Notes to Consolidated Financial Statements
Note 1—Business Description and Basis
of Presentation
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 Foreign Markets.
Our students pay
for their courses in full up-front or through payment agreements with independent third parties. 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 the 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 interacting
with the student remotely or in person and guiding the student, for example, through his or her first real estate transaction,
providing a real hands-on experience.
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. We continue to expand internationally. Starting
in 2014, we expanded our footprint to include Africa, Europe, and Asia, holding events in 21 countries. As we established traction
in these markets, we opened 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. In 2016 we held more events in several of
these countries than in the prior years. We intend to continue to focus on diversifying our sales internationally.
Merger.
On
November 10, 2014, we entered into an Agreement and Plan of Merger dated as of such date the (“Merger Agreement”) by
and among (i) PRCD, a Nevada corporation, (ii) Priced In Corp. Subsidiary, a Colorado corporation and a wholly-owned subsidiary
of PRCD (“PRCD Sub”), (iii) Tigrent Inc., a Colorado corporation (“TIGE”), and (iv) Legacy Education Alliance
Holdings, Inc., a Colorado corporation and a wholly-owned subsidiary of TIGE (“Legacy Holdings”). On November 10, 2014,
pursuant to the Merger Agreement, PRCD Sub merged with and into Legacy Holdings (the “Merger”), with Legacy Holdings
surviving the Merger and becoming our wholly owned subsidiary and we acquired the business of Legacy Holdings.
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. All intercompany balances and transactions
have been eliminated in consolidation.
Note 2—Significant Accounting
Policies
Use of estimates.
The preparation of 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 consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents.
We
consider all highly liquid instruments with an original maturity of three months or less to be cash or cash equivalents. We continually
monitor and evaluate our investment positions and the creditworthiness of the financial institutions with which we invest and maintain
deposit accounts. 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 December 31, 2016 and 2015, we did not have a CDAR balance.
Restricted cash.
Restricted
cash balances consist primarily of funds on deposit with credit card and other payment processors and cash collateral with our
purchasing card provider. These balances do not have the benefit of federal deposit insurance and are subject to the financial
risk of the parties holding these funds. Restricted cash balances held by credit card processors are unavailable to us unless,
and for a period of time after, we discontinue the use of their services. The hold back percentages are generally five percent
of the monthly credit card charges that are held for six months. The cash collateral held by our charge card provider is unavailable
unless we discontinue the usage of the purchasing card. Because a portion of these funds can be accessed and converted to unrestricted
cash in less than one year in certain circumstances, that portion is considered a current asset.
Financial Instruments.
Financial
instruments consist primarily of cash and cash equivalents, notes receivable, accounts payable, deferred course expenses, accrued
expenses, deferred revenue, and debt. GAAP requires the disclosure of the fair value of financial instruments, including assets
and liabilities recognized in the balance sheets. Our only financial liabilities measured and recorded at fair value on our consolidated
balance sheets on a recurring basis are the derivative financial instruments. Management believes the carrying value of the other
financial instruments recognized on the consolidated balance sheets (including receivables, payables and accrued liabilities) approximate
their fair value.
Inventory.
Inventory consists
primarily of books, videos and training materials held for sale to students enrolled in our training programs. Inventory is stated
at the lower of cost or market using the first-in, first-out method.
Deposits with credit card processors.
The deposits with our credit card processors are held due to arrangements under which our credit card processors withhold credit
card funds to cover charge backs in the event we are unable to honor our commitments. The deposits are six months or less rolling
reserves.
Property, equipment and Impairment
of long lived assets.
Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as presented in the following table:
|
Buildings
|
|
|
40 years
|
|
|
Furniture fixtures and equipment
|
|
|
3-7 years
|
|
|
Purchased software
|
|
|
3 years
|
|
Leasehold improvements are amortized
over the shorter of the estimated useful asset life or the remaining term of the applicable lease.
In accordance with GAAP, we evaluate
the carrying amount of our long-lived assets such as property and equipment, and finite-lived intangible assets subject to amortization
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets held and used is measured by the comparison of its carrying amount with the future net cash flows the
asset is expected to generate. We look primarily to the undiscounted future cash flows in the assessment of whether or not long-lived
assets have been impaired. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment
charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.
Revenue recognition.
We recognize
revenue in accordance with FASB ASC 605,
Revenue Recognition
(“ASC 605”). We recognize revenue when: (i) persuasive
evidence of an arrangement exists, (ii) delivery of product has occurred or services have been rendered, (iii) the price
to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. For product sales, these conditions
are generally met upon shipment of the product to the student or completion of the sale transaction. For training and service sales,
these conditions are generally met upon presentation of the training seminar or delivery of the service.
Some of our training and consulting
contracts contain multiple deliverable elements that include training along with other products and services. In accordance with
ASC 605-25
, Revenue Recognition – Multiple-Element Arrangements
, sales arrangements with multiple deliverables are
divided into separate units of accounting if the deliverables in the sales contract meet the following criteria: (i) the delivered
training or product has value to the client on a standalone basis, (ii) there is objective and reliable evidence of the contract
price of undelivered items and (iii) delivery of any undelivered item is probable. The contract price of each element is generally
determined by prices charged when sold separately. In certain arrangements, we offer these products bundled together at a discount.
The discount is allocated on a pro-rata basis to each element based on the relative contract price of each element when contract
price support exists for each element in the arrangements. The overall contract consideration is allocated among the separate units
of accounting based upon their contract prices, with the amount allocated to the delivered item being limited to the amount that
is not contingent upon the delivery of additional items or meeting other specified performance conditions. Contract price of the
undelivered items is based upon the normal pricing practice for our existing training programs, consulting services, and other
products, which are generally the prices of the items when sold separately.
Each transaction is separated into
its specific elements and revenue for each element is recognized according to the following policies:
|
Product
|
|
Recognition Policy
|
|
Seminars
|
|
Deferred upon payment and recognized when the seminar is attended or delivered on-line
|
|
Online courses
|
|
Deferred upon sale and recognized over the delivery period
|
|
Coaching and mentoring sessions
|
|
Deferred and recognized as service is provided
|
|
Data subscriptions and renewals
|
|
Deferred and recognized on a straight-line basis over the subscription period
|
In the normal course of business,
we recognize revenue based on the customers’ attendance of the course, mentoring training, coaching session or delivery of
the software, data or course materials on-line.
After a customer contract expires
we record breakage revenue less a reserve for cases where we allow a customer to attend after expiration. We recognized revenue
at the conclusion of the contract period of approximately $14.5 million and $20.2 million in the years ended December 31, 2016
and 2015, respectively. Our reserve for course attendance after expiration was $1.3 million at December 31, 2016 and 2015.
We provide a satisfaction guarantee
to our customers. Very few customers exercise this guarantee.
Deferred revenue occurs from courses,
online courses, mentorships, coaching sessions and website subscriptions and renewals in which payment is received before the service
has been performed or if a customer contract expires. Deferred revenue is recognized into revenue as courses are attended in-person
or on-line or coaching and mentor sessions are provided. While many of our course package contracts are two years, we consider
the fulfillment of them as a current liability because a customer could complete a two-year package in one year. We do have a few
products that are scheduled to last beyond one year and are accounted for as long-term deferred revenue.
Revenue amounts in our consolidated
financial statements are shown net of any sales tax.
Deferred course expenses.
We
defer licensing fees and commissions and fees paid to our speakers and telemarketers until such time as the revenue is earned.
Our speakers, who are all independent contractors, earn commissions on the cash receipts received at our training events and are
paid approximately 45 days after the training event. The deferred course expenses are expensed as the corresponding deferred
revenue is recognized. We also capitalize the commissions and fees paid to our speakers and expense them as the corresponding deferred
revenue is recognized.
Advertising expenses.
We
expense advertising as incurred. Advertising paid in advance is recorded as a prepaid expense until such time as the advertisement
is published. We incurred approximately $16.4 million and $16.5 million in advertising expense for the years ended December 31,
2016 and 2015, respectively, which is included in advertising and sales expenses in the accompanying Consolidated Statements of
Operations and Comprehensive Income (Loss). Included in prepaid expenses and other current assets was approximately $0.2 million
of prepaid media costs as of December 31, 2015. There were no media costs prepaid and included in prepaid expenses and other current
assets as of December 31, 2016.
Income taxes.
We account
for income taxes in conformity with the requirements of ASC 740,
Income Taxes
(“ASC 740”). Per ASC 740, the
provision for income taxes is calculated using the asset and liability approach of accounting for income taxes. We recognize deferred
tax assets and liabilities, at enacted income tax rates, based on the temporary differences between the financial reporting basis
and the tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax laws in the provision
for income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will
not be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset.
ASC 740 also clarifies
the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition
threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than
not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume
that the tax position will be examined by taxing authorities. ASC 740 also provides guidance on derecognition, classification,
interest and penalties, disclosures and transition.
Foreign currency translation
.
We account for foreign currency translation in accordance with ASC 830,
Foreign Currency Translation
. The functional currencies
of the Company’s foreign operations are the reported local currencies. Translation adjustments result from translating our
foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts of our foreign subsidiaries
are translated into United States dollars using the exchange rate in effect at the balance sheet date. Revenue and expenses are
translated using average exchange rates for each month during the fiscal year. The resulting translation gains or losses are recorded
as a component of accumulated other comprehensive income (loss) in stockholders’ deficit. Business is generally transacted
in a single currency not requiring meaningful currency transaction costs. We do not practice hedging as the risks do not warrant
the costs.
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 $0.2 million and $0.1 million
for the years ended December 31, 2016 and 2015, respectively. See Note 6 -
Share-Based Compensation
, for additional disclosures
regarding our share-based compensation.
Comprehensive income (loss).
Comprehensive income (loss) includes changes to equity accounts that were not the result of transactions with stockholders.
Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss) items. Our comprehensive income
(loss) generally consists of changes in the cumulative foreign currency translation adjustment.
Recent Accounting Pronouncements.
We have implemented all new accounting pronouncements that are in effect and that management believes would materially impact
our financial statements.
In January 2017,
the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-01,
“
Business Combinations,
” which clarifies the definition of a Business and improves the guidance for determining
whether a transaction involves the purchase or disposal of a business or an asset. This standard is effective for fiscal years
and interim periods beginning after December 15, 2017 and should be applied prospectively on or after the effective date. Early
adoption is permitted only for the transactions that have not been reported in financial statements that have been issued or made
available for issuance. We are currently evaluating the effect that the adoption of this standard will have on our financial
statements and expect to adopt this standard when effective.
In November 2016,
the FASB issued ASU 2016-18, “
Statement of Cash Flows: Restricted Cash,
” which provides guidance about the presentation
of changes in restricted cash and restricted cash equivalents on the statement of cash flows. This standard is effective for fiscal
years and interim periods beginning after December 15, 2017 and will be applied using a retrospective transition method to each
period presented. Early adoption was permitted. We are currently evaluating the effect that the adoption of this standard
will have on our financial statements and expect to adopt this standard when effective.
In October 2016,
the FASB issued ASU 2016-16, “
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory,
” which removes
the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of
assets other than inventory. This standard is effective for fiscal years and interim periods beginning after December 15, 2017
and will be applied using a modified retrospective basis. Early adoption was permitted. We are currently evaluating
the effect that the adoption of this standard will have on our financial statements and expect to adopt this standard when effective.
In August
2016, the FASB issued ASU 2016-15, “
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
”.
This ASU provides guidance and clarification in regards to the classification of eight types of receipts and payments in the statement
of cash flows, including debt repayment or extinguishment costs, settlement of zero-coupon bonds, proceeds from the settlement
of insurance claims, distributions received from equity method investees and cash receipts from beneficial interest in securitization
transactions. This standard is effective for fiscal years and interim periods beginning after December 15, 2017 and will be applied
using a retrospective transition method to each period presented. Early adoption is permitted. We expect to adopt this standard
when effective, and do not expect this guidance to have a significant impact on our financial statements.
In March
2016, FASB issued ASU No 2016-09 “
Compensation – Stock compensation
”. 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 was permitted. We expect to adopt this standard when effective,
and do not expect this guidance to have a significant impact on our financial statements.
In February
2016, the FASB issued ASU No 2016-02 “Leases”. 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”.
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.
In November 2015, the FASB issued
ASU No 2015-17,
“Balance Sheet Classification of Deferred Taxes,”
to simplify the balance sheet classification
of deferred taxes. This guidance requires that all deferred tax liabilities and assets should be classified as noncurrent on the
balance sheet. This guidance is effective for fiscal years and interim periods beginning after December 15, 2016. The companies
could choose to use either retrospective or prospective application. Early adoption was permitted. We adopted this guidance effective
January 1, 2016, and there is no significant impact on our financial statements.
In September 2015,
the FASB issued ASU No 2015-16, “
Simplifying the Accounting for Measurement-Period Adjustments,”
to simplify
the accounting for adjustments made during the measurement period to provisional amounts recognized in a business combination.
This guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement
period in the period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s
financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result
of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition,
the acquirer is required to present separately on the face of the income statement or disclose in the notes to the financial statements
the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting
periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance was effective
for fiscal years and interim periods beginning after December 15, 2015, and requires prospective application. Early adoption was
permitted. We adopted this guidance effective January 1, 2016, and there is no impact on our financial statements.
In July 2015, the
FASB issued ASU No 2015-11, “
Simplifying the Measurement of Inventory,
” to simplify the measurement of inventory
measured using the first-in, first-out (“FIFO”) or average cost method. This guidance requires entities to measure
inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course
of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance is effective for fiscal
years and interim periods beginning after December 15, 2016 with prospective application. Early adoption was permitted when applying
the amendments and switching to the new accounting at the beginning of the reporting period in which the amendments are adopted.
We expect to adopt this guidance when effective, and do not expect this guidance to have a significant impact on our financial
statements.
In January 2015,
the FASB
issued ASU
No. 2015-01, “
Income Statement – Extraordinary and Unusual
Items
”. The amendment eliminates the concept of extraordinary items. If an event meets the criteria for extraordinary
classification, an entity is required to segregate the item from the results of ordinary operations and show the item separately
in the income statement, net of tax. ASU 2015-01 was effective for fiscal years beginning after December 15, 2015, and early adoption
was permitted. We adopted this guidance effective January 1, 2016, and there is no impact on our financial statements.
In May 2014, the
FASB
issued ASU
No. 2014-09, “
Revenue from Contracts with Customers (Topic 606).
”
The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the
transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for
those goods or services. In August 2015, the FASB delayed the effective date of its revenue recognition standard to be effective
for fiscal years and interim periods beginning after December 15, 2017. We will be evaluating the impact, if any, that the standard
will have on our financial condition, results of operations, and disclosures in the near future.
Note 3—Concentration Risk
Cash and Cash Equivalents
We maintain deposits in banks which
may exceed the federal deposit insurance available. Management believes the potential risk of loss on these cash and cash equivalents
to be minimal. All cash balances as of December 31, 2016 and 2015, including foreign subsidiaries, without FDIC coverage was $1.0
million and $3.8 million, respectively.
Revenue
A significant portion of our revenue
is derived from the Rich Dad brands. For the years ended December 31, 2016 and 2015, Rich Dad brands provided 74.7% and 77.2% of
our revenue, respectively. In addition, we have operations in the U.S., Canada, the United Kingdom and Other foreign markets (See
Note 14—
Segment Information
).
Note 4—Property and Equipment
Property and equipment consists
of the following (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Land
|
|
$
|
782
|
|
|
$
|
782
|
|
|
Buildings
|
|
|
785
|
|
|
|
785
|
|
|
Software
|
|
|
2,606
|
|
|
|
2,607
|
|
|
Equipment
|
|
|
1,960
|
|
|
|
1,926
|
|
|
Furniture and fixtures
|
|
|
335
|
|
|
|
335
|
|
|
Building and leasehold improvements
|
|
|
1,172
|
|
|
|
1,170
|
|
|
Property and equipment
|
|
|
7,640
|
|
|
|
7,605
|
|
|
Less: accumulated depreciation
|
|
|
(6,510
|
)
|
|
|
(6,379
|
)
|
|
Property and equipment, net
|
|
$
|
1,130
|
|
|
$
|
1,226
|
|
Depreciation expense on property
and equipment in each of the years ended December 31, 2016 and 2015 was approximately $0.1 million and $0.2 million, respectively.
Note 5—Long-Term Debt
Long-term debt consists of the following
(in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Installment notes payable for equipment financing
|
|
$
|
42
|
|
|
$
|
52
|
|
|
Long-term debt
|
|
|
42
|
|
|
|
52
|
|
|
Less: current portion
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
Total long-term debt, net of current portion
|
|
$
|
31
|
|
|
$
|
42
|
|
The following is a summary of scheduled long-term debt maturities
by year (in thousands):
|
2017
|
|
$
|
11
|
|
|
2018
|
|
|
11
|
|
|
2019
|
|
|
12
|
|
|
2020
|
|
|
8
|
|
|
Total long-term debt
|
|
$
|
42
|
|
Note 6—Share-Based Compensation
The Company has one 2015 Equity Plan, the 2015 Incentive Plan. The financial activity pertaining to our employees
and directors under the 2015 Incentive Plan is reflected in our consolidated financial statements, presented herein.
The 2015 Incentive Plan was approved
by the stockholders at our annual meeting of stockholders on July 16, 2015. The 2015 Incentive Plan reserves 5,000,000 shares of
our Common Stock for stock options, restricted stock, and a variety of other types of equity awards. We believe that long-term
incentive compensation programs align the interests of management, employees and the stockholders to create long-term stockholder
value. We believe that equity based incentive compensation plans, such as the Incentive Plan, increase our ability to achieve this
objective, and, by allowing for several different forms of long-term equity based incentive awards, help us to recruit, reward,
motivate and retain talented employees and other service providers. The text of the 2015 Incentive Plan is included in the attachment
marked as Appendix B to the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on
June 16, 2015.
During the year ended December
31, 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 $0.2 million.
During the year ended December 31, 2015 pursuant to the 2015 Incentive Plan we awarded 714,019 shares
of restricted stock to our employees, which are subject to a three-year cliff vesting and 208,967 shares of restricted stock to
members of the Board of Directors, which are subject to a two-year cliff vesting.
The following table reflects the activity of the restricted shares:
|
Restricted Stock Activity (in thousands)
|
|
Number of shares
|
|
|
Weighted average grant date value
|
|
|
Unvested at December 31, 2014
|
|
|
605
|
|
|
$
|
0.15
|
|
|
Granted
|
|
|
923
|
|
|
|
0.46
|
|
|
Forfeited
|
|
|
(38
|
)
|
|
|
0.30
|
|
|
Vested
|
|
|
(155
|
)
|
|
|
0.08
|
|
|
Unvested at December 31, 2015
|
|
|
1,335
|
|
|
$
|
0.37
|
|
|
Granted
|
|
|
785
|
|
|
|
0.21
|
|
|
Forfeited
|
|
|
(150
|
)
|
|
|
0.14
|
|
|
Vested
|
|
|
(323
|
)
|
|
|
0.45
|
|
|
Unvested at December 31, 2016
|
|
|
1,647
|
|
|
$
|
0.30
|
|
Compensation Expense and Related Valuation Techniques
We account for share-based
awards under the provisions of ASC 718,
“Share-Based Payment,”
which established the accounting for share-based
awards exchanged for employee services. 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. Unrecognized
compensation expense associated with unvested share-based awards, consisting entirely of unvested restricted stock, was approximately
$347,000 and $350,000 at December 31, 2016 and 2015, respectively. That cost is expected to be recognized over a weighted-average
period of 1.9 years.
Our stock-based compensation expense
was approximately $0.2 million and $0.1 million for the years ended December 31, 2016 and 2015, respectively, and is included in
general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Income (Loss).
There were no related income tax effects in either year.
Note 7—Employee Benefit Plan
We have a 401(k) employee
savings plan for eligible employees that provide for a matching contribution from us, determined each year at our discretion. The
Company did not match, and therefore incurred no expense, during 2016 and 2015.
Note 8—Income Taxes
We recognize deferred tax assets
and liabilities, at enacted income tax rates, based on the temporary differences between the financial reporting basis and the
tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax laws in the provision for
income taxes in the period of enactment. When it is more likely than not that a portion or all of a deferred tax asset will not
be realized in the future, we provide a corresponding valuation allowance against the deferred tax asset. In the year ended December
31, 2015, we recorded a full valuation allowance against all net deferred tax assets because there was not sufficient evidence
to conclude that we would more likely than not realize those assets prior to expiration. In the fourth quarter of 2016, we determined
that valuation allowances against U.S. and U.K. (Rich Dad Education Limited only) deferred taxes were no longer required. Release
of these valuation allowances resulted in $2.4 million of tax benefit. The company assessed the weight of all available positive
and negative evidence and determined it was more likely than not that future earnings will be sufficient to realize the deferred
tax assets in the U.S. and U.K. (Rich Dad Education Limited only). In arriving at the conclusion that we had achieved sustained
profitability in the U.S. and U.K. (Rich Dad Education Limited only), we considered the following positive evidence: we were in
a cumulative three-year historical income position, we had income in 2016 and projections of book income for the years 2017-2020.
We have retained full valuation
allowances of $4.5 million against the deferred tax assets of our Canadian, U.K. (only Tigrent Learning UK Limited), Hong Kong,
and South Africa subsidiaries. The most significant negative factor that was considered in determining whether a valuation allowance
was required is a cumulative recent history of losses in all jurisdictions for the entities mentioned above.
As of December 31, 2016 and
2015, we had approximately $2.3 million and $3.9 million of federal net operating loss carryforwards, approximately $22.5
million and $25.1 million of foreign net operating loss carryforwards, and approximately $8.7 million and $10.2 million of state
net operating loss carryforwards, respectively. The federal loss carryforwards will begin to expire in 2032, the foreign loss carryforwards
begin to expire in 2027 and the state net operating loss carryforwards begin to expire in 2024.
Our sources of income (loss) and income tax provision (benefit) are
as follows (in thousands):
|
|
|
Years ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
3,126
|
|
|
$
|
3,552
|
|
|
Non-U.S.
|
|
|
(186
|
)
|
|
|
(6,263
|
)
|
|
Total income (loss) before income taxes
|
|
$
|
2,940
|
|
|
$
|
(2,711
|
)
|
|
Provision (benefit) for taxes:
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
335
|
|
|
$
|
—
|
|
|
State
|
|
|
21
|
|
|
|
33
|
|
|
Non-U.S.
|
|
|
—
|
|
|
|
—
|
|
|
Total current
|
|
|
356
|
|
|
|
33
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,153
|
)
|
|
|
—
|
|
|
State
|
|
|
—
|
|
|
|
(18
|
)
|
|
Non-U.S.
|
|
|
(144
|
)
|
|
|
—
|
|
|
Total deferred
|
|
|
(1,297
|
)
|
|
|
(18
|
)
|
|
Total income tax expense (benefit)
|
|
$
|
(941
|
)
|
|
$
|
15
|
|
|
Effective income tax rate
|
|
|
(32.0
|
)%
|
|
|
(0.6
|
)%
|
During the years ended December
31, 2016 and 2015, we decreased the valuation allowance by $2.7 million and $0.7 million, respectively.
The difference between the tax provision
at the statutory federal income tax rate and the tax provision attributable to income (loss) from continuing operations before
income taxes is as follows (in thousands):
|
|
|
Years ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Computed expected federal tax expense
|
|
$
|
1,029
|
|
|
$
|
(949
|
)
|
|
Decrease in valuation allowance
|
|
|
(2,706
|
)
|
|
|
(672
|
)
|
|
State income net of federal benefit
|
|
|
108
|
|
|
|
203
|
|
|
Non-U.S. income taxed at different rates
|
|
|
(51
|
)
|
|
|
848
|
|
|
Uncertain tax positions expense
|
|
|
—
|
|
|
|
(27
|
)
|
|
Foreign exchange adjustment
|
|
|
704
|
|
|
|
411
|
|
|
Foreign tax rate adjustment
|
|
|
(23
|
)
|
|
|
180
|
|
|
Other
|
|
|
(2
|
)
|
|
|
21
|
|
|
Income tax expense (benefit)
|
|
$
|
(941
|
)
|
|
$
|
15
|
|
During the fourth quarter ended
December 31, 2016, we determined that valuation allowances against U.S. and U.K. (Rich Dad Education Limited only) deferred taxes
were no longer required. Release of these valuation allowances resulted in $2.4 million of tax benefit, which decreased our effective
tax rate by 83.1 %, that was offset by tax on current period book income and other permanent and timing differences resulting
in an income tax benefit of $0.9 million for the year ended December 31, 2016.
Deferred income tax assets and liabilities
reflect the net tax effects of (i) temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts for income tax purposes and (ii) operating loss carryforwards. The tax effects of significant
components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
4,862
|
|
|
$
|
5,703
|
|
|
Accrued compensation, bonuses, severance
|
|
|
126
|
|
|
|
336
|
|
|
Allowance for bad debt
|
|
|
46
|
|
|
|
46
|
|
|
Intangible amortization
|
|
|
57
|
|
|
|
104
|
|
|
Impaired assets
|
|
|
240
|
|
|
|
240
|
|
|
Accrued expenses
|
|
|
20
|
|
|
|
29
|
|
|
Deferred revenue
|
|
|
1,991
|
|
|
|
2,712
|
|
|
Depreciation
|
|
|
221
|
|
|
|
241
|
|
|
Charitable Contribution Carryover
|
|
|
97
|
|
|
|
—
|
|
|
Restricted Stock Awards
|
|
|
3
|
|
|
|
—
|
|
|
Tax credits
|
|
|
35
|
|
|
|
97
|
|
|
Valuation allowance
|
|
|
(4,490
|
)
|
|
|
(7,196
|
)
|
|
Total deferred tax assets
|
|
$
|
3,208
|
|
|
$
|
2,312
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred course expenses
|
|
$
|
(1,913
|
)
|
|
$
|
(2,312
|
)
|
|
Total deferred tax liabilities
|
|
|
(1,913
|
)
|
|
|
(2,312
|
)
|
|
Net deferred tax asset
|
|
$
|
1,295
|
|
|
$
|
—
|
|
Deferred tax expense related to
the foreign currency translation adjustment for the years ended December 31, 2016 and 2015 was $0.7 million and $0.4 million, respectively,
and was fully offset by a corresponding decrease in the valuation allowance with the exception of $0.1 million for Rich Dad Education
Limited UK whose valuation allowance was released effective December 31, 2016. These amounts (except for Rich Dad Education Limited
UK), which net to zero, are reported in other comprehensive income (loss). The deferred tax assets presented above for net operating
losses and credits have been reduced by liabilities for unrecognized tax benefits.
The Company does not expect to repatriate
earnings from its foreign subsidiaries because the cumulative earnings and profits of the foreign subsidiaries as of December 31,
2016 and 2015 are negative. Accordingly, no U.S. federal or state income taxes have been provided thereon.
The liability pertaining to uncertain
tax positions was $1.6 million and $1.7 million at December 31, 2016 and 2015, respectively. In accordance with GAAP, we recorded
expense that increased the total liability pertaining to uncertain tax positions which was more than offset by a decrease in the
total liability attributable to foreign currency fluctuations and tax rate adjustments. A significant portion of the liability
pertaining to uncertain tax positions is recorded as a reduction of the value of net operating loss carryovers.
We include interest and penalties
in the liability for uncertain tax positions. Accrued interest and penalties on uncertain tax positions were approximately $0.1
million at December 31, 2016 and 2015, and is included in other liabilities in the accompanying Consolidated Balance Sheets. If
applicable, we recognize interest and penalties related to uncertain tax positions as tax expense.
The following is a tabular reconciliation
of the total amounts of unrecognized tax benefits:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Unrecognized tax benefits - January 1
|
|
$
|
1,717
|
|
|
$
|
1,744
|
|
|
Gross increases - tax positions in prior period
|
|
|
—
|
|
|
|
—
|
|
|
Gross decreases - tax positions in prior period
|
|
|
(81
|
)
|
|
|
(27
|
)
|
|
Unrecognized tax benefits - December 31
|
|
$
|
1,636
|
|
|
$
|
1,717
|
|
The total liability for unrecognized
tax benefits at December 31, 2016 and 2015, is netted against deferred tax assets related to net operating loss carryforwards
in the Consolidated Balance Sheets. The total liability for unrecognized tax benefits at December 31, 2016 and 2015, are as follows:
|
|
|
As of December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Reduction of net operating loss carryforwards
|
|
$
|
1,275
|
|
|
$
|
1,656
|
|
|
Reduction of tax credit carryforwards
|
|
|
—
|
|
|
|
5
|
|
|
Total reductions of deferred tax assets
|
|
|
1,275
|
|
|
|
1,661
|
|
|
Noncurrent tax liability (reflected in Other long-term liabilities)
|
|
|
361
|
|
|
|
56
|
|
|
Total liability for unrecognized tax benefits
|
|
$
|
1,636
|
|
|
$
|
1,717
|
|
We do not expect any significant
changes to unrecognized tax benefits in the next year.
At December 31, 2016 and 2015, the
Company estimated $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.
The Company was notified by the Internal Revenue Service that its federal income tax returns for the years
2013-2015 were selected for examination. The Company believes its provision for income taxes is adequate; however any assessment
would affect the Company’s results of operations and possibly cash flows.
We were also notified by the Canadian
Revenue Agency that our 2014-2016 goods and services tax (GST) and harmonized sales tax (HST) returns are being audited.
Our federal income tax
returns have been examined and reported upon by the Internal Revenue Service through December 31, 2012, and the years subsequent
to 2012 are subject to examination. Our state tax returns for years ranging from 2010 and 2011 are still open and subject to examination.
In addition, our Canadian tax returns and United Kingdom tax returns for all years after 2011 are subject to examination.
Note 9—Certain Relationships and Related
Transactions
Licensing Agreements with the Rich Dad Parties
Our primary business relies on
our license of the Rich Dad brand and related marks and intellectual property. The following transactions summarize our license
to use the Rich Dad trademarks, trade names and other business information in seminars in the US, Canada and the United Kingdom
(the “Rich Dad Intellectual Property Rights”):
Effective September 1, 2013, we
entered into new licensing and related agreements with RDOC (collectively, the “
2013 License Agreement
”) that
replaced the 2010 Rich Dad License Agreement. The initial term of the 2013 License Agreement expires August 31, 2018, but continues
thereafter on a yearly basis unless one of the parties provides timely notice of termination. The 2013 License Agreement broadened
the field of use to include real estate investing, business strategies, stock market investment techniques, stock/paper assets,
cash management, asset protection, entrepreneurship and other financially-oriented subjects. The 2013 License Agreement also (i)
reduces the royalty rate payable to RDOC compared to the 2010 Rich Dad License Agreement; (ii) broadens the Company’s exclusivity
rights to include education seminars delivered in any medium; (iii) eliminates the cash collateral requirements and related financial
covenants contained in the 2010 Rich Dad License Agreement; (iv) continues our right to pay royalties via a promissory note that
is convertible to preferred shares upon the occurrence of a Change in Control (as defined in the 2013 License Agreement); (v) eliminated
approximately $1.6 million in debt from our consolidated balance sheet as a result of debt forgiveness provided for in the agreement
terminating the 2010 Rich Dad License Agreement; and (vi) converted another approximately $4.6 million in debt to 1,549,882 shares
of our common stock.
On
April 22, 2014, we entered into an agreement with RDOC to settle certain claims we had against RDOC, Robert Kiyosaki, and Darren
Weeks arising out of RDOC’s, Kiyosaki’s, and Weeks’s promotion of a series of live seminars and related products
known as
Rich Dad:GEO
that we alleged infringed on our exclusive rights under the 2013 License Agreement between the Company
and RDOC (the “GEO Settlement Agreement”). In the GEO Settlement Agreement, RDOC, Kiyosaki, and Weeks agreed to terminate
any further activity in furtherance of the
Rich Dad:GEO
program. In addition, RDOC agreed, among other things, to (i) amend
the 2013 License Agreement to halve the royalty payable by us to RDOC to 2.5% for the whole of 2014, (ii) cancelled approximately
$1.3 million in debt owed by us to RDOC, and (iii) reimburse us for the legal fees we incurred in the matter. In addition, RDOC’s
right to appoint one member of our Board of Directors previously continued under the 2013 License Agreement was cancelled.
The 2013 License Agreement and the
GEO Settlement Agreement were assigned to our wholly owned subsidiary, Legacy Education Alliance Holdings, Inc. on September 10,
2014.
License Agreement with Robbie Fowler
We entered into a Talent Endorsement
Agreement with an effective date of January 1, 2013 with Robbie Fowler that supplements and earlier November 2, 2012 Agreement
with Mr. Fowler (collectively, the “Fowler License Agreement”). The Fowler License Agreement grants us the exclusive
right to use Robbie Fowler’s name, image, and likeness in connection with the advertisement, promotion, and sale in the United
Kingdom of a property training course developed by us. The term of the license is scheduled to expire on January 1, 2015, but may
be extended upon the mutual consent of the parties. Under the Fowler License Agreement, we pay Mr. Fowler a royalty on revenues
realized from the sale of Robbie Fowler-branded property courses and affiliated products, after deductions for value added taxes,
returns and refunds.
License Agreement with Martin Roberts
In 2009, we entered
into a Talent Endorsement Agreement with Martin Roberts that grants us the exclusive right to use Martin Robert’s, name,
image, and likeness, as well as well as the rights to use the name of Mr. Roberts’s published book entitled “Making
Money From Property,” in connection with the advertisement, promotion, and sale in the United Kingdom of a property training
course developed by us. The term of the license will continue unless (i) terminated by one party upon the event of a default of
the party, or (ii) by either party without cause upon thirty (30) days prior written notice to the other party. Under the License
Agreement with Mr. Roberts, we pay Mr. Roberts a royalty on revenues realized from the sale of Robbie Fowler-branded property
courses and affiliated products that are collected within thirty (30) days after a Company-sponsored Martin Roberts-branded event,
after deductions for value added taxes, banking charges, returns, refunds, and third party commissions. For sales to clients introduced
to us directly by Mr. Roberts and his associated websites as well as other marketing and promotional activities Mr. Roberts or
his associated companies may wish to undertake from time to time that are not part of a Company sponsored event and which result
in the sale of ours basic training her marketing and promotional activities, Mr. Roberts is entitled to 50% of gross revenue from
such sales of directly introduced clients.
Note 10—Capital Stock
Share Capital
Our authorized
share capital consists of 200,000,000 shares of Common Stock, par value $0.0001 per share, and 20,000,000 shares of preferred stock,
par value $0.0001 per share.
Common Stock
As of December 31, 2016, 22,630,927
shares of our Common Stock were outstanding. The outstanding shares of our Common Stock are validly issued, fully paid and non-assessable.
Holders of Common Stock are entitled
to one vote for each share on all matters submitted to a stockholder vote. Holders of Common Stock do not have cumulative voting
rights. Therefore, holders of a majority of the shares of Common Stock voting for the election of directors can elect all of the
directors. Holders of Common Stock representing a majority of the voting power of the Company’s capital stock issued, outstanding
and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders. A
vote by the holders of a majority of the Company’s outstanding shares is required to effectuate certain fundamental corporate
changes such as liquidation, merger or an amendment to the Company’s certificate of incorporation.
Holders of our Common Stock are
entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the
event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets
that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the Common
Stock. The Common Stock has no pre-emptive, subscription or conversion rights and there are no redemption provisions applicable
to the Common Stock.
In addition, our authorized but
unissued common shares could be used by our Board of Directors for defensive purposes against a hostile takeover attempt, including
(by way of example) the private placement of shares or the granting of options to purchase shares to persons or entities sympathetic
to, or contractually bound to support, management. We have no such present arrangement or understanding with any person. However,
our Common Stock have been reserved for issuance upon exercise of stock purchase rights designed to deter hostile takeovers, commonly
known as a “poison pill.” See Note 16 -
Subsequent Event,
for further discussion.
Preferred Stock
As of December 31,
2016, no shares of our preferred stock were outstanding. However, on February 15, 2017, the Company’s Board of Directors
adopted a Rights Agreement. See Note 16 -
Subsequent Event,
for further discussion.
Our authorized preferred stock is
“blank check” preferred. Accordingly, subject to limitations prescribed by law, our Board is expressly authorized,
at its discretion, to adopt resolutions to issue shares of preferred stock of any class or series, to fix the number of shares
of any class or series of preferred stock and to change the number of shares constituting any series and to provide for or change
the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations
or restrictions thereof, including dividend rights (including whether the dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting
any series of the preferred stock, in each case without any further action or vote by our stockholders.
Unregistered Sales of Equity Securities
We closed a private offering of
959,924 units (“Units”) at a gross price per Unit of $0.55, in June 2015. Each Unit included one share of common stock,
par value $0.0001 per share (“Common Stock”), and a three-year warrant (a “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.
We paid placement agent cash fees of 13% or $68,785 of the aggregate proceeds that was received and will pay
5% of all amounts received upon the exercise of the Warrants. We also issued to the placement agent warrants to purchase shares
of Common Stock equal to 10% of the total shares sold in the offering, or 95,992 shares, at an initial exercise price of $0.75
per share, subject to adjustment for certain corporate transactions such as a merger, stock-split or stock dividend. The value
of the warrants was $14,866. The placement agent fees and the fair value of the warrants were offset against the proceeds in Additional
paid-in capital on our Consolidated Balance Sheets. In connection with this private offering, our placement agent agreement with
the placement agent was terminated.
We described this sale of Units
in
Part II. Other Information, Item 2
in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015
that was filed with the Securities and Exchange Commission.
The offering of the Units was made
in a transaction that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities
Act”), pursuant to Section 4(a)(2) thereof and the provisions of Regulation D that is promulgated under the Securities Act.
Note 11—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 1,040,784 and 377,977 for the years ended December 31, 2016 and 2015, respectively. Weighted average
unvested restricted stock awards outstanding as of December 31, 2016, are included in the computation of our diluted EPS for the
year ended December 31, 2016. For the years ended December 31, 2015, weighted average unvested restricted stock awards outstanding
as of December 31, 2015, are not included as a component of diluted EPS as they are anti-dilutive due to net loss position during
that year.
The calculations of basic and diluted
EPS are as follows:
|
|
|
Year Ended December 31, 2016
|
|
|
Year Ended December 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
|
|
$
|
3,881
|
|
|
|
22,133
|
|
|
|
|
|
|
$
|
(2,726
|
)
|
|
|
20,910
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(182
|
)
|
|
|
(1,041
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
3,699
|
|
|
|
21,092
|
|
|
$
|
0.18
|
|
|
$
|
(2,726
|
)
|
|
|
20,910
|
|
|
$
|
(0.13
|
)
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
182
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
1,041
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(192
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
3,689
|
|
|
|
22,133
|
|
|
$
|
0.17
|
|
|
$
|
(2,726
|
)
|
|
|
20,910
|
|
|
$
|
(0.13
|
)
|
Note 12—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 consolidated balance sheets on a recurring
basis, and their level within the fair value hierarchy as of December 31, 2016 and 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 December 31, 2016
|
|
Warrant derivative liabilities
|
|
$
|
108,809
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
108,809
|
|
|
As of December 31, 2015
|
|
Warrant derivative liabilities
|
|
$
|
27,266
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,266
|
|
See Note – 13
Derivative Liability,
for further discussion.
Note 13—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
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.42
|
|
|
$
|
0.25
|
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
1.20
|
%
|
|
|
1.31
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Volatility factor
|
|
|
55
|
%
|
|
|
68.8
|
%
|
|
|
61.0
|
%
|
|
Term
|
|
|
3 years
|
|
|
|
1.5 years
|
|
|
|
2.5 years
|
|
As of December 31, 2016 and 2015, the fair value of the total warrants' derivative liability was $108,809
and $27,266, respectively, and recorded in other accrued expenses in the Consolidated Balance Sheets. We recognized a loss on change
of fair value of the derivative liability of $81,543 and a gain on change of fair value of the derivative liability of $136,266
for the years ended December 31, 2016 and 2015, respectively, which is recorded in Other income, net in the Consolidated Statements
of Operations and Comprehensive Income (Loss).
The following table summarizes the derivative liability included in the consolidated balance sheet:
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
27,266
|
|
|
Loss on change of fair value
|
|
|
81,543
|
|
|
Balance at December 31, 2016
|
|
$
|
108,809
|
|
The following table summarizes information about warrants
outstanding as of December 31, 2016:
|
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
|
Weighted-average exercise price
|
|
$
|
0.75
|
|
|
Remaining life (in years)
|
|
|
1.50
|
|
Note 14—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:
|
|
|
Years Ended December 31,
|
|
|
As a percentage of total revenue
|
|
2016
|
|
|
2015
|
|
|
U.S.
|
|
|
61.4
|
%
|
|
|
66.8
|
%
|
|
Canada
|
|
|
3.8
|
%
|
|
|
6.4
|
%
|
|
U.K.
|
|
|
19.9
|
%
|
|
|
19.9
|
%
|
|
Other foreign markets
|
|
|
14.9
|
%
|
|
|
6.9
|
%
|
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating results for the segments
are as follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Segment revenue
|
|
(In thousands)
|
|
|
United States
|
|
$
|
54,746
|
|
|
$
|
58,258
|
|
|
Canada
|
|
|
3,396
|
|
|
|
5,600
|
|
|
U.K.
|
|
|
17,747
|
|
|
|
17,306
|
|
|
Other foreign markets
|
|
|
13,307
|
|
|
|
5,997
|
|
|
Total consolidated revenue
|
|
$
|
89,196
|
|
|
$
|
87,161
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
|
United States
|
|
$
|
12,959
|
|
|
$
|
14,210
|
|
|
Canada
|
|
|
(40
|
)
|
|
|
1,079
|
|
|
U.K.
|
|
|
2,942
|
|
|
|
1,763
|
|
|
Other foreign markets
|
|
|
1,667
|
|
|
|
(3,831
|
)
|
|
Total consolidated gross profit
|
|
$
|
17,528
|
|
|
$
|
13,221
|
|
* Segment gross profit is calculated
as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Years Ended December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
|
United States
|
|
$
|
122
|
|
|
$
|
154
|
|
|
Canada
|
|
|
4
|
|
|
|
5
|
|
|
U.K.
|
|
|
20
|
|
|
|
26
|
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
146
|
|
|
$
|
185
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
|
United States
|
|
$
|
12,331
|
|
|
$
|
13,537
|
|
|
Canada
|
|
|
730
|
|
|
|
846
|
|
|
U.K.
|
|
|
3,508
|
|
|
|
4,672
|
|
|
Other foreign markets
|
|
|
3,795
|
|
|
|
2,070
|
|
|
Total consolidated identifiable assets
|
|
$
|
20,364
|
|
|
$
|
21,125
|
|
For both the years ended December 31,
2016 and 2015, our long-lived assets in the U.S. were approximately $1.2 million in each period. For both the years ended
December 31, 2016 and 2015, our international long-lived assets were less than $0.1 million in each period.
Note 15—Commitments and Contingencies
Licensing agreements.
On
April 22, 2014, we entered into an agreement with RDOC to settle certain claims we had against RDOC, Robert Kiyosaki, and Darren
Weeks arising out of RDOC’s, Kiyosaki’s, and Weeks’s promotion of a series of live seminars and related products
known as
Rich Dad:GEO
that we alleged infringed on our exclusive rights under the 2013 License Agreement between the Company
and RDOC (the “GEO Settlement Agreement”). In the GEO Settlement Agreement, RDOC, Kiyosaki, and Weeks agreed to terminate
any further activity in furtherance of the
Rich Dad:GEO
program. In addition, RDOC agreed, among other things, to (i) amend
the 2013 License Agreement to halve the royalty payable by us to RDOC to 2.5% for the whole of 2014, (ii) cancelled approximately
$1.3 million in debt owed by us to RDOC, and (iii) reimburse us for the legal fees we incurred in the matter. In addition, RDOC’s
right to appoint one member of our Board of Directors previously continued under the 2013 License Agreement was cancelled.
The 2013 License Agreement and the
GEO Settlement Agreement were assigned to our wholly owned subsidiary, Legacy Education Alliance Holdings, Inc. on September 10,
2014.
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 Consolidated Statement of Operations and Comprehensive Income (Loss) for the years ended
December 31, 2016 and 2015 were $4.3 million and $5.4 million, respectively.
Operating leases.
We lease
office space for administrative and training requirements. These leases expire through February 2019 and some of them have
renewal options and purchase options. In addition, certain office space leases provide for rent adjustment increases. The accompanying
Consolidated Statements of Operations and Comprehensive Income (Loss) reflect rent expense on a straight-line basis over the term
of the lease.
Rent expense for the years ended
December 31, 2016 and 2015 was approximately $0.8 million and $1.0 million, respectively. Except for a condominium lease with
our Chief Executive Officer, there are no other related party leases.
At December 31, 2016, future
remaining minimum lease commitments for all non-cancelable operating leases are as follows (in thousands):
|
2017
|
|
$
|
720
|
|
|
2018
|
|
|
438
|
|
|
2019
|
|
|
50
|
|
|
Total minimum lease payments
|
|
$
|
1,208
|
|
Purchase commitments
. From
time to time, the Company enters into non-cancelable commitments to purchase professional services, Information Technology licenses
and support, and training courses in future periods. The amounts of these non-cancelable commitments made by the Company at December
31, 2016 were approximately $0.7 million. There were no purchase commitments made by the Company at December 31, 2015.
Custodial and Counterparty Risk
.
The Company is subject to custodial and other potential forms of counterparty risk in respect of a variety of contractual and
operational matters. In the course of ongoing company-wide risk assessment, management monitors the Company 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 December 31, 2016 and 2015
were $3.1 million and $2.9 million, respectively. These balances are included on the Consolidated Balance Sheets in restricted
cash in 2016 and 2015. 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 December 31, 2016
and 2015, we did not have a CDAR balance.
Litigation.
Tigrent Group
Inc., Rich Dad Education, LLC, and Tigrent Enterprises Inc. v. Cynergy Holding, LLC, Bank of America, N.A., BA Merchant Services,
LLC, BMO Harris Bank, N.A. and Moneris Solutions Corporation
, was originally filed in the U.S. District Court for the Eastern
District of New York (No. 13 Civ. 03708) on June 28, 2013, but, due to a challenge to federal jurisdiction, was subsequently recommenced
in the Supreme Court of New York, County of Queens (No. 703951/2013), on September 19, 2013. In the lawsuit, we are seeking,
among other things, recovery of the $8.3 million in reserve funds withheld from us in connection with credit card processing agreements
executed with the Defendant credit card processing entities as well as with Process America (“PA”), a so-called “Independent
Sales Organization” that places merchants with credit card processors. The Amended Complaint alleges that the Defendants
breached their contractual obligations to us under our credit card processing agreements by improperly processing and transferring
our reserve funds to PA. We allege that Bank of America and BA Merchant Services are liable for a portion of our total damages
arising from these breach of contract claims (approximately $4.7 million), while Cynergy, Harris Bank, and Moneris are liable for
the total damages of approximately $8.3 million. We also allege that Cynergy, Harris Bank and Moneris committed common law
fraud and negligent misrepresentation by failing to disclose to us the unauthorized processing and transfers to PA notwithstanding
their knowledge of the mishandling of funds and of the fact that PA had failed to maintain the reserve funds as required under
the agreements. Pursuant to both of these claims, we allege that we are entitled to recover the full amount of our damages,
as well as, with respect to the fraud claim and punitive damages. Discovery in the proceeding is complete. On June 3, 2016, the
Court denied motions for summary judgment filed by the Defendants on our causes of action. The Defendants filed appeals of the
denial of their summary judgment motions with the Appellate Division, Second Division of the New York Supreme Court. Briefs have
been filed by the parties and we await the setting of oral argument.
Tigrent Group Inc. v. Process
America, Inc.,
Case No 1:12-cv-01314-RLM, filed March 16, 2012 in the U.S. District Court for the Eastern District of New York.
In this case we sought the return of the $8.3 million credit card merchant reserve account deposit held by Process America, a so-called
“Independent Sales Organization” that places merchants with credit card processors. On November 12, 2012, PA filed
for bankruptcy protection in the U.S. Bankruptcy Court for the Central District of California (“Bankruptcy Court.”)
On December 3, 2012, the Bankruptcy Court obtained jurisdiction of our dispute with PA. On June 21, 2013, the Tigrent Group filed
its proof of claim with Bankruptcy Court in the amount of $8.3 million, which claim has not been ruled on by the Court
On September 28,
2016, our affiliates TIGE and Legacy Education Alliance Holdings, Inc. (“Holdings”) entered into a Settlement Agreement
and General Release (“Settlement Agreement”) with Drevid, LLC; Michael Schlosser; Rebecca Schlosser; Peter Guitierrez;
Ana Guitierez; Ignacio Guigou; and GGE, LLC (collectively the “Drevid Parties”) that resolved two lawsuits that arose
out of the our investment in certain real property in Lee County, Florida known as Tranquility Bay, viz.,
Tranquility Bay of
Southwest Florida, LLC v
.
Gulf Gateway Enterprises, et al
., Case No. 11-CA-000342 filed January 28, 2011 in the
20
th
Judicial Circuit, Lee County, FL Civil Division and
Tranquility Bay of Southwest Florida, LLC v. Michael A.
Schlosser et al
., Case No. 14-CA-003160, filed October 30, 2014 in the Circuit Court of the 20
th
Judicial Circuit
for Lee County, Florida (collectively, the “Tranquility Bay Litigation”). Under the terms of the Settlement Agreement,
Holdings conveyed to Drevid, LLC Holdings’s membership interest in Tranquility Bay of Southwest Florida, LLC, a Florida
limited liability company with no on-going business activity (“TBSWFL”), without warranty or recourse regarding the
assets and liabilities of TBSWFL in exchange for a settlement and release by the Drevid Parties of all claims against TIGE, Holdings,
and other related entities and persons, including, but not limited to, claims brought by the Drevid Parties in the Tranquility
Bay Litigation. In addition, under the terms of the Settlement Agreement, we received the sum of $45,634 in settlement of an unsatisfied
judgment obtained by us in the 2011 case, above, the Drevid Parties are obligated to indemnify us against any claims that might
be brought against us by the party to which we transferred Tranquility Bay real property in 2010 up to maximum amount of $450,000,
and we are entitled to receive $300,000 from the proceeds of the sale of the Tranquility Bay real property if the Drevid Parties
are successful in obtaining control of such property in separate litigation to which we are not a party.
Aloia and Roland , LLP v. Anthony
Scott Dunlap, Dunlap Enterprises, LLC, Tranquility Bay of Pine Island, LLC and Tranquility Bay of Southwest Florida
, LLC, in
the 20
th
Judicial Circuit for Lee County Florida to (i) enforce the terms of a promissory note in the principal amount
of $0.1 million allegedly issued by our affiliate, TBSWF, in payment of attorneys fees allegedly owed by TBSWF to the plaintiff,
plus interest and late fees through the date of filing in the combined amount of $0.4 million and (ii) to foreclose on a mortgage
placed by Aloia and Roland, LLP on the real property that was owned by TBSWF and transferred in 2010. As a result of the Settlement
Agreement entered into with Drevid Parties as referenced in the preceding paragraph, we no longer have an interest in the entity
that is a party to this lawsuit.
Watson v. Whitney Education Group,
Inc. Russ Whitney, United Mortgage Corporation, Gulfstream Realty and Development, Inc. Douglas Realty, Inc. and Paradise Title
Services
, Inc., first filed September 21, 2007 in the in 20
th
Judicial Circuit, Lee County, FL, Case No. 07-CA-011207;
Huron River Area Credit Union v. Jeffrey Watson/ Watson v. Whitney Education Group, Inc. and Russell Whitney
, Case No. 2008-CA-5870-NC;
and
Huron River Area Credit Union v. Jeffrey Watson/ Watson v. Whitney Education Group, Inc. and Russell Whitney,
Case No.
2008-CA-5877-NC, both filed June 6, 2008 in the 12
th
Judicial Circuit, Sarasota County, FL Civil Division. In these
related cases, Jeffrey Watson (“Watson”) alleged against a subsidiary of the Company causes of action based upon losses
Watson alleges he incurred as the result of his purchase of real property from Gulfstream Realty and Development, an entity affiliated
with Mr. Whitney, and with whom we had a student referral agreement. On February 6, 2017, we entered into a Settlement Agreement
and General Release whereby all claims against the Company and Mr. Whitney were fully and finally settled and released, and all
three cases dismissed with prejudice without any admission of wrongdoing in exchange for the payment of $30,000 by the Company
to the Plaintiff.
We are involved from time to time in routine legal matters incidental to our business, including disputes
with students and requests from state regulatory agencies. Based upon available information, we believe that the resolution of
such matters will not have a material adverse effect on our consolidated financial position or results of operations.
Note 16—Subsequent Event
On February 15,
2017, the Board of Directors of the Company approved the adoption of a Rights Agreement between the Company and VStock Transfer,
LLC, as Rights Agent (as amended from time to time, the “Rights Agreement”). The Company entered into the Rights
Agreement on February 16, 2017. Refer to Form 8-K dated February 17, 2017 for additional information.
We have evaluated significant events
and transactions that occurred after the balance sheet date through March 31, 2017 and determined that there were no other events
or transactions that would require recognition or disclosure in our consolidated financial statements for the year ended December 31,
2016.