company, until we do so we will continue to expend significant amounts of cash for interest and dividend payments and will thus continue to rely heavily on our ability to raise cash from ourGWG Holdings’ L Bond offering, senior credit facility with LNV CorporationCredit Facility and other means as they are developed and available.

Life Insurance Policy Premium Payments

The payment of premiums and servicing costs to maintain life insurance policies represents one of our most significant requirements for cash disbursement. When a policy is purchased, we are able to calculate the minimum premium payments required to maintain the policy in-force. Over time as the insured ages, premium payments will increase. Nevertheless, the probability we will be required to pay the premiums decreases as mortality becomes more likely. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling. Beyond premiums, we incur policy servicing costs, including annual trustee, policy administration and tracking costs. Additionally, we incur significant financing costs, including principal, interest and dividends. Both policy servicing costs and financing costs are excluded from our internal rate of return calculations. We finance our businesses through a combination of life insurance policy benefit receipts, dividends and interest on other investments, equity offerings, debt offerings, and advances under our senior credit facility withthe LNV Corporation.

Page 69

Credit Facility and NF Credit Facility.

The amount of payments for anticipated premiums, including the requirement under ourthe LNV Credit Facility and NF Credit Facility to maintain a two month cost-of-insurance threshold within each policy cash value account, and servicing costs that we will be required to make over the next five years to maintain our current portfolio, assuming no mortalities, is set forth in the table below (in thousands):

Years Ending December 31, Premiums  Servicing  Total 
Nine months ending December 31, 2020 $49,708  $1,222  $50,930 
2021  83,813   1,630   85,443 
2022  96,636   1,630   98,266 
2023  108,749   1,630   110,379 
2024  118,269   1,630   119,899 
2025  131,528   1,630   133,158 
  $588,703  $9,372  $598,075 

Years Ending December 31,PremiumsServicingTotal
Nine months ending 2021$52,652 $1,098 $53,750 
202287,374 1,463 88,837 
202399,346 1,463 100,809 
2024108,838 1,463 110,301 
2025121,088 1,463 122,551 
2026133,556 1,463 135,019 
$602,854 $8,413 $611,267 
Our anticipated premium expenses are subject to the risk of increased cost-of-insurance charges (i.e., “COI” or premium charges) for the life insurance policies we own. We did not receive anyhave received notices of COI rate changes in 2019 orincreases on one policy in the first quarterthree months of 2021 compared to none in the first three months of 2020.

We have no known pending cost-of-insurance increases on any policies in our portfolio, but we are aware that cost-of-insurance increases have become more prevalent in the industry. Thus, we may see additional insurers implementing cost-of-insurance increases in the future.

Page 69
Life Insurance Policy Benefit Receipts

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

Quarter End Date 

Portfolio
Face Amount

(in thousands)

  

12-Month
Trailing
Benefits
Realized

(in thousands)

  

12-Month
Trailing
Premiums
Paid

(in thousands)

  12-Month
Trailing
Benefits/Premium
Coverage
Ratio		 
March 31, 2016  1,027,821   21,845   28,771   75.9%
June 30, 2016  1,154,798   30,924   31,891   97.0%
September 30, 2016  1,272,078   35,867   37,055   96.8%
December 31, 2016  1,361,675   48,452   40,239   120.4%
March 31, 2017  1,447,558   48,189   42,753   112.7%
June 30, 2017  1,525,363   49,295   45,414   108.5%
September 30, 2017  1,622,627   53,742   46,559   115.4%
December 31, 2017  1,676,148   64,719   52,263   123.8%
March 31, 2018  1,758,066   60,248   53,169   113.3%
June 30, 2018  1,849,079   76,936   53,886   142.8%
September 30, 2018  1,961,598   75,161   55,365   135.8%
December 31, 2018  2,047,992   71,090   52,675   135.0%
March 31, 2019  2,098,428   87,045   56,227   154.8%
June 30, 2019  2,088,445   82,421   59,454   138.6%
September 30, 2019  2,064,156   101,918   61,805   164.9%
December 31, 2019  2,020,973   125,148   63,851   196.0%
March 31, 2020  2,000,680   120,191   65,224   184.3%

Page 70

Quarter End Date
Portfolio Face Amount (in thousands)
12-Month Trailing Benefits Realized (in thousands)
12-Month Trailing Premiums Paid (in thousands)
12-Month Trailing Benefits/Premiums Coverage Ratio
March 31, 20171,447,558 48,189 42,753 112.7 %
June 30, 20171,525,363 49,295 45,414 108.5 %
September 30, 20171,622,627 53,742 46,559 115.4 %
December 31, 20171,676,148 64,719 52,263 123.8 %
March 31, 20181,758,066 60,248 53,169 113.3 %
June 30, 20181,849,079 76,936 53,886 142.8 %
September 30, 20181,961,598 75,161 55,365 135.8 %
December 31, 20182,047,992 71,090 52,675 135.0 %
March 31, 20192,098,428 87,045 56,227 154.8 %
June 30, 20192,088,445 82,421 59,454 138.6 %
September 30, 20192,064,156 101,918 61,805 164.9 %
December 31, 20192,020,973 125,148 63,851 196.0 %
March 31, 20202,000,680 120,191 65,224 184.3 %
June 30, 20201,960,826 137,082 66,846 205.1 %
September 30, 20201,921,067 149,415 67,931 220.0 %
December 31, 20201,900,715 125,109 69,734 179.4 %
March 31, 20211,879,895 125,566 71,206 176.3 %

We believe that the portfolio cash flow results set forth above are consistent with our general investment thesis that the life insurance policy benefits we receive will continue to increase over time in relation to the premiums we are required to pay on the remaining polices in the portfolio. Nevertheless, we expect that our portfolio cash flow on a period-to-period basis will remain inconsistent as we continue to allocate substantially more capital to Beneficient and have reduced capital allocated to acquiring a larger, more diversified portfolio of life insurance policies.

Interest Income

We earn interest income primarily on Beneficient’s loans receivable and the promissory note receivable from the LiquidTrusts. Although Beneficient has originated a limited number of loans to date, we expect interest income to continue to increase as Beneficient expands its operations if and when the trust charters are issued.

Inflation

Changes in inflation do not necessarily correlate with changes in interest rates. We presently do not foresee any material impact of inflation on our results of operations in the periods presented in our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

Unfunded Capital Commitments

Beneficient

The ExAlt Trusts had $73.7$35.5 million and $73.8$35.6 million of gross potential capital commitments as of March 31, 20202021 and December 31, 2019,2020, respectively, representing potential limited partner capital funding commitments on the interests in alternative asset fund collateral to its loans above any cash reserves.funds. The trust holding the interest in the limited partnership for the alternative asset fund is required to fund these limited partner capital commitments per the terms of the limited partnership agreement. Capital funding commitment reserves are maintained by the associated trusts within the ExAlt PlanTMcreated at the origination of each trust for up to $0.1 million. To the extent that the associated trustExAlt Trust cannot pay the capital funding commitment, Beneficient is obligated to lend sufficient funds to meet the commitment. Any amounts advanced by Beneficient to the ExAlt Trusts for these limited partner capital funding commitments above the associated capital funding commitment reserves held by the associated trustsExAlt Trusts are added to the loanExAlt Loan balance between Beneficient and the ExAlt Trusts and are expected to be recouped through the cash distributions from the interests in alternative asset fund collateral.

that collateralizes such ExAlt Loan.

Page 70
Capital commitments generally originate from limited partner agreements having fixed or expiring expiration dates. The total limited partner capital funding commitment amounts may not necessarily represent future cash requirements. Beneficient considers the creditworthiness of the investment on a case-by-case basis. At both March 31, 20202021 and December 31, 2019,2020, Beneficient had no reserves for losses on unused commitments to fund potential limited partner capital funding commitments.

Equity Method Investee Commitments
GWG Holdings has contributed $1.2 million in cash to FOXO during the three months ended March 31, 2021, and is committed to contribute an additional $2.5 million to the entity through October 2021, all of which has been contributed through such date.
Credit Risk and Interest Rate Risk

We review the credit risk associated with our portfolio of life insurance policies when estimating its fair value. In evaluating the policies’ credit risk, we consider insurance company solvency, credit risk indicators, economic conditions, ongoing credit evaluations, and company positions. We attempt to manage our credit risk related to life insurance policies typically by purchasing policies issued only from companies with an investment-grade credit rating by either Standard & Poor’s, Moody’s, or A.M. Best Company. As of March 31, 2020, 95.6%2021, 95.7% of our life insurance policies, by face value benefits, were issued by companies that maintained an investment-grade credit rating (BBB or better) by Standard & Poor’s.

The assets and liabilities exchanged in the Initial Transfer of the Exchange Transaction are excluded from this analysis.

Our LNV Credit Facility, NF Credit Facility, and Beneficient’s other borrowingsdebt due to related parties are floating-rate financings. In addition, our ability to offer interest and dividend rates that attract capital (including in our continuous offering of L Bonds) is generally impacted by prevailing interest rates. Furthermore, while ourGWG Holdings’ L Bond offering provides us with fixed-rate debt financing, our Debt Coverage Ratio is calculated in relation to the interest rate on all of our debt financing, exclusive of ourGWG Holdings’ Seller Trust L Bonds. Therefore, increases in interest rates impact our business by increasing our borrowing costs and reducing availability under our debt financing arrangements. Earnings from our life insurance portfolio are based upon the spread, if any, generated between the return on the portfolio and the total cost of our financing (excluding cost of financing for the Seller Trust L Bonds). As a result, increases in interest rates will reduce the earnings we expect to achieve from our investments in life insurance policies.

Page 71

Beneficient is subjectThe ExAlt Trusts hold investments in alternative assets, which are exposed to risks related to markets, credit, currency, and interest rates. Beneficient issues loans that are subject to credit risk, repayment risk and interest rate risk. Beneficient has underwriting procedures and utilizes market rates. As of March 31, 2020, all of Beneficient’s loans are collateralized by the cash flows originating from alternative assets without recourse to the client. Currently, all of these alternative assets consist of private equity limited partnership interests, which are primarily denominated in the U.S. dollar, Euro, and Canadian dollar. The underlying portfolio companies primarily operate in the United States and Western Europe, with the largest percentage, based on NAV, operating in healthcare technology, bio-technology,diversified financials, telecommunications services, food and diversified telecommunicationsstaples retailing, and software and services industries. The Company mitigates creditfinancial statements risk, throughstemming from such investments, are those associated with the determination of estimated fair values, the diminished ability to monetize certain investments in times of strained market conditions, the recognition of income and recognition of impairments on certain investments.


As of March 31, 2021, and December 31, 2020, all of the ExAlt PlanTM wherebyLoans, which are eliminated upon consolidation, are collateralized by the cash flows originating from the ExAlt Trusts’ investments in alternative assets. These ExAlt Loans are a key determinant in income (loss) allocable to Beneficient’s equity holders, and thus GWG Holdings. Beneficient has underwriting procedures and utilizes market rates. Additionally, Beneficient has purchased put options to protect the net asset value of the interests in alternative assets held by certain of the ExAlt Trusts from impacts associated with a broad market downturn. Finally, the ExAlt Trusts applicable trust agreements allow for excess cash flows from a collective pool of alternative assets canto be utilized to repay the loansExAlt Loans they have with Beneficient when cash flows from the client’s originalcustomer’s originally alternative assets are not sufficient to repay the outstanding principal, interest, and fees.
Guarantee and Collateral Provisions of L Bonds
GWG Holdings’ L Bonds are offered and sold under a registration statement declared effective by the SEC, and GWG Holdings has issued Seller Trust L Bonds under the L Bond Supplemental Indenture, as described in Note 9 to the condensed consolidated financial statements. The L Bonds and Seller Trust L Bonds are secured by substantially all the assets of GWG Holdings and a pledge of all of GWG Holdings’ common stock held by BCC and AltiVerse Capital Markets, L.L.C., a limited liability company owned by an entity related to the Ben Initial Investors, including Brad K. Heppner (GWG Holdings’ former Chairman, who served in such capacity from April 26, 2019 to June 14, 2021, and Beneficient's current Chief Executive Officer and Chairman) and an entity related to Thomas O. Hicks (one of Beneficient’s current directors and a former director of GWG Holdings) (“AltiVerse”). Together, BCC and AltiVerse represent approximately 12% of our outstanding common stock, and are
Page 71
guaranteed by GWG Life and a corresponding grant of a security interest in substantially all the assets of GWG Life. As a guarantor, GWG Life has fully and unconditionally guaranteed the payment of principal and interest on the L Bonds and Seller Trust L Bonds. GWG Life’s equity in GWG Life Trust, DLP IV, and DLP V Holdings serves as collateral for GWG Holdings’ L Bond and Seller Trust L Bond obligations. As of March 31, 2021, substantially all of our life insurance policies were held by DLP IV, DLP V, or GWG Life Trust. The policies held by DLP IV are not direct collateral for the L Bonds as such policies are pledged under the LNV Credit Facility.
On December 31, 2020, GWG Holdings, GWG Life and Bank of Utah, as trustee, entered into the Liquidity Bond Supplemental Indenture that provides for the issuance of two series of Liquidity Bonds, as described in Note 9 to the condensed consolidated financial statements. The Liquidity Bonds are issued by GWG Life and guaranteed by GWG Holdings. The Liquidity Bonds are secured by the same collateral as the other L Bonds.
Furthermore, regarding the obligations of GWG Holdings and its subsidiaries as of March 31, 2021:

(1)    The Seller Trust L Bonds are secured obligations of GWG Holdings, ranking junior to all senior debt of GWG Holdings and pari passu in right of payment and in respect of collateral with all L Bonds of GWG Holdings (see Note 9). Payments under the Seller Trust L Bonds are guaranteed by GWG Life. The assets exchanged in connection with the Beneficent transaction are available as collateral for all holders of the L Bonds and Seller Trust L Bonds. Specifically, the Common Units are held by GWG Holdings and the Commercial Loan is held by GWG Life.

(2)    The Liquidity Bonds are secured obligations of GWG Life, ranking junior to all senior debt of GWG Holdings or GWG Life and pari passu in right of payment and in respect of collateral with all L Bonds of GWG Holdings. Payments under the Liquidity Bonds are guaranteed by GWG Holdings.

(3) The terms of the LNV Credit Facility require that we maintain a significant excess of pledged collateral value over the amount outstanding on the LNV Credit Facility at any given time. Any excess after satisfying all amounts owing under the LNV Credit Facility is available as collateral for the L Bonds (including the Seller Trust L Bonds and Liquidity Bonds).

The following represents summarized financial information as of March 31, 2021 and December 31, 2020, with respect to the financial position, and for the three months ended March 31, 2021, with respect to results of operations. The tables present summarized financial information of GWG Holdings and GWG Life on a combined basis after elimination of (i) intercompany transactions and balances among such entities, including GWG Holdings’ interest in GWG Life, and (ii) equity in earnings from and investments in any subsidiary that is a non-guarantor (including DLP IV, DLP V, GWG Life Trust and Beneficient). The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.

Summarized Balance Sheet Information (in thousands, not intended to balance):
March 31, 2021December 31, 2020
Assets(1)
Cash, cash equivalents and restricted cash$63,755 $65,556 
Other assets3,945 6,366 
Total assets$67,700 $71,922 
Liabilities
L Bonds$1,345,091 $1,246,902 
Seller Trust L Bonds366,892 366,892 
Interest and dividends payable12,318 12,086 
Accounts payable and accrued expenses4,257 7,347 
Deferred tax liabilities51,272 51,469 
Total liabilities$1,779,830 $1,684,696 
Equity
Redeemable preferred stock and Series 2 redeemable preferred stock$141,472 $156,833 


Page 72
(1) Assets exclude: i) GWG Holdings’ investment in GWG Life of $1.2 billion as of both March 31, 2021 and December 31, 2020; ii) GWG Holdings’ aggregate investments in non-obligor subsidiaries of $660.9 million and $643.1 million as of March 31, 2021 and December 31, 2020, respectively; and iii) GWG Life’s aggregate investments in and loans to non-obligor subsidiaries of $1.2 billion as of both March 31, 2021 and December 31, 2020.
Summarized Statement of Operations Information (in thousands):
Three Months Ended March 31, 2021
Total revenues$12,968 
Interest expense36,002 
Other expenses11,400 
Total expenses47,402 
Loss before income taxes and preferred dividends(34,434)
Income tax benefit(13)
Preferred dividends3,192 
Net loss$(37,613)
Debt Coverage Ratio

The L Bond borrowing covenants of GWG Holdings require it to maintain a Debt Coverage Ratio of less thannot to exceed 90%. The Debt Coverage Ratio is calculated by dividing the sum of our total interest-bearing indebtedness (other than Excluded Indebtedness defined and described in note 2 to the table below) by the sum of our cash, cash equivalents, restricted cash, life insurance policy benefits receivable, the net present value of the life insurance portfolio, and, without duplication, the value of all of our other assets as reflected on our most recently available balance sheet prepared in accordance with GAAP.
GWG Holdings’ and GWG Life’s investments in Beneficient and GWG Life’s ownership interests in the holding companies that own DLP IV and DLP VI, which own substantially all of the life insurance portfolio, secure our obligations under the L Bonds, and are illiquid assets. Although GWG Holdings and GWG Life own debt and equity securities of Beneficient, a substantial majority of the net assets of Beneficient are currently represented by goodwill, an intangible asset. The calculation of Beneficient’s goodwill required the utilization of significant estimates and management judgment, as discussed elsewhere in this Quarterly Report on Form 10-Q. As a result, the carrying value of those assets as reflected in our condensed consolidated financial statements may not necessarily reflect the current market price for those assets, especially in the event of a bulk or distressed sale. Proceeds from L Bond sales will be primarily used for the repayment of L Bond maturities, interest payments and other operating expenses of GWG Holdings, and as otherwise specified in the prospectus for the L Bonds. GWG Holdings may also continue to use a portion of the proceeds from L Bond sales to make investments in Beneficient. Because advances may be used by Beneficient for working capital purposes, such investments may not increase the tangible assets securing the L Bonds. If the trustee for the L Bonds were forced to sell all or a portion of the collateral securing them, there can be no assurance that the trustee would be able to sell them for the prices at which we have recorded them in our condensed consolidated financial statements, and the trustee might be forced to sell them at significantly lower prices.
Page 73
The discount rate we use for the net present value of our life insurance portfolio for this calculation may not be the same discount rate we use for our GAAP valuation and is not necessarily reflective of the amount we could realize upon a sale of the portfolio (dollar amounts(dollars in thousands):

  March 31,
2020		  December 31,
2019		 
Life insurance portfolio policy benefits $2,000,680  $2,020,973 
Discount rate of future cash flows(1)  7.56%  7.55%
         
Net present value of life insurance portfolio policy benefits $831,167  $826,196 
All cash and cash equivalents (including restricted cash)  130,895   81,780 
Life insurance policy benefits receivable, net  15,330   23,031 
Financing receivables from affiliates  239,564   258,402 
Investments in Common Units and Preferred Series A Subclass 1 Unit Account  697,714   632,473 
Option Agreement and other assets  73,894   54,365 
Total Coverage(2) $1,988,564  $1,876,247 
         
Total Indebtedness(2) $1,266,419  $1,132,714 
         
Debt Coverage Ratio  63.69%  60.40%

(1)Weighted-average interest rate paid on indebtedness, excluding that of Seller Trust L-Bonds.

(2)Total Coverage excludes the assets of Beneficient. Total Indebtedness is equal to the total liabilities balance of GWG Holdings (excluding the liabilities of Beneficient) as of March 31, 2020, other than Excluded Indebtedness. Excluded Indebtedness is Indebtedness that is payable at the Company’s option in Capital Stock of the Company or securities mandatorily convertible into or exchangeable for Capital Stock of the Company, or any Indebtedness that is reasonably expected to be converted or exchanged, directly or indirectly, into Capital Stock of the Company. This change in the definition of the Debt Coverage Ratio was defined in Amendment No. 2 to the Amended and Restated Indenture entered into as of December 31, 2019 (see Note 10 to the condensed consolidated financial statements).

 March 31, 2021December 31, 2020
Life insurance portfolio policy benefits$1,879,895 $1,900,715 
Discount rate of future cash flows(1)
7.41 %7.46 %
Net present value of life insurance portfolio policy benefits$823,722 $822,859 
All cash and cash equivalents (including restricted cash)96,403 106,282 
Life insurance policy benefits receivable, net18,238 14,334 
Financing receivables from affiliates183,187 180,080 
Investments in Common Units(3)
437,990 438,194 
Investments in Preferred Series A Subclass 1 Unit Account(3)
319,030 319,030 
Investments in Preferred Series C Unit Account(3)
210,624 195,578 
Other Assets12,055 20,082 
Total Coverage(2)
$2,101,249 $2,096,439 
Total Indebtedness(2)
$1,585,165 $1,519,107 
Debt Coverage Ratio75.44 %72.46 %
(1)Weighted-average interest rate paid on indebtedness, excluding that of Seller Trust L-Bonds, as required under the indenture governing the L Bonds.
(2)Total Coverage excludes the assets of Beneficient. Total Indebtedness is equal to the total liabilities balance of GWG Holdings (excluding the liabilities of Beneficient) as of March 31, 2021, other than Excluded Indebtedness. “Excluded Indebtedness” means indebtedness that is payable at GWG Holdings’ option in capital stock of GWG Holdings or securities mandatorily convertible into or exchangeable for capital stock of GWG Holdings, or any Indebtedness that is reasonably expected to be converted or exchanged, directly or indirectly, into capital stock of GWG Holdings. This change in the definition of the Debt Coverage Ratio was defined in Amendment No. 2 to the Amended and Restated Indenture entered into as of December 31, 2019 (see Note 9 to the condensed consolidated financial statements).
(3)Generally represents the value of the investment in Beneficient as of December 31, 2019, for investments that existed at the time of the change-in-control transaction, or the value at the time of purchase for investments that were made subsequent to December 31, 2019. As noted above, these are illiquid investments that are carried at book basis and not market value.
As of March 31, 20202021 and December 31, 2019,2020, we were in compliance with the Debt Coverage Ratio.

Page 72

Based on a preliminary analysis, the Company expects the Debt Coverage Ratio to be approximately 82% as of September 30, 2021.

ITEM 4. 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 ourGWG Holdings’ 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.

Our

GWG Holdings’ Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) as of March 31, 20202021 (the end of the period covered by this report). Based on that evaluation, ourGWG Holdings’ Chief Executive Officer and Chief Financial Officer have concluded that due to the material weaknesses described below, our disclosure controls and procedures were effective.

not effective as of March 31, 2021.

Page 74
Material Weaknesses
Restatement
In connection with matters related to the Restatement, we have determined that a material weakness existed in our internal control over financial reporting for all periods from December 31, 2019 to December 31, 2020. As of December 31, 2020, the design and operating effectiveness of controls over the selection, application and review of the implementation of accounting policies were not sufficient to ensure amounts recorded and disclosed were fairly stated in accordance with GAAP. This material weakness resulted in the Restatement.
In response to this material weakness, our management has expended, and will continue to expend, a substantial amount of effort and resources for the remediation and improvement of our internal control over financial reporting. While we have processes to properly identify and evaluate the appropriate accounting technical pronouncements and other literature for all significant or unusual transactions, we are improving these processes to ensure that the nuances of such transactions are effectively evaluated in the context of the increasingly complex accounting standards. Our remediation plan at this time includes continuing to enhance our internal and external technical accounting resources by hiring additional personnel and increasing communication with third-party professionals with whom we consult regarding the application of complex accounting transactions.
Our remediation plan can only be accomplished over time and will be continually reviewed to determine that it is achieving its objectives. We can offer no assurance that these initiatives will ultimately have the intended effects.
Quarterly Valuation Allowance
In connection with the preparation and review of our quarterly condensed consolidated financial statements as of and for the period ended September 30, 2020, we also identified a material weakness in internal controls over the quarterly income tax provision process, which included the measurement of the valuation allowance against the Company’s deferred tax assets.
We have implemented a suite of enhanced internal controls and have involved additional external resources in the quarterly income tax provision process, including the assessment of the valuation allowance. We believe these measures will enable us to quickly remediate this material weakness in internal controls over the income tax provision process, including the valuation allowance against the Company’s deferred tax assets.
We have completed certain of such remediation activities as of the date of this filing and believe that we have strengthened our internal controls to address the identified material weakness. However, control weaknesses are not considered remediated until new internal controls have been operational for a period of time, are tested, and management concludes that these controls are operating effectively. We will continue to monitor the effectiveness of these remediation measures, and we will make any changes to the design of this plan and take such other actions that we deem appropriate given the circumstances.
Notwithstanding these material weaknesses, the Company has concluded that no material misstatements exist in the condensed consolidated financial statements, and such financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Company as of and for the three months ended March 31, 2021 and 2020, in conformity with accounting principles generally accepted in the United States of America.
Changes in Internal Control over Financial Reporting

As discussed elsewhere in this report, on December 31, 2019, GWG Holdings obtained the right to appoint a majority of the board of directors of Beneficient Management, the general partner of Ben LP. As a result of this change-of-control event, GWG Holdings reported the results of Ben LP and its subsidiaries on a consolidated basis beginning on the transaction date of December 31, 2019. As such, the scope of our assessment of the effectiveness of our disclosure controls and procedures did not include the internal control over financial reporting of Beneficient. These exclusions are consistent with the SEC Staff’s guidance that an assessment of a recently acquired business may be omitted from the scope of our assessment of the effectiveness of disclosure controls and procedures that are also part of internal control over financial reporting in the 12 months following the acquisition.

As a result of the consolidation of Beneficient, we have commenced a project to evaluate the processes and procedures of Beneficient’s internal control over financial reporting and incorporate Beneficient’s internal control over financial reporting into our internal control over financial reporting framework. In addition, as a result of the consolidation of Beneficient, we are in the process of implementing new processes and controls over accounting for goodwill and other intangible assets, primarily related to assessing these assets for impairment.

Other than the aforementioned items,material weaknesses, there were no changes in our internal control over financial reporting during the period covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Page 73

75

PART II — OTHER INFORMATION

ITEM 5.OTHER INFORMATION

The information set for under the heading “Amendment of Beneficient Credit Agreements” in Note 20 to the consolidated financial statements included in this Form 10-Q is hereby incorporated herein by reference.

ITEM 6.    EXHIBITS
ITEM 6.EXHIBITS

Exhibit
31.1Exhibit
22
List of Guarantor Subsidiaries (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 ClearLife Limited, dated April 15, 202027, 2021 (filed herewith).

99.2
Portfolio of Life Insurance Policies as of March 31, 2020 (filed herewith).2021 (filed herewith)
101.INS99.3
Sixth Amended and Restated Limited Partnership Agreement of Beneficient Company Holdings, L.P. (filed herewith)†
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

Page 74

† Certain confidential information has been excluded from this exhibit.

SIGNATURES

Pursuant to the requirements 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: May 15, 2020November 9, 2021By:/s/ Murray T. Holland
President and Chief Executive Officer
Date: May 15, 2020November 9, 2021By:/s/ Timothy L. Evans
Chief Financial Officer

Page 75

76