MIDWEST HOLDING INC. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 June 30, 2019

COMMISSION FILE NUMBER 000-10685

Midwest Holding Inc.
(Exact name of registrant as specified in its charter)

Nebraska	20-0362426
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
2900 S. 70th, Suite 400, Lincoln, Nebraska	68506
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (402) 489-8266

Former name, former address and former fiscal year, if changed since last report: Not applicable

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 Website, 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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or reviewed 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 by Rule 12b-2 of the Act). Yes ☐ No ☒

As of August 1, 2019, there were 1,023,408,553 shares of Voting Common Stock, par value $0.001 per share, issued and outstanding.

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MIDWEST HOLDING INC.

FORM 10-Q

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item No.		Item Caption		Page
Item 1.		Financial Statements		3
		Consolidated Balance Sheets		3
		Consolidated Statements of Comprehensive Loss		4
		Consolidated Statements of Stockholders’ Equity		5
		Consolidated Statements of Cash Flows		6
		Notes to Consolidated Financial Statements		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		32
Item 4.		Controls and Procedures		32
PART II – OTHER INFORMATION
Item No.		Item Caption		Page
Item 1.		Legal Proceedings		33
Item 1A.		Risk Factors		33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		33
Item 3.		Defaults Upon Senior Securities		33
Item 4.		Mine Safety Disclosures		33
Item 5.		Other Information		33
Item 6.		Exhibits		34
		Signatures		35

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

MIDWEST HOLDING INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

		June 30, 2019				December 31, 2018
Assets		(Unaudited)
Investments, available for sale, at fair value
Fixed maturities (amortized cost: 40,884,520 and $19,226,841, respectively) (See Note 5)		$	40,753,983			$	17,384,183
Mortgage loans on real estate, held for investment			4,176,039				-
Policy loans			43,254				43,843
Total investments			44,973,276				17,428,026
Cash and cash equivalents			10,274,224				2,832,567
Deferred acquisition costs, net			1,136,507				-
Premiums receivable			359,731				346,870
Accrued investment income			456,663				200,708
Reinsurance recoverables (Note 8)			23,505,095				23,100,644
Intangible assets			700,000				700,000
Property and equipment, net			83,617				91,414
Operating lease right of use assets			531,098				592,065
Other assets			463,091				261,884
Assets associated with business held for sale (see Note 4)			11,722,893				20,937,071
Total assets		$	94,206,195			$	66,491,249
Liabilities and Stockholders' Equity
Liabilities:
Benefit reserves		$	16,161,349			$	16,012,655
Policy claims			216,184				270,785
Deposit-type contracts			46,069,681				7,234,927
Advance premiums			476				490
Long-term debt			-				18,938,705
Deferred gain on coinsurance transactions			2,061,121				3,899,999
Lease liabilities (See Note 12):
Finance lease			5,579				9,299
Operating lease			585,595				646,519
Other liabilities			690,139				1,062,087
Liabilities associated with business held for sale (see Note 4)			11,718,136				21,052,733
Total liabilities			77,508,260				69,128,199
Commitments and Contingencies (See Note 11)
Stockholders' Equity:
Preferred stock, Series C, $0.001 par value. Authorized 1,500,000 shares; issued and outstanding none as of June 30, 2019 and 1,500,000 as of December 31, 2018			-				1,500,000
Common stock, $0.001 par value. Authorized 1,970,000,000 shares; issued and outstanding 1,023,408,553 as of June 30, 2019 and 22,873,764 as of December 31, 2018.			1,023,409				22,874
Additional paid-in capital			53,451,243				33,006,242
Accumulated deficit			(37,674,922	)			(35,348,052	)
Accumulated other comprehensive loss			(103,641	)			(1,818,014	)
Total Midwest Holding Inc.'s stockholders' equity (deficit)			16,696,089				(4,136,950	)
Noncontrolling interest			1,846				-
Total stockholders' equity (deficit)			16,697,935				(4,136,950	)
Total liabilities and stockholders' equity		$	94,206,195			$	66,491,249

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

		Three months ended June 30,								Six months ended June 30,
		2019				2018				2019				2018
Revenues
Insurance premiums		$	-			$	2,111			$	(2,479	)		$	8,347
Investment income, net of expenses			448,015				201,471				639,010			404,932
Net realized gains (losses) on investments			1,180				(152,203	)			(3,217	)		(201,874		)
Amortization of deferred gain on reinsurance			1,046,552				12,094				1,852,599				24,188
Fee income and other revenues			66,795				25,044				82,335				51,284
Total Revenues			1,562,542				88,517				2,568,248			286,877
Expenses:
Interest credited			230,366				19,349				251,187				41,032
Benefits			(1,523	)			33,529				1,872				93,168
Increase in benefit reserves			-				(21,110	)			-				(56,959	)
Amortization of deferred acquisition costs			19,796				-				21,865				-
Salaries and benefits			575,625				429,821				1,115,074			912,537
Other operating expenses			1,570,130				539,386				3,505,120			943,516
Total expenses			2,394,394				1,000,975				4,895,118			1,933,294
Loss from continuing operations before taxes			(831,852	)			(912,458	)			(2,326,870	)		(1,646,417		)
Federal income tax			-				-				-				-
Loss from continuing operations			(831,852	)			(912,458	)			(2,326,870	)		(1,646,417		)
Loss from discontinued operations			-				(6,181	)			-				(32,107	)
Net loss			(831,852	)			(918,639	)			(2,326,870	)		(1,678,524		)
Comprehensive income (loss):
Unrealized gains (losses) on investments arising during period			863,186				(471,893	)			1,711,156			(1,094,796		)
Less: reclassification adjustment for net realized (gains) losses on investments			(1,180	)			152,203				3,217			201,874
Other comprehensive income (loss)			862,006				(319,690	)			1,714,373			(892,922		)
Comprehensive income (loss):		$	30,154			$	(1,238,329	)		$	(612,497	)		$	(2,571,446	)
Net loss per common share
Basic		$	-			$	(0.04	)		$	(0.02	)		$	(0.07	)
Diluted		$	-			$	(0.001	)		$	-			$	(0.002	)

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)

					Additional															Total
		Common			Paid-In				Accumulated								Noncontrolling			Stockholders'
		Stock			Capital				Deficit				AOCI*				Interests			Equity
Balance, December 31, 2017		$	22,861		$	33,006,255			$	(30,282,518	)		$	(511,219	)		$	-		$	2,235,379
Preferred stock conversion adjustment			13			(13	)			-				-				-			-
Net loss			-			-				(5,065,534	)			-				-			(5,065,534	)
Unrealized losses on investments			-			-				-				(1,306,795	)			-			(1,306,795	)
Balance, December 31, 2018			22,874			33,006,242				(35,348,052	)			(1,818,014	)			-			(4,136,950	)
Net loss			-			-				(2,326,870	)			-				-			(2,326,870	)
Xenith note interest waived			-			845,536				-				-				-			845,536
Xenith note conversion			927,680			18,172,320				-				-				-			19,100,000
Class C preferred stock conversion			72,855			1,427,145				-				-				-			1,500,000
Change in equity of noncontrolling interests			-			-				-				-				1,846			1,846
Unrealized gains on investments			-			-				-				1,714,373				-			1,714,373
Balance, June 30, 2019		$	1,023,409		$	53,451,243			$	(37,674,922	)		$	(103,641	)		$	1,846		$	16,697,935

*	Accumulated other comprehensive income

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six Months ended June 30,
		2019				2018
Cash Flows from Operating Activities:
Net loss		$	(2,326,870	)		$	(1,678,524	)
Adjustments to arrive at cash provided by operating activities:
Net premium and discount on investments			49,751				58,719
Depreciation and amortization			32,254				81,133
Amortization of deferred acquisition costs			21,865				-
Deferred acquisition costs capitalized			(1,157,073	)			-
Net realized gains on investments			4,142				201,874
Deferred coinsurance ceding commission			(1,838,878	)			(24,188	)
Notes payable interest accrued			845,536				-
Changes in operating assets and liabilities:
Reinsurance recoverables			(404,451	)			(366,473	)
Accrued investment income			(255,955	)			(1,525	)
Premiums receivable			(12,861	)			19,397
Policy liabilities			672,825				427,068
Other assets and liabilities			(421,469	)			(56,627	)
Other assets and liabilities - Discontinued Operations			(120,419	)			560,182
Net cash used for operating activities			(4,911,603	)			(778,964	)
Cash Flows from Investing Activities:
Securities available for sale:
Purchases			(24,117,739	)			(5,837,939	)
Proceeds from sale or maturity			2,406,165				6,335,502
Other invested assets purchased			-				(100,000	)
Mortgage loans on real estate, held for investment
Purchases			(4,176,039	)			-
Net change in policy loans			589				6,806
Net purchases of property and equipment			(17,348	)			(6,707	)
Net cash used in or provided by investing activities			(25,904,372	)			397,662
Cash Flows from Financing Activities:
Finance lease			(222	)			(222	)
Proceeds from issuance of preferred stock			-				1,500,000
Proceeds from issuance of notes payable			-				600,000
Net transfers to noncontrolling interest			1,846				-
Receipts on deposit-type contracts			38,267,011				600
Withdrawals on deposit-type contracts			(11,003	)			(9,940	)
Net cash provided by financing activities			38,257,632				2,090,438
Net increase in cash and cash equivalents			7,441,657				1,709,136
Cash and cash equivalents:
Beginning			2,832,567				951,527
Ending		$	10,274,224			$	2,660,663

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)

		June 30, 2019				June 30, 2018
Supplemental Disclosure of Non-Cash Information
Conversion of notes payable
Book value of note payable		$	(19,100,000	)		$	-
Common stock			927,680				-
Additional paid in capital			18,172,320				-
Conversion of preferred stock
Book value of preferred stock			(1,500,000	)			-
Common stock			72,855				-
Additional paid in capital			1,427,145				-
		$	-			$	-

See Notes to Consolidated Financial Statements.

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MIDWEST HOLDING INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Nature of Operations and Basis of Presentation

Nature of Operations

Midwest Holding Inc. (“Midwest,” “the Company,” “we,” “our,” or “us”) was incorporated in Nebraska on October 31, 2003 for the primary purpose of operating a financial services company. The Company is in the life and annuity insurance business and operates through its wholly owned subsidiary, American Life & Security Corp. (“American Life”). As discussed in Note 3, on June 28, 2018, we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). On April 2, 2019, we obtained a 51% ownership in 1505 Capital that was established on August 31, 2018 with its Certificate of Formation. It was organized to provide financial and investment advisory and management services to clients and any related investment, trading or financial activities.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions from the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The information contained in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”), should be read in connection with the reading of these interim unaudited consolidated financial statements.

Certain GAAP policies, which significantly affect the determination of financial condition, results of operations and cash flows, are summarized in our 2018 Form 10-K.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the three months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the full year ending December 31, 2019. All material inter-company accounts and transactions have been eliminated in consolidation.

Investments

All fixed maturities owned by the Company are considered available-for-sale and are included in the consolidated financial statements at their fair value as of the financial statement date. Bond premiums and discounts are amortized using the scientific-yield method over the term of the bonds. Realized gains and losses on securities sold during the year are determined using the specific identification method. Unrealized holding gains and losses, net of applicable income taxes, are included in comprehensive loss.

Declines in the fair value of available for sale securities below their amortized cost are evaluated to assess whether any other-than-temporary impairment loss should be recorded. In determining if these losses are expected to be other-than-temporary, the Company considers severity of impairment, duration of impairment, forecasted recovery period, industry outlook, financial condition of the issuer, issuer credit ratings, and the intent and ability of the Company to hold the investment until the recovery of the cost.

The recognition of other-than-temporary impairment losses on debt securities is dependent on the facts and circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that the Company would be required to sell a security prior to recovery of the amortized cost, the difference between amortized cost and fair value is recognized in the statement of comprehensive income as an other-than-temporary impairment. If the Company does not expect to recover the amortized basis, does not plan to sell the security and if it is not more likely than not that the Company would be required to sell a security before the recovery of its amortized cost, the recognition of the other-than-temporary impairment is bifurcated. The Company recognizes the credit loss portion in the income statement and the noncredit loss portion in accumulated other comprehensive loss. The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected cash flows with the amortized cost basis of the debt security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed income security at the date of acquisition. Cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default. No other-than-temporary impairments were recognized during the six months ended June 30, 2019 or 2018.

Investment income consists of interest, dividends, and real estate income, which are recognized on an accrual basis and amortization of premiums and discounts.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Mortgage loans on real estate, held for investment

Mortgage loans on real estate, held for investment are carried at unpaid principal balances. Interest income on mortgage loans on real estate, held for investment is recognized in net investment income at the contract interest rate when earned. A mortgage loan is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. Valuation allowances on mortgage loans are established based upon losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate. These evaluations are revised as conditions change and new information becomes available. No such valuation allowance was established as of June 30, 2019.

Policy loans

Policy loans are carried at unpaid principal balances. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. No valuation allowance is established for these policy loans as the amount of the loan is fully secured by the death benefit of the policy and cash surrender value.

Cash and cash equivalents

The Company considers all liquid investments with original maturities of three months or less when purchased to be cash equivalents. At June 30, 2019 and December 31, 2018, the Company had no cash equivalents.

Deferred acquisition costs

Deferred acquisition costs (“DAC”) consist of incremental direct costs, net of amounts ceded to reinsurers, that result directly from and are essential to the contract acquisition transaction and would not have been incurred by the Company had the contract acquisition not occurred. These costs are capitalized, to the extent recoverable, and amortized over the life of the premiums produced. The Company evaluates the types of acquisition costs it capitalizes. The Company capitalizes agent compensation and benefits and other expenses that are directly related to the successful acquisition of contracts. The Company also capitalizes expenses directly related to activities performed by the Company, such as underwriting, policy issuance, and processing fees incurred in connection with successful contract acquisitions.

Recoverability of deferred acquisition costs is evaluated periodically by comparing the current estimate of the present value of expected pretax future profits to the unamortized asset balance. If this current estimate is less than the existing balance, the difference is charged to expense. The Company performs a recoverability analysis annually in the fourth quarter unless events occur which require an immediate review. The Company determined that no events occurred in the six months ended June 30, 2019 that suggest a review should be undertaken.

Property and equipment

Property and equipment are stated at cost net of accumulated depreciation. Annual depreciation is primarily computed using straight-line methods for financial reporting and straight-line and accelerated methods for tax purposes. Furniture and equipment is depreciated over 3 to 7 years and computer software and equipment is generally depreciated over 3 years. Depreciation expense totaled $9,814 and $12,676 for the three months ended June 30, 2019 and 2018, respectively. Depreciation expense totaled $19,320 and $25,234 for the six months ended June 30, 2019 and 2018, respectively. Accumulated depreciation totaled $954,800 and $943,323 as of June 30, 2019 and December 31, 2018, respectively.

Maintenance and repairs are expensed as incurred. Replacements and improvements which extend the useful life of the asset are capitalized. The net book value of assets sold or retired are removed from the accounts, and any resulting gain or loss is reflected in earnings.

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an asset may not be recoverable and exceeds estimated future undiscounted cash flows of the asset. A recognized impairment loss reduces the carrying amount of the asset to its fair value. Management has determined that no such events occurred in the three months ended June 30, 2019 that would indicate the carrying amounts may not be recoverable.

Reinsurance

In the normal course of business, the Company seeks to limit any single exposure to losses on large risks by purchasing reinsurance. The amounts reported in the consolidated balance sheets as reinsurance recoverable include amounts billed to reinsurers on losses paid as well as estimates of amounts expected to be recovered from reinsurers on insurance liabilities that have not yet been paid. Reinsurance recoverable on unpaid losses are estimated based upon assumptions consistent with those used in establishing the liabilities related to the underlying reinsured contracts. Insurance liabilities are reported gross of reinsurance recoverable. Management believes the recoverables are appropriately established. The Company generally strives to diversify its credit risks related to reinsurance ceded. Reinsurance premiums are generally reflected in income in a manner consistent with the recognition of premiums on the reinsured contracts. Reinsurance does not extinguish the Company’s primary liability under the policies written. Therefore, the Company regularly evaluates the financial condition of its reinsurers including their activities with respect to claim settlement practices and commutations, and establishes allowances for uncollectible reinsurance recoverable as appropriate. There were no allowances as of June 30, 2019 or December 31, 2018.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Benefit reserves

The Company establishes liabilities for amounts payable under insurance policies, including traditional life insurance and annuities. Generally, amounts are payable over an extended period of time. Liabilities for future policy benefits of traditional life insurance have been computed by a net level premium method based upon estimates at the time of issue for investment yields, mortality and withdrawals. These estimates include provisions for experience less favorable than initially expected. Mortality assumptions are based on industry experience expressed as a percentage of standard mortality tables.

Policy claims

Policy claims are based on reported claims plus estimated incurred but not reported claims developed from trends of historical data applied to current exposure.

Deposit-type contracts

Deposit-type contracts consist of amounts on deposit associated with deferred annuity riders, premium deposit funds and supplemental contracts without life contingencies.

Income taxes

The Company is subject to income taxes in the U.S. federal and various state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by tax authorities for the years before 2015. The Company is not currently under examination for any open years. The provision for income taxes is based on income as reported in the financial statements. The income tax provision is calculated under the asset and liability method. Deferred tax assets are recorded based on the differences between the financial statement and tax basis of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are investments, insurance reserves, and deferred acquisition costs. A deferred tax asset valuation allowance is established when there is uncertainty that such assets would be realized. The Company has no uncertain tax positions that it believes are more-likely-than not that the benefit will not to be realized. When applicable, the Company recognizes interest accrued related to unrecognized tax benefits and penalties in income tax expense. The Company had no accruals for payments of interest and penalties at June 30, 2019 or December 31, 2018.

Revenue recognition and related expenses

Amounts received as payment for annuities are recognized as deposits to policyholder account balances and included in future insurance policy benefits. Revenues from these contracts are comprised of fees earned for administrative and contract-holder services and cost of insurance, which are recognized over the period of the contracts, and included in revenue. Deposits are shown as a financing activity in the consolidated statements of cash flows.

Liabilities for future policy benefits are provided and acquisition costs are amortized by associating benefits and expenses with earned premiums to recognize related profits over the life of the contracts. Acquisition costs are amortized over the expected life of the annuity contracts.

Comprehensive loss

Comprehensive loss is comprised of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses from marketable securities classified as available for sale, net of applicable taxes.

Common and preferred stock and earnings (loss) per share

Common and preferred stock and earnings (loss) per share: The par value per each Company share is $0.001 with 1,970,000,000 voting common shares authorized, 20,000,000 non-voting common shares authorized, and 10,000,000 preferred shares authorized. On June 18, 2019, Xenith exercised the right to convert its 1,500,000 Series C preferred stock and the $19,100,000 notes payable to voting common stock at the conversion rate of approximately $.02 per common share. At June 30, 2019 and December 31, 2018, the Company had 1,023,408,553 and 22,873,764 voting common shares issued and outstanding, respectively. At June 30, 2019 and December 31, 2018, the Company had none and 1,500,000 Series C preferred shares outstanding shares, respectively.

The Series C preferred shares were converted by Xenith to voting common shares on June 18, 2019 at a rate of approximately $0.02 per share for 72,854,474 voting common shares. The stated annual dividend rate on the Series C preferred shares was 8%. At the time of the conversion, the holder forgave all previously accrued dividends from June 28, 2018 through the conversion date.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Loss per basic share attributable to the Company’s common stockholders was computed based on the weighted average number of shares outstanding during each period. The weighted average number of shares outstanding during the three months ended June 30, 2019 and 2018 was 220,781,744 and 22,860,701 shares, respectively. The weighted average number of shares outstanding during the six months ended June 30, 2019 and 2018 were 122,374,461 and 22,860,701 shares, respectively.

Loss per diluted share attributable to the Company’s common stockholders was computed based on the average shares outstanding and the notes payable and Preferred Shares as converted during each period of 2018. The weighted average number of shares outstanding during the three and six months ended June 30, 2018 were 1,023,395,490 and 525,892,004 shares, respectively.

Reclassifications

Certain reclassifications have been made on the Consolidated Balance Sheets and Statements of Comprehensive Loss for the year ended December 31, 2018 and the six months ended June 30, 2018. These reclassifications do not impact the overall Net loss or Net loss per common shares line items of the Consolidated Statement of Comprehensive Loss for the three months and six months ended June 30, 2018.

Note 2. New Accounting Standards

Adoption of New Accounting Standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The lease liability is measured at the present value of the lease payments over the lease term with the right-of-use asset measured as the lease liability amount and including adjustments for certain lease incentives and initial direct costs. Lease expense recognition will continue to differentiate between finance leases and operating leases resulting in a similar pattern of lease expense recognition as under current GAAP. This ASU permitted a modified retrospective adoption approach that includes a number of optional practical expedients that entities may elect upon adoption.

On January 1, 2019, the Company adopted this standard using a modified retrospective adoption approach. The adoption resulted in the Company identifying three operating leases and one financial lease which were subject to this guidance. The impact to the Consolidated Statements of Comprehensive Income (Loss) was minimal. We identified four leases with net assets of $539,837 and $606,629 and lease liabilities of $591,174 and $655,818 for the six months ended June 30, 2019 and the year ended December 31, 2018, respectively.

On February 14, 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. It allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The ASU is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for public business entities for reporting periods for which financial statements have not yet been issued. The Company has evaluated the impact of this update and has determined that this does not impact us currently due to not recording unrealized losses or gains net of tax. The Company has incurred net operating losses since inception so it does not record deferred tax assets or deferred tax liabilities due to establishing a valuation allowance.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). This amendment deferred the effective date of the previously issued ASU 2014-09 until the interim and annual reporting periods beginning after December 15, 2017. In addition, the FASB has issued four related ASU’s on principal versus agent guidance (ASU 2016-08), identifying performance obligations and the licensing implementation guidance (ASU 2016-10) a revision of certain SEC Staff Observer comments (ASU 2016-11) and implementation guidance (ASU 2016-12). The guidance permits two methods of transition upon adoption; full retrospective and modified retrospective. The Company adopted ASU 2014-09 on January 1, 2018 and utilized the modified retrospective method. Insurance contracts, lease contracts and investments are not within the scope of ASU 2014-09; therefore, this standard does not apply to the majority of our consolidated revenues. For the Company's miscellaneous income,which is within the scope of this guidance,the Company reviewed its service fee income revenue streams and compared its historical accounting policies and practices to the new adopted standard. The Company believes its historical revenue recognition was materially consistent with the way we recognized service fee income as of June 30, 2019.

11

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Future adoption of New Accounting Standards

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computer Arrangement That is a Service Contract. Under ASU No. 2018-15, the amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. In order to determine which costs can be capitalized, we are to follow the guidance in Subtopic 350-40. Cost for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and the post-implementation stage are expensed as the activities are performed. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Management has reviewed and evaluated the impact of this pending new standard and will implement this starting in fiscal year 2020. The Company has incurred substantial implementation costs related to the new cloud based technology that were incurred in 2018 and decided not to early adopt this ASU.

In August 2018, the FASB issued ASU No. 2018-12, Financial Services-Insurance (Topic 944). This update 1) modifies the timeliness of recognizing changes in the liability for future policy benefits and modifies the rate used to discount future cash flows, 2) simplifies the accounting for certain market-based options or guarantees associated with deposit contracts, 3) simplifies the amortization of deferred acquisition costs, and 4) addresses the effectiveness of the required disclosures. This ASU becomes effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. We anticipate that the adoption of ASU 2018-12 will have a broad impact on our consolidated financial statements and related disclosures and will require us to make changes to certain of our processes, systems and controls. We are unable to determine the impact at this time of ASU No. 2018-12 as we are still in the process of evaluating the standard.

In November 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. The amendments in this update include items brought to the Board’s attention by stakeholders to clarify the guidance in the amendments in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) which was issued in June 2016. These update amendments clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20. Under ASU 2016-13, this replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. This update changes the methodology from an incurred loss to an expected credit loss. An allowance for the expected credit loss will be set up and the net income will be impacted. The credit losses will be evaluated in the current period and an adjustment to the allowance can be made. The new standard becomes effective after December 15, 2019. We are currently evaluating the impact of our pending adoption of the new standard on our consolidated financial statements.

Note 3. Change in Control

On June 28, 2018 we underwent a change in control as a result of the closing of a Loan, Convertible Preferred Stock and Convertible Senior Secured Note Purchase Agreement dated May 9, 2018 (the “Agreement”) with a non-affiliated third party, Xenith Holdings LLC, a Delaware limited liability company (“Xenith”). Vespoint LLC, a Delaware limited liability company (“Vespoint”), owns 100% of the voting stock of Xenith. Vespoint is owned and managed by AMS Advisors LLC, a Delaware limited liability company, and Rendezvous Capital LLC, a New York limited liability company. Each of these three companies is a private investment company; they are controlled by A. Michael Salem and Michael Minnich, who are Co-Chief Executive Officers of Vespoint and Executive Officers of Midwest and American Life.

The terms and conditions of the Agreement were described in Midwest’s Current Report on Form 8-K filed with the SEC on May 14, 2018. All conditions to consummation of the Agreement, including approval of the transactions contemplated therein by the State of Nebraska Department of Insurance (“NDOI”), were subsequently met and a closing was held pursuant to the Agreement on June 28, 2018 (the “Closing”).

12

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Issuance of Series C Convertible Preferred Stock. At the closing of the Agreement, we issued 1,500,000 shares of newly created Series C Convertible Preferred Stock (“Series C Preferred Stock”) to Xenith for $1,500,000, which was recorded in our balance sheet as Mezzanine Equity, and it ranked senior to our voting common stock on liquidation with a preference of $1.00 per share. Subject to the availability of funds, annual dividends of 8% of the Series C Preferred Stock liquidation preference were payable by us; if not paid the dividends accrued. Also, at any time after June 28, 2025 and subject to Nebraska law, Xenith would have required us to redeem the Series C Preferred Stock at the liquidation preference (plus accrued dividends) or fair market value, whichever was greater. If the shares were not redeemed for any reason, an interest rate of 12% per year would have begun. The Preferred Stock voted along with the voting common stock as a single Series on an “as converted” basis. Also, Holders of Preferred Stock voting as a separate Series were entitled to elect five of the Company’s eight members of its Board of Directors. The Preferred Stock had several protections against the Company taking action that would adversely affect the rights of holders of Preferred Stock such as mergers, liquidation, dilutive stock issuances, among others. On June 18, 2019, the Series C Preferred Stock shares were converted, at Xenith’s election, into 72,854,474 shares of our voting common stock at approximately $0.02 per share. All accrued dividends were waived.

At closing of the Agreement, Xenith loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with cash interest of 4% per annum payable quarterly and accrued interest of another 4% per annum payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. Both notes were converted by Xenith into an aggregate 29,141,790 voting common shares on June 18, 2019.

The Agreement further provided that Xenith, in its sole discretion, could loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) could also to be converted into voting common stock at the price of $0.02 per share. Xenith loaned an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000. The additional notes were converted, at Xenith’s election, into 898,538,525 shares of voting common stock on June 18, 2019. All interest on the notes through June 18, 2019 was waived for payment and was accounted for as a capital contribution to Midwest.

Substantially all the proceeds from the Loans and Series C Preferred Stock were contributed to our insurance subsidiary, American Life, to be used for general business purposes.

To summarize of the conversion of the Notes and shares of Series C Preferred Stock into voting common stock and the outstanding voting common stock as of June 30, 2019:

Note 4. Assets and Liabilities Held for Sale

On November 30, 2018, American Life entered into an Assumption and Indemnity Reinsurance Agreement (“Reinsurance Agreement”) with Unified Life Insurance Company (“Unified”), a Texas domiciled stock insurance company. The Reinsurance Agreement provides that American Life ceded and Unified agreed to reinsure, on an indemnity reinsurance basis, 100% of the liabilities and obligations under substantially all of American Life’s life, annuity and health policies (“Policies”). The Agreement closed on December 10, 2018, as previously disclosed in Midwest’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on December 12, 2018. The effective date of the Agreement was July 1, 2018.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

After the closing of the Reinsurance Agreement, Unified began the process of preparing and delivering certificates of assumption and other materials to policyholders of American Life in order to effect an assumption of the Policies by Unified such that all of American Life’s rights and obligations under the policies arising on and after July 1, 2018 would be completely assumed by Unified without further indemnification or other obligations, except for liabilities, claims and obligations incurred before July 1, 2018. Unified is obligated to indemnify American Life against all liabilities and claims and all of its policy obligations from and after the July 1, 2018.

The consideration paid by Unified to American Life under the Reinsurance Agreement upon closing was $3,500,000 (“Ceding Commission”), subject to minor settlement adjustments. At closing, American Life transferred the Statutory Reserves and Liabilities, as defined in the Reinsurance Agreement, directly related to the policies, to Unified.

The Ceding Commission is being amortized on a straight-line basis over the life of the policies. When the policies are converted to assumptive, meaning American Life has no liability exposure for those policies, the remaining Ceding Commission will be recognized in our income statement.

As of June 30, 2019, 59% of the indemnity policies were converted to assumptive policies thereby releasing American Life from its legal obligations related to those policies.

Our balance sheet was required to be restated for all periods shown with the assets and liabilities which were ceded by American Life to Unified into separate line items as assets and liabilities held for sale. The table below summarizes the assets and liabilities that are included in discontinued operations as of June 30, 2019 and as of December 31, 2018:

		As of June 30,			As of December 31,
		2019			2018
Carrying amounts of major classes of assets included as part of discontinued operations:
Policy loans		$	131,443		$	366,849
Amounts recoverable from reinsurers			11,471,699			20,359,326
Premium recoverable			119,751			210,896
Total assets held for sale in the Consolidated Balance Sheet		$	11,722,893		$	20,937,071
Carrying amounts of major classes of liabilities included as part of discontinued operations:
Benefit reserves		$	4,654,144		$	9,799,834
Policy claims			131,000			127,666
Deposit-type contracts			6,899,693			11,050,139
Advance premiums			18,766			21,699
Accounts payable and accrued expenses			14,533			53,395
Total liabilities held for sale in the Consolidated Balance Sheet		$	11,718,136		$	21,052,733

14

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Our income statement was also required to be restated for all periods shown breaking out the net income between continuing operations and discontinued operations. There were no items in 2019 that were reclassified as discontinued operations, therefore, the table below summarizes only the losses that are included in discontinued operations for the three and six months ended June 30, 2018:

		Three months ended				Six months ended
		June 30,				June 30,
		2018				2018
Major line items constituting pretax loss of discontinued operations:
Premiums		$	499,852			$	938,888
Death and other benefits			(203,892	)			(411,113	)
Interest credited			(105,295	)			(205,119	)
Increase in benefit reserves			(42,014	)			(69,522	)
Amortization of deferred acquisition costs			(108,055	)			(202,913	)
Other operating expenses			(46,777	)			(82,328	)
Loss on discontinued operations		$	(6,181	)		$	(32,107	)

Note 5. Investments

The cost or amortized cost and estimated fair value of investments classified as available-for-sale as of June 30, 2019 and December 31, 2018 are as follows:

		Cost or			Gross			Gross
		Amortized			Unrealized			Unrealized			Estimated
		Cost			Gains			Losses			Fair Value
June 30, 2019:
Fixed maturities:
U.S. government obligations		$	2,102,347		$	7,122		$	29,705		$	2,079,764
Mortgage-backed securities			968,616			455			28,290			940,781
Asset-backed securities			21,220,300			71,310			63,228			21,228,382
States and political subdivisions -- general obligations			263,229			3,889			-			267,118
States and political subdivisions -- special revenue			25,172			190			-			25,362
Corporate			16,304,856			237,000			329,280			16,212,576
Total fixed maturities		$	40,884,520		$	319,966		$	450,503		$	40,753,983
Mortgage loans on real estate, held for investment			4,176,039			-			-			4,176,039
Total Investments		$	45,060,559		$	319,966		$	450,503		$	44,900,022
December 31, 2018:
Fixed maturities:
U.S. government obligations		$	2,112,816		$	247		$	117,112		$	1,995,951
Mortgage-back securities			1,068,976			-			64,925			1,004,051
States and political subdivisions -- general obligations			265,473			-			2,289			263,184
States and political subdivisions -- special revenue			25,231			-			58			25,173
Corporate			15,754,345			14			1,658,535			14,095,824
Total fixed maturities		$	19,226,841		$	261		$	1,842,919		$	17,384,183

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

The Company has two securities that individually exceed 10% of the total of the state and political subdivisions categories as of June 30, 2019. The amortized cost, fair value, credit ratings, and description of each security is as follows:

The following table summarizes, for all securities in an unrealized loss position at June 30, 2019 and December 31, 2018, the estimated fair value, pre-tax gross unrealized loss and number of securities by consecutive months they have been in an unrealized loss position.

		June 30, 2019								December 31, 2018
					Gross			Number					Gross			Number
		Estimated			Unrealized			of		Estimated			Unrealized			of
		Fair Value			Loss			Securities(1)		Fair Value			Loss			Securities(1)
Fixed Maturities:
Less than 12 months:
U.S. government obligations		$	-		$	-		-		$	7,862		$	430			1
Asset-backed securities			2,969,850			15,103		4			-			-			-
Corporate			755,327			20,155		2			3,351,664			315,617			23
Greater than 12 months:
U.S. government obligations			1,870,920			29,705		11			1,785,949			116,682			10
Mortgage-back securities			908,765			28,290		17			1,004,052			64,925			19
Asset-backed securities			8,626,896			48,125		9
States and political subdivisions -- general obligations			-			-		-			263,183			2,289			2
States and political subdivisions -- special revenue			-			-		-			25,173			58			1
Corporate			6,309,911			309,125		34			10,628,745			1,342,918			58
Total fixed maturities		$	21,441,669		$	450,503		77		$	17,066,628		$	1,842,919			114

(1)	We may reflect a security in more than one aging category based on various purchase dates.

Based on our review of the securities in an unrealized loss position at June 30, 2019 and December 31, 2018, no other-than-temporary impairments were deemed necessary. Management believes that the Company will fully recover its cost basis in the securities held at June 30, 2019, and management does not have the intent to sell nor is it more likely than not that the Company will be required to sell such securities until they recover or mature.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

The amortized cost and estimated fair value of fixed maturities at June 30, 2019, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following provides the current composition of our mortgage loans on real estate at June 30, 2019 and December 31, 2018:

The Company holds no valuation allowance as of June 30, 2019 due to impairment of these mortgages.

The Company is required to hold assets on deposit for the benefit of policyholders in accordance with statutory rules and regulations. At June 30, 2019 and December 31, 2018, these required deposits had a total amortized cost of $3,351,036 and $2,958,178 and fair values of $3,221,426 and $2,772,809, respectively.

The components of net investment income for the three and six months ended June 30, 2019 and 2018 are as follows:

Proceeds for the three months ended June 30, 2019 and 2018 from sales of investments classified as available-for-sale were $2,040,640 and $3,023,134, respectively. Gross gains of $7,382 and $0 and gross losses of $7,127 and $152,203 were realized on those sales during the three months ended June 30, 2019 and 2018, respectively. Proceeds for the six months ended June 30, 2019 and 2018 from sales of investments classified as available-for-sale were $2,406,165 and $6,335,502, respectively. Gross gains of $9,006 and $24,910 and gross losses of $13,148 and $226,784 were realized on those sales during the six months ended June 30, 2019 and 2018, respectively.

Note 6. Fair Values of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

●	Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
●	Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
●	Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Notes payable: Notes payable consisted of the convertible notes entered into due to the Xenith transaction and were recorded net of issuance costs. As of June 30, 2019, Midwest had no outstanding notes payable.

Fixed maturities: Fixed maturities are recorded at fair value on a recurring basis utilizing a third-party pricing source. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third party pricing services. For the period ended June 30, 2019, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third party prices were changed from the values received. Securities with prices based on validated quotes from pricing services are reflected within Level 2.

Cash: The carrying value of cash and cash equivalents and short-term investments approximate the fair value because of the short maturity of the instruments.

Mortgage loans on real estate, held for investment: Mortgage loans are carried at their principal value as there are no traded market values for these loans.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value. Policy loans are categorized as Level 3 in the fair value hierarchy.

Deposit-type contracts: The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. These liabilities are categorized as Level 3 in the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of June 30, 2019 and December 31, 2018.

		Quoted In			Significant Other			Significant			Estimated
		Active Markets			Observable Inputs			Unobservable Inputs			Fair
		(Level 1)			(Level 2)			(Level 3)			Value
June 30, 2019
Fixed maturities:
U.S. government obligations		$	-		$	2,079,764		$	-		$	2,079,764
Mortgage-backed securities			-			940,781			-			940,781
Asset-backed securities						21,228,382						21,228,382
States and political subdivisions — general obligations			-			267,118			-			267,118
States and political subdivisions — special revenue			-			25,362			-			25,362
Corporate			-			16,212,576			-			16,212,576
Total fixed maturities			-			40,753,983			-			40,753,983
Mortgage loans			-			-			4,176,039			4,176,039
Total Investments		$	-		$	40,753,983		$	4,176,039		$	44,930,022
December 31, 2018
Fixed maturities:
U.S. government obligations		$	-		$	1,995,951		$	-		$	1,995,951
Mortgage-back securities			-			1,004,051			-			1,004,051
States and political subdivisions - general obligations			-			263,184			-			263,184
States and political subdivisions - special revenue			-			25,173			-			25,173
Corporate			-			14,095,824			-			14,095,824
Total fixed maturities		$	-		$	17,384,183		$	-		$	17,384,183

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

There were no transfers of financial instruments between any levels during the six months ended June 30, 2019 or during the year ended December 31, 2018.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. There were no financial assets or financial liabilities measured at fair value on a non-recurring basis.

The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy, for financial assets and financial liabilities as of June 30, 2019 and December 31, 2018, respectively:

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Note 7. Income Tax Matters

Significant components of the Company’s deferred tax assets and liabilities as of June 30, 2019 and December 31, 2018 are as follows:

At June 30, 2019 and December 31, 2018, the Company recorded a valuation allowance of $1,835,176 and $1,928,454, respectively, on the deferred tax assets to reduce the total to an amount that management believes will ultimately be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income.

Section 382 of the Internal Revenue Code limits the utilization of U.S. net operating loss (“NOL”) carryforwards following a change of control, which occurred on June 28, 2018. As of June 30, 2019, the deferred tax assets included the expected tax benefit attributable to federal NOLs of $6,423,135. The federal NOLs generated prior to June 28, 2018 which are subject to Section 382 limitation can be carried forward. If not utilized, the NOLs of $890,636 prior to 2017 will expire through the year of 2032, and the NOLs generated from June 28, 2018 to June 30, 2019 do not expire and will carry forward indefinitely, but their utilization in any carry forward year is limited to 80% of taxable income in that year. The Company believes that it is more likely than not that the benefit from federal NOL carryforwards will not be realized; thus, we have recorded a full valuation allowance of $1,348,858 on the deferred tax assets related to these federal NOL carryforwards.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

There was no income tax expense for the six months ended June 30, 2019 and 2018. This differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21% to pretax income, as a result of the following:

		Three months ended June 30,								Six months ended June 30,
		2019				2018				2019				2018
Computed expected income tax benefit		$	(174,689	)		$	(192,914	)		$	(488,643	)		$	(352,490	)
Increase (reduction) in income taxes resulting from:
Meals, entertainment and political contributions			3,053				2,247				5,636				4,204
Change in loss carryforward due to 382 limitation			-				5,532,029				-				5,532,029
COD Interest			177,563				-				177,563				-
Other			(38,136	)			44,017				38,837				30,266
			142,480				5,578,293				222,036				5,566,499
Tax benefit before valuation allowance			(32,209	)			5,385,379				(266,607	)			5,214,009
Change in valuation allowance			32,209				(5,385,379	)			266,607				(5,214,009	)
Net income tax expenses		$	-			$	-			$	-			$	-

Note 8. Reinsurance

A summary of significant reinsurance amounts affecting the accompanying consolidated financial statements as of June 30, 2019 and December 31, 2018 and for the six months ended June 30, 2019 and 2018 is as follows:

The following table provides a summary of the significant reinsurance balances recoverable on paid and unpaid policy claims by reinsurer:

										Recoverable on						Total Amount
				Recoverable			Recoverable			Benefit			Ceded			Recoverable
		AM Best		on Paid			on Unpaid			Reserves/Deposit-			Due			from
Reinsurer		Rating		Losses			Losses			type Contracts			Premiums			Reinsurer
Optimum Re Insurance Company		A-		$	-		$	-		$	483,945		$	-		$	483,945
Sagicor Life Insurance Company		A-			-			119,871			11,383,747			268,351			11,235,267
US Alliance Life and Security Company		NR			-			31,000			11,782,702			27,819			11,785,883
				$	-		$	150,871		$	23,650,394		$	296,170		$	23,505,095

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Effective July 1, 2018, American Life entered into an assumptive and indemnity coinsurance transaction with Unified to transfer 100% of the risk related to the remaining legacy block of business, see Note 4 above for further discussion. We transferred $19,311,616 of GAAP net adjusted reserves as of July 1, 2018 to Unified for cash of $14,320,817, which was net of a ceding allowance of $3,500,000 plus the accrued interest on the transaction from July 1, 2018 until it closed on December 10, 2018. Unified assumed certain responsibilities for incurred claims, surrenders and commission from the effective date.

The ceding commission of $3,500,000 was recorded net of the difference between statutory and GAAP net adjusted reserves, the elimination of DAC of $1,890,013, VOBA of $338,536, and the remaining deferred profit from our legacy business of $26,896. The remaining $3,069,690 was reflected as a deferred gain and will be recognized into income over the expected duration of the legacy blocks of business. As of June 30, 2019, Unified had converted 59% of the indemnity coinsurance to assumptive coinsurance. American Life had amortization expense for six months ended June 30, 2019 of $67,108. As a result of the assumption of 59% of the indemnity policies, $1,747,582 was additionally released into income for the six months ended June 30, 2019. The ending deferred ceding commission at June 30, 2019 was $1,178,258.

American Life and Security National Life Insurance (“SNL”) reached an agreement to commutate the assumed block of life business effective July 31, 2018. American Life recorded a GAAP loss of $154,780 due to the difference between the GAAP and statutory reserves and the write-off of the remaining VOBA. Net adjusted reserves transferred back to SNL totaled $2,543,898 on a GAAP basis.

At June 30, 2019 and December 31, 2018, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to Sagicor were $11,235,267 and $11,494,161, respectively. At June 30, 2019 and December 31, 2018, total benefit reserves, policy claims, deposit-type contracts, and due premiums ceded by American Life to US Alliance were $11,785,883 and $11,149,888, respectively. American Life remains contingently liable on the ceded reinsurance should Sagicor or US Alliance be unable to meet their respective obligations.

The use of reinsurance does not relieve American Life of its primary liability to pay the full amount of the insurance benefit in the event of the failure of a reinsurer to honor its contractual obligation for all blocks of business except what is included in the Unified transaction. The reinsurance agreement with Unified discharges American Life’s responsibilities once all the policies have changed from indemnity to assumptive reinsurance. No reinsurer of business ceded by American Life has failed to pay policy claims (individually or in the aggregate) with respect to our ceded business.

American Life monitors several factors that it considers relevant to satisfy itself as to the ongoing ability of a reinsurer to meet all obligations of the reinsurance agreements. These factors include the credit rating of the reinsurer, the financial strength of the reinsurer, significant changes or events of the reinsurer, and any other relevant factors. If American Life believes that any reinsurer would not be able to satisfy its obligations with American Life, a separate contingency reserve may be established. At June 30, 2019 and December 31, 2018, no contingency reserve was established.

Note 9. Notes Payable

At closing of the Agreement, Xenith loaned a total of $600,000 to Midwest, repayable upon maturity in 10 years with interest of 8% per annum of accrued interest of another 4% per annum payable upon maturity. The loans were made under two notes of $500,000 and $100,000, respectively. The Agreement further provided that Xenith, in its sole discretion, may loan up to an additional $23,500,000 to Midwest. Any loans made by Xenith under this election (“Subsequent Loans”) could also to be converted into our voting common stock at $0.02 per share. Xenith contributed an additional $18,500,000 in the fourth quarter of 2018 following the amendment of the Midwest Articles of Incorporation to increase its authorized voting common shares to 1,970,000,000.

The Company had total accrued interest of $845,536 on the Xenith notes through June 18, 2019. This included interest not recorded from June 28, 2018 through December 31, 2018 of $131,711 and interest from January 1, 2019 through June 18, 2019 of $713,825. All interest on the notes from inception through June 18, 2019 were waived by Xenith. The accrued interest was accounted for as an additional capital contribution.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

The following table sets forth information regarding loans made to us by Xenith through June 18, 2019 and the number of shares of voting common stock each loan was converted into:

As of June 30, 2019, Midwest had no notes outstanding to Xenith.

Note 10. Deposit-Type Contracts

The Company’s deposit-type contracts represent the contract value that has accrued to the benefit of the policyholder as of the balance sheet date. Liabilities for these deposit-type contracts are included without reduction for potential surrender charges. This liability is equal to the accumulated account deposits, plus interest credited, and less policyholder withdrawals. The following table provides information about deposit-type contracts for the three months ended June 30, 2019 and the year ended December 31, 2018:

Under the terms of American Life’s historical coinsurance agreement with a third party, American Life assumed certain deposit-type contract obligations. These were commutated effective July 31, 2018. The deposits, withdrawals and interest credited in the table above represents the sales of the multi-year guaranteed annuity (“MYGA”) product for 2019 and activity from the third party through July 31, 2018.

Note 11. Contingencies and Commitments

Legal Proceedings: We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.

Regulatory Matters: State regulatory bodies and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning the Company’s compliance with laws in relation to, but not limited to, insurance and securities matters. American Life received a Certificate of Authority to conduct business in Iowa during the first quarter of 2019. American Life is seeking approval to conduct business in additional states during 2019.

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Note 12. Leases

Our operating lease activities consist of leases for office space and equipment. Our finance lease activities consist of leases for hardware which we will own at the end of the lease agreement. None of our lease agreements include variable lease payments. See discussion of the January 1, 2019 implementation impact at Note 1. Basis of Presentation and Summary of Significant Accounting Policies.

Supplemental balance sheet information as of June 30, 2019 for our leases is as follows:

				As of			As of
Leases		Classification		June 30, 2019			December 31, 2018
Assets
Noncurrent:
Finance		Office and other equipment, net of accumulated depreciation and amortization		$	8,739		$	14,564
Operating		Operating lease right-of-use assets			531,098			592,065
Total leased assets				$	539,837		$	606,629
Liabilities
Current:
Finance lease		Finance lease liabilities		$	5,579		$	9,299
Noncurrent:
Operating lease		Operating lease liabilities			585,595			646,519
Total leased liabilities				$	591,174		$	655,818

The difference between assets and liabilities includes a $5,266 adjust to the finance lease and a $54,454 adjustment to an operating lease, both at the beginning of the period as part of the ASC 842 implementation adjustment.

Our operating and finance leases expenses for the three and six months ended June 30, 2019 are as follows:

				Three months ended June 30,						Six months ended June 30,
Leases		Classification		2019			2018			2019			2018
Operating		General and administrative expense		$	3,344		$	4,609		$	7,109		$	9,219
Finance lease cost:
		Amortization expense			2,914			1,121			5,827			1,121
		Interest expense			111			111			222			222

Minimum contractual obligations for our leases as of June 30, 2019 are as follows:

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Midwest Holding Inc. and Subsidiary
Notes to Consolidated Financial Statements – Continued

Supplemental cash flow information related to leases was as follows:

		Three months ended June 30,								Six months ended June 30,
		2019				2018				2019				2018
Cash payments
Operating cash flows from operating leases		$	(190	)		$	1,076			$	42			$	1,076
Operating cash flows from finance leases			1,164				(628	)			2,328				(1,258	)
Financing cash flows from finance leases			(111	)			(111	)			(222	)			(222	)

The weighted average remaining lease terms of our finance and operating leases were nine months and three years, respectively and as of June 30, 2019. As of December 31, 2019 the weighted average remaining lease terms of our finance and operating leases were fifteen months and three and a half years, respectively. The weighted average discount rates used to determine the lease liabilities for finance leases was 6% and operating leases was 8% as of June 30, 2019 and December 31, 2019, respectively. The discount rate used for finance leases was based on the rates implicit in the leases. The discount rate used for operating leases was based on our incremental borrowing rate.

Note 13. Statutory Net Income and Surplus

American Life is required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the Nebraska Department of Insurance. Statutory practices primarily differ from GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. American Life’s statutory net losses for the six months ended June 30, 2019 and 2018 were $3,000,141 and $1,381,377, respectively. Capital and surplus of American Life as of June 30, 2019 and December 31, 2018 was $16,132,711 and $20,979,285, respectively. The net loss was primarily due to the continuing expenses incurred to provide services on the new software and related technology to distribute products through marketing organizations. The multi-year guaranteed annuity (“MYGA”) sales began late in January 2019 with $38,238,880 of face amount of policies issued during the first half of 2019. An additional $6,102,081 was pending as of June 30, 2019. Even though American Life had a significant increase in statutory revenue, the earnings profile of MYGA products are characterized by up-front statutory losses.

Note 14. Surplus Notes

Our surplus notes of $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. The Company retired the notes in full as of December 31, 2018, including any accrued interest, through the transfer of the 10 condominiums in Hawaii owned by American Life. The book value of the surplus notes, including interest, was $876,400. The book value of the 10 condominiums in Hawaii was $493,648. We recognized a gain of $382,752 on the settlement of the condos and surplus notes.

Note 15. Third Party Administration

The Company commenced its third party administrative (“TPA”) services in 2012 as an additional revenue source. These services are offered to non-affiliated entities. These agreements, for various levels of administrative services on behalf of each company, generate fee income for the Company. Services provided vary based on their needs and can include some or all aspects of back-office accounting and policy administration. We have been able to perform our TPA services using our existing in-house resources. Fees earned during the three months ended June 30, 2019 and 2018 amounted to $12,720 and $23,100, respectively. Fees earned during the six months ended June 30, 2019 and 2018 were $28,260 and $47,340, respectively.

Note 16. Subsequent Events

Effective July 25, 2019, American Life entered into a Funds Withheld Coinsurance and Modified Coinsurance Agreement (“FW/Modco Agreement”) with Ironbound Reinsurance Company Limited, an unaffiliated reinsurance company organized under the laws of Barbados (“Ironbound”). Under the FW/Modco Agreement, American Life will cede to Ironbound, on a funds withheld coinsurance and modified coinsurance basis, an initial ninety-five (95%) quota share of certain liabilities with respect to its MYGA business. American Life has established two accounts to hold the assets for the FW/Modco Agreement, a Funds Withheld Account and a Modco Deposit Account.

In addition, a trust account was established on June 30, 2019 among American Life, Ironbound and Wells Fargo Bank, National Association for the sole benefit of American Life to fund the Funds Withheld Account and the Modco Deposit Account for any shortage to cover required reserves.

The initial settlement included net premium income of $45,005,536 (gross premiums of $46,568,321 minus gross commissions paid of $1,562,786) and net statutory reserves of $47,271,267. The initial settlement for the Funds Withheld Account was $24,928,934 and for the Modco Deposit Account was $16,619,289 and the reserves required was $26,944,622 and $17,963,081, respectively. The amount owed to the Funds Withheld Account and the Modco Deposit Account from the trust account was $2,015,688 and $1,343,792, respectively which was funded at the closing of the Ironbound transaction.

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

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the financial condition as of June 30, 2019, compared with December 31, 2018, and the results of operations for the three months ended June 30, 2019, compared with the corresponding period in 2018 of Midwest Holding Inc. and its consolidated subsidiary. The MD&A is provided as a supplement to, and should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements (“Notes”) presented in “Part 1 – Item 1. Financial Statements” of this Report; and our Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”), including the sections entitled “Part I – Item 1A. Risk Factors,” and “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Cautionary Note Regarding Forward-Looking Statements

Except for certain historical information contained herein, this report contains certain statements that may be considered “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended, and such statements are subject to the safe harbor created by those sections. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements, including without limitation: any projections of revenues, earnings, cash flows, capital expenditures, or other financial items; any statement of plans, strategies, and objectives of management for future operations; any statements concerning proposed acquisition plans, new services, or developments; any statements regarding future economic conditions or performance; and any statements of belief and any statement of assumptions underlying any of the foregoing. Words such as “believe,” “may,” “could,” “expects,” “hopes,” “estimates,” “projects,” “intends,” “anticipates,” and “likely,” and variations of these words, or similar expressions, terms, or phrases, are intended to identify such forward-looking statements. Forward-looking statements are inherently subject to risks, assumptions, and uncertainties, some of which cannot be predicted or quantified, which could cause future events and actual results to differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Item 1A. Risk Factors," set forth in our 2018 Form 10-K.

All such forward-looking statements speak only as of the date of this Form 10-Q. You are cautioned not to place undue reliance on such forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the our expectations with regard thereto or any change in the events, conditions, or circumstances on which any such statement is based.

Overview

We were formed on October 31, 2003 for the primary purpose of becoming a financial services company. We presently conduct our business through our sole life insurance subsidiary, American Life & Security Corp. (“American Life”). In 2009, American Life was issued a certificate of authority to conduct life insurance business in Nebraska.

We have incurred losses since inception that resulted primarily from costs incurred while raising capital and establishing and operating American Life and other entities. We expect to continue to incur operating losses until American Life achieves a volume of in-force life insurance policies that provides premiums that are sufficient to cover our operating expenses.

On April 2, 2019, we obtained a 51% ownership in 1505 Capital that was established on August 31, 2018 with its Certificate of Formation. It was organized to provide financial and investment advisory and management services to clients and any related investment, trading or financial activities.

Critical Accounting Policies and Estimates

The MD&A included in our 2018 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. This report should be read in conjunction with the “Critical Accounting Policies and Estimates” discussed in our 2018 Form 10-K.

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Consolidated Results of Operations - Three Months Ended June 30, 2019

On June 28, 2018, Midwest closed on the Agreement with Xenith as discussed above in Note 3 to Item 1. Following the closing, we embarked upon a new business plan which includes leveraging technology to distribute insurance products through Independent Marketing Organizations ("IMOs").

We also reinsured our existing legacy block of insurance business through a reinsurance agreement with a third party reinsurer in exchange for a ceding commission of $3.5 million as described below. In addition, American Life obtained an A.M. Best Rating of B++ in December 2018. We purchased and installed comprehensive new technology during the fourth quarter of 2018 and we began selling our first MYGA product in late January 2019 through the IMOs.

American Life closed a reinsurance agreement on December 10, 2018 with a third party insurance company to cede 100% of the remaining legacy block of business, with the transaction being effective July 1, 2018. See Note 4 Assets and Liabilities Held for sale in the Notes to Consolidated Financial Statements above. Due to the assumptive nature of this agreement, this transaction qualifies to be reported as Discontinued Operations under ASC 2014-08 Presentation of Financial Statements (Topic 205); therefore, our 2018 income statement reflects net income from continuing operations and income from discontinued operations. The discussion below reflects the continuing operations changes year over year.

Net Loss: The change in net loss for continuing operations decreased primarily due to the release of $1,005,000 of the deferred ceding commission into income due to an additional 46% indemnity coinsurance being converted to assumptive by Unified and an increase in our investment income due to the larger investment portfolio. These were offset by increases in our salaries and operating expenses related to the new technology implementation and product development that continue in 2019 along with the increase in the interest credited on our outstanding annuities.

Premium revenue: The premium revenue decrease was primarily due to the premium in 2018 that was related to an assumed block of business which was commutated in July 2018. The introduction of our MYGA product discussed above generated a meaningful volume of premium; however, the premium income for this product was considered an investment contract and was deferred to deposit-type liabilities on our balance sheet. We expect that premium income will not be a major source of income until American Life develops new life insurance products in the future and achieves significant additional product sales.

Investment income, net of expenses: The components of our net investment income are as follows:

The increase in investment income was primarily due to the purchases of $19.4 million in new investments with higher rates of return during the first half of 2019. We expect this to increase in 2019 as American Life buys more bonds with the sale of the MYGA product. This will be offset by a reinsurance agreement where American Life expects to cede up to 95% of its premium income to a third party reinsurer.

Net realized gains and losses on investments: The net realized loss decreased primarily due to selling bonds to cover operating expenses in 2018 when market conditions were poor prior to the Xenith infusion of capital. We do not believe we will be required to sell bonds at a loss in the remaining months of 2019.

Amortization of deferred gain on reinsurance: The increase was due to an additional 46% of indemnity coinsurance being converted to assumptive reinsurance where we no longer have a legal obligation for those policies. American Life released into income 46% of the remaining deferred ceding commission. The total deferred ceding commissions released into income for the third party reinsurers was $1,046,552 and $12,049 for the three months ended June 30, 2019 and 2018, respectively.

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Miscellaneous income: Miscellaneous income increased due to the consolidation of an investment advisor subsidiary into Midwest as of April 2, 2019. This was offset by the decrease in TPA fees. We had only one customer for whom we performed these services. TPA fees earned during the three months ended June 30, 2019 and 2018 were $12,720 and $23,100, respectively.

Expenses are summarized in the table below.

Interest credited: The increase was due to the sale of the new MYGA product during the first half of 2019 that is classified as deposit-type funds. The interest credited in 2018 related to a block of business from SNL that was commutated on July 31, 2018.

Death and other benefits: Death benefits decreased due the commutation of the SNL block of business as of July 31, 2018. The benefits incurred in 2019 were for policies that were not included with our July 1, 2018 reinsurance transaction.

Increase in benefit reserves: The decrease in benefit reserves was due to the MYGA sales that were reflected on the balance sheet as a liability. There are no reserves held for this product on a GAAP basis.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs deferred on the sale of American Life’s MYGA product starting in late January 2019 and the subsequent amortization and the restatement of prior year for the legacy block of business amortization as an expense for discontinued operations.

Salaries and benefits: The increase was due to the addition of remuneration for two officers as a result of the Xenith transaction as discussed above in Note 3 – Change in Control in the Notes to Consolidated Financial Statements in this Report. These increases were offset by personnel reductions as a result of management’s cost-cutting initiatives.

Other operating expenses: Other operating expenses increased primarily due to approximately $454,000 of expenses incurred for consultants, continuing technology and software development, and portal and web design. We incurred $481,000 of interest on the Xenith notes payable through June 18, 2019. Payment of notes interest was forgiven by Xenith and hence treated as an additional capital contribution. Audit and other fees of $130,000 relating to the year-end 2018 audit that was delayed until July 2018. Management expects to be incurring additional product development and system related costs in the remaining half of 2019.

Consolidated Results of Operations - Six Months Ended June 30, 2019

The following discussion compares the results of the six months ended June 30, 2019 with the six months ended June 30, 2018. Unless the context indicates otherwise, the 2019 results are stated first followed by 2018 results.

Net Loss: The change in net loss for continuing operations increased primarily due to an increase in operating expenses related to the new technology implementation and product development that continued in 2019. These were offset by the release of 59% of the deferred ceding commission into income due to 59% indemnity coinsurance being converted to assumptive by Unified, the increase in investment income due to the increase in our investment portfolio and an increase in salaries and benefits.

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Insurance revenues are primarily generated from premium revenues and investment income. Insurance revenues are summarized in the table below.

Premium revenue: Premium revenue decreased primarily due to the premium in 2018 that was related to an assumed block of business which was commutated in July 2018. In 2019 we had a refund of premium that we had included in 2018. The introduction of our MYGA product discussed above generated a meaningful volume of premium; however, the premium income for this product was considered an investment contract and was deferred to deposit-type liabilities on our balance sheet. We expect that premium income will not be a major source of income until American Life develops new life insurance products in the future and achieves significant additional product sales.

Investment income, net of expenses: The components of our net investment income are as follows:

The increase in investment income was primarily due to an increase in our bond inventory as a result of the sales generated from the new MYGA product American Life introduced in Q1 2019. We expect this to continue to increase in 2019 as American Life sales of the MYGA product increases and new products are introduced.

Net realized losses on investments: The net realized loss decreased primarily due to selling bonds to cover operating expenses in 2018 when market conditions were poor prior to the Xenith infusion of capital. We do not believe we will be required to sell bonds at a loss in the remaining months of 2019 due to the level of capitalization and improved market conditions.

Amortization of deferred gain on reinsurance: The increase was due to 59% of indemnity coinsurance being converted to assumptive reinsurance where we no longer have a legal obligation for those policies. American Life released into income 59% of the remaining deferred ceding commission.

Miscellaneous income: Miscellaneous income increased due to the consolidation of an investment advisor subsidiary into Midwest as of April 2, 2019. This was offset by the decrease in TPA fees. We had only one customer for whom we performed these services. TPA fees earned during the six months ended June 30, 2019 and 2018 were $28,260 and $47,340, respectively.

Expenses are summarized in the table below.

Interest credited: The increase was due to the sale of the new MYGA product during the first half of 2019 that is classified as deposit-type funds. The interest credited in 2018 related to a block of business from SNL that was commutated on July 31, 2018.

Death and other benefits: Death benefits decreased due the commutation of the SNL block of business as of July 31, 2018. The benefits incurred in 2019 were for policies that were not included with our July 1, 2018 reinsurance transaction.

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Increase in benefit reserves: The change in benefit reserves was a result of the commutation of the SNL business as of July 31, 2018. The MYGA product does not carry reserves as the premium was reclassified as a liability on the balance sheet on a GAAP basis.

Amortization of deferred acquisition costs: The increase was due to the deferred acquisition costs on the sale of American Life’s MYGA product starting in late January 2019 and the subsequent amortization and the restatement of prior year for the legacy block of business amortization as an expense for discontinued operations.

Salaries and benefits: The increase was due to the addition of remuneration for two officers as a result of the Xenith transaction as discussed above in Note 3 – Change in Control in the Notes to Consolidated Financial Statements in this Report. These increases were offset by personnel reductions as a result of management’s cost-cutting initiatives.

Other operating expenses: Other operating expenses increased primarily due to approximately $1,100,000 of expenses incurred for consultants, continuing technology and software development, and portal and web design. We incurred $845,536 of interest on the Xenith notes payable that included approximately $131,000 for 2018 that was not previously included. Xenith forgave the payment of the interest accrued upon the conversion of the notes payable, as a result the payable was treated as an additional capital contribution. Audit and other fees of $327,000 relating to the year-end 2018 audit that was delayed until July 2018. Legal fees increased approximately $63,000 as a result of the state expansion initiatives, the settlement of the Hawaii condos, and fees associated with seeking a new reinsurer; these legal fees were offset by legal costs related to the acquisition of Midwest by Xenith that occurred in 2018. Management expects to be incurring additional product development and system related costs in Q2 of 2019.

Investments

The Company’s overall investment philosophy is reflected in the allocation of its investments. The Company emphasizes investment grade debt securities, mortgages, and policy loans. The Company has modified its investment strategy to purchase larger position securities with increased yields. The duration of our new investments will be less than ten years for the majority of those investments. The investment advisory subsidiary that we acquired a 51% ownership in on April 2, 2019, will be providing investment and management services to the Company going forward. The following table shows the carrying value of our investments by investment category and cash and cash equivalents, and the percentage of each to total invested assets as of June 30, 2019 and December 31, 2018.

		June 30, 2019						December 31, 2018
		Carrying			Percent			Carrying			Percent
		Value			of Total			Value			of Total
Fixed maturity securities:
U.S. government obligations		$	2,079,764		3.8	%		$	1,995,951			9.9	%
Mortgage-backed securities			940,781		1.7				1,004,051			5.0
Asset-backed securities			21,228,382		38.4				-			-
States and political subdivisions - general obligation			267,118		0.5				263,184			1.3
States and political subdivisions - special revenue			25,362		-				25,173			0.1
Corporate			16,212,576		29.3				14,095,824			69.5
Total fixed maturity securities			40,753,983		73.7				17,384,183			85.8
Mortgage loans on real estate, held for investment			4,176,039		7.6				-			-
Cash and cash equivalents			10,274,224		18.6				2,832,567			14.0
Policy Loans			43,254		0.1				43,843			0.2
		$	55,372,500		100.0	%		$	20,260,593			100.0	%

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The following table shows the distribution of the credit ratings of our portfolio of fixed maturity securities by carrying value as of June 30, 2019 and December 31, 2018.

		June 30, 2019						December 31, 2018
		Carrying						Carrying
		Value			Percent			Value			Percent
AAA and U.S. Government		$	3,220,460		7.9	%		$	3,045,768		17.5	%
AA			3,731,825		9.2				1,721,450		9.9
A			9,044,587		22.2				4,221,297		24.3
BBB			24,606,715		60.3				8,261,450		47.5
Total investment grade			40,603,587		99.6				17,249,965		99.2
BB and other			150,396		0.4				134,218		0.8
Total		$	40,753,983		100.0	%		$	17,384,183		100.0	%

Reflecting the quality of securities maintained by the Company, 99.6% and 99.2% of all fixed maturity securities were investment grade as of June 30, 2019 and December 31, 2018, respectively. Due to the low interest rate environment, the Company has invested in bonds with “A” or “BBB” ratings.

Market Risks of Financial Instruments

The Company holds a portfolio of investments that primarily includes cash, bonds, stocks, and real estate loans, held for investment. Each of these investments is subject to market risks that can affect their return and their fair value. A majority of the investments are fixed maturity securities including debt issues of corporations, U.S. Treasury securities, or securities issued by government agencies. The primary market risks affecting the investment portfolio are interest rate risk, credit risk, and equity risk.

Interest Rate Risk

Interest rate risk arises from the price sensitivity of investments to changes in interest rates. Interest and dividend income represent the greatest portion of an investment’s return for most fixed maturity securities in stable interest rate environments. The changes in the fair value of such investments are inversely related to changes in market interest rates. As interest rates fall, the interest and dividend streams of existing fixed-rate investments become more valuable and fair values rise. As interest rates rise, the opposite effect occurs. We attempt to mitigate our exposure to adverse interest rate movements through staggering the maturities of the fixed maturity investments and through maintaining cash and other short term investments to assure sufficient liquidity to meet its obligations and to address reinvestment risk considerations. Due to the composition of our book of insurance business, we believe it is unlikely that we would encounter large surrender activity due to an interest rate increase that would force the disposal of fixed maturities at a loss.

Credit Risk

We are exposed to credit risk through counterparties and within the investment portfolio. Credit risk relates to the uncertainty associated with an obligor’s ability to make timely payments of principal and interest in accordance with the contractual terms of an instrument or contract. We manage our credit risk through diversification of investments amongst many corporations and numerous industries. Additionally, our investment policy limits the size of holding in any particular issuer.

Liquidity and Capital Resources

At June 30, 2019, the Company had cash and cash equivalents totaling $10,274,224. We believe that our existing cash and cash equivalents will be sufficient to fund the anticipated operating expenses and capital transaction expenditures through the remainder of 2019 and 2020.

The National Association of Insurance Commissioners (“NAIC”) has established minimum capital requirements in the form of Risk-Based Capital (“RBC”). RBC factors the type of business written by an insurance company, the quality of its assets and various other aspects of an insurance company’s business to develop a minimum level of capital called “authorized control level risk-based capital” and compares this level to adjusted statutory capital that includes capital and surplus as reported under statutory accounting principles, plus certain investment reserves. Should the ratio of adjusted statutory capital to control level RBC fall below 200%, a series of remedial actions by the affected company would be required. On October 10, 2018 and December 7, 2018, Xenith contributed an additional $1,000,000 and $17,500,000, respectively to Midwest in the way of convertible notes. Midwest subsequently contributed all $18,500,000 to American Life. The additional funding allowed American Life to settle the Unified Life Insurance Company (“Unified”) coinsurance transaction instead of liquidating a portion of its bond portfolio. As a direct result of the capital contributions from the Xenith transaction discussed above and the ceding 100% of our remaining block of business to Unified, our RBC at December 31, 2018 was 5,480%.

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Effective July 1, 2018, American Life completed the 2018 reinsurance transaction discussed above. We paid no commissions or brokerage fees relating to this transaction. While the third party reinsurer assumed certain liabilities and obligations, we are not relieved of our legal liability to the policyholders until all the policies are transferred from “indemnity” to “assumptive.” Therefore, the liabilities and obligations associated with the reinsured blocks of business remain on our Consolidated Balance Sheets under Assets and Liabilities Held for Sale. We transferred $19,311,616 of GAAP net adjusted reserves as of July 1, 2018 to the third party reinsurer for cash of $14,320,817, which was net of a ceding allowance of $3,500,000 plus the accrued interest on the transaction from July 1, 2018 until it closed on December 10, 2018. The third party reinsurer assumed all responsibilities for incurred claims, surrenders and commission from the effective date. As of June 30, 2019, 59% of the reinsured block of business was converted from indemnity to assumptive reissuance. We and the third party reinsurer expect a majority of the remaining business will be assumed by December 31, 2019.

Surplus notes American Life had issued of $300,000 and $250,000 matured on August 1, 2016 and September 1, 2016, respectively. American Life reached an agreement with the holder of the notes in late 2018 to retire the surplus notes in full, including any accrued interest, through the transfer of the 10 condominiums in Hawaii owned by American Life. This transaction received regulatory approval in December 2018. The book value at December 31, 2018 of the surplus notes was $876,400 and the book value of the 10 condominiums in Hawaii was $493,648 with an estimated market value of $830,000. We recognized a gain of $382,752 on the settlement of the transaction.

Net cash used by operating activities was $4,911,603 for June 30, 2019, which was comprised primarily of the net loss of $2,326,870, the deferred coinsurance ceding commission of $1,838,878, the deferred acquisition costs capitalized of $1,157,073 and the amounts recoverable from reinsurers of $404,451, partially offset by an increase in policy liabilities of $672,825 primarily due increase in deposit-type contract interest. Net cash used for investing activities was $25,904,372. The primary source of cash used was from our purchase of investments from sales of the MYGA product. Offsetting this use of cash was our sale of investments in available-for-sale securities. Net cash provided by financing activities was $38,257,632. The primary source of cash was net receipts on the MYGA product.

Impact of Inflation

Insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such losses and expenses, are known. We attempt, in establishing premiums, to anticipate the potential impact of inflation. If, for competitive reasons, premiums cannot be increased to anticipate inflation, this cost would be absorbed by us. Inflation also affects the rate of investment return on the investment portfolio with a corresponding effect on investment income.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Contractual Obligations

As a “smaller reporting company,” the Company is not required to provide the table of contractual obligations required pursuant to this Item.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As a “smaller reporting company,” the Company is not required to provide disclosure pursuant to this Item.

ITEM 4. CONTROLS AND PROCEDURES.

We have established disclosure controls and procedures to ensure, among other things, material information relating to our Company, including our consolidated subsidiary, is made known to our officers who certify our financial reports and to the other members of our senior management and the Board of Directors.

Management, (with the participation of our principal executive officer/principal financial officer), carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2019. Based on this evaluation, our principal executive officer/principal financial officer concluded that, as of the end of December 31, 2018 covered in the Form 10-K report, our disclosure controls and procedures along with the related internal controls over financial reporting were not effective to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and is accumulated and communicated to our management, including our principal executive officer/principal financial officer to allow timely decisions regarding required disclosure.

Material Weakness Previously Identified

Refer to Item 9A of Part II of our 2017 Form 10-K/A and Item 4 of our June 30, 2018 Form 10-Q/A Amendment No. 2 for detail about previously identified material weaknesses in the Company’s internal control over financial reporting over timeliness of obtaining and assimilating all information and a complex and non-routine transaction. The Company has implemented the following remediation steps to address this material weakness: (i) meeting with our auditing firm on a timely schedule, (ii) established an enterprise risk management program, (iii) monitored and engaged an auditing advisor to assist with complex transactions, and (iv) retained consultants to verify and strengthen controls. The Company’s management determined these weaknesses were remediated as of June 30, 2019.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are involved in litigation incidental to our operations from time to time. We are not presently a party to any legal proceedings other than litigation arising in the ordinary course of our business, and we are not aware of any claims that could materially affect our financial position or results of operations.

ITEM 1A. RISK FACTORS.

There have been no material changes from the risk factors described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 in response to Item 1A of Part I of such Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS.

EXHIBIT
NUMBER		DESCRIPTION
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Principle Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Principle Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS **		XBRL Instance Document.
101.SCH **		XBRL Taxonomy Extension Schema Document.
101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB **		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document.

*

Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 8, 2019

	MIDWEST HOLDING INC.
	By:	/s/ A. Michael Salem
	Name:	A. Michael Salem
	Title:	Chief Executive Officer, Principal Executive Officer

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