GWG Holdings, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2017 GWG Holdings Inc. Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. Now I would like to turn the call to Mr. Dan Callahan. Please go ahead.

[Dan Callahan:]

Thank you, and good afternoon, everyone. Welcome to the GWG Holdings third quarter 2017 earnings call and our inaugural webcast that includes slides that illustrate the information we will be discussing today. On the call with me today are Jon Sabes, our Chairman and CEO; and Bill Acheson, Chief Financial Officer. Following our remarks, we'll be happy to take your questions. You will have to call in, in order to ask a question live. Some statements made on the call today, along with any projected financial results including forward-looking statements, are subject to certain risks and uncertainties. Any forward-looking statements made on the call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events. A sample list of factors and risks that could cause actual results to be materially different from forward-looking statements can be found in our earnings release and in our most recent 10-K and 10-Q reports. During the call, you'll hear references to various non-GAAP financial measures, which we believe enhance understanding of our performance. Reconciliation of the non-GAAP numbers to their respective GAAP numbers can be found in the press release available on our website. Please note that today's conference call is being recorded and will be available as a webcast. Replay details are available by going to our website at gwgh.com and through the Investor Relations tab. And with that, I will turn it over to Jon Sabes, Chairman and CEO, of GWG Holdings.

[Jon Sabes:]

Thank you, Dan, and thank you for everyone tuning in today and following our Q3 earnings report. So we're using slides today, which is a new feature. We hope that it's helpful in terms of communicating where we're at and where we're going with the company. And so this is all new and great. So let's start with purpose. I would like to start with purpose because it reminds us of what it is we're doing and why. For those of you who can see the slides, there is a individual in the slide, that is Mr. Napoleon Hill. He has in his hand a book, Think and Grow Rich. Napoleon authored what we think is the first practical guide of personal achievement and we use a lot of his work to inform us on how we get to our own goals. And he reminds us that we need to be purposeful in what it is we're trying to achieve to get to those goals. So as to that, consumers. Consumers own life insurance. We are so focused on bringing postretirement financial solutions to consumers who own life insurance. Investors. Investors who are seeking yield from non-correlated assets and financial advisers who are looking for value-added products and services to enhance their business. In sum, we are working on industry innovation for the life insurance industry. And foundationally, we're talking about the life insurance product, and on secondary market principles that what we can do with that. And later, on Insurtech, and what we can – how we can use breakthrough technology to enhance and move this industry forward. So let's come to consumers. This past quarter, I had the great pleasure of meeting John and Donna Mcmullen, that's featured on the slide there. John is a retired Vietnam vet. He served as a marine in a recon unit. And if you haven't seen Ken Burns documentary on Vietnam, I suggest you invest the 18 hours of viewing to learn more about that story and John McMullen and what he went through. I bring it out because we had the opportunity to serve John and Donna with the services we offer. Donna is a trusted companion, found an appointed agent through Google search. They brought their life insurance policy to us, and we were able to transact and exchange that policy, pay off the loan against their policy, through which they would have had cancellation of debt incurred if they would have surrendered it. And we were able to pay that loan off and give them the resources to visit their grandchildren and continue to live a dignified life. These were two of the finest individuals that I have met in a long time. And it reminds me of what it is we are doing to help consumers who own life insurance maximize the value of their policies. This story brings the quote to mind, which is You can succeed fast and quickest by helping others, Napoleon Hill. And then in the short existence of our company's history, we have delivered over $457 million, almost $0.5 billion of value to probably about 2,000 consumers who owned life insurance. This is a compelling opportunity for the consumers who own life insurance and we can compare that value to around $30 million in cash surrender value. So this is a compelling opportunity for the consumers who own life insurance and the market that stands to serve them. When we think about the market, according to Conning, this is a $187 billion annual market opportunity, according to their research. Compare that to $2.1 billion in policy benefits that were sold in 2016, you're looking at – this industry has just scratched the surface and the drivers that are driving this market opportunity are obvious. So as a company, we have been highly focused on how to extend this market opportunity and how the GWG becomes a leader in it. So you may have heard, if you have been following us, our D100 strategy. I spoke about this in Q2. I suggested that we would really be in the position to report on the success of the overall execution of this strategy at year-end or in March when we report Q4. But let me just highlight what that strategy is and how it is we are doing what we expect to do, which is expand this market? We are contracting with the life insurance distribution hierarchy. This hierarchy involves IMOs or independent marketing organizations, BGAs or broker general agents, and agents who work under this distribution in order to access their clients and the policies that are in force. We use our Appointed Agent Program as the means by which we are able to do this and our life insurance in the secondary market. And this strategy is a result of the work that we've been doing with Chris Orestis, who now has been with the company close to eight months. And we are just retooling our direct effort under the strategy. We branded this – the LifeCare Exchange and we are really excited about the opportunity that this program has to expand that market that we've been so focused on building. The next slide that we're going to show just gives you some early indication of what we're seeing. Here in the slide is three BGAs, broker general agents, and the policies that these BGAs have sold. And we are now working with these BGAs and their underlying agents to uncover opportunities to bring our LifeCare Exchange. In total, you're looking at over 7,000 life insurance policies that we deem as qualified policies, totaling roughly almost $4 billion in face. So these are big numbers and we're just getting started. The average policy size is relatively small compared to historical market, $300,000 to $500,000 in face value. And this is the majority of life insurance that exists in the marketplace. Market participants have not figured out how to access the broad-based market opportunity that exists with the secondary market. And here at GWG, we've been highly focused on how to do this. It's a complicated effort, but we are on the forefront of this. And like I said, by year-end and in March when we report back, we'll able to show you conclusively how many of these policies are beginning to drop through as we continue to execute this strategy and then be able to give you guidance on how might that look like in the future. We're super excited about this and I'm very pleased to share with you these numbers today. In terms of the industry and building out our D100 strategy, this is true industry innovation. We're literally bringing consumers practically a new class of products based on secondary market principles. And the distribution is interested in these products and regulators are supportive of these products. And GWG will be the leader in developing these products and bringing it to the market. In terms of investors, we've seen growing demand for the assets that we own. This is, in fact, increasing the prices of the policies that we have to pay in the traditional life settlement broker market and decreasing the yields that we're able to obtain. This is good in terms of – our portfolio is growing in terms of its overall value, but it produces some pressure for us to continue to buy policies at the yields we want when we're in a competitive environment. This also is good though from the sense of D100, to the extent we can develop D100 to have a steady, large source and growing source of policies, it creates value for shareholders. Investors continue to be interested in this asset for the reasons we have been talking about for years; non-correlation, investment-grade rated credit and an absolute return strategy that will generate returns. So let me turn now to Insurtech, an industry innovation in a little different way. I'm going to spend a little bit of time to reset exactly what we're doing in terms of our Insurtech subsidiary, Life Epigenetics. Again, we just introduced this business to the marketplace. And it's a moment to take a time – a moment to take a recess on what exactly it is. This is based on the science of epigenetics and epigenetics biomarkers and the work that Dr. Steve Horvath completed in 2013, when he discovered that we as humans have a biological age and a biological clock that is driven and measurable by epigenetic biomarkers. So what does this mean? What Dr. Horvath found out and discovered and published in 2013 was that two individuals who are 70 years of age will age differently. And he can measure what that difference is based upon the epigenetic biomarkers. And when I met with Dr. Horvath in 2015, and I said, so Dr. Horvath, let me understand this. Does the person that has the older biological age have a higher incidence of all-cause mortality. And he said, exactly. Yes, they do. And I said, have you ever heard of the life insurance industry? And he said, No, I have not. And it was from that basis that we began working together. And in 2016, Dr. Horvath filed for the patent of the DNA methylation and mortality predictor. And we licensed that patent or applied patent in 2017 and as the exclusive predictor for the global life insurance industry. So this is an all-cause mortality predictor that we own. Now we have also been working on other epigenetic biomarkers that are predictive for traditional underwriting factors. And these are predictors, a proprietary of GWG. This work's being done by Dr. Brian Chen, who was the first author with Dr. Horvath on all of this research. And we're finding that we can develop and own a variety of predictors that are applicable to the traditional underwriting methodology of the life insurance industry. So I had the pleasure and opportunity of rolling out Life Epigenetics recently in Las Vegas at the Insurtech Connect Conference. This is the insurance industry's largest technology conference. There were over 4,000 attendees there and many of them for the first time, they heard about epigenetics and Life Epigenetics. I can't tell you how proud I was to represent this company with Life Epigenetics at this conference. What we have is truly remarkable. Since our last call, we have been out talking with the major insurance companies and reinsurance companies about how epigenetics promises to enhance and evolve the business. I'm convinced that epigenetics and the predictors that we bring to the global industry will be foundational for the life insurance in the future. And that future is closer than you may think. In fact, we were very excited to announce that we have two insurance carriers who are engaged with us right now on some testing. One is a relatively small test with a large carrier. But the other – with again, another large carrier is a scale test. We're going to start in January a scale test of 10,000 units. We'll be comparing our epigenetic biomarkers against the traditional underwriting and we'll working with this carrier to discover how epigenetics can help improve their business. In total, we are a disruptive force in the life insurance industry. We've been active for over a decade in the secondary market to provide value to consumers. It's disruptive to the [consumer] – I'm sorry, the [indiscernible] surrender behavior that consumers have been exhibiting and carriers have been enjoying. At the same time, we've been providing yield to investors and we're truly innovating the industry with our epigenetic technology. I can't be more excited about the strategy that we're executing. We're highly focused and purposeful on those. And again, by year-end, in March, when we report our 10-K, I really expect to give you further guidance and further proof points on how we are exhibiting on these strategies and what they mean to value creation for common shareholders. With that, I'm going to turn the call over to Bill Acheson, our Chief Financial Officer. He's got a number of graphs to help enhance this presentation today. And we are thrilled to continue our conversation.

[William Acheson:]

Thanks, John. Welcome, everybody. I'm going to go through much of what I've gone through on previous calls, but we'll just do it in a little more detail. And we'll do it with a little more perspective, because this business is as we've said several times, it is a long-term business. And so you need to look at the various metrics that we'll go through on a longer-term basis. And so we figured that this would be maybe a little more meaningful to you. So starting from the top as we always do. We talk about our alternative investment sales because our financial advisers and our independent broker dealers are partners, who raise us capital to invest in this business. And it is a very capital intensive business. And as you can see from the graph in front of you, we have – our selling group is of record size. As we sit here today, we have over 6,000 advisers, 140-odd broker dealers and we're seeing a really still continued strong demand for non-correlated investments. So we're very happy with our selling group and the progress we've made in this group for the last really eight years that we've been raising capital through this group. From an investment sales perspective, we are – not surprisingly, when you think about the size of a selling group, but we are producing near-record results in terms of our investment sales. This is the third quarter in a row where we're above $50 million in capital raised. As you can see from the graph, it's roughly split 50-50 in the past four quarters, between our L Bonds and our redeemable preferred stock. So we're pleased that those are selling equally well. And we are seeing, as I mentioned, a continued supportive macroenvironment for alternatives. And I would also say that kind of leading on from what John had said about the interest of institutional investors, I think, the idea of investing in longevity-based assets is also becoming more mainstream. And so we're seeing this in record results in our alternative distribution. Now when we look at our portfolio, we see – we take a look at our purchases. And John really kind of set this up a little bit. Although our purchase volumes have rebounded from last quarter, you can see that they're down really from a high of say four or five quarters ago. And a lot of that has to do with the intense competition that we're seeing in the broker space. And while I think in the long run, interest from institutions and others in this market is definitely a positive. In the short term, it, as John mentioned, challenges us to buy the quantity of assets that we want, at the yields that we want. And in fact, just prior to this call, we were talking about the fact that we're seeing assets being priced at areas that we're just not super comfortable with. And we're seeing underwriting features that we don't want to have in our portfolio over the long term. And so in order to preserve the quality, we're sacrificing some quantity. And I would say that in the broker space that we would expect this to continue for the next quarter or so. Now John also mentioned relaunching our D100 business, which – we are no stranger to direct, as you can see from the graph. We've been active in the direct market for the better part of two years, and as John mentioned, we are very optimistic about our D100 business. And I do think the broker space is still a viable space over time, but I think now is the time to be more cautious as it relates to the assets we put on in that channel. From the portfolio overall perspective, it's growing really nicely and it's looking really good. We're about at 28% year-over-year growth. That's net of maturities. And importantly, the diversification within the pool – within the policies is increasing. And that will lead to two things. One that will lead to more consistent cash flow, which we'll look at on the next slide, but also it begins to bring in the ability to use alternative financing for the portfolio. And by that, really what I mean is the securitization. And for those who've been following us for the last couple of years, we've talked about the possibility of getting a rated deal and doing a securitization. Or at least, this concept that the bigger the pool gets, the more financing options that we have. And I think we're starting to see that. We've seen more interest and more reality in the securitization market. And it may be something that we pursue in the future. But the point is, is that our portfolio continues to grow. And I think, over the next medium term here, we're going to be presented with other options to create more value for the company. So taking a look further here at the breakdown of the life insurance policies by age, again, aging very nicely. You can see in the yellow bar. We are over $600 million of face amount of benefits on insurance greater than 85. We are now up to $168 million of insurance benefits on those insurers aged 90 or older. And so this portfolio – again, as you think of the long term, we've been building it for nine years and it may still be a while yet. But as this marches forward, these cash flows will be realized. Now just as a side note, Q4 and Q1 historically have been the high benefits of the four quarters of the year. We seem to have recognized the most of those benefits in this quarter that we're in now and the first quarter. So let's look at our benefit realization. And we are beginning to see more consistency. And this is really evidenced by the circle on the graph that just shows the fact that over the last six consecutive quarters, the cash flow coming from the portfolio has been 95% or better of the premiums that we have had to pay on those policies over the trailing 12 months, and this is a important statistic to follow. And following on to my earlier comment. In Q4 to date, so October first through today, we disclosed this in our press release, we've realized $15 million of benefits already this quarter. And this really brings up a couple of points. Number one, the cash flows are still going to be lumpy. And you can see here, in the first five weeks of a quarter, we already have 50% more than we had in all of Q2. So expect this number to continue to bounce around. But it also begins to maybe validate our previous history that Q4 and Q1 are historically high quarters. So we're off to a good start in that regard. Looking at our balance sheet, we have talked a lot about improving our balance sheet and growing one that is appropriate for a large portfolio and for growth. And we've done that. We continue our strong asset growth. We reported a record amount of stockholders equity, as you can see on the graph. And the line charts just shows you that the leverage has come down into a comfortable range for us and for the size of our balance sheet. What is not on here and it's on our press release, a couple of other actions that we took around retiring our Series I Secured Notes, which was some debt that we had outstanding. And redeeming our Series A Preferred Stock, which was a 10% preferred stock, that had quite a heavy convert option into the common. So by redeeming that, we not only relieved ourselves of a 10% dividend payment, but we also eliminated a potentially very dilutive security to our common shareholder. So that happened in the quarter which we're very happy with. Next, let's take a look at the liquidity. We define liquidity here as cash and restricted cash, plus any policy benefits receivable. And the reason we look at this is because we want to make sure that we have enough cash around to provide a cushion for cash flow disruptions or delays. And that would be buying policies, servicing the debt, managing redemptions. And as you have a cash flow profile that is yet to be super consistent, you need to keep cash around. So we have quite a bit of liquidity. We'll talk more about the senior facility at the end of this presentation. But just for this graph, over time, the senior facility that we just put in place is going to allow us to invest more of this cash. So I would think – depending upon how the cash comes from the portfolio, you'll see this number going down. But the good news is, we're starting from the right spot. We've got excess liquidity and now we're going to begin the process of drawing it into earning assets. First, take a look at our financial results. Look at the revenue and expense line up there. Our revenue is in the blue and it's still a bit volatile as it jumps around with benefits realized and with portfolio growth. Our SG&A line, which is the bar graph, kind of shows you that our SG&A, our non-interest costs are flattening out. But our interest costs continue to rise with our increased debt outstanding. Now our revenue in the past few quarters has been impacted by life expectancy updates. Now what is that? That is, in our portfolio, periodically, as required by our senior lender and by our internal policies, we update life expectancies on the portfolio, on the policies that we own, on certain ones. You can think of it as getting a new appraisal, if you will. And this is really just a feature of owning and maintaining a large portfolio of life insurance and these events are policy and situation specific. And so they occur. Forecasting them is very difficult and so we don't try to do so. But we thought you'd like to know and – as it is a feature of our P&L that will come and go with the timing and severity of these events. Taking a look now at our financial results from a GAAP basis. Our GAAP results are, as you can see, still highly correlated to our benefits and to our growth. And in quarters where we've had high amounts of policy benefits, we've been in positive territory GAAP wise or near breakeven. And that continues to be the case and will continue to be the case into the future. Obviously, in this quarter, we had some LE adjustments that were negative, partially offset by some discount rate adjustments. But this picture again viewed over the long term, I think, we believe will start to show more consistency, but we've yet to achieve that as we sit here at the end of the third quarter. So looking at our detailed GAAP results, we reported a net loss attributable to common shareholders of $7.6 million. That's $1.31 per basic and fully diluted share on revenue of $40.7 million, which is up 6% from the year ago period. We had a positive impact of discount rate change of about $8 million. This was partially offset by the LE adjustment I mentioned of $5.4 million. These are pretax numbers. We had revenue from new policy purchases of $7.2 million. And that was down $4.5 million from a year ago on this lower purchase volume. So you are seeing this manifest itself a little bit in the P&L. Realized gain this quarter was $7.4 million. That was up $3.2 million from the year ago period on a higher realized number of benefits. Those benefits totaled $9.7 million from eight policies in the third quarter of this year compared to $4.4 million – sorry, were up $4.4 million and on four policies in the one year ago period. Our total expenses for the quarter were $21.5 million. That was up 24% from a year ago, but I would point out in the graph – previous graph kind of showed this a little better was, our SG&A costs have really kind of plateaued. And although I do see future investment, we certainly do not expect the sizable increases that we've seen year-over-year. Looking at our non-GAAP measures. We project and calculate our non-GAAP measures to try to understand and to try to simulate the economic value that's sitting in the portfolio prior to the maturity event, to attempt to smooth out the income recognition and look at what is in the portfolio. And this graph on the screen right now shows you a few lines and we won't spend a lot of time on it, but the gold line is our – just our face amount of benefits. That's just the total policy that we have right now. The blue line is our cost basis in those policies and that dotted line is really the spread that is sitting in there. Now we don't know when that spread is going to come out, but we know it eventually is going to. And so to give you an example, if the entire portfolio were to mature tomorrow, we would collect the difference between the top of the gold line $1.6 billion and the top of the blue line, which is $600 million. Obviously, that's highly unlikely but that illustrates that there's a $1 billion worth of potential spread in there. And like I said, when that comes out and how that manifests itself is yet to be seen, but we try to measure that with our non-GAAP measure. So when you look at our non-GAAP results, we start with our net loss to common shareholders. We [indiscernible] our GAAP fair market value. We increase our cost basis to reflect the fact that for non-GAAP, we capitalize premiums and interest as opposed to expense them for GAAP. And then we simulate this income on a non-GAAP cost basis, which is the yield that we are accruing on that spread. And that was $9 million. If you total those all up and we reported an adjusted non-GAAP net income for this quarter of $5.4 million. Now finally, before we turn it back to Carmen for our Q&A. I want to spend a little time on the senior credit facility we had announced earlier and we talked a little bit about in our press release that we had closed an amended senior credit facility at the end of the quarter. And from a financial perspective, realizing the full value of these policy benefits is our primary goal. So we want this portfolio to remain in force, perpetually, so that we can collect the benefits. And this senior facility really supports that goal. It is a 10-year committed facility, which is similar to the facility that was amended, however, we increased our borrowing limit up to $300 million, which is significant. And also which is significant, we created the capacity to fund the premiums on the policies pledged to this facility for 10 years. So that means we have the premiums covered on our current policy – the substantial majority of our current policy for the next 10 years. So that does a couple of things. Number one, it reduces the liquidity risk, which is a risk we've talked to you about continually over time and it greatly reduces the liquidity risk. And as I mentioned earlier, it's going to allow us since we have our premium burden taken care of, it's going to allow us to carry less liquidity and put more of that cash into earning assets. And finally, it has a revolving feature, which is a new feature from the facility that it replaced. And it will allow us to create additional capacity for new policies as their current policies mature. So we view this as a facility that we're going to have for a long time. And it's not only going to be appropriate for the policies that sit there today, but we're going to be able to use it over the next 10 years really to build and grow our business. So a very significant result in Q3. So that's the end of my remarks. I will turn it back over to Carmen for a Q&A.

[Operator:]

[Operator Instructions] And our first question is from the line of William Gibson with Roth Capital Partners. Your line is open sir.

[William Gibson:]

Hi, my first question relates to that accounting number, which has always been crazy. Are they counting all the small policies to get to that big number?

[Jon Sabes:]

Yes. Bill. They are looking at the total outstanding around $12 trillion of in force life insurance owned by consumers in the United States.

[William Gibson:]

Okay. And the two insurance companies that are testing the epigenetics, did that come out of your Vegas trip, or – I guess, I'm just surprised that they're on at this early?

[Jon Sabes:]

Yes, Bill. Those did not come out of the Vegas trip at Insurtech Connect. Those came out of, again, our business development prospecting. We are in conversations throughout the industry right now with all the major reinsurers and major carriers.

[William Gibson:]

And is your plan for that, if it unfolds, is to license the technology? And will that be on the per policy basis or how do you see the business model?

[Jon Sabes:]

Yes. That's – we're still at point of discovery. I believe what one core part of this business will be akin to a testing company. So we will be providing our scale testing to insurance carriers to give them insight into both the traditional underwriting factors such as smoking, alcohol use, and a variety of things that we think we can derive from epigenetics as well as providing them with an all-cause mortality factor and that's Dr. Horvath's work. So clearly, that's the interest from the carriers, business development activity. Yes, I was – I've been very surprised by the quickness of a few of the more open-minded progressive carriers to grab onto this, but I will tell you that all of the conversations that we're having across the industry are one, very positive, very interested and I'm just thrilled with the opportunity. At Insurtech Connect, I felt as though we have the future of the industry in hand and no one else that I could tell anyways had anything close to it. So that's the primary business model. I think that we'll be working with carriers on. I don't know if that is exclusive on how we will capitalize on the opportunity. So more to come on that as we get further down the pike on conversations with the industry participants.

[William Gibson:]

Thank you, and then a question for Bill, your net present value figure in the Q, have you stopped providing that?

[William Acheson:]

No. It should be in there, Bill. It's still back in the MD&A section. There's a lot to look at it in there, I know. Thanks for the question.

[William Gibson:]

Thank you.

[Operator:]

[Operator Instructions] And our next question is from the line of Chance Carson with Intervest International. Your line is open.

[Chance Carson:]

Hi John and Bill, how are you doing?

[Jon Sabes:]

Good afternoon Chance. Good to hear from you.

[Chance Carson:]

Yes. Hi listen, Bill, you mentioned as cash flows – I'm sorry, as the credit facility is available to be used for investment purposes. I got the distinct impression of that means you're going to be phasing out the public bond offering and/or the preferred offering. I'm wondering, how many more months or years would you project you'll still have shelf products for us to sell to the public as in the L-Bond and the preferred stock. And I heard some mention and some I can't remember that this preferred too might be it. You just don't want more equity dilution. What are your thoughts on the availability of these two products for us to sell to our clients going forward?

[William Acheson:]

That's a great question, Chance. We have no plans on significantly changing and not using our retail distribution. I think, the best way to look at this facility is as a nice complement to the L-Bonds and the redeemable preferred because it provides the 10-year premium line, which is a great backstop to the products that we sell that you know so well, which are a bit shorter term but give us a nice cost of funds advantage and also diversifies our funding. I mean, one of the real benefits of maintaining relationships with people like you and with our investors is we have a very diversified funding base. So in the unlikely event, something were to happen to our capital provider, we want to maintain a presence in the market. So we don't see any major changes on the horizon regarding that. As it relates specifically to the preferred and individual offerings, when that one gets closer to completion, we're probably about halfway through that one. We'll certainly take a look at it and not meaning decisions as to what's next, but we're really happy with the business – the institutional line and we are really happy with our retail line as well.

[Chance Carson:]

Thanks. Any [indiscernible] when you get to critical mass, may be 1,000 policies or something? When would you anticipate we'd see another interest rate cut in the bonds?

[William Acheson:]

That's another good question, Chance. I don't have that forecast. We're pretty happy where we are right now with our yields. I think what will happen is, over time I don't expect it to be in the next quarter or so, but I think, over time, we'll look at what options become available for rating or something like that. But then, of course, we'll look at what the interest rate environment is at the time we do that. So as we sit here and think about our next let us call it two quarters worth of business, we don't have anything on the shelf right now to change the rates.

[Chance Carson:]

Okay, thanks. Another quick question, when – I'm sorry, the non-GAAP earnings – I forget how many millions of dollars you said, but you said the GAAP loss was about $1.31 a share. What does that $8 million or $9 million non-GAAP earnings relate to on a per share basis? Is it still a loss or is it a gain?

[William Acheson:]

No. It would be just under $1 a share, basic share gain.

[Chance Carson:]

How's that under $1 share non-GAAP earnings for this quarter compared to a year ago and kind of the trend for the year? I mean, I presume it's down a little, but how much?

[William Acheson:]

Yes, just give me one second and I'll pull that up. I have it here. Let's see. Versus the year ago period, yes, it's down a little bit. It was $7.6 million a year ago ended September 30 versus $5.4 million. So for some of the same reasons I mentioned, down a little bit. The non-GAAP tends to be a little more – a little less volatile by the way that we do it, but slightly under where we were a year ago.

[Chance Carson:]

Okay. And do you think that's just because, like you said, the rate of acquisition of the policies priced reasonably has been climbing due to the broker competition? Or is there some other feature? Is it any...?

[William Acheson:]

Given that you start with your GAAP net income, so whatever is running through GAAP will have an impact on your non-GAAP. But it's typically more related to – as policies mature and come out of the portfolio, what that does to the remaining portfolio in it, but generally moves in the same fashion as GAAP.

[Chance Carson:]

That makes sense. One last question, what is the estimated net asset value of the common stock these days or this quarter? I think, last quarter it was like $12 and change or something, if I remember?

[William Acheson:]

Well, we have stopped reporting it. So I don't have it right in front of me. I can certainly calculate it for you. It's not one that we use any longer. We have discontinued that a few quarters ago.

[Chance Carson:]

Why did you do that? Were the analysts kind of thinking that was…?

[William Acheson:]

We just thought that it was – that there was already so many different things that we use around, debt coverage ratio, around our non-GAAP, around how we describe yield. We didn't feel like another measure was really adding a significant amount of value. It's really what came down to it.

[Chance Carson:]

Okay. Remind me of the conversion price on the preferred to common? And what the percentage of conversion per annum is? Just quickly remind me of the features?

[Jon Sabes:]

I believe it's $12.50 a share. No?

[Chance Carson:]

$12.50.

[William Acheson:]

$12.75, and then the convert is up to 10% of the holdings.

[Chance Carson:]

Okay. And it was $10 conversion price or $18 or something. Why was it on the preferred one? It was much higher, wasn't it?

[Chance Carson:]

$15.

[Jon Sabes:]

Yes, $15.

[Chance Carson:]

Okay. Well, guys, I think you are doing a great job. And John, I am so excited about what's going on with the epigenetics. I think that has some potential real gains in the net asset value of the company as I'm sure you are. How do you contain your excitement?

[Jon Sabes:]

Thanks Chance, we are – it's the phrase I picked up, in the search for silver, don't pass by gold. But frankly we're just really focused on this industry. I mean, we think about kind of – we're starting with the backwaters of the life insurance product itself. And what it should look like? And how it should address consumers' needs? And then on the front-end, in terms of how it promises to be underwritten more efficiently, more accurately to be able to be issued frankly cheaper and faster. So it's a really compelling story, I think, we've built for the shareholders. And our message is being received, I think, broad and wide. We've got quite a bit of work to do. It's a big industry we're tackling, but it's exciting I think across the major initiatives we have underway.

[Chance Carson:]

Sure is. Final, final, final question, what's the thought on secondary offering, sale of more common shares to bring the liquidity up? As you know, the trading is very modest and the bid and ask spreads are pretty gappy.

[Jon Sabes:]

Yes, we feel your pain there. We're cognizant of it. We'd like to create liquidity in the common. Our feeling is that we want to see really some more proof points, as I mentioned, relative to D100 and Life Epigenetics. With a few more proof points, which I expect to be able to report to you in March after year-end, but technically, we get all of Q1 to kind of execute. I think, we have those proof points. For better or for worse, I truly believe it will be for better and that sets up the opportunity for the analysts to follow us for the investors who are really interested in the story to validate kind of the growth expectation as to the business. And that provides the platform for a properly executed secondary.

[Chance Carson:]

Now that makes sense. I agree with you pretty much. Thanks guys. I think you are doing a great job. My clients love your offerings, and so do I.

[Jon Sabes:]

Thanks Chance. I appreciate the support.

[Operator:]

[Operator Instructions] And our next question is from the line of William Gibson with Roth Capital Partners. Your line is open.

[William Gibson:]

One follow-up, when do you think we reach the tipping point for our life insurance agents joining?

[Jon Sabes:]

Well – Hi, Bill, I think we are on it right now. Those numbers I flashed relative to just our initial work with the life insurance distribution hierarchy are very strong. Our pipeline for business development is wide. I think we finally have found it relative to a message of exchanging life insurance for new value-added process services as opposed to a traditional life settlement. And so how we continue to execute that and continue to speak in the vernacular of the industry, exchanging one insurance product for another really will, I think, open the floodgates to the broader market to be much more transactional. When I look at the industry and I see that insurance companies regularly encourage and promote the exchange of, say, an annuity or a life insurance policy for the sale of, let's say, a long-term care insurance product. I guess they'll only allow the consumer to access the cash surrender value or the surrender values offered. I just find that there is a massive opportunity to deliver consumer value for the carriers that start to get a little bit more progressive, that want to sell their products based upon readily ascertainable market values for these assets that clients own. So that's kind of sort of the nature of the conversation that we're having across the industry and working and now contracting with large distribution aspects of the business allow us to – once these products are brought to market, be more prolific in their distribution. So we're getting close. It's a big industry. It's a long-winded answer to a short question, but we're as close to it as I've ever seen in my history of working with the company.

[William Gibson:]

Thank you.

[Operator:]

Thank you and ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to John Sabes for his final remarks.

[Jon Sabes:]

Great. Thank you again for everyone for tuning in to our Q3 call. I hope the slides and interface has been a value-added addition to our presentation. We look forward to continue to execute on the strategies we have talked about today, and reporting to you in Q4 results as to the further validation of our execution and our expectations of great things to come. So, thanks again. Have a great evening.

[Operator:]

And with that ladies and gentlemen, we conclude our conference for today. Thank you for dialing in. You may all disconnect.