NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1 - General
Business Description.
We are a provider of practical, high-quality, and value-based educational training on the topics of personal finance, entrepreneurship,
real estate, and financial markets investing strategies and techniques. Our programs are offered through a variety of formats and
channels, including free-preview workshops, basic training classes, symposiums, telephone mentoring, one-on-one mentoring, coaching
and e-learning primarily under the Rich Dad® Education brand (“Rich Dad”) which was created in 2006 under license
from entities affiliated with Robert Kiyosaki, whose teachings and philosophies are detailed in the book titled,
Rich Dad Poor
Dad.
In addition to Rich Dad, we market our products and services under a variety of brands, including
Martin Roberts, The
Independent Woman, Women in Wealth
and
Brick Buy Brick
. Our products and services are offered in the United States,
Canada, the United Kingdom, and other international markets.
Basis of Presentation.
The terms “Legacy Education Alliance, Inc.,” the “Company,” “we,” “our,” “us”
or "Legacy" as used in this report refer collectively to Legacy Education Alliance, Inc., a Nevada corporation (“Legacy”),
the registrant, which was formerly known as Priced In Corp., and, unless the context otherwise requires, together with its wholly-owned
subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation, other operating subsidiaries and any predecessor
of Legacy Education Alliance Holdings, including Tigrent Inc., a Colorado corporation.
The accompanying unaudited
condensed consolidated financial statements presented herein are for us and our consolidated subsidiaries, each of which is a
wholly-owned subsidiary. The accompanying condensed consolidated balance sheet as of December 31, 2015 was derived from our audited
consolidated financial statements and does not include all disclosures required under United States of America generally accepted
accounting principles (“U.S. GAAP”), for annual financial statements. All significant intercompany transactions have
been eliminated. These interim financial statements should be read in conjunction with the consolidated financial statements included
in our Annual Report on Form 10-K for the year ended December 31, 2015 and reflect all normal recurring adjustments that are,
in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported in
our Condensed Consolidated Statements of Operations and Comprehensive Income are not necessarily indicative of amounts expected
for the respective annual periods or any other interim period.
Significant Accounting
Policies.
Our significant accounting policies have been disclosed in
Note 2 - Significant Accounting Policies
in our
most recent Annual Report on Form 10-K. There have been no changes to the policies disclosed therein. The accompanying unaudited
condensed consolidated financial statements we present in this report have been prepared in accordance with those policies.
Reclassifications.
Certain amounts reported in the condensed consolidated financial statements for the prior periods have been reclassified to
conform to the current reporting presentation.
Use of Estimates.
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Tax in
Interim Periods.
We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts
are reflected in these condensed consolidated financial statements for each of those jurisdictions. Tax laws and tax rates vary
substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries.
We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision
or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary
income or loss to determine the income tax provision or benefit allocated to the interim period.
Losses from jurisdictions
for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated
annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions
for which no benefit can be realized. The effects of unusual and infrequent items are recognized in the impacted interim period
as discrete items.
The estimated annual
effective tax rate may be affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction. Adjustments
to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We have established
valuation allowances against our deferred tax assets, including net operating loss carryforwards and income tax credits. Valuation
allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets
to the amount that is deemed more likely than not to be realizable. Our ability to realize these deferred tax assets is dependent
on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation
to actual results and expected trends on a quarterly basis. A change in our valuation allowance would impact our income tax expense/benefit
and our stockholders’ deficit and could have a significant impact on our results of operations or financial condition in
future periods.
Note 2 - New Accounting Pronouncements
Adoption of Accounting Standards
We have implemented all new accounting
pronouncements that are in effect and that management believes would materially affect our financial statements.
New Accounting Standards
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards
Update (“ASU”)
No 2016-09 “Compensation – Stock compensation”
(Topic 718)
. The new
guidance is intended to simplify some provisions in stock compensation accounting, including the accounting for income taxes, forfeitures,
and statutory tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective
for fiscal years and interim periods beginning after December 15, 2016. Early adoption is permitted. We expect to adopt this standard
when effective, and the impact on our financial statements is not currently estimable.
In
February 2016, the FASB issued
ASU
No 2016-02 “Leases”
(Topic 842)
. The
standard requires companies that lease valuable assets like aircraft, real estate, and heavy equipment to recognize on their balance
sheets the assets and liabilities generated by contracts longer than a year. The standard also requires companies to disclose in
the footnotes to their financial statements information about the amount, timing, and uncertainty for the payments they make for
the lease agreements. This standard is effective for fiscal years and interim periods beginning after December 15, 2018. Early
adoption is permitted. We expect to adopt this standard when effective, and the impact on our financial statements is not currently
estimable.
In January 2016,
the FASB issued
ASU
No 2016-01, “
Recognition and Measurement of Financial Assets and
Financial Liabilities”, Financial Instruments – Overall (Subtopic 825-10)
. The new guidance is intended to improve
the recognition and measurement of financial instruments. This guidance requires that financial assets and financial liabilities
must be separately presented by measurement category and form of financial asset on the balance sheet or the accompanying notes
to the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2017.
The standard includes a requirement that businesses must report changes in the fair value of their own liabilities in other comprehensive
income instead of earnings, and this is the only provision of the update for which the FASB is permitting early adoption. We expect
to adopt this guidance when effective, and do not expect this guidance to have a significant impact on our financial statements.
Note 3 - Share-Based Compensation
We account for share-based
awards under the provisions of ASC 718, “
Compensation—Stock Compensation
.” Accordingly, share-based compensation
cost is measured at the grant date based on the fair value of the award and we expense these costs using the straight-line method
over the requisite service period. Share-based compensation expense was $37.0 thousand for the three months ended March 31, 2016.
There was no share-based compensation expense recorded in the three months ended March 31, 2015. See Note 6 -
Share-Based Compensation
,
in the Notes to Consolidated Financial Statements for the year ended December 31, 2015, included in our 2015 Annual Report for
further discussion.
Note 4 - Earnings Per
Share (“EPS”)
Basic EPS is computed
by dividing net income by the basic weighted-average number of shares outstanding during the period.
Diluted EPS is computed
by dividing net income by the diluted weighted-average number of shares outstanding during the period and, accordingly, reflects
the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options, were exercised,
settled or converted into common stock and were dilutive. The diluted weighted-average number of shares used in our diluted EPS
calculation is determined using the treasury stock method.
Unvested awards
of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards, are considered
to be participating securities, and therefore, the two-class method is used for purposes of calculating EPS. Under the two-class
method, a portion of net income is allocated to these participating securities and is excluded from the calculation of EPS allocated
to common stock. Our restricted stock awards are subject to forfeiture and restrictions on transfer until vested and have identical
voting, income and distribution rights to the unrestricted common shares outstanding. Our weighted average unvested restricted
stock awards outstanding were 885,486 for the three months ended March 31, 2016. We had no unvested restricted stock awards outstanding
for the three months ended March 31, 2015.
The calculations
of basic and diluted EPS are as follows:
|
|
Three Months Ended March 31, 2016
|
|
|
Three Months Ended March 31, 2015
|
|
|
|
Net
Income
|
|
|
Weighted Average
Shares Outstanding
|
|
|
Earnings
Per
Share
|
|
|
Net Loss
|
|
|
Weighted
Average
Shares Outstanding
|
|
|
Loss
Per
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
593
|
|
|
|
21,846
|
|
|
|
|
|
|
$
|
(611
|
)
|
|
|
20,001
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(24
|
)
|
|
|
(885
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
569
|
|
|
|
20,961
|
|
|
$
|
0.03
|
|
|
$
|
(611
|
)
|
|
|
20,001
|
|
|
$
|
(0.03
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
24
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
885
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Stock options added under the treasury stock method
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
593
|
|
|
|
21,846
|
|
|
$
|
0.03
|
|
|
$
|
(611
|
)
|
|
|
20,001
|
|
|
$
|
(0.03
|
)
|
Note 5 - Fair Value Measurements
ASC 820,
“Fair
Value Measurements and Disclosures”
defines fair value, establishes a consistent framework for measuring fair value and
expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 defines
fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date.
ASC 820 specifies
a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
In accordance with
ASC 820, these two types of inputs have created the following fair value hierarchy:
●
|
Level 1-Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
|
●
|
Level 2-Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
|
|
|
|
●
|
Quoted prices for similar assets or liabilities in active markets
|
|
|
|
●
|
Quoted prices for identical or similar assets or liabilities in markets that are not active
|
|
|
|
●
|
Inputs other than quoted prices that are observable for the asset or liability
|
|
|
|
●
|
Inputs that are derived principally from or corroborated by observable market data by correlation or other means; and
|
|
|
●
|
Level 3-Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows).
|
The following table presents the derivative financial instruments, our only financial liabilities measured
and recorded at fair value on our condensed consolidated balance sheets on a recurring basis, and their level within the fair value
hierarchy as of March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
Amount
|
|
|
Quoted
Prices in Active
Markets for Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
As of March 31, 2016
|
Warrant derivative liabilities
|
|
$
|
22,080
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,080
|
|
As of December 31, 2015
|
Warrant derivative liabilities
|
|
$
|
27,266
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,266
|
|
Financial Instruments.
Financial instruments consist primarily of cash and cash equivalents, notes receivable, accounts payable, deferred course
expenses, accrued expenses, deferred revenue, and debt. U.S. GAAP requires the disclosure of the fair value of financial instruments,
including assets and liabilities recognized in the balance sheets. Management believes the carrying value of the other financial
instruments recognized on the condensed consolidated balance sheet date, including receivables, payables and accrued liabilities
approximate their fair value.
Note 6 - Derivative Liability
In June 2015,
we granted warrants to purchase 959,924 shares of the Company’s common stock through a private offering of units
(“Units”). Each Unit included one share of Common Stock, par value $0.0001
per share, and a three-year Warrant to purchase one share of Common Stock at an initial exercise price per share equal to
$0.75, subject to adjustment for certain corporate transactions such as a merger, stock-split or stock dividend and, if the
Company does not continue to be a reporting company under the Securities Exchange Act of 1934 during the two-year period
after closing, the exercise price will be reduced to $0.01 per share. Each Unit includes limited registration rights for the
investors for the shares of Common Stock and the shares of Common Stock that would be issued upon the exercise of a Warrant
("Underlying Shares") when and if we register our shares of Common Stock in a different offering, subject to
certain excluded registered offerings. The Company has also issued to the placement agent warrants to purchase our shares of
Common Stock equal to 10% of the total shares sold in the offering, or 95,992 shares.
Because these warrants
have full reset adjustments that would preclude the instrument from being considered as index to the Company’s stock, it
is subject to derivative liability treatment under
ASC 815-40-15
, which requires as of the date the warrants are issued,
the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.
Key assumptions used to determine
the fair value of the warrants follows:
|
|
At Issuance
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
0.87
|
%
|
|
|
1.31
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
55
|
%
|
|
|
60.6
|
%
|
|
|
61.0
|
%
|
Term
|
|
|
3 years
|
|
|
|
2.25 years
|
|
|
|
2.5 years
|
|
As of March 31, 2016 and
December 31, 2015, the fair value of the total warrants' derivative liability is $22,080 and $27,266, respectively, and recorded
in other accrued expenses in the Condensed Consolidated Balance Sheets. We recognized a gain on the derivative liability of $5,186
for the three months ended March 31, 2016, which is recorded in other income, net in the Condensed Consolidated Statements of
Operations and Comprehensive Income.
The following table summarizes the derivative
liability included in the balance sheet:
Balance at December 31, 2015
|
|
$
|
27,266
|
|
Gain on change of fair value
|
|
|
(5,186
|
)
|
Balance at March 31, 2016
|
|
$
|
22,080
|
|
The following table summarizes information
about warrants outstanding as of December 31, 2015:
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
Weighted-average exercise price
|
|
$
|
0.75
|
|
Remaining life (in years)
|
|
|
2.25
|
|
Note 7 - Income Taxes
Income tax expense was
$10.0 thousand and $11.0 thousand for the three months ended March 31, 2016 and 2015, respectively. Our effective tax rate was
1.7% and (1.8%) for the three months ended March 31, 2016 and 2015, respectively. Our effective tax rates differed from the U.S.
statutory corporate tax rate of 35.0% primarily because of the mix of pre-tax income or loss earned in certain jurisdictions and
the change in our valuation allowance.
We record a valuation
allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. As of March
31, 2016 and December 31, 2015, a valuation allowance of $6.7 million and $7.2 million, respectively, has been provided against
net operating loss carryforwards and other deferred tax assets. We decreased our valuation allowance by $0.5 million and $0.4 million
for the three months ended March 31, 2016 and 2015, respectively.
As of March 31,
2016 and December 31, 2015, we had total unrecognized tax benefits of $1.7 million, related to foreign and domestic tax positions.
Of this amount, the Company estimates that $0.1 million, of the unrecognized tax benefits, if recognized, would impact the effective
tax rate. A substantial portion of our liability for uncertain tax benefits is recorded as a reduction of net operating losses
and tax credit carryforwards.
During the three
months ended March 31, 2016 and 2015, we had no material changes in uncertain tax positions. We record interest and penalties related
to unrecognized tax benefits within the provision for income taxes. We believe that no current tax positions that have resulted
in unrecognized tax benefits will significantly increase or decrease within one year. We file income tax returns in the U.S. federal
jurisdiction and in various state and foreign jurisdictions.
Note 8 - Concentration of Risk
Cash and cash
equivalents
. We maintain deposits in banks in amounts that might exceed the federal deposit insurance available. Management
believes the potential risk of loss on these cash and cash equivalents to be minimal. Cash balances as of March 31, 2016 and
December 31, 2015, including foreign subsidiaries, without FDIC coverage were $4.4 million and $3.8 million, respectively.
Revenue.
A
significant portion of our revenue is derived from the Rich Dad brands. For the three months ended March 31, 2016 and 2015, Rich
Dad brands provided 74% and 84% of our revenue, respectively. In addition, we have operations in the U.S., Canada, the United Kingdom
and other foreign markets (see Note 9—
Segment Information
).
Note 9 - Segment Information
We manage our business
in four operating segments based on geographic location for which operating managers are responsible to the Chief Operations Officer.
As such, operating results, as reported below, are reviewed regularly by our Chief Operating Officer, or Chief Operating Decision
Maker (“CODM”) and other members of the executive team.
The proportion of
our total revenue attributable to each segment is as follows:
|
|
Three Months Ended March 31,
|
|
As a percentage of total revenue
|
|
2016
|
|
|
2015
|
|
U.S.
|
|
|
63.4
|
%
|
|
|
71.0
|
%
|
Canada
|
|
|
5.1
|
%
|
|
|
6.7
|
%
|
U.K.
|
|
|
22.2
|
%
|
|
|
18.8
|
%
|
Other foreign markets
|
|
|
9.3
|
%
|
|
|
3.5
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating results
for the segments are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Segment revenue
|
|
(In thousands)
|
|
United States
|
|
$
|
14,424
|
|
|
$
|
15,434
|
|
Canada
|
|
|
1,155
|
|
|
|
1,468
|
|
U.K.
|
|
|
5,049
|
|
|
|
4,075
|
|
Other foreign markets
|
|
|
2,110
|
|
|
|
766
|
|
Total consolidated revenue
|
|
$
|
22,738
|
|
|
$
|
21,743
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
United States
|
|
$
|
3,706
|
|
|
$
|
4,582
|
|
Canada
|
|
|
195
|
|
|
|
289
|
|
U.K.
|
|
|
1,479
|
|
|
|
284
|
|
Other foreign markets
|
|
|
(536
|
)
|
|
|
(1,304
|
)
|
Total consolidated gross profit
|
|
$
|
4,844
|
|
|
$
|
3,851
|
|
*
|
Segment gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
United States
|
|
$
|
33
|
|
|
$
|
44
|
|
Canada
|
|
|
1
|
|
|
|
1
|
|
U.K.
|
|
|
5
|
|
|
|
6
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
39
|
|
|
$
|
51
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
United States
|
|
$
|
13,520
|
|
|
$
|
13,537
|
|
Canada
|
|
|
1,086
|
|
|
|
846
|
|
U.K.
|
|
|
5,025
|
|
|
|
4,672
|
|
Other foreign markets
|
|
|
2,965
|
|
|
|
2,070
|
|
Total consolidated identifiable assets
|
|
$
|
22,596
|
|
|
$
|
21,125
|
|
Note 10 - Commitments and Contingencies
Licensing agreements
.
We are committed to pay royalties for the usage of certain brands, as governed by various licensing agreements, including Rich
Dad, Robbie Fowler, and Martin Roberts. Total royalty expenses included in our Condensed Consolidated Statement of Operations and
Comprehensive Income were $1.0 million and $1.2 million for the three months ended March 31, 2016 and 2015, respectively.
Custodial and
Counterparty Risk
. We are subject to custodial and other potential forms of counterparty risk in respect to a variety of contractual
and operational matters. In the course of ongoing Company-wide risk assessment, management monitors our arrangements that involve
potential counterparty risk, including the custodial risk associated with amounts prepaid to certain vendors and deposits with
credit card and other payment processors. Deposits held by our credit card processors at March 31, 2016 and December 31, 2015,
were $3.3 million and $2.9 million, respectively. These balances are included on the Condensed Consolidated Balance Sheets in restricted
cash. While these balances reside in major financial institutions, they are only partially covered by federal deposit insurance
and are subject to the financial risk of the parties holding these funds. When appropriate, we utilize Certificate of Deposit Account
Registry Service (CDARS) to reduce banking risk for a portion of our cash in the United States. A CDAR consists of numerous individual
investments, all below the FDIC limits, thus fully insuring that portion of our cash. At March 31, 2016 and December 31, 2015,
we did not have a CDAR balance.
Litigation.
We
and certain of our subsidiaries, from time to time, are parties to various legal proceedings, claims and disputes that have arisen
in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance.
A substantial settlement
payment or judgment in excess of our accruals could have a material adverse effect on our financial position, results of operations
or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not expect any of these existing
matters, individually or in the aggregate, to have a material adverse effect upon our financial position, results of operations
or cash flows. There have been no material changes to the legal proceedings disclosed in the litigation section of Note 15 -
Commitments and Contingencies
, in the Notes to Consolidated Financial Statements for the year ended December 31, 2015, included
in our 2015 Annual Report for further discussion.
Note 11 - Subsequent Event
We have evaluated significant events and transactions that occurred after the balance sheet date and determined
that there were no events or transactions that would require recognition or disclosure in our condensed consolidated financial
statements for the three months ended March 31, 2016.