10-Q 1 wmih-10q_20180331.htm 10-Q wmih-10q_20180331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2018

or

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

Commission file number 001-14667

 

WMIH Corp.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

91-1653725

(State or other jurisdiction

of incorporation)

 

(IRS Employer

Identification No.)

800 FIFTH AVENUE, SUITE 4100

SEATTLE, WASHINGTON

 

98104

(Address of principal executive offices)

 

(Zip Code)

(206) 922-2957

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Common Stock $0.00001 par value

 

206,714,132

(Class)

 

(Outstanding at May 1, 2018)

 

 


 

Forward-Looking Statements

Certain information included in this Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q that address activities, events, conditions or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business and these statements are not guarantees of future performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements may include the words “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “strategy,” “future,” “opportunity,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result” and similar expressions. Such forward-looking statements involve risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by such statements. Some of these risks are identified and discussed under Risk Factors in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. These risk factors will be important to consider in determining future results and should be reviewed in their entirety. These forward-looking statements are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that the events, results or trends identified in these forward-looking statements will occur or be achieved. Forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement, except as required by law.

* * * * *

As used in this Quarterly Report on Form 10-Q, unless the context requires otherwise, (i) the terms “Company,”  “we,” “us,” or “our” refer to WMIH Corp. (formerly WMI Holdings Corp.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp., without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp., without regard to its subsidiaries; (iv)  “WMMRC” means WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); (v)  “WMIIC” means WMI Investment Corp. (formerly a wholly-owned subsidiary of WMIH); and (vi) “Merger Sub” means Wand Merger Corporation (a wholly-owned subsidiary of WMIH).

 

 

 

1


WMIH CORP.

FORM 10-Q

INDEX

 

 

 

 

2


PART I

FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements.

WMIH CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(Unaudited)

 

March 31, 2018

 

 

December 31, 2017 (1)

 

ASSETS:

 

 

 

 

 

 

 

Investments held in trust:

 

 

 

 

 

 

 

Fixed-maturity securities

$

249

 

 

$

1,518

 

Cash equivalents held in trust

 

940

 

 

 

4,199

 

Total investments held in trust

 

1,189

 

 

 

5,717

 

Cash and cash equivalents

 

27,890

 

 

 

26,709

 

Fixed-maturity securities

 

2,904

 

 

 

2,142

 

Restricted cash

 

576,202

 

 

 

578,936

 

Accrued investment income

 

61

 

 

 

59

 

Other assets

 

679

 

 

 

558

 

Total assets

$

608,925

 

 

$

614,121

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Losses and loss adjustment reserves

 

408

 

 

 

474

 

Unearned premiums

 

 

 

 

39

 

Other liabilities

 

16,893

 

 

 

16,303

 

Total liabilities

 

17,301

 

 

 

16,816

 

Commitments and contingencies

 

 

 

 

 

 

 

Redeemable convertible series B preferred stock, $0.00001 par value; 600,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017; aggregate liquidation preference of $600,000,000 as of March 31, 2018 and December 31, 2017

 

503,713

 

 

 

503,713

 

Stockholders’ equity:

 

 

 

 

 

 

 

Convertible series A preferred stock, $0.00001 par value; 1,000,000 shares issued and outstanding as of March 31, 2018 and December 31, 2017; aggregate liquidation preference of $10 as of March 31, 2018 and December 31, 2017

 

 

 

 

 

Common stock, $0.00001 par value; 3,500,000,000 authorized; 206,714,132 and 206,714,132 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively

 

2

 

 

 

2

 

Additional paid-in capital

 

141

 

 

 

39

 

Retained earnings

 

87,768

 

 

 

93,551

 

Total stockholders’ equity

 

87,911

 

 

 

93,592

 

Total liabilities, redeemable convertible preferred stock and stockholders’ equity

$

608,925

 

 

$

614,121

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

(1) Balances derived from audited financial statements as of December 31, 2017.

 

3


WMIH CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts and share data)

(Unaudited)

 

 

Three months ended

March 31, 2018

 

 

Three months ended

March 31, 2017

 

Revenues:

 

 

 

 

 

 

 

Premiums earned

$

23

 

 

$

430

 

Net investment income

 

2,170

 

 

 

1,180

 

Total revenues

 

2,193

 

 

 

1,610

 

Operating expenses:

 

 

 

 

 

 

 

Losses and loss adjustment expense

 

62

 

 

 

94

 

Ceding commission expense

 

 

 

 

50

 

General and administrative expense

 

7,714

 

 

 

2,012

 

Loss contract reserve reduction

 

 

 

 

(916

)

Interest expense

 

 

 

 

610

 

Total operating expenses

 

7,776

 

 

 

1,850

 

Net operating loss

 

(5,583

)

 

 

(240

)

Other income:

 

 

 

 

 

 

 

Gain on change in fair value of derivative embedded conversion feature

 

 

 

 

(18,029

)

Total other income

 

 

 

 

(18,029

)

(Loss) income before income taxes

 

(5,583

)

 

 

17,789

 

Income tax expense (benefit)

 

 

 

 

 

Net (loss) income

 

(5,583

)

 

 

17,789

 

Redeemable convertible series B preferred stock dividends

 

(200

)

 

 

(4,500

)

Net (loss) income attributable to common and participating stockholders

$

(5,783

)

 

$

13,289

 

Basic net (loss) income per share attributable to common stockholders (Note 12)

$

(0.03

)

 

$

0.02

 

Shares used in computing basic net (loss) income per share

 

202,692,144

 

 

 

202,423,969

 

Diluted net (loss) income per share attributable to common stockholders (Note 12)

$

(0.03

)

 

$

0.02

 

Shares used in computing diluted net (loss) income per share

 

202,692,144

 

 

 

213,623,959

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

4


WMIH CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE

PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(Unaudited)

 

 

Series B Redeemable Convertible

Preferred Stock

 

 

 

Series A Convertible

Preferred Stock

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Additional

paid-in

capital

 

 

Retained earnings

 

 

Total stockholders’ equity

 

Balance at January 1, 2017

 

600,000

 

 

$

502,213

 

 

 

 

1,000,000

 

 

$

 

 

 

 

206,380,800

 

 

$

2

 

 

$

108,415

 

 

$

85,719

 

 

$

194,136

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,882

 

 

 

25,882

 

Redeemable convertible series B preferred cash dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,050

)

 

 

(18,050

)

Reduction of accrued fees incurred relating to Series B preferred stock issuance

 

 

 

 

1,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification of derivative asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(108,893

)

 

 

 

 

 

(108,893

)

Issuance of common stock under restricted stock compensation arrangement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

333,332

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

517

 

 

 

 

 

 

517

 

Balance at December 31, 2017

 

600,000

 

 

 

503,713

 

 

 

 

1,000,000

 

 

 

 

 

 

 

206,714,132

 

 

 

2

 

 

 

39

 

 

 

93,551

 

 

 

93,592

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,583

)

 

 

(5,583

)

Redeemable convertible series B preferred cash dividends

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(200

)

 

 

(200

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102

 

 

 

 

 

 

102

 

Balance at March 31, 2018

 

600,000

 

 

$

503,713

 

 

 

 

1,000,000

 

 

$

 

 

 

 

206,714,132

 

 

$

2

 

 

$

141

 

 

$

87,768

 

 

$

87,911

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 

 

5


WMIH CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

Three months ended

March 31, 2018

 

 

Three months ended

March 31, 2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net (loss) income

$

(5,583

)

 

$

17,789

 

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Amortization of premium or discount on fixed maturity securities

 

7

 

 

 

31

 

Net realized loss on sale of investments

 

4

 

 

 

2

 

Unrealized loss (gain) on trading securities

 

2

 

 

 

(21

)

Gain on derivative embedded conversion feature

 

 

 

 

(18,029

)

Equity-based compensation

 

102

 

 

 

140

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accrued investment income

 

(2

)

 

 

(28

)

Other assets

 

(121

)

 

 

(74

)

Cash equivalents held in trust

 

3,259

 

 

 

(1,029

)

Losses and loss adjustment reserves

 

(66

)

 

 

(188

)

Losses payable

 

 

 

 

(53

)

Unearned premiums

 

(39

)

 

 

(225

)

Accrued ceding commission expense

 

 

 

 

(6

)

Accrued interest on notes payable

 

 

 

 

(3

)

Loss contract reserve

 

 

 

 

(916

)

Other liabilities

 

3,890

 

 

 

(246

)

Total adjustments

 

7,036

 

 

 

(20,645

)

Net cash provided by (used in) operating activities

 

1,453

 

 

 

(2,856

)

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchase of investments

 

 

 

 

(19,974

)

Proceeds from sales and maturities of investments

 

494

 

 

 

47,513

 

Net cash provided by investing activities

 

494

 

 

 

27,539

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Fees incurred and paid relating to preferred stock issuance

 

(2,500

)

 

 

 

Redeemable convertible series B preferred stock dividends

 

(1,000

)

 

 

(4,500

)

Notes payable – principal repayments

 

 

 

 

(351

)

Net cash used in financing activities

 

(3,500

)

 

 

(4,851

)

(Decrease) increase in cash and cash equivalents

 

(1,553

)

 

 

19,832

 

Cash, cash equivalents and restricted cash, beginning of period

 

605,645

 

 

 

575,838

 

Cash, cash equivalents and restricted cash, end of period

$

604,092

 

 

$

595,670

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid during the period:

 

 

 

 

 

 

 

Interest

$

 

 

$

610

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

6


WMIH CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless otherwise indicated, financial information, including dollar values stated in the text of the notes to financial statements, is expressed in thousands.

References herein, unless the context requires otherwise, to (i) the terms “Company,” “we,” “us” or “our” generally are intended to refer to WMIH Corp. (formerly WMI Holdings Corp. and Washington Mutual, Inc.) and its subsidiaries on a consolidated basis; (ii) “WMIH” refers only to WMIH Corp. without regard to its subsidiaries; (iii) “WMIHC” refers only to WMI Holdings Corp. without regard to its subsidiaries; (iv) “WMMRC” means WM Mortgage Reinsurance Company, Inc. (a wholly-owned subsidiary of WMIH); (v) “WMIIC” means WMI Investment Corp. (formerly a wholly-owned subsidiary of WMIH); and (vi)“Merger Sub” means Wand Merger Corporation (a wholly-owned subsidiary of WMIH).

 

Note 1: The Company and its Subsidiaries

WMIH Corp.

WMIH Corp. (“WMIH”) is a corporation duly organized and existing under the laws of the State of Delaware since May 11, 2015. WMIH is the direct parent of WM Mortgage Reinsurance Company, Inc., a Hawaii corporation (“WMMRC”), and, until its dissolution on January 18, 2018, WMI Investment Corp., a Delaware corporation (“WMIIC”). Additionally, WMIH is the direct parent of Wand Merger Corporation, a Delaware corporation (“Merger Sub”).

Since emerging from bankruptcy on March 19, 2012 (the “Effective Date”), we have had limited operations other than WMMRC’s legacy reinsurance business, which is being operated in runoff mode. Since the Effective Date, our primary strategic objective has been to identify and consummate one or more acquisitions of an operating business, either through a merger, purchase, business combination or other form of acquisition. To that end, we have continued to seek, identify and evaluate acquisition opportunities of varying sizes across an array of industries for the purpose of facilitating an acquisition by WMIH of one or more operating businesses. Since 2014, in addition to management’s ongoing efforts, WMIH has worked with our strategic partner, an affiliate of KKR & CO. L.P. (together with its affiliates, “KKR”), to identify and evaluate potential acquisition opportunities.

On February 12, 2018, WMIH, Merger Sub and Nationstar Mortgage Holdings Inc., a Delaware corporation that is currently listed on the New York Stock Exchange under the ticker symbol “NSM” (“Nationstar”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into Nationstar (the “Nationstar Transaction” or the “Merger”), with Nationstar continuing as the surviving corporation and a wholly-owned subsidiary of WMIH. Subject to the terms and conditions of the Merger Agreement, at the effective time of the Merger (the “Merger Effective Time”) and as a result of the Merger, each share of Nationstar’s common stock issued and outstanding immediately prior to the Merger Effective Time (other than shares owned, directly or indirectly, by Nationstar, WMIH or Merger Sub or by any Nationstar stockholder who properly exercises and perfects appraisal of his, her or its shares under Delaware law) will be converted into the right to receive, at the election of the holder of such share, (i) $18.00 per share in cash, without interest, or (ii) 12.7793 shares of validly issued, fully paid and nonassessable shares of WMIH common stock, par value $0.00001 per share, subject in each case to pro rata cutbacks to the extent cash or stock is oversubscribed (the “Merger Consideration”). The aggregate amount of cash to be paid as Merger Consideration in the Merger is approximately $1.2 billion.

If we do not consummate the Nationstar Transaction or another Acquisition or Qualified Acquisition (as such terms are defined in our Amended and Restated Certificate of Incorporation (as amended, the “Certificate of Incorporation”)) on or prior to October 5, 2019 (the “Series B Redemption Date”), as such date may be extended in accordance with the provisions of our Certificate of Incorporation, the outstanding shares of WMIH’s 5.00% Series B Convertible Preferred Stock (the “Series B Preferred Stock”) would be required to be redeemed, as more fully described in Note 9: Capital Stock and Derivative Instruments.

As of March 31, 2018, WMIH was authorized to issue up to 3,500,000,000 shares of common stock, and up to 10,000,000 shares of preferred stock (in one or more series), in each case with a par value of $0.00001 per share.  As of March 31, 2018 and December 31, 2017, 206,714,132 shares, respectively, of WMIH’s common stock were issued and outstanding. As of March 31, 2018 and December 31, 2017, 1,000,000 shares of WMIH’s Series A Convertible Preferred Stock (the “Series A Preferred Stock”) were issued and outstanding.  As of December 31, 2017, 600,000 shares of WMIH’s 3% Series B Convertible Preferred Stock (the “Original Series B Preferred Stock”) were issued and outstanding.  On December 11, 2017, we announced an amendment of the Original Series B Preferred Stock (the “Series B Amendment”), which amendment became automatically effective at 12:00 a.m., New York City time, on January 5, 2018, and effected an exchange of the previously outstanding Original Series B Preferred Stock for shares of Series B Preferred Stock. As of March 31, 2018, 600,000 shares of Series B Preferred Stock were issued and outstanding.

7


WMMRC

WMMRC is a wholly-owned subsidiary of WMIH. Prior to August 2008 (at which time WMMRC became a direct subsidiary of Washington Mutual, Inc. (“WMI”), WMMRC was a wholly-owned subsidiary of FA Out-of-State Holdings, Inc., a second-tier subsidiary of Washington Mutual Bank (“WMB”) and third-tier subsidiary of WMI. WMMRC is a pure captive insurance company domiciled in the State of Hawaii. WMMRC was incorporated on February 25, 2000, and received a Certificate of Authority, dated March 2, 2000, from the Insurance Division of the State of Hawaii.

WMMRC was originally organized to reinsure private mortgage insurance risk for seven primary mortgage insurers then offering private mortgage insurance on loans originated or purchased by former subsidiaries of WMI. The seven primary mortgage insurers are United Guaranty Residential Insurance Company (“UGRIC”), Genworth Mortgage Insurance Corporation (“GMIC”), Mortgage Guaranty Insurance Corporation (“MGIC”), PMI Mortgage Insurance Company (“PMI”), Radian Guaranty Incorporated (“Radian”), Republic Mortgage Insurance Company (“RMIC”) and Triad Guaranty Insurance Company (“Triad”).

Due to the then deteriorating performance in the mortgage guarantee markets and the closure and receivership of WMB, the reinsurance agreements with each of the primary mortgage insurers were terminated or placed into runoff during 2008. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. As a result, effective September 26, 2008, WMMRC’s continuing operations consisted solely of the runoff of coverage associated with mortgages placed with the primary mortgage carriers prior to September 26, 2008. In runoff, an insurer generally writes no new business but continues to service its obligations under in force policies and otherwise continues as a licensed insurer. The reinsurance agreements with Triad, PMI, UGRIC and Radian were commuted on August 31, 2009, October 2, 2012, April 3, 2014 and October 23, 2017, respectively, and the related trust assets were distributed in accordance with the commutation agreements. In addition, the RMIC reinsurance agreement was terminated on February 2, 2018, and the remaining trust assets were distributed to WMMRC per the terms of the agreement. On February 13, 2018, the aggregate excess of loss reinsurance agreement between WMMRC and GMIC was terminated in accordance with the terms of the agreement.  The underlying trust and the related quota share agreement remain in place. As a result, WMMRC’s current continuing operations consist solely of the runoff of coverage associated with mortgages placed with the following two remaining carriers, GMIC and MGIC.

WMIIC

WMIIC was dissolved on January 18, 2018. As of December 31, 2017 and the date of its dissolution, WMIIC did not have any operations and was fully eliminated upon consolidation.

Merger Sub

On February 6, 2018, Merger Sub was formed as a wholly-owned subsidiary of WMIH.

Note 2: Significant Accounting Policies

Basis of Presentation

WMIH resumed timely filing of all periodic reports for a reporting company under the Exchange Act for all periods after emergence from bankruptcy on the Effective Date.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reporting. Certain information and footnote disclosures normally included in the financial statements and prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures included are appropriate. The condensed consolidated balance sheet as of December 31, 2017, included herein, was derived from the audited consolidated financial statements as of that date.

These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed in the Company’s Annual Report on Form 10-K, filed with the SEC on March 2, 2018. Interim information presented in the unaudited condensed consolidated financial statements has been prepared by management. In the opinion of management, the financial statements include all adjustments necessary for a fair presentation and that all such adjustments are of a normal, recurring nature and necessary for the fair statement of the financial position, results of operations and cash flows for the periods presented in accordance with GAAP. The results of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.

8


All significant intercompany transactions and balances have been eliminated in preparing the condensed consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Management has made significant estimates in certain areas, including valuing certain financial instruments, other assets and liabilities, the determination of the contingent risk liabilities, and in determining appropriate insurance reserves. Actual results could differ substantially from those estimates.

Fair Value of Certain Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Generally, for assets that are reported at fair value, the Company uses quoted market prices or valuation models to estimate their fair value. These models incorporate inputs such as forward yield curves, market volatilities and pricing spreads, utilizing market-based inputs where readily available. The degree of management judgment involved in estimating the fair value of a financial instrument or other asset is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are actively traded in the marketplace or whose values are based on readily available market value data, little judgment is necessary when estimating the instrument’s fair value. When observable market prices and data are not readily available, significant management judgment often is necessary to estimate fair value. In those cases, different assumptions could result in significant changes in valuation.

The Company classifies fixed-maturity investments as trading securities, which are recorded at fair value. As such, changes in unrealized gains and losses on investments held at the balance sheet date are recognized and reported as a component of net investment income on the condensed consolidated statement of operations. The Company believes fair value provides better matching of investment earnings to potential cash flow generated from the investment portfolio and reduces subjectivity related to evaluating other-than-temporary impairment on the Company’s investment portfolio.

The carrying value of cash and cash equivalents, restricted cash, accounts payable and accrued liabilities approximate their respective fair values because of their short-term nature.

The carrying value of the loss contract reserve, in periods during which such reserve exists, approximates its fair value and is based on valuation methodologies using discounted cash flows at interest rates which approximate the Company’s weighted-average cost of capital.

The carrying value of the derivative embedded conversion feature of the Series B Preferred Stock, in periods during which such embedded conversion feature was required to be bifurcated, was adjusted to its fair value as determined using Level 3 inputs described below under fair value measurement.  

The carrying value of notes payable, in periods during which such notes payable exist, approximates fair value based on time to maturity, underlying collateral, and prevailing interest rates.

Fair Value Measurement

The Company’s estimates of fair value for financial assets and financial liabilities are based on the framework established in the Financial Accounting Standards Board (“FASB”) Fair Value Measurements and Disclosures accounting guidance. The framework is based on the inputs used in valuation and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the fair value accounting guidance hierarchy is based on whether the significant inputs into the valuation are observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Company’s significant market assumptions.

The three levels of the hierarchy are as follows:

Level 1–Inputs to the valuation methodology are quoted prices for identical assets or liabilities traded in active markets.

Level 2–Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.

9


Level 3–Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the inputs that market participants would use.

Fair values are based on quoted prices in active markets when available (Level 1). The Company receives the quoted prices from a third party, nationally recognized pricing service. When quoted prices are not available, the Company utilizes a pricing service to determine an estimate of fair value. The fair value is generally estimated using current market inputs for similar financial instruments with comparable terms and credit quality, commonly referred to as matrix pricing (Level 2). These valuation techniques involve some level of management estimation and judgment. The Company recognizes transfers between levels in the fair value hierarchy at the end of the reporting period.

Fixed-Maturity Securities

Fixed-maturity securities consist of U.S. Treasury securities, obligations of U.S. government sponsored agencies and domestic and foreign corporate debt securities. Fixed-maturity securities held in trust are for the benefit of the primary insurers as more fully described in Note 3: Insurance Activity. Investments in fixed-maturity securities are reported at their estimated fair values and are classified as trading securities in accordance with applicable accounting guidance. Realized gains and losses on the sale of fixed-maturity securities are determined using the specific identification method and are reported as a component of net investment income within the condensed consolidated statement of operations.

Investments Held in Trust

Investments held in trust consist of cash equivalents, which include highly liquid overnight money market instruments, and fixed-maturity securities which are held in trust for the benefit of the primary insurers, as more fully described in Note 3: Insurance Activity and Note 4: Investment Securities, and are subject to the restrictions on distribution of net assets of subsidiaries as described below.

Third Party Restrictions on Distribution of Net Assets of Wholly-Owned Subsidiaries

The net assets of WMMRC are subject to restrictions on distribution from multiple sources, including the primary insurers who have approval control of distributions from the trust, and the Insurance Division of the State of Hawaii who has approval authority over distributions or intercompany advances.

Premium Recognition

Premiums assumed are earned on a daily pro-rata basis over the underlying policy terms. Premiums assumed relating to the unexpired portion of policies in force at the balance sheet date are recorded as unearned premiums. Unearned premiums also include a reserve for post default premium reserves. Post default premium reserves occur when a loan is in a default position and the servicer continues to advance the premiums. If the loan ultimately goes to claim, the premiums advanced during the period of default are subject to recapture. The Company records a default premium reserve based on information provided by the underlying mortgage insurers when they provide information on the default premium reserve separately from other reserves. The change in the post default premium reserve is reflected as a reduction or increase, as the case may be, in premiums assumed. The Company has recorded unearned premiums totaling zero and $39 thousand as of March 31, 2018 and December 31, 2017, respectively.

The Company recognizes premium deficiencies when there is a probable loss on an insurance contract. Premium deficiencies are recognized if the sum of the present value of expected losses and loss adjustment expenses, unamortized deferred acquisition costs, and maintenance costs, excluding intercompany charges, exceed expected future unearned premiums and anticipated investment income. Premium deficiency reserves have been recorded totaling $0.4 million and $0.3 million as of March 31, 2018 and December 31, 2017, respectively. Intercompany administrative costs are excluded from the computation of premium deficiencies.

The Company’s premium deficiency analysis was performed on a single book basis and includes all book years and reinsurance treaties aggregated together using assumptions based on the actuarial best estimates at the balance sheet date. The calculation for premium deficiency requires significant judgment and includes estimates of future expected premiums, claims, loss adjustment expenses and investment income as of the balance sheet date. To the extent ultimate losses are higher or premiums are lower than estimated, additional premium deficiency reserves may be required in the future.

10


Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, amounts due from banks, U.S. Treasury bills and overnight investments. Except as described above in Investments Held in Trust, the Company considers all amounts that are invested in highly liquid overnight money market instruments to be cash equivalents. The Federal Deposit Insurance Corporation (“FDIC”) insures amounts on deposit with each financial institution up to limits as prescribed by law. The Company may hold funds with financial institutions in excess of the FDIC insured amount, however, the Company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk on cash and cash equivalents.

Restricted Cash

Restricted cash includes proceeds of the Original Series B Preferred Stock offering held in escrow and included, through the termination of the Indentures (as defined in Note 7: Notes Payable) on October 2, 2017, amounts held for the express purposes of paying principal, interest and related fees on the Runoff Notes (as defined in Note 7: Notes Payable) pursuant to the terms of the Indentures.

Ceding Commission Expense

The Company is required to pay a ceding commission to certain primary insurers pursuant to certain reinsurance agreements.

Losses and Loss Adjustment Reserves

The losses and loss adjustment reserves include case basis estimates of reported losses and supplemental amounts for incurred but not reported (“IBNR”) losses. A default is considered the incident (e.g., the failure to make timely payment of mortgage payments) that may give rise to a claim for mortgage insurance. In establishing the losses and loss adjustment reserve, the Company based its estimates primarily on the ceded loss and loss adjustment reserves as provided by the primary mortgage guaranty carriers.

WMMRC has recorded reserves at the ceded case reserves and IBNR loss levels established and reported by the primary mortgage guaranty carriers as of March 31, 2018 and December 31, 2017, respectively. Management believes that the recorded aggregate liability for unpaid losses and loss adjustment expenses at period end represents the Company’s best estimate, based upon the available data, of the amount necessary to cover the current cost of losses. However, due to the inherent uncertainty arising from fluctuations in the persistency rate of mortgage insurance claims, the Company’s size and lack of prior operating history, external factors such as future changes in regional or national economic conditions, judicial decisions, federal and state legislation related to mortgage restructuring and foreclosure restrictions, claims denials and coverage rescissions by primary carriers and other factors beyond the Company’s control, it is not presently possible to determine whether actual loss experience will conform to the assumptions used in determining the estimated amounts for such liability at the balance sheet date. Accordingly, the ultimate liability could be significantly higher or lower, as the case may be, than the amount indicated in the financial statements and there can be no assurance that the reserve amounts recorded will be sufficient. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

Loss Contract Reserve

A loss contract reserve relating to contractual obligations of WMMRC was established at March 19, 2012 as a result of applying fresh start accounting and in compliance with Accounting Standards Codification (“ASC”) 805-10-55-21- Broad Transactions, which defines a loss contract as “a contract in which the unavoidable costs of meeting the obligation under the contract exceed the economic benefits expected to be received under it.”  The value of this reserve is analyzed quarterly and is adjusted accordingly.  The adjustment (if any) to the reserve produces an expense or contra-expense in the condensed consolidated statements of operations.

Derivatives

We evaluate our convertible debt, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted. This accounting treatment requires that the carrying amount of embedded derivatives be marked-to-market at each balance sheet date and carried at fair value. In the event that the fair value is recorded as a liability, the change in fair value during the period is recorded in the Statement of Operations as either income or expense. If an embedded derivative is no longer required to be separately accounted for due to conversion, exercise or modification to the terms of an instrument, the derivative is marked to fair value at the conversion, exercise or modification date and then the related fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

11


The classification of financial instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.

Management must determine whether an instrument (or an embedded feature) is indexed to our stock. An entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. The application of this exercise could affect the accounting for (i) certain freestanding warrants that contain exercise price adjustment features or contain contingently puttable cash settlement options, if any, and (ii) convertible notes containing anti-dilution protections and/or exercise price adjustment features.

The Company had recorded a derivative embedded conversion feature as a result of the issuance of the Original Series B Preferred Stock which was adjusted to its fair value as determined using Level 3 inputs described above under Fair Value Measurement.  The change in fair value of the derivative embedded conversion feature was calculated at each reporting date and recorded as other income or other expense on the statement of operations. As a result of the Series B Amendment, the embedded conversion feature was modified, and the derivative was marked to fair value at December 31, 2017 and then the related fair value was reclassified to equity in accordance with ASC 815-15-35-4 - Embedded Conversion Option that No Longer Meets Bifurcation Criteria, as more fully described in Note 9: Capital Stock and Derivative Instruments.

Other Liabilities

At March 31, 2018, the total balance of $16.9 million of other liabilities is comprised of $8.3 million of accrued fees relating to the Original Series B Preferred Stock offering and an accrual for professional fees and recurring business expenses currently payable of approximately $8.6 million. At December 31, 2017, the total balance of $16.3 million of other liabilities is comprised of $8.3 million of accrued fees relating to the Original Series B Preferred Stock offering, $2.5 million related to an extension of the escrow agreement related to the Series B Preferred Stock, an accrual for professional fees and recurring business expenses of approximately $4.7 million and $0.8 million of accrued cash dividends relating to the Original Series B Preferred Stock. The accrued fees would be paid in the event of a Qualified Acquisition, as more fully described in Note 6: Service Agreements and Related Party Transactions.

Comprehensive Income

The Company has no comprehensive income other than the net income disclosed in the condensed consolidated statement of operations.

Net Income Per Common Share

In calculating earnings per share, the Company follows the two-class method, which distinguishes between the classes of securities based on the proportionate participation rights of each security type in the Company's undistributed income. The Series A Preferred Stock and the Series B Preferred Stock are treated as one class for purposes of applying the two-class method, because they have substantially equal rights and share equally on an as converted basis with respect to income available to WMIH common stockholders.

Basic net income per WMIH common share is computed by dividing net income attributable to WMIH’s common stockholders by the weighted-average number of common shares outstanding for the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these are subject to repurchase.  Basic net income attributable to common stockholders is computed by deducting preferred dividends and the basic calculation of undistributed earnings attributable to participating securities from net income.

Diluted net income per WMIH common share is computed by dividing net income attributable to WMIH’s common stockholders by the weighted-average number of common shares outstanding during the period after subtracting the weighted-average of any unvested restricted shares outstanding, as these are subject to repurchase, and adding any potentially dilutive WMIH common stock equivalents outstanding during the period. Diluted net income attributable to common stockholders is computed by deducting preferred dividends and the diluted calculation of undistributed earnings attributable to participating securities from net income.

If common stock equivalents exist, in periods where there is a net loss, diluted net loss per common share would be equal to or less than basic net loss per common share, since the effect of including any common stock equivalents would be antidilutive.

12


Equity-Based Compensation

On May 22, 2012, WMIH’s Board of Directors (the “Board” or “Board of Directors”) approved the Company’s 2012 Long-Term Incentive Plan (the “2012 Plan”) so that awards of restricted stock could be made to its non-employee directors and to have a plan in place for awards of equity based compensation to executives and others in connection with the Company’s operations and future strategic plans. A total of 2.0 million shares of WMIH’s common stock were initially reserved for future issuance under the 2012 Plan, which became effective upon the Board approval on May 22, 2012. On February 10, 2014, the Board approved and adopted a First Amendment to the 2012 Plan, pursuant to which the number of shares of WMIH’s common stock reserved and available for grants under the 2012 Plan was increased from 2.0 million shares to 3.0 million shares, and the terms of the 2012 Plan were modified to permit such an increase through action of the Board, except when stockholder approval is necessary to comply with any applicable law, regulation or rule of any stock exchange on which WMIH’s shares are listed, quoted or traded. On February 25, 2015, the number of shares authorized and available for awards under the 2012 Plan was increased from 3.0 million to 12.0 million shares of WMIH’s common stock, subject to approval of stockholders of WMIH.  This approval was received at WMIH’s Annual Meeting of Stockholders on April 28, 2015. The 2012 Plan provides for the granting of restricted shares and other cash and share based awards. The value of restricted stock is generally determined using the fair market value determined to be the trading price at the close of business on the respective date the awards were granted.

Income Taxes

The Company follows the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the carrying amounts and tax bases of assets and liabilities and losses carried forward and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates and laws applicable to the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent that it is more likely than not that deferred tax assets will not be realized.

The Company recognizes the financial statement effects of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. Penalties and interest, of which there are none, would be reflected in income tax expense. Tax years are open to the extent the Company has net operating loss (“NOL”) carry-forwards available to be utilized currently.

On December 22, 2017, the Tax Cuts and Jobs Act, which reforms U.S. Tax legislation and related laws, was signed into law. One of the provisions of the new tax law reduces the Company’s U.S. federal corporate income tax rate from 35% to 21%. Our deferred tax assets, although fully reserved, have been revalued at the lower rate beginning in 2017. The Company continues to evaluate the impact of the new tax law on its financial condition and results of operations.

Dividend Policy

WMIH has paid no dividends on its common stock on or after the Effective Date and currently has no plans to pay a dividend on its common stock.

WMIH has paid $1.0 million and $18.0 million of cash dividends on its Series B Preferred Stock for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively. Additionally, WMIH has accrued unpaid and undeclared cash dividends of zero and $0.8 million, as of March 31, 2018 and December 31, 2017, respectively.

New Accounting Pronouncements

The Company has reviewed new accounting pronouncements issued between March 2, 2018, the filing date of our most recent Form 10-K, and the filing date of this Form 10-Q, and has determined that no pronouncements issued are relevant to the Company, and/or have a material impact on the Company’s consolidated financial position, results of operations or disclosure requirements. 

 

13


Note 3: Insurance Activity

The Company, through WMMRC, reinsures mortgage guaranty risks of mortgage loans originated by affiliates of the Company during the period from 1997 through 2008. WMMRC is (or was) a party to reinsurance agreements with UGRIC, GMIC, MGIC, PMI, Radian, RMIC and Triad. The agreements with UGRIC and Triad were placed into runoff effective May 31, 2008. The agreements with all other primary mortgage insurers were placed into runoff effective September 26, 2008. The reinsurance agreements with Triad, PMI, UGRIC and Radian were commuted on August 31, 2009, October 2, 2012, April 3, 2014, and October 23, 2017, respectively. The RMIC agreement was terminated on February 2, 2018.

All agreements between WMMRC and the primary mortgage insurers are on an excess of loss basis, except for a reinsurance treaty with GMIC during 2008, which is reinsured on a 50% quota share basis. Pursuant to the excess of loss reinsurance treaties, WMMRC reinsures a second loss layer which ranges from 5% to 10% of the risk in force in excess of the primary mortgage insurer’s first loss percentage which range from 4% to 5%. Each calendar year, or book year, is treated separately from other years when calculating losses. In return for accepting a portion of the risk, WMMRC receives, net of ceding commission, a percentage of the premium that ranges from 25% to 40%.

As security for the ceding insurers, WMMRC has entered into separate trust agreements with each of the primary mortgage insurance companies whereby a portion of the funds from premiums assumed are held in trust accounts for the benefit of each separate insurer. Pursuant to the terms of the reinsurance agreements, WMMRC is required to keep such assets in trust for a minimum of five years and is subject to claims for up to ten years from termination of obligations arising from the last year in which insurance business was written prior to runoff. Release of funds from the trust by WMMRC requires approval from the primary mortgage insurance companies.

Premiums assumed and earned are as follows for the periods ended March 31, 2018 and 2017, respectively:

 

 

Three months ended March 31, 2018

 

 

Three months ended March 31, 2017

 

Premiums (released) assumed

$

(16

)

 

$

205

 

Change in unearned premiums

 

39

 

 

 

225

 

Premiums earned

$

23

 

 

$

430

 

The components of the liability for losses and loss adjustment reserves are as follows as of March 31, 2018 and December 31, 2017, respectively:

 

March 31, 2018

 

 

December 31, 2017

 

Case-basis reserves

$

12

 

 

$

151

 

IBNR reserves

 

1

 

 

 

1

 

Premium deficiency reserves

 

395

 

 

 

322

 

Total losses and loss adjustment reserves

$

408

 

 

$

474

 

 

Losses and loss adjustment reserve activity are as follows for the three months ended March 31, 2018 and the year ended December 31, 2017, respectively:  

 

 

 

 

 

 

 

 

 

Three months ended

March 31, 2018

 

 

Year ended

December 31, 2017

 

Balance at beginning of period

$

474

 

 

$

811

 

Incurred - prior periods

 

62

 

 

 

19

 

Paid or terminated - prior periods

 

(128

)

 

 

(356

)

Total losses and loss adjustment reserves

$

408

 

 

$

474

 

 

The loss contract reserve balance is analyzed and adjusted quarterly. The balance in the reserve was zero as of both March 31, 2018 and December 31, 2017. The value of this reserve was decreased to zero during the year ended December 31, 2017 and is anticipated to remain at zero.  The reserve remained unchanged during the three months ended March 31, 2018 and decreased by $0.9 million during the three months ended March 31, 2017. In periods during which a reduction in the loss contract reserve occurs, a corresponding decrease in expense is reflected in the condensed consolidated statement of operations for the respective period.  

 

14


Note 4: Investment Securities

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of total fixed-maturity securities and total fixed-maturity securities held in trust at March 31, 2018, are as follows:  

 

March 31, 2018

 

Class of securities:

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

Obligations of U.S. government sponsored enterprises

$

2,250

 

 

$

 

 

$

(8

)

 

$

2,242

 

Corporate debt securities

 

917

 

 

 

 

 

 

(6

)

 

 

911

 

Total fixed-maturity securities

 

3,167

 

 

 

 

 

 

(14

)

 

 

3,153

 

Less total unrestricted fixed-maturity securities

 

2,917

 

 

 

 

 

 

(13

)

 

 

2,904

 

Total fixed-maturity securities held in trust

$

250

 

 

$

 

 

$

(1

)

 

$

249

 

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of total fixed-maturity securities and total fixed-maturity securities held in trust at December 31, 2017, are as follows:

 

December 31, 2017

 

Class of securities:

Amortized Cost

 

 

Gross Unrealized Gains

 

 

Gross Unrealized Losses

 

 

Estimated Fair Value

 

Obligations of U.S. government sponsored enterprises

$

2,249

 

 

$

 

 

$

(10

)

 

$

2,239

 

Corporate debt securities

 

1,425

 

 

 

 

 

 

(4

)

 

 

1,421

 

Total fixed-maturity securities

 

3,674

 

 

 

 

 

 

(14

)

 

 

3,660

 

Less total unrestricted fixed-maturity securities

 

2,151

 

 

 

 

 

 

(9

)

 

 

2,142

 

Total fixed-maturity securities held in trust

$

1,523

 

 

$

 

 

$

(5

)

 

$

1,518

 

 

Amortized cost and estimated fair value of fixed-maturity securities at March 31, 2018 by contractual maturity are as follows:

 

 

Amortized

Cost

 

 

Estimated

Fair Value

 

Maturity in:

 

 

 

 

 

 

 

2018

$

3,167

 

 

$

3,153

 

Total fixed-maturity securities

$

3,167

 

 

$

3,153

 

 

Actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Net investment income for the three months ended March 31, 2018 and 2017, respectively, is summarized as follows:

 

 

Three months ended

March 31, 2018

 

 

Three months ended

March 31, 2017

 

Investment income:

 

 

 

 

 

 

 

Amortization of premium or discount on fixed-maturity securities

$

(7

)

 

$

(31

)

Investment income on fixed-maturity securities

 

17

 

 

 

178

 

Interest income on cash and cash equivalents

 

2,271

 

 

 

1,014

 

Realized net (loss) from sale of investments

 

(4

)

 

 

(2

)

Unrealized (loss) on cash equivalents held at period end

 

(105

)

 

 

 

Unrealized (loss) gain on trading securities held at period end

 

(2

)

 

 

21

 

Net investment income

$

2,170

 

 

$

1,180

 

 

15


The following table shows how the Company’s investments are categorized in accordance with fair value measurement, as of March 31, 2018:

 

March 31, 2018

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Class of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government sponsored enterprises

 

997

 

 

 

1,245

 

 

 

 

 

 

2,242

 

Corporate debt securities

 

911

 

 

 

 

 

 

 

 

 

911

 

Total fixed-maturity securities

 

1,908

 

 

 

1,245

 

 

 

 

 

 

3,153

 

Money market funds

 

28,684

 

 

 

 

 

 

 

 

 

28,684

 

Total

$

30,592

 

 

$

1,245

 

 

$

 

 

$

31,837

 

The following table shows how the Company’s investments are categorized in accordance with fair value measurement, as of December 31, 2017:

 

December 31, 2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Class of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. government sponsored enterprises

 

995

 

 

 

1,244

 

 

 

 

 

 

2,239

 

Corporate debt securities

 

1,421

 

 

 

 

 

 

 

 

 

1,421

 

Total fixed-maturity securities

 

2,416

 

 

 

1,244

 

 

 

 

 

 

3,660

 

Money market funds

 

30,780

 

 

 

 

 

 

 

 

 

30,780

 

Total

$

33,196

 

 

$

1,244

 

 

$

 

 

$

34,440

 

 

A review of the fair value hierarchy classifications of the Company’s investments is conducted quarterly. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications are reported as transfers in or transfers out of the applicable Level at the end of the calendar quarter in which the reclassifications occur. During the three months ended March 31, 2018 and the year ended December 31, 2017, zero and $2.4 million, respectively, of investments were transferred from Level 2 to Level 1 as a result of improving market conditions for short-term and investment grade corporate securities.

 

 

January 1, 2018 to

March 31, 2018

 

January 1, 2017 to

 December 31, 2017

 

 

Transfers
from Level 1 to
Level 2

 

 

Transfers
from Level 2
to Level 1

 

 

Transfers
from Level 1 to
Level 2

 

 

Transfers
from Level 2
to Level 1

 

Class of securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of US government sponsored enterprises

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

995

 

Corporate debt securities

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

1,421

 

Total transfers

$

—  

 

 

$

—  

 

 

$

—  

 

 

$

2,416

 

 

16


Note 5: Income Taxes

For the three months ended March 31, 2018, the Company recorded a net loss attributable to common and participating stockholders of approximately $5.8 million. The Company projects tax losses for the year ending December 31, 2018, assuming that circumstances remain unchanged and not taking into account the Nationstar Transaction or any other acquisitions.  Due to this projected tax loss and the existence of NOL carry-forwards which have a 100% valuation allowance recorded to reduce them to zero, the Company has not recorded an income tax expense or benefit for the three months ended March 31, 2018. The Company recorded no income tax expense or benefit for the year ended December 31, 2017 due to tax losses in that period.

The Company files a consolidated federal income tax return. Pursuant to a tax sharing agreement, WMMRC’s federal income tax liability is calculated on a separate return basis determined by applying 35% prior to the 2017 tax reform and 21% for 2018 and future years to taxable income, in accordance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), that apply to property and casualty insurance companies. WMIH, as WMMRC’s parent, pays federal income taxes on behalf of WMMRC and settles the federal income tax obligation on a current basis in accordance with the tax sharing agreement. WMMRC made no tax payments to WMIH during the three months ended March 31, 2018 or the year ended December 31, 2017 associated with the Company’s tax liability from the preceding year.

On December 22, 2017, the Tax Cuts and Jobs Act, which reforms U.S. Tax legislation and related laws, was signed into law. One of the provisions of the new tax law reduces the Company’s U.S. federal corporate income tax rate from 35% to 21% resulting in a reduction of the deferred tax asset relating to the NOL carry-forward of $842.9 million and a corresponding change in the related valuation allowance. Our deferred tax assets, although fully reserved, have been revalued at the lower rate as of March 31, 2018 and December 31, 2017. The Company continues to evaluate the impact of the new tax law on its financial condition and results of operations.

Deferred federal income taxes arise from temporary differences between the valuation of assets and liabilities as determined for financial reporting purposes and income tax purposes. Temporary differences principally relate to discounting of loss reserves, accruals, net operating losses and unrealized gains and losses on investments. As of March 31, 2018 and December 31, 2017, the Company recorded a valuation allowance equal to 100% of the net deferred federal income tax asset due to uncertainty regarding the Company’s ability to realize these benefits in the future.

On March 19, 2012, WMIH emerged from bankruptcy. Prior to emergence, WMI abandoned the stock of WMB, thereby generating a worthless stock deduction of approximately $8.4 billion which gave rise to an NOL for the year ended December 31, 2012. Under Section 382 of the Code (“Section 382”), and based on the Company’s analysis, we believe that the Company experienced an “ownership change” (generally defined as a greater than 50% change (by value) in our equity ownership over a three-year period) on March 19, 2012, and our ability to use our pre-change of control NOLs and other pre-change tax attributes against our post-change income was limited. The Section 382 limitation is applied annually so as to limit the use of our pre-change NOLs to an amount that generally equals the value of our stock immediately before the ownership change multiplied by a designated federal long-term tax-exempt rate. Due to applicable limitations under Section 382 and a reduction of tax attributes due to cancellation of indebtedness, a portion of these NOLs were limited and will expire unused. We believe that the total available and utilizable NOL carry-forward at December 31, 2017 was approximately $6.0 billion. At March 31, 2018, there was no limitation on the use of these NOLs. These NOLs will begin to expire in 2031. The Company’s ability to utilize the NOLs or realize any benefits related to the NOLs is subject to a number of risks. (See Part I-Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017).

As of March 31, 2018 and December 31, 2017, WMIH had a capital loss carryforward of $1.6 million, most of which is subject to expiration in 2018.

The Company accounts for uncertain tax positions in accordance with the income tax accounting guidance. The Company has analyzed filing positions in the federal and state jurisdictions where it is required to file tax returns, as well as the open tax years in these jurisdictions. Tax years 2011 to present are subject to examination by the Internal Revenue Service. The Company believes that its federal income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain federal income tax positions have been recorded. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for federal income taxes. The Company did not incur any federal income tax related interest income, interest expense or penalties for the three months ended March 31, 2018 or for the year ended December 31, 2017.

Note 6: Service Agreements and Related Party Transactions

WMMRC has engaged a Hawaii-based service provider, Marsh Management Services, Inc., to provide accounting and related management services for its operations. In exchange for performing these services, WMMRC pays such service provider a management fee.

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WMIH entered into an Investment Management Agreement and an Administrative Services Agreement with WMMRC on March 19, 2012. Each of these agreements was approved by WMMRC’s primary regulator, the Insurance Division of the State of Hawaii. Total amounts incurred under these agreements totaled $0.3 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. The expense and related income eliminate on consolidation.

Under the terms of the Investment Management Agreement, WMIH receives from WMMRC a fee equal to the product of (x) the ending dollar amount of assets under management during the calendar month in question and (y) .002 divided by 12. WMIH is responsible for investing the funds of WMMRC based on applicable investment criteria and subject to rules and regulations to which WMMRC is subject.

Under the terms of the Administrative Services Agreement, WMIH receives from WMMRC a fee of $110 thousand per month. WMIH is responsible for providing administrative services to support, among other things, supervision, governance, financial administration and reporting, risk management and claims management as may be necessary, together with such other general or specific administrative services that may be reasonably required or requested by WMMRC in the ordinary course of its business.

On March 22, 2012, WMIH and the WMI Liquidating Trust (the “Trust”) entered into a Transition Services Agreement (the “TSA”). Pursuant to the TSA, the Trust makes available certain services and employees including the services of our Chief Legal Officer and Secretary and our Controller. The TSA provides the Company with basic infrastructure and support services to facilitate the Company’s operations. The TSA, as amended, extends the term of the agreement through September 30, 2018, with automatic renewals thereafter for successive additional three-month terms, subject to non-renewal at the end of any additional term upon written notice by either party at least 30 days prior to the expiration of the additional term.

On or about October 14, 2014, the Trust filed a lawsuit in King County Superior Court in the State of Washington against 16 former directors and officers of WMI (the “D&O Litigation”). The Trust’s complaint alleged, among other things, that the defendants named therein breached their fiduciary duties to WMI and committed corporate waste and fraud by squandering WMI’s financial resources.  In connection with the settlement of the D&O Litigation, during the year ended December 31, 2015, among the Trust, certain former directors and officers of WMI and certain insurance carriers that underwrote director and officer liability insurance policies for the benefit of WMI and its affiliates (including such former directors and officers), such insurance carriers agreed to pay the Trust $37.0 million, of which $3.0 million was placed into a segregated reserve account (the “RSA Reserve”) to be administered by a third party pursuant to the terms of a Reserve Settlement Agreement (the “RSA”).

Based on elections of certain holders of claims in connection with our bankruptcy prior to the Effective Date, WMIH retained an economic interest in certain litigation proceeds, if any, recovered by the Trust, including those related to the D&O Litigation. During the years ended December 31, 2017, 2016 and 2015, WMIH had other income of $123 thousand, $123 thousand and $7.8 million, respectively, as a result of its receipt of its share of net litigation proceeds related to the D&O Litigation. As of March 31, 2018, $1.5 million remained in the RSA Reserve.  Under the RSA, funds are released from the RSA Reserve to the Trust if and when certain designated conditions are satisfied.  If and when these funds are released to the Trust, and to the extent WMIH is entitled to receive such funds, it is anticipated the Trust will make payments to WMIH in an amount equal to WMIH’s share of the litigation proceeds.  Due to the contingent nature of future distributions from the RSA Reserve, there can be no assurance that WMIH will receive any distributions from the remaining balance in the RSA Reserve in the future. During the three months ended March 31, 2018, WMIH has recorded no income from litigation proceeds.  As of March 31, 2018, WMIH has not received any litigation proceeds from the Trust, other than as described above.  

In preparation for the offering of the Original Series B Preferred Stock, WMIH engaged KKR Capital Markets LLC (“KCM”), an affiliate of KKR & Co. L.P., to act as a joint book-running manager for the Original Series B Preferred Stock offering.  KCM also acted as an initial purchaser of the Original Series B Preferred Stock. During the year ended December 31, 2015, as a result of satisfying a post-closing covenant to reincorporate in the State of Delaware within 180 days following the closing of the Series B Preferred Stock offering, we paid $8.25 million to KCM.  Upon consummation of a “Qualified Acquisition” (as such term is defined in Article VI of WMIH’s Certificate of Incorporation), we will pay KCM an additional fee (the “KCM Deferred Fee”) of $8.25 million.  We have recorded the KCM Deferred Fee in “other liabilities” on our condensed consolidated balance sheet and this amount was included in “accrued fees relating to Series B Preferred Stock issuance” on our condensed consolidated statements of cash flows. The Nationstar Transaction will constitute a “Qualified Acquisition” pursuant to the terms of the WMIH Certificate of Incorporation. 

In connection with entering into the Merger Agreement, on February 12, 2018, WMIH entered into (i) a letter agreement with KCM, pursuant to which KCM agreed to act as a non-exclusive financial advisor to WMIH with respect to the Merger and is entitled to receive a transaction fee equal to $25 million and (ii) a fee letter with KCM, pursuant to which KCM will (a) act as a placement agent with respect to a bridge financing facility of up to $2.75 billion to be entered into by WMIH in connection with the Merger, (b) provide capital markets advice and other assistance as agreed to with WMIH and (c) receive a fee equal to 0.25% of the aggregate amount of the commitments in respect of such bridge financing facility (other than in respect of any of such amounts committed by certain affiliates of KCM), payable upon the initial funding under the bridge financing facility. Based on the current size of the committed facility, the fees payable to KCM as placement agent for arranging the bridge facility are expected to be approximately $6.875 million.  

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On February 12, 2018, pursuant to an Amendment to Letter Agreement, dated February 12, 2018 (the “Amendment to Letter Agreement”), by and among WMIH, KKR Fund Holdings L.P. (“KKR Fund”), KKR Wand Investors L.P. (“KKR Wand”), KKR Wand Holdings Corporation (“KKR Wand Holdings”) and KKR Wand Investors Corporation (“KKR Wand Investors”), which amended that certain Letter Agreement, dated December 8, 2017 (the “KKR Letter Agreement”), by and among WMIH, KKR Fund and KKR Wand, certain KKR entities that hold stock of WMIH (the “KKR Entities”) entered into a voting and support agreement with Nationstar in connection with the Merger Agreement pursuant to which, among other things, each of the KKR Entities agreed to vote their shares of WMIH stock in favor of the stock issuance proposal. In addition, the voting and support agreement prohibits each of the KKR Entities from engaging in activities that have the effect of soliciting a competing acquisition proposal. Messrs. Harrington and Olson are the sole directors and holders of voting stock in the KKR Entities. 

Concurrently with the execution of the Merger Agreement, FIF HE Holdings LLC (“Fortress”) entered into a letter agreement with WMIH and the KKR entities, pursuant to which, among other things, WMIH agreed to waive and consent to certain acquisitions and dispositions of WMIH common stock under the Certificate of Incorporation of WMIH. In addition, pursuant to the terms of the Fortress letter agreement, neither the KKR Entities nor any of its affiliates will, without the prior written consent of Fortress, exercise any registration rights under the investor rights agreement and the Series B registration rights agreement, or under any other agreement until six months after the later of (A) the closing of the Merger and (B) the date on which a shelf registration statement is declared effective pursuant to the Fortress registration rights agreement. 

On February 12, 2018, Directors Gallagher, Glossman, Renoff, Scheiwe and Willingham, and Mr. Fairfield, WMIH’s President and Chief Operating Officer, each entered into a voting and support agreement with Nationstar (each of which we refer to as a “D&O voting agreement”) in connection with the Merger Agreement pursuant to which, among other things, each of them agreed, in his or her capacity as a stockholder of WMIH, to vote his or her shares of WMIH stock in favor of the stock issuance proposal. In addition, each of the voting and support agreements prohibits engaging in activities that have the effect of soliciting a competing acquisition proposal.

Note 7: Notes Payable

On the Effective Date, WMIH issued $110.0 million aggregate principal amount of its 13% Senior First Lien Notes due 2030 (the “First Lien Notes”) under an indenture, dated as of March 19, 2012 (the “First Lien Indenture”), between WMIH and Wilmington Trust, National Association, as Trustee. Additionally, WMIH issued $20.0 million aggregate principal amount of its 13% Senior Second Lien Notes due 2030 (the “Second Lien Notes” and, together with the First Lien Notes, the “Runoff Notes”) under an indenture, dated as of March 19, 2012 (the “Second Lien Indenture” and, together with the First Lien Indenture, the “Indentures”), between WMIH and the Law Debenture Trust Company of New York, as Trustee. On January 5, 2017, The Law Debenture Trust Company of New York notified WMIH that it had completed the transfer of substantially all of its corporate trust business to Delaware Trust Company, and that Delaware Trust Company had become the successor trustee under the Second Lien Indenture. The Runoff Notes were scheduled to mature on March 19, 2030 and pay interest quarterly.

As of April 15, 2015, the First Lien Notes were fully redeemed by the Company, and on April 27, 2015, the First Lien Indenture was satisfied and discharged. As of September 29, 2017, the Second Lien Notes were fully redeemed by the Company, and on October 2, 2017, the Second Lien Indenture was satisfied and discharged. As a result of the satisfaction and discharge of the Second Lien Indenture, the Collateral Account (as defined in the Indentures) was subsequently closed and the remaining funds transferred to cash and cash equivalents to be used for general corporate purposes.

Note 8: Financing Arrangements

As of March 31, 2018 and December 31, 2017, the Company had no debt financing arrangements in place.

Note 9: Capital Stock and Derivative Instruments

On the Effective Date, all shares of common and preferred equity securities previously issued by WMI were cancelled and extinguished. As of the Effective Date, and pursuant to WMIHC’s Amended and Restated Articles of Incorporation (the “Articles”), WMIHC was authorized to issue up to 500,000,000 shares of common stock and up to 5,000,000 shares of blank check preferred stock, in one or more series, each with a par value of $0.00001 per share. 200,000,000 shares of common stock were issued by WMIHC in reliance on Section 1145 of the United States Bankruptcy Code on the Effective Date.

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On May 11, 2015, the date that WMIHC reincorporated from the State of Washington to the State of Delaware (the “Reincorporation Date”), all shares of common and preferred equity securities previously issued by WMIHC automatically were converted into one share of the substantially similar common stock, Series A Preferred Stock or Series B Preferred Stock, as applicable, of WMIH. At the same time, each outstanding option, right or warrant to acquire shares of WMIHC’s common stock was converted into an option, right or warrant to acquire an equal number of shares of WMIH’s common stock under the same terms and conditions as the original options, rights or warrants. As of the Reincorporation Date, and pursuant to the Certificate of Incorporation, WMIH is authorized to issue up to 3,500,000,000 shares of common stock and up to 10,000,000 shares of blank check preferred stock, in one or more series, each with a par value of $0.00001 per share.

All of the terms of the agreements described below and attributed to WMIH are also attributable to WMIHC relative to the various agreements and instruments prior to the Reincorporation Date.  The references to WMIH are based on the date this Form 10-Q has been filed.  The references would have been to WMIHC prior to the Reincorporation Date.

On January 30, 2014, WMIH entered into (i) an investment agreement, dated as of January 30, 2014 (the “Investment Agreement”), with KKR Fund and, for limited purposes, KKR Management Holdings L.P., and (ii) an investor rights agreement, dated as of January 30, 2014 (the “Investor Rights Agreement”), with KKR Fund. On January 30, 2014, pursuant to the Investment Agreement, WMIH issued 1,000,000 shares of Series A Preferred Stock having the terms, rights, obligations and preferences contained in the Articles of Amendment of WMIH dated January 30, 2014 for a purchase price equal to $11.1 million and has issued to KKR Fund warrants to purchase, in the aggregate, 61.4 million shares of WMIH’s common stock, 30.7 million of which have an exercise price of $1.32 per share and 30.7 million of which have an exercise price of $1.43 per share (together, the “Warrants”).   On February 12, 2018, pursuant to the Amendment to Letter Agreement, KKR Fund contributed all of the Warrants and shares of Series A Preferred Stock held by it to KKR Wand Holdings.

The Series A Preferred Stock has rights substantially similar to those associated with WMIH’s common stock, with the exception of a liquidation preference, conversion rights and customary anti-dilution protections. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) $10.00 per one million shares of Series A Preferred Stock plus declared but unpaid dividends on such shares and (ii) the amount that the holder would be entitled to in a relevant transaction had the Series A Preferred Stock been converted to common stock of WMIH.  The Series A Preferred Stock is convertible at a conversion price of $1.10 per share into shares of common stock of WMIH either at the option of the holder or automatically upon transfer by KKR Wand Holdings to a non-affiliated party. As a result of the calculation of a beneficial conversion feature as required by ASC topic 470 - Debt a preferred deemed dividend of $9.5 million was recorded in conjunction with the issuance of the Series A Preferred Stock. This preferred deemed dividend resulted in an increase to our accumulated deficit, and an increase in additional paid in capital. Further, KKR Wand Holdings, as the holder of the Series A Preferred Stock and the Warrants, has other rights pursuant to the Investor Rights Agreement as described below.

The Warrants have a five-year term from the date of issuance and are subject to customary structural adjustment provisions for stock splits, combinations, recapitalizations and other similar transactions. KKR Wand Holdings’ rights as a holder of the Series A Preferred Stock and the Warrants, and the rights of any subsequent holder that is an affiliate of KKR Fund (together with KKR Wand Holdings, the “Series A Holders”) are governed by the Investor Rights Agreement.  

On February 12, 2018, in connection with the Merger Agreement, KKR Wand Holdings and WMIH entered into a warrant exchange agreement, pursuant to which, conditioned and effective upon the effectiveness of the Merger, KKR Wand Holdings agreed to exchange the 61,400,000 Warrants it holds for 21,197,619 shares of WMIH common stock (the “Warrant Exchange”).

In accordance with the Investor Rights Agreement, except for the issuance of WMIH’s common stock in respect of the Warrants and the Series A Preferred Stock, KKR Fund and its affiliates (including KKR Wand Holdings) shall not purchase or acquire any equity securities of WMIH or its subsidiaries without WMIH’s prior written consent, subject to certain exceptions.

The Investor Rights Agreement also provides the Series A Holders with registration rights, including three long form demand registration rights, unlimited short form demand registration rights and customary piggyback registration rights with respect to WMIH’s common stock (and WMIH’s common stock underlying the Series A Preferred Stock and the Warrants), subject to certain minimum thresholds, customary blackout periods and lockups of 180 days. On July 1, 2015, WMIH filed a shelf registration statement (the “Initial Registration Statement”) covering resales of Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock.  On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding (as amended, the “Registration Statement”). The Registration Statement was declared effective under the Securities Act of 1933, as amended (the “Securities Act”) on November 25, 2015. On January 26, 2018, WMIH amended the Registration Statement, by means of a post-effective amendment, to deregister the Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Series B Preferred Stock, and such post-effective amendment to the Registration Statement was declared effective under the Securities Act on January 29, 2018.

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The Investor Rights Agreement also provides that to the extent that WMIH undertakes any capital markets issuances, WMIH shall engage KKR Capital Markets LLC to assist WMIH in such issuances on customary commercial terms reasonably acceptable to WMIH. 

For as long as the Series A Holders beneficially own any shares of common stock of WMIH or Series A Preferred Stock or any of the Warrants, WMIH has agreed to provide customary Rule 144A information rights, to provide the Series A Holders with regular audited and unaudited financial statements and to allow the Series A Holders or their representatives to inspect WMIH’s books and records.

Pursuant to the KKR Letter Agreement, as amended by the Amendment to Letter Agreement, for the period commencing on December 8, 2017 (the “Amendment Date”), and ending on the date that is eighteen (18) months following January 5, 2018 (the “Series B Amendment Effective Time”) for so long as (1) KKR Wand Holdings has not transferred any, and together with the KKR Affiliates continues to beneficially own (with the unencumbered right to vote) all, of the Series A Preferred Stock it or KKR Fund owns as of the Amendment Date, (2) KKR Wand Holdings has not transferred any, and together with the KKR Affiliates continues to beneficially own (with the unencumbered right to vote) all, Warrants it or KKR Fund owns as of the Amendment Date or any of the common stock issuable upon the exercise thereof, and (3) KKR Wand Investors has not transferred, in the aggregate, more than, and together with the KKR Affiliates continues to beneficially own (with the unencumbered right to vote) at least, 50% of the Series B Preferred Stock it or KKR Wand owns as of the Amendment Date, the Company shall not enter into a definitive agreement with respect to any target acquisition without the prior written consent of KKR Wand Holdings; provided, however, that if KKR Wand Holdings does not give written notice to the Company of its approval of, or objection to, a proposed target acquisition within five (5) business days of having received notice of the material definitive terms of such target acquisition, KKR Wand Holdings shall be deemed to have approved such target acquisition and the Company may pursue such target acquisition, including by entering into a definitive material agreement in respect thereof, without the prior written consent of KKR Wand Holdings hereunder. For the avoidance of doubt, after the date that is eighteen (18) months following the Series B Amendment Effective Time, KKR Wand Holdings shall have no consent rights hereunder with respect to any target acquisition. KKR Wand Holdings has consented to the Merger.

The foregoing description of (i) the Investor Rights Agreement is qualified in its entirety by reference to the Investor Rights Agreement, which was filed with the SEC as Exhibit 4.2 on Form 8-K on January 31, 2014, and incorporated by reference, (ii) the Warrants are qualified in their entirety by reference to the Form of Tranche A Warrant and Form of Tranche B Warrant, which were filed with the SEC as Exhibits 4.3 and 4.4, respectively, on Form 8-K on January 31, 2014, and incorporated by reference, (iii) the Series A Preferred Stock is qualified in its entirety by reference to the Articles of Amendment of WMIH dated January 30, 2014, which were filed with the SEC as Exhibit 4.5 on Form 8-K on January 31, 2014, and incorporated by reference, the Form of Series A Convertible Preferred Stock Certificate, which was filed with the SEC as Exhibit 4.6 on Form 8-K on January 31, 2014, and incorporated by reference, and the Certificate of Incorporation, which was filed with the SEC as Exhibit 3.1 on Form 8-K12G3 on May 13, 2015, and incorporated by reference, (iv) the Investment Agreement is qualified in its entirety by reference to the Investment Agreement, which was filed with the SEC as Exhibit 10.1 on Form 8-K on January 31, 2014, and incorporated by reference, and (v) the KKR Letter Agreement is qualified in its entirety by reference to the KKR Letter Agreement, which was filed with the SEC as Exhibit 10.3 on Form 8-K on December 11, 2017, and incorporated by reference, and the Amendment to Letter Agreement, which was filed with the SEC as Exhibit 10.27 on Form 10-K on March 2, 2018, and incorporated by reference herein.

On January 5, 2015, WMIH, in connection with an offering of 600,000 shares of its Original Series B Preferred Stock, filed with the Secretary of State of Washington Articles of Amendment of Articles of Incorporation (the “Articles of Amendment”) containing the Designation of Rights and Preferences of the 3% Series B Convertible Preferred Stock (the “Certificate of Designation”) creating the Original Series B Preferred Stock and designating the rights and preferences of the Original Series B Preferred Stock.

The foregoing descriptions of the Articles of Amendment and the Certificate of Designation are qualified in their entirety by the provisions of the Articles of Amendment and the Certificate of Designation, filed as Exhibits 3.1 and 4.1 to a Form 8-K on January 5, 2015, respectively, and incorporated by reference herein, and the Certificate of Incorporation, which was filed with the SEC as Exhibit 3.1 on Form 8-K12G3 on May 13, 2015, and incorporated by reference.

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On January 5, 2015, in connection with the offering and pursuant to that certain Purchase Agreement, dated December 19, 2014 (the “Purchase Agreement”), by and among WMIH, Citigroup Global Markets Inc. (“Citi”) and KCM (KCM and Citi together, the “Initial Purchasers”), WMIH entered into a Registration Rights Agreement with the Initial Purchasers (the “Registration Rights Agreement”), pursuant to which WMIH has agreed that, subject to certain conditions, WMIH will use its reasonable efforts to (i) file a shelf registration statement covering resales of WMIH’s common stock issuable upon mandatory conversion of the Original Series B Preferred Stock no later than six months after January 5, 2015 (the “Issue Date”); (ii) file a shelf registration statement covering resales of the Original Series B Preferred Stock no later than one year after the Issue Date; and (iii) cause each of these shelf registration statements to be declared effective under the Securities Act. On July 1, 2015, WMIH filed the Initial Registration Statement covering resales of the Original Series B Preferred Stock and shares of WMIH’s common stock issuable upon mandatory conversion of the Original Series B Preferred Stock. On November 23, 2015, WMIH amended the Initial Registration Statement to cover WMIH’s common stock issuable upon conversion of the Series A Preferred Stock and shares of WMIH’s common stock issuable upon exercise of warrants issued in connection with the issuance of our Series A Preferred Stock currently outstanding. The Registration Statement was declared effective under the Securities Act on November 25, 2015.

On January 5, 2018, WMIH entered into an amendment to such Registration Rights Agreement (which we refer to, as amended, as the “Series B Registration Rights Agreement”), pursuant to which WMIH agreed to use reasonable efforts to file a shelf registration statement (or, as permitted, an amendment to any existing shelf registration statement) with the SEC as promptly as practicable after January 5, 2018, but no later than June 15, 2018, with respect to (i) resales of the shares of the Series B Preferred Stock that are Transfer Restricted Securities (as defined in the Series B Registration Rights Agreement) and (ii) resales of the shares common stock that are Transfer Restricted Securities and (a) issuable upon the conversion of shares of the Series B Preferred Stock, (b) issuable as a Regular Dividend (as defined in the WMIH charter) and (c) issuable as a Special Distribution (as defined in the WMIH charter).

On January 26, 2018, WMIH amended the Registration Statement, by means of a post-effective amendment, to deregister the Original Series B Preferred Stock and WMIH’s common stock issuable upon mandatory conversion of the Original Series B Preferred Stock, and such post-effective amendment to the Registration Statement was declared effective under the Securities Act on January 29, 2018.

In connection with the transactions contemplated by the Merger Agreement, WMIH, KKR Wand Holdings, KKR Wand Investors and Fortress executed a Letter Agreement on February 12, 2018 (the “Fortress Letter Agreement”) pursuant to which the holders of WMIH stock affiliated with KKR agreed to modify certain of their registration rights.  The reference to the Fortress Letter Agreement is qualified in its entirety by reference to the Letter Agreement dated as of February 12, 2018, by and among the Company, Fortress and the other stockholders party from time to time thereto, which was filed with the SEC as Exhibit 10.2 on Form 8-K on February 12, 2018, and incorporated by reference.

The foregoing description of the Registration Rights Agreement is qualified in its entirety by the provisions of the Registration Rights Agreement, filed as Exhibit 10.1 on Form 8-K on January 5, 2015, and incorporated by reference herein, and to the First Amendment to that certain Registration Rights Agreement, dated January 5, 2018 and filed as Exhibit 10.1 on Form 8-K on January 5, 2018, and incorporated by reference herein.  

On January 5, 2015, in connection with the offering and pursuant to the Purchase Agreement, WMIH entered into an Escrow Agreement (the “Escrow Agreement”) with Citibank, N.A., as Escrow Agent (the “Escrow Agent”), pursuant to which WMIH caused to be deposited with the Escrow Agent the amount of $598.5 million, representing the proceeds of the offering of the Original Series B Preferred Stock less offering fees payable on the Issue Date but before payment of other offering fees and expenses (including fees contingent upon future events). These net proceeds have been, and will be, released from escrow from time to time to WMIH as instructed by WMIH in amounts necessary to (i) pay certain fees related to the offering that may become payable to the Initial Purchasers, (ii) finance WMIH’s efforts to explore and/or fund, in whole or in part, acquisitions, whether completed or not, including reasonable attorney fees and expenses related thereto, accounting expenses, due diligence and financial advisor fees and expenses, (iii) pay certain amounts that may become payable to the holders of the Series B Preferred Stock upon the occurrence of certain put events, (iv) pay certain amounts that would become payable to the holders of the Series B Preferred Stock upon a mandatory redemption of the Series B Preferred Stock, and (v) pay certain expenses related to the offering. The entire net proceeds will be released from escrow as instructed by WMIH upon consummation of a Qualified Acquisition (as defined below). If we have not consummated a Qualified Acquisition on or prior to October 5, 2019, we will be required to redeem all of the outstanding Series B Preferred Stock on October 5, 2019, the Series B Redemption Date; provided, if prior to the Series B Redemption Date we have publicly announced that WMIH has entered into a definitive agreement for an Acquisition, the Series B Redemption Date will be extended to the earlier of April 5, 2020 and the day immediately following the date such definitive agreement is terminated or the date such Acquisition is closed.  “Acquisition” means any acquisition by the Company (or any of its direct or indirect wholly-owned subsidiaries), in a single transaction or a series of transactions, whether by purchase, merger or otherwise, of all or substantially all of the assets of, or of 80% or more of the equity interests in, or a business line, unit or division of, any person. A “Qualified Acquisition” means an Acquisition that, taken together with prior Acquisitions (if any), collectively utilizes aggregate net proceeds of the Series B Preferred Stock financing of $450 million.  The aggregate redemption cost, assuming all 600,000 shares remain outstanding, of all of the Series B Preferred Stock is $600.0 million, plus shares of WMIH’s common stock in respect of any accrued and unpaid dividends, if any, whether or not declared.

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As of March 31, 2018, and December 31, 2017, the balance remaining in the escrow account totaled approximately $576.2 million and $578.9 million, respectively. The foregoing description of the Escrow Agreement is qualified in its entirety by the provisions of the Escrow Agreement, filed on Form 8-K on January 5, 2015, as Exhibit 10.2 and incorporated by reference herein, and as amended by Amendment No. 1, Amendment No. 2, and Amendment No. 3, filed on Form 10-K on March 2, 2018, Form 8-K on December 11, 2017 and on Form 10-K on March 2, 2018, respectively.

If the Series B Preferred Stock is redeemed or determined likely to be redeemed, the Company would be required to record a charge to earnings of approximately $96.3 million to accrete the value of the Series B Preferred Stock to the $600.0 million redemption value. As of March 31, 2018, the Company has determined that recording for accretion to the Series B Preferred Stock’s redemption value is not required.

The shares of Series B Preferred Stock are hybrid financial instruments that blend characteristics of both equity and debt securities.  The terms of the Series B Preferred Stock provide for either redemption of the principal and interest for cash at maturity or in the event of certain predetermined circumstances or mandatory conversion into WMIH’s common stock. The Original Series B Preferred Stock also embodied contingent equity-linked share price protections, an embedded conversion feature, in the form of a variable conversion price based on a 20 trading day average of volume weighted-average price. The Series B Preferred Stock has no variable conversion feature and the fair market value at December 31, 2017 of the embedded conversion feature was reclassified to equity.  

The Original Series B Preferred Stock was amended on December 8, 2017 and this amendment became effective at the Series B Amendment Effective Time. The amendment was determined to be a modification for accounting purposes based on qualitative and quantitative factors including cash flow analysis. Prior to the Series B Amendment Effective Time, upon any conversion of Original Series B Preferred Stock in accordance with its terms, the Original Series B Preferred Stock would have converted based on the outstanding principal and accrued interest, and the average trading price of WMIH common stock over the 20 trading days prior to conversion, subject to a floor of $1.75 per share and a ceiling of $2.25 per share. Subsequent to the Series B Amendment Effective Time, the Series B Preferred Stock will convert into shares of WMIH common stock based on a fixed conversion price of $1.35 per share. As a result of the variability of the mandatory conversion provisions prior to the Series B Amendment Effective Time, the Company determined that the Original Series B Preferred Stock contained certain embedded derivative features. Management’s evaluation resulted in the conclusion that, prior to the Series B Effective Time, the compound derivative financial instrument required bifurcation and separately accounted for the embedded conversion feature as a derivative. A derivative liability results primarily when the Company average stock price (as defined in the Certificate of Incorporation) exceeds the conversion price, including the ceiling conversion price of $2.25, as defined by the Certificate of Incorporation. A derivative asset results when the Company’s average stock price is less than the conversion price, including the floor price of $1.75. The aggregate fair value of the embedded conversion feature was a liability of $66.2 million on the date of issuance of the Original Series B Preferred Stock. At December 31, 2017, the fair value of the embedded conversion feature was reclassified to equity due to its modification and therefore, the embedded conversion feature is no longer separately accounted for as of March 31, 2018 and December 31, 2017. At March 31, 2017, the fair value of the embedded conversion feature was an asset of $98.7 million. A change in the fair value of the embedded conversion feature constituted other income or expense, as the case may be, in the applicable reporting period.  Upon conversion or redemption of the Original Series B Preferred Stock, any asset or liability related to the embedded conversion feature would have been eliminated. Upon modification of the Original Series B Preferred Stock, specifically as a result of the elimination of the variable conversion feature, the embedded conversion feature is no longer required to be separately accounted for.  At December 31, 2017, the fair market value of the embedded conversion feature was determined to be $108.9 million, and this amount was reclassified to equity. During the three months ended March 31, 2018 the embedded conversion feature was no longer separately accounted for, and during the three months ended March 31, 2017, the fair value of the derivative liability increased by $18.0 million. This change in fair value is included as other income in the condensed consolidated statement of operations for the three months ended March 31, 2017.

On June 1, 2017, WMIH issued restricted stock grants to members of the Board totaling $0.4 million, of aggregate fair value.  The restricted shares noted above vest over a three-year period.

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On May 15, 2015, WMIH issued restricted stock grants to our Chief Executive Officer, William C. Gallagher, and our President and Chief Operating Officer, Thomas L. Fairfield, in conjunction with employment agreements totaling $9.8 million of aggregate fair value (the “Exec Grants”) based on the $2.76 trading price of WMIH shares at the close of business on the date issued. The number of shares of WMIH common stock granted in connection with this award was determined by dividing $4.0 million by $2.25 per share of WMIH common stock (i.e., the assumed conversion price specified in the Exec Grants executed on the grant date); provided however, pursuant to the terms of the employment agreements, if the final conversion price of the Series B Preferred Stock (the “Series B Conversion Price”) is lower than $2.25 per share, WMIH is required to grant additional shares to Mr. Gallagher and Mr. Fairfield so that the total award will be equal to the amount of shares that would have been granted if the assumed conversion price had been equal to the final Series B Conversion Price (subject to a minimum price of $1.75 per share).  Accordingly, WMIH will be required to issue an additional 507,936 restricted shares to each of Mr. Gallagher and Mr. Fairfield (1,015,872 total shares) if the Merger is consummated, based on the final Series B Conversion Price of $1.35 and the minimum grant price of $1.75. The Exec Grants will vest in full and will be recognized as compensation expense upon the consummation of a Qualified Acquisition, subject to the executives’ continued employment with the Company until such time. The foregoing description of the restricted stock agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Gallagher Restricted Stock Agreement and the Fairfield Restricted Stock Agreement (collectively, the “Executive Agreements”), which were filed as Exhibit 10.3 and Exhibit 10.5, respectively, of Form 8-K12G3 filed on May 13, 2015 and incorporated herein by reference. On March 9, 2018, WMIH entered into the Amendment of the Gallagher employment agreement (as defined below) (which we refer to as the “Gallagher Amendment”) and the Amendment of the Fairfield employment agreement (as defined below) (which we refer to as the “Fairfield Amendment” and, together with the Gallagher Amendment, which we refer to as the “Employment Amendments”). The Employment Amendments, which were approved by the Board and its compensation committee, amend each of the Gallagher employment agreement and the Fairfield employment agreement, by extending the terms of each of Mr. Gallagher’s and Mr. Fairfield’s employment with WMIH until the earlier of (a) the closing date of the Merger or (b) the termination of the Merger Agreement. Except as modified by the Amendments, all other terms and conditions of each of the Gallagher employment agreement and Fairfield employment agreement remain in full force and effect. The Employment Amendments were filed as Exhibit 10.1 and Exhibit 10.2, respectively, of Form 8-K filed on March 9, 2018 and incorporated herein by reference. The fair market value of the Exec Grants as of March 31, 2018 approximates $5.0 million as the stock price was $1.42 per share at the close of the market on March 31, 2018.  This excludes the 1,015,872 additional shares (the “Exec Additional Shares”) which will be issued upon consummation of the Nationstar Transaction, 507,936 additional shares each to both Mr. Gallagher and Mr. Fairfield.

The total unamortized value related to the unvested restricted share grants totals $5.5 million and $3.5 million at March 31, 2018 and December 31, 2017, respectively.

The unamortized value of $5.5 million at March 31, 2018, if all are ultimately vested, would be amortized according to the following schedule.  The fair value of the Exec Grants will vest and be recognized on the date of the consummation of a Qualified Acquisition.  Additionally, the Exec Additional Shares would be issued and immediately vest on the date of the consummation of a Qualified Acquisition.   

Amortization Schedule

(in thousands)

 

March 31, 2018

unamortized dollar value

 

2nd quarter 2018

 

$

71

 

3rd quarter 2018

 

 

71

 

4th quarter 2018

 

 

71

 

1st quarter 2019

 

 

66

 

2nd quarter 2019

 

 

36

 

3rd quarter 2019

 

 

36

 

4th quarter 2019

 

 

36

 

1st quarter 2020

 

 

31

 

Unamortized fair-value - subject to vesting schedule

 

 

418

 

Unamortized fair-value - event dependent

 

 

5,049

 

Total unamortized dollar value

 

$

5,467

 

 

 

 

 

 

Net equity-based compensation totaled $0.1 million and $0.1 million for the three months ended March 31, 2018 and March 31, 2017, respectively. The restricted stock awards were issued at the fair market value determined to be the trading price at the close of business on the respective date the awards were granted.

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A summary of WMIH’s restricted stock award activity for the three months ended March 31, 2018 and year ended December 31, 2017 is presented below:

 

 

Number of restricted stock awards outstanding

 

 

Weighted-average grant date

fair value

 

 

Aggregate

fair value

(in thousands)

 

Outstanding—January 1, 2017

 

 

6,380,800

 

 

 

2.1306

 

 

 

13,595

 

Restricted stock awards granted during 2017

 

 

333,332

 

 

 

1.2000

 

 

 

400

 

Outstanding—December 31, 2017

 

 

6,714,132

 

 

 

2.0844

 

 

 

13,995

 

Restricted stock awards granted during 2018

 

 

 

 

 

 

 

 

 

Outstanding—March 31, 2018

 

 

6,714,132

 

 

$

2.0844

 

 

$

13,995

 

 

WMIH has issued the total number of shares subject to the restricted stock grants, however, until vested they are subject to repurchase. Shares subject to repurchase totaled 3,834,512 on March 31, 2018 and 4,053,640 on December 31, 2017. The Exec Grants vest upon future events, and are not time specific, therefore, they are listed as event dependent.  The shares subject to repurchase at March 31, 2018 will vest, assuming circumstances remain unchanged, according to the following schedule:

 

Vesting schedule of shares subject to repurchase

 

March 31, 2018

unvested shares

 

1st quarter 2019

 

 

167,848

 

2nd quarter 2019

 

 

 

3rd quarter 2019

 

 

 

4th quarter 2019

 

 

 

1st quarter 2020

 

 

111,108

 

Total unvested shares - subject to vesting schedule

 

 

278,956

 

Unvested shares - event dependent

 

 

3,555,556

 

Total unvested shares

 

 

3,834,512

 

Pursuant to a restricted stock agreement, WMIH has the right, but not the obligation, to repurchase any unvested (but issued) shares of WMIH’s common stock at $0.00001 per share upon the termination of service in the case of a director, or in the case of the Exec Grants, if the Series B Preferred Stock are redeemed or as a result of certain circumstances as defined by the terms of the Exec Grants.

A summary of WMIH’s restricted shares issued and subject to repurchase as of March 31, 2018 and December 31, 2017 is presented below:

Vesting schedule of shares subject to repurchase

 

Unvested shares

 

Shares subject to repurchase—January 1, 2017

 

 

4,039,591

 

Shares issued subject to vesting during 2017

 

 

333,332

 

Shares vested during 2017

 

 

(319,283

)

Shares subject to repurchase—December 31, 2017

 

 

4,053,640