NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The
quarterly report on Form 10-Q for the quarter ended September 30, 2017 should be read in conjunction with the Company’s
financial statements for the year ended December 31, 2016, contained in the Company’s annual report on Form 10-K for the
fiscal year ended December 31, 2016 as filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2017.
As contemplated by the SEC under Article 8 of Regulation S-X, the accompanying financial statements and footnotes have been condensed
and therefore do not contain all disclosures required by generally accepted accounting principles (“GAAP”). The interim
financial data are unaudited, however in the opinion of IEG Holdings Corporation (“we, “our”, “us”)
the interim data includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of
results for the interim periods. Results of interim periods are not necessarily indicative of those to be expected for the full
year.
Nature
of Business
The
principal business activity of the Company is providing unsecured online consumer loans under the brand name “Mr. Amazing
Loans” via the Company’s website and online application portal at www.mramazingloans.com. The Company started its
business and opened its first office in Las Vegas, Nevada in 2010. The Company currently offers $5,000 and $10,000 unsecured consumer
loans that mature, unless prepaid, five years from the date they are issued. The Company is a direct lender with state licenses
and/or certificates of authority in 20 states – Alabama, Arizona, California, Florida, Georgia, Illinois, Kentucky, Louisiana,
Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia and Wisconsin. The Company
originates direct consumer loans to residents of these states through its online application portal, with all loans originated,
processed and serviced out of its centralized Las Vegas head office.
Basis
of Accounting
These
consolidated financial statements include the operations of IEG Holdings Corporation and its wholly-owned subsidiaries, Investment
Evolution Corporation (“IEC”) and IEC SPV, LLC (“IEC SPV” and collectively with IEG Holdings Corporation
and IEC, the “Company”). All inter-company transactions and balances have been eliminated in consolidation.
The
Company’s accounting and reporting policies are in accordance with U.S. GAAP and conform to general practices within the
consumer finance industry.
The
consolidated financial statements have been prepared in conformity with GAAP. The accompanying consolidated financial statements
do not include any adjustments to reflect any possible future effects on the recoverability and classification of assets or the
amounts and classification of liabilities.
Liquidity
The
principal conditions and events that raise substantial doubt about the Company’s ability to meet its obligations as they
come due are:
|
|
(i)
|
the Company
has reported recurring losses and
|
|
|
(ii)
|
the Company
has not yet generated positive net cash flows from operations.
|
However,
the Company has reduced its core operating expenses. In addition, cash in bank has significantly increased during the nine months
ended September 30, 2017, resulting from substantial positive net cash flows from investing activities specifically from the sale
of shares of OneMain’s common stock acquired in connection with the OneMain tender offer. Management has evaluated the result
of their plans for the next 12 months and as a result of the plans, the Company can meet all its obligations at least through
November 2018. However, the Company will require additional capital in order to expand its operations.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Management uses its historical records and knowledge of its business in making
these estimates. Accordingly, actual results may differ from these estimates.
Cash
and Cash Equivalents
For
the purpose of the statement of cash flows, the Company considers cash equivalents to include short-term, highly liquid investments
with an original maturity of three months or less.
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
Loans
Receivable and Interest Income
The
Company offers its loans at or below the prevailing statutory rates. Loans are carried at the unpaid principal amount outstanding,
net of an allowance for credit losses.
The
Company calculates interest revenue using the interest yield method. Charges for late payments are credited to income when collected.
Accrual
of interest income on loans receivable is suspended when no payment has been received on account for 91 days or more on a contractual
basis, at which time a loan is considered delinquent. Payments received on nonaccrual financing loans are first applied to the
unpaid accrued interest and then principal. Loans are returned to active status and accrual of interest income is resumed when
all of the principal and interest amounts contractually due are brought current; at which time management believes future payments
are reasonably assured. At September 30, 2017, 81 loans, with a total balance of $326,000 were delinquent or in default.
Allowance
for Credit Losses
The
Company maintains an allowance for credit losses due to the fact that it is probable that a portion of the loans receivable will
not be collected. The allowance is estimated by management based on various factors, including specific circumstances of the individual
loans, management’s knowledge of the industry, and the experience and trends of other companies in the same industry.
Our
portfolio of loans receivable consists of a large number of relatively small, homogenous accounts. The allowance for credit losses
is determined using a systematic methodology, based on a combination of historical bad debt of comparable companies. Impaired
loans are considered separately and 100% charged off.
The
allowance for credit losses is primarily based upon models that analyze specific portfolio statistics and also reflect, management’s
judgment regarding overall accuracy. We take into account several relevant internal and external factors that affect loan receivable
collectability, including the customer’s transaction history, specifically the timeliness of customer payments, the remaining
contractual term of the loan, the outstanding balance of the loan, historical loan receivable charge-offs, our current collection
patterns and economic trends.
Impaired
Loans
The
Company assesses loans for impairment individually when a loan is 91 days past due. The Company defines impaired loans as bankrupt
accounts and accounts that are 184 days or more past due. In accordance with the Company’s charge-off policy, once a loan
is deemed uncollectible, 100% of the remaining balance is charged-off. Loans can also be charged off when deemed uncollectible
due to consumer specific circumstances.
The
Company does not accrue interest on impaired loans and any recoveries of impaired loans are recorded to the allowance for credit
losses. Changes in the allowance for credit losses are recorded as operating expenses in the accompanying statement of operations.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are being provided using the straight-line method over the estimated
useful lives of the assets as follows:
|
Classification
|
|
Life
|
|
Computer
equipment
|
|
5
years
|
|
Furniture
and fixtures
|
|
5-8
years
|
The
Company amortizes its leasehold improvements over the shorter of their economic lives, which are generally five years, or the
lease term that considers renewal periods that are reasonably assured. Expenses for repairs and maintenance are charged to expense
as incurred, while renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statement of operations.
Operating
Lease
The
Company’s office lease for 3960 Howard Hughes Parkway, Suite 490, Las Vegas, NV 89169 expires (unless renewed) on September
30, 2020.
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
Income
Taxes
We
account for income taxes using the liability method in accordance with the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 740 “Income Taxes”. To date, no current income tax liability
has been recorded due to our accumulated net losses. Deferred income tax assets and liabilities are recognized for temporary differences
between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax
returns. Our net deferred income tax assets have been fully reserved by a valuation allowance due to the uncertainty of our ability
to realize future taxable income and to recover our net deferred income tax assets.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising costs amounted to $184,268 and $313,902 for the nine months ended September 30, 2017
and 2016, respectively. Advertising costs amounted to $180,808 and $92,593 for the three months ended September 30, 2017 and 2016,
respectively.
Earnings
and Loss per Share
The
Company computes net earnings (loss) per share in accordance with ASC 260-10 that establishes standards for computing and presenting
net earnings (loss) per shares. Basic earnings (loss) per share are computed by dividing net income (loss) attributed to common
shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares, if any, had been issued and if the additional common shares were
dilutive. Basic and diluted loss per share has been adjusted retroactively for the net 1-for-10 reverse split that occurred on
October 27, 2016.
Reclassifications
Certain
numbers from the prior period have been reclassified to conform to the current year presentation.
Fair
Value of Financial Instruments
The
Company has adopted guidance issued by the FASB that defines fair value, establishes a framework for measuring fair value in accordance
with existing GAAP, and expands disclosures about fair value measurements. Assets and liabilities recorded at fair value in the
consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their
fair value. The categories are as follows:
|
|
●
|
Level
I – Inputs are unadjusted, quoted prices for identical assets or liabilities in
active markets at the measurement date.
|
|
|
●
|
Level
II – Inputs, other than quoted prices included in Level I that are observable for
the asset or liability through corroboration with market data at the measurement date.
|
|
|
●
|
Level
III – Unobservable inputs that reflect management’s best estimate of what
market participants would use in pricing the asset or liability at the measurement date.
|
The
following table summarizes fair value measurements by level at September 30, 2017 for assets and liabilities measured at fair
value on a recurring basis:
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Total
|
|
|
Cash
|
|
$
|
1,850,317
|
|
|
|
|
|
|
|
|
|
|
$
|
1,850,317
|
|
|
Loans receivable, net
|
|
$
|
|
|
|
|
|
|
|
|
4,975,770
|
|
|
$
|
4,975,770
|
|
The
following table summarizes fair value measurements by level at December 31, 2016 for assets and liabilities measured at fair value
on a recurring basis:
|
|
|
Level
I
|
|
|
Level
II
|
|
|
Level
III
|
|
|
Total
|
|
|
Cash
|
|
$
|
322,441
|
|
|
|
|
|
|
|
|
|
|
$
|
322,441
|
|
|
Loans receivable, net
|
|
$
|
|
|
|
|
|
|
|
|
6,374,908
|
|
|
$
|
6,374,908
|
|
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
Loans
receivable are carried net of the allowance for credit losses, which is estimated by applying historical loss rates of our portfolio
and of other companies’ portfolios in the same industry with recent default trends to the gross loans receivable balance.
The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and
estimated remaining loan terms. Therefore, the carrying value of the loans receivable approximates the fair value.
Carrying
amounts reported in the consolidated balance sheets for other receivables, accounts payable, and accrued expenses approximate
fair value because of their immediate or short-term nature. The fair value of borrowings is not considered to be significantly
different than its carrying amount because the stated rates for such debt reflect current market rates and conditions.
Marketable
Securities
On
June 16, 2017, we closed our tender offer to purchase shares of the common stock of OneMain Holdings, Inc. (“OneMain”),
pursuant to which we acquired 151,994 shares of the common stock of OneMain (the cost of which was valued at an aggregate of $3.55
million based on the closing price of the shares of OneMain’s common stock of $23.38 on June 15, 2017) in exchange for 3,039,880
shares of the Company’s common stock. The security was classified as available-for-sale and had an unrealized loss of $153,514
prior to the sale. On June 22, 2017, we sold 100% of the 151,994 shares of OneMain’s common stock in exchange for $3.4 million
in cash. At September 30, 2017 the marketable securities balance was $0.
Loss
on Sale of Marketable Securities
The
Company sold securities classified as available for sale for net proceeds of $3,400,106 resulting in a loss on sale totaling $153,514
during the nine months ended September 30, 2017.
Legal
Settlement and Related Fees
From time to time, the Company may be involved
in legal proceedings in the normal course of its business. The Company incurred one-off legal settlements and related fees of
$624,283 during the nine months ended September 30, 2017. Of this amount, $178,982 was in the form of reductions to outstanding
loan principal. These settlements related to an action by the State of Virginia under the Virginia consumer lending program
and a separate action by an individual customer. In addition, as part of the settlements, the annual interest rate on all
loans originated in Virginia have been reduced to 12% APR. As of September 30, 2017, there are $230,227 in outstanding loans that
originated in Virginia, which mature between May 2019 and April 2022. The Company is not involved in any material legal proceedings
at the present time.
Other
Comprehensive Income
The
Company’s other comprehensive income consists of unrealized gains (losses) on securities classified as available for sale
that are recorded as an element of shareholder’s equity but are excluded from net income.
Recent
Accounting Pronouncements
Recently
Issued or Newly Adopted Accounting Standards
In
May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
.
The standard will eliminate the transaction and industry specific revenue recognition guidance under current U.S. GAAP and replace
it with a principle based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods
beginning after December 15, 2017. Early adoption is not permitted. The revenue recognition standard is required to be applied
retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if
any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition
method nor has it determined the effect of the standard on its ongoing financial reporting.
In
August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 changes to the disclosure of
uncertainties about an entity’s ability to continue as a going concern. These changes require an entity’s management
to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt
is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within
one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then
the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial
doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s
ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial
doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise
substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the
entity’s ability to continue as a going concern. These changes became effective for the Company for the 2016 annual period.
Our adoption of these changes have no material impact on the consolidated financial statements.
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes
(Topic 740). The amendments in ASU 2015-17 change the requirements
for the classification of deferred taxes on the balance sheet. Currently, GAAP requires an entity to separate deferred income
tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. To simplify the
presentation of deferred income taxes, the amendments in this ASU require that deferred tax liabilities and assets be classified
as noncurrent in a classified statement of financial position. The pronouncement became effective for the 2017 fiscal year. Adoption
of these changes have no material impact on the consolidated financial statements.
In
January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall
(Subtopic 825-10): Recognition and Measurement
of Financial Assets and Financial Liabilities. The update intends to enhance the reporting model for financial instruments to
provide users of financial statements with more decision-useful information and addresses certain aspects of the recognition,
measurement, presentation, and disclosure of financial instruments. The new standard affects all entities that hold financial
assets or owe financial liabilities. For public business entities, the amendments in this update are effective for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal years. Management is evaluating the impact of
the adoption of these changes will have on the consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842),
which supersedes existing guidance on accounting for leases
in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU
2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted.
The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the
impact of the adoption of this standard on its consolidated financial statements.
In
April 2016, the FASB issued AS 2016-10,
Revenue from Contracts with Customers (Topic 606)
, which amends certain aspects
of the Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted
concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017.
Early adoption is permitted. The Company has not yet selected a transition method nor has it determined the effect of the standard
on its ongoing financial reporting.
2.
LOANS RECEIVABLE
Loans
receivable consisted of the following at September 30, 2017 and December 31, 2016:
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
Loans receivable
|
|
$
|
5,923,536
|
|
|
$
|
7,587,349
|
|
|
Allowance for
credit losses
|
|
$
|
(947,766
|
)
|
|
$
|
(1,212,441
|
)
|
|
Loans receivable, net
|
|
$
|
4,975,770
|
|
|
$
|
6,374,908
|
|
A reconciliation
of the allowance for credit losses consist of the following at September 30, 2017 and December 31, 2016:
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
Beginning balance, January 1
|
|
$
|
1,212,441
|
|
|
$
|
985,375
|
|
|
Provision for credit losses
|
|
$
|
919,529
|
|
|
$
|
1,865,362
|
|
|
Loans charged
off
|
|
$
|
(1,184,204
|
)
|
|
$
|
(1,638,296
|
)
|
|
Ending balance
|
|
$
|
947,766
|
|
|
$
|
1,212,441
|
|
|
Basis of assessment:
|
|
|
|
|
|
|
|
|
|
Individually
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Collectively
|
|
$
|
947,766
|
|
|
$
|
1,212,441
|
|
The
following is an age analysis of past due receivables as of September 30, 2017 and December 31, 2016:
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
|
|
|
31-60
Days Past Due
|
|
|
61-90
Days Past Due
|
|
|
Greater
than 90 Days
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Financing Receivables
|
|
|
Recorded
Investment > 90 Days and not Accruing
|
|
|
September 30, 2017
|
|
$
|
192,718
|
|
|
$
|
109,195
|
|
|
$
|
326,000
|
|
|
$
|
627,913
|
|
|
$
|
5,295,623
|
|
|
$
|
5,923,536
|
|
|
$
|
326,000
|
|
|
December 31, 2016
|
|
$
|
257,299
|
|
|
$
|
163,590
|
|
|
$
|
367,098
|
|
|
$
|
787,987
|
|
|
$
|
6,799,362
|
|
|
$
|
7,587,349
|
|
|
$
|
367,098
|
|
The
Company’s primary credit quality indicator is the customer’s Vantage credit score as determined by Experian on the
date of loan origination. The Company does not update the customer’s credit profile during the contractual term of the loan.
The
following is a summary of the loan receivable balance as of September 30, 2017 and December 31, 2016 by credit quality indicator:
|
Credit
Score
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
550-575
|
|
$
|
13,528
|
|
|
$
|
16,264
|
|
|
576-600
|
|
$
|
97,926
|
|
|
$
|
183,701
|
|
|
601-650
|
|
$
|
2,665,973
|
|
|
$
|
3,332,371
|
|
|
651-700
|
|
$
|
2,286,572
|
|
|
$
|
2,946,944
|
|
|
701-750
|
|
$
|
651,491
|
|
|
$
|
874,408
|
|
|
751-800
|
|
$
|
157,504
|
|
|
$
|
166,811
|
|
|
801-850
|
|
$
|
36,797
|
|
|
$
|
46,368
|
|
|
851-900
|
|
$
|
13,744
|
|
|
$
|
20,482
|
|
|
|
|
$
|
5,923,536
|
|
|
$
|
7,587,349
|
|
3.
PROPERTY AND EQUIPMENT
At
September 30, 2017 and December 31, 2016, property and equipment consists of the following:
|
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
Computer equipment
|
|
$
|
99,556
|
|
|
$
|
99,556
|
|
|
Furniture and fixtures
|
|
|
21,303
|
|
|
|
21,303
|
|
|
Leasehold improvements
|
|
|
7,112
|
|
|
|
7,112
|
|
|
|
|
$
|
127,971
|
|
|
$
|
127,971
|
|
|
Less accumulated depreciation and amortization
|
|
|
113,144
|
|
|
|
108,649
|
|
|
Total
|
|
$
|
14,827
|
|
|
$
|
19,322
|
|
Depreciation
of property and equipment amounted to $4,495 and $7,045 during the nine months ended September 30, 2017 and 2016, respectively.
Depreciation of property and equipment amounted to $1,451 and $3,212 during the three months ended September 30, 2017 and 2016,
respectively. Depreciation costs are included in the accompanying statements of operations in operating expenses.
4.
SENIOR DEBT
We previously
had a credit facility in the form of a line of credit with BFG Investment Holdings, LLC (“BFG”) in the amount of $10,000,000
pursuant to a Loan and Security Agreement, as amended (the “Loan Agreement”), among BFG and certain of our wholly-owned
subsidiaries. In connection with the Loan Agreement, IEC SPV and certain of our other wholly-owned subsidiaries entered into a
profit sharing agreement with BFG pursuant to which IEC SPV is required to pay BFG 20% of its net profit (“Net Profit”)
for a period beginning on June 11, 2012 and ending 10 years from the date the Loan Agreement is repaid in full. Net Profit is
defined in the profit sharing agreement as gross revenue less (i) interest paid on the loan, (ii) payments on any other debt incurred
as a result of refinancing the loan through a third party, as provided in the Loan Agreement, (iii) any costs, fees or commissions
paid on account of the loan (including loan servicing fees of 0.5% on eligible consumer loans receivable), and (iv) charge-offs
to bad debt resulting from consumer loans. All of IEC SPV’s loans receivable as of September 30, 2017 were pledged as collateral
for fulfillment of the Net Profit interest due.
Effective
as of July 15, 2015, BFG converted the credit facility from a revolving facility to a term loan and on August 21, 2015, we, through
certain of our wholly-owned subsidiaries, repaid the entire balance of principal and accrued interest under the Loan Agreement.
There is currently no outstanding balance under the Loan Agreement, but IEC SPV will be required to pay 20% of its Net Profit
to BFG until August 21, 2025 (10 years from August 21, 2015) or until we pay BFG $3,000,000 to terminate the profit sharing agreement.
Net Profit for the nine months ended September 30, 2017 and 2016 was calculated at $0 and $96,083, respectively.
5.
STOCKHOLDERS’ EQUITY
On
June 16, 2017, we closed our tender offer to purchase shares of the common stock of OneMain, pursuant to which we acquired 151,994
shares of the common stock of OneMain (valued at an aggregate of $3.55 million based on the closing price of the shares of OneMain’s
common stock of $23.38 on June 15, 2017) in exchange for 3,039,880 shares of the Company’s common stock.
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
As
of September 30, 2017, the aggregate number of shares which the Company had the authority to issue is 350,000,000 shares, of which
300,000,000 shares are common stock, par value $0.001 per share, and 50,000,000 shares are preferred stock, par value $0.001 per
shares. At September 30, 2017, the Company had 12,335,293
shares of common stock issued and outstanding.
The Company’s Board of Directors is authorized at any time, and from time to time, to provide for the issuance of preferred
stock in one or more series, and to determine the designations, preferences, limitations and relative or other rights of the preferred
stock or any series thereof.
In
January 2017, the Company’s Board of Directors approved a stock repurchase program pursuant to which the Company may purchase
on the open market and at prevailing prices outstanding shares of the Company’s common stock with an aggregate value of
up to $2,000,000. During the nine months ended September 30, 2017, the Company purchased an aggregate of 418,773 shares under
the stock repurchase program for an aggregate purchase price of $276,880 and cancelled the 418,773 shares. On October 30, 2017,
our Board of Directors authorized the extension of the stock repurchase program from December 31, 2017 to December 31, 2018 under
the same terms.
Common
Stock Dividends
Historically,
we have not paid any cash dividends on our common stock. In May 2017, we announced the declaration of a cash dividend of $0.005
per common share for the first quarter of 2017. The dividend was paid on August 21, 2017 to stockholders of record at the close
of business on June 5, 2017. In August 2017, we announced the declaration of a cash dividend of $0.005 per common share for the
second quarter of 2017. The dividend was paid on August 21, 2017 to stockholders of record at the close of business on August
11, 2017. We expect to pay ongoing dividends. Payment of future dividends on our common stock, if any, will be at the discretion
of our board of directors and will depend on, among other things, our results of operations, cash requirements and surplus, financial
condition, contractual restrictions and other factors that our board of directors may deem relevant. We may determine to retain
future earnings, if any, for reinvestment in the development and expansion of our business.
Series
H Preferred Stock
During
the nine months ended September 30, 2017 and year ended December 31, 2016, the Company issued 0 and 3,071,000 of Series H convertible
preferred stock, respectively, with a par value of $0.001 per share. At September 30, 2017, no shares of Series H convertible
preferred stock were outstanding. At September 30, 2017, we held deposits on 63,595 Series H preferred shares to be issued of
$63,595. These shares we subsequently issued on October 30, 2017.
Description
of Series H Preferred Stock
Our
amended and restated articles of incorporation, as amended, authorize 10,000,000 shares of Series H preferred stock, par value
$0.001 per share, of which no shares are outstanding as of September 30, 2017. There are no sinking fund provisions applicable
to our Series H preferred stock.
Ranking.
The Series H preferred stock ranks
pari passu
with any other series of preferred stock subsequently designated by IEG
Holdings and not designated as senior securities or subordinate to the Series H preferred stock.
Liquidation
Preference.
In the event of a liquidation or winding up of IEG Holdings, a holder of Series H preferred stock will be entitled
to receive $1.00 per share of Series H preferred stock.
Dividends.
The Series H Preferred Stock is not entitled to receive dividends.
Conversion.
Holders of Series H preferred shares have the following rights with respect to the conversion of Series H preferred shares
into shares of our common stock:
|
|
●
|
At
5:00 pm Eastern time on December 31, 2017, each and every share of Series H Preferred Stock issued and outstanding at such
time shall automatically and without further action of any holder thereof, convert into shares of the Corporation’s
Common Stock on the bases of four (4) shares of Common Stock for each share of Series H Preferred Stock.
|
|
|
|
|
|
|
●
|
Promptly
after December 31, 2017, the Corporation shall deliver to each prior holder of Series H Preferred Stock whose shares have
been converted into shares of Common Stock as set forth in Section 6(A), a certificate representing the number of the Corporation’s
shares of Common Stock into which such Series H Preferred Stock has been converted.
|
|
|
●
|
In
the event that, prior to 5:00 p.m. on December 31, 2017, IEG Holdings completes any consolidation, merger, combination, statutory
share exchange or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities,
money and/or any other property, then in any such case the Series H Preferred Stock shall at the same time be similarly exchanged
or changed into preferred shares of the surviving entity providing the holders of such preferred shares with (to the extent
possible) the same relative rights and preferences as the Series H Preferred Stock. For the avoidance of doubt, in the event
that any such consolidation, merger, combination, statutory share exchange or other transaction is completed after 5:00 p.m.
on December 31, 2017, the shares of Series H Preferred Stock shall have been converted into shares of Common Stock and as
such shall be exchanged for or changed into other stock or securities, money and/or any other property, as any other shares
of Common Stock.
|
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
Voting.
Except as provided in the immediately following sentence, Series H Preferred Stock shall have no right to vote on any matter
to come before the shareholders of IEG Holdings. The affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than fifty percent (50%) of the then outstanding Series H Preferred Stock,
shall be required for any change to IEG Holdings’ Articles of Incorporation which would amend, alter, change or repeal any
of the powers, designations, preferences and rights of the Series H Preferred Stock.
Redemption
and Call Rights.
The Series H Preferred Stock have no redemption or call rights.
6.
CONCENTRATION OF CREDIT RISK
The
Company’s portfolio of finance receivables is with consumers living throughout Alabama, Arizona, California, Florida, Georgia,
Illinois, Kentucky, Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia
and Wisconsin and consequently, such consumers’ ability to honor their installment contracts may be affected by economic
conditions in these areas.
The
Company maintains cash at financial institutions which may, at times, exceed federally insured limits.
At
September 30, 2017, the Company had cash and cash equivalents exceeding insured limits by $1,129,171.
7.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company entered into a new non-cancelable operating lease on August 1, 2017, with a term commencing on September 19, 2017 and
expiring on September 30, 2020, for an office property located at 3960 Howard Hughes Parkway, Las Vegas. The Company relocated
its principal offices from the property located at 6160 West Tropicana Avenue, Las Vegas office in September 2017. Monthly rental
payments under the new operating lease are $5,794, and the Company is responsible for its pro rata shares of operating expenses
and property taxes. In addition to the 6160 West Tropicana Avenue, Las Vegas office lease that expired on September 30, 2017,
the Company previously had leases for operating facilities in Florida, Illinois and Arizona all of which terminated during 2016.
Total rent expense for the nine months ended September 30, 2017 and 2016 was $52,715 and $154,838 respectively. Total rent expense
for the three months ended September 30, 2017 and 2016 was $23,826 and $47,373 respectively. The Company is responsible for certain
operating expenses in connection with these leases.
Legal
Matters
From time to time, the Company may be involved
in legal proceedings in the normal course of its business. The Company incurred one-off legal settlements and related fees of
$624,283 during the nine months ended September 30, 2017. Of this amount, $178,982 was in the form of reductions to outstanding
loan principal. These settlements related to an action by the State of Virginia under the Virginia consumer lending program
and a separate action by an individual customer. In addition, as part of the settlements, the annual interest rate on all
loans originated in Virginia have been reduced to 12% APR. As of September 30, 2017, there are $230,227 in outstanding loans that
originated in Virginia, which mature between May 2019 and April 2022. The Company is not involved in any material legal proceedings
at the present time.
Professional
Consulting Contract
The
Company has a professional consulting contract with Mr. Mathieson, the Company’s Chief Executive Officer (our “Chief
Executive Officer”) and the sole member of the Board of Directors, according to which the Company paid the Chief Executive
Officer $300,000 in cash and $0 in health insurance premiums and costs for the nine months ended September 30, 2017.
On
July 1, 2017, we and our Chief Executive Officer agreed to terminate, effective July 1, 2017, the consulting contract dated January
1, 2017 between our Chief Executive Officer and the Company pursuant to which the Company was required to pay Mr. Mathieson $1,000,000
annually in exchange for certain consulting services. Concurrently with the termination of that consulting contract, IEC and our
Chief Executive Officer entered into a new professional consulting contract, effective as of July 1, 2017 (the “Professional
Consulting Contract”). Pursuant to the terms of the Professional Consulting Contract, our Chief Executive Officer agreed
to provide regulatory and management consulting services as requested by the Company and/or IEC. The Professional Consulting Contract
has a term of 1.5 years and renews automatically for successive one-year periods unless notice of termination is provided 30 days
prior to the automatic renewal date. In exchange for the services provided to the Company and/or IEC by our Chief Executive Officer,
IEC agreed to pay him $1,200,000 annually in quarterly payments of $300,000 due in advance each quarter and to provide health
insurance benefits as well as a discretionary bonus to be determined by the Company’s Board of Directors, which consists
solely of Mr. Mathieson. There was no bonus approved or paid for the year ended December 31, 2016 or for the nine months ended
September 30, 2017.
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
Regulatory
Requirements
State
statutes authorizing the Company’s products and services typically provide state agencies that regulate banks and financial
institutions with significant regulatory powers to administer and enforce the law. Under statutory authority, state regulators
have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements
in different ways, or issue new administrative rules. In addition, when the staff of state regulatory bodies change, it is possible
that the interpretations of applicable laws and regulations may also change.
Net
Profit Interest
The
Company has a net profit interest agreement with a third party lender, under which the Company pays 20% of its subsidiary IEC
SPV LLC’s net profit to the lender (see note 4).
8.
RELATED PARTY TRANSACTIONS
Chief
Executive Officer
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016 the Company incurred compensation expense to
our Chief Executive Officer under the Professional Consulting Contract and previously-terminated consulting contracts between
the Company and the Chief Executive Officer of $300,000 and $750,000 respectively. During the nine months ended September 30,
2017 the company paid in cash common share dividends in the amount of $69,000 to our Chief Executive Officer and preferred share
dividends in the amount of $29,917 were paid in cash to our Chief Executive Officer during the nine months ended September 30,
2016. During the three months ended September 30, 2017 and three months ended September 30, 2016 the Company incurred compensation
expense to our Chief Executive Officer under the Professional Consulting Contract and previously-terminated consulting contracts
between the Company and the Chief Executive Officer of $300,000 and $250,000 respectively.
Chief
Operating Officer
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016 the Company incurred compensation expense to
our Chief Operating Officer of $172,500. During the nine months ended September 30, 2017 the company paid in cash common share
dividends in the amount of $20 to our Chief Operating Officer. During the three months ended September 30, 2017 and three months
ended September 30, 2016 the Company incurred compensation expense to our Chief Operating Officer of $57,500.
Consulting
Fees
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred director fees totaling
$0 and $26,500, respectively, to Matthew Banks, a former director of the Company. During the three months ended September 30,
2017 and three months ended September 30, 2016, the Company incurred director fees totaling $0 and $9,000, respectively, to Matthew
Banks, a former director of the Company.
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred director fees totaling
$0 and $26,500, respectively to R & H Nominees Pty Ltd, which is owned by Harold Hansen, a former director of the Company.
During the three months ended September 30, 2017 and three months ended September 30, 2016, the Company incurred director fees
totaling $0 and $9,000, respectively to R & H Nominees Pty Ltd, which is owned by Harold Hansen, a former director of the
Company.
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred consulting fees totaling
$0 and $120,404, respectively, to Frank Wilkie and related parties. Frank Wilkie is a shareholder of IEG Holdings Corporation.
During the three months ended September 30, 2017 and three months ended September 30, 2016, the Company incurred consulting fees
totaling $0 and $33,200, respectively, to Frank Wilkie and related parties. Frank Wilkie is a shareholder of IEG Holdings Corporation.
As of September 30, 2017, the Company had a deposit on series H preferred stock in the amount of $63,595 from Frank Wilkie, which
shares of preferred stock were issued on October 30, 2017.
IEG
HOLDINGS CORPORATION
NOTES
TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER
30, 2017
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred consulting fees totaling
$50,000 and $40,000, respectively, to Clem Tacca and related parties. Clem Tacca is a shareholder of IEG Holdings Corporation.
During the three months ended September 30, 2017 and three months ended September 30, 2016, the Company incurred consulting fees
totaling $30,000 and $40,000, respectively, to Clem Tacca and related parties. Clem Tacca is a shareholder of IEG Holdings Corporation.
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred consulting fees totaling
$30,000 and $50,700, respectively, to Judith Willoughby and related parties. Judith Willoughby is a shareholder of IEG Holdings
Corporation. During the three months ended September 30, 2017 and three months ended September 30, 2016, the Company incurred
consulting fees totaling $0 and $37,500, respectively, to Judith Willoughby and related parties. Judith Willoughby is a shareholder
of IEG Holdings Corporation.
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred consulting fees totaling
$0 and $82,886, respectively, to Ascendant SC Pty Ltd. Ascendant SC Pty Ltd is a shareholder of IEG Holdings Corporation. During
the three months ended September 30, 2017 and three months ended September 30, 2016, the Company incurred consulting fees totaling
$0 and $14,000, respectively, to Ascendant SC Pty Ltd. $35,000 of the consulting fee incurred in 2016 were offset as consideration
for Common Stock on May 2, 2016. Ascendant SC Pty Ltd is a shareholder of IEG Holdings Corporation.
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred consulting fees totaling
$50,000 and $50,000, respectively, to Worldwide Holdings LLC. Worldwide Holdings LLC is a shareholder of IEG Holdings Corporation.
During the three months ended September 30, 2017 and three months ended September 30, 2016, the Company incurred consulting fees
totaling $0 and $50,000, respectively, to Worldwide Holdings LLC. Worldwide Holdings LLC is a shareholder of IEG Holdings Corporation.
During
the nine months ended September 30, 2017 and nine months ended September 30, 2016, the Company incurred consulting fees totaling
$0 and $193,024, respectively, to three related parties. During the three months ended September 30, 2017 and three months ended
September 30, 2016, the Company incurred consulting fees totaling $0 and $86,585, respectively, to three related parties. $122,000
of the consulting fees incurred during the nine months ended September 30, 2016 were offset as consideration for common stock
subscriptions. The related parties are shareholders of IEG Holdings Corporation.
9.
SUBSEQUENT EVENTS
Issuance
of Series H Shares
On
October 30, 2017, the Company issued 934,589 shares of Series H convertible preferred stock to a total of four investors, each
of whom is a related party and resides in Australia, in consideration for receipt of $1.00 per share, representing an aggregate
purchase price of $934,589. These securities were issued in reliance upon the exemptions provided by Regulation S promulgated
pursuant to the Securities Act. The issuances involved offers and sales of securities outside the United States. The offers and
sales were made in offshore transactions and no directed selling efforts were made by the issuer, a distributor, their affiliates
or any persons acting on their behalf. No offering circular was used in connection with this issuance.
Declaration
of Dividend
On
October 30, 2017, our Board of Directors declared a cash dividend of $0.005 per common share for the third quarter of 2017. The
dividend is payable on November 20, 2017 to stockholders of record at the close of business on November 11, 2017.