As filed with the Securities and Exchange Commission on April 25, 2014
 


Registration No. 333-_____________
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
     
 
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
     
   
GWG HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
     
 
Delaware
 
26-2222607
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
220 South Sixth Street, Suite 1200
Minneapolis, Minnesota 55402
Tel: (612) 746-1944
Fax: (612) 746-0445
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
     
 
Jon R. Sabes
Chief Executive Officer
220 South Sixth Street, Suite 1200
Minneapolis, Minnesota 55402
Tel: (612) 746-1944
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to :
Paul D. Chestovich, Esq.
Maslon Edelman Borman & Brand, LLP
3300 Wells Fargo Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Tel: (612) 672-8200
     
   
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
 
If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. o
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
 
 

 
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  o         Accelerated filer  o         Non-accelerated filer  o         Smaller reporting company x
 
CALCULATION OF REGISTRATION FEE
 
Title of each class of securities
to be registered
 
Amount to be
registered (1)
   
Proposed maximum
offering
price
per share
   
Proposed maximum aggregate
offering
price (2)
   
Amount of
registration
fee
 
Common Stock, $0.001 par value
 
                shares
    $       $ 15,000,000     $ 1,932  
(1)
Includes             shares purchasable by the underwriters to cover over-allotments, if any.
(2)
Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) of the Securities Act of 1933.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


 
 

 
 
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion, dated April 25, 2014
 
(GWG LOGO)
 
GWG Holdings, Inc.
 
                        Shares
Common Stock
 
This is a firm commitment underwritten public offering of           shares of common stock of GWG Holdings, Inc. We are selling all of the shares of common stock being offered by means of this prospectus. Prior to this offering, there has been no public market for our common stock.
 
We expect that the initial public offering price will be $          per share.
 
We have reserved the symbol "GWGH" for purposes of listing our common stock on The NASDAQ Capital Market and expect to apply to list our common stock on such exchange.
 
Investing in our common stock may be considered speculative and involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 12 to read about the risks you should consider before buying shares of our common stock.
 
We are an “emerging growth company” under applicable law and will be subject to reduced public company reporting requirements. Please read the disclosures on page 6 of this prospectus for more information.
 
   
Per Share
   
Total
 
Public offering price
  $       $ 15,000,000  
Underwriting discounts and commissions (1)
  $       $    
Proceeds to us, before expenses
  $       $    
 

 
(1)
See “Underwriting” beginning on page 86 for disclosure regarding compensation, including reimbursement of expenses, payable by us to the underwriters.
 
We have granted the underwriters a 45-day option to purchase up to an additional              shares of our common stock at the initial public offering price, less underwriting discounts and commissions, solely to cover over-allotments of shares, if any.
 
Delivery of the shares of our common stock will be made on or about                , 2014.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 

The date of this prospectus is                , 2014
 
 
 

 
 
 
[INSERT INSIDE COVER ARTWORK, IF ANY]
 
 
 
 

 
 
TABLE OF CONTENTS
 
 
 
Page
  1
  2
  10
  12
  27
  28
  30
  31
  32
  45
  66
  72
DIRECTOR COMPENSATION   74
  75
  77
  79
  80
  84
  86
  89
  89
  89
 
F-1
 
 
 

 
 
ABOUT THIS PROSPECTUS
 
You should rely only on the information in this prospectus. Neither we, nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since the date of this prospectus.
 
We are making offers to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. You should not consider this prospectus to be an offer to sell, or a solicitation of an offer to buy, shares of our common stock if the person making the offer or solicitation is not qualified to do so or if it is unlawful for you to receive the offer or solicitation.
 
References in this prospectus to “we,” “us,” “our,” the “Company” and “GWG” refer to GWG Holdings, Inc. together with its consolidated subsidiaries, unless the context requires otherwise. Our corporate structure, including our principal subsidiaries, is as follows:
 
(FLOW CHART)
 
We refer to these subsidiaries throughout this prospectus as “GWG Life,” “DLP Funding II” and “DLP Master Trust II,” respectively.
 
Our authorized capital stock consists of 210,000,000 shares of common stock, $0.001 par value per share, and 40,000,000 shares of preferred stock, $0.001 par value per share, of which 10,000,000 shares have been designated as Series A Convertible Preferred Stock and 30,000,000 shares are undesignated preferred stock. As of April 25, 2014, there were 9,124,000 shares of our common stock and 3,368,109 shares of our Series A Convertible Preferred Stock issued and outstanding. Pursuant to the rights, preferences and privileges of our Series A Convertible Preferred Stock as set forth in our Certificate of Incorporation, the issued and outstanding shares of our Series A Convertible Preferred Stock will be automatically converted into an aggregate of 5,052,163 shares of our common stock immediately prior to the closing of this offering. Unless we indicate otherwise, the information in this prospectus assumes that such conversion has taken place. After giving effect to (i) the sale of all              shares of common stock in this offering and the (ii) automatic conversion of our Series A Convertible Preferred Stock into common stock immediately prior to the closing of this offering, our authorized capital stock will consist of an aggregate of 210,000,000 shares of common stock, of which              shares will be issued and outstanding, and 40,000,000 shares of undesignated preferred stock, none of which will be issued and outstanding.
 
This prospectus contains summaries of certain other documents, which summaries contain all material terms of the relevant documents and are believed to be accurate, but reference is hereby made to the full text of the actual documents for complete information concerning the rights and obligations of the parties thereto.
 
The industry and market data used throughout this prospectus have been obtained from our own research, surveys or studies conducted by third parties and industry or general publications. Industry publications and surveys generally state that they have obtained information from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. We believe that each of these studies and publications is reliable.
 
 
1

 
 
     
   
     
 
This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider. To understand this offering fully, you should carefully read the entire prospectus, including the section entitled “Risk Factors,” before making a decision to invest in our common stock. Unless otherwise noted or unless the context otherwise requires, the terms “we,” “us,” “our,” the “Company” and “GWG” refers to GWG Holdings, Inc. together with its wholly owned subsidiaries.
 
     
 
Our Company
 
     
 
 We are engaged in the emerging secondary market for life insurance. We acquire life insurance policies in the secondary market from policy owners desiring to sell their policies at a discount to the face value of the insurance benefit. Once we purchase a policy, we continue paying the policy premiums in order to ultimately collect the face value of the insurance benefit. Our mission is to become a leading originator of life insurance policies purchased in the secondary market in the United States. Our strategy is to continue build large, actuarially diverse and profitable portfolios of policies and offer investors unique investment products to indirectly participate in the ownership of our portfolios.
 
     
 
 We believe our strategy will help create a new and more diverse financial market for policy owners and financial investors in the secondary market for life insurance, where both participants can profit. For an insured person, typically a senior citizen, the profit opportunity is the ability to sell their policy or policies into the secondary market for a value that may be significantly higher than the lapse or surrender value associated with the policy or policies. For investors, the profit opportunity is the difference, or “spread,” between (i) the cost of purchasing and maintaining a life insurance policy over the insured’s lifetime, and (ii) the amount of the policy benefit that will paid upon the insured’s mortality. In addition, the profit opportunity for an investor is unique, and we believe attractive, in that potential investment returns are not correlated to general economic or financial market conditions.
 
     
 
 According to the American Council of Life Insurers Fact Book 2013 (ACLI), individuals owned over $11.2 trillion in face value of life insurance policy benefits in the United States in 2012. This figure includes all types of policies, including term and permanent insurance known as whole life, universal life, variable life and variable universal life. The secondary market for life insurance has developed around individuals aged 65 years or older owning either permanent insurance or term insurance convertible into permanent insurance. According to the ACLI, the lapse rate and surrender rate of individually owned life insurance policies reached 5.9% in 2012, representing approximately $649 billion in face value of life insurance policy benefits. These figures do not include group-owned life insurance, such as employer-provided life insurance, the market for which totaled over $8.0 trillion in face value of life insurance policy benefits in the United States in 2013. According to the ACLI, the lapse rate and surrender rate of group-owned life insurance policies reached 6.2% in 2012, representing approximately $496 billion in face value of insurance benefits.
 
     
 
 Owners of life insurance policies generally allow them to lapse or surrender the policies for a variety of reasons, including: (i) unrealistic original earnings assumptions made when the policy was purchased, combined with higher premium payments later in the term of the policy than initially forecasted; (ii) increasing premium payment obligations as the insured ages; (iii) changes in financial status or outlook which cause the insured to no longer require life insurance; (iv) other financial needs that make the insurance unaffordable; or (v) a desire to maximize the policy’s investment value. Rather than allowing a policy to lapse as worthless, or surrendering a life insurance policy at a fraction of its inherent value, the sale of a life insurance policy in the secondary market can bring significant value to the policy owner. For example, the life insurance secondary market often pays policy sellers amounts ranging from two to ten times the surrender value that would otherwise be offered by the insurance carrier.
 
     
 
 The market opportunity for selling and purchasing life insurance policies in the secondary market is relatively new and continues to develop. According to Conning Research & Consulting (Conning), the secondary market for life insurance policies grew from $2.0 billion in face value of life insurance policy benefits purchased in 2002 to over $12.0 billion in face value of life insurance policy benefits purchased in 2008. During and after the 2009 credit crisis, the secondary market for life insurance contracted significantly, evidenced by Conning’s report that investors purchased approximately $2.0 billion in face value of life insurance policy benefits in  2012. Nevertheless, Conning reports that consumer demand for continued development for the secondary market remains strong, and there are indications of strengthening interest among investors.
 
     
 
 
2

 
 
             
 
 To participate in the market opportunity, we have spent and intend to continue to spend significant resources: (i) developing a robust operational platform and systems for purchasing and servicing life insurance policies; (ii) obtaining requisite licensure to purchase life insurance in the secondary market; (iii) developing financing resources for purchasing and servicing life insurance policies; (iv) recruiting and developing a committed professional management team; (v) establishing origination relationships for purchasing life insurance policies in the secondary market; and (vi) developing a financing strategy to participate in this business sector.
 
             
 
 We were formed in 2006. Since then, we have acquired over $1.6 billion in face value of life insurance policy benefits and have become an active purchaser and financier of life insurance policies in the secondary market. In 2008, after selling approximately $1.0 billion in face value of life insurance policy benefits, we adopted our current buy-and-hold strategy of investing in a portfolio life insurance policies and offering investors the opportunity to finance our ownership of the portfolio. As of December 31, 2013, we owned approximately $741 million in face value of life insurance policy benefits with an aggregate cost basis of approximately $226 million. Aggregate cost basis includes our acquisition costs and ongoing premiums and financing costs. To date, we have financed the acquisition of this portfolio through (i) the private placement of secured notes by our direct wholly owned subsidiary GWG Life Settlements, LLC, (ii) the use of a senior revolving credit facility, our “revolving credit facility,” benefitting our indirect wholly owned subsidiary GWG DLP Funding II, LLC, which subsidiary owns substantially all of our life insurance policy assets, and (iii) the ongoing offering of the debentures. For more information on our corporate structure, please refer to the “—Corporate Organization” caption below.
 
             
 
 A summary of our portfolio of life insurance policies as of December 31, 2013 is set forth in the table below:
 
             
 
Life Insurance Portfolio Summary
 
             
 
Total portfolio face value of policy benefits
 
$
740,648,000
   
 
Average face value per policy
 
$
2,816,000
   
 
Weighted average face value per insured life
 
$
3,099,000
   
 
Weighted average age of insured (yrs.)
   
82.1
   
 
Average life expectancy estimate (yrs.)
   
7.25
   
 
Total number of policies
   
263
   
  Total number of lives     239    
 
Demographics
   
64% Males; 36% Females
   
 
Number of smokers
   
3 insureds are smokers
   
 
Largest policy as % of total portfolio
   
1.35
%
 
 
Average policy as % of total portfolio
   
0.38
%
 
 
Average annual premium as % of face value
   
3.07
%
 
             
 
 We generally purchase life insurance policies through secondary market transactions directly from the policy owner who originally purchased the life insurance in the primary market. Historically, we have purchased policies in the secondary market through a network of life insurance agents, life insurance brokers, and licensed providers who assist policy owners in accessing the secondary market. We expect to significantly increase our visibility among insurance agents, financial professionals, and consumers directly in order to educate a wider audience about the opportunities for participation in the secondary market of life insurance with us.
 
             
 
 
3

 
 
         
 
 Before we purchase a life insurance policy, we conduct an underwriting review. Our present underwriting review process generally includes obtaining at least two life expectancy estimates on each insured from third-party medical-actuarial firms. We then generally base our life expectancy estimates on the average of two estimates. In some cases, we may obtain more than two life expectancy estimates.  In those cases, we average the two life expectancy estimates that we believe are the most reliable of those we have received, based on our own analyses and conclusions.  In this regard, the two life expectancy estimates we ultimately choose to average may not always be the most conservative.  In the case of small face policies, which we currently define as life insurance policies with less than $250,000 in face value of policy benefits, we may choose not to obtain life expectancies from third-party medical-actuarial firms, but rather use standard mortality tables to develop our own life expectancy of an insured. The policies we have purchased to date are universal life insurance policies issued by rated life insurance companies. Universal life insurance is a type of permanent life insurance in which premium payments above the cost of insurance are credited to the “cash value” of the policy. The cash value is credited each month with interest based on the terms of the insurance policy agreement. If a universal life insurance policy were to lapse, the insured or other owner of the policy would nonetheless have a right to receive the cash value of the policy. Universal life insurance is different from “term” life insurance in that “term” life insurance does not have a cash value associated with it. Presently, we seek to purchase life insurance policies issued by rated life insurance companies with investment grade credit ratings by Standard & Poor’s (AAA through BBB), Moody’s (Aaa through Baa3), or A.M. Best Company (aaa through bbb). As of December 31, 2012 and December 31, 2013, over 89.8% and 93.5%, respectively, of life insurance policies in our portfolio were issued by companies rated “A” or better under the Standard & Poor’s rating system. Many of our present underwriting review processes, including our policy of obtaining two life expectancy estimates from medical-actuarial firms as described above, are undertaken in satisfaction of obligations under our revolving credit facility. As a result, we may in the future modify our underwriting review processes if permitted under our borrowing arrangements.
 
         
 
 The price we are willing to pay for the policy in the secondary market is primarily a function of: (i) the policy’s face value; (ii) the life expectancy of the individual insured by the policy; (iii) the premiums expected to be paid over the life of the insured; (iv) market competition from other purchasers; and (v) the particular underwriting characteristics of the policy, relative to the characteristics of our existing portfolio of life insurance policies.
 
         
 
 We seek to earn profits by purchasing policies at discounts to the face value of the insurance benefit. We purchase policies at discounts that are expected to exceed the costs necessary to pay premiums and financing and servicing costs through the date of the insured’s mortality. We rely on the actuarial life expectancy assumptions to estimate the expected mortality of the insureds within our portfolio. Presently, we seek to finance our life insurance policy purchases and payment of premiums and financing costs, until we receive policy benefits, through the sale of our Renewable Secured Debentures and the use of our revolving line of credit. In the past, we have also relied on the sale of our Series A preferred stock and Series I subsidiary secured notes (issued by our subsidiary GWG Life Settlements, LLC) (the “Series I Secured notes”).
 
         
 
 We believe the socio-economic and demographic trends strongly support the long-term development of our market opportunity and that our business model provides significant advantages to both owners of life insurance policies and investors. For owners of life insurance, selling in the secondary market often provides significant value over that offered by the insurance carrier. For investors, our earnings from life insurance policies are not correlated to traditional markets such as real estate, equity markets, fixed income markets, currency or commodities. We believe that by acquiring a large portfolio of well-diversified life insurance policies, we will offer value to both owners of life insurance and investors seeking returns derived from non-correlated assets.
 
         
 
 Our objective is to earn returns from the life insurance policies we purchase in the secondary market which are greater than the costs necessary to purchase and finance those policies to their maturity. We expect to accomplish our objective by:
 
         
   
purchasing life insurance policies with expected internal rates of returns in excess of our cost of capital;
 
         
   
paying the premiums and costs associated with the life insurance policy until the insured’s mortality;
 
         
   
obtaining a large and diverse portfolio to mitigate actuarial risk;
 
         
   
maintaining diversified funding sources to reduce our overall cost of financing;
 
         
   
engaging in hedging strategies that reduce potential volatility to our cost of financing; and
 
         
   
maintaining rigorous portfolio monitoring and servicing.
 
         
 
 
4

 
 
         
   We have built our business with what we believe to be the following competitive strengths:  
         
   
Industry Experience : We have actively participated in the development of the secondary market of life insurance as a principal purchaser and financier since 2006. Our position within the marketplace has allowed us to evaluate over 36,000 life insurance policies for possible purchase, thereby gaining a deep understanding of the variety of issues involved when purchasing life insurance policies in the secondary market. We have participated in the leadership of various industry associations and forums, including the Life Insurance Settlement Association (LISA) and the Insurance Studies Institute (ISI). Our experience gives us confidence in building a portfolio of life insurance policies that will perform to our expectations.
 
         
   
Operational Platform : We have built an operational platform and systems for efficiently tracking, processing, and servicing life insurance policies that we believe provide competitive advantages when purchasing policies in the secondary marketplace, and servicing the policies once acquired.
 
         
   
Origination and Underwriting Practices : We seek to purchase life insurance policies that meet published guidelines on what policies would be accepted in a rated securitization. We purchase only permanent life insurance policies we consider to be non-contestable and that meet stringent underwriting criteria and reviews. We consider a life insurance policy to be “non-contestable” once applicable state law prohibits the insurer from challenging the validity of the policy due to fraud. In this regard, state non-contestability laws generally require a period of one to two years to elapse after the initial issuance of the policy before that policy is considered non-contestable under state law. Non-contestability laws do not, however, prevent an insurer from challenging the validity of a policy procured by fraud for lack of an insurable interest at the time at which the policy was purchased (such as is the case with “stranger-originated” life insurance policies).
 
         
   
Origination Relationships : We have established origination relationships with over 300 life insurance policy brokers and insurance agents who submit policies for our purchase or financing. Our referral base knows our underwriting standards for purchasing life insurance policies in the secondary market, which provides confidence in our bidding and closing processes and streamlines our own due-diligence process. We expect to expand our origination relationships and channels with the proceeds of this offering.
 
         
   
Life Expectancy Methodology : We generally rely on two life expectancy estimates from independent third-party medical-actuarial underwriting firms to develop our own life expectancy estimate.  For a majority of our life insurance policy purchases, we rely on estimates obtained from 21st Services and AVS Underwriting to develop our life expectancy estimate. We may also obtain life expectancy estimates from Fasano Associates and Examination Management Services, Inc.
 
         
   
Pricing Software and Methodology : We use actuarial pricing methodologies and software tools that are built and supported by leading independent actuarial service firms such as Modeling Actuarial Pricing Systems, Inc. (“MAPS”) for calculating our expected returns.
 
         
   
Diversified Funding : We have actively developed diversified sources for accessing capital markets in support of our buy-and-hold strategy for our portfolio of life insurance policies, ranging from institutional bank financing to a network of broker-dealers registered with the Financial Industry Regulatory Authority (“FINRA”), many of whom have participated in one or more of our Series I Secured note financing, our Series A preferred stock financing, or our Renewable Secured Debenture financing.
 
         
 
 On the other hand, our business involves a number of challenges and risks described in more detail elsewhere in this prospectus, including the following:
 
         
   
Relatively New Market : The purchase and ownership of life insurance policies acquired in the secondary market is a relatively new and evolving market. Our ability to source and purchase life insurance policies at attractive discounts materially depends on the continued development of the secondary market for life insurance. This includes the solvency of the life insurance companies that pay the face value of the life insurance benefits, the accuracy of life expectancy assumptions, and other factors beyond our control.
 
         
 
 
5

 
 
         
   
Assumptions About Valuation of Our Assets : The valuation of our portfolio of life insurance policies, which is the principal asset on our balance sheet, requires us to make material assumptions that may ultimately prove to be incorrect. These assumptions include appropriate discount rates, cash flow projections, and actuarial life expectancies, any of which may ultimately prove to be inaccurate.
 
         
   
Ability to Expand Our Portfolio : Our business model relies on achieving actual results that are in line with the results we expect to attain from our investments in life insurance policy assets. In this regard, we believe that the larger the portfolio of life insurance policies we own, the greater likelihood we will achieve actuarial results matching our expected results. Although we plan to expand the number of life insurance policies we own using proceeds raised from the sale of our Renewable Secured Debentures and our common stock in this offering, we may be unable to meet this goal. And, even if we attain the goal, we may not achieve the actuarial results we expect.
 
         
   
Reliance on Financing : To date, we have chosen to finance our business almost entirely through the issuance of debt, including the sale of Renewable Secured Debentures, Series I Secured notes, and a senior revolving credit facility. Our business model expects that we will have continued access to financing in order to purchase a large and diversified portfolio of life insurance policies, and thereafter pay the attendant premiums and servicing costs of maintaining that portfolio. In building a larger portfolio of policies, our goal is to remain diversified in terms of insurance carriers and the medical conditions of insureds. We believe that diversification among insurers and medical conditions will lower our overall risk, and that a larger number of policies will provide our portfolio with greater actuarial stability. We will be required to rely on our access to financing until such time as we experience a significant amount of mortality within our portfolio and begin receiving significant revenues from the receipt of insurance policy benefits. Nevertheless, we may not receive insurance policy benefits that match our cash flow projections.
 
         
   
Risk of Investment in Life Insurance Policies : Our investments in life insurance policies have inherent risks, including fraud and legal challenges to the validity of the policies, as well as the possibility that the seller of the policy may have provided us with inaccurate or misleading information.
 
         
   
Effects of Regulation : Our business is subject to complex state regulation. Changes in state laws and regulations governing our business, or changes in the interpretation of such laws and regulations, could negatively affect our business.
 
         
 
 Our business also involves certain other challenges and risks described in the “Risk Factors” section of this prospectus.
 
         
 
Implications of Being an “Emerging Growth Company”
 
         
 
 As a public reporting company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company we:
 
         
   
are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
 
         
   
are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”);
 
         
 
 
6

 
 
         
   
are not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes); 
 
         
   
are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
 
         
   
may present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations, or MD&A; and
 
         
   
are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act.
 
         
 
 We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act. Please see “Risk Factors,” page 22 (“ We are an ‘emerging growth company’ . . . .” ).
 
         
 
 Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
 
         
 
 Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, or such earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. Furthermore, under current SEC rules we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates) of less than $75 million as of the last business day of our most recently completed second fiscal quarter.
 
     
 
Corporate Organization
 
     
 
 Our business was organized in February 2006. As a parent holding company, GWG Holdings was incorporated on March 19, 2008 as a limited liability company. On June 10, 2011, GWG Holdings converted from a Delaware limited liability company to a Delaware corporation through the filing of statutory articles of conversion. In connection with the conversion, each class of limited liability company membership interests in GWG Holdings, LLC was converted into shares of common stock of GWG Holdings, Inc.
 
         
 
 
7

 
 
     
 
 Our corporate structure, including our principal subsidiaries, is as follows:
 
     
  (FLOW CHART)  
     
 
 GWG Life Settlements, LLC (a Delaware limited liability company), or GWG Life, is a licensed life/viatical settlement provider and the guarantor of the obligations of GWG Holdings under our Renewable Secured Debentures. GWG DLP Funding II, LLC (a Delaware limited liability company), or DLP Funding II, is a wholly owned special-purpose subsidiary owning life insurance policies and is the borrower under our revolving line of credit from Autobahn/DZ Bank. The life insurance policy assets owned by DLP Funding II are held in the GWG DLP Master Trust II (a Delaware statutory trust). The trust exists solely to hold the collateral security (i.e., life insurance policies) granted to Autobahn/DZ Bank under our revolving line of credit. DLP Funding II is the beneficiary under that trust.
 
     
 
 Our principal executive offices are located at 220 South Sixth Street, Suite 1200, Minneapolis, Minnesota 55402 and our telephone number is (612) 746-1944. Our website address is www.gwglife.com. The information on or accessible through our website is not part of this prospectus.
 
     
 
 
8

 
 
               
 
The Offering
 
               
 
Common stock offered by us
 
             shares
 
               
 
Common stock outstanding prior to this offering
 
9,124,000 shares (1)
 
               
 
Common stock to be outstanding after this offering
 
             shares (1)(2)(3)
 
               
 
Use of proceeds
 
Based on an assumed initial public offering price of $     per share, we estimate that the net proceeds to us from this offering will be approximately $     million after payment of underwriting discounts, commissions and our estimated offering expenses (approximately $million if the underwriters exercises the over-allotment in full).
 
               
         
We intend to use the proceeds from this offering to:
 
               
         
promote and advertise the opportunities for consumers owning life insurance and investors to profit from participating in the secondary market for life insurance policies;
 
               
         
purchase additional life insurance policies in the secondary market;
 
               
         
pay premiums on life insurance policy assets we own; and
 
               
         
fund portfolio operations and for working capital purposes.
 
               
         
See “Use of Proceeds” for more information.
 
               
 
Risk factors
 
You should read the “Risk Factors” section of this prospectus beginning on page 12 for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.
 
               
 
Proposed NASDAQ Capital Market symbol
 
GWGH (4)
 
               
 
(1)
Excludes 2,000,000 shares of our common stock currently reserved for issuance under our 2013 Stock Incentive Plan, of which there are 852,500 common shares subject to outstanding incentive grants. Also excludes 831,908 common shares that are issuable upon the exercise of outstanding warrants.
 
               
 
(2)
Includes 5,052,163 shares of our common stock to be issued immediately prior to the closing of this offering upon the automatic conversion of 3,368,109 shares of our Series A Convertible Preferred Stock that are currently issued and outstanding.
 
               
 
(3)
Excludes an aggregate of          shares of our common stock issuable upon the exercise of warrants we expect to grant to       , the underwriters for this offering, and excludes up to an aggregate of          shares issuable to the underwriters if they exercise the over-allotment option in full, as described under “Underwriting.”
 
               
 
(4)
We have reserved the symbol "GWGH" for purposes of listing our common stock on The NASDAQ Capital Market and expect to apply to list our common stock on such exchange.
 
               
 
 
9

 
 
RISK RELATING TO FORWARD -LOOKING STATEMENTS
 
Certain matters discussed in this prospectus are forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. Nevertheless, these forward-looking statements are subject to risks, uncertainties and assumptions about our operations and the investments we make, including, among other things, factors discussed under the heading “Risk Factors” in this prospectus and the following:
 
 
 ●
changes in the secondary market for life insurance;
 
 
 
 
 ●
our limited operating history;
 
 
 
 
 ●
the valuation of assets reflected on our financial statements;
 
 
 
 
 ●
the reliability of assumptions underlying our actuarial models;
     
    the reliability of assumptions underlying our life expectancy estimates;
 
 
 
 
 ●
our reliance on debt financing;
 
 
 
 
 ●
risks relating to the validity and enforceability of the life insurance policies we purchase;
 
 
 
 
 ●
our reliance on information provided and obtained by third parties;
 
 
 
 
 ●
federal and state regulatory matters, including the effect and outcome of current regulatory investigations;
 
 
 
 
 ●
additional expenses, not reflected in our operating history, related to being a public reporting company;
 
 
 
 
 ●
competition in the secondary life insurance market;
 
 
 
 
 ●
the relative illiquidity of life insurance policies;
 
 
 
 
 ●
life insurance company credit exposure;
 
 
 
 
 ●
economic outlook;
 
 
 
 
 ●
performance of our investments in life insurance policies;
 
 
 
 
 ●
financing requirements;
 
 
 
 
 ●
litigation risks; and
 
 
 
 
 ●
restrictive covenants contained in borrowing agreements.
 
 
10

 
 
Some of the statements in this prospectus that are not historical facts are “forward-looking” statements. Forward-looking statements can be identified by the use of words like “believes,” “could,” “possibly,” “probably,” “anticipates,” “estimates,” “projects,” “expects,” “may,” “will,” “should,” “seek,” “intend,” “plan,” “expect,” or “consider” or the negative of these expressions or other variations, or by discussions of strategy that involve risks and uncertainties. All forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual transactions, results, performance or achievements to be materially different from any future transactions, results, performance or achievements expressed or implied by such forward-looking statements. We base these forward-looking statements on current expectations and projections about future events and the information currently available to us. Although we believe that the assumptions for these forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate. Consequently, no representation or warranty can be given that the estimates, opinions, or assumptions made in or referenced by this prospectus will prove to be accurate. Some of the risks, uncertainties and assumptions are identified in the discussion entitled “Risk Factors” in this prospectus. We caution you that the forward-looking statements in this prospectus are only estimates and predictions, or statements or current intent. Actual results or 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. These risks, uncertainties and assumptions include, but are not limited to, those discussed in this prospectus.
 
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to certain issuers, including issuers that do not have their equity traded on a recognized national exchange or the NASDAQ Capital Market. Our common stock does not trade on any recognized national exchange or the NASDAQ Capital Market. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading.
 
 
11

 
 
 
An investment in our common stock involves a high degree of risk. Before deciding whether to invest in our common stock, you should consider carefully the risks described below, together with all of the other information set forth in this prospectus and the documents incorporated by reference herein, and in any free writing prospectus that we have authorized for use in connection with this offering. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be harmed. This could cause the trading price of our common stock to decline, resulting in a loss of all or part of your investment. The risks described below and in the documents referenced above are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business.
 
Risks Related to Our Company and Our Industry
 
Material changes in the life insurance secondary market, a relatively new and evolving market, may adversely affect our operating results, business prospects and our ability to repay our debt obligations.
 
Our sole business is the purchase and ownership of life insurance policies acquired in the secondary market, which is a relatively new and evolving market. The success of our business and our ability to repay the principal and interest on our debt obligations depends in large part on the continued development of the secondary market for life insurance, including the solvency of life insurance companies to pay the face value of the life insurance benefits, both of which will critically impact the performance of the life insurance policy assets we own. We expect that the development of the secondary market will primarily be impacted by a variety of factors such as the interpretation of existing laws and regulations (including laws relating to insurable interests), the passage of new legislation and regulations, mortality improvement rates, and actuarial understandings and methodologies. Importantly, all of the factors that we believe will most significantly affect the development of the life insurance secondary market are beyond our control. Any material and adverse development in the life insurance secondary market could adversely affect our operating results, our access to capital, our ability to repay our various debt and other obligations, and our business prospects and viability. Because of this, an investment in our common stock generally involves greater risk as compared to investments offered by companies with more diversified business operations in more established markets.
 
We have a relatively limited history of operations and our earnings and cash flows may be volatile, resulting in future losses and uncertainty about our ability to service and repay our debt when and as it comes due.
 
We are a company with a limited history, which makes it difficult to accurately forecast our earnings and cash flows. During the year ended December 31, 2013, we incurred a net loss of $(195,000), and in the year ended December 31, 2012, we incurred a net loss of $(1,013,000).  Our lack of a significant history and the evolving nature of our market make it likely that there are risks inherent in our business that are yet to be recognized by us or others, or not fully appreciated, and that could result in us earning less than we anticipate or even suffering further losses. As a result of the foregoing, an investment in our common stock necessarily involves uncertainty about the stability of our earnings, cash flows and, ultimately, our ability to service and repay our debt. Accordingly, there is a risk that you could lose your entire investment.
 
The valuation of our principal assets on our balance sheet requires us to make material assumptions that may ultimately prove to be incorrect. In such an event, we could suffer significant losses that could materially and adversely affect our results of operations and eventually cause us to be in default of restrictive covenants contained in our borrowing agreements.
 
Our principal asset is a portfolio of life insurance policies purchased in the secondary market, comprising approximately 83% of our total assets at December 31, 2012 and 85% of our total assets at December 31, 2013. Those assets are considered “Level 3” fair value measurements under ASC 820, Fair Value Measurements and Disclosures , as there is currently no active market where we are able to observe quoted prices for identical assets. As a result, our valuation of those assets incorporates significant inputs that are not observable. Fair value is defined as an exit price representing the amount that would be received if assets were sold or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
 
 
12

 
 
A Level 3 fair value measurement is inherently uncertain and creates additional volatility in our financial statements that are not necessarily related to the performance of the underlying assets. As of December 31, 2013 and 2012, we estimated the fair value discount rate for our portfolio to be 11.69% and 12.08%, respectively. If in the future we determine that a higher discount rate is required to ascribe fair value to a similarly situated portfolio of life insurance policies, we could experience significant losses materially affecting our results of operations. It is also possible that significant losses of this nature could at some point cause us to fall out of compliance with certain borrowing covenants contained in our various borrowing agreements. This could result in acceleration of our loan balances under the revolving credit facility or our Series I Secured notes and the debentures, which we may not be able to repay. We may be forced to seek additional debt or equity financing to repay such debt amounts, which may not be available on terms acceptable to us, if at all. If we are unable to repay when debt comes due, then our senior lender or the holders of our Series I Secured notes and the debentures, or both, would have the right to foreclose on our assets
 
In an effort to present operating results not subject to the valuation volatility associated with the discount rate we choose, we intend to provide additional non-GAAP financial disclosures, on a consistent basis, presenting the actuarial economic gain we expect within our portfolio of life insurance policies at the expected internal rate of return against the costs we incur over the same period. We report these very same non-GAAP financial measures to the lender under our revolving credit facility pursuant to financial covenants in the related borrowing documents. Nevertheless, our reported GAAP earnings may in the future be volatile for reasons that do not bear an immediate relationship to the cash flows we experience.
 
For further disclosure relating to the risks associated with the valuation of our assets, see the risk factor below “ If actuarial assumptions we obtain from third-party providers . . . .” on page 17.
 
Our expected results from our life insurance portfolio may not match actual results, which could adversely affect our ability to service and grow our portfolio for diversification.
 
Our business model relies on achieving actual results that are in line with the results we expect to attain from our investments in life insurance policy assets. In this regard, we believe that the larger portfolio we own, the greater the likelihood that we will achieve our expected results. To our knowledge, rating agencies generally suggest that portfolios of life insurance policies be diversified enough to achieve actuarial stability in receiving expected cash flows from underlying mortality. For instance, in a study published in 2012, A.M. Best concluded that at least 300 lives are necessary to narrow the band of cash flow volatility and achieve actuarial stability, while Standard & Poor’s has indicated that stability is unlikely to be achieved with a pool of less than 1,000 lives. As of December 31, 2012, we owned approximately $572 million in face value of life insurance policies covering 194 lives. As of December 31, 2013, we owned $741 million in face value of life insurance policies covering 239 lives. Accordingly, while there is risk with a portfolio of any size that our actual yield may be less than expected, we believe that the risk we face is presently more significant given the relative lack of diversification in our current portfolio as compared to rating agency recommendations.
 
Although we plan to expand the number of life insurance policies we own using proceeds raised from this offering and from this offering and from our ongoing offering of Renewable Secured Debentures, we may be unable to meet this goal if sufficient financing from capital sources is not available or is available only on unfavorable or unacceptable terms. Furthermore, even if our portfolio reaches the size we desire, we still may experience material differences between the actuarial models we use and actual mortalities.
 
Differences between our expectations and actuarial models (which include life expectancy estimates) on the one hand, and actual mortality results on the other hand, could have a materially adverse effect on our operating results and cash flow. In such a case, we may face liquidity problems, including difficulties servicing our remaining portfolio of policies and servicing our outstanding debt obligations. Continued or material failures to meet our expected results could decrease the attractiveness of our securities in the eyes of potential investors, making it even more difficult to obtain capital needed to service our portfolio, grow the portfolio to obtain desired diversification, and service our existing debt. All of these events may have a negative impact on the price of our common stock.
 
 
13

 
 
We critically rely on debt financing for our business. Any inability to borrow could adversely affect our business operations, our ability to satisfy our obligations under the debentures and, ultimately, our viability.
 
To date, we have chosen to finance our business principally through the issuance of debt, including debt incurred by DLP Funding II under a senior revolving credit facility provided by Autobahn/DZ Bank (which we refer to throughout this prospectus as our “revolving credit facility”), our Series I Secured notes and  the debentures. Our revolving credit facility is secured by all of the assets of DLP Funding II, has a maximum amount of $100 million, and the outstanding balance at December 31, 2013 and December 31, 2012 was approximately $79 million and $71 million, respectively. Obligations under the revolving credit facility have a scheduled maturity date of December 31, 2014, and obligations under our Series I Secured notes and the debentures have scheduled maturities as indicated below in the risk factor “ If a significant number of holders . . . . ,” on page 20. Our debt arrangements comprise the most important sources of financing on which our business critically relies to grow our portfolio of life insurance policies and maintain those policies.
 
Our business model expects that we will have continued access to financing in order to purchase a large and diversified portfolio of life insurance policies and pay the attendant premiums and costs of maintaining the portfolio, all while satisfying our current interest and principal repayment obligations under our revolving credit facility and other indebtedness. We expect to refinance our revolving credit facility, either through renewal or replacement, when it comes due on December 31, 2014. Pending the due date or refinancing of our revolving credit facility, we expect that proceeds from our life insurance policies will first be used to satisfy our obligations under that facility, as required by the agreement governing the revolving credit facility. Accordingly, until we achieve cash flows derived from our portfolio of life insurance policies, we expect to rely on the proceeds from our ongoing offering of the debentures to satisfy our ongoing financing and liquidity needs. Nevertheless, continued access to financing and liquidity under the revolving credit facility or otherwise is not guaranteed. For example, general economic conditions could limit our access to financing, as could regulatory or legal pressures exerted on us, our financiers or those involved in our general plan of financing such as brokers, dealers and registered investment advisors. If we are unable to borrow under the revolving credit facility or otherwise for any reason, or to renew or replace the revolving credit facility when it comes due in December 2014, our business would be adversely impacted and our ability to service and repay our obligations would be compromised and the price of our common stock would likely suffer as a result. In such a case, we could determine to raise additional financing through the sale of equity, but any such sale of equity interests would likely be dilutive to the holders of our common stock.
 
Our investments in life insurance policies have inherent risks, including fraud and legal challenges to the validity of the policies, which we will be unable to eliminate and which may adversely affect our results of operations.
 
When we purchase a life insurance policy, we underwrite the purchase of the policy to mitigate certain risks associated with insurance fraud and other legal challenges to the validity of the life insurance policy. For example, to the extent that the insured is not aware of the existence of the policy, the insured him or herself does not exist, or the insurance company does not recognize the policy, the insurance company may cancel or rescind the policy thereby causing the loss of an investment in that policy. In addition, if medical records have been altered in such a way as to shorten a life expectancy report, this may cause us to overpay for the related policy. Finally, we may experience legal challenges from insurance companies claiming that the insured failed to have an insurable interest at the time the policy was originally purchased or that the policy owner made fraudulent disclosures to the insurer at the time the policy was purchased (e.g., disclosures pertaining to the health status of the insured or the existence or sources of premium financing), or challenges from the beneficiaries of an insurance policy claiming, upon mortality of the insured that the sale of the policy to us was invalid.
 
To mitigate these risks, we require a current verification of coverage from the insurance company, complete a due-diligence investigation of the insured and accompanying medical records, review the life insurance policy application, require a policy to have been in force for at least two years before purchasing, and require a legal review of any premium financing associated with the life insurance policy to determine whether an insurable interest existed at the time the policy was originally purchased in the primary market. Nevertheless, we do not expect that these steps will eliminate the risk of fraud or legal challenges to the life insurance policies we purchase. Furthermore, changes in laws or regulations, or the interpretation of existing laws or regulations, may prove our current due-diligence and risk-mitigation efforts inadequate for us to have confidence that our portfolio of life insurance policies are unlikely to be successfully challenged or to purchase new policies with such confidence. If a significant face amount of policies were invalidated for reasons of fraud or any other reason, our results of operations would be adversely affected, perhaps materially.
 
 
14

 
 
Every acquisition of a life insurance policy necessarily requires us to materially rely on information provided or obtained by third parties. Any misinformation or negligence in the course of obtaining information could materially and adversely affect the value of the policies we own.
 
The acquisition of each life insurance policy is negotiated based on variables and particular facts that are unique to the life insurance policy itself and the health of the insured. The facts we obtain about the policies and the insured at the time at which the policy is applied for and obtained are based on factual representations made to the insurance company by the insured, and the facts the insurance company independently obtains in the course of its own due-diligence examination, such as facts concerning the health of the insured and whether or not there is an insurable interest present when the policy was issued. Any misinformation or negligence in the course of obtaining or supplying information relating to an insurance policy or insured could materially and adversely impact the value of the life insurance policies we own and could, in turn, adversely affect our financial condition, results of operations, and the value of our common stock.
 
Our business is subject to state regulation, and changes in state laws and regulations governing our business, or changes in the interpretation of such laws and regulations, could negatively affect our business.
 
When we purchase a life insurance policy, we are subject to state insurance regulations. Over the past years, we have seen a dramatic increase in the number of states that have adopted legislation and regulations from a model law promulgated by either the National Association of Insurance Commissioners (NAIC) or by the National Conference of Insurance Legislators (NCOIL). These laws are essentially consumer protection statutes responding to abuses that arose early in the development of our industry, some of which may persist. Today, almost every state has adopted some version of either the NAIC or NCOIL model laws, which generally require the licensing of purchasers of and brokers for life insurance policies, the filing and approval of purchase agreements, and the disclosure of transaction fees. These laws also require various periodic reporting requirements and prohibit certain business practices deemed to be abusive.
 
State statutes typically provide state regulatory agencies with significant powers to interpret, administer and enforce the laws relating to the purchase of life insurance policies. Under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes. State regulators may also impose rules that are generally adverse to our industry. Because the life insurance secondary market is relatively new and because of the history of certain abuses in the industry, we believe it is likely that state regulation will increase and grow more complex during the foreseeable future. We cannot, however, predict what any new regulation would specifically involve.
 
Any adverse change in present laws or regulations, or their interpretation, in one or more states in which we operate (or an aggregation of states in which we conduct a significant amount of business) could result in our curtailment or termination of operations in such jurisdictions, or cause us to modify our operations in a way that adversely affects our profitability. Any such action could have a corresponding material and negative impact on our results of operations and financial condition, primarily through a material decrease in revenues, and could also negatively affect our general business prospects.
 
If federal or state regulators or courts conclude that the purchase of life insurance in the secondary market constitutes, in all cases, a transaction in securities, we could be in violation of existing covenants under our revolving credit facility, which could result in significantly diminished access to capital. We could also face increased operational expenses. The materialization of any of these risks could adversely affect our operating results and possibly threaten the viability of our business.
 
Some states and the SEC have, on occasion, attempted to regulate the purchase of non-variable universal life insurance policies as transactions in securities under federal or state securities laws. In July 2010, the SEC issued a Staff Report of its Life Settlement Task Force. In that report, the Staff recommended that certain types of purchased life insurance policies be classified as securities. The SEC has not taken any position on the Staff Report, and there is no indication if the SEC will take or advocate for any action to implement the recommendations of the Staff Report. In addition, there have been several federal court cases in which transactions involving the purchase and fractionalization of life insurance contracts have been held to be transactions in securities under the federal Securities Act of 1933. We believe that the matters discussed in the Staff Report, and existing case law, do not presently impact our current business model since our purchases of life settlements are currently distinguishable from those cases that have been held by courts, and advocated by the Staff Report, to be transactions in securities. For example, presently neither we nor any of our affiliates are involved in the fractionalization of any life insurance policies, and we do not presently purchase variable life insurance policies.
 
 
15

 
 
With respect to state securities laws, almost all states currently treat the sale of a life insurance policy as a securities transaction under state laws, although some states exclude from the definition of security the original sale from the insured or the policy owner to the life settlement provider. To date, due to the manner in which we conduct and structure our activities and the availability, in certain instances, of exceptions and exemptions under those state laws, such laws have not adversely impacted our business model.
 
As a practical matter, the widespread application of federal securities laws to our purchases of life insurance policies, either through the expansion of the definition of what constitutes a “security,” the expansion of the types of transactions in life insurance policies that would constitute transactions in “securities,” or the elimination or limitation of available exemptions and exceptions (whether by statutory change, regulatory change, or administrative or court interpretation) could burden us and other companies operating in the life insurance secondary market through the imposition of additional processes in the purchase of life insurance policies or the imposition of additional corporate governance and operational requirements through the application of the federal Investment Company Act of 1940. Any such burdens could be material. Among the particular repercussions for us would be a violation of existing covenants under our revolving credit facility requiring us to not be an “investment company” under the Investment Company Act of 1940, which could in the short or long term affect our liquidity and increase our cost of capital and operational expenses, all of which would adversely affect our operating results. It is possible that such an outcome could threaten the viability of our business and our ability to satisfy our obligations as they come due.
 
Being a public company results in additional expenses and diverts management’s attention, and could also adversely affect our ability to attract and retain qualified directors.
 
We have been a public reporting company since January 31, 2012. As a public reporting company, we are subject to the reporting requirements of the Securities Exchange Act of 1934. These requirements generate significant accounting, legal and financial compliance costs, and make some activities more difficult, time consuming or costly, and may place significant strain on our personnel and resources. The Securities Exchange Act of 1934 requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to establish the requisite disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required.
 
As a result, management’s attention may be diverted from other business concerns, which could have an adverse and even material effect on our business, financial condition and results of operations. These rules and regulations may also make it more difficult and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent, could be adversely impacted.
 
Our business and prospects may be adversely affected by changes, lack of growth or increased competition in the life insurance secondary market.
 
The growth of the life insurance policy secondary market and our expansion within the market may be negatively affected by a variety of factors beyond our control, including:
 
 
 ●
the inability to locate sufficient numbers of life insurance policy sellers and agents to source such sellers;
 
 
 ●
the inability to convince life insurance policy owners of the benefits of selling their life insurance policy;
 
 
16

 
 
 
 ●
competition from other companies in the life insurance secondary market;
 
 
 ●
negative publicity about the market based on actual or perceived abuses; and
 
 
 ●
the adoption of additional governmental regulation.
 
The relatively new and evolving nature of the market in which we operate makes these risks unique and difficult to quantify. Nevertheless, contractions in the secondary market for life insurance policies, whether resulting from general economic conditions, regulatory or legal pressures or otherwise (including regulatory pressures exerted on us or others involved in the secondary market for life insurance or involved with participants in that market), could make participation in that market generally less desirable. This could, in turn, depress the prices at which life insurance policies on the secondary market are bought and sold. As indicated elsewhere in this prospectus, decreases in the value of life insurance policies on the secondary market could negatively affect our results of operations and our financial condition since the value of our policy portfolio is marked to market on a quarterly basis.
 
Changes in general economic conditions could adversely impact our business.
 
Changes in general economic conditions, including, for example, interest rates, investor sentiment, changes specifically affecting the insurance industry, competition, technological developments, political and diplomatic events, tax laws, and other factors not known to us today, can substantially and adversely affect our business and prospects. For example, changes in interest rates may increase our cost of capital and ability to raise capital, and have a corresponding adverse impact on our operating results. While we may engage in certain hedging activities to mitigate the impact of these changes, none of these conditions are or will be within our control.
 
If actuarial assumptions we obtain from third-party providers and rely on to model our expected returns on our investments in life insurance policies change, our operating results and cash flow could be adversely affected, as well as the value of our collateral and our ability to service our debt obligations.
 
The expected internal rate of return we calculate we will earn when purchasing a life insurance policy is based upon our estimate of how long the insured will live—an actuarial life expectancy estimate.  We presently obtain actuarial life expectancy estimates from third-party medical-actuarial underwriting companies. In the case of small face policies, which we currently define as life insurance policies with less than $250,000 in face value of policy benefits, we may choose not to obtain life expectancies from third-party medical-actuarial firms, but rather use standard mortality tables to develop our own life expectancy of an insured.  These actuarial life expectancies are subject to interpretation and change based on evolving medical technology, actuarial data and analytical techniques. Any increase in the actuarial life expectancy estimates of insureds within our portfolio could have a materially adverse effect on our operating results and cash flow. Adverse impacts on the value of our life insurance policy portfolio or our cash flow could in turn impair the value of the collateral we have pledged to our creditors, and our ability to service our debt and obligations as they come due.
 
For example, on January 22, 2013, 21st Services, an independent provider of life expectancy analysis and related services for the life settlement industry in general, announced advancements in its underwriting methodology, resulting in revised life expectancy mortality tables for life settlement transactions. Based on information publicly released by 21st Services, the revised tables incorporate significantly more older-age mortality data than earlier versions commonly used by the life insurance industry, resulting in a far greater ability to:
 
 
 ●
assess the magnitude of impact that hundreds of different types of health impairments have on senior mortality on a case-by-case basis;
 
 
 ●
apply credits and debits during the underwriting process in a manner that accounts for the different impacts of the same impairments for males and females; and
 
 
 ●
reflect the difference in mortality between insureds who have sold policies and the group of 90,000 insureds underwritten by 21st Services, most of whom did not ultimately sell their policies in the life settlement market (such difference is frequently referred to in the life-settlement industry as “anti-selection”).
 
 
17

 
 
21st Services reported that the revised mortality tables reflected an average 19% increase in the life expectancy of insureds. Nevertheless, 21st Services representatives have also advised us that generalizations could not be gleaned from their report as the changes that were made were very granular and dependent upon the specific medical conditions of an insured, as well as other factors. More specifically, mortality tables increased the general life expectancies most significantly for people leading an active lifestyle. The revised tables also generally reflect increased life expectancies for non-smoking men and women. 21st Services representatives have further advised us that (i) certain medial conditions have resulted in increased life expectancies (e.g., cardiovascular disease) and some conditions resulted in decreased life expectancies, and (ii) the revised tables also have greater impact on the life expectancies of insureds who are younger.  
 
For a majority of our life insurance policy purchases, we use 21st Services life expectancy estimates as one of two such estimates we generally obtain prior to purchasing life insurance policies on the secondary market and average those estimates for our life expectancy estimate. The life expectancy of an insured has an inverse relationship to the expected internal rate of return to be generated from life insurance policies purchased in the secondary market. A reduced internal rate of return may reduce the value of a life insurance policy available for purchase on the secondary market, and the value of life insurance policies already purchased by us and being serviced in our portfolio.
 
As of December 31, 2012, we increased all life expectancy reports provided by 21st Services by an average of 8.67%. The impact of this adjustment to the fair value of our portfolio was a decrease of $12.4 million as of December 31, 2012, and the impact on our expected internal rate of return was a decrease from 14.27% to 12.84%. In February 2013, we began the process of evaluating the impact of 21st Services’ revised mortality tables upon our portfolio. We concluded that the adjustments we made a year ago were reasonable based upon the updated life expectancy estimates we have received as of December 31, 2013 .
 
We generally rely on two life expectancy estimates from independent third-party medical-actuarial underwriting firms to develop our own life expectancy estimate.  In some cases, we may obtain more than two life expectancy estimates.  In those cases, we average the two life expectancy estimates that we believe are the most reliable of those we have received, based on our own analyses and conclusions. In this regard, the two life expectancy estimates we ultimately choose to average may not always be the most conservative ones we obtain.
 
In addition to actuarial life expectancies, we rely on pricing and premium forecasting software models developed by third-party actuarial companies for the valuation of policies we purchase, future mortality revenues, and the calculation of anticipated internal rates of return. These pricing models forecast the estimated future premiums due, as well as the future mortalities based on the survival probabilities of the insureds over their life expectancies. It is possible that the actuarial tables we presently use will again change in the future or that the mortality assumptions will fail substantially to meet actuarial estimates, and that any such failure could have a materially adverse effect on our business.
 
We rely on estimated rates of mortality for the actuarial assumptions we use when valuing life insurance policies and forecasting the performance of our portfolio, and we also rely on other estimates derived from statistical methodologies for projecting our future cash flows, among other things. If our estimates prove to be incorrect, it could materially and adversely affect our ability to satisfy our debt service and repayment obligations.
 
If we assume we will receive cash inflows from policies sooner than we actually do, we may not be able to make payment on our debt obligations in a timely manner, or at all. Moreover, a significant discovery that results in mortality improvements among seniors, above historically predicted rates by medical actuaries providing life expectancies, could have a material adverse effect on our life insurance policy investments.
 
For example, we use a modeling method for projecting cash flows known as the “probabilistic method.” This is an actuarial method that uses a mortality curve to project the likely flow of policy benefits to us, and attempts to reflect the probability that each premium must be paid. We have in fact experienced fewer cash flows from policy benefits than projected in the early stages of ownership of our current life insurance policy portfolio using this method. We had expected to receive approximately $65.7 million in cumulative policy benefits as of December 31, 2013, and in fact received $28.6 million. This has resulted in greater than expected premium payments, increasing from an expected $58.6 million to $61.0 million. Barring significant mortality improvements (i.e., medical advancements relating to the medical conditions of insureds), however, the fact that actual results have differed from the expectations derived from the probabilistic method of projecting cash flows should ordinarily result in greater cash flows later in the portfolio’s servicing period.
 
 
18

 
 
We update and revise our projected future cash flows each month using the probabilistic method to reflect the actual experience within our life insurance policy portfolio to date. We use the current future cash flow projection to generate our expected internal rate of return on the life insurance policy portfolio we own. We would expect to change our method of calculating our future cash flows only if leading actuarial firms no longer believed such methodology was the most appropriate means of generating projected cash flows from a life insurance policy portfolio. Any change to the pricing model, methodology, premium forecasting assumptions, cash flow projections, or the mortality assumptions accompanied therewith that increase the projected cost of insurance premiums or decrease the probability of mortality could have a material and adverse impact on our results of operations and cash flows. Ultimately, this could adversely affect our ability to meet our debt service and repayment obligations and negatively impact the market value of our common stock.
   
We may not be able to raise the capital that we are seeking, and may be unable to meet our overall business objectives of growing a larger, more statistically diverse portfolio of life insurance policies.
 
Our offering of Renewable Secured Debentures is the principal means by which we have raised, and presently intend to continue raising, the funds needed to meet our goal of growing a larger, more statistically diverse portfolio. Nevertheless, we may not be able to sell the debentures that we are seeking to sell in that offering or in any other financing effort that we undertake primarily for the purpose of growing and diversifying our portfolio. Any failure on our part, for whatever reason, to meet our goal of growing and diversifying our portfolio may subject us to greater risk that we will not receive cash flow from our portfolio when we project receiving it. Slower than expected cash flows, combined with the failure to finance our growth and service our portfolio, could force us to sell some or all of our investments in life insurance policies in order to satisfy our debt-related obligations and service our portfolio. If we are forced to sell investments in life insurance policies or our entire portfolio, we may be unable to sell them at prices we believe are appropriate, and may not be able to sell them at prices that approximate the discount rate we have applied to value our portfolio, particularly if our sale of policies occurs at a time when we are (or are perceived to be) in distress. In any such event, our business and the value of our securities, including our debt securities and common stock, may be materially and adversely impacted.
 
We depend upon cash distributions from our subsidiaries, and contractual restrictions on distributions to us or adverse events at one of our operating subsidiaries could materially and adversely affect our ability to pay our debts and to continue to operate our business.
 
GWG Holdings, Inc. is a holding company. As a holding company, we conduct our operations through our operating subsidiaries, and our only significant assets are the capital stock of our subsidiaries. Accordingly, our ability to meet our cash obligations depends in material part upon the ability of our subsidiaries to make cash distributions to us. In this regard, the ability of our subsidiaries to make distributions to us is, and will continue to be, restricted by certain negative covenants in the agreement governing our revolving credit facility. DLP Funding II is the borrower under our revolving credit facility (see note 6 to our consolidated financial statements). The significant majority of the insurance policies we own are subject to a collateral arrangement with the agent for our revolving credit lender, as described in note 2 to our consolidated financial statements. Under this arrangement, collection and escrow accounts are used to fund purchases of and premiums for the insurance policies and to pay interest and other charges under the revolving credit facility. The lender and its agent must authorize all disbursements from these accounts, including any distributions to GWG Life. Distributions are limited to an amount that would result in the borrowers (us) realizing an annualized rate of return on the equity-funded amount for such assets of not more than 18%, as determined by the agent. After such amount is reached, the credit agreement requires that excess funds be used to fund repayments or a reserve account in certain amount, before any additional distributions may be made.
 
If any of the above limitations were to materially impede the flow of cash to us, such fact would materially and adversely affect our ability to service and repay our debt, including obligations under the debentures and Series I Secured notes. In addition, any adverse event at the subsidiary level, such as a declaration of bankruptcy, liquidation or reorganization or an event of default under our revolving credit facility, could materially and adversely affect the ability of our subsidiaries to make cash distributions to us. Just as with a material contractual impediment to cash flow, any such subsidiary corporate event would materially and adversely affect our ability to service and repay our debt, and negatively impact our ability to continue operations.
 
 
19

 
 
If a significant number of holders of our Series I Secured notes and Renewable Secured Debentures demand repayment of those instruments instead of renewing them, and at such time we do not have sufficient capital on hand to fund such repayment (and do not otherwise have access to sufficient capital), we may be forced to liquidate some of our life insurance policy assets, which could have a material and adverse impact on our results of operations.
 
Our direct and wholly owned subsidiary, GWG Life, had issued and outstanding approximately $29.7 million and $38.6 million in Series I Secured notes as of December 31, 2013 and 2012, respectively. By virtue of GWG Life’s full and unconditional guarantee of obligations under the debentures, and other agreements contained in or made in connection with the indenture, the debentures are pari passu in right of payment and collateral with the Series I Secured notes. The indenture governing the debentures, and the note issuance and security agreement governing the Series I Secured notes, each provide for cross defaults upon an event of default under the provisions of the other agreement (i.e., an event of default under the note issuance and security agreement will constitute an event of default under the indenture for the debentures, and vice versa).
 
The terms of the Series I Secured notes have renewal features. Since we first issued our Series I Secured notes, we have experienced $114,803,000 in maturities, of which $86,990,000 has renewed for an additional term as of December 31, 2013. This has provided us with an aggregate renewal rate of approximately 76% for investments in our Series I Secured notes. Future contractual maturities of Series I Secured notes payable at December 31, 2013 are as follows:
 
Years Ending December 31,
       
2014
 
 $
16,111,000
 
2015
   
6,700,000
 
2016
   
2,030,000
 
2017
   
4,085,000
 
2018
   
754,000
 
Thereafter
   
64,000
 
   
$
29,744,000
 
   
The terms of the Renewable Secured Debentures also have renewal features. Since we first issued our debentures, we have experienced $18,330,000 in maturities, of which $11,572,000 has renewed for an additional term as of December 31, 2013. This has provided us with an aggregate renewal rate of approximately 63% for investments in the debentures. Future contractual maturities of debentures at December 31, 2013 are as follows:
 
Years Ending December 31,
     
2014
 
$
34,258,000
 
2015
   
41,509,000
 
2016
   
29,152,000
 
2017
   
7,667,000
 
2018
   
5,381,000
 
Thereafter
   
16,924,000
 
   
$
134,891,000
 
 
If investors holding existing indebtedness with short-term maturities do not elect to renew and we do not, at such time, have access to sufficient capital or have not raised sufficient capital by other financing efforts, we may need to liquidate some of our investments in life insurance policies earlier than anticipated. In such an event, we may be unable to sell those life insurance policies at prices we believe are fair or otherwise appropriate and such sales could have a material and adverse impact on our results of operations.
 
 
20

 
 
Because we intend to hold our life insurance policies to their maturity, we therefore measure our debt coverage ratio against our current cost of financing, which may not reflect the sale price of our life insurance policies if we were to liquidate them.
 
We intend and expect to hold the life insurance policy investments until they are paid out at the mortality of the insured. As a result, we measure our debt coverage ratio based on the portfolio’s gross expected yield against the interest cost of our total debt obligations to finance the portfolio. The debt coverage ratio, expressed as a percentage, is defined as the ratio of (i) total amounts outstanding on any indebtedness for borrowed money, over (ii) the net present asset value of all life insurance assets we own, plus any cash held in our accounts. For this purpose, the net present asset value is calculated as the present value of the life insurance portfolio’s expected future cash flows discounted at the weighted-average interest rate of the indebtedness for the previous month. Under the indenture for our Renewable Secured Debentures, the maximum amount of debentures we may issue at any time is limited to an amount such that our debt coverage ratio does not exceed 90%. This limitation is designed to provide some comfort to holders of our debt that the value of our assets exceeds our obligations to those holders. Our compliance with the debt coverage ratio then might suggest to an equity investor that, for so long as we remain in compliance with the indenture covenant relating to our debt coverage ratio, we would have value in our assets after the satisfaction of all amounts owing to our creditors.  Nevertheless, the debt coverage ratio (as calculated) is not based on the fair value of our life insurance policy assets, which may be different—greater or less—than the amount we would receive if we were forced to sell those assets in the marketplace. Furthermore, mere compliance with the debt coverage ratio does contemplate or account for the significant transactional costs that would be associated with a sale of all or any significant portion of our portfolio.  Accordingly, our compliance with the debt coverage ratio in the indenture should not be understood as an indication that our common shares will have any value after the complete liquidation of our portfolio.  In this regard, in the event of a sale of our entire portfolio that results in impairment of our ability to satisfy our debt obligations, there would no assets remaining for payments to holders of our common stock.  Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Debt Financings Summary” for more information.
 
Our controlling stockholders and principal executives are involved in a litigation “clawback” claim made by a bankruptcy trustee to an affiliate, and it is possible that the trustee may assert claims against our company.
 
Our Chief Executive Officer, Jon R. Sabes and our Chief Operating Officer, Steven F. Sabes, who together beneficially own or control approximately 94.2% of our common stock, as of December 31, 2013, are subject to litigation relating to claims by a bankruptcy trustee for loan payments made to an affiliate, Opportunity Finance, LLC. Such payments may ultimately be deemed to be avoidable transfers under preference or other legal theories. Case No. 08-45257 (U.S. Bankruptcy Court District of Minnesota). In addition, GWG Holdings invested $1.0 million in Opportunity Finance, LLC in 2006 and was repaid and received $176,948 of interest income from that investment in 2007. Jon R. Sabes and Steven F. Sabes together beneficially own approximately 94.2% of our common stock prior to this offering and, assuming the sale of all             common shares offered hereby, will beneficially own approximately        % of our common stock after this offering. To date, no claim has been made against GWG Holdings.
 
Although we believe there are numerous meritorious defenses to the claims made by the bankruptcy trustee, and we are advised that the defendants in that action will vigorously defend against the trustee’s claims, such defendants may not prevail in the litigation with the bankruptcy trustee. If the bankruptcy trustee sought to sell or transfer the equity interests of Jon R. Sabes or Steven F. Sabes as a result of the litigation, there could be a change in control of the Company, and our business together with all of our investors, including investors in our common stock, could be materially and adversely impacted. Such adverse results would likely arise in connection with negative change-in-control covenants contained in our revolving credit facility agreements, the breach of those covenants and an ensuing event of default under such facility. Finally, regardless of the outcome of this litigation, these matters are likely to distract management and reduce the time and attention that they are able to devote to our business.  
 
The loss of the services of our current executives or other key employees, or the failure to attract additional key individuals, would materially and adversely affect our business operations and prospects.
 
Our financial success is dependent to a significant degree upon the efforts of our current executive officers and other key employees. In addition, our revolving credit facility requires Messrs. Jon R. Sabes and Steven F. Sabes to generally remain active within the business. We have entered into employment agreements with Messrs. Jon R. Sabes, Steven F. Sabes, Paul A. Siegert and Jon Gangelhoff. Nevertheless, there can be no assurance that these individuals will continue to provide services to us. A voluntary or involuntary termination of employment could have a materially adverse effect on our business operations if we were not able to attract qualified replacements in a timely manner. At present, we do not maintain key-man life insurance policies for any of these individuals. In addition, our success and viability is also dependent to a significant extent upon our ability to attract and retain qualified personnel in all areas of our business, especially our sales, policy acquisition, and financial management team. If we were to lose the members of these service teams, we would need to replace them with qualified individuals in a timely manner or our business operations and prospects could be adversely impacted.
 
 
21

 
 
We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of some other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive to investors.
 
As a public reporting company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” under the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular, as an emerging growth company we:
 
 
are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
 
 
are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”);
 
 
are not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes);
 
 
are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
 
 
may present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial Condition and Results of Operations, or MD&A; and
 
 
are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act.
 
We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
 
Certain of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a “smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or CEO pay ratio disclosure; and may present only two years of audited financial statements  and related MD&A disclosure.
 
Under the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933, or such earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more than $1.0 billion in annual revenues, have more than $700 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. Furthermore, under current SEC rules we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates) of less than $75 million as of the last business day of our most recently completed second fiscal quarter.
 
 
22

 
 
We cannot predict if investors will find our securities less attractive due to our reliance on these exemptions. If investors were to find our securities less attractive as a result of our election, we may have difficulty raising all of the proceeds we seek in this offering.
 
Advances previously made to members of our executive management and outstanding at the time that we initially filed the registration statement for our ongoing offering of Renewable Secured Debentures may be deemed violations of Section 402 of the Sarbanes-Oxley Act of 2002. That law prohibits public reporting companies from extending or maintaining credit to directors or executive officers in the form of a personal loan. Any such violations could have a material and adverse effect upon our reputation and business.
 
Prior to our conversion from a limited liability company to a corporation and the filing of the registration statement for our ongoing offering of Renewable Secured Debentures, we made certain advances to our executive management personnel, Messrs. Jon R. Sabes, Steven F. Sabes and Paul A. Siegert, that were to be repaid by such individuals upon or in connection with operating distributions to be paid by us when the Company had cash flow sufficient to make distributions on account of their ownership interests in the Company. For further information, please refer to the “Executive Compensation” section of this prospectus the “—Summary Compensation Table,” “—Employment Agreements and Change-in-Control Provisions,” and “—Related-Party Transactions” captions thereunder.
 
Each of Messrs. Jon R. Sabes, Steven F. Sabes and Paul A. Siegert have repaid all outstanding advances, including all interest accrued thereon. Nevertheless, because such loan advances remained outstanding at the time that we initially filed such registration statement with the SEC, we may be deemed to have inadvertently violated Section 402 of the Sarbanes-Oxley Act of 2002, which prohibits “issuers” from extending or maintaining credit to directors or executive officers in the form of a personal loan. As defined under the Sarbanes-Oxley Act of 2002, the term “issuer” includes, in addition to public companies, a company that has filed a registration statement that has not yet become effective under the Securities Act of 1933 and that has not been withdrawn. Although we believe that the loan advances constitute business loans, as opposed to personal loans, regulatory authorities may not agree with this assessment if the matter is investigated and claims alleging a violation are pursued. On July 27, 2011, Messrs. Jon R. Sabes, Steven F. Sabes and Paul A. Siegert repaid their loan balances.
 
Violations of the Sarbanes-Oxley Act of 2002 could result in significant penalties, including censure, cease and desist orders, revocation of registration and fines. It is also possible that the criminal penalties could exist, although criminal penalties require a related violation to have been willful, and not the result of an innocent mistake, negligence or inadvertence. In the end, it is possible that we could face any of these potential penalties or results, and any action by administrative authorities, whether or not ultimately successful, could have a material and adverse effect upon our reputation and business.
 
Risks Related to This Offering
 
Since our common stock has not been publicly traded before this offering, the price of our common stock may be subject to wide fluctuations.
 
Before this offering, there was no public market for our common stock. Even though we expect to apply to list our shares on The NASDAQ Capital Market, an active trading market for our common stock may not develop following this offering and any such listing. You may not be able to sell your shares quickly or at the current market price if trading in our stock is not active. You may lose all or a part of your investment. The initial public offering price was arbitrarily determined based on negotiations between us and the underwriters. The market price of our common stock after the offering will likely vary from the initial offering price and is likely to be highly volatile and subject to wide fluctuations in response to a variety of factors and risks, many of which are beyond our control. See “Underwriting.” In addition to the risks noted elsewhere in this prospectus, some of the other factors affecting our stock price may include:
 
 
 ●
variations in our operating results;
 
 ●
the level and quality of securities analysts’ coverage for our common stock;
 
 ●
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
 
23

 
 
 
 ●
announcements by third parties of significant claims or proceedings against us; and
 
 ●
future sales of our common stock.
 
For these reasons, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on past results as an indication of future performance. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been instituted against the public company. Regardless of its outcome, this type of litigation could result in substantial costs to us and a likely diversion of our management’s attention. You may not receive a positive return on your investment when you sell your shares and you may lose the entire amount of your investment.
 
Our management has broad discretion over the use of the proceeds from this offering and may apply the proceeds in ways that do not improve our operating results or increase the value of your investment.
 
Based on an assumed initial public offering price of $     , we estimate that the net proceeds from this offering (excluding any exercise of the underwriters’ over-allotment option) will be approximately $      million after deducting underwriting discounts and commissions and offering expenses. Management will retain broad discretion as to the use and allocation of these net proceeds. Accordingly, our investors will not have the opportunity to evaluate the economic, financial and other relevant information that we may consider in the application of the net proceeds. Management may apply the proceeds in ways that do not improve our operating results or increase the value of your investment. See “Use of Proceeds.”
 
The concentration of our common stock ownership by our current management will limit your ability to influence corporate matters.
 
Upon completion of this offering, our directors and executive officers will beneficially own and will be able to vote in the aggregate approximately       % of our issued and outstanding common stock (approximately     % if the underwriters over-allotment option is exercised in full). As such, our directors and executive officers, as stockholders, will continue to have the ability to elect or remove any or all of our directors and to control substantially all corporate activities, including the outcome of tender offers, mergers, proxy contests or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for their shares of common stock. This concentrated control will limit your ability to influence corporate matters and, as a result, we may take actions that our stockholders do not view as beneficial. In addition, such concentrated control could discourage others from initiating changes of control. In such cases, the perception of our prospects in the market may be adversely affected and the market price of our common stock may decline.
 
Our Board of Directors’ ability to issue “blank check” preferred stock and any anti-takeover provisions we adopt may depress the value of our common stock.
 
Our Certificate of Incorporation authorizes 40,000,000 shares of “blank check” preferred stock. This means that our Board of Directors has the power to issue any or all of the shares of such preferred stock, including the authority to establish one or more series and to fix the powers, preferences, rights and limitations of such class or series, without seeking stockholder approval, subject to certain limitations on this power under the listing requirements of The NASDAQ Stock Market, Inc. The authority of our Board of Directors to issue “blank check” preferred stock, along with any future anti-takeover measures we may adopt, may, in certain circumstances, delay, deter or prevent takeover attempts and other changes in control of our company that are not approved by our Board of Directors. As a result, our stockholders may lose opportunities to dispose of their shares at favorable prices generally available in takeover attempts or that may be available under a merger proposal and the market price of our common stock and the voting and other rights of our stockholders may also be affected. See “Description of Capital Stock.”
 
 
24

 
 
You will experience immediate and substantial dilution in the value of the shares of common stock you purchase.
 
The initial public offering price is substantially higher than the net tangible book value of each outstanding share of our common stock. Purchasers of common stock in this offering will experience immediate and substantial dilution on a book value basis. The dilution will be $     per share in the net tangible book value per share of common stock from an assumed $     initial public offering price, $     per share if the underwriters exercise the over-allotment option in full. If options to purchase shares of common stock are exercised, there would be further dilution. See “Dilution.”
 
A substantial number of shares will be eligible for future sale by our current stockholders and the sale of those shares could adversely affect our stock price.
 
Immediately following the sale of           shares of our common stock in this offering, our current stockholders will own approximately         % of the outstanding shares of our common stock (approximately % if the underwriters’ over-allotment option is exercised in full). We expect that our directors, executive officers and certain other stockholders will agree not to offer, sell, contract to sell, swap, make any short sale of, pledge, establish or increase a “put equivalent position” or liquidate or decrease a “call equivalent position” within the meaning of Rule 16a-1 under the Securities Exchange Act of 1934, grant any option to purchase or otherwise dispose of, or publicly announce his, her or its intention to do any of the foregoing with respect to any shares of common stock, or any securities convertible into, or exercisable or exchangeable for, any shares of common stock for a period of         months after the date of this prospectus, without the prior written consent of the underwriters.
 
If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the expiration of any contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could be adversely effected. Based on shares outstanding as of April 25, 2014, upon completion of this offering, we will have outstanding               shares of common stock assuming no exercise of the underwriters’ over-allotment option and          shares if the underwriters exercise the over-allotment option in full. Of these shares, only the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market.
 
After the lock-up agreements pertaining to this offering expire, up to an additional        shares will be eligible for sale in the public market, subject to volume limitations under Rule 144 under the Securities Act of 1933. In addition, 2,000,000 shares are reserved for future issuance under our 2013 Stock Incentive Plan may become eligible for sale in the public market to the extent permitted by the provisions of various award agreements, the lock-up agreements and Rules 144 and 701 under the Securities Act. In connection with this offering, we anticipate we will also grant to the underwriters upon the closing of this offering       year warrants to purchase up to an aggregate of       shares of our common stock at a per-share exercise price equal to     % of the initial public offering price. We also have 3,368,109 shares of our Series A Convertible Preferred Stock issued and outstanding at December 31, 2013, which are convertible into an aggregate of 5,052,163 shares of our common stock at the effective time of this offering, as well as outstanding warrants to purchase a total of 831,908 shares of our common stock at $      per share, which are vested with respect to all shares. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.
 
Our common stock could be delisted from The NASDAQ Capital Market, which delisting could hinder your ability to obtain accurate quotations on the price of our common stock, or dispose of our common stock in the secondary market.
 
Although we expect to apply to list our common stock on The NASDAQ Capital Market, we cannot guarantee that an active public market for our common stock will develop following this offering and any such listing. In order to maintain any listing on The NASDAQ Capital Market, we must register at least one bid for our common stock at a price that equals or exceeds $5.00 per share on the that day our common stock is first quoted on The NASDAQ Capital Market. Thereafter, our common stock must sustain a minimum bid price of at least $1.00 per share and we must satisfy the other requirements for continued listing on The NASDAQ Capital Market. In the event our common stock is delisted from The NASDAQ Capital Market, trading in our common stock could thereafter be conducted in the over-the-counter markets in the so-called pink sheets (currently called the “OTC Markets”) or the National Association of Securities Dealer’s OTC Bulletin Board. In such event, the liquidity of our common stock would likely be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, and there would likely be a reduction in the coverage of our company by security analysts and the news media, thereby resulting in lower prices for our common stock than might otherwise prevail.
 
 
25

 
 
Because we do not intend to pay dividends on our common stock, you must rely on stock appreciation for any return on your investment.
 
We presently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. As a result, you must rely on stock appreciation and a liquid trading market for any return on your investment. If an active and liquid trading market does not develop, you may be unable to sell your shares of common stock at or above the initial public offering price or at the time you would like to sell.
 
The protection provided by the federal securities laws relating to forward-looking statements does not apply to us. The lack of this protection could harm us in the event of an adverse outcome in a legal proceeding relating to forward-looking statements made by us.
 
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to certain issuers, including issuers that do not have their equity traded on a recognized national securities exchange. Our common stock does not trade on any recognized national securities exchange. As a result, we will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by us contained a material misstatement of fact or was misleading in any material respect because of our failure to include any statements necessary to make the statements not misleading. The lack of this protection in a contested proceeding could harm our financial condition.
 
 
26

 
 
USE OF PR OCEEDS
 
Based on an assumed initial public offering price of $     per share, we estimate that the net proceeds from this offering will be approximately $     million, after deducting approximately $     million in underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise the over-allotment option in full, then we estimate that the net proceeds to us from this offering will be approximately $     million.
 
We intend to use the net proceeds from this offering to:
 
 
 ●
promote and advertise the opportunities for consumers owning life insurance and investors to profit from participating in the secondary market for life insurance policies;
 
 
 ●
purchase additional life insurance policies in the secondary market;
 
 
 ●
pay premiums on life insurance policy assets we own; and
 
 
 ●
fund our portfolio operations and for working capital purposes.
 
The amount of proceeds we actually apply towards purchasing additional life insurance policies will depend, among other things, on the amount of net proceeds that we receive from the sale of common stock being offered, the amount of net proceeds that we receive from our other financing activities (such as our ongoing offering of Renewable Secured Debentures), the existence and timing of opportunities to expand our portfolio of insurance policy assets, our cash needs for certain other expenditures (summarized below) we anticipate incurring in connection with this offering and in connection with our business, and the availability of other sources of cash.
 
As indicated above, we may use some of the net proceeds from this offering to pay premiums on life insurance policy assets we own. Our aggregate premium obligations over the next five years for life insurance policy assets that we own as of December 31, 2013 are set forth in the table below. These premium obligations do not take into account the expectation of mortality over the periods presented.
 
Year
  Premiums  
2014
   
22,739,000
 
2015
   
25,056,000
 
2016
   
27,508,000
 
2017
   
30,653,000
 
2018
   
33,509,000
 
   
$
139,465,000
 
 
Funds for our portfolio operations and working capital include, but are not limited to, expenditures such as obtaining life expectancy reports, mortality tracking and legal and collections expenses. Funds for general working capital purposes included, but are not limited to, marketing and sales expenses, as well as tax liabilities and interest rate caps, swaps or hedging instruments for our life insurance policy portfolio or our indebtedness.
 
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to us from this offering. Accordingly, our management will have broad discretion in the application of these proceeds. Net offering proceeds not immediately applied to the uses summarized above will be invested in short-term investments such as money market funds, commercial paper, U.S. Treasury Bills and similar securities investments pending their use. We may also purchase interest rate hedges to lock in our cost of capital, or longevity hedges to lock in our expected return from our portfolio.
 
 
27

 
 
CAPITALIZA TION
 
The following table sets forth, as of December 31, 2013, our consolidated debt and stockholders’ equity on an actual basis and as adjusted to give effect to (i) the conversion of all 3,368,109 shares of our Series A Convertible Preferred Stock issued and outstanding at December 31, 2013 into an aggregate of 5,052,163 shares of our common stock; and (ii) the sale of                shares of our common stock in this offering at an assumed initial public offering price of $     per share and our receipt of the estimated $     million in net proceeds from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The table below does not reflect an aggregate of 2,000,000 shares of common stock available as of the date of this prospectus for future issuance under our 2013 Stock Incentive Plan, of which there were 852,500 common shares subject to outstanding incentive grants. The table below also does not reflect 831,908 common shares issuable upon the exercise of warrants outstanding as of the date of this prospectus. The table also excludes up to an aggregate of       shares of our common stock issuable upon exercise of  warrants we expect to grant to       , our underwriters for this offering, upon the closing of the offering.
 
You should read this information in conjunction with “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the related notes appearing elsewhere in this prospectus.
                 
   
  At December 31 , 2013
 
    Actual     As
Adjusted
 
Debt:
  (Dollars in thousands,
except
per-share amounts)
(Unaudited)
 
Renewable Secured Debentures
 
$
131,646
   
$
131,646
 
Series I Secured notes (1)
   
29,275
     
29,275
 
Revolving credit facility (2)
   
79,000
     
79,000
 
Total debt
 
$
239,921
   
$
239,921
 
Preferred stock:
               
Series A Convertible Preferred (par value $0.001; shares authorized 40,000,000; shares issued and outstanding 3,368,109; liquidation preference of $25,261,000 on December 31, 2013) (3)
 
$
24,722
   
$
0
 
Stockholders’ equity:
               
Common stock (par value $0.001 per share; shares authorized 210,000,000; shares issued and outstanding 9,124,000)
 
$
9
   
$
   
Additional paid-in capital
   
2,937
         
Retained earnings
   
(8,438
)
    (8,438
)
Total stockholders’ equity
 
$
(5,492
)
 
$
 
 
Total debt, preferred stock and common stockholders’ equity
 
$
259,151
   
$
   
 

 
(1)
The total outstanding face amount of Series I Secured notes outstanding at December 31, 2013 was $29,744,000, less unamortized selling costs of $606,000. The weighted-average interest rate of our outstanding Series I Secured notes at December 31, 2013 was approximately 8.35%, and the weighted-average maturity was approximately 2.49 years.
 
 
28

 
 
 
(2)
The interest rate of our revolving credit line floats in  conjunction with advances made thereunder. The weighted-average interest rate payable under our revolving credit line at December 31, 2013 was approximately 6.19%. Amounts owing under our revolving credit line come due on December 31, 2014.
 
 
(3)
As of December 31, 2013, we had issued 3,368,109 preferred shares resulting in gross consideration of $25,261,000 (including cash proceeds, conversion of Series I Secured notes and accrued interest on Series I notes, and conversion of preferred dividends payable) net of redemptions. We incurred Series A preferred stock issuance costs of $2,838,000, of which $2,385,000 was amortized to additional paid in capital as of December 31, 2013, resulting in a carrying amount of $24,723,000.
 
 
29

 
 
DILUTION

As of December 31, 2013, our net tangible book value was $13,163,000, or $0.93 per share of common stock.  Net tangible book value per share represents our total tangible assets, less our total liabilities, divided by the number of outstanding shares of our common stock on a pro forma basis that assumes the conversion of all 3,368,109 shares of our Series A Convertible Preferred Stock issued and outstanding at December 31, 2013 into an aggregate of 5,052,163 shares of our common stock.  Dilution represents the difference between the amount per share paid by purchasers in this offering and the pro forma net tangible book value per share of common stock after the offering.  After giving effect to the sale of            shares of common stock in this offering at an assumed offering price of $     per share, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, but without adjusting for any other change in our pro forma net tangible book value subsequent to December 31, 2013, our pro forma net tangible book value would have been $     per share.  This represents an immediate increase in pro forma net tangible book value of $     per share to our existing stockholders and immediate dilution of $     per share to new investors purchasing shares at the assumed public offering price.  The following table illustrates the dilution in pro forma net tangible book value per share to new investors as of December 31, 2013:

Public offering price
  $    
Pro forma net tangible book value before offering
  $    
Increase in pro forma net tangible book value attributable to new investors
  $    
Pro forma net tangible book value after offering
  $    
Dilution in pro forma net tangible book value to new investors
  $    
 
The following table sets forth, as of December 31, 2013, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing holders of our common stock and the price to be paid by new investors at an assumed public offering price of $       .

   
Shares Purchased
   
Total Consideration
   
Average
Price
 
   
Number
   
Percent
   
Amount
   
Percent
   
Per Share
 
                               
Existing stockholders (1)
             
%
 
$
-
     
-
%
 
$
   
New investors
             
%
 
$
       
100
%
 
$
   
                               
Total
             
%
 
$
       
100
%
 
$
   
 

(1)
Assumes the conversion of all 3,368,109 shares of our Series A Convertible Preferred Stock issued and outstanding at December 31, 2013 into an aggregate of 5,052,163 shares of our common stock at the effective time of this offering.

As of December 31, 2013, there were 852,500 shares of common stock issuable upon the exercise of outstanding stock options.  Our 2013 Stock Incentive Plan authorizes the issuance of up to 2,000,000 shares of our common stock.  To the extent that incentives granted under the 2013 Stock Incentive Plan are issued and exercised, there will be further dilution to new investors.  The discussion and tables above assume no grants of incentives under the 2013 Stock Incentive Plan, exclude the dilutive impact of 831,908 common shares issuable upon exercise of warrants outstanding as of December 31, 2013, and exclude an aggregate of           shares of our common stock issuable upon exercise of  warrants we expect to grant to the underwriters upon the closing of this offering.
 
 
30

 
 
SELECTED FINANCIAL INFORMATION

The   following tables set forth selected historical consolidated statement of operations and balance sheet data.  The summary statement of operations data for fiscal years 2013 and 2012 and the selected balance sheet data as of December 31, 2013 and 2012 are derived from our audited consolidated financial statements contained elsewhere in this prospectus.

The selected pro forma balance sheet data as of December 31, 2013 reflects the conversion of all 3,368,109 shares of our Series A Convertible Preferred Stock issued and outstanding at December 31, 2013 into an aggregate of 5,052,163 shares of our common stock. This selected historical financial data set forth below should be read together with the financial statements and the related notes, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.

BALANCE SHEET DATA:
 
   
December 31,
2013
   
December 31,
2012
 
Total Assets
  $ 275,380,476     $ 197,948,035  
Investment in Portfolio
    234,672,794       164,317,183  
Cash and Cash Equivalents
    33,449,793       27,497,044  
Restricted Cash
    5,832,970       2,093,092  
Total Liabilities
    256,149,798       175,303,946  
Revolving Credit Facility
    79,000,000       71,000,000  
Series I Secured notes (1)
    29,275,202       37,844,711  
Renewable Secured Debentures (2)
    131,646,062       55,718,950  
Stockholder Preferred and Common Equity
    19,530,678       22,644,089  
 

(1)
The total outstanding face amount of Series I Secured notes outstanding at December 31, 2013 was $29,744,000, less unamortized selling costs of $606,000.

(2)
The total outstanding face amount of Renewable Secured  Debentures outstanding at December 31, 2013 was $134,891,000 plus $1,902,000 of subscriptions in process, less unamortized selling costs of $5,147,000.

INCOME STATEMENT DATA:

   
December 31,
2013
   
December 31,
2012
 
Total Revenue
  $ 33,064,774     $ 17,525,798  
Gain on Life Insurance Contracts
    29,513,642       17,436,743  
Interest Expense
    20,762,644       10,878,627  
Net Income (Loss)
    (194,955 )     (1,012,899 )

 
31

 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION

You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this prospectus, particularly under the headings “Risk Factors” and “Business.” 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. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity and capital resources, as well as other non-historical statements, are forward-looking statements.  These forward-looking statements are subject to numerous risks and uncertainties. Our actual results could differ materially from those suggested or implied by any forward-looking statements.  Please see the “Risk Relating to Forward-Looking Statements” section of this prospectus.

Overview

We are engaged in the emerging secondary market for life insurance policies.  We acquire life insurance policies in the secondary market from policy owners desiring to sell their policies at a discount to the face value of the insurance benefit.  Once we purchase a policy, we continue paying the policy premiums in order to ultimately collect the face value of the insurance benefit.  We generally seek to hold the individual policies to maturity, in order to ultimately collect the policy’s face value upon the insured’s mortality.  Our strategy is to build a profitable and large (greater than 300 lives) portfolio of policies that is diversified in terms of insurance carriers and the medical conditions of insureds.  We believe that diversification among insureds, insurers and medical conditions will lower our overall risk exposure, and that a larger number of individual policies (diversification in overall number) will provide our portfolio with greater actuarial stability.
 
In 2013, we recognized $12,036,000 of revenue from the receipt of $16,600,000 in policy benefits. In addition, we recognized revenue from the change in fair value of our life insurance policies, net of premiums and carrying costs, of $17,478,000. In 2013, interest expense, including amortization of the deferred financing costs and preferred stock dividends, was $20,763,000, and selling, general and administrative expenses were $10,323,000.  Income tax expense in 2013 was $2,174,000.  Our net loss in 2013 was $195,000.
 
To date, we have financed our business principally through the issuance of debt, including debt incurred by our subsidiary DLP Funding II under a senior revolving credit facility provided by Autobahn/DZ Bank, Series I Secured notes issued by our subsidiary GWG Life and our ongoing registered public offering of Renewable Secured Debentures. See the “Liquidity and Capital Resources” caption below. Since July 31, 2011, we have also issued Series A Convertible Preferred Stock for gross consideration of approximately $25.2 million, including cash proceeds, conversion of Series I Secured notes and accrued interest on those notes, and satisfaction of preferred dividends payable. All outstanding shares of our preferred stock (equaling 3,368,109 preferred shares as of the date of this prospectus) will be automatically converted into an aggregate of 5,052,163 shares of our common stock upon the closing of this offering.
 
Critical Accounting Policies
 
Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with the Generally Accepted Accounting Principles (GAAP) requires us to make 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. We believe that the judgments, estimates and assumptions involved in the accounting for the valuation of investments in life insurance policies have the greatest potential impact on our consolidated financial statements and accordingly believe these to be our critical accounting estimates. Below we discuss the critical accounting policies associated with these estimates as well as certain other critical accounting policies.
 
Ownership of Life Insurance Policies—Fair Value Option

Our primary business involves the purchasing and financing of life insurance policies. As such, we account for the purchase of life insurance policies in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification (FASB ASC) 325-30, Investments in Insurance Contracts, which requires us to use either the investment method or the fair value method. We have elected to account for these life insurance policies as investments using the fair value method.
 
 
32

 

We initially record our purchase of life insurance policies at the transaction price, which is the amount paid for the policy, inclusive of all fees and costs associated with the acquisition. The fair value of our investment in the portfolio of insurance policies is evaluated at the end of each reporting period. Changes in the fair value of the portfolio of life insurance policies are based on periodic evaluations and are recorded as changes in fair value of life insurance policies in our consolidated and combined statement of operations, and the fair value amounts included on our balance sheet are adjusted accordingly. The fair value is determined as the net present value of the life insurance portfolio’s future expected cash flows, determined after incorporating current life expectancy estimates and discount rate assumptions.

In addition to reporting our results of operations and financial condition based on the fair value of our life insurance policies as required by GAAP, management also makes calculations and evaluates our financial condition based on the weighted-average expected internal rate of return of the policies and other non-GAAP financial measures. See “Non-GAAP Financial Measures” below.

Valuation of Life Insurance Policies

Unobservable inputs, as discussed below, are a critical component of our estimate of the fair value of our investments in life insurance policies. We currently use a probabilistic method of estimating and valuing the projected cash flows of our portfolio of life insurance policies, which we believe to be the preferred and most prevalent valuation method in the industry. In this regard, the most significant assumptions we make are the life expectancy estimates of the insureds and the discount rate applied to the projected cash flows to be derived from our portfolio.

In determining life expectancy estimates, we generally use actuarial medical reviews from independent medical underwriters. These medical underwriters summarize the health of the insured by reviewing historical and current medical records. The medical underwriters evaluate the health condition of the insured in order to produce an estimate of the insured’s mortality—a life expectancy report. In the case of a small face policy ($250,000 face value or less), we may use one life expectancy report or estimate life expectancy based on a modified methodology which does not use actuarial medical reviews from independent medical underwriters. The life expectancy estimate represents a range of probabilities for the insured’s mortality against a group of cohorts with the same age, sex and smoking status. These mortality probabilities represent a mathematical curve known as a mortality curve, which is then used to generate a series of expected cash flows from the life insurance policy over the expected lifespan of the insured. A discount rate is used to calculate the net present value of the expected cash flows. The discount rate represents the internal rate of return we expect to earn on investments in a policy or in the portfolio as a whole at the stated fair value. The discount rate used to calculate fair value of our portfolio incorporates the guidance provided by ASC 820, Fair Value Measurements and Disclosures. Many of our current underwriting review processes, including our policy of obtaining actuarial medical reviews from independent medical underwriters as described above, are undertaken in satisfaction of obligations under our revolving credit facility. As a result, we may in the future modify our underwriting review processes if permitted under our borrowing arrangements.
 
The table below provides the discount rate used to estimate the fair value of our portfolio of life insurance policies for the period ending:
 
December 31, 2013
 
December 31, 2012
11.69%
 
12.08%

The change in the discount rate incorporates current information about discount rates applied by other reporting companies owning portfolios of life insurance policies, discount rates observed in the life insurance secondary market, market interest rates, the credit exposure to the issuing insurance companies and our estimate of the risk premium a purchaser would require to receive the future cash flows derived from our portfolio of life insurance policies.  Because we use the discount rate to arrive at the fair value of our portfolio, the rate we choose necessarily assumes an orderly and arms-length transaction (i.e., a non-distressed transaction in which neither seller nor buyer is compelled to engage in the transaction).

We engaged a third party, Model Actuarial Pricing Systems (MAPS), to prepare a third-party valuation of our life settlement portfolio. MAPS owns and maintains the portfolio pricing software we use. MAPS processed policy data, future premium data, life expectancy estimate data, and other actuarial information we supplied to calculate a net present value for our portfolio using the specified discount rate of 11.69%. MAPS independently calculated the net present value of our portfolio of 263 policies to be $234,672,794, which is the same fair value estimate we used on the balance sheet as of December 31, 2013, and furnished us with a letter documenting its calculation. A copy of such letter is filed as an exhibit to the registration statement of which this prospectus is a part.
 
 
33

 
 
JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or JOBS Act, was enacted.  Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. This means that an “emerging growth company” can make an election to delay the adoption of certain accounting standards until those standards would apply to private companies. We have elected to delay such adoption of new or revised accounting standards and, as a result, we may not comply with new or revised accounting standards at the same time as other public reporting companies that are not “emerging growth companies.” This exemption will apply for a period of five years following our first sale of common equity securities under an effective registration statement or until we no longer qualify as an “emerging growth company” as defined under the JOBS Act, whichever is earlier.
 
Deferred Income Taxes
 
FASB ASC 740, Income Taxes , requires us to recognize deferred tax assets and liabilities for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established for any portion of deferred tax assets that is not considered more likely than not to be realized.

We have provided a valuation allowance against the deferred tax asset related to a note receivable because we believe that, when realized for tax purposes, it will result in a capital loss that will not be utilized because we have no expectation of generating a capital gain within the applicable carryforward period. Therefore, we do not believe that it is more likely than not that the deferred tax asset will be realized.
 
We have also provided a valuation allowance against the deferred tax asset related to a tax basis capital loss generated with respect to its settlement and subsequent disposal of our investment in Athena Structured Funds PLC (see “Notes to Consolidated Financial Statements” Note 10).  Since we have no expectation of generating capital gains within the applicable carry-forward period, we do not believe that it is more likely than not that the deferred asset will be realized.

A valuation allowance is required to be recognized to reduce deferred tax assets to an amount that is more likely than not to be realized. Realization of deferred tax assets depends upon having sufficient past or future taxable income in periods to which the deductible temporary differences are expected to be recovered or within any applicable carryback or carryforward periods. We believe that it is more likely than not that we will be able to realize all of our deferred tax assets other than that which is expected to result in a capital loss.
 
Deferred Financing and Issuance Costs

Financing costs incurred to obtain financing under the revolving credit facility have been capitalized and are amortized using the straight-line method over the term of the revolving credit facility.  The Series I Secured note obligations are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of each respective borrowing.  The Renewable Secured Debentures are reported net of issuance costs, sales commissions and other direct expenses, which are amortized using the interest method over the term of each respective borrowing.  The Series A preferred stock is reported net of issuance costs, sales commissions, including the fair value of warrants issued, and other direct expenses, which are amortized using the interest method as interest expense over the three-year redemption period.
 
 
34

 
 
Principal Revenue and Expense Items
 
We earn revenues from three primary sources as described below.
 
Policy Benefits Realized .  We recognize the difference between the death benefits and carrying values of the policy when an insured event has occurred and we determine that settlement and ultimate collection of the death benefits is realizable and reasonably assured. Revenue from a transaction must meet both criteria in order to be recognized.  We generally collect the face value of the life insurance policy from the insurance company within 45 days of the insured’s mortality.
   
Change in Fair Value of Life Insurance Policies .  We have elected to carry our investments in life insurance policies at fair value in accordance with ASC 325-30, Investments in Life Insurance Contracts . Accordingly, we value our investments in our portfolio of life insurance policies each reporting period in accordance with the fair value principles discussed herein, which includes the expected payment of premiums for future periods.
   
Sale of a Life Insurance Policy or a Portfolio of Life Insurance Policies .  In an event of a sale of a policy, we recognize gain or loss as the difference between the sale price and the carrying value of the policy on the date of the receipt of payment on such sale.
   
 
Our main components of expense are summarized below.
   
Selling, General and Administrative Expenses .  We recognize and record expenses incurred in the operations of our business.  These expenses include thing such as professional fees, salaries, and sales and marketing expenditures.
   
Interest Expense .  We recognize and record interest expenses associated with the costs of financing our life insurance portfolio for the current period.  These expenses include interest paid to our senior lender under our revolving credit facility, as well as all interest paid on our debentures and other outstanding indebtedness such as our Series I Secured notes and dividends on convertible, redeemable preferred stock.  When we issue long-term indebtedness, we amortize the issuance costs associated with such indebtedness over the outstanding term of the financing, and classify it as interest expense.
 
Results of Operations—2013 Compared to 2012
 
The following is our analysis of the results of operations for the periods indicated below.  This analysis should be read in conjunction with our consolidated financial statements and related notes.
 
Revenue . Revenue recognized from the receipt of policy benefits was $12,036,000 and $6,283,000 in 2013 and 2012, respectively.  Revenue recognized from the change in fair value of our life insurance policies, net of premiums and carrying costs, was $17,478,000 in 2013 and $11,154,000 in 2012. That portion of the change in fair value related to new policies acquired during 2013 and 2012 was $27,475,000 and $12,242,000, respectively. In each case, the increases in fair value were due to changes in the discount rates we applied to calculate the net present value of cash flows expected from our portfolio of life insurance policies, change in fair value of policies acquired during the period, and aging of the policies. The discount rate incorporates current information about market interest rates, credit exposure to the insurance companies that issued the life insurance policies in our portfolio and our estimate of the risk premium an investor would require to receive the future cash flows from our portfolio of life insurance policies. The discount rate applied to estimate the fair value of the portfolio of life insurance policies we own was 11.69% as of December 31, 2013, compared to 12.08% for the same date in 2012. The decrease in discount rate was due to an increase in the size of the portfolio and the diversity of policies held in our portfolio of life insurance policies that resulted in a lower anticipated risk premium to a potential buyer. The carrying value of policies acquired during each quarterly reporting period are adjusted to their current fair value using the fair value discount rate applied to the entire portfolio as of that reporting date.
 
Gain Upon Termination of Agreement with Athena Securities Ltd . In June 2013, we entered into a “Purchase and Sale Agreement” with Athena Securities Ltd. and Athena Securities Group Ltd. This agreement effected the termination of an earlier agreement that the parties had entered into in 2011. That 2011 agreement had contemplated cooperative efforts by the parties aimed at developing a security and related offering in Europe or Ireland, the proceeds of which would be used to finance the acquisition of life-insurance related assets in the United States. We sought to terminate the 2011 agreement due to a changing regulatory environment in Europe that negatively affected the likelihood of consummating the contemplated offering of securities, and due to our dissatisfaction with Athena’s performance under the 2011 agreement. Accordingly, the June 2013 agreement contained mutual general releases of claims and substantially unwound certain capital stock transactions that had been effected under the earlier agreement. In particular, Athena returned to us for redemption 865,000 shares of our common stock, and retained 124,000 common shares in recognition of their earlier efforts under the 2011 agreement. For our part, we sold back to Athena Securities Group Ltd. all of our ownership in Athena Structured Funds, PLC that we had originally acquired under the 2011 agreement. As a result of the termination effected by our June 2013 agreement with Athena and our re-acquisition of 865,000 shares of our common stock, we recorded a non-cash gain on the transaction of $3,252,000. Presently, we have no ongoing business relationship with Athena.
 
Expenses . Interest expense, including amortization of the deferred financing costs and preferred stock dividends, was $20,763,000 during 2013 compared to $10,879,000 during 2012, an increase of $9,884,000. The increase was due to increased average debt outstanding and increased issuance costs being amortized during 2013.  Selling, general and administrative expenses were $10,323,000, and $6,467,000 for 2013 and 2012, respectively, representing an increase of $3,856,000. Employee compensation and benefits increased by $2,140,000.  This increase partially resulted from $825,000 in bonuses paid to the original members of the Company (prior to its conversion to a corporation) equal to the tax effect of the conversion from an LLC to a corporation, and a $449,000 increase related to the implementation of a new incentive compensation plan.  Legal expenses increased by $745,000 due in part to increased compliance work.  Sales and marketing expenses increased by $971,000 due to increased activity related to our public offering of Renewable Secured Debentures and increased effort at procuring life insurance policies for our investment portfolio.
 
 
35

 
 
Income Tax Expense. Income tax expense was $2,174,000 and $1,193,000 in 2013 and 2012, respectively. The effective tax rate for the 12 months ended December 31, 2013 and 2012, was 109.8% and 661.8%, respectively, compared to a statutory rate of 40.5%. In 2013 and 2012, there were significant permanent differences between income before income taxes and taxable income. The primary permanent difference between our effective tax rate and the statutory federal rate results from the accrual of preferred stock dividend expense, state taxes, and other non-deductible expenses. The dividends charged to interest expense were $2,528,000 and $2,227,000 in 2013 and 2012, respectively.  Excluding the impact of the dividends and other permanent differences, the effective tax rate for 2013 and 2012 would have been 40.5%.
  
The most significant temporary differences between GAAP net income and taxable net income are the treatment of interest costs with respect to the acquisition of the life insurance policies and revenue recognition with respect to the mark-to-market of life insurance portfolio.

Liquidity and Capital Resources
 
We finance our business through a combination of policy benefit revenues, origination fees, equity offerings, debt offerings, and a credit facility. We have used our debt offerings and credit facility primarily for policy acquisition, policy servicing and portfolio-related financing expenditures. We charge an intercompany origination fee in the amount of one to four percent of the face value of a life insurance policy’s benefit when we acquire the related life insurance policy. The origination fee we charge is included in the total purchase price we pay for a life insurance policy for purposes of our valuation and expected internal rate of return calculations, but is not netted against the purchase price we pay to a seller of an insurance policy. We generated cash flows of $3,711,000 and $2,539,000 from origination fees in 2013 and 2012, respectively.  Profit from intracompany origination fees for life insurance policies retained by the Company are eliminated from our consolidated statements of operations. As such, the origination fees collected under our life insurance policy financing arrangements are reflected in our consolidated statements of cash flows as cash flows from financing activities as they are paid in the form of borrowings used to finance the acquisition. Our revolving bank line allows DLP Funding II to borrow the funds necessary to pay origination fees to GWG Life.  Our borrowing agreements allow us to use net proceeds of the Renewable Secured Debentures for policy acquisition, which includes the payment of origination fees. If the policy acquisition is not financed, no fees are included in the consolidated cash flows.  See “Cash Flows” below for further information. We determine the purchase price of life insurance policies in accordance with ASC 325-30, Investments in Insurance Contracts , using the fair value method. Under the fair value method, the initial investment is recorded at the transaction price.  Because the origination fees are paid from a wholly owned subsidiary to the parent company, these fees are not included in the transaction price as reflected in our consolidated financial statements. For further discussion on our accounting policies for life settlements, please refer to note 1 to our consolidated financial statements.
 
As of December 31, 2013, we had approximately $43.2 million in combined available cash and available borrowing base surplus capacity under our revolving credit facility for the purpose of purchasing additional life insurance policies, paying premiums on existing policies, paying portfolio servicing expenses, and paying principal and interest on our outstanding financing obligations.

In September 2012, we concluded a Series A preferred stock offering, receiving an aggregate $24.6 million in subscriptions for our Series A preferred stock. These subscriptions consisted of $14.0 million in conversions of outstanding Series I Secured notes and $10.6 million of cash investment. We have used the proceeds from the sale of our Series A preferred stock, together with the origination fees we received to purchase and finance life insurance policies to fund our operational expenditures.

In June 2011, we registered a $250.0 million debt offering of our Renewable Secured Debentures with the SEC, which registration became effective on January 31, 2012. As of December 31, 2013, we had approximately $134.9 million in principal amount of Renewable Secured Debentures outstanding. As of December 31, 2013, the total amount of Renewable Secured Debentures sold, including renewals, is $153.2 million.
 
 
36

 

Our wholly owned subsidiary GWG Life issued Series I Secured notes beginning in November 2009 on a private placement basis to accredited investors only. As of December 31, 2013, we had approximately $29.7 million in principal amount of Series I Secured notes outstanding.  This offering was closed in November 2011.

The weighted-average interest rate of our outstanding Series I Secured notes as of December 31, 2013 and 2012 was 8.35% and 8.22%, respectively, and the weighted-average maturity at those dates was 2.49 and 1.43 years, respectively. The Series I Secured notes have renewal features.  Since we first issued our Series I Secured notes, we have experienced $114,803,000 in maturities, of which $86,990,000 has renewed for an additional term as of December 31, 2013. This has provided us with an aggregate renewal rate of approximately 76% for investments in our Series I Secured notes. Future contractual maturities of Series I Secured notes payable at December 31, 2013 are as follows:
 
Years Ending December 31,
     
2014
  $ 16,111,000  
2015
    6,700,000  
2016
    2,030,000  
2017
    4,085,000  
2018
    754,000  
Thereafter
    64,000  
    $ 29,744,000  

The weighted-average interest rate of our outstanding Renewable Secured Debentures as of December 31, 2013 and 2012 was 7.53% and 7.65%, respectively, and the weighted-average maturity at those dates was 3.69 and 3.03 years, respectively. Our Renewable Secured Debentures have renewal features.  Since we first issued our Renewable Secured Debentures, we have experienced $18,339,000 in maturities, of which $11,572,000 has renewed for an additional term as of December 31, 2013.  This has provided us with an aggregate renewal rate of approximately 63% for investments in our Renewable Secured Debentures. Future contractual maturities of Renewable Secured Debentures at December 31, 2013 are as follows: 
 
Years Ending December 31,
     
2014
 
$
34,258,000
 
2015
   
41,509,000
 
2016
   
29,152,000
 
2017
   
7,667,000
 
2018
   
5,381,000
 
Thereafter
   
16,924,000
 
   
$
134,891 ,000
 
 
The Renewable Secured Debentures and Series I Secured notes are secured by all our assets, and are subordinate to our revolving credit facility with Autobahn/DZ Bank.  The Renewable Secured Debentures and Series I Secured notes are pari passu with respect to payment and collateral pursuant to an inter-creditor agreement (see notes 7 and 8 to our consolidated financial statements).

We maintain a $100 million revolving credit facility with Autobahn/DZ Bank through GWG Life’s wholly owned subsidiary DLP Funding II. As of December 31, 2013 and 2012, we had $79.0 and $71.0 million outstanding under the revolving credit facility and maintained an available borrowing base surplus of $3.9 and $15.0 million (see note 6 to our consolidated financial statements).
 
 
37

 

We expect to meet our ongoing operational capital needs through a combination of policy benefit revenues, origination fees, and proceeds from financing transactions. We expect to meet our policy acquisition, servicing, and financing capital needs principally from the receipt of policy benefit revenues from our portfolio of life insurance policies, net proceeds from our offering of Renewable Secured Debentures, and from our revolving credit facility. Because we only receive origination fees when we purchase a policy, our receipt of those fees is contingent upon our consummation of policy purchases, which is, in turn, contingent upon our receipt of external funding. Despite recent adverse capital market conditions, including a prolonged credit crisis, we have demonstrated continued access to credit and financing markets.  Furthermore, we expect to begin receiving insurance benefit payments on our portfolio of life insurance policies as the average age of the insureds increase and mortality events occur over time—which we expect to begin more significantly in 2015 and steadily increasing until 2018. As a result of the foregoing, we estimate that our liquidity and capital resources are sufficient for our current and projected financial needs. Nevertheless, if we are unable to continue our offering of Renewable Secured Debentures for any reason (or if we become unsuccessful in selling debentures), and we are unable to obtain capital from other sources, we expect that our business would be materially and adversely affected. In addition, our business would be materially and adversely affected if we did not receive the policy benefits we forecast and if holders of our Renewable Secured Debentures or Series I Secured notes failed 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 obligations and continue to pay policy premiums.
 
Capital expenditures have historically not been material and we do not anticipate making material capital expenditures in 2013 or beyond.

Debt Financings Summary
 
We had the following outstanding debt balances as of December 31, 2013:
 
Issuer/Borrower
 
Principal
Amount
Outstanding
   
Weighted
Average
Interest
Rate
 
GWG Holdings, Inc. - Renewable Secured Debentures
 
$
134,891,000
     
7.53
%
GWG Life Settlements, LLC - Series I Secured notes
   
29,744,000
     
8.35
%
GWG DLP Funding II, LLC - revolving credit facility
   
79,000,000
     
6.19
%
Total
 
$
243,635,000
     
7.20
%

Our total credit facility and other indebtedness balance as of December 31, 2013 and 2012 was $243,635,000 and $167,179,000, respectively. At December 31, 2013, the total outstanding face amount under our Series I Secured notes outstanding was $29,744,000, less unamortized selling costs of $469,000, resulting in a carrying amount of $29,275,000.  At December 31, 2012, the total outstanding face amount under our Series I Secured notes outstanding was $38,570,000, less unamortized selling costs of $725,000, resulting in a carrying amount of $37,845,000.  At December 31, 2013, the total outstanding face amount of Renewable Secured Debentures was $134,891,000 plus $1,902,000 of subscriptions in process, less unamortized selling costs of $5,147,000, resulting in a carrying amount of $131,646,000.  At December 31, 2012, the total outstanding face amount of Renewable Secured Debentures outstanding was $57,609,000 plus $845,000 of subscriptions in process, less unamortized selling costs of $2,735,000, resulting in a carrying amount of $55,719,000.  At December 31, 2013, the fair value of our investments in life insurance policies of $234,673,000 plus our cash balance of $33,450,000 and our restricted cash balance of $5,833,000, totaled $273,956,000, representing an excess of portfolio assets over secured indebtedness of $30,321,000.  At December 31, 2012, the fair value of our investments in life insurance policies of $164,317,000 plus our cash balance of $27,497,000 and our restricted cash balance of $2,093,000, totaled $193,907,000, representing an excess of portfolio assets over secured indebtedness of $26,728,000. The Renewable Secured Debentures and Series I Secured notes are secured by all our assets and are subordinate to our revolving credit facility with Autobahn/DZ Bank. The Renewable Secured Debentures and Series I Secured notes are pari passu with respect to payment and shared collateral pursuant to an inter-creditor agreement.
 
 
38

 
 
The following forward-looking table seeks to illustrate the impact of the sale of our portfolio of life insurance assets at various discount rates in order to satisfy our debt obligations as of December 31, 2013.  In all cases, the sale of the life insurance assets owned by DLP Funding II will be used first to satisfy all amounts owing under the revolving credit facility with Autobahn/ DZ Bank.  The net sale proceeds remaining after satisfying all obligations under the revolving credit facility would be applied to Renewable Secured Debentures and Series I Secured notes on a pari passu basis.
                                         
Portfolio Discount Rate
 
11%
   
12%
   
13%
   
14%
   
15%
 
Value of portfolio
 
$
243,497,996
   
$
230,868,939
   
$
219,232,233
   
$
208,487,889
   
$
198,547,915
 
Cash and cash equivalents
   
39,282,008
     
39,282,008
     
39,282,008
     
39,282,008
     
39,282,008
 
Total assets
   
282,780,004
     
270,150,947
     
258,514,241
     
247,769,897
     
237,829,923
 
Revolving credit facility Autobahn/DZ Bank
   
79,000,000
     
79,000,000
     
79,000,000
     
79,000,000
     
79,000,000
 
Net after revolving credit facility
   
203,780,004
     
191,150,947
     
179,514,241
     
168,769,897
     
158,829,923
 
Series I Secured notes and Renewable Secured Debentures
   
164,634,927
     
164,634,927
     
164,634,927
     
164,634,927
     
164,634,927
 
Net after Series I Secured notes and Renewable Secured Debentures
 
$
39,145,077
   
$
26,516,020
   
$
14,879,314
   
$
4,134,970
   
$
(5,805,004
)
Impairment to Series I Secured notes and Renewable Secured Debentures
 
No impairment
   
No impairment
   
No impairment
   
No impairment
   
Impairment
 

The table illustrates that our ability to fully satisfy amounts owing under the Renewable Secured Debentures and Series I Secured notes would likely be impaired upon the sale of all our life insurance assets at a price equivalent to a discount rate of approximately 14.41% or higher. The discount rates used to calculate the fair value of our portfolio for mark-to-market accounting were 11.69% as of December 31, 2013, and 12.08% as of December 31, 2012. The table does not include any allowance for transactional fees and expenses associated with a portfolio sale (which expenses and fees could be substantial), and is provided to demonstrate how various discount rates used to value our portfolio could affect our ability to satisfy amounts owing under our debt obligations, in light of our senior secured lender’s right to priority payments.  In addition, the table does not directly address the adverse effect of the potential sale of our portfolio of life insurance assets on holders of our common stock.  In the event of such sale and a resulting impairment of the Company’s ability to satisfy its debt obligations, there would no assets remaining for payments to holders of our common stock. You should read the above table in conjunction with the information contained in other sections of this prospectus, including our discussion of discount rates included under the “—Critical Accounting Policies – Valuation of Insurance Policies” caption above. 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. The forward-looking presentation above is subject to numerous risks and uncertainties. Our actual results could differ materially from those suggested or implied by the above table. Please see “Risk Relating to Forward-Looking Statements” above.

Cash Flows
 
The payment of premiums and servicing costs to maintain life insurance policies represents our most significant requirement for cash disbursement. When a policy is purchased, we are able to calculate the minimum premium payments required to maintain the policy in-force. Over time as the insured ages, premium payments will increase; however, the probability of actually needing to pay the premiums decreases since mortality becomes more likely. These scheduled premiums and associated probabilities are factored into our expected internal rate of return and cash-flow modeling described herein. Beyond premiums, we incur policy servicing costs, including annual trustee and tracking costs, and debt servicing costs, including principal and interest payments. Until we receive a stable amount of proceeds from the policy benefits, we intend to pay these costs from our credit facility, when permitted, through the issuance of debt securities, including Renewable Secured Debentures, and with proceeds from this offering.
 
 
39

 
 
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 collected and premiums paid on our portfolio. The trailing 12-month benefits/premium coverage ratio indicates the ratio of policy benefits received to premiums paid over the trailing 12-month period from our portfolio of life insurance policies.
 
 
Quarter End Date
 
Portfolio
Face
Amount
   
12-Month
Trailing
Benefits
Collected
   
12-Month
Trailing
Premiums
Paid
   
12-Month
Trailing
Benefits/Premium
Coverage Ratio
 
March 31, 2012
 
$
482,455,000
   
$
4,203,000
   
$
14,977,000
     
28.06
%
June 30, 2012
   
489,255,000
     
8,703,000
     
15,412,000
     
56.47
%
September 30, 2012
   
515,661,000
     
7,833,000
     
15,837,000
     
49.46
%
December 31, 2012
   
572,246,000
     
7,350,000
     
16,597,000
     
44.28
%
March 31, 2013
   
639,755,000
     
11,350,000
     
18,044,000
     
62.90
%
June 30, 2013
   
650,655,000
     
13,450,000
     
19,182,000
     
70.11
%
September 30, 2013
 
 
705,069,000
   
 
18,450,000
   
 
20,279,000
     
90.98
%
December 31, 2013
   
740,648,000
     
16,600,000
     
21,733,000
     
76.38
%
We believe that the portfolio cash flow results set forth above represent 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 results will remain inconsistent until such time we achieve our goal of acquiring a larger, more diversified portfolio of life insurance policies in order to obtain more normalized actuarial results. As our receipt of life insurance policy benefits continues to increase, we expect to begin servicing and paying down our outstanding indebtedness, or alternatively purchasing additional life insurance policies, from these cash flows. As indicated above under “Liquidity and Capital Resources,” we presently expect that by 2015, the cash inflows from the receipt of policy benefits will exceed the premium obligations on the remaining life insurance policies held within the portfolio as of December 31, 2013.  See “Business—Portfolio Management.”
 
The amount of payments for anticipated premiums and servicing costs that we will be required to make over the next five years to maintain our current portfolio, assuming no mortalities, is set forth in the table below.
 
Year
 
Premiums
and
Servicing
 
2014
 
$
22,871,000
 
2015
   
25,188,000
 
2016
   
27,639,000
 
2017
   
30,785,000
 
2018
   
33,641,000
 
Total
 
$
140,124 ,000
 
The life insurance policies owned by DLP Funding II are subject to a collateral arrangement with the agent to our revolving credit lender, as described in note 6 to the consolidated financial statements. Under this arrangement, collection and escrow accounts are used to fund purchases and premiums of the insurance policies and to pay interest and other charges under our revolving credit facility. The lender and its agent must authorize all disbursements from these accounts, including any distributions to GWG Life or Holdings. Distributions are limited to an amount that would result in the borrowers (DLP Funding II, GWG Life, and Holdings) realizing an annualized rate of return on the equity funded amount for such assets of not more than 18%, as determined by the agent. After such amount is reached, the credit agreement requires that excess funds be used to fund repayments or a reserve account in a certain amount before any additional distributions may be made. In the future, these arrangements may restrict the cash flows available for payment of principal and interest on our debt obligations.
 
 
40

 

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

Off-Balance Sheet Arrangements
 
Operating Lease - We entered into an office lease with U.S. Bank National Association as the landlord. The lease was effective April 22, 2012 with a term through August 31, 2015. The lease is for 11,695 square feet of office space located at 220 South Sixth Street, Minneapolis, Minnesota. We are obligated to pay base rent plus common area maintenance and a share of the building operating costs. Minimum lease payments under the lease are as follows:

2014
 
$
104,000
 
2015
 
$
70,000
 
Total
 
$
174,000
 
 
Credit Risk
 
We review the credit risk associated with our portfolio of life insurance policies when estimating its fair value. In evaluating the policies’ credit risk we consider insurance company solvency, credit risk indicators, economic conditions, ongoing credit evaluations, and company positions. We attempt to manage our credit risk related to life insurance policies typically by purchasing policies issued only from companies with an investment grade credit rating by either Standard & Poor’s, Moody’s, or A.M. Best Company.  As of December 31, 2013, 99.09% of our life insurance policies, by face value benefits, were issued by companies that maintained an investment grade rating (BBB- or better) by Standard & Poor’s.  See the table disclosing the concentration risk of our ten largest insurance company holdings as of December 31, 2013 under “Business–Portfolio Credit Risk Management” on page 61.
 
Interest Rate Risk
 
Our credit facility is floating-rate financing. In addition, our ability to offer interest rates that attract capital (including in the offer and sale of Renewable Secured Debentures) is generally impacted by prevailing interest rates. Furthermore, while our other indebtedness provides us with fixed-rate financing, our debt coverage ratio is calculated in relation to our total cost of financing. Therefore, fluctuations in interest rates impact our business by increasing our borrowing costs, and reducing availability under our debt financing arrangements. Furthermore, we calculate our portfolio earnings based upon the spread generated between the return on our life insurance portfolio and the cost of our financing. As a result, increases in interest rates will reduce the earnings we expect to achieve from our investments in life insurance policies.
 
Non-GAAP Financial Measures
 
We use non-GAAP financial measures when evaluating our financial results, for planning and forecasting purposes, and for maintaining compliance with covenants contained in our borrowing agreements. Non-GAAP financial measures disclosed by management are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These non-GAAP financial measures are not in accordance with GAAP and may be different from non-GAAP measures used by other companies, including other companies within our industry.  This presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for comparable amounts prepared in accordance with GAAP. See the notes to our consolidated financial statements and our audited financial statements contained herein.
 
We have elected to carry our investments in life insurance policies at fair value in accordance with ASC 325-30, Investments in Life Insurance Contracts . Accordingly, we value our investments in life insurance policies at the conclusion of each reporting period in accordance with GAAP fair value accounting principles.  In addition to GAAP, we are required to report non-GAAP financial measures to Autobahn/DZ Bank under certain financial covenants made to that lender under our revolving credit facility. As indicated above, we also use non-GAAP financial reporting to manage and evaluate the financial performance of our business.
 
 
41

 
 
GAAP-based fair value requires us to mark-to-market our investments in life insurance policies, which by its nature, is based upon Level 3 measurements that are unobservable.  As a result, this accounting treatment imports financial market volatility and subjective inputs into our financial reporting. We believe this type of accounting reporting is at odds with one of the key attractions for purchasing and owning a portfolio life insurance policies: the non-correlated nature of the returns to be derived from such policies. Therefore, in contrast to a GAAP-based fair valuation, we seek to measure the accrual of the actuarial gain occurring within the portfolio of life insurance policies at their expected internal rate of return based on statistical mortality probabilities for the insureds (using primarily the insured’s age, sex and smoking status). The expected internal rate of return tracks actuarial gain occurring within the policies according to a mortality table as the insureds’ age increases. By comparing the actuarial gain accruing within our portfolio of life insurance policies against our costs during the same period, we can estimate, manage and evaluate the overall financial profitability of our business without regard to mark-to-market volatility. We use this information to balance our life insurance policy purchasing and manage our capital structure, including the issuance of debt and utilization of our other sources of capital, and to monitor our compliance with borrowing covenants. We believe that these non-GAAP financial measures provide information that is useful for investors to understand period-over-period operating results separate and apart from fair value items that may, or could, have a disproportionately positive or negative impact on results in any particular period.
 
Our credit facility requires us to maintain a “positive net income” and “tangible net worth” each of which are calculated on an adjusted non-GAAP basis on the method described above, without regard to GAAP-based fair value measures.  In addition, our revolving credit facility requires us to maintain an “excess spread,” which is the difference between (i) the weighted average of our expected internal rate of return of our portfolio of life insurance policies and (ii) the weighted average of our credit facility’s interest rate.  These calculations are made using non-GAAP measures in the method described below, without regard to GAAP-based fair value measures.

In addition, our Renewable Secured Debentures and Series I Secured notes require us to maintain a “debt coverage ratio” designed to ensure that the expected cash flows from our portfolio of life insurance policies is able to adequately service our total outstanding indebtedness. In addition, the indenture for our Renewable Secured Debentures requires us to maintain a “subordination ratio” which limits the total amount of indebtedness that can be issued senior in rank to the Renewable Secured Debentures and Series I Secured notes. These ratios are calculated using non-GAAP measures in the method described below, without regard to GAAP-based fair value measures.

Adjusted Non-GAAP Net Income .  Our credit facility requires us to maintain a positive net income calculated on an adjusted non-GAAP basis. We calculate the adjusted net income by recognizing the actuarial gain accruing within our life insurance policies at the expected internal rate of return of the policies we own without regard to fair value.  We net this actuarial gain against our costs during the same period to calculate our net income on a non-GAAP basis.
                 
   
Year Ended
 
   
2013
   
2012
 
GAAP net income (loss)
 
$
(195,000
)
 
$
(1,013,000
)
Unrealized fair value gain (1)
    (39,338,000 )     (27,856,000 )
Adjusted cost basis increase (2)
    38,627,000       25,936,000  
Accrual of unrealized actuarial gain (3)
    21,822,000       4,794,000  
Total adjusted non-GAAP income (4)
  $ 20,916,000     $ 1,861,000  
 

(1)
Reversal of unrealized fair value gain of life insurance policies for current period.
(2)
Adjusted cost basis is increased to include those acquisition and servicing expenses that are not capitalized by GAAP.
(3)
Accrual of actuarial gain at expected internal rate of return based on investment cost basis for the period.
(4)
We must maintain an annual positive consolidated net income, calculated on a non-GAAP basis, to maintain compliance with our revolving credit facility with DZ Bank/Autobahn. 
 
 
42

 
 
Adjusted Non-GAAP Tangible Net Worth .  Our revolving credit facility requires us to maintain a tangible net worth in excess of $15 million calculated on an adjusted non-GAAP basis. We calculate the adjusted tangible net worth by recognizing the actuarial gain accruing within our life insurance policies at the expected internal rate of return of the policies we own without regard to fair value.  We net this actuarial gain against our costs during the same period to calculate our tangible net worth on a non-GAAP basis.
 
As of December 31,
 
2013
   
2012
 
GAAP net worth (1)
 
$
19,231,000
   
$
22,644,000
 
Less intangible assets (2)
   
(6,068,000
)
   
(3,650,000
)
GAAP tangible net worth
   
13,163,000
     
18,994,000
 
Unrealized fair value gain (3)
   
(114,744,000
)
   
(75,406,000
)
Adjusted cost basis increase (4)
   
106,201,000
     
67,123,000
 
Accrual of unrealized actuarial gain (5)
   
49,666,000
     
27,845,000
 
Total adjusted non-GAAP tangible net worth (6)
 
$
54,286,000
   
$
38,556,000
 
 

(1)
Includes termination of redeemable member’s interest prior to corporate conversion and preferred stock classified as temporary equity.
(2)
Unamortized portion of deferred financing costs and pre-paid insurance.
(3)
Reversal of cumulative unrealized fair value gain or loss of life insurance policies.
(4)
Adjusted cost basis is increased by acquisition and servicing expenses which are not capitalized under GAAP.
(5)
Accrual of cumulative actuarial gain at expected internal rate of return based on investment cost basis.
(6)
We must maintain a total adjusted non-GAAP tangible net worth of $15 million to maintain compliance with our revolving credit facility with DZ Bank/Autobahn.

Excess Spread . Our revolving credit facility requires us to maintain a 2.00% “excess spread” between our weighted-average expected internal rate of return of our portfolio of life insurance policies and the credit facility’s interest rate. A presentation of our excess spread and our total excess spread is set forth below. Management uses the “total excess spread” to gauge expected profitability of our investments, and uses the “excess spread” to monitor compliance with our borrowing covenants.
 
As of December 31,
  2013     2012
 
Weighted-average expected IRR (1)
   
12.21
%
   
12.84
%
Weighted-average revolving credit facility interest rate (2)
   
6.19
%
   
2.02
%
Excess spread (3)
   
6.02
%
   
10.82
%
Total weighted-average interest rate on indebtedness for borrowed money (4)
   
7.20
%
   
5.39
%
Total excess spread
   
5.01
%
   
7.45
%
 

(1)
This represents the weighted-average expected internal rate of return of the life insurance policies as of the measurement date based upon our investment cost basis in the insurance policies and expected cash flows from the life insurance portfolio. Our investment cost basis is calculated as our cash investment in the life insurance policies, without regard to GAAP-based fair value measurements, and is set forth below:
 
Investment Cost Basis
 
As of December 31,
 
2013
   
2012
 
GAAP fair value
 
$
234,673,000
   
$
164,317,000
 
Unrealized fair value gain (A)
   
(114,744,000
)
   
(75,406,000
)
Adjusted cost basis increase (B)
   
106,201,000
     
67,123,000
 
Investment cost basis (C)
 
$
226,130,000
   
$
156,034,000
 
 
 
43

 
 

 
(A)
This represents the reversal of cumulative unrealized GAAP fair value gain of life insurance policies.
 
(B)
Adjusted cost basis is increased to include those acquisition and servicing expenses that are not capitalized by GAAP.
 
(C)
This is the full cash investment cost basis in life insurance policies from which our expected internal rate of return is calculated.

(2)
This is the weighted-average revolving credit facility interest rate as of the measurement date.
(3)
We must maintain an excess spread of 2.00% relating to our revolving credit facility to maintain compliance under such facility.
(4)
Represents the weighted-average interest rate paid on all outstanding indebtedness as of the measurement date, determined as follows:
 
Outstanding Indebtedness
 
As of December 31,
  2013     2012  
Revolving credit facility
 
$
79,000,000
   
$
71,000,000
 
Series I Secured notes
   
29,744,000
     
38,570,000
 
Renewable Secured Debentures
   
134,891,000
     
57,609,000
 
Total
 
$
243,635,000
   
$
167,179,000
 
             
Interest Rates on Indebtedness
           
Revolving credit facility
   
6.19
%
   
2.02
%
Series I Secured notes
   
8.35
%
   
8.22
%
Renewable Secured Debentures
   
7.53
%
   
7.65
%
Weighted-average interest rates on indebtedness
   
7.20
%
   
5.39
%
 
Debt Coverage Ratio and Subordination Ratio. Our Renewable Secured Debentures and Series I Secured notes require us to maintain a “debt coverage ratio” of less than 90%.  The “debt coverage ratio” is calculated by dividing the sum of our total indebtedness by the sum of our cash and cash equivalents and the net present value of the life insurance portfolio. The “subordination ratio” for our Renewable Secured Debentures is calculated by dividing the total indebtedness that is senior to Renewable Secured Debentures and Series I Secured notes by the sum of the company’s cash and cash equivalents and the net present value of the life insurance portfolio. The “subordination ratio” must be less than 50%.  For purposes of both ratio calculations, the net present value of the life insurance portfolio is calculated using a discount rate equal to the weighted average interest rate of all indebtedness.
 
As of December 31,
 
2013
   
2012
 
Life insurance portfolio policy benefits
 
$
740,648,000
   
$
572,246,000
 
Discount rate of future cash flows
   
7.20
%
   
5.39
%
Net present value of life insurance portfolio policy benefits
 
$
302,761,000
   
$
248,702,000
 
Cash and cash equivalents
   
39,283,000
     
29,590,000
 
Total Coverage
 
$
332,044,000
   
$
278,292,000
 
                 
Revolving credit facility
   
79,000,000
     
71,000,000
 
Series I Secured notes
   
29,744,000
     
38,570,000
 
Renewable Secured Debentures
   
134,891,000
     
57,609,000
 
Total Indebtedness
 
$
243,635,000
   
$
167,179,000
 
                 
Debt Coverage Ratio
   
71.23
%
   
60.07
%
Subordination Ratio
   
23.10
%
   
25.51
%
 
As of December 31, 2013, we were in compliance with both the debt coverage ratio and the subordination ratio as required under our related financing agreements for Renewable Secured Debentures and Series I Secured notes.
 
 
44

 
 
BUSINESS

Overview

We are engaged in the emerging secondary market for life insurance policies. We acquire life insurance policies in the secondary market from policy owners desiring to sell their policies at a discount to the face value of the insurance benefit. Once we purchase a policy, we continue paying the policy premiums in order to ultimately collect the face value of the insurance benefit. We seek to hold the individual policies to maturity, in order to ultimately collect the  policy’s benefit upon the insured’s mortality. Our strategy is to build a profitable (purchased at discounts sufficient to provide a positive return on investment ) and large (greater than 300 lives) portfolio of policies that are well diversified in terms of insurance carriers and the mortality profiles of insureds. We believe that diversification among insurers, mortality profiles, and medical conditions will lower our overall risk exposure, and that a larger number of individual policies (diversification in overall number) will provide our portfolio with greater actuarial  stability. See “—Our Portfolio” below for additional information.

As of December 31, 2013, we owned approximately $740.6 million in face value of life insurance policy benefits covering 239 lives with an aggregate cost basis of approximately $226 million. Aggregate cost basis includes our acquisition costs and ongoing maintenance and carrying costs. We have acquired this portfolio through a combination of the  sale of secured notes by a subsidiary and our revolving credit facility. Our objective is to earn returns from the life insurance policies we purchase in the secondary market which are greater than the costs necessary to purchase and finance those policies to their maturity. We expect to accomplish our objective by:
     
 
 ●
purchasing life insurance policies with expected internal rates of returns in excess of our cost of capital;
     
 
 ●
paying the premiums and costs associated with the life insurance policy until the insured’s mortality;
     
 
 ●
obtaining a large and diverse portfolio to mitigate actuarial risk;
     
 
 ●
maintaining diversified funding sources to reduce our overall cost of financing;
     
 
 ●
engaging in hedging strategies that reduce potential volatility to our cost of financing; and
     
 
 ●
maintaining rigorous portfolio monitoring and servicing practices.
 
We intend to apply the proceeds of this offering, along with approximately $100 million potentially available to DLP Funding II under the revolving credit facility with Autobahn/DZ Bank, of which $21 million is currently available (subject to borrowing base limitations) and amounts we raise under our ongoing public offering of Renewable Secured Debentures, to expand the portfolio of insurance policies we own, and finance those policies until their maturity. See also “Use of Proceeds.”

Market

  Life insurance companies earn substantial revenue windfalls due to the lapse and surrender of many insurance policies. These revenue windfalls have enabled life insurance companies to issue policies with reduced premiums. These two business practices create a profit opportunity for the life insurance secondary market. The profit opportunity is the difference, or “spread,” between (i) the cost of purchasing and maintaining a life insurance policy over the insured’s lifetime, and (ii) the policy’s benefit that will paid upon the insured’s mortality. The secondary market for life insurance policies has also been driven by the creation of life insurance policy pricing tools and actuarial modeling techniques developed by investors.

According to the American Council of Life Insurers Fact Book 2013 (ACLI), individuals owned over $11.22 trillion of face value of life insurance policies in the United States in 2012. This figure includes all types of policies, including term and permanent insurance known as whole life, universal life, variable life, and variable universal life. The secondary market for life insurance has developed around individuals aged 65 years or older owning either permanent insurance or term insurance convertible into permanent insurance. According to the ACLI, the average annual lapse rate and surrender rate of individual life insurance policies for 2012 was 5.9%, over $649 billion in face value of policy benefits in 2012 alone. These figures do not include group-owned life insurance, such as employer-provided life insurance, whose market totals over $8.01 trillion of face value of life insurance policies in the United States in 2012, and whose policies exhibit similar lapse and surrender rates according to the ACLI.
 
 
45

 
 
Owners of life insurance policies generally allow them to lapse or surrender the policies for a variety of reasons, including: (i) unrealistic original earnings assumptions made when the policy was purchased, combined with higher premium payments later in the term of the policy than initially forecasted; (ii) increasing premium payment obligations as the insured ages; (iii) changes in financial status or outlook which cause the insured to no longer require life insurance; (iv) other financial needs that make the insurance unaffordable; or (v) a desire to maximize the policy’s investment value. Rather than allowing a policy to lapse as worthless, or surrendering a life insurance policy at a fraction of its inherent value, the sale of a life insurance policy in the secondary market can bring significant value to the policy owner.  The life insurance secondary market often pays policy sellers amounts ranging from two to ten times the surrender value that would otherwise be offered by the insurance carrier.
 
The market opportunity for selling and purchasing life insurance policies in the secondary market is relatively new. According to Conning Research & Consulting (Conning), the secondary market for life insurance policies grew from $2 billion in 2002 to over $12 billion in face value of life insurance policy benefits purchased in 2008. During and after the 2009 credit crisis, the secondary market for life insurance contracted significantly, evidenced by Conning’s report that investors purchased approximately $2.0 billion in face value of life insurance benefits in 2012. Nevertheless, Conning reports that consumer demand for continued development for the secondary market remains strong, and there are indications of strengthening interest among investors. Conning reports that the fundamental appeal of the secondary market for life insurances remains that policy holders are offered value-added benefits and investors are offered assets with low correlation to equity markets and competitive returns. Conning concludes that, given the current economic condition and investor sentiment, demand for life settlements will increase, and the market’s largest growth will likely come from companies which attract capital for those assets.

The rapidly aging population of individuals aged 65 years and older in United States supports our market opportunity. According to the United States Census Bureau (Bureau) the population age 65 and older is expected to more than double between 2012 and 2060, from 43.1 million to 92.0 million. With the increase in the number of the “oldest old” being even more dramatic — those 85 and older are projected to more than triple from 5.9 million to 18.2 million, reaching 4.3 percent of the total population states the Bureau. Research published by Natixis Global Asset Management (NGAM) reports that retirees will be required to finance a larger portion of their retirement as the government’s ability to support them fades. In 2012, the State of Texas endorsed our industry by adopting legislation that enables individuals with life insurance to enter the Medicaid program provided they sell their life insurance policy in the secondary market and use the proceeds specifically for long-term care. Several states are considering similar legislation to deal with the increasing costs of providing long-term care.
 
To participate in the market opportunity, we have spent and intend to continue to spend significant resources: (i) developing a robust operational platform and systems for purchasing and servicing life insurance policies; (ii) obtaining requisite licensure to purchase life insurance in the secondary market; (iii) developing financing resources for purchasing and servicing life insurance policies; (iv) recruiting and developing a professional management team; (v) establishing origination relationships for purchasing life insurance policies in the secondary market; and (vi) developing a financing strategy to participate in this business sector. We believe that the implementation of our financing strategy, Renewable Secured Debentures (sometimes simply referred to in this prospectus as our “debentures”), offers us a unique opportunity to attract capital and lead the future development of the life insurance secondary market.
 
As the life insurance secondary market has grown, a regulatory framework has been established to oversee the sale of life insurance policies in the secondary market. Since 2007, there has been a dramatic increase in the number of states that have adopted legislation and regulations. Today, almost every state has adopted some version of model laws prohibiting business practices deemed to be abusive and generally requiring the licensing of life insurance purchasers and brokers, the filing and approval of purchase agreements, disclosure of transaction fees and periodic reporting requirements. The widespread adoption of this regulatory framework by states has brought about standardized practices and procedures for purchasing life insurance policies in the secondary market. In addition, several states have modified their laws to adopt notice requirements for the benefit of life insurance owners, alerting them to the existence of the secondary market before they surrender their life insurance policy or allow it to lapse.
 
 
46

 
 
We believe the strengthened regulatory framework, along with the emergence of best practices adopted within the life insurance secondary market, has led to a growing awareness of the secondary market among life insurance agents and financial advisors. We expect this growing awareness, along with the demographic factors described above, will lead to continued growth in the secondary market for life insurance policies.

The secondary market for life insurance policies has also attracted global investor interest because investments in these policies can provide non-correlated investment diversification. The ability for investors to invest in the life insurance asset class comes as a result of the development of life insurance policy pricing tools and actuarial modeling techniques for valuing portfolios of life insurance policies. Standardized life insurance pricing tools and actuarial modeling software, including life expectancies, have provided foundational support for the development of the life insurance secondary market. The appeal for investors to achieve non-correlated diversification appears strong, particularly after the global recession of 2008. The appeal of non-correlation is that the underlying investment return is independent of the factors contributing to economic downturns such as real estate values, commodity prices, and stock market indices. In addition, many life insurance policies represent payment obligations from highly rated life insurance companies. As a result, investors can evaluate the expected risk premium they receive for investing in the asset class as compared to the credit profile of the underlying insurance company. The risk premium offered by the asset class, along with the non-correlated return profile has attracted a large number of investors seeking investment opportunities in the life insurance secondary market. As innovation and investor awareness of the secondary market for life insurance increases, we expect continued investor interest in the asset class.
 
Company History

After we were founded in 2006, we developed a platform to evaluate, purchase, service, and track life insurance policies purchased in the secondary market. Our original model was to operate as a joint venture with WestLB, AG, a German commercial bank, with the goal of having the bank securitize and sell the life insurance policies we purchased. During 2006 and 2007, we built an institutional platform to underwrite, purchase, service, and track life insurance policies purchased in the secondary market in conjunction with a $250 million revolving credit facility we obtained from WestLB. In 2008, however, WestLB informed us that they were abandoning their effort to securitize and sell our life insurance portfolio in light of the global economic and financial crisis. This resulted in a material change to our business plan, as we had earlier purchased the portfolio of life insurance policies in DLP Funding per WestLB’s mandate with the expectation these policies would be sold through a securitization. Subsequently, in 2010 we sold the original portfolio owned by DLP Funding.

Since 2008, we have focused on establishing diversified funding sources whose investment expectation is based on the purchase and finance of life insurance policies to their maturity—a buy-and-hold strategy—as opposed to the securitized sale of those assets prior to maturity. In July 2008, our wholly owned subsidiary GWG DLP Funding II, LLC, or “DLP Funding II,” established a $100 million credit facility with Autobahn Funding Company, LLC, a bank-sponsored commercial paper conduit administered by DZ Bank AG Deutsche Zentral-Genossenschaftsbank, or “DZ Bank.” This credit facility was amended and restated in January 2013. In addition, our subsidiary GWG Life Settlements, LLC, or “GWG Life,” began selling Series I Secured notes to further finance the business. In January 2012, we began a registered public offering of our Renewable Secured Debentures in order to grow and diversify our portfolio.

Our Business Model

We generally purchase life insurance policies through secondary market transactions directly from the policy owner who originally purchased the life insurance in the primary market. Historically, we have purchased policies in the secondary market through a network of life insurance agents, life insurance brokers, and licensed providers who assist policy owners in accessing the secondary market.
 
 
47

 
 
Before we purchase a life insurance policy, we conduct an underwriting review. Our present underwriting review process generally includes obtaining at least two life expectancy estimates on each insured from third-party medical-actuarial firms. We generally base our life expectancy estimates on the average of two estimates. In some cases, we may obtain more than two life expectancy estimates. In those cases, we average the two life expectancy estimates that we believe are the most reliable of those we have received, based on our own analyses and conclusions. In this regard, the two life expectancy estimates we ultimately choose to average may not always be the most conservative ones we obtain.  In the case of small face policies, which we define as life insurance policies with less than $250,000 in face value of policy benefits, we may choose not to obtain life expectancies from third-party medical-actuarial firms, but rather use standard mortality tables to develop our own life expectancy of an insured. The policies we purchase are universal life insurance policies issued by rated life insurance companies. Universal life insurance is a type of permanent life insurance in which premium payments above the cost of insurance are credited to the “cash value” of the policy. The cash value is credited each month with interest based on the terms of the insurance policy agreement. If a universal life insurance policy were to lapse, the insured or other owner of the policy would nonetheless have a right to receive the cash value of the policy. Universal life insurance is different from “term” life insurance in that “term” life insurance does not have a cash value associated with it. We seek to purchase life insurance policies issued by rated life insurance companies with investment grade credit ratings by Standard & Poor’s (AAA through BBB), Moody’s (Aaa through Baa3), or A.M. Best Company (aaa through bbb). As of December 31, 2013, over 93.5% of life insurance policies in our portfolio were issued by companies rated “A” or better under Standard & Poor’s rating system. Many of our current underwriting review processes, including our policy of obtaining two life expectancy estimates from medical actuarial firms as described above, are undertaken in satisfaction of obligations under our revolving credit facility. As a result, we may in the future modify our underwriting review process if permitted under our borrowing arrangements.
 
The price we are willing to pay for the policy in the secondary market is primarily a function of: (i) the policy’s face value; (ii) the life expectancy of the individual insured by the policy; (iii) the premiums expected to be paid over the life of the insured; (iv) market competition from other purchasers; and (v) the particular underwriting characteristics of the policy, relative to the characteristics of our portfolio of life insurance policies.

We seek to earn profits by purchasing policies at discounts to the face value of the insurance benefit. We purchase policies at discounts that are expected to exceed the costs necessary to pay premiums and financing and servicing costs through the date of the insured’s mortality. We rely on the actuarial life expectancy assumptions to estimate the expected mortality of the insureds within our portfolio. We seek to finance our life insurance policy purchases and payment of premiums and financing costs, until we receive policy benefits, through the sale of the debentures, the use of our revolving line of credit, and with proceeds from this offering. In the past, we have also relied on the sale of Series A preferred stock and of our secured notes issued by our subsidiary GWG Life Settlements, LLC.

We believe the socio-economic and demographic trends strongly support the long-term development of our market opportunity and that our business model provides significant advantages to both owners of life insurance policies and investors. For owners of life insurance, selling in the secondary market often provides significant value over that offered by the insurance carrier. For investors, our earnings from life insurance policies are not correlated to traditional markets such as real estate, equity markets, fixed income markets, currency or commodities. We believe that by acquiring a large portfolio of well diversified life insurance policies will offer value to both owners of life insurance and investors seeking returns derived from non-correlated assets. We believe our financing strategy positions us as a leader in the secondary market of life insurance.   
 
We have built our business with what we believe to be the following competitive strengths:
     
 
 ●
Industry Experience : We have actively participated in the development of the secondary market of life insurance as a principal purchaser and financier since 2006. Our position within the marketplace has allowed us to evaluate over 36 ,000 life insurance policies for possible purchase, thereby gaining a deep understanding of the variety of issues involved when purchasing life insurance policies in the secondary market. We have participated in the leadership of various industry associations and forums, including the Life Insurance Settlement Association (LISA) and the Insurance Studies Institute (ISI). Our experience gives us confidence in building a portfolio of life insurance policies that will perform to our expectations.
     
 
 ●
Operational Platform : We have built an operational platform and systems for efficiently tracking, processing and servicing life insurance policies that we believe provide competitive advantages when purchasing policies in the secondary marketplace, and servicing the policies once acquired.
 
 
48

 
 
 
 ●
Origination and Underwriting Practices : We seek to purchase life insurance policies that meet published guidelines on what policies would be accepted in a rated securitization. We purchase only permanent life insurance policies we consider to be non-contestable and that meet stringent underwriting criteria and reviews. We consider a life insurance policy to be “non-contestable” once applicable state law prohibits the insurer from challenging the validity of the policy due to fraud. In this regard, state non-contestability laws generally require a period of one to two years to elapse after the initial issuance of the policy before that policy is considered non-contestable under state law. Non-contestability laws do not, however, prevent an insurer from challenging the validity of a policy procured by fraud for lack of an insurable interest at the time at which the policy was purchased (such as is the case with “stranger-originated” life insurance policies).
     
 
 ●
Origination Relationships : We have established origination relationships with over 300 life insurance policy brokers and insurance agents who submit policies for our purchase or financing. Our referral base knows our underwriting standards for purchasing life insurance policies in the secondary market, which provides confidence in our bidding and closing processes and streamlines our own due-diligence process. We expect to expand our origination relationships and channels with the proceeds of this offering.
     
 
 ●
Life Expectancy Methodology : We generally rely on two life expectancy estimates from independent third-party medical-actuarial underwriting firms to develop our own life expectancy estimate.  For a majority of our life insurance policy purchases, we rely on estimates obtained from 21st Services and AVS Underwriting to develop our life expectancy estimate. We may also obtain life expectancy estimates from Fasano Associates and Examination Management Services, Inc.
     
 
 ●
Pricing Software and Methodology : We use actuarial pricing methodologies and software tools that are built and supported by leading independent actuarial service firms such as Modeling Actuarial Pricing Systems, Inc. (“MAPS”) for calculating our expected returns.
     
   ● Diversified Funding : We have actively developed diversified sources for accessing capital markets in support of our buy-and-hold strategy for our portfolio of life insurance policies, ranging from institutional bank financing to a network of broker-dealers registered with the Financial Industry Regulatory Authority (“FINRA”), many of whom have participated in one or more of our Series I Secured note financing, our Series A preferred stock financing, or our Renewable Secured Debenture financing.
 
On the other hand, our business involves a number of challenges and risks described in more detail elsewhere in this prospectus, including the following:
     
 
 ●
 
Relatively New Market : The purchase and ownership of life insurance policies acquired in the secondary market is a relatively new and evolving market. Our ability to source and purchase life insurance policies at attractive discounts materially depends on the continued development of the secondary market for life insurance. This includes the solvency of the life insurance companies that pay the face value of the life insurance benefits, the accuracy of life expectancy assumptions, and other factors beyond our control.
     
 
 ●
Assumptions About Valuation of Our Assets : The valuation of our portfolio of life insurance policies, which is the principal asset on our balance sheet, requires us to make material assumptions that may ultimately prove to be incorrect. These assumptions include appropriate discount rates, cash flow projections, and actuarial life expectancies, any of which may ultimately prove to be inaccurate.
     
 
 ●
Ability to Expand Our Portfolio : Our business model relies on achieving actual results that are in line with the results we expect to attain from our investments in life insurance policy assets. In this regard, we believe that the larger the portfolio of life insurance policies we own, the greater likelihood we will achieve actuarial results matching our expected results. Although we plan to expand the number of life insurance policies we own using proceeds raised from the sale of our Renewable Secured Debentures and our common stock in this offering, we may be unable to meet this goal. And, even if we attain the goal, we may not achieve the actuarial results we expect.
 
 
49

 
 
 
 ●
Reliance on Financing : To date, we have chosen to finance our business almost entirely through the issuance of debt, including the sale of Renewable Secured Debentures, Series I Secured notes, and a senior revolving credit facility. Our business model expects that we will have continued access to financing in order to purchase a large and diversified portfolio of life insurance policies, and thereafter pay the attendant premiums and servicing costs of maintaining that portfolio. In building a larger portfolio of policies, our goal is to remain diversified in terms of insurance carriers and the medical conditions of insureds. We believe that diversification among insurers and medical conditions will lower our overall risk, and that a larger number of policies will provide our portfolio with greater actuarial stability. We will be required to rely on our access to financing until such time as we experience a significant amount of mortality within our portfolio and begin receiving significant revenues from the receipt of insurance policy benefits. Nevertheless, we may not receive insurance policy benefits that match our cash flow projections.
     
 
 ●
Risk of Investment in Life Insurance Policies : Our investments in life insurance policies have inherent risks, including fraud and legal challenges to the validity of the policies, as well as the possibility that the seller of the policy may have provided us with inaccurate or misleading information.
     
 
 ●
Effects of Regulation : Our business is subject to complex state regulation. Changes in state laws and regulations governing our business, or changes in the interpretation of such laws and regulations, could negatively affect our business.
 
Our business also involves certain other challenges and risks, described in the “Risk Factors” section of this prospectus.
 
Our Portfolio
 
Our portfolio of life insurance policies, owned by our subsidiaries as of December 31, 2013, is summarized below:
 
Life Insurance Portfolio Summary

Total portfolio face value of policy benefits
 
$
740,648,000
 
Average face value per policy
 
$
2,816,000
 
Weighted average face value per insured life
 
$
3,099,000
 
Weighted average age of insured (yrs.)
 
 
82.1
 
Average life expectancy estimate (yrs.)
 
 
7.25
 
Total number of policies
 
 
263
 
Total number of lives     239  
Demographics
64% Males;
36% Females
 
Number of smokers
3 insureds are
smokers
 
Largest policy as % of total portfolio
 
 
1.35
%
Average policy as % of total portfolio
 
 
0.38
%
Average annual premium as % of face value
 
 
3.07
%
 
Our portfolio of life insurance policies, owned by our subsidiaries as of December 31, 2013, organized by the insured’s current age and the associated policy benefits, is summarized below:

Distribution of Policy Benefits by Current Age of Insured
                   
Min Age
   
Max Age
 
Policy
Benefits
 
 
Distribution
 
65
   
69
 
$
8,156,000
 
 
 
1.10
%
70
   
74
 
 
42,017,000
 
 
 
5.67
%
75
   
79
 
 
186,411,000
 
 
 
25.18
%
80
   
84
 
 
269,314,000
 
 
 
36.36
%
85
   
89
 
 
219,179,000
 
 
 
29.59
%
90
   
95
 
 
15,571,000
 
 
 
2.10
%
Total
   
 
 
$
740,648,000
 
 
 
100.00
%
 
 
50

 
 
Our portfolio of life insurance policies, owned by our subsidiaries as of December 31, 2013, organized by the insured’s current age and number of policies owned, is summarized below:
 
Distribution of Policies by Current Age of Insured
 
Min Age
   
Max Age
 
Policies
 
 
Distribution
 
65
   
69
 
 
6
 
 
 
2.28
%
70
   
74
 
 
17
 
 
 
6.46
%
75
   
79
 
 
62
 
 
 
23.58
%
80
   
84
 
 
94
 
 
 
35.74
%
85
   
89
 
 
77
 
 
 
29.28
%
90
   
95
 
 
7
 
 
 
2.66
%
Total
   
 
 
 
263
 
 
 
100.00
%

Our portfolio of life insurance policies, owned by our subsidiaries as of December 31, 2013, 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

Min LE (Months)
   
Max LE
(Months)
 
Policy
Benefits
 
 
Distribution
 
144
   
172
 
$
13,000,000
 
 
 
1.76
%
120
   
143
 
 
107,674,000
 
 
 
14.54
%
96
   
119
 
 
199,027,000
 
 
 
26.87
%
72
   
95
 
 
167,919,000
 
 
 
22.67
%
48