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, Brick Buy Brick and Elite Business Star
. 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 (Loss) 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.
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 (loss) 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.
During the three months
ended September 30, 2016 pursuant to the 2015 Incentive Plan we awarded 695,000 shares of restricted stock to our employees, which
are subject to a three-year cliff vesting and 90,000 shares of restricted stock to members of the board of directors, which are
subject to a two-year cliff vesting. The grant date price per share was $0.21 for a total grant date fair value of $164.9 thousand.
Share-based compensation expenses related to the above restricted
stock grant and prior years’ restricted stock grants were $43.0 thousand and $22.7 thousand for the three months ended September
30, 2016 and 2015, respectively, and $117.0 thousand and $22.7 thousand for the nine months ended September 30, 2016 and 2015,
respectively, which are reported as a separate line item in the condensed consolidated statement of changes in stockholders’
deficit.
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 1,020,068 and 658,048 for the three months ended September 30, 2016 and 2015, respectively, and 930,674 and 221,760 for the
nine months ended September 30, 2016 and 2015, respectively.
The
calculations of basic and diluted EPS are as follows:
|
|
Three Months Ended
September 30, 2016
|
|
|
Three Months Ended
September 30, 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
|
|
$
|
1,168
|
|
|
|
22,204
|
|
|
|
|
|
|
$
|
(967
|
)
|
|
|
21,407
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(53
|
)
|
|
|
(1,020
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
1,115
|
|
|
|
21,184
|
|
|
$
|
0.05
|
|
|
$
|
(967
|
)
|
|
|
21,407
|
|
|
$
|
(0.04
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
53
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(55
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
1,113
|
|
|
|
22,204
|
|
|
$
|
0.05
|
|
|
$
|
(967
|
)
|
|
|
21,407
|
|
|
$
|
(0.04
|
)
|
|
|
Nine Months Ended
September 30, 2016
|
|
|
Nine Months Ended
September 30, 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
|
|
$
|
2,786
|
|
|
|
21,966
|
|
|
|
|
|
|
$
|
(2,557
|
)
|
|
|
20,938
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(115
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
2,671
|
|
|
|
21,035
|
|
|
$
|
0.13
|
|
|
$
|
(2,557
|
)
|
|
|
20,938
|
|
|
$
|
(0.12
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
115
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(120
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
2,666
|
|
|
|
21,966
|
|
|
$
|
0.12
|
|
|
$
|
(2,557
|
)
|
|
|
20,938
|
|
|
$
|
(0.12
|
)
|
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 September
30, 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 September 30, 2016
|
|
Warrant derivative liabilities
|
|
$
|
22,310
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,310
|
|
As of December 31, 2015
|
|
Warrant derivative liabilities
|
|
$
|
27,266
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,266
|
|
Financial
Instruments.
Financial instruments consist
primarily of cash and cash equivalents, 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. The initial exercise price of the Warrant of $0.75 per share shall be reduced to $0.55
per share if a registration statement is not filed within 60 days after the date of issue or not declared effective within 270
days after the date of issue, 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. The exercise price of
the Warrant of $0.55 per share has been triggered. 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
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
0.77
|
%
|
|
|
1.31
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
55
|
%
|
|
|
69.1
|
%
|
|
|
61.0
|
%
|
Term
|
|
|
3 years
|
|
|
|
1.75 years
|
|
|
|
2.5 years
|
|
As
of September 30, 2016 and December 31, 2015, the fair value of the total warrants' derivative liability is $22,310 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 $2,133 and $126,575 for the three months ended September 30, 2016 and 2015, respectively, and $4,956 and
$126,575 for the nine months ended September 30, 2016 and 2015, respectively, which is recorded in other income, net in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
The
following table summarizes the derivative liability included in other accrued expenses in the Condensed Consolidated Balance Sheets:
Balance at December 31, 2015
|
|
$
|
27,266
|
|
Gain on change of fair value
|
|
|
(4,956
|
)
|
Balance at September 30, 2016
|
|
$
|
22,310
|
|
The
following table summarizes information about warrants outstanding as of September 30, 2016:
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
Weighted-average exercise price
|
|
$
|
0.55
|
|
Remaining life (in years)
|
|
|
1.75
|
|
Note
7 - Income Taxes
Income
tax expense was $8.0 thousand and $8.0 thousand for the three months ended September 30, 2016 and 2015, respectively, and $27.0
thousand and $29.0 thousand for the nine months ended September 30, 2016 and 2015, respectively. Our effective tax rate was 0.7%
and (0.8%) for the three months ended September 30, 2016 and 2015, respectively, and 1.0% and (1.1%) for the nine months ended
September 30, 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 September 30, 2016 and December 31, 2015, a valuation allowance of $6.1 million and $7.2 million, respectively,
has been provided against net operating loss carryforwards and other deferred tax assets. Our valuation allowance decreased by
$1.1 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.
As
of September 30, 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 nine months ended September 30, 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 September
30, 2016 and December 31, 2015, including foreign subsidiaries, without FDIC coverage were $2.1 million and $3.8 million, respectively.
Revenue.
A significant portion of our revenue is derived from the Rich Dad brands. Revenue derived from the Rich Dad brands as a percentage
of total revenue was 74.4% and 76.0% for the three months ended September 30, 2016 and 2015, respectively, and 74.6% and 79.0%
for the nine months ended September 30, 2016 and 2015, 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 September 30,
|
|
|
Nine Months Ended September 30,
|
|
As a percentage of total revenue
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
U.S.
|
|
|
61.6
|
%
|
|
|
64.0
|
%
|
|
|
62.6
|
%
|
|
|
66.6
|
%
|
Canada
|
|
|
3.9
|
%
|
|
|
6.0
|
%
|
|
|
4.2
|
%
|
|
|
7.0
|
%
|
U.K.
|
|
|
20.0
|
%
|
|
|
22.2
|
%
|
|
|
20.4
|
%
|
|
|
20.1
|
%
|
Other foreign markets
|
|
|
14.5
|
%
|
|
|
7.8
|
%
|
|
|
12.8
|
%
|
|
|
6.3
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating
results for the segments are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Segment
revenue
|
|
(In thousands)
|
|
|
(In thousands)
|
|
United States
|
|
$
|
13,837
|
|
|
$
|
14,400
|
|
|
$
|
42,944
|
|
|
$
|
44,521
|
|
Canada
|
|
|
884
|
|
|
|
1,340
|
|
|
|
2,900
|
|
|
|
4,698
|
|
U.K.
|
|
|
4,494
|
|
|
|
4,983
|
|
|
|
14,007
|
|
|
|
13,439
|
|
Other foreign markets
|
|
|
3,254
|
|
|
|
1,765
|
|
|
|
8,731
|
|
|
|
4,209
|
|
Total consolidated revenue
|
|
$
|
22,469
|
|
|
$
|
22,488
|
|
|
$
|
68,582
|
|
|
$
|
66,867
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
|
(In thousands)
|
|
United States
|
|
$
|
3,882
|
|
|
$
|
3,038
|
|
|
$
|
11,007
|
|
|
$
|
10,594
|
|
Canada
|
|
|
93
|
|
|
|
220
|
|
|
|
132
|
|
|
|
1,144
|
|
U.K.
|
|
|
761
|
|
|
|
754
|
|
|
|
2,774
|
|
|
|
1,441
|
|
Other foreign markets
|
|
|
(361
|
)
|
|
|
(1,143
|
)
|
|
|
(295
|
)
|
|
|
(3,316
|
)
|
Total consolidated gross profit
|
|
$
|
4,375
|
|
|
$
|
2,869
|
|
|
$
|
13,618
|
|
|
$
|
9,863
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
|
(In thousands)
|
|
United States
|
|
$
|
28
|
|
|
$
|
37
|
|
|
$
|
94
|
|
|
$
|
119
|
|
Canada
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
3
|
|
U.K.
|
|
|
5
|
|
|
|
7
|
|
|
|
15
|
|
|
|
11
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
34
|
|
|
$
|
45
|
|
|
$
|
112
|
|
|
$
|
133
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
United States
|
|
$
|
11,378
|
|
|
$
|
13,537
|
|
Canada
|
|
|
939
|
|
|
|
846
|
|
U.K.
|
|
|
4,735
|
|
|
|
4,672
|
|
Other foreign markets
|
|
|
4,292
|
|
|
|
2,070
|
|
Total consolidated identifiable assets
|
|
$
|
21,344
|
|
|
$
|
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, Martin Roberts, and Elite Business Star. Total royalty expenses included in our Condensed Consolidated Statements
of Operations and Comprehensive Income (Loss) were $1.2 million and $1.3 million for the three months ended September 30, 2016
and 2015, respectively, and $3.3 million and $4.1 million for the nine months ended September 30, 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 September 30, 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
September 30, 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
On October 11, 2016,
our majority shareholder, Tigrent Inc. announced its plans to distribute substantially all of its holdings in Legacy to Tigrent
shareholders
. Approximately 16 million shares
of our common stock will be distributed thereby increasing our public float significantly.
We
have evaluated significant events and transactions that occurred after the balance sheet date and determined that there were no
other events or transactions that would require recognition or disclosure in our condensed consolidated financial statements for
the period ended September 30, 2016.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
The
following discussion and analysis of our financial condition and results of operations for the periods indicated should be read
in conjunction with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form
10-K as of and for the year ended December 31, 2015. This discussion contains forward-looking statements reflecting our current
expectations that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those
contained in these forward-looking statements due to a number of factors, including those discussed in our most recent Form 10-K,
and elsewhere in this Form 10-Q.
Business
Overview
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, Brick Buy Brick, and Elite Business Star
. Our products and services are offered in the United States, Canada, the
United Kingdom, and other international markets.
Our
students pay for their courses in full up-front or through payment agreements with independent third parties, and under United
States of America generally accepted accounting principles (“U.S. GAAP”), we recognize revenue when our students take
their courses or the term for taking their course expires, which could be several quarters after the student purchases a program
and pays their fee. Over time, we have taken steps to shorten many of our course contracts from two-year contracts to one-year
contracts, which is expected to accelerate revenue recognition as services are delivered faster and/or contract terms expire sooner.
We also continue to expand our innovative symposium-style course delivery model into other markets. Our symposiums combine multiple
advanced training courses in one location, allowing us to achieve certain economies of scale that reduce costs and improve margins
while also accelerating U.S. GAAP revenue recognition, while at the same time, enhancing our student's experience, particularly,
for example, through the opportunity to network with other students.
We
also provide a richer experience for our students through one-on-one mentoring (two to four days in length, on site or remotely)
and telephone mentoring (10 to 16 weekly one-on-one or one-on-many telephone sessions). Mentoring involves a subject matter expert
visiting the student in person and guiding the student, for example, through his or her first real estate transaction, providing
a real hands-on experience.
We
were founded in 1996, and through a reverse merger, became a publicly-held company in November 2014. Today we are a global company
with approximately 200 employees that has cumulatively served more than two million students from more than 150 countries and
territories over the course of our operating history.
We manage our business in
four segments based on geographic location. These segments include our historical core markets of the United States, Canada, and
the United Kingdom, with the fourth segment including all Other Foreign Markets. In 2014, we expanded our footprint to include
Africa, Europe, and Asia, holding events in 21 countries. As we have established traction in these markets, we have moved forward
on opening offices in South Africa and Hong Kong during the first six months of 2015. Overall, we added an additional five new
countries to our footprint in 2015 for a total global reach of 26 countries. We intend to continue to focus on diversifying our
sales internationally.
In
addition to our international expansion efforts, we are diversifying our product offerings through the introduction of established
brands into new markets and the development of new brands. Overall, we currently offer 10 brands, which include:
|
●
|
Rich
Dad® Education: Our flagship brand based on the teachings of Robert Kiyosaki, an entrepreneur, investor, educator, and
author of the best-selling personal finance book of all time,
Rich Dad Poor Dad
. Mr. Kiyosaki has written more than
15 books with combined sales of more than 26 million copies.
|
|
|
|
|
●
|
Rich
Dad® Stock Education: In our Rich Dad Stock Education program, we teach students how to become savvy investors that can
potentially create winning trades and profits in any market condition through the development of personal trading plans that
are compatible with their current financial situation, the level of risk they are comfortable with, and their long-term financial
goals.
|
|
|
|
|
●
|
Making
Money from Property with Martin Roberts™: A property-based curriculum focused on how and why to buy property at auction
in the U.K. Based on the teachings of Martin Roberts, renowned U.K. TV personality, property expert, journalist, and author
of
Making Money from Property
, our Making Money from Property program is designed to show investors tested strategies
to buy at auction, as well as the difference between income and capital growth strategies, negotiating transactions, and buying
properties overseas.
|
|
|
|
|
●
|
Brick
Buy Brick™: Initially launched in the UK, Brick Buy Brick is now also available in the U.S. Canada and the other international
markets in which we operate. The program introduces our students to the tools and strategies used by successful investors
to make money work for them through real estate investing.
|
|
|
|
|
●
|
Building
Wealth: A program that offers students training on how to build and preserve wealth, start or manage a business, and benefit
through investing in property regardless of market conditions.
|
|
|
|
|
●
|
Robbie
Fowler Property Academy™: Designed to teach investment strategies individuals can use to achieve a potential clear path
towards long-term wealth, the goal of our Property Academy training program is to provide a comprehensive property investment
education. We teach our students the investment strategies currently implemented throughout the UK, such as Social Housing,
Buy-To-Let, Lease Options, and Land Development.
|
|
|
|
|
●
|
Women
In Wealth™: Created to inspire women of all ages and backgrounds to potentially achieve financial security, Women In
Wealth seeks to empower women with a strong financial education and help them learn the potential benefits of real estate
investing to create cash flow and build financial independence.
|
|
|
|
|
●
|
The
Independent Woman™: Developed by women for women, based on the teachings and principles of Kim Kiyosaki, investor, entrepreneur,
and bestselling author of Rich Woman and It's Rising Time, The Independent Women program imparts the principles and strategies
essential for potential financial independence.
|
|
|
|
|
●
|
Trade
Up Investor Education™: Built on the belief that a successful investor is an educated investor and developed in partnership
with Investor's Business Daily®, a leading financial news and research organization since 1984, students are offered educational
training designed to help them increase their knowledge of stock and options trading.
|
|
|
|
|
●
|
Elite
Business Star™: Created in partnership with entrepreneur Kevin Harrington, one of the original Sharks from the
television show
Shark Tank
, Elite Business Star is designed to help individuals grow their business through
a variety of business strategies including marketing, asset protection, and business financing.
|
Recent Developments
On October 11, 2016
,
our majority shareholder, Tigrent Inc. announced its plans to distribute substantially all of its holdings in Legacy to Tigrent
shareholders. Approximately 16 million shares of our common stock will be distributed thereby increasing our public float significantly.
RESULTS
OF OPERATIONS
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands, except
per share data)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
22,469
|
|
|
$
|
22,488
|
|
|
$
|
68,582
|
|
|
$
|
66,867
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
12,268
|
|
|
|
13,032
|
|
|
|
36,506
|
|
|
|
37,012
|
|
Advertising and sales expenses
|
|
|
4,618
|
|
|
|
5,319
|
|
|
|
15,207
|
|
|
|
15,889
|
|
Royalty expenses
|
|
|
1,208
|
|
|
|
1,268
|
|
|
|
3,251
|
|
|
|
4,103
|
|
General and administrative expenses
|
|
|
3,595
|
|
|
|
4,070
|
|
|
|
11,339
|
|
|
|
12,901
|
|
Total operating costs and expenses
|
|
|
21,689
|
|
|
|
23,689
|
|
|
|
66,303
|
|
|
|
69,905
|
|
Income (loss) from operations
|
|
|
780
|
|
|
|
(1,201
|
)
|
|
|
2,279
|
|
|
|
(3,038
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(5
|
)
|
Other income, net
|
|
|
397
|
|
|
|
243
|
|
|
|
537
|
|
|
|
515
|
|
Total other income
|
|
|
396
|
|
|
|
242
|
|
|
|
534
|
|
|
|
510
|
|
Income (loss) before income taxes
|
|
|
1,176
|
|
|
|
(959
|
)
|
|
|
2,813
|
|
|
|
(2,528
|
)
|
Income tax expense
|
|
|
(8
|
)
|
|
|
(8
|
)
|
|
|
(27
|
)
|
|
|
(29
|
)
|
Net income (loss)
|
|
$
|
1,168
|
|
|
$
|
(967
|
)
|
|
$
|
2,786
|
|
|
$
|
(2,557
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.05
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
|
$
|
(0.12
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
0.05
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.12
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
21,184
|
|
|
|
21,407
|
|
|
|
21,035
|
|
|
|
20,938
|
|
Diluted weighted average common shares outstanding
|
|
|
22,204
|
|
|
|
21,407
|
|
|
|
21,966
|
|
|
|
20,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,168
|
|
|
$
|
(967
|
)
|
|
$
|
2,786
|
|
|
$
|
(2,557
|
)
|
Foreign currency translation adjustments
|
|
|
581
|
|
|
|
811
|
|
|
|
2,540
|
|
|
|
695
|
|
Total comprehensive income (loss)
|
|
$
|
1,749
|
|
|
$
|
(156
|
)
|
|
$
|
5,326
|
|
|
$
|
(1,862
|
)
|
Our
operating results are expressed as a percentage of revenue in the table below:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
54.6
|
|
|
|
58.0
|
|
|
|
53.2
|
|
|
|
55.4
|
|
Advertising and sales expenses
|
|
|
20.5
|
|
|
|
23.7
|
|
|
|
22.2
|
|
|
|
23.8
|
|
Royalty expenses
|
|
|
5.4
|
|
|
|
5.6
|
|
|
|
4.7
|
|
|
|
6.1
|
|
General and administrative expenses
|
|
|
16.0
|
|
|
|
18.1
|
|
|
|
16.6
|
|
|
|
19.3
|
|
Total operating costs and expenses
|
|
|
96.5
|
|
|
|
105.4
|
|
|
|
96.7
|
|
|
|
104.6
|
|
Income (loss) from operations
|
|
|
3.5
|
|
|
|
(5.4
|
)
|
|
|
3.3
|
|
|
|
(4.6
|
)
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Total other income
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Income (loss) before income taxes
|
|
|
5.2
|
|
|
|
(4.3
|
)
|
|
|
4.1
|
|
|
|
(3.8
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
|
5.2
|
%
|
|
|
(4.3
|
)%
|
|
|
4.1
|
%
|
|
|
(3.8
|
)%
|
Outlook
Cash
sales were $65.5 million for the nine months ended September 30, 2016 compared to $70.6 million for the nine months ended September
30, 2015, a decrease of $5.1 million or 7.2%. The decrease was driven primarily by a $8.0 million decrease in our U.S. segment
related to the effects of a sluggish U.S. economy, which was partially offset by $5.4 million increase in our International segment.
We believe that cash sales remain an important metric when evaluating our operating performance as revenue recognition under U.S.
GAAP occurs when our students attend their courses or the term for taking their course expires, which could be several quarters
after the student purchases a program and pays their fee.
We
anticipate cash sales to increase throughout 2017, particularly as new brands gain greater traction in our more established markets,
and as we expand internationally and hone our selling and marketing strategy in new markets.
OPERATING
SEGMENTS
We
operate in four operating segments based on geographic location. The proportion of our total revenue attributable to each segment
is as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
As a percentage of total revenue
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
U.S.
|
|
|
61.6
|
%
|
|
|
64.0
|
%
|
|
|
62.6
|
%
|
|
|
66.6
|
%
|
Canada
|
|
|
3.9
|
%
|
|
|
6.0
|
%
|
|
|
4.2
|
%
|
|
|
7.0
|
%
|
U.K.
|
|
|
20.0
|
%
|
|
|
22.2
|
%
|
|
|
20.4
|
%
|
|
|
20.1
|
%
|
Other foreign markets
|
|
|
14.5
|
%
|
|
|
7.8
|
%
|
|
|
12.8
|
%
|
|
|
6.3
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Segment
revenue
|
|
(In thousands)
|
|
|
(In thousands)
|
|
United States
|
|
$
|
13,837
|
|
|
$
|
14,400
|
|
|
$
|
42,944
|
|
|
$
|
44,521
|
|
Canada
|
|
|
884
|
|
|
|
1,340
|
|
|
|
2,900
|
|
|
|
4,698
|
|
U.K.
|
|
|
4,494
|
|
|
|
4,983
|
|
|
|
14,007
|
|
|
|
13,439
|
|
Other foreign markets
|
|
|
3,254
|
|
|
|
1,765
|
|
|
|
8,731
|
|
|
|
4,209
|
|
Total consolidated revenue
|
|
$
|
22,469
|
|
|
$
|
22,488
|
|
|
$
|
68,582
|
|
|
$
|
66,867
|
|
United
States
Over
the past several years, our U.S. business shifted its focus to consist primarily of
Rich Dad™ Education
brand offerings.
Revenue derived from the Rich Dad brands was $12.1 million and $13.5 million or as a percentage of total segment revenue was 87.5%
and 93.8% for the three months ended September 30, 2016 and 2015, respectively, and $37.8 million and $42.3 million or as a percentage
of total segment revenue was 88.1% and 95.0% for the nine months ended September 30, 2016 and 2015, respectively. The majority
of this revenue pertained to real estate-related education, with the balance pertaining to financial markets training. We are
continuing to develop non-Rich Dad brands, such as
The Independent Women
,
Woman in Wealth
,
Brick Buy Brick, Elite
Business Star™
and others to diversify our business, although our business to date in these brands has not been material
to our Company as a whole.
The
U.S. segment revenue was $13.8 million and $14.4 million or as a percentage of total revenue was 61.6% and 64.0% for the three
months ended September 30, 2016 and 2015, respectively, and $43.0 million and $44.5 million or as a percentage of total revenue
was 62.6% and 66.6% for the nine months ended September 30, 2016 and 2015, respectively. The slight decrease in revenue during
the three months ended September 30, 2016 compared to the same period in 2015, was primarily due to the decrease in revenue of
$1.3 million or 100.0%, as a result of the change in our revenue recognition policy with regards to DVD fulfillment, which was
partially offset by increase in recognition of revenue from expired contracts of $0.7 million or 41.4%. The decrease in revenue
of $1.5 million or 3.4% during the nine months ended September 30, 2016 compared to the same period in 2015, was primarily due
to the $5.9 million or 95.7% decline in revenue, as a result of the change in our revenue recognition policy with regards to DVD
fulfillment, partially offset by increased attendance (i.e. fulfillment) of $3.9 million or 12.3% and increase in recognition
of revenue from expired contracts of $0.4 million or 6.4%.
Canada
Similar
to the U.S. segment, our Canadian segment's revenue primarily consists of Rich Dad branded offerings. Revenue derived from the
Rich Dad brands was $0.8 million and $1.3 million or as a percentage of total segment revenue was 87.9% and 95.3% for the three
months ended September 30, 2016 and 2015, respectively, and $2.5 million and $4.3 million or as a percentage of total segment
revenue was 87.7% and 91.6% for the nine months ended September 30, 2016 and 2015, respectively. The majority of this revenue
pertained to real estate-related education, with the balance pertaining to financial markets training.
The
Canadian segment revenue was $0.9 million and $1.3 million or as a percentage of total revenue was 3.9% and 6.0% for the three
months ended September 30, 2016 and 2015, respectively, and $2.9 million and $4.7 million or as a percentage of total revenue
was 4.2% and 7.0% for the nine months ended September 30, 2016 and 2015, respectively. The decrease in revenue during the three
months ended September 30, 2016 compared to the same period in 2015, was primarily due to the decline in recognition of revenue
from expired contracts of $0.3 million or 61.4%. The decrease in revenue of $1.8 million or 38.3% during the nine months ended
September 30, 2016 compared to the same period in 2015, was primarily due to the decline in recognition of revenue from expired
contracts of $1.2 million or 70.2% and due to the $0.5 million or 88.2% decline in revenue, as a result of the change in our revenue
recognition policy with regards to DVD fulfillment.
U.K.
In
contrast to our U.S. and Canadian segments, our U.K. segment is more diversified among several different brands. Revenue derived
from the Rich Dad brands was $1.3 million and $2.1 million or as a percentage of total segment revenue was 29.0% and 41.9% for
the three months ended September 30, 2016 and 2015, respectively, and $4.6 million and $5.8 million or as a percentage of total
segment revenue was 32.6% and 43.1% for the nine months ended September 30, 2016 and 2015, respectively. The majority of this
revenue pertained to real estate-related education, with the balance pertaining to financial markets training.
The
U.K. segment revenue was $4.5 million and $5.0 million or as a percentage of total revenue was 20.0% and 22.2% for the three months
ended September 30, 2016 and 2015, respectively, and $14.0 million and $13.5 million or as a percentage of total revenue was 20.4%
and 20.1% for the nine months ended September 30, 2016 and 2015, respectively. The decrease in revenue for the three months ended
September 30, 2016 compared to the same period in 2015, was primarily due to decreased attendance (i.e. fulfillment) of $0.6 million
or 15.4%, partially offset by the increase in recognition of revenue from expired contracts of $0.1 million or 19.7%. The increase
in revenue for the nine months ended September 30, 2016 compared to the same period in 2015 was primarily due to increase in recognition
of revenue from expired contracts of $1.4 million or 85.0%, partially offset by decreased attendance (i.e. fulfillment) of $0.9
million or 7.7%.
Other
Foreign Markets
We
operate in other foreign markets, including European, Asian and African countries. Our Other Foreign Markets segment is gaining
traction and has shown significant growth in revenue. Revenue derived from the Rich Dad brands was $2.5 million and $0.2 million
or as a percentage of total segment revenue was 77.7% and 12.8% for the three months ended September 30, 2016 and 2015, respectively,
and $6.3 million and $0.4 million or as a percentage of total segment revenue was 71.7% and 10.8% for the nine months ended September
30, 2016 and 2015, respectively.
The
Other Foreign Markets segment revenue was $3.3 million and $1.8 million or as a percentage of total revenue was 14.5% and 7.8%
for the three months ended September 30, 2016 and 2015, respectively, and $8.7 million and $4.2 million or as a percentage of
total revenue was 12.8% and 6.3% for the nine months ended September 30, 2016 and 2015, respectively. The increase in revenue
of $1.5 million or 83.3% during the three months ended September 30, 2016 compared to the same period in 2015, was primarily due
to increased attendance (i.e. fulfillment) of $0.8 million or 46.8% and increase in recognition of revenue from expired contracts
of $0.7 million or 100.0%. The increase in revenue of $4.5 million or 107.1% during the nine months ended September 30, 2016 compared
to the same period in 2015, was primarily due to increased attendance (i.e. fulfillment) of $3.8 million or 90.2% and increase
in recognition of revenue from expired contracts of $0.7 million or 100.0%.
Three
Months Ended September 30, 2016 Compared to Three Months Ended September, 2015
Revenue
Revenue
was $22.5 million for the three months ended September 30, 2016 compared to $22.5 million for the three months ended September
30, 2015. Revenue was flat year over year, as the increase in recognition of revenue from expired contracts of $1.2 million or
39.6% and increased attendance (i.e. fulfillment) of $0.4 million or 2.1%, was offset by the decline in recognition of revenue
of $1.6 million or 100.0%, due to the change in our revenue recognition policy with regards to DVD fulfillment. Cash sales were
$21.5 million for the three months ended September 30, 2016 compared to $24.2 million for the three months ended September 30,
2015, a decrease of $2.7 million or 11.2%. The decrease was driven primarily by a $4.8 million decrease in our U.S. segment related
to the effects of a sluggish U.S. economy, which was partially offset by $3.3 million increase in our International segment.
Operating
Expenses
Total
operating costs and expenses were $21.7 million for the three months ended September 30, 2016 compared to $23.7 million for the
three months ended September 30, 2015, a decrease of $2.0 million or 8.4%. The decrease was primarily due to a $0.7 million decrease
in direct course expenses, a $0.7 million decrease in advertising and sales expenses, a $0.5 million decrease in general and administrative
expenses and a $0.1 million decrease in royalty expense.
Direct
course expenses
Direct
course expenses relate to our free preview workshops, basic training and advanced training, and consist of instructor fees, facility
costs, salaries, commissions and fees associated with our field representatives and related travel expenses. Direct course expenses
were $12.3 million for the three months ended September 30, 2016 compared to $13.0 million for the three months ended September
30, 2015, a decrease of $0.7 million or 5.4%, which was primarily related to a decrease in the sales commissions due to a decline
in cash sales.
Advertising
and sales expenses
We
generally obtain most of our potential customers through internet-based advertising. The trend of increasing online advertising
and reducing direct mail and radio advertising continued during the three months ended September 30, 2016 compared to the three
months ended September 30, 2015, as we believe it is a more cost-efficient method of attracting potential customers. Advertising
and sales expenses consist of purchased media to generate registrations to our free preview workshops and costs associated with
supporting customer recruitment. We obtain the majority of our customers through free preview workshops. These preview workshops
are offered in various metropolitan areas in the U.S., the United Kingdom, Canada, and other international markets. Prior to the
actual workshop, we spend a significant amount of money in the form of advertising through various media channels.
Advertising
and sales expenses were $4.6 million for the three months ended September 30, 2016 compared to $5.3 million for the three months
ended September 30, 2015, a decrease of $0.7 million, or 13.2%. As a percentage of revenue, advertising and sales expenses were
20.5% and 23.7% of revenue for the three months ended September 30, 2016 and 2015, respectively, a decrease of 3.2%.
Royalty
expenses
We
have licensing and related agreements with RDOC, whereby we have exclusive rights to develop, market, and sell Rich Dad-branded
live seminars, training courses, and related products worldwide. In connection with these agreements and our other licensing agreements,
we are required to pay royalties. Royalty expenses were $1.2 million for the three months ended September 30, 2016 compared to
$1.3 million for the three months ended September 30, 2015, a decrease of $0.1 million, or 7.7%.
General
and administrative expenses
General
and administrative expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expense and
travel for the corporate staff, as well as depreciation and amortization expenses. General and administrative expenses were $3.6
million for the three months ended September 30, 2016 compared to $4.1 million for the three months ended September 30, 2015,
a decrease of $0.5 million, or 12.2%. The decrease was primarily driven by lower compensation costs.
Income
tax expense
Income
tax expense was $8.0 thousand and $8.0 thousand for the three months ended September 30, 2016 and 2015, respectively. Our effective
tax rate was 0.7% and (0.8%) for the three months ended September 30, 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. See
Note 7 Income Taxes,
for further information.
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 September 30, 2016 and December 31, 2015, a valuation allowance of $6.1 million and $7.2 million, respectively,
has been provided against net operating loss carryforwards and other deferred tax assets. There were no significant changes in
our valuation allowance during the three months ended September 30, 2016. Our valuation allowance decreased by $0.2 million
for the three months ended September 30, 2015.
Net
income (loss)
Net
income was $1.2 million or $0.05 per basic and diluted common share for the three months ended September 30, 2016, compared to
a net loss of ($1.0) million or ($0.04) per basic and diluted common share for the three months ended September 30, 2015, an increase
in net income of $2.2 million or $0.09 per basic and diluted common share. Net income for the three months ended September 30,
2016 was positively impacted by the decreases in operating costs and expenses of $2.0 million or 8.4%, primarily due to decreases
in direct course expenses, advertising and sales expenses and general and administrative expenses.
Nine
Months Ended September 30, 2016 Compared to Nine Months Ended September, 2015
Revenue
Revenue
was $68.6 million for the nine months ended September 30, 2016 compared to $66.9 million for the nine months ended September 30,
2015, an increase of $1.7 million or 2.5%. The increase was due to increased attendance (i.e. fulfillment) of $6.7 million or
13.3% and the increase in recognition of revenue from expired contracts of $1.4 million or 14.7%, partially offset by the decline
in recognition of revenue of $6.4 million or 95.1%, due to the change in our revenue recognition policy with regards to DVD fulfillment.
Cash sales were $65.5 million for the nine months ended September 30, 2016 compared to $70.6 million for the nine months ended
September 30, 2015, a decrease of $5.1 million or 7.2%. The decrease was driven primarily by a $8.0 million decrease in our U.S.
segment related to the effects of a sluggish U.S. economy, which was partially offset by $5.4 million increase in our International
segment.
Operating
Expenses
Total
operating costs and expenses were $66.3 million for the nine months ended September 30, 2016 compared to $69.9 million for the
nine months ended September 30, 2015, a decrease of $3.6 million or 5.2%. The decrease was due to a $1.6 million decrease in general
and administrative expenses, a $0.8 million decrease in royalty expense, a $0.7 million decrease in advertising and sales expenses,
and a $0.5 million decrease in direct course expenses.
Direct
course expenses
Direct
course expenses relate to our free preview workshops, basic training and advanced training, and consist of instructor fees, facility
costs, salaries, commissions and fees associated with our field representatives and related travel expenses. Direct course expenses
were $36.5 million for the nine months ended September 30, 2016 compared to $37.0 million for the nine months ended September
30, 2015, a decrease of $0.5 million or 1.4%, which was primarily related to a decrease in the sales commissions due to a decline
in cash sales.
Advertising
and sales expenses
We
generally obtain most of our potential customers through internet-based advertising. The trend of increasing online advertising
and reducing direct mail and radio advertising continued during the nine months ended September 30, 2016 compared to the nine
months ended September 30, 2015, as we believe it is a more cost-efficient method of attracting potential customers. Advertising
and sales expenses consist of purchased media to generate registrations to our free preview workshops and costs associated with
supporting customer recruitment. We obtain the majority of our customers through free preview workshops. These preview workshops
are offered in various metropolitan areas in the U.S., the United Kingdom, Canada, and other international markets. Prior to the
actual workshop, we spend a significant amount of money in the form of advertising through various media channels.
Advertising
and sales expenses were $15.2 million for the nine months ended September 30, 2016 compared to $15.9 million for the nine months
ended September 30, 2015, a decrease of $0.7 million, or 4.4%. As a percentage of revenue, advertising and sales expenses were
22.2% and 23.8% of revenue for the nine months ended September 30, 2016 and 2015, respectively, a decrease of 1.6%.
Royalty
expenses
We
have licensing and related agreements with RDOC, whereby we have exclusive rights to develop, market, and sell Rich Dad-branded
live seminars, training courses, and related products worldwide. In connection with these agreements and our other licensing agreements,
we are required to pay royalties. Royalty expenses were $3.3 million for the nine months ended September 30, 2016 compared to
$4.1 million for the nine months ended September 30, 2015, a decrease of $0.8 million, or 19.5%.
General
and administrative expenses
General
and administrative expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expense and
travel for the corporate staff, as well as depreciation and amortization expenses. General and administrative expenses were $11.3
million for the nine months ended September 30, 2016 compared to $12.9 million for the nine months ended September 30, 2015, a
decrease of $1.6 million, or 12.4%. The decrease was primarily driven by lower compensation costs.
Income
tax expense
Income
tax expense was $27.0 thousand and $29.0 thousand for the nine months ended September 30, 2016 and 2015, respectively. Our effective
tax rate was 1.0% and (1.1%) for the nine months ended September 30, 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. See
Note 7 Income Taxes,
for further information.
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 September 30, 2016 and December 31, 2015, a valuation allowance of $6.1 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 $1.1 million and $0.2 million for the nine months ended September 30, 2016 and 2015, respectively.
Net
income (loss)
Net
income was $2.8 million or $0.13 per basic and $0.12 per diluted common share for the nine months ended September 30, 2016, compared
to a net loss of ($2.6) million or ($0.12) per basic and diluted common share for the nine months ended September 30, 2015, an
increase in net income of $5.4 million or $0.25 per basic and $0.24 per diluted common share. Net income for the nine months ended
September 30, 2016 was positively impacted by the increase in revenue primarily due to increased attendance (i.e. fulfillment)
of $6.7 million or 13.3% and decreases in operating costs and expenses of $3.6 million or 5.2%, due to decreases in general and
administrative expenses of $1.6 million, royalty expense of $0.8 million, advertising and sales expenses of $0.7 million and direct
course expenses of $0.5 million.
Critical
Accounting Policies
For
a discussion of our critical accounting policies and estimates that require the use of significant estimates and judgments,
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies”
in our Annual Report on Form 10-K for the year ended December 31, 2015.
LIQUIDITY
AND CAPITAL RESOURCES
Known
Trends and Uncertainties
In
general, we believe we will experience increased demand for our products and services as global economic conditions continue to
slowly improve. We believe that our products and services appeal to those who seek increased financial freedom. If we experience
a prolonged decline in demand for our products and services, it could have a material adverse effect on our future operating results.
Historically,
we have funded our working capital and capital expenditures using cash and cash equivalents on hand. However, given our relatively
modest operating cash flows during the past two years combined, we have needed to manage our cash position to ensure the future
viability of our business.
Our cash flows
are subject to a number of risks and uncertainties, including, but not limited to, earnings, seasonality, and fluctuations in
foreign currency exchange rates. Based upon current and anticipated levels of operations, we believe cash and cash equivalents
on hand will be sufficient to fund our expected financial obligations and anticipated liquidity requirements. During 2014, in
the U.S., we entered into agreements with third-party financing companies that provide our customers with financing options not
previously available to them for the purchase of our products and services. This new source of funds for our customers had a positive
impact on both our revenue and operating cash flows and we expect it to continue to have a positive impact on our business going
forward.
The
following is a summary of our cash flow activities for the periods stated (in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by (used in) operating activities
|
|
|
(2,006
|
)
|
|
|
3,525
|
|
Net cash used in investing activities
|
|
|
(40
|
)
|
|
|
(83
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(7
|
)
|
|
|
452
|
|
Effect of foreign currency exchange rates
|
|
|
841
|
|
|
|
(1,024
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,212
|
)
|
|
|
2,870
|
|
Operating
Cash Flows and Liquidity
Net
cash used in operating activities was $2.0 million in the nine months ended September 30, 2016 compared to net cash provided by
operating activities of $3.5 million in the nine months ended September 30, 2015, representing a period-over-period decrease of
$5.5 million. This decrease was primarily the result of a decrease in current liabilities for deferred revenue in 2016 as a result
of increased revenue recognition related to the previously-mentioned increase in fulfillment.
Investing
Cash Flows
Net
cash used in investing activities totaled $40.0 thousand in the nine months ended September 30, 2016 and $83.0 thousand in the
nine months ended September 30, 2015, representing our purchases of property and equipment.
Financing
Cash Flows
Our
consolidated capital structure as of September 30, 2016 and December 31, 2015 was 100.0% equity.
Net
cash used in financing activities totaled $7.0 thousand in the nine months ended September 30, 2016, compared to net cash provided
by financing activities of $452.0 thousand in the nine months ended September 30, 2015, representing a period-over-period decrease
in cash from financing activities of $459.0 thousand, primarily due to $459.0 thousand of net proceeds we received from a private
offering of securities in the nine months ended September 30, 2015.
We
expect that our working capital deficit, which is primarily a result of our significant deferred revenue balance, will continue
for the foreseeable future. As of September 30, 2016 and December 31, 2015, our consolidated current deferred revenue was $54.1
million and $60.7 million, respectively.
Our cash and cash equivalents
were, and continue to be, invested in short-term, liquid, money market funds. Restricted cash balances consisted primarily of
funds on deposit with credit card processors
and cash collateral with our credit card vendors. Restricted cash balances held by credit card processors are unavailable to us
unless we discontinue sale of our products or discontinue the usage of a vendor’s credit card. As sales of the products
and services related to our domestic business have decreased, our credit card vendors have not returned funds held as collateral,
resulting in higher restricted cash balances.
Off-Balance
Sheet Arrangements
We
had no off-balance sheet arrangements as of September 30, 2016.
Item
4. Controls and Procedures.
An
evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15
under the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of our management,
including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). As of September 30,
2016, based upon that evaluation, the CEO and CFO concluded that the design and operation of these disclosure controls and procedures
were effective.
There
has been no change in our internal control over financial reporting that occurred during the three months ended September 30,
2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings.
We
are subject to a number of contingencies, including litigation, from time to time. For further information regarding legal proceedings,
see Note 10
Commitments and Contingencies
, to our condensed consolidated financial statements.
Item
1A. Risk Factors.
Not
Required
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
There
was no repurchases of the Company's equity securities during the three months ended September 30, 2016.
Item
6. Exhibits
Exhibit
Number
|
|
Description
|
31.1*
|
|
Certification
of The Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002
|
31.2*
|
|
Certification
of The Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002
|
32.1*
|
|
Certification
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
32.2*
|
|
Certification
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
101*
|
|
The
following materials from Legacy Education Alliance, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September
30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September
30, 2016 and December 31, 2015 (Unaudited), (ii) Condensed Consolidated Statements of Operations and Comprehensive Income
(Loss) for the three and nine months ended September 30, 2016 and 2015 (Unaudited), (iii) Condensed Consolidated Statement
of Changes in Stockholders’ Deficit for the nine months ended September 30, 2016 (Unaudited), (iv) Condensed Consolidated
Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited) and (v) Notes to Condensed Consolidated
Financial Statements (Unaudited).
|
* Filed
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
LEGACY
EDUCATION ALLIANCE, INC.
|
|
|
Dated:
November 14, 2016
|
By:
|
/s/
ANTHONY C. HUMPAGE
|
|
|
Anthony
C. Humpage
Chief
Executive Officer and Director
|
|
|
|
Dated:
November 14, 2016
|
By:
|
/s/
CHRISTIAN A. J. BAEZA
|
|
|
Christian
A. J. Baeza
|
|
|
Chief
Financial Officer
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