ITEM
1. BUSINESS
Business
Overview
IEG
Holdings Corporation (“IEG Holdings,” the “Company,” “we,” “us,” or “our”)
is a fintech company that provides unsecured online consumer loans under the brand name “Mr. Amazing Loans” via our
website and online application portal at www.mramazingloans.com. Fintech companies, such as IEG Holdings, apply technology to
improve financial services. We started our business and opened our first office in Las Vegas, Nevada in 2010. We currently offer
$5,000 and $10,000 unsecured consumer loans that mature in five years. We are currently licensed and/or hold certificates of authority
and originating direct consumer loans 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.
We provide loans to residents of these states through our online application portal, with all loans originated, processed and
serviced out of our centralized Las Vegas head office, which eliminates the need for physical offices in all of these states.
Our
strategy is to address the market needs of underbanked consumers that tend to be ignored by mainstream institutional credit providers
such as banks and credit unions, and charged excessive fees and interest by fringe lenders such as payday lenders. In the current
global environment, we believe there is a substantial need and opportunity for the small personal loans we offer.
All
of our personal loans are offered at prevailing statutory rates with fixed affordable repayments and no prepayment penalties.
We conduct full underwriting on all applications including credit checks and review of bank statements to ensure customers have
capacity to repay their loans, and have designed our loans to help customers reach a stronger financial position.
OneMain
Tender Offer
On
January 5, 2017, we launched a tender offer for shares of OneMain Holdings, Inc. (“OneMain”) common stock (the “OneMain
Tender Offer”). In our tender offer materials relating to the OneMain Tender Offer, we indicated that we intended to use
our OneMain stockholdings to become an activist investor, to pressure OneMain to transform its “brick and mortar”
business model to our online-only distribution business model. The OneMain Tender Offer was undersubscribed, with stockholders
representing approximately 0.1% of OneMain’s outstanding shares tendering their shares. On June 16, 2017, IEG Holdings closed
the OneMain Tender Offer, with 151,994 OneMain shares of common stock acquired (valued at an aggregate of $3.6 million based on
the closing price of shares of OneMain common stock of $23.38 on June 15, 2017) in exchange for 3,039,880 shares of IEG Holdings’
common stock.
On
June 16, 2017, we sent a letter to OneMain’s Chief Executive Officer and board of directors with the following activist
stockholder demands:
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Appoint
Mr. Mathieson as an IEG Holdings representative on OneMain’s board of directors,
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Appoint
Mr. Mathieson as an IEG Holdings representative on OneMain’s management team,
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Implement
substantial cost cuts, and
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Implement
a new and improved online strategy.
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We
indicated in our letter that we intended, in our role as an activist investor, to:
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Encourage
OneMain to transform the OneMain “brick and mortar” business model to IEG Holdings’ 100% online-only distribution
business model, which IEG Holdings believes could result in estimated cost savings of at least $700 million per year by closing
over 1,700 OneMain offices, terminating over 10,000 employees, and achieving substantial cuts in advertising/marketing costs
and other significant cost-cutting measures, including a significant reduction in aggregate annual executive compensation,
and
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Encourage
OneMain to improve its business from termination of low margin OneMain business segments with a new focus on high margin unsecured
loans to near prime clients, a focus on refinancing of existing high quality OneMain customers and termination of lending
to subprime OneMain customers with FICO scores of less than 600 to reduce OneMain’s loss levels.
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This
was the only contact that IEG Holdings had with OneMain following expiration of the OneMain Tender Offer. On June 22, 2017, the
fifth business day following termination of the OneMain Tender Offer, IEG Holdings sold 100% of its OneMain shares (an aggregate
of 151,994 shares, which represented approximately 0.1% of OneMain’s outstanding shares) in exchange for approximately $3.4
million in cash due to lack of response from OneMain’s management, an undersubscribed tender offer and what management believed,
based on the low level of tendering stockholders, to be a lack of OneMain stockholder support for the proposed business changes.
Had management perceived greater OneMain stockholder support for the proposed business changes or OneMain management demonstrated
a willingness to enter into discussions, IEG Holdings likely would have considered retaining its stake in OneMain for a longer
period of time or indefinitely. The sale of the tendered OneMain shares by IEG Holdings significantly increased IEG Holdings’
capital and net asset value and resulted in a substantial increase in lending in the third and fourth quarters ending December
31, 2017. Despite IEG Holdings’ desire to effect changes in OneMain’s management, IEG Holdings did not include a minimum
tender condition in its offer because IEG Holdings determined that the acquisition of any OneMain shares under the OneMain Tender
Offer could add stockholder value by increasing IEG Holdings’ capital and net asset value.
On
July 1, 2017, we and our Chief Executive Officer, Mr. Paul Mathieson who is also the sole member of our Board of Directors, 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 annually in exchange for certain consulting services.
Concurrently with the termination of that consulting contract, IEC, and Mr. Mathieson 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, Mr. Mathieson 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.
Following
the sale of the OneMain shares acquired in the OneMain Tender Offer, we have started to use, and expect to continue to use, the
proceeds from the sale to fund increased new loan volumes and to pay Mr. Mathieson, our Chief Executive Officer and the sole member
of our board of directors, amounts owed pursuant to the terms of his Professional Consulting Contract. The Professional Consulting
Contract obligates us to pay Mr. Mathieson $1.2 million annually, plus health insurance and a discretionary bonus to be determined
by our sole director. Beginning on July 1, 2018, the July 2017 Consulting Contract will be replaced with a new consulting contract.
See “—Recent Developments—Professional Consulting Contract.”
Recent
Developments
July
2017 Lending Club Tender Offer
On
July 12, 2017, the Company filed with the SEC a registration statement on Form S-4 (the “S-4 Registration Statement”)
and a Schedule TO relating to the Company’s offer to exchange four shares of the Company’s common stock for each share
of the common stock of LendingClub Corporation (“Lending Club”), par value $0.01 per share, up to an aggregate of
40,345,603 shares of Lending Club’s common stock, representing approximately 9.99% of the outstanding shares of Lending
Club’s common stock as of April 28, 2017, validly tendered and not properly withdrawn in the offer (the “2017 Lending
Club Tender Offer”). The 2017 Lending Club Tender Offer and the withdrawal rights were set to expire at 5:00 p.m., Eastern
time, on August 10, 2017, unless extended.
Following
the launch of the 2017 Lending Club Tender Offer, the price per share of the Company’s common stock, as quoted on the OTCQB,
dropped significantly. On August 1, 2017, due to the drop in the Company’s stock price, the Company determined that the
2017 Lending Club Tender Offer no longer had a reasonable chance of success and accordingly, the Company determined that it would
terminate the 2017 Lending Club Tender Offer and withdraw the S-4 Registration Statement. Any shares that were tendered by Lending
Club stockholders were not accepted and were returned to the relevant stockholders. From time to time, the Company may consider
a future tender offer where it identifies either business or investment opportunities.
2016
Reverse and Forward Stock Splits
IEG
Holdings has executed and initiated reverse stock splits that have resulted in a reduction in the number of stockholders of IEG
Holdings and certain stockholders were involuntarily cashed out. In April 2016 and October 2016, we effected reverse and forward
stock splits. In each case, stockholders who would otherwise have received fractional shares received cash in exchange for shares
of IEG Holdings. These stockholders were involuntarily cashed out, and the splits were approved by Mr. Mathieson in his capacity
as our sole director. The stockholders that were involuntarily cashed out were cashed out at a higher per share price than the
current per share price. Accordingly, the effects of changes in our stock price were positive for such stockholders, as they could
choose to repurchase shares at a lower cost per share. As our largest stockholder, sole officer and director, Mr. Mathieson can
exercise sole authority over any future reverse stock splits, including the existence of and terms of any reverse stock splits,
that could result in stockholders being involuntarily cashed out. Our stockholders should be willing to entrust all aspects of
our management to Mr. Mathieson.
Abandonment
of Reverse-Forward Stock Split and Cash-Out
On
June 21, 2017, the Company filed with the SEC a preliminary information statement on Schedule 14C (the “Preliminary Information
Statement”). The Preliminary Information Statement, though not in definitive form, related to a vote by the Company’s
sole director and holder of a majority of the voting power of the issued and outstanding capital stock of the Company to effect
a reverse 1-for-1,000 stock split (the “Reverse Split”), followed immediately by a forward 1,000-for-1 stock split
(the “Forward Split”) of the Company’s common stock. The Company’s intention was that registered stockholders
whose shares of the Company’s common stock were converted into less than one share in the Reverse Split would receive cash
payments equal to the fair value of those fractional interests. The Reverse Split and Forward Split, together with the related
cash payments to stockholders with less than 1,000 shares of the Company’s common stock prior to the Reverse Split are referred
to herein as the “Reverse/Forward Split.”
The
primary goal of the Reverse/Forward Split was cost savings from reducing administrative costs associated with stockholder accounts,
and the Company believes that previously completed reverse/forward stock splits have achieved substantial administrative cost
savings. Neither the Reverse/Forward Split nor any reverse/forward stock split previously completed by the Company were designed
for the purposes of or in connection with a “going private” transaction. The board of directors and controlling stockholder
approved the Reverse/Forward Split on June 14, 2017, which was the day before the expiration of the tender offer for shares of
OneMain common stock. The board did not believe the decision to take corporate action to effect the split was a material change
to the OneMain Tender Offer as it would have only potentially impacted up to eight of the OneMain stockholders who had accepted
the offer who held less than 1,000 IEG Holdings shares if they still owned their shares on July 25, 2017. Even if they did still
own their shares on July 25, 2017, they would have been provided notice from the Information Statement and could have purchased
a small number of extra shares to avoid being repurchased if they did not want to sell or they could have sold on the market at
a higher price in the days after the OneMain Tender Offer closed and the Information Statement was filed. The total amount of
the repurchase would have been approximately $100,000, would have impacted almost exclusively non-OneMain tendering stockholders
and represents a non-material amount of IEG Holdings’ total assets. The total amount of less than $8,000 for the eight affected
OneMain tendering stockholders compared to the approximately $3.55 million worth of OneMain shares acquired in the OneMain Tender
Offer is not material. The board believes that the cost savings from the proposed Reverse/Forward Split, though not material,
would have been a positive for the OneMain tendering stockholders if it had been effected.
On
July 21, 2017, the Company announced that it would not effect the Reverse/Forward Split and instructed holders of the Company’s
common stock to disregard the Preliminary Information Statement that was filed with the SEC in its entirety. The Company’s
determination to abandon the Reverse/Forward Split was based on the Company’s launch, on July 12, 2017, of the 2017 Lending
Club Tender Offer subsequent to the filing of the Preliminary Information Statement with the SEC on June 21, 2017. The Company
expected that a significant number of individual new stockholders could acquire less than 1,000 shares of the Company’s
common stock in connection with the 2017 Lending Club Tender Offer which could have significantly increased the cost of completing
the Reverse/Forward Split. For the avoidance of doubt, no reverse and/or forward split occurred on July 25, 2017 and no stockholders
were cashed out on July 25, 2017. The Company has no intention of effecting the Reverse/Forward Split or any other reverse and/or
forward split in the near future.
Stock
Repurchase Program
In
January 2017, our Board of Directors approved a stock repurchase program authorizing the open market repurchase of up to $2,000,000
of our common stock for the following reasons:
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The
stock repurchase program permits the Company to purchase shares of its common stock from time to time at prices that are below
what the Board believes to be the true value of the shares.
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The
Company’s common stock is trading at close to record low prices.
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The
stock repurchase program reflects the commitment of our Board of Directors to enhance stockholder value and its confidence
in our long-term growth prospects.
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The
Board believes the stock repurchase program is a strategic investment and an appropriate use of corporate funds.
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Any
repurchases will only be effected to the extent that they do not impair the Company’s capital or the Company’s
ability to pay its debts.
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The
Company has available liquidity from existing customer loan repayments to be able to both reinvest in new customer loans and
also to strategically invest back into our company via stock repurchases.
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The
stock repurchase program will assist in improving stock liquidity and ensuring a more orderly and less volatile market for
a relatively small outlay of cash.
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No
purchases are required.
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Purchases
under the program are authorized through December 31, 2018. As at the close of business on March 28, 2018, 458,973 shares have
been repurchased to date under this program.
Declaration
of Dividends
In May 2017, our
sole director declared 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. On August 1, 2017, our sole director
declared 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. On October 30, 2017, we declared a cash dividend of
$0.005 per common share for the third quarter of 2017. The dividend was paid on November 20, 2017 to stockholders of record
at the close of business on November 11, 2017.
Notes
Offering Terminated
In
December 2016, we launched a private offering of up to $10 million aggregate principal amount of our 12% senior unsecured notes
due December 31, 2026 (the “Notes”), on a self-underwritten basis. The Notes offering was terminated in May 2017.
No Notes were sold in the offering.
OneMain
Holdings, Inc. Tender Offer Closed
On
June 16, 2017, we closed the OneMain Tender Offer, pursuant to which we acquired 151,994 shares of the common stock of OneMain
(valued at an aggregate of approximately $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 per share valuation of the
Company’s common stock used as consideration in the OneMain Tender Offer was $1.169 per share at the closing date of the
OneMain Tender Offer. On June 22, 2017, we sold 100% of the 151,994 shares of the common stock of OneMain, which we obtained in
the OneMain Tender Offer, on the open market in exchange for $3.4 million in cash. We have begun to use and expect to continue
to use the proceeds from the sale of those shares of the common stock of OneMain to fund increased new loan volumes in the second
half of 2017 and to pay our Chief Executive Officer and the sole member of our Board of Directors amounts owed pursuant to the
terms of the professional consulting contract, effective as of July 1, 2017, between IEC and our Chief Executive Officer.
Amendment
of Series H Preferred Stock
On
June 20, 2017, we filed articles of amendment (the “June 20 Amendment”) to our amended and restated articles of incorporation,
as amended (the “Articles”) with the Florida Secretary of State. The June 20 Amendment has the effect of revising
the terms of our Series H preferred stock, par value $0.001 per share (the “Series H Preferred Stock”) to:
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remove
rights to receive dividends on our Series H preferred stock;
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(2)
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increase
the conversion ratio of the Series H preferred stock from 0.2 shares of Common Stock per share of Series H preferred stock
to 1 share of Common Stock per share of Series H preferred stock;
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(3)
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remove
our right to redeem or call our Series H preferred stock;
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provide
for automatic conversion of Series H preferred stock into shares of our Common Stock on December 31, 2017; and
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remove
the voting rights for Series H preferred stock.
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The
Amendment was approved by our board of directors on June 19, 2017.
In
addition, on July 26, 2017, we filed additional articles of amendment (the “July 26 Amendment”) to our Articles that
had the effect of further revising the terms of the Series H Preferred Stock to increase the conversion ratio of the Series H
Preferred Stock from one share of our common stock per share of the Series H Preferred Stock to four shares of our common stock
per share of the Series H Preferred Stock, which may dilute the value of our common stock.
The
June 20 Amendment and the July 26 Amendment were approved by our Board of Directors on June 19, 2017 and July 26, 2017, respectively.
Resale
Registration Statement Filing
On
August 31, 2017, the SEC declared effective the resale registration statement (the “Resale Registration Statement”)
filed by the Company on Form S-1 relating to the sale by certain selling stockholders of an aggregate of 9,089,220 shares of the
Company’s common stock at a fixed price set by the Company of $3.00 per share. The shares of our common stock registered
pursuant to the Resale Registration Statement represent approximately 52% of our outstanding shares of common stock as of March
28, 2018. All 6,900,000 shares of our common stock held by our Chief Executive Officer who is also the sole member of our Board
of Directors and holds 39.5% of the issued and outstanding shares of our common stock, were registered for resale under the Resale
Registration Statement. The actual value of shares of our common stock may be significantly less than the offering price of $3.00
per share. If the selling stockholders, including our Chief Executive Officer and sole director, sell the shares of our common
stock registered under the Resale Registration Statement on the open market, the market price of the Company’s common stock
may decline significantly.
Professional
Consulting Contract
On
July 1, 2017, we and our Chief Executive Officer, Mr. Paul Mathieson who is also the sole member of our Board of Directors, 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 annually in exchange for certain consulting services.
Concurrently with the termination of that consulting contract, IEC and Mr. Mathieson entered into a new Professional Consulting
Contract, effective as of July 1, 2017. 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.
On
March 22, 2018, we entered into a new professional consulting contract with Mr. Mathieson (the “2018 Consulting Contract”)
and terminated the July 2017 Consulting Contract, effective July 1, 2018. Pursuant to the terms of the 2018 Consulting Contract,
Mr. Mathieson agreed to provide regulatory and management consulting services as requested by IEG Holdings and/or IEC, including
the hiring and compensation of IEC personnel, interaction with third party service providers and vendors and, as requested by
IEG Holdings, other activities that are designed to assist IEC in conducting business. The term of the 2018 Consulting Contract
begins as of July 1, 2018 continues indefinitely unless three months’ written notice of termination is provided by either
party.
In exchange
for Mr. Mathieson’s services, IEG Holdings agreed to pay Mr. Mathieson an annual base salary of $600,000, which represents
a 50% reduction in Mr. Mathieson’s annual salary, as compared to his current annual salary of $1,200,000 payable under Mr.
Mathieson’s consulting contract currently in effect (the “2017 Consulting Contract”). Pursuant to the terms
of the 2018 Consulting Contract, no bonus is to be paid to Mr. Mathieson by IEG Holdings. Pursuant to the terms of the 2018 Consulting
Contract, fees are to be paid quarterly in advance on July 1st, October 1st, January 1st and April 1st beginning on July 1, 2018.
Unlike in prior years, IEG Holdings will not pay Mr. Mathieson’s health insurance premiums or any bonuses. Mr. Mathieson
will also receive reimbursement for all reasonable expenses incurred for the benefit of IEC, including but not limited to travel
expenses for him and his entourage, hotel expenses, communication, security and entertainment expenses.
IEG Holdings
expects that, beginning in the third quarter of 2018, its salary and compensation operating expense will be substantially reduced
as a result of entry into the 2018 Consulting Contract.
Series
H Preferred Stock Issuances & Conversions
On October 30, 2017, the
Company completed a private placement of 934,589 shares of the Series H Preferred Stock to four non-U.S. persons. The Company
received an aggregate purchase price of $934,589 for the sale of the shares of Series H Preferred Stock and intends to use the
proceeds from that sale to expand its operations, including through increased advertising designed to increase the amount and
number of loans entered into with customers and to fund operations of the Company. The issuance of shares of Series H Preferred
Stock was exempt from the registration requirements of the Securities Act in reliance upon Regulation S promulgated pursuant to
the Securities Act.
On December 15, 2017,
the Company completed a private placement of 305,000 shares of Series H Preferred Stock to three non-U.S. persons. The Company received an aggregate purchase price of $305,000 for the sale of the shares of Series H Preferred Stock
and intends to use the proceeds from that sale to expand its operations, including through increased advertising designed to increase
the amount and number of loans entered into with customers and to fund operations of the Company. The issuance of shares of Series
H Preferred Stock was exempt from the registration requirements of the Securities Act in reliance upon Regulation S promulgated
pursuant to the Securities Act.
On
December 28, 2017, the Company completed a private placement of 52,500 shares of Series H Preferred Stock to two non-U.S. persons. The Company received an aggregate purchase price of $52,500 for the sale of the shares of Series
H Preferred Stock and intends to use the proceeds from that sale to expand its operations, including through increased advertising
designed to increase the amount and number of loans entered into with customers and to fund operations of the Company. The issuance
of shares of Series H Preferred Stock was exempt from the registration requirements of the Securities Act in reliance upon Regulation
S promulgated pursuant to the Securities Act.
On
December 31, 2017, the holders of an aggregate of 1,292,089 shares of Series H preferred stock, representing all of the outstanding
Series H Preferred Shares, pursuant to the terms of the Series H Preferred Shares, converted their shares of Series H Preferred
Shares, effective December 31, 2017. In accordance with the terms of the Series H Preferred Shares, upon the conversion of such
Series H Preferred Shares, the Company issued to the converting holders of Series H Preferred Shares an aggregate of 5,168,356
shares of the Company’s common stock. As a result of the conversion, no Series H Preferred Shares are outstanding. In addition,
as a result of the conversion and subsequent issuance of common stock, 17,463,449 shares of the Company’s common stock are
issued and outstanding. Due solely to the issuance of common stock, and not as the result of any stock disposition, Paul Mathieson,
the Company’s Chairman and Chief Executive Officer, is no longer a majority stockholder. Following the issuance of common
stock, Mr. Mathieson owns approximately 39.5% of the Company’s outstanding common stock.
2018
Lending Club Tender Offer
On
January 5, 2018, we launched an offer to exchange 13 shares of IEG Holdings’ common stock for each share of common stock
of Lending Club, up to an aggregate of 20,701,999 shares of Lending Club common stock, representing approximately 4.99%
of Lending Club’s outstanding shares as of October 31, 2017, validly tendered and not properly withdrawn in the offer (the
“2018 Lending Club Tender Offer”). On February 20, 2018, we terminated and withdrew the 2018
Lending Club Tender Offer due to a comment that we received from the SEC raising a concern that the 2018 Lending Club Tender Offer
was improperly commenced. Any shares that were tendered by Lending Club stockholders were not accepted by us and were promptly
returned to the relevant stockholders.
Corporate
Name Change to Mr. Amazing Loans Corporation
On
March 26, 2018, we filed articles of amendment (the “Amendment”) to our amended and restated articles of incorporation,
as amended (the “Articles”) with the Florida Secretary of State. The Amendment has the effect of changing our corporate
name from IEG Holdings Corporation to Mr. Amazing Loans Corporation, in order to align our consumer brand (Mr. Amazing Loans)
with our corporate name. The Amendment was approved by Mr. Mathieson, our Chief Executive Officer and sole director, and by holders
of a majority of the voting power of our voting stock. In connection with the approval of the Amendment by holders of a majority
of the voting power of our voting stock, we filed a preliminary information statement on Schedule 14C with the SEC on March 21,
2018. The Amendment and the corporate name change will become effective on the later of (a) the date on which the Financial Industry
Regulatory Authority approves the corporate name change, and (b) April 30, 2018; provided, however, that prior to effectiveness
of the corporate name change, we must first (i) file a definitive information statement on Schedule 14C with the SEC, which we
expect will occur on or about April 2, 2018, (ii) mail copies of the information statement to our stockholders, and (iii) wait
at least 20 days from the mailing of the information statement to our stockholders.
Control
of IEG Holdings Rests with Mr. Mathieson
As
our largest stockholder, sole officer and director, Mr. Mathieson will have the right to make all decisions with respect to our
management. Mr. Mathieson can exercise sole authority over the direction of IEG Holdings, and any future reverse stock splits
that could result in stockholders being involuntarily cashed out.
Investment
Company Act of 1940
If
we were deemed to be an investment company under the 1940 Act, applicable restrictions could make it impractical for us to continue
our business as contemplated and could have a material adverse effect on our business. Under Sections 3(a)(1)(A) and (C) of the
1940 Act, an issuer of securities will generally fit the definition of an “investment company” for purposes of the
1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing,
reinvesting or trading in securities or (ii) is engaged or proposes to engage in the business of issuing face-amount installment
certificates or has any of this type of certificate outstanding. In addition, issuers who do not otherwise fit the definition
of an investment company are sometimes deemed to be investment companies, under Section 3(a)(1)(C) of the 1940 Act, if the value
of their investment securities exceeds 40% of their total assets.
Although
an issuer may fall within the definition of an “investment company” under Section 3(a)(1)(C) of the 1940 Act, the
issuer may qualify for an exemption from the definition. Rule 3a-1 under the 1940 Act provides an exemption from the definition
of investment company if, on a consolidated basis with its wholly owned subsidiaries, nor more than 45% of its net income after
taxes for the last four quarters is derived from securities other than government securities and securities of majority owned
subsidiaries and companies primarily controlled by it. As of December 31, 2017, we calculated both our percentage of investment
security assets (securities other than government securities, employee companies and certain subsidiaries and affiliates) to total
assets and our total percentage of investment income (income from investment securities) as compared to total income to be below
the Rule 3a-1 45% thresholds.
We
were able to maintain our compliance with the 1940 Act because we regularly monitor our status under the 1940 Act and conduct
prudential analyses in accordance with the 1940 Act and the SEC’s interpretations thereof. We conduct such analyses on a
consolidated basis with our wholly owned subsidiaries to determine whether the thresholds set out in Rule 3a-1 are exceeded. As
a result, we do not believe that we should be regulated as an “investment company,” as such term is defined in the
1940 Act, and we intend to conduct our operations to maintain this status. However, if we were to be deemed an investment company,
restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates,
could have a material adverse effect on our business.
Market
We
operate in the consumer finance industry serving the growing population of consumers who have limited access to credit from banks,
credit card companies and other lenders. According to the Federal Deposit Insurance Corporation, 7.7% (1 in 13) of households
in the United States were unbanked in 2013. This proportion represented nearly 9.6 million households. According to the Center
for Financial Services December 2015 report, the rapid rise of short-term credit, which grew 37% from 2012 to 2014, while single
payment credit grew only 0.1% over the same period, is starkly apparent. With anticipated regulatory changes likely to alter the
feasibility of offering loans due in one lump sum, many companies are investing more heavily in installment-based credit products,
while new players are seeking to upend the economics of small-dollar loans through online channels and alternative underwriting.
The strong marketing and new account approval rates of subprime credit cards have also provided consumers with increased access
to funds available on a short-term basis. Together, these shifts in the consumer lending industry suggest that total revenue for
short-term credit products, estimated at $29 billion in 2014, may outpace that of single payment credit products, estimated at
$38 billion for the same year. Short-term credit products generate nearly twice as much annual revenue as single payment credit
products.
Installment
lending to non-prime consumers is one of the most highly fragmented sectors of the consumer finance industry. We are a state-licensed
Internet-based personal loan company serving in the consumer installment lending industry. Our online lending platform provides
the distribution network to efficiently address this growing market of consumers without the significant costs and overhead associated
with an extensive branch network. We believe we are well positioned to capitalize on the significant growth and expansion opportunity
created by the continued shift of consumers to online services, such as online banking and in our case online personal loans.
We
are currently licensed and/or hold certificates of authority to provide loans online to residents of Alabama, Arizona, California,
Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania,
Texas, Utah, Virginia and Wisconsin, with plans to continue to expand across the United States by acquiring additional state lending
licenses. The following is a breakdown of our cumulative loan origination amounts in each licensed state for our current active
loan portfolio as at December 31, 2017:
State
|
|
Origination
Volume ($)
|
|
|
Current
Principal ($)
|
|
|
Number
of
Loans
|
|
Alabama
|
|
|
120,000
|
|
|
|
104,150
|
|
|
|
22
|
|
Arizona
|
|
|
439,000
|
|
|
|
244,990
|
|
|
|
81
|
|
California
|
|
|
1,255,000
|
|
|
|
1,111,125
|
|
|
|
217
|
|
Florida
|
|
|
1,035,000
|
|
|
|
611,830
|
|
|
|
197
|
|
Georgia
|
|
|
732,009
|
|
|
|
500,919
|
|
|
|
135
|
|
Illinois
|
|
|
1,070,000
|
|
|
|
806,159
|
|
|
|
198
|
|
Kentucky
|
|
|
75,000
|
|
|
|
71,821
|
|
|
|
14
|
|
Louisiana
|
|
|
10,000
|
|
|
|
8,529
|
|
|
|
2
|
|
Maryland
(1)
|
|
|
10,000
|
|
|
|
9,657
|
|
|
|
2
|
|
Missouri
|
|
|
316,000
|
|
|
|
249,405
|
|
|
|
57
|
|
Nevada
|
|
|
818,000
|
|
|
|
594,064
|
|
|
|
156
|
|
New
Jersey
|
|
|
932,000
|
|
|
|
678,809
|
|
|
|
171
|
|
New
Mexico
|
|
|
25,000
|
|
|
|
20,110
|
|
|
|
4
|
|
Ohio
(2)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Oregon
|
|
|
180,000
|
|
|
|
139,282
|
|
|
|
35
|
|
Pennsylvania
|
|
|
655,000
|
|
|
|
532,446
|
|
|
|
119
|
|
Texas
|
|
|
435,565
|
|
|
|
276,190
|
|
|
|
90
|
|
Utah
|
|
|
45,000
|
|
|
|
38,400
|
|
|
|
8
|
|
Virginia
|
|
|
477,000
|
|
|
|
162,995
|
|
|
|
88
|
|
Wisconsin
(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
(1)
|
Maryland
was added as a licensed state in October 2016.
|
|
(2)
|
Ohio
was added as a licensed state in December 2016.
|
|
(3)
|
Wisconsin
was added as a licensed state in June 2017.
|
Business
Strategy
Our
business strategy is to lower the cost of providing consumer loans by leveraging our online lending platform and distribution
network to enable further loan book growth and portfolio diversification. Our strategy includes a number of key elements:
|
●
|
State-Licensed
Model:
Our state-licensed business model is a key element of our business strategy. We are currently licensed in Alabama,
Arizona, California, Florida, Georgia, Illinois, Kentucky, Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico,
Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia and Wisconsin.
|
|
|
|
|
●
|
Online
Distribution:
We launched online lending in March 2013 and commenced online advertising in July 2013. Upon fulfillment
of state regulatory requirements, we received approval from regulators in Alabama, Arizona, California, Florida, Georgia,
Illinois, Kentucky, Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah,
Virginia and Wisconsin to operate solely online in these states. This allows us to fully service all 20 states from our centralized
Las Vegas headquarters, which we believe is a key competitive advantage over brick and mortar lenders.
|
|
|
|
|
●
|
Cost-Effective
Customer Acquisition:
Our customer acquisition costs have been reduced since we launched online lending and marketing.
|
|
|
|
|
●
|
Continue
to Grow Loan Book:
Total cumulative loan originations as of December 31, 2017 have increased 192% to $16,209,023 since
our January 1, 2015 total of $5,549,023. We believe this growth in lending is attributable to launching online lending and
joint venturing with a number of new marketing partners, however, such past growth is not necessarily indicative or predictive
of our future results of operation.
|
|
|
|
|
●
|
Strategic
Acquisitions:
We have reviewed, and continue to review, opportunities to expand our business through acquisition or merger
in the consumer finance sector. We are pursuing opportunities that provide synergies with our existing business and specifically
target potential acquisitions that are significantly accretive to stockholder equity and/or provide significant revenue growth
opportunities via a minority or majority shareholding.
|
On December
22, 2017, we announced that we had formed a wholly owned subsidiary to explore the legalities and economic risks and benefits
of entering into a joint venture with IEC to accept repayment of customer loans in the form of existing crypto/blockchain currencies,
provide the crypto equivalent of $5,000 and $10,000 loans to customers, and also potentially create and issue an IEC cryptocurrency.
The company did not begin operations and was in the development planning stages. On March 14, 2018, we announced that, after considering
the potential risks and benefits, we will not pursue a cryptocurrency offering or any other cryptocurrency-related ventures at
this time. We will continue to monitor the developing regulatory landscape surrounding this new technology and may consider cryptocurrency
opportunities in the future. In addition, we will continue to explore the potential application of blockchain technology to our
core consumer lending business.
Competitive
Strengths
We
believe our competitive strengths are:
|
●
|
Market
and Scope for Growth:
Large personal and payday loan market in the United States presents opportunity for growth and expansion.
|
|
|
|
|
●
|
Regulation:
We are materially compliant with state lending licenses in Alabama, Arizona, California, Florida, Georgia, Illinois, Kentucky,
Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia and Wisconsin,
and are well positioned for current and future regulatory changes due to ongoing compliance and conservative business model.
|
|
|
|
|
●
|
Customer
Proposition:
Our unsecured $5,000 and $10,000 installment loans are all offered over five years and feature affordable
weekly repayments. Rates range from 12.0% - 29.9% APR which make us a low-cost alternative to payday loans which have an average
APR of over 400%.
|
|
|
|
|
●
|
Online
Distribution:
Special approval has been granted by the Alabama, Arizona, California, Florida, Georgia, Illinois, Kentucky,
Louisiana, Maryland, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Texas, Utah, Virginia and Wisconsin
regulators to operate our business without a physical office location in each state. As a result, we have closed offices in
Arizona, Illinois and Florida and moved to full online loan distribution, enabling us to offer loans to residents in all 20
of our licensed states from our Las Vegas headquarters.
|
|
|
|
|
●
|
Customer
Acquisition:
We launched online advertising in July 2013 with positive results from search engine cost per click advertising
and online lead generation. In addition, we engaged a number of new marketing partners in 2014, 2015 and 2016, including online
lead generators and direct mail. All of these avenues provide opportunities for strong growth at low customer acquisition
costs.
|
|
|
|
|
●
|
Barriers
to Entry:
We believe that state licensure acts as a barrier to entry into our segment of the consumer loan market. We
are strongly positioned with approval to operate under 20 state licenses from one centralized head office.
|
Products
We
currently provide $5,000 and $10,000 online consumer loans unsecured over a five-year term with rates ranging from 12.0% to 29.9%
annual percentage rate. Our current loan portfolio also includes loans remaining from our previous product offerings which were
$2,000 to $10,000 loans unsecured over a three- to five-year term at 12.0% to 29.9%.
Our
personal loan products are fully amortizing, fixed rate, unsecured installment loans and all loans are offered at prevailing statutory
rates, with our standard loan product being a 29.9% interest rate and annual percentage rate, fully amortizing, five-year unsecured
personal loan. The variations from this standard loan product in certain states is due to individual state requirements and to
comply with our state lending licenses; for example, Florida requires a blended rate which caps the maximum rate on a $5,000 loan
at 24%.
The
following is a breakdown of loan terms and interest rates for each currently licensed state:
State
|
|
IEG
Holdings’
APR for $5,000 Loans
|
|
|
Maximum
Permitted
Rate
for
$5,000
Loans
|
|
|
IEG
Holdings’
APR for $10,000 Loans
|
|
|
Maximum
Permitted
Rate
for
$10,000
Loans
|
|
Alabama
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
Arizona
|
|
|
24.90
|
%
|
|
|
24.90
|
%
|
|
|
23.90
|
%
|
|
|
23.90
|
%
|
California
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
Florida
|
|
|
23.90
|
%
|
|
|
24.00
|
%
|
|
|
19.90
|
%
|
|
|
21.00
|
%
|
Georgia
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
Illinois
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
Kentucky
|
|
|
23.90
|
%
|
|
|
24.00
|
%
|
|
|
23.90
|
%
|
|
|
24.00
|
%
|
Louisiana
|
|
|
28.90
|
%
|
|
|
28.90
|
%
|
|
|
25.50
|
%
|
|
|
25.50
|
%
|
Maryland
|
|
|
24.00
|
%
|
|
|
24.00
|
%
|
|
|
24.00
|
%
|
|
|
24.00
|
%
|
Missouri
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
|
|
29.90
|
%
|
|
|
29.90
|
%
|
Nevada
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
New
Jersey
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
New
Mexico
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
Ohio
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
|
|
—
|
(2)
|
|
|
—
|
(2)
|
Oregon
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
Pennsylvania
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
|
|
29.90
|
%
|
|
|
30.00
|
%
|
Texas
|
|
|
28.86
|
%
|
|
|
28.86
|
%
|
|
|
25.84
|
%
|
|
|
25.84
|
%
|
Utah
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
|
|
29.90
|
%
|
|
|
36.00
|
%(1)
|
Virginia
|
|
|
12.00
|
%
|
|
|
12.00
|
%
|
|
|
12.00
|
%
|
|
|
12.00
|
%
|
Wisconsin
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
|
|
29.90
|
%
|
|
|
36.00
|
%
|
|
(1)
|
There
is no rate limit in this jurisdiction. However, in order to comply with the Servicemembers Civil Relief Act, the maximum APR
is 36.0%.
|
|
|
|
|
(2)
|
We
do not offer $10,000 loans in Ohio.
|
The
following is an illustrative profile of our personal loans:
|
Loan
Product
|
-
|
$5,000
and $10,000 loans
|
|
|
-
|
5
years
|
|
|
-
|
28.9%
average APR
|
|
|
-
|
Fixed
rate, fully amortizing
|
|
|
-
|
No
hidden or additional fees
|
|
|
-
|
No
prepayment penalties
|
|
Loan
Purpose
|
Loans
available for any purpose. Common uses include:
|
|
|
-
|
Debt
consolidation
|
|
|
-
|
Medical
expenses
|
|
|
-
|
Home
improvements
|
|
|
-
|
Auto
repairs
|
|
|
-
|
Major
purchase
|
|
|
-
|
Discretionary
spending
|
|
Average
Borrower Demographic
|
-
|
600
- 750 credit score
|
|
|
-
|
$40,000
- $100,000 income
|
|
|
-
|
25
- 60 years old
|
We
commenced originating personal loans online in July 2013. Prior to that, we provided loans to customers via our office network,
which comprised one office in each state as required by state licensing regulations. Our online loan origination platform now
means that a qualifying customer can obtain a loan from us without having to come into an office location. We have maintained
our full underwriting processes, identity verifications and fraud checks to ensure that online customers are verified to the same
degree that customers were when they obtained a loan in an office. We expect our website and application portal,
www.mramazingloans.com
,
to be a key driver of customer conversions and loan book growth.
The
following graphs depict our monthly loan origination values from January 2013 through December 2017 and our yearly revenue for
2013 through 2017:
The
following table sets forth the minimum, maximum and average credit score, income and age of our current borrowers as of December
31, 2017:
Average
Borrower Demographic of Current Loan Portfolio as at December 31, 2017
Demographic
|
|
Minimum
|
|
|
Maximum
|
|
|
Average
|
|
Credit
Score
|
|
|
559
|
|
|
|
886
|
|
|
|
667
|
|
Income
|
|
$
|
24,372
|
|
|
|
273,396
|
|
|
|
63,867
|
|
Age
|
|
|
23
|
|
|
|
86
|
|
|
|
45
|
|
Customer
Acquisition
Since
launching online lending in July 2013, our marketing efforts have been focused on online customer acquisition. We saw increases
in loan applications and inquiries as a result of search engine advertising and commenced banner advertising, remarketing and
search engine optimization in 2014. We commenced online video advertising in 2015. We have also engaged numerous online lead generators
who provide personal loan leads on a daily basis with a combination of cost per funded loan and cost per application expense.
We are continuing to develop relationships with additional lead generation partners to drive further growth. We also supplement
our online marketing efforts with traditional direct mail advertising.
Additional
Information Regarding Our Loan Portfolio
This
section provides additional quantitative information and qualitative discussion related to our loan portfolio and related credit
metrics and trends including key loan and credit metrics.
Loans
Receivable Roll-Forward
The
table below documents the activity in the loan receivable accounts for the period indicated. Specifically, it shows a roll-forward
of our loans receivable balance, detail of new loan originations, principal reductions from cash collections and loan charge-offs.
The data encompasses changes during each quarter of 2017 and also changes during the full year 2017 compared to 2016.
|
|
New
Loans
|
|
|
Principal
Reductions
|
|
|
Loan
Charge-
Offs
|
|
|
Quarter-end
Balance
|
|
Q1
2017 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
12-31-16 $7,587,349
|
|
$
|
140,000
|
|
|
$
|
482,391
|
|
|
$
|
330,637
|
|
|
$
|
6,914,321
|
|
Q2
2017 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
3-31-17 $6,914,321
|
|
$
|
145,000
|
|
|
$
|
503,130
|
|
|
$
|
538,259
|
|
|
$
|
6,017,932
|
|
Q3
2017 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
06-30-17 $6,017,932
|
|
$
|
855,000
|
|
|
$
|
634,088
|
|
|
$
|
315,308
|
|
|
$
|
5,923,536
|
|
Q4
2017 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
09-30-17 $5,923,536
|
|
$
|
965,000
|
|
|
$
|
436,752
|
|
|
$
|
290,903
|
|
|
$
|
6,160,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
Activity Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bal 12-31-16
$7,587,349
|
|
$
|
2,105,000
|
|
|
$
|
2,056,361
|
|
|
$
|
1,475,107
|
|
|
$
|
6,160,881
|
|
New
loan volume slowed in the first half of 2017 due to Company capital constraints and reduced advertising. New loan volume increased
in the second half of 2017 due to increased available Company capital and increased advertising. However, the increased level
of principal reductions from cash collections and once-off Virginia loan principal reductions due to legal settlements resulted
in a reduction in the loans receivable balance to $6,160,881 as at December 31, 2017 compared to $7,587,349 at December 31, 2016.
The
table below documents the activity in the loan receivable accounts for the periods indicated. Specifically, it shows a roll-forward
of our loans receivable balance, detail of new loan originations, principal reductions from cash collections and loan charge-offs.
The data encompasses changes during each quarter of 2016 and also changes during the full year 2016 compared to 2015.
|
|
New
Loans
|
|
|
Principal
Reductions
|
|
|
Loan
Charge-Offs
|
|
|
Quarter-end
Balance
|
|
Q1
2016 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
12-31-15 $8,110,077
|
|
$
|
535,000
|
|
|
$
|
541,082
|
|
|
$
|
441,956
|
|
|
$
|
7,662,039
|
|
Q2
2016 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
3-31-16 $7,662,039
|
|
$
|
1,785,000
|
|
|
$
|
459,806
|
|
|
$
|
220,725
|
|
|
$
|
8,766,508
|
|
Q3
2016 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
6-30-16 $8,766,508
|
|
$
|
375,000
|
|
|
$
|
567,779
|
|
|
$
|
320,239
|
|
|
$
|
8,253,490
|
|
Q4
2016 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
9-30-16 $8,253,490
|
|
$
|
425,000
|
|
|
$
|
435,766
|
|
|
$
|
655,375
|
|
|
$
|
7,587,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
Activity Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bal
12-31-15 $8,110,077
|
|
$
|
3,120,000
|
|
|
$
|
2,004,433
|
|
|
$
|
1,638,295
|
|
|
$
|
7,587,349
|
|
New
loan volume slowed in the second half of 2016 due to Company capital constraints and reduced advertising. The level of principal
reductions from cash collections, combined with reduced new 2016 loan volumes (compared to 2015) and an increase in loan charge-offs,
resulted in a reduction in the loans receivable balance to $7,587,349 as at December 31, 2016 compared to $8,110,077 at December
31, 2015.
Portfolio
Yield
The
following table shows, as of December 31, 2017, the aggregate loan principal outstanding and the average portfolio yield by state.
In addition, to show indicative duration of the portfolio yield, the table shows the average loan amount, average current principal
outstanding and the average years to maturity of the loans in each state.
State
|
|
Total
Current
Principal ($)
|
|
|
Average
Yield
(%)
|
|
|
Average
Loan
Amount
($)
|
|
|
Average
Current
Principal
($)
|
|
|
Average
Years
to
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
|
104,150
|
|
|
|
29.90
|
|
|
|
5,455
|
|
|
|
4734
|
|
|
|
3.7
|
|
Arizona
|
|
|
244,990
|
|
|
|
24.89
|
|
|
|
5,420
|
|
|
|
3,025
|
|
|
|
2.0
|
|
California
|
|
|
1,111,125
|
|
|
|
29.90
|
|
|
|
5,783
|
|
|
|
5,120
|
|
|
|
3.9
|
|
Florida
|
|
|
611,830
|
|
|
|
23.40
|
|
|
|
5,242
|
|
|
|
3,106
|
|
|
|
2.2
|
|
Georgia
|
|
|
500,919
|
|
|
|
29.90
|
|
|
|
5,422
|
|
|
|
3,711
|
|
|
|
2.2
|
|
Illinois
|
|
|
806,159
|
|
|
|
29.90
|
|
|
|
5,404
|
|
|
|
4,072
|
|
|
|
3.0
|
|
Kentucky
|
|
|
71,821
|
|
|
|
29.90
|
|
|
|
5,357
|
|
|
|
5,130
|
|
|
|
4.5
|
|
Louisiana
|
|
|
8,529
|
|
|
|
28.90
|
|
|
|
5,000
|
|
|
|
4,264
|
|
|
|
4.6
|
|
Missouri
|
|
|
249,405
|
|
|
|
29.90
|
|
|
|
5,544
|
|
|
|
4,376
|
|
|
|
3.2
|
|
Maryland
(1)
|
|
|
9,657
|
|
|
|
24.00
|
|
|
|
5,000
|
|
|
|
4,828
|
|
|
|
4.5
|
|
Nevada
|
|
|
594,064
|
|
|
|
29.86
|
|
|
|
5,244
|
|
|
|
3,808
|
|
|
|
2.8
|
|
New
Jersey
|
|
|
678,809
|
|
|
|
29.90
|
|
|
|
5,450
|
|
|
|
3,970
|
|
|
|
2.9
|
|
New
Mexico
|
|
|
20,110
|
|
|
|
29.90
|
|
|
|
6,250
|
|
|
|
5,027
|
|
|
|
3.1
|
|
Ohio
(2)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oregon
|
|
|
139,794
|
|
|
|
29.90
|
|
|
|
5,143
|
|
|
|
3,979
|
|
|
|
3.0
|
|
Pennsylvania
|
|
|
532,446
|
|
|
|
29.90
|
|
|
|
5,504
|
|
|
|
4,474
|
|
|
|
3.3
|
|
Texas
|
|
|
276,190
|
|
|
|
24.00
|
|
|
|
4,473
|
|
|
|
3,571
|
|
|
|
2.4
|
|
Utah
|
|
|
38,400
|
|
|
|
29.90
|
|
|
|
5,625
|
|
|
|
4,800
|
|
|
|
3.5
|
|
Virginia
|
|
|
162,995
|
|
|
|
12.00
|
|
|
|
5,420
|
|
|
|
1,852
|
|
|
|
2.5
|
|
Wisconsin
(3)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Maryland was added as a licensed state in October 2016.
(2)
Ohio was added as a licensed state in December 2016.
(3)
Wisconsin was added as a licensed state in June 2017.
We
undertook an advertising strategy during the first half of 2017 that focused on refinancing customers in the states with an average
yield of 29.9% only to maximize our portfolio yield while we were capital constrained. In the third and fourth quarters of 2017
we focused on providing new loans to customers in the states with an average yield of 29.9% to maximize our portfolio yield. The
advertising strategy resulted in an increase in the average portfolio yield in 2017 compared to 2016.
The
following table shows, as of December 31, 2016, the aggregate loan principal outstanding and the average portfolio yield by state.
In addition, to show indicative duration of the portfolio yield, the table shows the average loan amount, average current principal
outstanding and the average years to maturity of the loans in each state.
State
|
|
Total
Current
Principal
($)
|
|
|
Average
Yield
(%)
|
|
|
Average
Loan
Amount
($)
|
|
|
Average
Current
Principal
($)
|
|
|
Average
Years
to
Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alabama
|
|
|
89,203
|
|
|
|
29.90
|
|
|
|
5,278
|
|
|
|
4,956
|
|
|
|
4.3
|
|
Arizona
|
|
|
370,766
|
|
|
|
24.90
|
|
|
|
5,152
|
|
|
|
3,745
|
|
|
|
2.8
|
|
California
|
|
|
779,210
|
|
|
|
29.90
|
|
|
|
5,215
|
|
|
|
4,780
|
|
|
|
4.2
|
|
Florida
|
|
|
1,073,758
|
|
|
|
23.93
|
|
|
|
5,162
|
|
|
|
3,863
|
|
|
|
3.1
|
|
Georgia
|
|
|
800,394
|
|
|
|
29.90
|
|
|
|
5,379
|
|
|
|
4,522
|
|
|
|
3.6
|
|
Illinois
|
|
|
936,025
|
|
|
|
29.90
|
|
|
|
5,260
|
|
|
|
4,415
|
|
|
|
3.6
|
|
Kentucky
|
|
|
14,426
|
|
|
|
29.90
|
|
|
|
5,000
|
|
|
|
4,809
|
|
|
|
4.5
|
|
Louisiana
|
|
|
12,839
|
|
|
|
28.90
|
|
|
|
5,000
|
|
|
|
4,280
|
|
|
|
4.0
|
|
Maryland
(1)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Missouri
|
|
|
254,103
|
|
|
|
29.90
|
|
|
|
5,068
|
|
|
|
4,307
|
|
|
|
3.6
|
|
Nevada
|
|
|
663,594
|
|
|
|
29.90
|
|
|
|
4,932
|
|
|
|
3,770
|
|
|
|
3.2
|
|
New
Jersey
|
|
|
843,708
|
|
|
|
29.90
|
|
|
|
5,240
|
|
|
|
4,305
|
|
|
|
3.4
|
|
New
Mexico
|
|
|
27,056
|
|
|
|
29.90
|
|
|
|
5,000
|
|
|
|
4,509
|
|
|
|
3.9
|
|
Ohio
(2)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oregon
|
|
|
163,429
|
|
|
|
29.90
|
|
|
|
5,000
|
|
|
|
4,417
|
|
|
|
3.9
|
|
Pennsylvania
|
|
|
562,074
|
|
|
|
29.90
|
|
|
|
5,427
|
|
|
|
4,804
|
|
|
|
3.9
|
|
Texas
|
|
|
347,538
|
|
|
|
17.80
|
|
|
|
4,820
|
|
|
|
3,764
|
|
|
|
3.4
|
|
Utah
|
|
|
49,829
|
|
|
|
29.90
|
|
|
|
5,000
|
|
|
|
4,530
|
|
|
|
4.0
|
|
Virginia
|
|
|
599,398
|
|
|
|
29.89
|
|
|
|
5,339
|
|
|
|
4,375
|
|
|
|
3.5
|
|
Wisconsin
(3)
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Maryland was added as a licensed state in October 2016.
(2)
Ohio was added as a licensed state in December 2016.
(3)
Wisconsin was added as a licensed state in June 2017.
We
undertook an advertising strategy during 2016 that focused on seeking new customers in the states with an average yield of 29.9%
only to maximize our portfolio yield while we were capital constrained. The advertising strategy resulted in an increase in the
average portfolio yield in 2016 compared to 2015.
Customer
Acquisition Costs
Since
launching online lending in 2013, our marketing efforts have been focused on online customer acquisition. We experienced increases
in loan applications and inquiries as a result of search engine advertising and commenced banner advertising, remarketing and
search engine optimization in 2014. We commenced online video advertising in 2015. We have also engaged numerous online lead generators
who provide personal loan leads on a daily basis with a combination of cost per funded loan and cost per application expense.
We are continuing to develop relationships with additional lead generation partners to drive further growth. We also supplement
our online marketing efforts with traditional direct mail advertising.
The
following table shows the level of advertising cost versus the level of loan volume in 2016 and 2017 as both a dollar amount and
as a percentage of loan volume for the relevant year. The advertising cost represents both general advertising/brand awareness
costs as well as direct fees paid to lead generators and direct mail costs. Although it potentially overstates the direct cost
of customer acquisition in a particular year it provides a guide to the general cost and trends in customer acquisition costs.
In addition, the customer cost of acquisition is upfront, whereas the revenue from the customer is typically realized 5 years
later and for repeat customers, even later.
Origination
Year
|
|
Loan
Volume
|
|
|
Advertising
Cost
|
|
|
Cost
of Acquisition
|
|
2016
|
|
$
|
3,120,000
|
|
|
$
|
373,350
|
|
|
|
12.0
|
%
|
2017
|
|
$
|
2,105,000
|
|
|
$
|
407,760
|
|
|
|
19.
4
|
%
|
In
2017 there was a substantial increase in advertising expenses as a percentage of new loans funded in the year as a significant
direct mail campaign targeting new customers was conducted with more competition from competitors for new loans. However, enhancements
have been made to the Company’s internal underwriting procedures and process in early 2018 that management believe should
result in a reduction in the cost of customer acquisition in 2018 to substantially less than 2017 levels.
Gross
Charge-off Ratio and Recovery Ratio
The
credit quality of our loans is driven by our underwriting criteria, which takes into account income, money management, credit
history, employment history and willingness and capacity to repay the proposed loan. The profitability of our loan portfolio is
directly connected to net credit losses; therefore, we closely analyze credit performance. We also monitor recovery rates because
of their contribution to the reduction in the severity of our charge-offs. Additionally, because delinquencies are an early indicator
of future net credit losses, we analyze delinquency trends, adjusting for seasonality, to determine whether or not our loans are
performing in line with our original estimates. Because loan volume and portfolio size determine the magnitude of the impact of
each of the above factors on our earnings, we also closely monitor origination volume and annual percentage rate.
The
table below sets forth information regarding the gross charge-off ratio and the recovery ratio in both dollar amounts and in terms
of a ratio versus outstanding loans receivable balance. The data is presented for each quarter in 2016 and 2017, for each of the
full years for 2016 and 2017.
Date
|
|
Loans
Receivable
Balance
($)
|
|
|
Average
Balance
($)
Quarterly
|
|
|
Charge-Offs
($)
Quarterly
|
|
|
Ratio
(%)
Quarterly
|
|
|
Average
Balance
($)
Annual
|
|
|
Charge-Offs
($)
Annual
|
|
|
Ratio
(%)
Annual
|
|
|
Recovery
($)
Annual
|
|
|
Recovery
(%)
Annual
|
|
12-31-15
|
|
|
8,110,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-31-16
|
|
|
7,662,039
|
|
|
|
7,886,058
|
|
|
|
441,956
|
|
|
|
5.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6-30-16
|
|
|
8,766,508
|
|
|
|
8,214,273
|
|
|
|
220,725
|
|
|
|
2.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9-30-16
|
|
|
8,253,490
|
|
|
|
8,509,999
|
|
|
|
320,239
|
|
|
|
3.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12-31-16
|
|
|
7,587,349
|
|
|
|
7,920,419
|
|
|
|
655,375
|
|
|
|
8.27
|
|
|
|
7,848,713
|
|
|
|
1,638,295
|
|
|
|
20.87
|
|
|
|
27,149
|
|
|
|
1.66
|
|
03-31-17
|
|
|
6,914,321
|
|
|
|
7,250,835
|
|
|
|
330,637
|
|
|
|
4.56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
06-30-17
|
|
|
6,017,932
|
|
|
|
6,466,127
|
|
|
|
538,259
|
|
|
|
8.32
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
09-30-17
|
|
|
5,923,536
|
|
|
|
5,970,734
|
|
|
|
315,308
|
|
|
|
5.28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
12-31-17
|
|
|
6,160,881
|
|
|
|
6,042,208
|
|
|
|
290,903
|
|
|
|
4.81
|
|
|
|
6,874,115
|
|
|
|
1,475,107
|
|
|
|
21.46
|
|
|
|
57,308
|
|
|
|
3.89
|
|
We
saw a slight increase in charge-off ratio in 2017 versus 2016 as we saw an increasing trend in customer hardship and more customers
utilizing external debt management services. We significantly increased our level of loss recoveries in both dollar amount and
percentage of loans receivable balance due to more internal resources being allocated to the task, combined with a larger pool
of losses to recover funds from.
Delinquency
Ratio
The
tables below set forth, for the period indicated, information concerning the delinquency ratio measured in buckets of days delinquent
in both dollar amounts and also as a percentage of total principal.
Delinquency
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Principal 2017
|
|
|
1-30
Days Principal
|
|
|
1-30
Days
Percentage
|
|
|
31-60
Days
Principal
|
|
|
31-60
Days Percentage
|
|
|
61-90
Days Principal
|
|
|
61-90
Days Percentage
|
|
|
91-120
Days Principal
|
|
|
91-120
Days Percentage
|
|
|
Over
120
Days Principal
|
|
|
Over
120
Days Percentage
|
|
|
Past
Due
|
|
|
Past
Due
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,160,881
|
|
|
$
|
491,371
|
|
|
|
7.98
|
|
|
$
|
157,988
|
|
|
|
2.56
|
|
|
$
|
84,640
|
|
|
|
1.37
|
|
|
$
|
90,945
|
|
|
|
1.48
|
|
|
$
|
236,761
|
|
|
|
3.84
|
|
|
$
|
570,334
|
|
|
|
9.26
|
|
|
(1590
Loans
|
)
|
|
|
(135
Loans
|
)
|
|
|
|
|
|
|
(41
Loans
|
)
|
|
|
|
|
|
|
(23
Loans
|
)
|
|
|
|
|
|
|
(24
Loans
|
)
|
|
|
|
|
|
|
(62
Loans
|
)
|
|
|
|
|
|
|
(150
Loans
|
)
|
|
|
|
|
At December 31, 2017, we had 86 loans
delinquent or in default (defined as 91+ days past due), representing 5.32% of the number of loans in our active portfolio.
Loans become eligible for the lender to take legal action at 60 days past due. At December 31, 2017, our delinquency percentage
rate for past due loans was 9.26% (31+ days) with an allowance for loan loss at 20.00%.
Delinquency
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Principal
2016
|
|
|
1-30
Days Principal
|
|
|
1-30
Days Percentage
|
|
|
31-60
Days Principal
|
|
|
31-60
Days Percentage
|
|
|
61-90
Days Principal
|
|
|
61-90
Days Percentage
|
|
|
91-120
Days Principal
|
|
|
91-120
Days Percentage
|
|
|
Over
120
Days Principal
|
|
|
Over
120
Days Percentage
|
|
|
Past
Due
|
|
|
Delinquent
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,587,349
|
|
|
$
|
669,570
|
|
|
|
8.83
|
|
|
$
|
257,299
|
|
|
|
3.39
|
|
|
$
|
163,590
|
|
|
|
2.16
|
|
|
$
|
210,790
|
|
|
|
2.78
|
|
|
$
|
156,308
|
|
|
|
2.06
|
|
|
$
|
787,987
|
|
|
|
10.39
|
|
|
(1782
Loans
|
)
|
|
|
(156
Loans
|
)
|
|
|
|
|
|
|
(58
Loans
|
)
|
|
|
|
|
|
|
(40
Loans
|
)
|
|
|
|
|
|
|
(48
Loans
|
)
|
|
|
|
|
|
|
(35
Loans
|
)
|
|
|
|
|
|
|
(181
Loans
|
)
|
|
|
|
|
At
December 31, 2016, we had 83 loans delinquent or in default (defined as 91+ days past due), representing 4.84% of the number of
loans in our active portfolio. Loans become eligible for the lender to take legal action at 60 days past due. At December 31,
2016, our delinquency percentage rate for past due loans was 10.39% (31+ days) with an allowance for loan loss at 16.00%. There
was an increase in the delinquency ratio from December 31, 2015 to December 31, 2016 due to an increasing trend in customer hardship,
combined with a fall in loans receivables principal outstanding.
Allowance
for Credit Losses Ratio
Management
exercises its judgment, based on quantitative analyses, qualitative factors, such as recent delinquency and other credit trends,
and experience in the consumer finance industry, when determining the amount of the allowance for loan receivable losses. We adjust
the amounts for management’s estimate of the effects of events and conditions such as changes to underwriting criteria,
portfolio seasoning, and current economic conditions, including levels of unemployment, and personal bankruptcies.
The
allowance for credit losses ratio (reserve level) was increased from 16% for 2016 to 20% for 2017. The net loan balance decreased
from $6,374,908 at December 31, 2016 to $4,928,704 at December 31, 2017. The net loan balance at the current reserve level of
20% is $4,928,704 at December 31, 2017.
There
was no change in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and
recovery practices not considered elsewhere in estimating credit losses in the twelve months of 2017 compared to the year ended
December 31, 2016. There were no material changes in international, national, regional, and local economic and business conditions
and developments in the twelve months of 2017 compared to the year ended December 31, 2016 that affected the collectability of
the portfolio, including the condition of various market segments other than increased customer hardship. During 2017 there was
no significant change in the nature of the loan portfolio and was a decrease in the average size of the loan portfolio. There
were no changes in the experience, ability, and depth of lending management and other relevant staff in the twelve months ended
December 31, 2017. There was a decrease in the volume and severity of past due loans and the volume of non-accrual loans
due to a smaller loan portfolio for the twelve months ended December 31, 2017, as compared to the year ended December 31, 2016.
No changes were made to the quality of our loan review system in the twelve months ended December 2017. There was no significant
effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses
in our loan portfolio in the twelve months ended December 31, 2017.
Contractual
Loan Maturity
The
following table shows, as of December 31, 2017, the aggregate principal amount of loans by maturity date.
Loans
Maturing
|
|
Current
Principal
|
|
|
Maturing
|
|
Within
1 year
|
|
$
|
31,482
|
|
|
|
0.51
|
%
|
Within
2 years
|
|
$
|
805,358
|
|
|
|
13.07
|
%
|
Within
3 years
|
|
$
|
1,661,511
|
|
|
|
26.97
|
%
|
Within
4 years
|
|
$
|
1,694,940
|
|
|
|
27.51
|
%
|
Within
5 years
|
|
$
|
1,967,589
|
|
|
|
31.94
|
%
|
TOTAL
|
|
$
|
6,160,881
|
|
|
|
|
|
The
following table shows, as of December 31, 2016, the aggregate principal amount of loans by maturity date.
Loans
Maturing
|
|
Current
Principal
|
|
|
Maturing
|
|
Within
1 year
|
|
$
|
8,356
|
|
|
|
0.11
|
%
|
Within
2 years
|
|
$
|
101,140
|
|
|
|
1.33
|
%
|
Within
3 years
|
|
$
|
1,685,971
|
|
|
|
22.22
|
%
|
Within
4 years
|
|
$
|
3,131,799
|
|
|
|
41.28
|
%
|
Within
5 years
|
|
$
|
2,660,083
|
|
|
|
35.06
|
%
|
TOTAL
|
|
$
|
7,587,349
|
|
|
|
|
|
All
loans are written with a fixed 5-year term (closed end) with no exceptions, providing an affordable repayment either weekly or
monthly. However, loans can be repaid early without any penalty. As the tables above show, the Company has a substantial long
duration loan book with over 86% of current loans maturing in more than two years’ time and the majority mature in the 3
to 5 year range, which is expected to continue in the future.
Loan
Underwriting
Applicants
apply online providing income, employment and banking information in the pre-approval process. The pre-approval process utilizes
a soft credit pull, electronic review of 60-90 day banking history and if the applicant successfully meets the minimum pre-approval
criteria they are invited to proceed. Upon accepting the conditional pre-approval, the applicant authorizes a full credit report
from Experian and verification of employment. Applicants are provided disclosures and privacy statements during this process.
Once
the application has been transmitted, a full credit report is obtained and the automated preliminary underwriting is completed
based on stated income and expense data obtained from the credit report. The automated preliminary underwriting includes, but
is not limited to, credit score, number of credit inquiries, outstanding unpaid collections, length of credit history, length
of employment, debt to income ratio and internet protocol, or “IP,” address to verify location of applicant.
The
second step in the underwriting process for those applicants that are conditionally approved based on stated income, credit score,
number of credit inquires, outstanding unpaid collections, length of credit history and length of employments, debt to income
ratio, IP address, is to validate the actual income (current pay invoices and prior year W-2) and a review of the 60-90 day read-only
statements from the applicant’s primary bank for satisfactory money management. During this process the pay invoices are
reviewed for garnishments, hardship loans and other legal liens allowed on wages. Bank statements are transmitted electronically
directly to underwriting to ensure the integrity of the information. This process allows the underwriter to review the money management
of every applicant and to assess the ability to take on additional expense. It also provides the underwriter with additional debt
not found on traditional credit reports such as payday loans, title loans and IRS payments that could affect the ability of the
applicant to assume additional debt. If all conditions are met as it relates to money management, maximum debt to income, minimum
length of employment, and satisfactory credit history the underwriter recommends final approval and request to draw documents.
The
final step in the underwriting process is to present the completed file to the Chief Credit Officer for final approval and order
to draw documents. The file is then reviewed for any exceptions to policy, compliance with the underwriting policies and to ensure
the loan system is reflective of what has been presented by the underwriter. The applicant is then approved for a $5,000 or $10,000
loan based on income, ability to repay and credit strength. Rate and loan terms are fixed (fixed rate and fixed term can vary
based on regulatory state maximums) as we do not utilize risk based variable pricing models eliminating the risk of discrimination
and other compliance related issues.
The
closing process is completed by contacting the applicant, communicating the lending decision and reviewing loan terms and conditions.
Upon acceptance an identity check using Experian’s Precise Identity Screening is completed and if successful loan documents
are emailed for electronic signature, and returned to us for final verifications, document review and funding.
Servicing
All
of our loan servicing is handled in our centralized Las Vegas head office. All servicing and collection activity is conducted
and documented using an industry standard loan service software system which handles and records all records and transactions
of loan originations, loan servicing, collections and reporting.
Our
primary third-party servicing arrangement is with CyberRidge, LLC, a company that licenses its consumer loan software to us. We
use this software for our loan management system. We have a servicing agreement with CyberRidge, LLC which renews automatically
unless either party notifies the other, at least 60 days prior to the end of the renewal term. We believe the risk of termination
is low as we are a paying customer of CyberRidge, LLC and have maintained a positive working relationship since 2012. In the unlikely
event that the agreement was terminated, we believe 60 days’ notice would be sufficient to find a suitable replacement with
minimal disruption to our business.
Portfolio
Ledger Stratification as at December 31, 2017
|
|
Current
Unpaid
Principal Balance
|
|
|
%
|
|
0
- 30 days
|
|
$
|
5,590,547
|
|
|
|
90.75
|
%
|
31
- 60 days
|
|
|
157,988
|
|
|
|
2.56
|
%
|
61
- 90 days
|
|
|
84,640
|
|
|
|
1.37
|
%
|
91
- 120 days
|
|
|
90,945
|
|
|
|
1.48
|
%
|
121
- 184 days
|
|
|
236,761
|
|
|
|
3.84
|
%
|
Total
|
|
$
|
6,160,881
|
|
|
|
100
|
%
|
At
December 31, 2017 we also had 86 loans delinquent or in default (defined as 91+ days past due) representing 5.32% of the number
of loans in our active portfolio. Loans become eligible for lender to take legal action at 60 days past due.
Cryptocurrency/Blockchain
On
December 22, 2017, we announced that we had formed a wholly owned subsidiary to explore the legalities and economic risks and
benefits of entering into a joint venture with IEC to accept repayment of customer loans in the form of existing crypto/blockchain
currencies, provide the crypto equivalent of $5,000 and $10,000 loans to customers, and also potentially create
and issue an IEC cryptocurrency. The company did not begin operations and was in the development planning stages. On March
14, 2018, we announced that, after considering the potential risks and benefits, we will not pursue a cryptocurrency offering
or any other cryptocurrency-related ventures at this time. We will continue to monitor the developing regulatory landscape surrounding
this new technology and may consider cryptocurrency opportunities in the future. In addition, we will continue to explore the
potential application of blockchain technology to our core consumer lending business.
Regulation
Consumer
loans in the United States are regulated at both the federal and state level. National oversight is provided by the Federal Trade
Commission, which enforces the following credit laws that protect consumers’ rights to get, use and maintain credit:
|
●
|
The
Truth in Lending Act promotes the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize
the manner in which costs associated with borrowing are calculated and disclosed.
|
|
|
|
|
●
|
The
Fair Credit Reporting Act promotes the accuracy and privacy of information in the files of the nation’s credit reporting
companies. If a company denies an application, under the Fair Credit Reporting Act consumers have the right to the name and
address of the credit reporting company they contacted, provided the denial was based on information given by the credit reporting
company.
|
|
|
|
|
●
|
The
Equal Opportunity Credit Act prohibits credit discrimination on the basis of sex, race, marital status, religion, national
origin, age, or receipt of public assistance. Creditors may ask for this information (except religion) in certain situations,
but they may not use it to discriminate against consumers when deciding whether to grant you credit.
|
|
|
|
|
●
|
The
Fair Credit Billing Act and Electronic Fund Transfer Act establish procedures for resolving mistakes on credit billing and
electronic fund transfer account statements.
|
|
|
|
|
●
|
The
Fair Debt Collection Practices Act (the “FDCPA”) applies to personal, family, and household debts. The FDCPA prohibits
debt collectors from engaging in unfair, deceptive, or abusive practices while collecting these debts.
|
In
addition, the CFPB, a federal oversight body organized in connection with the Dodd-Frank Act has broad authority over our business.
The CFPB is a new agency which commenced operations in 2011, and there continues to be uncertainty as to how the agency’s
actions or the actions of any other new agency could impact our business or that of our issuing banks. The CFPB has the authority
to write regulations under federal consumer financial protection laws, such as the Truth in Lending Act and the Equal Credit Opportunity
Act, and to enforce those laws against and examine financial institutions for compliance. The CFPB is authorized to prevent “unfair,
deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. To assist in its
enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer
finance products, including the loan products we facilitate. This system could inform future CFPB decisions with respect to its
regulatory, enforcement or examination focus.
We
are subject to the CFPB’s jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit.
The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct
on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system, that we
were engaging in activities that pose risks to consumers.
There
continues to be uncertainty as to how the CFPB’s strategies and priorities, including in both its examination and enforcement
processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements
to alter or cease offering affected loan products and services, making them less attractive and restricting our ability to offer
them.
Consumer
loans are also regulated at the state level, and the regulatory requirements vary between states. We are licensed in the following
states:
|
●
|
Alabama
(Consumer Credit License, No. MC 22125, which commenced on August 13, 2015)
|
|
|
|
|
●
|
Arizona
(Consumer Lender License, No. CL0918180, which commenced on May 20, 2011)
|
|
|
|
|
●
|
California
(Finance Lender License, No. 60 DBO 35873, which commenced on July 7, 2015)
|
|
|
|
|
●
|
Florida
(Consumer Finance Company License, No. CF9900865, which commenced on August 29, 2011)
|
|
|
|
|
●
|
Georgia
(Certificate of Authority, No. 14021183, which commenced on March 4, 2014)
|
|
|
|
|
●
|
Illinois
(Consumer Installment Loan License, No. CI3095, which commenced on April 13, 2011)
|
|
|
|
|
●
|
Kentucky
(Consumer Finance License, No. CL327249, which commenced on December 17, 2015)
|
|
|
|
|
●
|
Louisiana
(License No. 1226052-980840, which was issued on October 2, 2015)
|
|
|
|
|
●
|
Maryland
(License No. 2307, which commenced on October 25, 2016)
|
|
●
|
Missouri
(Consumer Installment Loan License, No. 510-15-7308, which commenced on April 7, 2014)
|
|
|
|
|
●
|
Nevada
(Installment Loan License, No. II22748, which commenced on June 15, 2010)
|
|
|
|
|
●
|
New
Jersey (Consumer Lender License, No. L066960, which commenced on April 24, 2014)
|
|
|
|
|
●
|
New
Mexico (Certificate of Authority, No. 5012554, which commenced on January 29, 2015)
|
|
|
|
|
●
|
Ohio
(License No. SL 400243, which commenced on December 21, 2016)
|
|
|
|
|
●
|
Oregon
(Consumer Finance License, No. 0407-001-C, which commenced on January 8, 2015)
|
|
|
|
|
●
|
Pennsylvania
(Consumer Lender License, No. 49269, which commenced on December 23, 2014)
|
|
|
|
|
●
|
Texas
(Regulated Lender License, No. 1400031843-150319, which commenced on November 14, 2014)
|
|
|
|
|
●
|
Utah
(Consumer Lender License, which commenced on February 5, 2015)
|
|
|
|
|
●
|
Virginia
(Certificate of Authority, No. CIS0368, which commenced on March 5, 2014)
|
|
|
|
|
●
|
Wisconsin
(Loan Company License, No. 3051, which commenced on June 19, 2017)
|
State
licensing statutes impose a variety of requirements and restrictions on us, including:
|
●
|
record-keeping
requirements;
|
|
|
|
|
●
|
restrictions
on servicing practices, including limits on finance charges and fees;
|
|
|
|
|
●
|
disclosure
requirements;
|
|
|
|
|
●
|
examination
requirements;
|
|
|
|
|
●
|
surety
bond and minimum net worth requirements;
|
|
|
|
|
●
|
financial
reporting requirements;
|
|
|
|
|
●
|
notification
requirements for changes in principal officers, stock ownership or corporate control;
|
|
|
|
|
●
|
restrictions
on advertising; and
|
|
|
|
|
●
|
review
requirements for loan forms.
|
The
statutes also subject us to the supervisory and examination authority of state regulators in certain cases.
We
did not incur any costs in connection with the compliance with any federal, state, or local environmental laws.
Competition
We
operate in a highly competitive environment. Several personal consumer loan companies operate in the United States. Our competitors
include:
|
●
|
large,
publicly-traded, state-licensed personal loan companies,
|
|
|
|
|
●
|
peer-to-peer
lending companies, such as Lending Club and Prosper,
|
|
|
|
|
●
|
online
personal loan companies, such as Avant,
|
|
|
|
|
●
|
“brick
and mortar” personal loan companies, including those that have implemented websites to facilitate online lending, and
|
|
|
|
|
●
|
payday
lenders, tribal lenders and other online consumer loan companies.
|
We
believe we compete based on affordable repayment terms, favorable interest rates and low overhead due to on-line distribution.
We believe that in the future we will face increased competition from these companies as we expand our operations. Most of the
entities against which we compete, or may compete, are larger and have greater financial resources than us. No assurance can be
given that increased competition will not have an adverse effect on our company.
Office
Location
Our
executive office, which also serves as our centralized operational headquarters and Nevada branch, is located at 3960 Howard Hughes
Parkway, Suite 490, Las Vegas, Nevada 89169. This facility occupies a total of approximately 1,906 square feet under a lease that
expires on September 30, 2020. Our annual rental cost for this facility is approximately $69,531, plus a proportionate share of
operating expenses which are expected to be minimal as the space is 1.32% of the total building rentable space. We believe this
facility is adequate for our current and near term future needs due to our online strategy and our ability to operate 7 days a
week with unrestricted hours of operation from this location.
Employees
As
of March 28, 2018, we had five full-time employees. None of our employees is represented by a union. We consider our relations
with our employees to be good.
Corporate
History
We
were organized as a Florida corporation on January 21, 1999, under the name Interact Technologies, Inc. (“Interact”).
Interact was formed for the purpose of acquiring certain medical technology. On February 18, 1999, we changed our name to Fairhaven
Technologies, Inc. (“Fairhaven”). Fairhaven’s business plan continued to involve the acquisition of certain
medical technology. By June 1999, Fairhaven abandoned its business plan and had no operations until December 2001. On December
14, 2001, we changed our name to Ideal Accents, Inc. Ideal Accents, Inc. was engaged primarily in the business of accessorizing
cars and trucks at the new vehicle dealer level. Ideal Accents, Inc. ceased operations in 2005. IEC, our wholly owned subsidiary,
commenced operations in 2010 and in February 2013, we changed our name to IEG Holdings Corporation.
In
2005, Mr. Mathieson, our Chief Executive Officer and sole director, founded IEG in Sydney, Australia. IEG launched the Amazing
Loans business in Australia in 2005 and the Mr. Amazing Loans business in the United States via IEGC in 2010. From 2005 until
2012, Mr. Mathieson operated the Amazing Loans business through IEG in Australia. In 2012 following an extensive cost/benefit
analysis, IEG’s management made a strategic decision to focus on its U.S. operations and cease its Australian operations.
Management concluded that it should cease Australian operations due to the following:
|
●
|
a
lack of funding opportunities for non-U.S. loan receivables,
|
|
|
|
|
●
|
the
difficulties of operating in the Australian time zone compared to the Las Vegas time zone of its principal executive offices,
|
|
|
|
|
●
|
the
Australian requirement to maintain a specific Australian lending license for Australian operations or to utilize expensive
outsourcing for licensing,
|
|
|
|
|
●
|
the
small size of the Australian consumer finance market as compared to the U.S. market (approximately 1/100
th
of the
size),
|
|
|
|
|
●
|
the
lack of automation opportunities in Australia due to the absence of instant access to FICO credit score information and other
significant data only available for U.S. residents,
|
|
|
|
|
●
|
the
significant extra cost and time requirements to provide audited accounts for any non-Australian operations,
|
|
|
|
|
●
|
significantly
different/expensive website and documentation requirements for Australia, and
|
|
|
|
|
●
|
the
perceived reticence of U.S. investors to invest in Australian operations (mainly due to an unwillingness to travel to Australia
for due diligence purposes).
|
Accordingly,
IEG ceased doing business in Australia in 2012.
On
January 28, 2013, IEGC entered into a stock exchange agreement (the “Stock Exchange Agreement”) among IEGC, its sole
stockholder, IEG, and our company. Under the terms of the Stock Exchange Agreement, we agreed to acquire a 100% interest in IEGC
for 272,447 shares of our common stock after giving effect to a 1-for-6 reverse stock split (also adjusted for the 1-for-100 reverse
stock split that took effect June 17, 2015 and the net 1-for-10 reverse stock split that was effective on October 27, 2016). On
February 14, 2013, we filed an amendment to our articles of incorporation, as amended, with the Secretary of State of Florida
which had the effect of:
|
●
|
changing
our name from Ideal Accents, Inc. to IEG Holdings Corporation,
|
|
|
|
|
●
|
increasing
the number of shares of our authorized common stock to 1,000,000,000, $0.001 par value,
|
|
|
|
|
●
|
creating
50,000,000 shares of “blank-check” preferred stock, and
|
|
|
|
|
●
|
effecting
the Reverse Stock Split pursuant to the terms of the Stock Exchange Agreement.
|
FINRA
approved the amendment to our articles of incorporation, as amended, on March 11, 2013.
On
March 13, 2013, we completed the acquisition of IEGC under the terms of the Stock Exchange Agreement and issued to IEG 272,447
shares of our common stock after giving effect to the Reverse Stock Split whereby we acquired a 100% interest in IEGC. The stock
exchange agreement between IEGC, IEG and IEG Holdings resulted in a reverse acquisition with a public shell, with IEGC being the
accounting acquirer. IEG Holdings issued 90 shares of its common stock to the stockholders of IEG (IEG transferred its ownership
in IEGC to its stockholders, which is why the shares were issued to the ultimate stockholders of IEG rather than to IEG itself)
for each share of IEGC, in exchange for 100% ownership interest in IEGC. We determined that IEGC was the accounting acquirer because
of the following facts and circumstances:
|
1.
|
After
consummation of the transaction, the ultimate stockholders of IEGC own 99.1% of the outstanding shares of IEG Holdings;
|
|
|
|
|
2.
|
The
board of directors of IEG Holdings immediately after the transaction is comprised exclusively of former directors of IEGC;
and
|
|
|
|
|
3.
|
The
operations of IEG Holdings immediately after the transaction are those of IEGC.
|
After
completing the Stock Exchange Agreement and terminating all Australian operations via the sale of the remaining loan book, IEG
entered into voluntary liquidation on June 25, 2014. In August 2015, IEGC assigned all of its tangible and intangible assets to
IEG Holdings and IEGC was dissolved.
On
May 1, 2015, we filed articles of amendment to our amended and restated articles of incorporation, as amended, with the Secretary
of State of Florida. The amendment was approved by FINRA, and became effective, on June 17, 2015. The articles of amendment effected
(i) a 1-for-100 reverse stock split, and (ii) an increase in our authorized capital stock from 2,550,000,000 shares to 3,050,000,000
shares, of which 3,000,000,000 shares are common stock and 50,000,000 are preferred stock.
On
September 10, 2015, we filed articles of amendment to our amended and restated articles of incorporation, as amended, with the
Secretary of State of Florida. The articles of amendment had the effect, among other things, of adjusting the conversion ratio
of the Series H preferred stock, from 1,333/100,000 (0.01333) to 2,666/100,000 (0.02666) shares of common stock for each Series
H preferred share, to account for the Company’s offering to existing stockholders of the Company commenced August 3, 2015.
On
December 1, 2015, we filed articles of amendment to our amended and restated articles of incorporation, as amended, with the Secretary
of State of Florida. The articles of amendment had the effect, among other things, of adjusting the conversion ratio of the Series
H preferred stock, from 2,666/100,000 (0.02666) to 5,332/100,000 (0.05332) shares of common stock for each Series H preferred
share, to account for the Company’s offering to existing stockholders of the Company commenced December 1, 2015.
On
January 8, 2016, we filed articles of amendment to our amended and restated articles of incorporation, as amended, with the Secretary
of State of Florida. The articles of amendment had the effect, among other things, of adjusting the conversion ratio of the Series
H preferred stock, from 5,332/100,000 (0.05332) to 0.1 shares of common stock for each Series H preferred share, to account for
the Company’s offering to existing stockholders of the Company commenced January 8, 2016.
On
March 22, 2016, we filed articles of amendment to our amended and restated articles of incorporation, as amended. The amendment
had the effect, among other things, of adjusting the conversion ratio of the Series H preferred stock from 0.1 shares to 0.2 shares
of common stock for each Series H preferred share, to account for our offering to existing stockholders commenced March 16, 2016.
Effective
April 1, 2016, we amended our amended and restated articles of incorporation, as amended, in order to effect a 1-for-100 reverse
stock split. No fractional shares were issued. Rather, we paid stockholders who would have received a fractional share an amount
equal to the average closing price per share of our common stock on the OTCQB, averaged over the period of 30 consecutive calendar
days ending on (and including) April 1, 2016. In April 2016, we purchased 1,793 shares of the common stock of IEG Holdings in
exchange for an aggregate purchase price of $130,769, equivalent to $72.93 per share. As a result, there was a reduction in the
number of record holders with 676 record holders of the Company receiving cash in exchange for their shares of IEG Holdings in
connection with this forward stock split and reverse stock split transaction. In addition, after the reverse stock split was effected
on April 1, 2016, we amended our amended and restated articles of incorporation, as amended, to effect (i) a 100-for-1 forward
stock split, and (ii) a reduction in the number of authorized shares of common stock from 3 billion to 200 million.
On
May 16, 2016, we filed articles of amendment to our amended and restated articles of incorporation, as amended, with the Secretary
of State of Florida. The articles of amendment had the effect, among other things, of:
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(i)
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Reducing
the dividend rate on our Series H preferred stock from 10% per annum to 8% per annum,
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(ii)
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Extending
the date after which we may redeem the unconverted outstanding shares of Series H preferred stock from June 30, 2016 to December
31, 2016,
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(iii)
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Extending
the date on which the holders of our Series H preferred stock may convert their shares into shares of our common stock from
June 30, 2016 to December 31, 2016, and
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(iv)
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Removing
the requirement to adjust the Series H preferred stock conversion ratio when we conduct a rights offering to our existing
stockholders.
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On
October 12, 2016, we filed articles of amendment to our amended and restated articles of incorporation, as amended, with the Secretary
of State of Florida. The articles of amendment had the effect of:
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(i)
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Adjusting
the conversion ratio of the Series H preferred stock, from two to 0.2 shares of common stock for each Series H preferred share,
to account for Company’s reverse/forward split effective October 27, 2016, and
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(ii)
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Amending
the redemption date of the Series H preferred stock from “[a]ny time after the December 31, 2016” to “[a]ny
time after 6:00 p.m. Eastern time on December 31, 2016.”
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Effective
October 27, 2016, we effected a reverse stock split of our outstanding shares of common stock, at the ratio of 1-for-1,000. No
fractional shares were issued. Rather, we paid stockholders who would have received a fractional share an amount equal to the
average closing price per share of our common stock on the OTCQX, averaged over the period of 30 consecutive calendar days preceding
the reverse stock split. We purchased 12,957 shares of IEG Holdings common stock in exchange for an aggregate purchase
price of $78,330 equivalent to $6.04 per share. As a result, there was a reduction in the number of record
holders with 309 record holders of the Company receiving cash in exchange for their IEG Holdings shares in connection with this
reverse stock split and forward stock split transaction. Immediately following the completion of the reverse stock split, we effected
a forward stock split of our common stock on a 100-for-1 share basis and a reduction of the number of authorized shares of common
stock from 200,000,000 to 40,000,000.
Effective
December 5, 2016, we increased our number of authorized shares of common stock from 40,000,000 to 300,000,000.
On
June 20, 2017, we filed articles of amendment (the “June 20 Amendment”) to our amended and restated articles of incorporation,
as amended. The June 20 Amendment has the effect of revising the terms of the Series H preferred stock to:
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(1)
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remove
rights to receive dividends on our Series H preferred stock;
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(2)
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increase
the conversion ratio of our Series H preferred stock from 0.2 shares of our common stock per share of Series H preferred stock
to one share of our common stock per share of Series H preferred stock;
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(3)
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remove
our right to redeem or call the Series H preferred stock;
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(4)
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provide
for automatic conversion of Series H preferred stock into shares of our common stock on December 31, 2017; and
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(5)
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remove
the voting rights for Series H preferred stock except with respect to changes to our articles which would amend, alter, change
or repeal any of the powers, designations, preferences and rights of holders of the Series H preferred stock.
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In
addition, on July 26, 2017, we filed articles of amended (the “July 26 Amendment”) to our articles that had the effect
of further revising the terms of the Series H preferred stock to increase the conversion ratio of the Series H preferred stock
from one share of our common stock per share of Series H preferred stock to four shares of our common stock per share of Series
H preferred stock.
The
Amendment was approved by the Company’s board of directors on June 19, 2017 and July 26, 2017, respectively.
On
October 30, 2017, the Company completed a private placement of 934,589 shares of the Series H Preferred Stock to four non-U.S.
persons. The Company received an aggregate purchase price of $934,589 for the sale of the shares of Series H Preferred Stock and
intends to use the proceeds from that sale to expand its operations, including through increased advertising designed to increase
the amount and number of loans entered into with customers and to fund operations of the Company. The issuance of shares of Series
H Preferred Stock was exempt from the registration requirements of the Securities Act in reliance upon Regulation S promulgated
pursuant to the Securities Act.
On
December 15, 2017, the Company completed a private placement of 305,000 shares of Series H Preferred Stock to three non-U.S. persons.
The Company received an aggregate purchase price of $305,000 for the sale of the shares of Series H Preferred Stock and intends
to use the proceeds from that sale to expand its operations, including through increased advertising designed to increase the
amount and number of loans entered into with customers and to fund operations of the Company. The issuance of shares of Series
H Preferred Stock was exempt from the registration requirements of the Securities Act in reliance upon Regulation S promulgated
pursuant to the Securities Act.
On
December 28, 2017, the Company completed a private placement of 52,500 shares of Series H Preferred Stock to two non-U.S. persons.
The Company received an aggregate purchase price of $52,500 for the sale of the shares of Series H Preferred Stock and intends
to use the proceeds from that sale to expand its operations, including through increased advertising designed to increase the
amount and number of loans entered into with customers and to fund operations of the Company. The issuance of shares of Series
H Preferred Stock was exempt from the registration requirements of the Securities Act in reliance upon Regulation S promulgated
pursuant to the Securities Act.
On
December 31, 2017, the holders of an aggregate of 1,292,089 shares of Series H preferred stock, representing all of the outstanding
Series H Preferred Shares, pursuant to the terms of the Series H Preferred Shares, converted their shares of Series H Preferred
Shares, effective December 31, 2017. In accordance with the terms of the Series H Preferred Shares, upon the conversion of such
Series H Preferred Shares, the Company issued to the converting holders of Series H Preferred Shares an aggregate of 5,168,356
shares of the Company’s common stock. As a result of the conversion, no Series H Preferred Shares are outstanding. In addition,
as a result of the conversion and subsequent issuance of common stock, 17,463,449 shares of the Company’s common stock are
issued and outstanding. Due solely to the issuance of common stock, and not as the result of any stock disposition, Paul Mathieson,
the Company’s Chairman and Chief Executive Officer, is no longer a majority stockholder. Following the issuance of common
stock, Mr. Mathieson owns approximately 39.5% of the Company’s outstanding common stock.
ITEM
1A. RISK FACTORS
The
risk factors in this section describe the material risks to our business, prospects, results of operations, financial condition
or cash flows, and should be considered carefully. In addition, these factors constitute our cautionary statements under the Private
Securities Litigation Reform Act of 1995 and could cause our actual results to differ materially from those projected in any forward-looking
statements (as defined in such act) made in this annual report on Form 10-K. Investors should not place undue reliance on any
such forward-looking statements. Any statements that are not historical facts and that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions or future events or performance (often, but not always, through the use
of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is
anticipated,” “estimated,” “intends,” “plans,” “believes” and “projects”)
may be forward-looking and may involve estimates and uncertainties which could cause actual results to differ materially from
those expressed in the forward-looking statements.
Further,
any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect
the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible
for us to predict all of such factors. Further, we cannot assess the impact of each such factor on our results of operations or
the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements.
Risks
Related to Our Business and Industry
Our
limited operating history and our failure since inception to achieve an operating profit makes our future prospects and financial
performance unpredictable.
We
commenced operations in 2010 and as a result, we have a limited operating history upon which a potential investor can evaluate
our prospects and the potential value of an investment in our company. In addition, we have not made an operating profit since
our incorporation. We remain subject to the risks inherently associated with new business enterprises in general and, more specifically,
the risks of a new financial institution and, in particular, a new Internet-based financial institution. Our prospects are subject
to the risks and uncertainties frequently encountered by companies in their early stages of development, including the risk that
we will not be able to implement our business strategy. If we are unable to implement our business strategy and grow our business,
our business will be materially adversely affected.
We
may not be able to implement our plans for growth successfully, which could adversely affect our future operations.
Since
January 2015, the amount we have loaned to borrowers (our loan book) has increased by 192.1% from $5,549,023 to $16,209,023 as
of December 31, 2017. We expect to continue to grow our loan book and number of customers at an accelerated rate in the future.
Our future success will depend in part on our continued ability to manage our growth. We may not be able to achieve our growth
plans, or sustain our historical growth rates or grow at all. Various factors, such as economic conditions, regulatory and legislative
considerations and competition, may also impede our ability to expand our market presence. If we are unable to grow as planned,
our business and prospects could be adversely affected.
IEG
Holdings has executed and initiated reverse stock splits that have resulted in a reduction in the number of stockholders of IEG
Holdings. Stockholders may be involuntarily cashed out in the future.
In
April 2016, we effected a reverse stock split at a ratio of one share of the common stock of IEG Holdings for every 100 such shares.
In October 2016, we effected a reverse stock split at a ratio of one share of the common stock of IEG Holdings for every 1,000
such shares. In each case, stockholders who would otherwise have received fractional shares received cash in exchange for shares
of IEG Holdings and as a result, in April 2016, we purchased 1,793 shares of the common stock of IEG Holdings in exchange for
an aggregate purchase price of $130,769, and in October 2016, we purchased 12,957 shares of the common stock of IEG Holdings
in exchange for an aggregate purchase price of $78,330. If we decide to execute a reverse stock split in the future,
IEG Holdings stockholders could be required to accept cash in exchange for their shares of IEG Holdings.
As
our largest stockholder, sole officer and director, Mr. Mathieson can exercise sole authority over any future reverse stock splits,
including the existence of and terms of any reverse stock splits, that could result in stockholders being involuntarily cashed
out. Our stockholders should be willing to entrust all aspects of our management to Mr. Mathieson.
Our
inability to manage our growth could harm our business.
We
anticipate that our loan book and customer base will continue to grow significantly over time. To manage the expected growth of
our operations and personnel, we will be required to, among other things:
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improve
existing and implement new transaction processing, operational and financial systems, procedures and controls;
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maintain
effective credit scoring and underwriting guidelines; and
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increase
our employee base and train and manage this growing employee base.
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If
we are unable to manage growth effectively, our business, prospects, financial condition and results of operations could be adversely
affected.
We
may need to raise additional capital that may not be available, which could harm our business.
Our
growth will require that we generate additional capital either through retained earnings or the issuance of additional debt or
equity securities. Additional capital may not be available on terms acceptable to us, if at all. Any equity financings could result
in dilution to our stockholders or reduction in the earnings available to our common stockholders. In July 2017, we received approximately
$3.4 million in cash in exchange for shares of OneMain common stock. We acquired those shares of OneMain’s common stock
pursuant to the OneMain Tender Offer in exchange for shares of the Company’s common stock. The cash received in connection
with the OneMain Tender Offer was a significant portion of the cash raised by the Company during the year ended December 31, 2017
and resulted in dilution of the Company’s then-existing stockholders. In addition, if adequate capital is not available
or the terms of such capital are not attractive, we may have to curtail our growth and our business, and our business, prospects,
financial condition and results of operations could be adversely affected.
As
an online consumer loan company whose principal means of delivering personal loans is the Internet, we are subject to risks particular
to that method of delivery.
We
are predominantly an online consumer loan company and there are a number of unique factors that Internet-based loan companies
face. These include concerns for the security of personal information, the absence of personal relationships between lenders and
customers, the absence of loyalty to a conventional hometown branch, our customers’ difficulty in understanding and assessing
the substance and financial strength of an online loan company, a lack of confidence in the likelihood of success and permanence
of online loan companies and many individuals’ unwillingness to trust their personal details and financial future to a relatively
new technological medium such as the Internet. As a result, some potential customers may be unwilling to establish a relationship
with us.
Conventional
“brick and mortar” consumer loan companies, in growing numbers, are offering the option of Internet-based lending
to their existing and prospective customers. The public may perceive conventional established loan companies as being safer, more
responsive, more comfortable to deal with and more accountable as providers of their lending needs. We may not be able to offer
Internet-based lending that has sufficient advantages over the Internet-based lending services and other characteristics of conventional
“brick and mortar” consumer loan companies to enable us to compete successfully.
We
may not be able to make technological improvements as quickly as some of our competitors, which could harm our ability to compete
with our competitors and adversely affect our results of operations, financial condition and liquidity.
Both
the Internet and the financial services industry are undergoing rapid technological changes, with frequent introductions of new
technology-driven products and services. In addition to improving the ability to serve customers, the effective use of technology
increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability
to address the needs of our customers by using technology to provide products and services that will satisfy customer demands,
as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven
products and services or be successful in marketing these products and services to our customers. If we are unable, for technical,
legal, financial or other reasons, to adapt in a timely manner to changing market conditions, customer requirements or emerging
industry standards, our business, prospects, financial condition and results of operations could be adversely affected.
A
significant disruption in our computer systems or a cybersecurity breach could adversely affect our operations.
We
rely extensively on our computer systems to manage our loan origination and other processes. Our systems are subject to damage
or interruption from power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism,
severe weather conditions, catastrophic events and human error, and our disaster recovery planning cannot account for all eventualities.
If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair
or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions,
which could adversely affect our business and results of operations. Any compromise of our security could also result in a violation
of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation, loss or misuse of the
information and a loss of confidence in our security measures, which could harm our business.
Our
ability to protect the confidential information of our borrowers and investors may be adversely affected by cyber-attacks, computer
viruses, physical or electronic break-ins or similar disruptions.
We
process certain sensitive data from our borrowers and investors. While we have taken steps to protect confidential information
that we receive or have access to, our security measures could be breached. Any accidental or willful security breaches or other
unauthorized access to our systems could cause confidential borrower and investor information to be stolen and used for criminal
purposes. Security breaches or unauthorized access to confidential information could also expose us to liability related to the
loss of the information, time-consuming and expensive litigation and negative publicity. If security measures are breached because
of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited,
our relationships with borrowers and investors could be severely damaged, and we could incur significant liability.
Because
techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until
they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
In addition, federal regulators and many federal and state laws and regulations require companies to notify individuals of data
security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement
and often lead to widespread negative publicity, which may cause borrowers and investors to lose confidence in the effectiveness
of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, we could lose borrowers
and investors and our business and operations could be adversely affected.
Any
significant disruption in service on our platform or in our computer systems, including events beyond our control, could prevent
us from processing or posting payments on loans, reduce the attractiveness of our marketplace and result in a loss of borrowers
or investors.
In
the event of a system outage and physical data loss, our ability to perform our servicing obligations, process applications or
make loans available would be materially and adversely affected. The satisfactory performance, reliability and availability of
our technology are critical to our operations, customer service, reputation and our ability to attract new and retain existing
borrowers and investors.
Any
interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches,
whether accidental or willful, could harm our relationships with our borrowers and investors and our reputation. Additionally,
in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur.
Our disaster recovery plan has not been tested under actual disaster conditions, and we may not have sufficient capacity to recover
all data and services in the event of an outage. These factors could prevent us from processing or posting payments on the loans,
damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause
borrowers and investors to abandon our marketplace, any of which could adversely affect our business, financial condition and
results of operations.
We
contract with third parties to provide services related to our online web lending and marketing, as well as systems that automate
the servicing of our loan portfolios. See “—We depend on third-party service providers for our core operations including
online lending and loan servicing and interruptions in or terminations of their services could materially impair the quality of
our services.” While there are material cybersecurity risks associated with these services, we require that our vendors
provide industry-leading encryption, strong access control policies, Statement on Standards for Attestation Engagements (SSAE)
16 audited data centers, systematic methods for testing risks and uncovering vulnerabilities, and industry compliance audits to
ensure data and assets are protected. To date, we have not experienced any cyber incidents that were material, either individually
or in the aggregate.
Our
unsecured loans generally have delinquency and default rates higher than prime and secured loans, which could result in higher
loan losses.
We
are in the business of originating unsecured personal loans. As of December 31, 2017, approximately 1.89% of our customers are
subprime borrowers, which we define as borrowers having credit scores below 600 on the Vantage model 1.0 credit risk scale
developed by VantageScore Solutions, LLC. Unsecured personal loans and subprime loans generally have higher delinquency and default
rates than secured loans and prime loans. Subprime borrowers are associated with lower collection rates and are subject to higher
loss rates than prime borrowers. Subprime borrowers have historically been, and may in the future become, more likely to be affected,
or more severely affected, by adverse macroeconomic conditions, particularly unemployment. If our borrowers default under an unsecured
loan, we will bear a risk of loss of principal, which could adversely affect our cash flow from operations. Delinquency interrupts
the flow of projected interest income from a loan, and default can ultimately lead to a loss. We attempt to manage these risks
with risk-based loan pricing and appropriate management policies. However, we cannot assure you that such management policies
will prevent delinquencies or defaults and, if such policies and methods are insufficient to control our delinquency and default
risks and do not result in appropriate loan pricing, our business, financial condition, liquidity and results of operations could
be harmed. If aspects of our business, including the quality of our borrowers, are significantly affected by economic changes
or any other conditions in the future, we cannot be certain that our policies and procedures for underwriting, processing and
servicing loans will adequately adapt to such changes. If we fail to adapt to changing economic conditions or other factors, or
if such changes affect our borrowers’ capacity to repay their loans, our results of operations, financial condition and
liquidity could be materially adversely affected. At December 31, 2017 we had 150 loans considered past due at 31+ days past due,
representing 9.26% of the number of loans in our active portfolio. At December 31, 2017, we had 86 loans delinquent or in default
(defined as 91+ days past due) representing 5.32% of the number of loans in our active portfolio. Loans become eligible for a
lender to take legal action at 60 days past due.
If
our estimates of loan receivable losses are not adequate to absorb actual losses, our provision for loan receivable losses would
increase, which would adversely affect our results of operations.
We
maintain an allowance for loans receivable losses. To estimate the appropriate level of allowance for loan receivable losses,
we consider known and relevant internal and external factors that affect loan receivable collectability, including the total amount
of loan receivables outstanding, historical loan receivable charge-offs, our current collection patterns, and economic trends.
If customer behavior changes as a result of economic conditions and if we are unable to predict how the unemployment rate, housing
foreclosures, and general economic uncertainty may affect our allowance for loan receivable losses, our provision may be inadequate.
Our allowance for loan receivable losses is an estimate, and if actual loan receivable losses are materially greater than our
allowance for loan receivable losses, our financial position, liquidity, and results of operations could be adversely affected.
Our
risk management efforts may not be effective which could result in unforeseen losses.
We
could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage,
monitor, and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk, and other market-related
risks, as well as operational risks related to our business, assets and liabilities. Our risk management policies, procedures,
and techniques, including our scoring methodology, may not be sufficient to identify all of the risks we are exposed to, mitigate
the risks we have identified or identify additional risks to which we may become subject in the future.
We
face strong competition for customers and may not succeed in implementing our business strategy.
Our
business strategy depends on our ability to remain competitive. There is strong competition for customers from personal loan companies
and other types of consumer lenders, including those that use the Internet as a medium for lending or as an advertising platform.
Our competitors include:
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large,
publicly-traded, state-licensed personal loan companies such as OneMain Holdings, Inc.;
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peer-to-peer
lending companies such as LendingClub Corporation and Prosper Marketplace Inc.;
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online
personal loan companies such as Avant;
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“brick
and mortar” personal loan companies, including those that have implemented websites to facilitate online lending; and
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payday
lenders, tribal lenders and other online consumer loan companies.
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Some
of these competitors have been in business for a long time and have name recognition and an established customer base. Most of
our competitors are larger and have greater financial and personnel resources. In order to compete profitably, we may need to
reduce the rates we offer on loans, which may adversely affect our business, prospects, financial condition and results of operations.
To remain competitive, we believe we must successfully implement our business strategy. Our success depends on, among other things:
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having
a large and increasing number of customers who use our loans for financing needs;
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our
ability to attract, hire and retain key personnel as our business grows;
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our
ability to secure additional capital as needed;
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our
ability to offer products and services with fewer employees than competitors;
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the
satisfaction of our customers with our customer service;
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ease
of use of our websites; and
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our
ability to provide a secure and stable technology platform for providing personal loans that provides us with reliable and
effective operational, financial and information systems.
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If
we are unable to implement our business strategy, our business, prospects, financial condition and results of operations could
be adversely affected.
We
depend on third-party service providers for our core operations including online lending and loan servicing, and interruptions
in or terminations of their services could materially impair the quality of our services.
We
rely substantially upon third-party service providers for our core operations, including online web lending and marketing and
vendors that provide systems that automate the servicing of our loan portfolios which allow us to increase the efficiency and
accuracy of our operations. These systems include tracking and accounting of our loan portfolio as well as customer relationship
management, collections, funds disbursement, security and reporting. This reliance may mean that we will not be able to resolve
operational problems internally or on a timely basis, which could lead to customer dissatisfaction or long-term disruption of
our operations. If these service arrangements are terminated for any reason without an immediately available substitute arrangement,
our operations may be severely interrupted or delayed. If such interruption or delay were to continue for a substantial period
of time, our business, prospects, financial condition and results of operations could be adversely affected.
If
we lose the services of any of our key management personnel, our business could suffer.
Our
future success significantly depends on the continued service and performance of our Chief Executive Officer, Paul Mathieson and
our Chief Operating Officer, Carla Cholewinski. Competition for these employees is intense and we may not be able to attract and
retain key personnel. We do not maintain any “key man” or other related insurance. The loss of the service of our
Chief Executive Officer or our Chief Operating Officer, or the inability to attract additional qualified personnel as needed,
could materially harm our business.
If we were deemed
to be an investment company under the 1940 Act, applicable restrictions could make it impractical for us to continue our business
as contemplated and could have a material adverse effect on our business.
Under
Sections 3(a)(1)(A) and (C) of the 1940 Act, an issuer of securities will generally fit the definition of an “investment
company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage
primarily, in the business of investing, reinvesting or trading in securities or (ii) is engaged or proposes to engage in the
business of issuing face-amount installment certificates or has any of this type of certificate outstanding. In addition, issuers
who do not otherwise fit the definition of an investment company are sometimes deemed to be investment companies, under Section
3(a)(1)(C) of the 1940 Act, if the value of their investment securities exceeds 40% of their total assets.
Although
an issuer may fall within the definition of an “investment company” under Section 3(a)(1)(C) of the 1940 Act, the
issuer may qualify for an exemption from the definition. Rule 3a-1 under the 1940 Act provides an exemption from the definition
of investment company if, on a consolidated basis with its wholly owned subsidiaries, nor more than 45% of its net income after
taxes for the last four quarters is derived from securities other than government securities and securities of majority owned
subsidiaries and companies primarily controlled by it. As of December 31, 2017, we calculated both our percentage of investment
security assets (securities other than government securities, employee companies and certain subsidiaries and affiliates) to total
assets and our total percentage of investment income (income from investment securities) as compared to total income to be below
the Rule 3a-1 45% thresholds.
We
were able to maintain our compliance with the 1940 Act because we regularly monitor our status under the 1940 Act and conduct
prudential analyses in accordance with the 1940 Act and the SEC’s interpretations thereof. We conduct such analyses on a
consolidated basis with our wholly owned subsidiaries to determine whether the thresholds set out in Rule 3a-1 are exceeded. As
a result, we do not believe that we should be regulated as an “investment company,” as such term is defined in the
1940 Act, and we intend to conduct our operations to maintain this status. However, if we were to be deemed an investment company,
restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates,
could have a material adverse effect on our business.
We
have incurred, and will continue to incur, increased costs as a result of being a public reporting company.
In
April 2015, we became a public reporting company. As a public reporting company, we incur significant legal, accounting and other
expenses that we did not incur as a non-reporting company, including costs associated with our SEC reporting requirements. We
expect that the additional reporting and other obligations imposed on us under the Exchange Act, will increase our legal and financial
compliance costs and the costs of our related legal, accounting and administrative activities significantly. Management estimates
that compliance with the Exchange Act reporting requirements as a reporting company will cost in excess of $200,000 annually.
Given our current financial resources, these additional compliance costs could have a material adverse impact on our financial
position and ability to achieve profitable results. These increased costs will require us to divert money that we could otherwise
use to expand our business and achieve our strategic objectives.
We
operate in a highly competitive market, and we cannot ensure that the competitive pressures we face will not have a material adverse
effect on our results of operations, financial condition and liquidity.
The
consumer finance industry is highly competitive. Our success depends, in large part, on our ability to originate consumer loan
receivables. We compete with other consumer finance companies as well as other types of financial institutions that offer similar
products and services in originating loan receivables. Some of these competitors may have greater financial, technical and marketing
resources than we possess. Some competitors may also have a lower cost of funds and access to funding sources that may not be
available to us. While banks and credit card companies have decreased their lending to non-prime customers in recent years, there
is no assurance that such lenders will not resume those lending activities. Further, because of increased regulatory pressure
on payday lenders, many of those lenders are starting to make more traditional installment consumer loans in order to reduce regulatory
scrutiny of their practices, which could increase competition in markets in which we operate.
Negative
publicity could adversely affect our business and operating results.
Negative
publicity about our industry or our company, including the quality and reliability of our marketplace, effectiveness of the credit
decisioning and scoring models used in the marketplace, changes to our marketplace, our ability to effectively manage and resolve
borrower and investor complaints, privacy and security practices, litigation, regulatory activity and the experience of borrowers
and investors with our marketplace or services, even if inaccurate, could adversely affect our reputation and the confidence in,
and the use of, our marketplace, which could harm our business and operating results. Harm to our reputation can arise from many
sources, including employee misconduct, misconduct by our partners, outsourced service providers or other counterparties, failure
by us or our partners to meet minimum standards of service and quality, inadequate protection of borrower and investor information
and compliance failures and claims.
Our
business is subject to extensive regulation in the jurisdictions in which we conduct our business.
Our
operations are subject to regulation, supervision and licensing under various federal, state and local statutes, ordinances and
regulations. In most states in which we operate, a consumer credit regulatory agency regulates and enforces laws relating to consumer
lenders such as us. These rules and regulations generally provide for licensing as a consumer lender, limitations on the amount,
duration and charges, including interest rates, for various categories of loans, requirements as to the form and content of finance
contracts and other documentation, and restrictions on collection practices and creditors’ rights. In certain states, we
are subject to periodic examination by state regulatory authorities. Some states in which we operate do not require special licensing
or provide extensive regulation of our business.
We
are also subject to extensive federal regulation, including the Truth in Lending Act, the Equal Credit Opportunity Act and the
Fair Credit Reporting Act. These laws require us to provide certain disclosures to prospective borrowers and protect against discriminatory
lending and leasing practices and unfair credit practices. The principal disclosures required under the Truth in Lending Act include
the terms of repayment, the total finance charge and the annual percentage rate charged on each contract or loan. The Equal Credit
Opportunity Act prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national
origin, sex, age or marital status. According to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are
required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved
of the reasons for the rejection. In addition, the credit scoring system used by us must comply with the requirements for such
a system as set forth in the Equal Credit Opportunity Act and Regulation B. The Fair Credit Reporting Act requires us to provide
certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer
reporting agency and to respond to consumers who inquire regarding any adverse reporting submitted by us to the consumer reporting
agencies. Additionally, we are subject to the Gramm-Leach-Bliley Act, which requires us to maintain the privacy of certain consumer
data in our possession and to periodically communicate with consumers on privacy matters. We are also subject to the Servicemembers
Civil Relief Act, which requires us, in most circumstances, to reduce the interest rate charged to customers who have subsequently
joined, enlisted, been inducted or called to active military duty.
A
material failure to comply with applicable laws and regulations could result in regulatory actions, lawsuits and damage to our
reputation, which could have a material adverse effect on our results of operations, financial condition and liquidity.
The
Consumer Financial Protection Bureau (the “CFPB”) is a new federal agency formed pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), and there continues to be uncertainty as to how
the agency’s actions or the actions of any other new agency could impact our business.
The
CFPB, constituted pursuant to the Dodd-Frank Act, which commenced operations in 2011, has broad authority over the business in
which we engage. This includes authority to write regulations under federal consumer financial protection laws, such as the Truth
in Lending Act and the Equal Credit Opportunity Act, and to enforce those laws against and examine financial institutions for
compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory,
supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows
consumers to log complaints with respect to various consumer finance products, including the loan products we facilitate. This
system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus.
We
are subject to the CFPB’s jurisdiction, including its enforcement authority, as a servicer and acquirer of consumer credit.
The CFPB may request reports concerning our organization, business conduct, markets and activities. The CFPB may also conduct
on-site examinations of our business on a periodic basis if the CFPB were to determine, through its complaint system, that we
were engaging in activities that pose risks to consumers.
There
continues to be uncertainty as to how the CFPB’s strategies and priorities, including in both its examination and enforcement
processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements
to alter or cease offering affected loan products and services, making them less attractive and restricting our ability to offer
them.
Actions
by the CFPB or other regulators against us or our competitors that discourage the use of the marketplace model or suggest to consumers
the desirability of other loan products or services could result in reputational harm and a loss of borrowers or investors. Our
compliance costs and litigation exposure could increase materially if the CFPB or other regulators enact new regulations, change
regulations that were previously adopted, modify, through supervision or enforcement, past regulatory guidance, or interpret existing
regulations in a manner different or stricter than have been previously interpreted.
We
are required to pay a prior lender interest on our net profit until 2025, which may have a material adverse effect on our results
of operations.
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 December
31, 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 year ended December 31, 2017 and 2016 was calculated at $0 and $57,094, respectively.
Risks
Relating to Our Common Stock
Trading
on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for
our stockholders to resell their common stock.
Our
common stock is quoted on the OTCQB tier of the OTC Markets. Trading in securities quoted on the OTC Markets is often thin and
characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations
or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance.
Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than the
trading of securities listed on a stock exchange like NASDAQ or the NYSE. These factors may result in investors having difficulty
reselling any shares of our common stock.
Our
common stock price is likely to be highly volatile because of several factors, including a limited public float.
The market price of our
common stock has been volatile in the past. For example, as of March 28, 2018, our common stock has had a 52-week high
sale price of $4.19 and a low sale price of $0.14. The market price of our common stock is likely to be highly volatile
in the future, as well. You may not be able to resell shares of our common stock following periods of volatility because of the
market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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actual
or anticipated fluctuations in our operating results;
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the
absence of securities analysts covering us and distributing research and recommendations about us;
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we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
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overall
stock market fluctuations;
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announcements
concerning our business or those of our competitors;
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actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
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conditions
or trends in the industry;
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litigation;
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changes
in market valuations of other similar companies;
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future
sales of common stock;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market
in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to
the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Because
Mr. Mathieson, our largest stockholder, Chief Executive Officer and sole director, will make all management decisions, including
with respect to any future reverse stock splits that could result in stockholders being involuntarily cashed out, you should only
invest in IEG Holdings shares if you are comfortable entrusting Mr. Mathieson to make all decisions.
As
our largest stockholder, sole officer and director, Mr. Mathieson will have the right to make all decisions with respect to our
management. Mr. Mathieson can exercise sole authority over the direction of IEG Holdings, and any future reverse stock splits
that could result in stockholders being involuntarily cashed out. Investors will not have an opportunity to evaluate specific
projects that will be financed with future operating income. Our stockholders should be willing to entrust all aspects of our
management to Mr. Mathieson.
Future
stock issuances would dilute stockholders’ ownership, and may reduce our share value.
If, in the future, we
authorize an increase in our authorized common stock and issue additional shares, the future issuance of common stock or preferred
stock may result in substantial dilution in the percentage of our common stock held by our then existing shareholders. We may
value any common stock issued in the future on an arbitrary basis. The issuance of common stock for future services or acquisitions
or other corporate actions may have the effect of diluting the value of the shares held by our investors, and might have an adverse
effect on any trading market for our common stock.
An increase in our authorized
shares would need to be authorized by our stockholders. However, Mr. Mathieson, our largest stockholder, sole officer and director,
beneficially owns 6,900,000 shares of our common stock, which represents 39.5% of our outstanding common stock. As a result, Mr.
Mathieson controls a substantial percentage of our voting power and therefore has substantial influence over all matters submitted
to our stockholders for approval. In addition, we can issue additional shares of common stock without consulting stockholders and
without offering shares to existing stockholders, which would result in dilution of stockholders’ interests in our company
and could depress our stock price.
We
face corporate governance risks and negative investor perceptions because we have only one officer and director and have not adopted
a written policy for the review, approval or ratification of transactions with related parties or conflicted parties.
Mr.
Mathieson is our sole officer and director. As such, he has significant control over our business direction. Additionally, because
he is our sole director, there are no other board members available to second and/or approve related party transactions involving
Mr. Mathieson, including the compensation Mr. Mathieson may be paid and any consulting or other agreements we may enter into with
Mr. Mathieson. Additionally, there is no segregation of duties between officers because Mr. Mathieson is our sole officer, and
as such, he is solely responsible for the oversight of our accounting functions. Because no other directors are approving related
party transactions involving Mr. Mathieson and no other officers are approving our financial statements, investors may question
the fairness of related party transactions or the accuracy of financial statements. The price of our common stock may be adversely
affected and/or devalued compared to similarly sized companies with multiple officers and directors due to the investing public’s
perception of limitations facing our Company due to the fact that we only have one officer and director.
Although
Mr. Mathieson intends to enter into any related party transactions on an arms’ length basis, we do not have a written policy
for the review, approval or ratification of transactions with related parties or conflicted parties. As our sole officer and director,
Mr. Mathieson makes decisions such as the approval of related party transactions, Mr. Mathieson’s compensation, and oversight
of the accounting function. Mr. Mathieson exercises full control over all matters that typically require board approval. Accordingly,
Mr. Mathieson’s actions are not subject to the review and approval of a board of directors and, as such, the Company may
be at risk for a conflict of interest arising between Mr. Mathieson’s duties in his role as Chief Executive Officer and
his own personal financial and business interests in other business ventures distinct and separate from the interests of the Company.
His personal interests may not coincide with the interests of the stockholders and, in the absence of the effective segregation
of such duties, there is a risk of a conflict of interest.
Our
common stock is currently, has been in the past, and may be in the future, a “penny stock” under SEC rules. It may
be more difficult to resell securities classified as “penny stock.”
Our
common stock is a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a
per-share price below $5.00). Unless we obtain a per-share price above $5.00, these rules impose additional sales practice requirements
on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as “established
customers” or “accredited investors.” For example, broker-dealers must determine the appropriateness for non-qualifying
persons of investments in penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise
exempt from the rules, a standardized risk disclosure document that provides information about penny stocks and the risks in the
penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock,
disclose the compensation of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing
the market value of each penny stock held in the customer’s account, provide a special written determination that the penny
stock is a suitable investment for the purchaser, and receive the purchaser’s written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If
a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states
securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
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If
a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and
firms that committed the fraud for damages.
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However,
investors who have signed arbitration agreements may have to pursue their claims through arbitration.
These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that
becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our
securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect your ability
to resell our common stock.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not
invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the
increased financial risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance that our
common stock will not remain classified as a “penny stock” in the future.
If
we fail to maintain effective internal control over financial reporting, the price of our securities may be adversely affected.
Our
internal control over financial reporting may have weaknesses and conditions that could require correction or remediation, the
disclosure of which may have an adverse impact on the price of our common stock. We are required to establish and maintain appropriate
internal control over financial reporting. Failure to establish those controls, or any failure of those controls once established,
could adversely affect our public disclosures regarding our business, prospects, financial condition or results of operations.
In addition, management’s assessment of internal control over financial reporting may identify weaknesses and conditions
that need to be addressed in our internal control over financial reporting or other matters that may raise concerns for investors.
Any actual or perceived weaknesses and conditions that need to be addressed in our internal control over financial reporting or
disclosure of management’s assessment of our internal control over financial reporting may have an adverse impact on the
price of our common stock.
We
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act and if we fail to continue to comply,
our business could be harmed and the price of our securities could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an annual assessment of internal control over financial
reporting, and for certain issuers (but not us) an attestation of this assessment by the issuer’s independent registered
public accounting firm. The standards that must be met for management to assess the internal control over financial reporting
as effective are evolving and complex, and require significant documentation, testing, and possible remediation to meet the detailed
standards. We expect to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is
difficult for us to predict how long it will take or costly it will be to complete the assessment of the effectiveness of our
internal control over financial reporting for each year and to remediate any deficiencies in our internal control over financial
reporting. As a result, we may not be able to complete the assessment and remediation process on a timely basis. In the event
that our Chief Executive Officer or Chief Financial Officer determines that our internal control over financial reporting is not
effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our securities
will be affected; however, we believe that there is a risk that investor confidence and the market value of our securities may
be negatively affected.
Our
Chief Executive Officer is the largest, but not a majority, stockholder. This concentration of stock could limit your ability
to influence the outcome of important transactions, including a change in control.
As
of March 28, 2018, Mr. Mathieson beneficially owned 6,900,000 shares of our common stock, which represents 39.5% of our outstanding
common stock. As a result, Mr. Mathieson controls a substantial percentage of our voting power and therefore has substantial influence
over all matters submitted to our stockholders for approval. Mr. Mathieson may have interests that differ from yours and may vote
in a way with which you disagree and which may be adverse to your interests. This concentrated voting power may have the effect
of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive
a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our common
stock.
As
a board member, Mr. Mathieson owes a fiduciary duty to our stockholders and must act in good faith and in a manner he reasonably
believes to be in the best interests of our stockholders. As a stockholder, Mr. Mathieson is entitled to vote his shares in his
own interest, which may not always be in the interests of our stockholders generally.
Shares
eligible for future sale may adversely affect the market.
From time to time, certain
of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant
to Rule 144, non-affiliate stockholders may sell freely after six months, subject only to the current public information requirement.
Affiliates may sell after six months, subject to the Rule 144 volume, manner of sale (for equity securities), current public information,
and notice requirements. Of the approximately 17,463,449 shares of our common stock outstanding as of March 28, 2018, approximately
5,393,093 shares are tradable without restriction. Given the limited trading of our common stock, resale of even a small
number of shares of our common stock pursuant to Rule 144 or an effective registration statement may adversely affect the market
price of our common stock.
Shares
registered in our resale registration statement on Form S-1 may adversely affect the market for our shares.
The
market price of IEG Holdings’ common stock may decline as a result of the registration for resale by us of 9,089,220 shares
of our common stock, equal to approximately 52% of our outstanding common stock as of March 28, 2018. Of the shares registered
for resale, Mr. Mathieson, our Chairman and Chief Executive Officer, beneficially owns 6,900,000 of such shares. Mr. Mathieson’s
shares are not tradable without restriction, however, as they remain subject to certain restrictions, including volume restrictions,
as a result of his status as an affiliate of IEG Holdings.
Provisions
of our amended and restated articles of incorporation and amended and restated bylaws may delay or prevent a takeover which may
not be in the best interests of our stockholders.
Provisions
of our amended and restated articles of incorporation, as amended, and our amended and restated bylaws may be deemed to have anti-takeover
effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a
takeover attempt. In addition, certain provisions of the Florida Business Corporations Act also may be deemed to have certain
anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess
any voting rights unless these voting rights are approved by a majority of a corporation’s disinterested stockholders. Further,
our amended and restated articles of incorporation, as amended, authorize the issuance of up to 50,000,000 shares of preferred
stock with such rights and preferences as may be determined from time to time by our board of directors in their sole discretion.
Our board of directors may, without stockholder approval, issue series of preferred stock with dividends, liquidation, conversion,
voting or other rights that could adversely affect the voting power or other rights of the holders of our common stock.
As
an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely
on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required
to:
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have
an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply
with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation
or a supplement to the auditor’s report providing additional information about the audit and the consolidated financial
statements (i.e., an auditor discussion and analysis);
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submit
certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency”;
and
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disclose
certain executive compensation related items such as the correlation between executive compensation and performance and comparisons
of the chief executive officer’s compensation to median employee compensation.
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addition, Section 102 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition
period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words,
an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply
to private companies. We have elected to take advantage of the benefits of this extended transition period. Our consolidated financial
statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We
will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first
fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated
filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ordinary shares that
is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter
or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
Until
such time, however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our common
stock and the price of our securities may be more volatile.
GENERAL
RISK STATEMENT
Based
on all of the foregoing, we believe it is possible for future revenue, expenses and operating results to vary significantly from
quarter to quarter and year to year. As a result, quarter-to-quarter and year-to-year comparisons of operating results are not
necessarily meaningful or indicative of future performance. Furthermore, we believe that it is possible that in any given quarter
or fiscal year our operating results could differ from the expectations of public market analysts or investors.