UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10
GENERAL
FORM FOR REGISTRATION OF SECURITIES
PURSUANT
TO SECTION 12(b) OR 12(g) OF
THE
SECURITIES EXCHANGE ACT OF 1934
LEGACY EDUCATION ALLIANCE, INC.
(Exact
name of registrant as specified in its charter)
39-2079974
(I.R.S.
Employer Identification No.)
Nevada
(State
or Other Jurisdiction of Incorporation of Organization)
1612
Cape Coral Parkway East, Cape Coral, FL 33904
(Address
of principal executive offices) (ZIP Code)
(239)
542-0643
(Registrant’s
telephone number, including area code)
Copies
of correspondence to:
Gregory
C. Yadley, Esq.
Shumaker,
Loop & Kendrick, LLP
101
E. Kennedy Blvd., Ste. 2800
Tampa,
FL 33602
Telephone:
(813) 229-7600
Securities
to be registered pursuant to Section 12(b) of the Act:
None
Securities
to be registered pursuant to Section 12(g) of the Act:
Common
Stock
(Title
of Class)
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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Accelerated filer
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☐
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Non-accelerated filer
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☐ (Do not check if a smaller reporting company)
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Smaller reporting company
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☒
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Emerging growth company
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☐
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If an emerging growth company, indicate by check mark
if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act. ☐
TABLE
OF CONTENTS
Forward-looking
Statements
This
registration statement contains “forward-looking statements” (within the meaning of the Private Securities Litigation
Reform Act of 1995) that are based on current expectations, estimates, forecasts, and projections, our beliefs, and assumptions
made by us, including (i) our strategies regarding growth, including our intention to develop new products; (ii) our financing
plans; (iii) trends affecting our financial condition or results of operations; (iv) our ability to continue to control costs
and to meet our liquidity and other financing needs; and (v) our ability to respond to changes in customer demand domestically
and internationally, including as a result of standardization. In addition, we may make other written or oral statements, which
constitute forward-looking statements, from time to time. Words such as “may,” “expects,” “projects,”
“anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
variations of such words, and similar expressions are intended to identify such forward-looking statements. Similarly, statements
that describe our future plans, objectives or goals also are forward-looking statements. These statements are not guarantees of
future performance and are subject to a number of risks and uncertainties, including those discussed below and elsewhere in this
report. Our actual results may differ materially from what is expressed or forecasted in such forward-looking statements, and
undue reliance should not be placed on such statements. All forward-looking statements are made as of the date hereof, and we
undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Factors
that could cause actual results to differ materially from what is expressed or forecasted in such forward-looking statements include,
but are not limited to: (i) conditions in the capital markets, including the interest rate environment and the availability of
capital; (ii) changes in the competitive marketplace that could affect our revenue and/or cost bases, such as increased competition
and lack of qualified marketing, management or other personnel; (iii) product sales mix and the geographic mix of sales nationally
and internationally, and those described in the “Risk Factors” section.
ITEM
1—BUSINESS
Our
Corporate History and Background
Legacy
Education Alliance, Inc. (the “Company”) was incorporated on November 23, 2010 in Nevada under the name Streamline
Resources, Inc. Our name was subsequently changed to Priced In Corp (“PRCD”) on April 24, 2012. Prior to the merger
discussed below, we were a shell corporation with nominal operating activity.
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.
At
the effective time of the Merger (the “Effective Time”):
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PRCD
amended and restated its certificate of incorporation and bylaws, which included an increase in our authorized stock to 220
million shares (200 million shares of Common Stock and 20 million shares of preferred stock);
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PRCD
changed its name from “Priced In Corp” to “Legacy Education Alliance, Inc.”;
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All
of the shares of Common Stock, par value $0.01 per share, of Legacy Holdings outstanding at the Effective Time were converted
and exchanged into 16,000,000 shares of our Common Stock, par value $0.0001 per share (“Common Stock”), and were
held by TIGE.
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As
a result of the Merger, TIGE owned approximately 80% of Legacy with the then remaining outstanding shares (3,997,500) held by
the existing PRCD shareholders.
There
was no cash consideration exchanged in the Merger. In accordance with the terms and conditions of the Merger Agreement, PRCD agreed
to pay TIGE taxes and related liabilities and other specified costs and expenses, including certain administrative and related
expenses that have been or will be from time to time incurred by TIGE that are related to TIGE’s investment in PRCD (including
the cost of preparing and distributing reports regarding our business and financial condition to its shareholders), its administrative
costs and expenses, and taxes, other than income taxes arising from dividends or distributions by us to TIGE. All shares of PRCD
Common Stock issued in connection with the Merger are restricted securities, as defined in paragraph (a) of Rule 144 under the
Securities Act of 1933, as amended (the “Securities Act”). Such shares were issued pursuant to an exemption from the
registration requirements of the Securities Act, under Section 4(a)(2) of the Securities Act and the rules and regulations promulgated
thereunder.
The
Merger was accounted for as a “reverse merger” and recapitalization since, immediately following the completion of
the transaction, the holders of TIGE’s stock had effective control of PRCD. In addition, TIGE controlled the surviving entity
through control of Legacy’s Board of Directors as a result of the appointment of the existing directors of TIGE to the four
board seats of Legacy. Additionally, all of TIGE’s officers and senior executive positions continued on as management of
the surviving entity after consummation of the Merger. For accounting purposes, Legacy Holdings was deemed to be the accounting
acquirer in the transaction and, consequently, the transaction was treated as a recapitalization of PRCD. Accordingly, Legacy
Holdings’ assets, liabilities and results of operations became the historical financial statements of the registrant, and
the Company’s assets, liabilities and results of operations were consolidated with PRCD effective as of the date of the
closing of the Merger. Prior to the Merger, PRCD was a “shell” corporation with nominal assets, liabilities and operating
activity. No step-up in basis or intangible assets or goodwill was recorded in this transaction.
On
February 14, 2017, TIGE completed the distribution of 15,998,326 shares of Common Stock in Legacy approved by the Board of Directors
of TIGE on October 4, 2016. Pursuant to the distribution, 1.00105 shares of Legacy Common Stock were distributed for each share
of stock held in TIGE.
For
a further discussion of the Merger and its effects on our business, please see the information contained in our Current Report
on Form 8-K, filed on November 10, 2014 and the related amendments thereto.
Presentation
of Financial Statements
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.
This
Form 10 includes financial statements and related notes that present the consolidated financial position, results of operations,
comprehensive income (loss), and cash flows of Legacy and its subsidiaries.
Our
Strategy
Our
objective is to be the leading global provider of services and products that enable individuals from all walks of life, regardless
of their current economic situation and education background, to take control of their financial futures and enable them to achieve
financial freedom.
Our
strategy is focused primarily on the following areas:
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Continued
development of our U.S. businesses
. We will continue our focus on U.S. service offerings in an attempt to improve our
revenue and expand our offerings as appropriate, including e-learning and other electronic format offerings and the development
of new brands.
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Development
of our International market
. 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.
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Security
and longevity of our brands
. We operate under 10 different brands. This provides us the flexibility to provide our services
through different demographics, price points and sales channels. This strategy of going to market with multiple brands allows
us to protect the individual brands and to provide brand diversification if a particular brand enters a difficult phase. This
strategy also allows us to manage individual brand-fatigue while maintaining overall market share and meeting competition.
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Fulfilling
our customer obligations
. We intend to optimize the pace and improve the cost efficiency with which we fulfill our long
term customer commitments. We have:
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expanded
the options for course fulfillment in order to reduce the number of expired contracts; by increasing the number of courses
offered through electronic media and via the internet;
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implemented
an improved outreach program that involves contacting our customers to help them manage their course schedules;
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Increased
the number of symposiums we hold globally, which we believe will play a significant role in our business model going forward.
Symposiums allow us to hold multiple Elite classes in one location resulting in cost savings based on economies of scale.
These events have been well received by our customers, providing them with networking opportunities as well as bonus events
and activities that have enhanced their experience.
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Enhanced
eLearning
. We intend to continue developing and promoting interactive and online distributed course content and enhanced
technology platforms capable of streaming video, interactive e-learning, and distributed e-learning. We have been developing
our social and brand presence internationally.
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Consistent
quality assurance
. We believe that to be an effective provider of training we need to ensure that our course offerings
meet our strict quality assurance guidelines. We will continue to monitor and enforce standards for marketing, sales presentations,
and training delivery throughout our organization.
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Continued
professional development.
We will continue to identify, recruit and retain a team of trainers, mentors and coaches who
possess practical, hands-on experience in their areas of expertise.
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Recent
Developments
On
February 14, 2017, TIGE completed the distribution of 15,998,326 shares of Common Stock in Legacy approved by the Board of Directors
of TIGE on October 4, 2016. Pursuant to the distribution, 1.00105 shares of Legacy Common Stock were distributed for each share
of stock held in TIGE.
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.
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 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.
The
proportion of our total revenue attributable to each segment is as follows:
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Years Ended
December 31,
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As a percentage of total revenue
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2016
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2015
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U.S.
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61.4
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%
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66.8
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%
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Canada
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3.8
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%
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6.4
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%
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U.K.
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19.9
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%
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19.9
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%
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Other foreign markets
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14.9
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%
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6.9
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%
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Total consolidated revenue
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100
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%
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100
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%
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Years Ended
December 31,
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Segment revenue
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2016
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2015
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(In thousands)
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United States
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$
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54,746
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$
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58,258
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Canada
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3,396
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5,600
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U.K.
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17,747
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17,306
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Other foreign markets
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13,307
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5,997
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Total consolidated revenue
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$
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89,196
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$
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87,161
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See
the caption Revenue, in “
Item 2 – FINANCIAL INFORMATION - Management’s Discussion and Analysis of Financial
Condition and Results of Operations,”
for further information.
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:
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Rich
Dad® Education: Our flagship brand based on the teachings of Robert Kiyosaki, an entrepreneur, investor, educator, and
author of
Rich Dad Poor Dad
. Mr. Kiyosaki has written more than 15 books with combined sales of more than 26 million
copies.
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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.
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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.
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Brick
Buy Brick™: Initially launched in the UK, Brick Buy Brick is now also available in the U.S. Canada and the other foreign
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.
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Building
Wealth 5PC: 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.
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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.
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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.
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The
Independent Woman™: Developed by women for women, is 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.
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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.
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Elite
Business Star™: Elite Business Star is designed to help individuals grow their business through a variety of business
strategies including marketing, asset protection, and business financing.
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Marketing
Our
Rich Dad brands, along with our other brands, are the foundation for our marketing efforts. These brands provide credibility and
sustainability within our media mix to promote live events and online trainings. Live onsite two-hour preview events are offered
weekly in four to six markets in the U.S., Canada and the U.K. Marketing these events is primarily done online through banner
ads, text ads, and emails. Direct mail, radio, television, public relations, social media and print advertising are also used
to obtain event registrations. We enter into marketing and other agreements with other organizations to market our products and
services to the public internationally.
We
offer people the opportunity to attend a free preview event or they can advance directly to one of our three-day basic training
classes. People who enroll and attend the basic training class receive reference materials relevant to the subject matter to be
taught at the class. The basic training course is usually held over a weekend within two to four weeks of the initial free preview
workshop. Our experience is that offering the free preview as a first step, is an effective way to introduce to our students the
methodology of investing, as well as to market and sell our three-day basic training courses.
Marketing
efforts continue to those customers who choose to continue their education with a three-day basic training class. Welcome letters,
product kits that include manuals, books and audio files, an online reference library, and reminder communication letters are
all branded for consistency and credibility. Customers at the three-day basic training may choose to continue on with their education
through our elite training classes and mentorships offered during the basic training classes.
Elite
training classes are fulfilled through various delivery methods to meet the needs of our customers. We have re-branded our Elite
division from Rich Dad Education to Elite Legacy Education to expand our market reach. As a result of these re-branding efforts,
we utilize multiple front end brands to market into our Elite division but Rich Dad will remain the primary marketing channel
for attracting customers to our Elite courses in the U.S.
We
also market for new customers who prefer to learn online and provide people the opportunity to attend free ninety-minute live
online webinars that are held weekly on six different topics. Webinars are marketed via online banner ads, affiliate marketing,
email campaigns, social media and other media methods. Customers can also skip the entry-leveled free webinars to attend paid
online trainings that utilize similar marketing methods to attract attendees.
Training
Programs
We
have three significant categories for our programs:
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Basic
training live and online courses,
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Elite
level live and online training courses, and
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Individualized
mentoring programs.
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Basic
Training Courses
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Rich
Dad® Education
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Rich
Dad Stock Education
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Making
Money from Property with Martin Roberts
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Brick
Buy Brick
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Building
Wealth™
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Robbie
Fowler Property Academy
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Women
In Wealth
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The
Independent Woman
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Trade
Up Investor Education
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Elite
Business Star
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Elite
Training Courses
Customers
who attend our basic training courses may choose to continue with Elite training courses in real estate, financial markets investing
and/or entrepreneurship skills. The Elite training courses of study include:
Elite
Real Estate Courses
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Elite
Financial Markets Courses
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Momentum
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Master
Trader™
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Tax
and Asset Protection
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Options
1
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Wholesale
Buying
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FOREX
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Discount
Notes & Mortgages
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Options
2
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Banking
Relationships & Short Sale Systems
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Elite
Options
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Mobile
Homes
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FACT
(Futures & Commodity Trading)
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Foreclosure
Strategies
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Asset
Protection
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Fund,
Fix and Flip
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Elite
FOREX
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Marketing
Today
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Income
Properties
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Tax
Liens
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Lease
Options
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Commercial
Real Estate
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Business
Financing & Factoring
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Domestic
Land Development
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Creative
Real Estate Financing
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Buy,
Rent and Hold (Canada)
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Buy,
Fix and Sell (Canada)
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Creative
Financing (Canada)
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Distressed
Property & Repossessions (U.K.)
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Asset
Protection (U.K.)
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Lease
Options/Purchase Options (U.K.)
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Buy
to Let (U.K.)
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Houses
of Multiple Occupancy (U.K.)
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Auction
Training (U.K.)
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Social
Housing (U.K.)
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Creative
Finance (U.K.)
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Elite
Business Entrepreneurship Courses
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Business
Tax and Asset Protection
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Top
Branding and Marketing Strategies
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Strategies
for Raising Capital
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Mind
Over Money
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Customers
may access training content through multiple delivery channels, including:
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Live
instruction in classroom settings;
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Onsite
mentoring;
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Telephonic
mentoring;
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Electronic
access to live online or pre-recorded on-demand programs;
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Electronic
media;
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Symposiums;
and
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Webinars.
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Through
strategic partners, customers can purchase a license to use supporting software for real estate, financial markets investing or
Elite Business Star software. With either software program, a subscription-based data service is available for purchase which
allows customers to interactively determine investment options and make better informed decisions about potential investments.
Individualized
Mentoring and Coaching Programs
We
offer live, real time, one-on-one mentoring for Real Estate, Business and the Financial Markets that are tailored to meet students’
individual goals and needs. Real Estate mentoring is offered on site at the student’s chosen location, while Financial Market
mentoring can be provided either on-site or remotely. Mentoring is intended to give the student a professional assessment of his
or her individual goals and experience and to help the student build an investment plan that can be put into action. Mentoring
sessions are generally 2 to 4 days in length.
Coaching
programs are typically sold in a number of different subject areas and generally delivered in 10 to 16 weekly one-on-one telephone
sessions. Some of the topics include Real Estate Coaching, Financial Markets Coaching and Business Coaching. A set curriculum
approach is generally used. Each module comes with assignments, exercises and reading materials to be completed between sessions.
Geographic
Diversification
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.
Competition
During
our more than 20-year history, we have competed with a number of organizations within the U.S. and internationally. Our primary
competitors are Fortune Builders, Armando Montelongo, Zurixx, Dean Graziosi, Flip Advantage, Flipping Formula, Winning the Property
War, Yancey Co, Nick Virtucci and Success Resources. Some of these competitors have established brands through a media-based relationship,
such as HGTV, and use television programs to promote their brands. We believe that Success Resources is our only significant global
competitor in the large event business.
Generally,
competitive factors within the proprietary training market include:
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The
range and depth of course offerings;
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The
quality of trainers;
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The
quality of reference materials provided in connection with course studies; and
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We
believe that the range and depth of our course offerings, the quality of our trainers and reference materials are comparable or
superior to those of our competitors. Typically, our trainers for our Elite courses have been active investors in their chosen
field, have been trained by us and, to a large degree, are previous customers of our programs. Trainers for our Elite courses
are chosen based on their knowledge and experience with the coursework covered, and are further qualified by meeting knowledge
standards developed internally.
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 worldwide (the “Rich Dad
Intellectual Property Rights”):
Effective
September 1, 2013, we entered into new licensing and related agreements with Rich Dad Operating Company, LLC
(“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, 2015 with Robbie Fowler that supplements an earlier
November 2, 2012 Agreement and a Talent Endorsement Agreement with an effective date of January 1, 2013, both 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 Fowler License Agreement will expire by its terms on January 1, 2020. 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 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. We entered into a subsequent Talent Endorsement Agreement with an effective date of April 20
th
,
2017 (the “Supplemental Agreement”) that grants us the non-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 of educational training, products and materials
related to real estate, securities and options trading and investment, as well as general wealth building and investing strategies,
principles and motivation. The term of the license granted under the Supplemental Agreement is for an initial six months period
expiring on October 20, 2017 and will continue thereafter unless (i) terminated by one party upon the event of certain specified
defaults of the party, or (ii) by either party without cause upon thirty (30) days prior written notice to the other party. Under
the Supplemental 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.
Employees
and Independent Contractors
As
of December 31, 2016 we had approximately 203 full-time employees of whom 157, or 77%, were located in the U.S. and the remaining
23% were located in the United Kingdom, Canada, South Africa or Hong Kong. In addition, we employ part-time employees in various
capacities and independent contractors who are trainers, coaches or mentors. Our employees are not represented by a labor union,
and we believe our relations with our employees are satisfactory. Our independent contractors are either paid commissions based
upon the dollar value of the courses purchased by customers at our free preview workshops and basic training courses, or are paid
fixed fees for teaching and mentoring Elite courses. Independent contractors are required to execute agreements with us that set
forth their commission structures and contain customary confidentiality and non-competition provisions.
Available
Information
We
electronically file reports with the Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to such reports. The public may read and copy any materials that
we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet
site that contains reports and information statements, and other information regarding issuers that file electronically with the
SEC at
http://www.sec.gov.
Additionally, information about us, including our reports filed with the SEC, is available through
our web site at
http:// www.legacyeducationalliance.com.
Such reports are accessible at no charge through our web site
and are made available as soon as reasonably practicable after such material is filed with or furnished to the SEC. Our website
and the information contained on that site, or connected to that site, are not incorporated by reference into this report.
ITEM
1A.—RISK FACTORS
Risks
Related to Our Business
The
termination of our license agreement to use the Rich Dad brand would materially adversely impact our business, financial condition
and results of operations, given the high concentration of sales from course offerings under the Rich Dad
®
Education
Brand
Our
Rich Dad® Education
real estate and financial market course offerings accounted for approximately 73.9% of our total
cash sales and approximately 74.7% of our total revenue in 2016. Our 2013 License Agreement with Rich Dad
®
expires
on August 31, 2018. While the term of that agreement automatically renews for successive one-year periods thereafter, the licensor
can terminate the agreement by providing timely written notice of termination prior to the expiration of the then current term.
The license agreement can also be terminated for a default by us. See the section entitled “Licensing Agreements with the
Rich Dad Parties” above, for a discussion of the terms of this significant agreement. Termination or non-renewal of our
2013 License Agreement or termination of our relationship with the Rich Dad Parties would have a material adverse effect on our
business, financial condition and results of operations.
If
revenues from our Rich Dad brand decline, this could materially adversely impact our business, financial condition and results
of operations.
The
Rich Dad® Education
brand accounts for a significant portion of our total revenue. If revenue from the
Rich Dad®
Education
Brand declines, and is not offset by revenue increases in our other brands it could have a material adverse effect
on our business, financial condition and results of operations. Further, a decrease in popularity or public acceptance of Robert
Kiyosaki or the
Rich Dad™ Education
Brand would have a significant impact on our business, financial condition and
results of operations. Additionally, if Mr. and Mrs. Kiyosaki, the founders of the
Rich Dad™ Education
Brand, do
not spend as much time in the public eye, it could impact the popularity of the
Rich Dad™ Education
Brand and consequently
impact our sales of
Rich Dad™ Education
products.
The
termination of certain material license agreements could materially adversely impact our business, financial condition and results
of operations.
The
Fowler License Agreement and the License Agreement and Supplemental Agreement with Martin Roberts may be terminated by the respective
licensors upon short notice. We use the intellectual property licensed to us under these agreements to conduct the sale of Robbie
Fowler-branded property courses and affiliated products in the U.K. If Mr. Roberts or Mr. Fowler terminated their relationship
with us, it could have a material adverse effect on our business, financial condition and results of operations.
Our
cash flows from operations declined in 2016 versus our cash flows from operations in 2015. If this trend continues in the future,
it could impair our ability to fund our working capital needs and adversely affect our financial condition.
Management
currently projects that our available cash balances will be sufficient to maintain our operations during 2017 and beyond. However,
when considering all of the applicable operational and external risks and uncertainties, including, but not limited to cash generated
from new and ongoing business initiatives, our ability to effectively execute our strategies, and potential current and future
litigation matters, we believe that we may not be adequately capitalized. We may seek to obtain additional capital through the
issuance of equity or debt, which may dilute the equity holdings of our current investors. In addition, we may seek to borrow
additional capital from institutional and commercial banks or other sources to fund future operations on terms that may include
restrictive covenants, liens on assets, high effective interest rates, and repayment provisions that reduce our cash resources
and limit future access to capital markets. We do not currently have any commitments for future external funding. Our ability
to raise additional capital may be adversely impacted by the economic environment. If we cannot generate the required cash to
sustain operations or obtain additional capital on acceptable terms, we will need to make further revisions to our business plan,
sell or liquidate assets, or limit our operations.
Our
operations outside the United States subject us to additional risks inherent in international operations.
We
currently operate in the United Kingdom, Canada, Hong Kong, South Africa and other international markets in addition to our U.S.
operations and we plan on continuing our international market expansion going forward. As a result, we face risks that are inherent
in international operations, including:
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Complexity
of operations across borders;
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Currency
exchange rate fluctuations;
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Restrictions
on the movements of cash;
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Obtaining
and maintaining bank and merchant processing accounts;
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Multiple
and possibly overlapping or conflicting tax laws;
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Applicability
of training concepts to foreign markets;
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Compliance
with foreign regulatory requirements including banking, cash repatriation, and data protection;
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Political
instability; and
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Price
controls or restrictions on exchange of foreign currencies.
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If
we are unable to successfully manage these and other factors, our business could be adversely affected and our financial condition
and results of operations could suffer.
Additionally,
in June 2016, voters in the U.K. approved the exit of that country from the E.U. (“Brexit”), and the British government
has indicated that it intends to negotiate the withdrawal of the U.K. from the E.U. based on the results of this vote. The Brexit
vote has created significant economic uncertainty in the U.K. and in EMEA, which may negatively impact our business in those regions.
In addition, the terms of the U.K.’s withdrawal from the E.U., currently unknown but once negotiated, could potentially
disrupt the markets we serve and the tax jurisdictions in which we operate and adversely change tax benefits, currency exchange
rates, or liabilities in these or other jurisdictions, and may cause us to lose customers, suppliers, and employees. In addition,
Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U.
laws to replace or replicate.
Uncertain
economic conditions and other changes experienced by our customers, including the willingness to trade or invest in securities
or real estate, could influence their willingness to spend their discretionary income on our course offerings and products, and
could materially adversely impact our business, financial condition and results of operations.
Uncertain
economic conditions may affect our customers’ discretionary income, access to credit and ability and willingness to purchase
our course offerings and products. Economic conditions and consumer spending are influenced by a wide range of factors that are
beyond our control. These conditions include but are not limited to:
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Demand
for our course offerings and related products;
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Conditions
in the securities and investment markets;
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Conditions
in the real estate market;
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Availability
of mortgage financing and other forms of credit and consumer credit;
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General
economic and business conditions;
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Adverse
changes in consumer confidence levels;
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General
political developments; and
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Adverse
weather or natural or man-made disasters.
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Any
decreased interest in real estate investing in the future could impact
Rich Dad® Education
and our other brands. Additionally,
a prolonged economic downturn or uncertainty over future economic conditions, particularly in the U.S., could increase these effects
on our business. In addition, our ongoing business expansion efforts and related operational changes add to the difficulty and
risk of forecasting the timing, magnitude and direction of operational and financial outcomes with respect to our business.
We
face significant competition in our markets.
Our
success depends upon our ability to attract customers by providing high-quality courses and training materials, as well as to
attract and retain quality trainers to provide those courses. The market for training courses for specific business issues, such
as real estate or stock market investing, is intensely competitive. If we are unable to successfully compete, our business, financial
condition and results of operations will be materially harmed. Certain competitors may be able to secure alliances with customers
and affiliates on more favorable terms, devote greater resources to marketing and promotional campaigns and devote substantially
more resources to course development than we can. In addition, it is possible that certain competitors, or potential competitors,
could reduce their pricing to levels that would make it difficult for us to compete. Increased competition may result in reduced
operating margins, as well as loss of market share and brand recognition. Our success is dependent on our ability to successfully
attract customers to programs that they feel will enhance their knowledge and enhance their earning power. Their level of satisfaction
with our course offerings affects our reputation as they tell others about their experience. Our business could suffer if we fail
to deliver quality programs at acceptable price points.
In
addition, in order to compete effectively in our markets, we may need to change our business in significant ways. For example,
to respond to market competition we may change our pricing, product, or service offerings, make key decisions about technology
changes or marketing strategies, or acquire additional businesses or technologies. Any of these actions could hurt our business,
financial condition and results of operations. Competitors continually introduce new programs that may compete directly with our
offerings that may make our offerings uncompetitive or obsolete. Larger competitors may have superior abilities to compete for
customers and skilled professionals, reducing our ability to deliver our quality offerings to our customers.
Laws
and regulations can affect the operation of our business and may limit our ability to operate in certain jurisdictions.
Federal,
state, and international laws and regulations impact our operations and may limit our ability to obtain authorization to operate
in some states or countries. Many federal, state, and international governmental agencies assert authority to regulate providers
of investment training programs. Failure to comply with these regulations could result in legal action instituted by the jurisdictions,
including cease and desist and injunctive actions. In the event we are subject to such legal action, our reputation could be harmed
and the demand for our course offerings and products could be significantly reduced. 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. Future regulatory changes with respect to the various topics of our courses or the
investment techniques we teach, could also impact the content of our course offerings, which in turn, could negatively impact
future sales.
We
could have liability or our reputation could be damaged if we do not protect customer data or if our information systems are breached.
We
are dependent on information technology networks and systems to process, transmit and store electronic information and to communicate
among our locations around the world and with our customers. Security breaches of this infrastructure could lead to shutdowns
or disruptions of our systems and potential unauthorized disclosure of confidential information. We are also required at times
to manage, utilize and store sensitive or confidential customer or employee data. As a result, we are subject to numerous U.S.
and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state
laws governing the protection of individually identifiable information. If any person, including any of our associates, negligently
disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates
that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or
confidential customer or employee data, whether through systems failure, employee negligence, fraud or misappropriation, could
damage our reputation and cause us to lose customers.
We
are highly dependent on our senior management, high performing sales speakers and course trainers, and if we are not able to retain
them or to recruit and retain additional qualified personnel, our business could suffer.
We
are highly dependent upon our senior management, including Anthony C. Humpage, our Chief Executive Officer. The loss of services
of Mr. Humpage or other members of our senior management or high performing sales speakers or course trainers could have a material
adverse effect on our business, financial condition and results of operations.
We
may choose to increase our management personnel. For example, we may need to obtain certain additional functional capability,
including regulatory, sales, business development, and quality assurance and control, either by hiring additional personnel or
by outsourcing these functions to qualified third-parties. We may not be able to engage these third-parties on terms favorable
to us. Also, we may not be able to attract and retain qualified personnel on acceptable terms given the competition for such personnel
among companies that operate in our markets. If we fail to identify, attract, retain and motivate highly skilled personnel, or
if we lose current employees or contractors, it could have a material adverse effect on our business, financial condition and
results of operations. We currently do not maintain key man insurance on any member of our senior executive management team.
Our
ability to sell and fulfill courses may be affected by adverse weather, natural disaster, strikes or other unpredictable events.
Adverse
weather, natural disasters, external labor disruptions and other adverse events may affect our ability to conduct our business,
and could have a material adverse effect on our business, financial condition and results of operations. Severe weather or natural
disasters, such as hurricanes, blizzards, floods and earthquakes, may reduce the ability of our students to travel to our events.
These natural disasters may also disrupt the printing and transportation of the materials used in our direct mail campaigns. Furthermore,
postal strikes could occur in the countries where we operate which could delay and reduce delivery of our direct mail marketing
materials. Transportation strikes could also occur in the countries where we operate, adversely affecting our ability to conduct
business.
Risks
Related to Ownership of Our Common Stock
We
may issue shares of preferred stock that subordinate your rights and dilute your equity interests.
We
may need to raise investment capital for us to successfully execute our business strategy and it may be preferable or necessary
to issue preferred stock to investors. Preferred stock may grant the holders certain preferential rights in voting, dividends,
liquidation or other rights in preference over a company’s Common Stock.
The
issuance by us of preferred stock could dilute both the equity interests and the earnings per share of existing holders of our
Common Stock. Such dilution may be substantial, depending upon the number of shares issued. The newly authorized shares of preferred
stock could also have voting rights superior to our Common Stock, and in such event, would have a dilutive effect on the voting
power of our existing stockholders.
Any
issuance of preferred stock with voting rights could, under certain circumstances, have the effect of delaying or preventing a
change in control of us by increasing the number of outstanding shares entitled to vote and by increasing the number of votes
required to approve a change in control of us. Shares of voting or convertible preferred stock could be issued, or rights to purchase
such shares could be issued, to render more difficult or discourage an attempt to obtain control of us by means of a tender offer,
proxy contest, merger or otherwise. Such issuances could therefore deprive our stockholders of benefits that could result from
such an attempt, such as the realization of a premium over the market price that such an attempt could cause. Moreover, the issuance
of such shares of preferred stock to persons friendly to our Board of Directors could make it more difficult to remove incumbent
managers and directors from office even if such change were to be favorable to stockholders generally.
Our
Common Stock has a limited trading market, which could affect your ability to sell shares of our Common Stock and the price you
may receive for our Common Stock.
Our
Common Stock is currently traded in the over-the-counter market and “bid” and “asked” quotations regularly
appear on the OTCQB maintained by OTC Markets, Inc. under the symbol “LEAI”. Currently there is limited trading volume
in our securities. We cannot predict the extent to which investors’ interest in our Common Stock will provide an active
and liquid trading market, which could depress the trading price of our Common Stock and could have a long-term adverse impact
on our ability to raise capital in the future. We may be vulnerable to investors taking a “short position” in our
Common Stock, which would likely have a depressing effect on the price of our Common Stock and add increased volatility to our
trading market. The volatility of the market for our Common Stock could have a material adverse effect on our business, financial
condition and results of operations. There cannot be any guarantee that an active trading market for our securities will develop
or, if such a market does develop, will be sustained. Accordingly, investors must be able to bear the financial risk of losing
their entire investment in our Common Stock.
Being
an SEC reporting company imposes costs and compliance risks.
Compliance
with the periodic reporting requirements required by the SEC consumes a considerable amount of both internal, as well external,
resources and represents a significant cost for us. Our management will be required to administer appropriate programs and policies
in responding to increased legal, regulatory compliance, and reporting requirements, and any failure to do so could lead to the
imposition of fines and penalties and harm our business.
In
addition, if we are unable to continue to devote adequate funding and the resources needed to maintain such compliance, while
continuing our operations, we may be in non-compliance with applicable SEC rules or the securities laws, and be delisted from
the OTCQB or other market we may be listed on, which would result in a decrease in or absence of liquidity in our Common Stock,
and potentially subject us and our officers and directors to civil, criminal and/or administrative proceedings and cause us to
voluntarily file for deregistration of our Common Stock with the Commission.
Future
sales of our Common Stock in the public market could lower the price of our Common Stock and impair our ability to raise funds
in future securities offerings.
We
may decide to raise additional capital through the sale of our securities. Future sales of a substantial number of shares of our
Common Stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market
price of our Common Stock and could make it more difficult for us to raise funds in the future through the sale of our securities.
In
the event we raise capital through a private placement of our Common Stock and/or other securities convertible into shares of
our Common Stock, such offering could dilute both the equity interests and the earnings per share of our stockholders. Such dilution
may be substantial, depending upon the number of shares issued in any potential private placement.
The
market price of our Common Stock may be volatile and may be affected by market conditions beyond our control.
The
market for our Common Stock is characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our
share price is attributable to a number of factors. First, our shares of Common Stock are sporadically and thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in
the event that a large number of shares of our Common Stock are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact on its share price. Second, we are a speculative
or “risky” investment due to our limited operating history, and uncertainty of future market acceptance for our potential
products. As a consequence of this enhanced risk, more risk-averse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly
and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control
and may decrease the market price of our Common Stock, regardless of our operating performance. We cannot make any predictions
or projections as to what the prevailing market price for our Common Stock will be at any time, including as to whether our Common
Stock will sustain its current market price, or as to what effect the sale of shares or the availability of Common Stock for sale
at any time will have on the prevailing market price.
The
market price of our Common Stock is subject to significant fluctuations in response to, among other factors:
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changes
in our financial performance or a change in financial estimates or recommendations by securities analysts;
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announcements
of innovations or new products or services by us or our competitors;
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the
emergence of new competitors or success of our existing competitors;
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operating
and market price performance of other companies that investors deem comparable;
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changes
in our Board of Directors or management;
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sales
or purchases of our Common Stock by insiders;
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commencement
of, or involvement in, litigation;
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changes
in governmental regulations; and
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general
economic conditions and slow or negative growth of related markets.
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In
addition, if the market for stock in our industry, or the stock market in general, experience a loss of investor confidence, the
market price of our Common Stock could decline for reasons unrelated to our business, financial condition or results of operations.
If any of the foregoing occurs, it could cause the price of our Common Stock to fall and may expose us to lawsuits that, even
if unsuccessful, could be costly to defend and distract our Board of Directors and management.
We
do not intend to pay dividends for the foreseeable future, and you must rely on increases in the market prices of our Common Stock
for returns on your investment.
For
the foreseeable future, we intend to retain any earnings to finance the development and expansion of our business, and we do not
anticipate paying any cash dividends on our Common Stock. Accordingly, investors must be prepared to rely on sales of their Common
Stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not
purchase our Common Stock. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors
and will depend on our results of operations, financial condition, contractual restrictions, restrictions imposed by applicable
law and other factors our Board of Directors deems relevant.
We
are subject to penny stock regulations and restrictions and you may have difficulty selling shares of our Common Stock.
The
Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has
a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions.
Our Common Stock is a “penny stock”, and we are subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule.
This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established
customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income
exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make
a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior
to sale. As a result, this rule affects the ability of broker-dealers to sell our securities and affects the ability of purchasers
to sell any of our securities in the secondary market.
For
any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made
about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.
There
can be no assurance that our shares of Common Stock will qualify for exemption from the Penny Stock Rule. In any event, even if
our Common Stock were exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which
gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission
finds that such a restriction would be in the public interest.
In
addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (“
FINRA
”)
has adopted similar rules that may also limit a stockholder’s ability to buy and sell our Common Stock. FINRA rules require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment
is suitable for such customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers
to recommend that their customers buy our Common Stock, which may limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
Anti-takeover
provisions could limit the ability of a third party to acquire us.
In
February 2017, we adopted a shareholder rights plan that is scheduled to expire February 15, 2019. The purpose of the plan is
to protect the Company against unwanted share activity. The shareholder rights plan, commonly known as a “poison pill,”
gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's
shares. The plan is designed to ensure that the Board of Directors has sufficient time to consider any proposal from a third party
that might result in a change in control of the Company, make sure that all stockholders receive fair and equal treatment in the
event of any such a proposal, and encourage any potential acquirer to negotiate with the Board of Directors. In addition, the
plan will guard against partial tender offers, open market accumulations and other coercive tactics aimed at gaining control of
the Company without paying all stockholders a full control premium for their shares.
The
Nevada Revised Statutes, which is the general corporate law applicable to us, contain provisions governing acquisition of controlling
interest of us. These provisions provide generally that any person or entity that acquires a certain percentage of our outstanding
voting shares may be denied voting rights with respect to the acquired shares, unless the holders of a majority of the voting
power of us, excluding the shares that any such acquiring person or entity, an officer or a director of the corporation, and an
employee of the corporation exercises voting rights, elect to restore such voting rights in whole or in part. This provision of
the Nevada Revised Statutes could impede an acquisition of us even if a premium would be paid to our stockholders for their shares.
We
have only a limited ability to protect our intellectual property rights, which are important to our success.
Our
financial success depends, in part, upon our ability to protect our brand names, curriculums, and other proprietary and licensed
intellectual property. The existing laws of some countries in which we conduct business might offer only limited protection of
our intellectual property rights. To protect our intellectual property, we rely upon a combination of confidentiality policies,
nondisclosure, and other contractual arrangements, as well as copyright and trademark laws. The steps we take in this regard may
not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we might not be able
to detect unauthorized use of, or take appropriate and timely steps to enforce, our intellectual property rights, especially in
foreign jurisdictions. The loss of proprietary content or the unauthorized use of our intellectual property, including our brand
names, may create significant market confusion and resulting in greater competition, loss of revenue, and adverse publicity.
ITEM
2—FINANCIAL INFORMATION
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, 2016. 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.
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 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
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. 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.
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
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 foreign
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, is 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™: 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
February 14, 2017, TIGE completed the distribution of 15,998,326 shares of Common Stock in Legacy approved by the Board of Directors
of TIGE on October 4, 2016. Pursuant to the distribution, 1.00105 shares of Legacy Common Stock were distributed for each share
of stock held in TIGE.
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.
RESULTS
OF OPERATIONS
|
|
Years Ended December 31,
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
89,196
|
|
|
$
|
87,161
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
47,843
|
|
|
|
48,201
|
|
Advertising and sales expenses
|
|
|
19,484
|
|
|
|
20,293
|
|
Royalty expenses
|
|
|
4,341
|
|
|
|
5,446
|
|
General and administrative expenses
|
|
|
15,055
|
|
|
|
16,317
|
|
Total operating costs and expenses
|
|
|
86,723
|
|
|
|
90,257
|
|
Income (loss) from operations
|
|
|
2,473
|
|
|
|
(3,096
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Other income, net
|
|
|
472
|
|
|
|
392
|
|
Total other income
|
|
|
467
|
|
|
|
385
|
|
Income (loss) before income taxes
|
|
|
2,940
|
|
|
|
(2,711
|
)
|
Income tax benefit/(expense)
|
|
|
941
|
|
|
|
(15
|
)
|
Net income (loss)
|
|
$
|
3,881
|
|
|
$
|
(2,726
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.18
|
|
|
$
|
(0.13
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
0.17
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
21,092
|
|
|
|
20,910
|
|
Diluted weighted average common shares outstanding
|
|
|
22,133
|
|
|
|
20,910
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,881
|
|
|
$
|
(2,726
|
)
|
Foreign currency translation adjustments, net of tax of $0
|
|
|
988
|
|
|
|
1,310
|
|
Total comprehensive income (loss)
|
|
$
|
4,869
|
|
|
$
|
(1,416
|
)
|
Our
operating results are expressed as a percentage of revenue in the table below:
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
53.6
|
|
|
|
55.3
|
|
Advertising and sales expenses
|
|
|
21.8
|
|
|
|
23.3
|
|
Royalty expenses
|
|
|
4.9
|
|
|
|
6.2
|
|
General and administrative expenses
|
|
|
16.9
|
|
|
|
18.7
|
|
Total operating costs and expenses
|
|
|
97.2
|
|
|
|
103.5
|
|
Income (loss) from operations
|
|
|
2.8
|
|
|
|
(3.5
|
)
|
Other income
|
|
|
|
|
|
|
|
|
Other income, net
|
|
|
0.5
|
|
|
|
0.4
|
|
Total other income
|
|
|
0.5
|
|
|
|
0.4
|
|
Income (loss) before income taxes
|
|
|
3.3
|
|
|
|
(3.1
|
)
|
Income tax benefit/(expense)
|
|
|
1.1
|
|
|
|
—
|
|
Net income (loss)
|
|
|
4.4
|
%
|
|
|
(3.1
|
)%
|
Outlook
Cash
sales were $86.8 million for the year ended December 31, 2016 compared to $94.1 million for the year ended December 31, 2015,
a decrease of $7.3 million or 7.8%.
The decrease was driven primarily by a $12.8 million
decrease in our U.S. segment related to the effects of a sluggish U.S. economy and a $2.5 million decrease in our U.K. segment,
which was partially offset by an $8.2 million increase in our Other Foreign Markets segment. We believe that cash sales remain
an important metric when evaluating our operating performance. Pursuant to U.S. GAAP, w
e 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. Our students pay for their courses in full up-front or through payment agreements with independent third parties.
We
anticipate cash sales to increase throughout 2017, particularly as new brands gain greater traction in our more established markets,
and as we continue to 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:
|
|
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
|
%
|
|
|
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
|
|
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 $48.0 million and $54.6 million or as a percentage of total segment revenue was 87.7%
and 93.7% for the years ended December 31, 2016 and 2015, respectively. The majority 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 $54.8 million and $58.3 million or as a percentage of total
revenue was 61.4% and 66.8% for the years ended December 31, 2016 and 2015, respectively. The decrease
in
revenue of $3.5 million or 6.0% during the year ended December 31, 2016 compared to the same period in 2015, was due to the $6.0
million or 95.8% decline in revenue, as a result of the change in our revenue recognition policy with regards to DVD fulfillment
and decrease in recognition of revenue from expired contracts of $0.1 million or 1.4%, partially offset by increased attendance
(i.e. fulfillment) of $2.6 million or 6.1%.
Canada
Similar
to the U.S., our Canadian segment's revenue primarily consists of Rich Dad branded offerings. Revenue derived from the Rich Dad
brands was $3.0 million and $5.1 million or as a percentage of total segment revenue was 87.9% and 90.7% for the years ended December
31, 2016 and 2015, respectively. The majority pertained to real estate-related education, with the balance pertaining to financial
markets training.
The
Canadian
segment revenue was $3.4 million and $5.6 million or as a percentage of
total revenue was 3.8% and 6.4% for the years ended December 31, 2016 and 2015, respectively.
The
decrease in revenue of $2.2 million or 39.3% during the year ended December 31, 2016 compared to the same period in 2015, was
due to the decline in recognition of revenue from expired contracts of $1.4 million or 77.1%, due to the $0.6 million or 90.5%
decline in revenue, as a result of the change in our revenue recognition policy with regards to DVD fulfillment and $0.2 million
or 5% decline in revenue due to decreased attendance (i.e. 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 $5.4 million and $7.1 million or as a percentage of total segment revenue was 30.5% and 40.8% for
the years ended December 31, 2016 and 2015, respectively. The majority pertained to real estate-related education, with the balance
pertaining to financial markets training.
The
U.K.
segment revenue was $17.7 million and $17.3 million or as a percentage of total
revenue was 19.9% and 19.9% for the years ended December 31, 2016 and 2015, respectively.
The
increase of $0.4 million in revenue for the year ended December 31, 2016 compared to the same period in 2015, was due to increase
in recognition of revenue from expired contracts of $1.4 million or 60.5%, partially offset by decreased attendance (i.e. fulfillment)
of $1.0 million or 6.7%.
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 $10.2 million and $0.5 million
or as a percentage of total segment revenue was 76.8% and 9.0% for the years ended December 31, 2016 and 2015, respectively.
The
Other Foreign Markets segment revenue was $13.3 million and $6.0 million or as a percentage of total revenue was 14.9% and 6.9%
for the years ended December 31, 2016 and 2015, respectively. The increase in revenue of $7.3 million or 121.7% during the year
ended December 31, 2016 compared to the same period in 2015, was due to increased attendance (i.e. fulfillment) of $6.0 million
or 101.0% and increase in recognition of revenue from expired contracts of $1.3 million or 100.0%.
Year
Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenue
Revenue
was $89.2 million for the year ended December 31, 2016 compared to $87.2 million for the year ended December 31, 2015, an increase
of $2.0 million or 2.3%. The increase was due to increased attendance (i.e. fulfillment) of $7.5 million or 11.2% and the increase
in recognition of revenue from expired contracts of $1.1 million or 8.5%, partially offset by the decline in recognition of revenue
of $6.6 million or 95.3%, due to the change in our revenue recognition policy with regards to DVD fulfillment.
Cash
sales were $86.8 million for the year ended December 31, 2016 compared to $94.1 million for the year ended December 31, 2015,
a decrease of $7.3 million or 7.8%.
The decrease was driven primarily by a $12.8 million
decrease in our U.S. segment related to the effects of a sluggish U.S. economy and a $2.5 million decrease in our U.K. segment,
which was partially offset by an $8.2 million increase in our Other Foreign Markets segment.
Operating
Expenses
Total
operating costs and expenses were $86.7 million for the year ended December 31, 2016 compared to $90.3 million for the year ended
December 31, 2015, a decrease of $3.6 million or 4.0%. The decrease was due to a $1.2 million decrease in general and administrative
expenses, a $1.2 million decrease in royalty expense, a $0.8 million decrease in advertising and sales expenses, and a $0.4 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 $47.8 million for the year ended December 31, 2016 compared to $48.2 million for the year ended December 31, 2015, a decrease
of $0.4 million or 0.8%, 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 year ended December 31, 2016 compared to the year ended December
31, 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 Foreign 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 $19.5 million for the year ended December 31, 2016 compared to $20.3 million for the year ended December
31, 2015, a decrease of $0.8 million, or 3.9%. As a percentage of revenue, advertising and sales expenses were 21.8% and 23.3%
of revenue for the year ended December 31, 2016 and 2015, respectively, a decrease of 1.5%.
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 $4.3 million for the year ended December 31, 2016 compared to $5.5 million
for the year ended December 31, 2015, a decrease of $1.2 million, or 21.8%.
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 $15.1
million for the year ended December 31, 2016 compared to $16.3 million for the year ended December 31, 2015, a decrease of $1.2
million, or 7.4%. The decrease was primarily driven by lower compensation costs.
Income
tax expense
Income
tax benefit was $0.9 million for the year ended December 31, 2016, compared to income tax expense of $15.0 thousand for the year
ended December 31, 2015. 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 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.
Our
effective tax rate was (32.0%) and (0.6%) for the year ended December 31, 2016 and 2015, respectively. Our effective tax rates
differed from the U.S. statutory corporate tax rate of 35.0% primarily because of the mix of pre-tax income or loss earned in
certain jurisdictions and the change in our valuation allowance. See
Note 8 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 December 31, 2016 and December 31, 2015, a valuation allowance of $4.5 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 $2.7 million and $0.7 million for the year ended December 31, 2016 and 2015, respectively.
Net
income (loss)
Net
income
was $3.9 million or $0.18 per basic and
$0.17 per
diluted common share for the year ended December 31, 2016, compared to a net loss
of ($2.7) million or ($0.13) per basic and diluted common share for the year ended December 31, 2015, an increase in net income
of
$6.6 million
or $0.31 per basic and $0. 30 per diluted common share. Net income
for the year ended December 31, 2016 was positively impacted by the increase in revenue primarily due to increased attendance
(i.e. fulfillment) of $7.5 million or 11.2% and decreases in operating costs and expenses of $3.6 million or 4.0%, due to decreases
in general and administrative expenses of $1.2 million, royalty expense of $1.2 million, advertising and sales expenses of $0.8
million, direct course expenses of $0.4 million and a $0.9 million increase in income tax benefit
related to the release
of certain valuation allowances against certain deferred tax assets in the U.S. and U.K. segments.
Critical
Accounting Policies
The
preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect
reported amounts and related disclosures. In addition to the estimates presented below, there are other items within our consolidated
financial statements that require estimation, but are not deemed critical as defined below. We believe these estimates are reasonable
and appropriate. However, if actual experience differs from the assumptions and other considerations used, the resulting changes
could have a material effect on the financial statements taken as a whole.
Management
believes that the following policies and estimates are critical because they involve significant judgments, assumptions and estimates.
Management has discussed the development and selection of the critical accounting estimates with the Audit Committee of our Board
of Directors and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates.
Long-Lived
Assets
We
evaluate the carrying amount of our long-lived assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. We record an impairment loss when indications of impairment are present
and undiscounted cash flows estimated to be generated by those assets are less than assets’ carrying value. We evaluate
the remaining life and recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. At such time, we estimate the future cash flows expected from the use of the assets
and their eventual dispositions and, if lower than the carrying amounts, adjust the carrying amount of the assets to their estimated
fair value. Because of our changing business conditions including current and projected level of income, business trends, prospects
and market conditions, our estimates of cash flows to be generated from our operations could change materially, resulting in the
need to record additional impairment charges.
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 presented in our consolidated financial statements are shown net of any sales tax.
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, accounting in interim periods, disclosures and transition.
Accounting
for Litigation and Settlements
We
are involved in various legal proceedings. Due to their nature, such legal proceedings involve inherent uncertainties including,
but not limited to, court rulings, negotiations between affected parties, and the possibility of governmental intervention. Management
assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances as
appropriate. While certain of these matters involve substantial amounts, management believes, based on available information,
that the ultimate resolution of such legal proceedings will not have a material adverse effect on our financial condition or results
of operations.
The
critical accounting policies discussed above are not intended to be a comprehensive list of all of our accounting policies. In
many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted
in the U.S., with no need for management’s judgment in their application. There are also areas in which management’s
judgment in selecting any available alternative would not produce a materially different result.
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):
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Net cash provided by (used in) operating activities
|
|
|
(1,563
|
)
|
|
|
2,780
|
|
Net cash used in investing activities
|
|
|
(55
|
)
|
|
|
(81
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(10
|
)
|
|
|
450
|
|
Effect of foreign currency exchange rates
|
|
|
(1,542
|
)
|
|
|
(1,200
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,170
|
)
|
|
|
1,949
|
|
Operating
Cash Flows and Liquidity
Net
cash used in operating activities was $1.6 million in the year ended December 31, 2016 compared to net cash provided by operating
activities of $2.8 million in the year ended December 31, 2015, representing a period-over-period decrease of $4.4 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 $0.1 million in the year ended December 31, 2016 and $0.1 million in the year ended
December 31, 2015, representing our purchases of property and equipment.
Financing
Cash Flows
Our
consolidated capital structure as of December 31, 2016 and December 31, 2015 was 100.0% equity.
Net
cash used in financing activities totaled $10.0 thousand in the year ended December 31, 2016 compared to net cash provided by
financing activities of $0.5 million in the year ended December 31, 2015, representing a period-over-period decrease in cash from
financing activities of $0.5 million, primarily due to $0.5 million of net proceeds we received from a private offering of securities
in the year ended December 31, 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 December 31, 2016 and 2015, our consolidated current deferred revenue was $54.4 million and
$60.7 million, respectively.
Our
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 slightly higher restricted cash balances.
Off-Balance
Sheet Arrangements
We
are not a party to any material off-balance sheet arrangements as of December 31, 2016.
ITEM
3—PROPERTIES
The
following table sets forth our office locations as of December 31, 2016:
Purpose
|
|
Location
|
|
Own/lease
|
|
Approximate square footage
|
|
|
Lease expiration
|
Executive offices
|
|
Cape Coral, FL
|
|
Own
|
|
|
40,734
|
|
|
—
|
U.S. operations and telemarketing headquarters
|
|
Salt Lake City, UT
|
|
Lease
|
|
|
6,294
|
|
|
Nov. 2018
|
Canadian headquarters
|
|
Vaughn, Ontario
|
|
Lease
|
|
|
5,100
|
|
|
Feb. 2019
|
U.K. headquarters and training center
|
|
Richmond, Surrey
|
|
Lease
|
|
|
4,226
|
|
|
Various
|
South Africa corporate administration
|
|
Johannesburg, South Africa
|
|
Lease
|
|
|
205
|
|
|
May. 2018
|
Hong Kong corporate administration
|
|
Causeway Bay, Hong Kong
|
|
Lease
|
|
|
208
|
|
|
Jan. 2019
|
|
|
|
|
|
|
|
56,767
|
|
|
|
We
are the sole beneficiary of a land trust that owns the land and building of our executive offices in Cape Coral, Florida. James
E. May, our Executive Vice President and General Counsel, serves as the trustee. Our executive office building is approximately
40,734 square feet and is situated on approximately 4.5 acres.
We
lease approximately 6,294 square feet of office space in Salt Lake City, Utah for our U.S. operations and telemarketing headquarters.
The lease expires in November 2018 and rent is payable monthly at rates increasing from $8,890 to $10,306 over the term of the
lease.
We
lease approximately 5,100 square feet of office space in Ontario, Canada for our Canadian headquarters. The lease expires in February
2019 and rent is payable monthly at rates increasing from approximately $3,000 to $3,600 over the term of the lease.
We
lease approximately 4,226 square feet of office space which is used for both corporate administration and training purposes in
Richmond, Surrey. We lease various rooms in the same facility with different lease terms with the latest expiration date in February
2017. The total monthly rent is approximately $69,460.
We
lease approximately 205 square feet of office space which is used for corporate administration purposes in Johannesburg, South
Africa. The lease expires in May 2018. The total monthly rent is approximately $2,100.
We
lease approximately 208 square feet of office space which is used corporate administration purposes in Causeway Bay, Hong Kong.
The lease expires in January 2019. The total monthly rent is approximately $4,500.
We
believe that our facilities are adequate for our current purposes.
ITEM
4—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the beneficial common stock ownership as of April 26, 2017 (i) of each person known by us to be the
beneficial owner of five percent or more of our common stock, (ii) by each of our directors and Named Executive Officers and directors
and (iii) by all directors and executive officers as a group.
As
used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act
of 1934 as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment
power (including the power to dispose or direct the disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, including a right to acquire such power(s) during the next 60 days.
Unless
otherwise noted, beneficial ownership consists of sole ownership, voting and investment rights. This table is based upon information
supplied to us by our Named Executive Officers, directors and principal stockholders and/or contained in reports filed by these
persons with the SEC.
Name
|
|
Amount of
Beneficial
Ownership of
Common
Stock
|
|
|
Percent of
Common Stock
(1)
|
|
Christian Baeza
(2)
|
|
|
198,750
|
|
|
|
*
|
|
James K. Bass
(3)
|
|
|
177.611
|
|
|
|
*
|
|
Iain Edwards
(2)
|
|
|
314,375
|
|
|
|
1.4
|
|
Peter W. Harper
(3)
|
|
|
195,000
|
|
|
|
*
|
|
Anthony C. Humpage
(2)(4)
|
|
|
3,802,312
|
|
|
|
16.8
|
|
James E. May
(2)
|
|
|
530,206
|
|
|
|
2.3
|
|
Cary Sucoff
(3)
|
|
|
373,750
|
|
|
|
1.7
|
|
All directors and executive officers as a group
|
|
|
5,822,913
|
|
|
|
25.7
|
|
|
|
|
|
|
|
|
|
|
Other owners of more than 5% of outstanding Common Stock
|
|
|
|
|
|
|
|
|
Day One LLC
(5)
|
|
|
2,279,530
|
|
|
|
10.1
|
|
Ingrid Whitney
(6)
|
|
|
2,279,799
|
|
|
|
10.1
|
|
Lazarus Investment Partners LLLP
(7)
|
|
|
1,352,760
|
|
|
|
6.0
|
|
Lazarus Macro Micro Partners LLP
(7)
|
|
|
6,507
|
|
|
|
6.0
|
|
*
|
Less than 1%
|
(1)
|
Based
on 22,630,927 shares of Common Stock issued and outstanding as of April 26, 2017.
|
(2)
|
Includes
restricted common shares that are held in escrow and which vest in three equal annual installments but which may be voted
in the interim.
|
(3)
|
Includes
awards of restricted common shares for independent director services that are held in escrow and which vest in two equal annual
installments but which may be voted in the interim.
|
(4)
|
Includes
shares held by McDowell Sonoran LLC and Pemberton Holdings, LLC which may be deemed to be beneficially owned by Anthony C.
Humpage. The address of McDowell Sonoran LLC and Pemberton Holdings LLC is 3225 McLeod Drive, Suite 100, Las Vegas, NV 89121.
|
(5)
|
The
address of Day One LLC is 4818 Coronado Parkway, Cape Coral, FL 33904.
|
(6)
|
The
address of Ingrid Whitney is 2228 SW 17
th
Avenue, Cape Coral, FL 33991.
|
(7)
|
See
Schedule 13G filed on 2/3/2017. The address of Lazarus 3200 Cherry Creek South Drive, Suite 670, Denver, Colorado 80209.
|
Change
in Control
On October 4, 2016,
the Board of Directors of TIGE authorized and approved a distribution to its shareholders of 15,999,838 shares of the Company’s
Common Stock. As a result of the distribution, TIGE shareholders became direct owners of Legacy common stock. Prior to the distribution,
TIGE owned more than 70% of the issued and outstanding shares of Legacy’s common stock. Subsequent to the TIGE distribution,
no person has power to direct or cause the direction of the management and polices of Legacy by virtue of ownership of voting securities.
ITEM
5—DIRECTORS AND EXECUTIVE OFFICERS
Set
forth below is the name, age and present principal occupation or employment, and material occupations, positions, offices or employments
for the past five years of our current directors and executive officers:
Officers
and Directors
Name
|
|
Age
|
|
Position
|
James
K. Bass
|
|
60
|
|
Director
and Chairman
|
Peter
W. Harper
|
|
55
|
|
Director
|
Anthony
Humpage
|
|
61
|
|
Chief
Executive Officer and Director
|
Cary
Sucoff
|
|
65
|
|
Director
|
James
E. May
|
|
62
|
|
Executive
Vice President and General Counsel
|
Christian
Baeza
|
|
54
|
|
Chief
Financial Officer
|
Ian
Edwards
|
|
49
|
|
Chief
Operating Officer
|
Martin
Foster
|
|
44
|
|
Vice
President of International
|
Martin
Ehrhard
|
|
39
|
|
Vice
President of Information Technology
|
Stacey
Perkins
|
|
37
|
|
Vice
President of Global Marketing
|
James
K. Bass
Mr.
Bass has served as a Director since November 10, 2014, and as a director of Tigrent Inc. since May 3, 2010. He has served as Chairman
of the Board of Directors since July 2015. From September 2005 to June 2009, Mr. Bass served as the Chief Executive Officer and
a director of Piper Aircraft, Inc., a general aviation manufacturing company. He served as the Chief Executive Officer and a director
of Suntron Corporation, a provider of high mix electronic manufacturing services, from its incorporation in May 2001 until May
2005, and as Chief Executive Officer of EFTC Corporation, a subsidiary of Suntron Corporation, from July 2000 until April 2001.
From 1992 to July 2000, Mr. Bass was a Senior Vice President of Sony Corporation. Prior to that, Mr. Bass spent 15 years in various
manufacturing management positions at the aerospace group of General Electric Corporation. Since September 2000, Mr. Bass has
served on the Board of Directors of TTM Technologies, Inc., a manufacturer of complex printed circuit boards used in sophisticated
electronic equipment, where he serves as Chairman of the Compensation Committee. Additionally, since October 2010, Mr. Bass has
been a director at Mercury Computer Systems, a provider of open, commercially developed, application-ready, multi-INT subsystems
for the Intelligence, Surveillance and Reconnaissance (ISR) market. Mr. Bass holds a B.S.M.E. degree from Ohio State University
(1979).
Peter
W. Harper
Mr.
Harper was appointed to the Board and chairman of the Company’s Audit Committee on December 1, 2015. He has more than 30
years of public, private-equity backed and global company experience in the retail, insurance, electronic manufacturing and consumer
products industries. He is currently the Chief Financial Officer at DEI Holdings and Sound United, a global manufacturer and distributor
of high end home audio products. Prior to joining DEI/Sound United in January of 2017, Mr. Harper was the President and CFO of
Twin-Star International from 2013 to 2016, CFO at Scottsdale Insurance from 2005 to 2012 and Suntron Corporation from 2000 to
2005. Prior to that he had senior finance positions at Iomega Corporation and General Electric. Mr. Harper received a BS from
San Jose State University in 1983.
Anthony
C. Humpage
Mr.
Humpage, 61, has served as our Chief Executive Officer and Director since November 10, 2014. Mr. Humpage has been the CEO of our
predecessor since September 4, 2012 and has been a member of the Board of Directors of our predecessor since May 23, 2012. Mr.
Humpage was previously Chief Financial Officer of the Rich Dad Operating Company, LLC, which licenses its Rich Dad® brand
to us. Mr. Humpage was previously Executive Vice President and Chief Financial Officer of Government Liquidation, the leading
online auction website for federal government surplus and scrap assets, from 1998 to 2011. Earlier in his career, he worked in
the construction materials, manufacturing and professional service industries specializing in early-stage and troubled organizations.
A certified public accountant and a British chartered accountant, Mr. Humpage holds a MBA Finance degree from Western International
University (1995).
Cary
Sucoff
Mr.
Sucoff was first elected to the Board on July 16, 2015 and has over 30 years of securities industry experience encompassing supervisory,
banking and sales responsibilities. Mr. Sucoff currently owns and operates Equity Source Partners, LLC an advisory and consulting
firm. He has participated in the financing of hundreds of public and private companies. Mr. Sucoff currently serves on the following
Boards of Directors: Contrafect Corp. (CFRX), root9B Technologies (RTNB), Legacy Education Alliance, Inc. (LEAI), Greenwood Hall,
Inc. (ELRN) and First Wave Technologies. In addition, Mr. Sucoff currently serves as a consultant to Sapience Therapeutics. Mr.
Sucoff is past President of New England Law/Boston and has been a member of the Board of Trustees for over 25 years. He is the
Chairman of the Endowment Committee. Mr. Sucoff received a B.A. from SUNY Binghamton (1974) and a J.D. from New England School
of Law (1977) where he was the Managing Editor of the Law Review and graduated Magna Cum Laude. Mr. Sucoff has been a member of
the Bar of the State of New York since 1978.
Iain
Edwards
Mr.
Edwards, 49, has served as our Chief Operating Officer since November 10, 2014. Mr. Edwards has served as the Chief Operating
Officer of our predecessor since May 2013. Mr. Edwards joined the Company in 2002 as general manager of our U.K. office, and was
promoted to U.K. Managing Director in 2004 and to President of International Operations in 2006. From 1997 until 2002, Mr. Edwards
worked for and subsequently owned Jongor Limited, a single London Depot operation. Between 1991 and 1997, Mr. Edwards served time
in the British Army in various capacities. Mr. Edwards holds a B.A. in Business Studies from the University of Greenwich, London
(1991).
Christian
Baeza
Mr.
Baeza, 54, joined Legacy Education Alliance in April 2015. Prior to joining the company, Mr. Baeza held various senior finance
positions including Director of Financial Reporting and Assistant Corporate Controller at Kraton Performance Polymers, Inc. From
2003 to 2008 he held various finance positions at Spectra Energy Corporation. Mr. Baeza began his career as a member of the accounting
and auditing practice at Arthur Andersen LLP from 1995 to 1998. Mr. Baeza earned his B.B.A. degree in accounting from Florida
International University.
James
E. May
Mr.
May, 62, has served as our Chief Administrative Officer and General Counsel since November 10, 2014. Mr. May has served as the
Chief Administrative Officer of our predecessor since September 2009, and as the General Counsel of our predecessor since May
2009. Mr. May joined the Company in June 2007 as Assistant General Counsel. In his current role he is responsible for the Company’s
Legal, Human Resources and Compliance functions. Prior to joining the Company, he held the position of Associate General Counsel
with Gateway Computers, where he was, at various times, the chief legal counsel for the Gateway Country Stores retail division
and for the Business and Government Sales division, where he managed the Contract Management organization. Prior to that, he was
Vice President, Deputy General Counsel with Blockbuster Videos, Inc. in Ft. Lauderdale, Florida and Dallas, Texas where he was
the chief legal counsel for domestic store operations, including litigation management. Mr. May has a B.A. degree from American
University (1981) and a J.D. degree from Catholic University Law School (1984).
Martin
Foster
Mr.
Foster, 44, joined the Company in April 2002 as Event Manager of the UK division. During his time with the Company he has held
several positions including UK Operations Manager, UK General Manager and most recently Managing Director of the UK and International
divisions. Prior to joining the Company Mr. Foster lived and worked in South Africa where he held the position of Sales and Solutions
Manager (Africa) for a global internet solutions company. Mr. Foster studied Business through UNISA and IT through both Microsoft
and Compaq.
Martin
Ehrhard
Mr.
Ehrhard, 39, has served as the Vice President of Information Technology since November 2016. Mr. Ehrhard joined the company in
October 1998 and is an accomplished IT professional with two decades of security, engineering, and technology management experience.
Mr. Ehrhard is an avid student of technology and studied professionally through Microsoft Learning and Oracle Education.
Stacey
Perkins
Mrs.
Perkins, 37, began serving as Vice President of Global Marketing in 2016. She joined the company in 2004 and has managed various
departments in the company including Marketing, Event Planning, Product Development, Corporate Communications, and Shipping and
Logistics. She has over a decade of experience in the educational training seminar and services industry. A natural leader, her
greatest strengths include communication, brand psychology, brand strategy and creative marketing. Mrs. Perkins studied Business
Management at Santa Fe College.
ITEM
6—EXECUTIVE COMPENSATION
Director
Compensation
We
use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on the Board
of Directors. In setting director compensation, we consider the significant amount of time that directors expend in fulfilling
their duties to the Company as well as the skill-level required of members of the Board. We also consulted with an independent
compensation consultant and this compensation reflects his recommendations.
Our
employee directors do not receive any additional compensation for serving on the Board. During 2016, our only employee director
was Anthony C. Humpage.
Each
non-employee director received a quarterly retainer of $12,500 each of the quarters in fiscal year 2016. Non-employee directors
are reimbursed for expenses incurred in attending Board meetings.
James
K. Bass received an additional $5,000 per quarter for his services as Chairman of our Board of Directors in 2016 and received
an additional $3,750 per quarter for fiscal year 2016 for his services as Chairman of our Compensation Committee.
Peter
Harper received an additional $3,750 per quarter for his services as Chairman of our Audit Committee in 2016 and received an additional
$20,000 in 2016 for his services as Chairman of a special committee which the Company formed to consider a potential merger with
Tigrent Inc.
Cary
Sucoff received an additional $3,750 per quarter for his services as Chairman of our Nominating and Corporate Governance Committee
during 2016.
In
addition to receiving quarterly retainers, directors have been generally eligible to receive sign-on and annual equity awards
through stock or options. We have adopted an equity incentive plan that was approved by the stockholders at our annual meeting
of stockholders on July 16, 2015 for equity based incentives under the Company’s 2015 Equity Plan (the “2015 Incentive
Plan”).
Total
compensation attributable to each non-employee director during 2016, which excludes reimbursable expenses, was as follows:
Name
|
|
Fees
earned or
paid
in cash
($)
|
|
|
Stock
awards
($)
(1)(2)
|
|
|
Total
($)
|
|
James K. Bass
|
|
$
|
85,000
|
|
|
$
|
6,300
|
|
|
$
|
91,300
|
|
Peter Harper
|
|
$
|
85,000
|
|
|
$
|
6,300
|
|
|
$
|
91,300
|
|
Cary Sucoff
|
|
$
|
65,000
|
|
|
$
|
6,300
|
|
|
$
|
71,300
|
|
(1)
|
Each
non-employee director was granted restricted shares of common stock on August 19, 2016 which vest over two years.
|
(2)
|
Stock
awards are valued based on the closing price per share on the grant date.
|
On
March 17, 2017, and upon the recommendation of the Nominating and Governance Committee, the Board of Directors voted to increase
the annual equity component of Director compensation to a number of shares having a Fair Market Value (as defined by the Company’s
Incentive Plan approved by stockholders on July 16, 2015) from $15,000 to $20,000. The Nominating and Governance Committee determined
that the increase was appropriate after consultation with the Company’s outside compensation consultant and assessment of
the National Association of Corporate Directors annual Director Compensation Report. The amount of the cash stipend payable to
directors remained unchanged.
Executive
Compensation Program
Our
executive compensation program is determined and proposed by our Compensation Committee and is approved by our Board of Directors.
None of the Named Executive Officers are members of the Compensation Committee or otherwise had any role in determining the compensation
of other Named Executive Officers, although the Compensation Committee does consider the recommendations of our Chief Executive
Officer in setting compensation levels for our other executive officers.
Executive
Employment Agreements
In
October 2013, we entered into an employment agreement with Anthony C. Humpage, our Chief Executive Officer, with no specific
term. Each party has the right to terminate the agreement within the parameters outlined in the agreement. In exchange for
services rendered, Mr. Humpage is entitled to receive a base salary of $375,000 per year, subject to annual increases, and
is eligible for an annual incentive bonus based on defined performance targets, of up to 120% of the annual base salary. The
Company can terminate the agreement with cause, or upon a change in control, as defined in the agreement and under certain
circumstances, Mr. Humpage may be eligible to receive termination benefits.
In
addition to the annual incentive bonus, Mr. Humpage is eligible to receive:
Other
incentives based on the achievement of goals specified by our Compensation Committee;
Additional
discretionary bonuses from time to time as determined by our Compensation Committee; and
Reimbursement
for certain specified expenses.
Executive
Compensation Program Objectives and Overview
The
Compensation Committee conducts an annual review of our executive compensation programs to ensure that:
The
program is designed to achieve our goals of promoting financial and operational success by attracting, motivating and facilitating
the retention of key employees with outstanding talent and ability; and
The
program adequately rewards performance which is tied to creating stockholder value.
Our
current executive compensation program is based on three components, which are designed to be consistent with our compensation
philosophy: (1) base salary; (2) annual incentive bonuses; and (3) grants of stock options and restricted stock.
In
structuring executive compensation packages, the Compensation Committee considers how each component promotes retention and/or
motivates performance by the executive. Base salaries, perquisites and personal benefits, and severance and other termination
benefits are primarily intended to attract and retain highly qualified executives. We believe that in order to attract and retain
top executives, we need to provide them with compensation levels that reward their continued productive service. Annual incentive
bonuses are primarily intended to motivate our executive officers to achieve specific strategies and operating objectives, although
we believe they also help us to attract and retain top executives. Our long-term equity incentives are primarily intended to align
executive officers’ long-term interests with stockholders’ long-term interests, although we believe they also play
a role in helping us to attract and retain top executives. Annual bonuses and stock option or restricted stock grants are the
elements of our executive compensation program designed to reward performance and thus the creation of stockholder value.
We
view our current executive compensation program as one in which the individual components combine together to create a total compensation
package for each executive officer that we believe achieves our compensation objectives. In determining our current executive
compensation program and the amounts of compensation for each component of our program, the Compensation Committee evaluates the
current executive compensation data for companies in our industry. The Compensation Committee believes that our current executive
compensation program is appropriate based on the evaluation of the compensation paid by companies in our industry for similarly
situated employees.
Role
of Compensation Committee and Executive Officers in Compensation Decisions
The
role of our Compensation Committee is to oversee our compensation programs and retirement plans and policies and review and approve
all compensation decisions relating to the Company’s Named Executive Officers, including our Chief Executive Officer. Our
Compensation Committee reviews, and in consultation with the entire Board of Directors and our Chief Executive Officer (other
than with respect to his own compensation), makes all compensation decisions for the Named Executive Officers. The Compensation
Committee reviews and recommends and the independent members of the Board of Directors approves the annual compensation package
of our Chief Executive Officer.
Our
Compensation Committee intends to meet with our Chief Executive Officer at least annually to review the performance of the other
executive officers, receive the recommendations of the Chief Executive Officer on the executive officers compensation and approve
their annual compensation packages. This meeting is intended to include a review by the Chief Executive Officer of the performance
of each Named Executive Officer who reports directly to our Chief Executive Officer.
Setting
Executive Compensation
In
furtherance of the philosophy and objectives described above, in setting compensation for our executive officers, our Compensation
Committee considered data obtained from the consulting firm of Pearl Meyer & Partners, in addition to other factors, to assess
competitive pay levels and establish compensation targets for base salary, annual incentives and long-term incentives. The data
from the Pearl Meyer & Partners surveys reflects compensation practices of companies in the education industry with annual
revenue and free cash flow that are comparable to our own, and includes data for executives with responsibilities cutting across
the entire enterprise (“
Survey Group
”).
Base
Salary
We
provide our executive officers and other employees with a base salary designed to compensate them for the day-to-day services
rendered to us during the fiscal year. Our Compensation Committee reviews each executive officer’s salary and performance
annually. Market data from the Survey Group is used to determine base salary ranges for our executive officers based on the position
and responsibility. An executive officer’s actual salary relative to this competitive salary range varies based on the level
of his or her responsibility, experience, individual performance and internal pay-equity considerations. Specific salary increases
take into account these factors and the current market for management talent. Salary increases are considered by the Compensation
Committee each year.
Annual
Incentive Compensation
We
have an Executive Incentive Plan (the “
Bonus Plan
”) for our executive officers and other participating employees.
The Bonus Plan, administered by the Compensation Committee, provides that the Compensation Committee will determine the total
amount of performance incentive bonuses to be paid to participants under the Bonus Plan. Bonuses are based upon specific measures
of our financial performance and achievement of each participant’s agreed upon annual goals.
Specifically,
the Bonus Plan provides for target bonuses as a percent of each participant’s yearly salary.
The
target bonuses for our executive officers are as follows:
Chief
Executive Officer — 100%
Senior
Executive Officers — 50%
Vice
Presidents and key employees — 20% to 50, as specified
Junior
employees may participate in the plan as designated.
Payouts
under the Bonus Plan are subject to the approval of the Compensation Committee following the finalization of our annual financial
results and are based upon the following metrics: (i) Total Annual Cash Sales, (ii) Overall Adjusted EBITDA, (iii) increase in
Adjusted EBITDA and (iv) achievement of the participant’s individual goals.
Equity
Incentive Compensation
The
Company’s 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.
Deferred
Compensation Plans
We
do not have a deferred compensation plan.
Retirement
Benefits
We
have a 401(k) employee savings plan for eligible employees that provides for a matching contribution from us, determined each
year at our discretion. The Company made no matching contributions in 2016.
Medical,
Dental, Life Insurance and Disability Coverage
We
provide other benefits such as medical, dental and life insurance, and disability coverage to each Named Executive Officer in
benefits plans that are also provided to all eligible U.S. based salaried employees. Eligible employees can purchase additional
life, dependent life and accidental death and dismemberment coverage as part of their employee benefits package.
Deductibility
of Executive Compensation
Under
the Omnibus Budget Reconciliation Act of 1993, provisions were added to the Internal Revenue Code under Section 162(m) that limits
the tax deduction for compensation in excess of $1.0 million paid to certain executive officers. However, performance based compensation
can be excluded from the limit so long as it meets certain requirements. To qualify as “performance based” under Section
162(m), compensation payments must be determined pursuant to a plan, by a committee of at least two “outside” directors
(as defined in the regulations promulgated under the Code) and must be based on achieving objective performance goals. In addition,
the material terms of the plan must be disclosed to and approved by stockholders and the outside directors or the Compensation
Committee, as applicable, must certify that the performance goals were achieved before payments can be awarded. The Compensation
Committee believes that the restricted stock grants previously awarded by the Company qualify as performance based compensation
and satisfy the requirements for exemption under the Internal Revenue Code Section 162(m).
For
2016, none of our Named Executive Officers was paid an annual salary in excess of $1.0 million. Restricted stock granted under
the terms of long-term incentives are exempt as performance based compensation for purposes of calculating the $1.0 million limit.
To maintain flexibility in compensating the Named Executive Officers in a manner designed to promote varying corporate goals,
the Compensation Committee reserves the right to recommend and award compensation that is not deductible under Section 162(m).
Executive
Compensation Tables
The
following table sets forth information regarding compensation earned by, awarded to or paid to our Named Executive Officers during
the two fiscal years ended December 31, 2016 and 2015:
Summary
Executive Compensation Table
For
the Years Ended December 31, 2016 and December 31, 2015
Name and Principal Position
|
|
Year
|
|
Salary
($)
|
|
|
Non-Equity Incentive Compensation
($)
(1)
|
|
|
Stock
Awards
($)
(3)(4)
|
|
|
Total
($)
|
|
Anthony C. Humpage
|
|
2016
|
|
$
|
375,000
|
|
|
$
|
150,000
|
|
|
$
|
78,750
|
|
|
$
|
603,750
|
|
Chief Executive Officer and Director
|
|
2015
|
|
$
|
325,000
|
|
|
$
|
292,500
|
|
|
|
—
|
|
|
$
|
617,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christian A. J. Baeza
|
|
2016
|
|
$
|
200,000
|
|
|
$
|
33,000
|
|
|
$
|
16,800
|
|
|
$
|
249,800
|
|
Chief Financial Officer
|
|
2015
|
|
$
|
200,000
|
|
|
$
|
56,280
|
|
|
$
|
45,000
|
|
|
$
|
301,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iain Edwards
(2)
|
|
2016
|
|
$
|
206,020
|
|
|
$
|
20,602
|
|
|
$
|
16,800
|
|
|
$
|
243,422
|
|
Chief Operating Officer
|
|
2015
|
|
$
|
225,000
|
|
|
$
|
123,750
|
|
|
$
|
112.500
|
|
|
$
|
461,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James E. May
|
|
2016
|
|
$
|
260,000
|
|
|
$
|
44,200
|
|
|
$
|
16,800
|
|
|
$
|
321,000
|
|
Executive Vice President and General Counsel
|
|
2015
|
|
$
|
240,000
|
|
|
$
|
78,200
|
|
|
$
|
120,000
|
|
|
$
|
438,200
|
|
(1)
|
Reflects
amounts earned during fiscal year 2016 and paid in 2017.
|
(2)
|
Salary
includes amounts paid to Mr. Edwards’s consulting company for work related to non-U.K. services.
|
(3)
|
The
Company’s 2015 Equity Plan (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. 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. The financial activity pertaining to our employees and directors under the 2015 Incentive Plan is reflected
in our consolidated financial statements presented herein. 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 held in escrow and which vest in three equal
annual installments but which may be voted in the interim.
|
(4)
|
Stock
awards are valued based on the closing price per share on the grant date.
|
Outstanding
Equity Awards Table
For
the Year Ended 12/31/2016
Name and Principal Position
|
|
Number of
Unvested
Shares
|
|
|
Market
Value of Unvested Shares ($)
|
|
Anthony C. Humpage
Chief Executive Officer and Director
|
|
|
375,000
|
|
|
|
157,500
|
|
|
|
|
|
|
|
|
|
|
Christian A. J. Baeza
Chief Financial Officer
|
|
|
142,500
|
|
|
|
59,850
|
|
|
|
|
|
|
|
|
|
|
Iain Edwards
(2)
Chief Operating Officer
|
|
|
236,250
|
|
|
|
99,225
|
|
|
|
|
|
|
|
|
|
|
James E. May
Executive Vice President and General Counsel
|
|
|
246,667
|
|
|
|
103,600
|
|
As
of December 31, 2016, there were no outstanding option awards for any of our Named Executive Officers.
Potential
Payments Upon Termination or Change in Control
The
employment agreement with our Chief Executive Officer provides for payments upon termination without “cause”, as defined
in the agreement, of six months base salary plus a prorated termination bonus. Upon termination of the CEO’s employment
without Cause within 18 months following a Change in Control (as such terms are defined in the agreement,) the CEO shall receive
amounts earned by him but not yet paid as of the termination date, one year of base salary, and a pro-rated portion of the CEO’s
annual incentive bonus and is eligible to receive certain basic employee benefits for twelve additional months after termination.
Our
U.S. based Named Executive Officers have also signed our standard confidentiality and non-competition agreement that applies for
certain time periods following the employee’s termination of employment for any reason. The non-competition time period
after termination of employment is generally one to two years.
ITEM
7—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions
with Related Persons.
There
were no transactions during 2016 between the Company and its executive officers, directors, nominees, principal stockholders and
other related parties involving amounts in excess of $120,000.
Related
Person Transactions Policy.
Our
Board has adopted a written policy for the review and the approval or ratification of any related person transaction. Under the
policy, a “related person” is any (1) director, nominee for director or executive officer of the Company and any Immediate
Family Member of such person, and (2) any holder of 5% or more of any class of outstanding equity securities of the Company and
any Immediate Family Member such person. The policy defines an “Interested Transaction” is any transaction, arrangement
or relationship or series of similar transactions, arrangements or relationships (including any indebtedness or guarantee of indebtedness)
in which (1) the aggregate amount involved will or may reasonably be expected to exceed $120,000 in any calendar year, (2) the
Company or its subsidiaries or affiliates is a participant, and (3) any Related Person has or will have a direct or indirect interest
(other than solely as a result of being a director or a less than 10% beneficial owner of another entity). The policy requires
the Audit Committee will review the material facts of all Interested Transactions that require the Committee’s approval
and either approve or disapprove of the entry into the Interested Transaction, subject to certain exceptions described in the
Policy.
Director
Independence
The
Board of Directors has determined that each of our directors, except our Chief Executive Officer, Anthony C. Humpage, qualifies
as an “independent director.” Currently, our independent directors are James K. Bass, Peter W. Harper and Cary Sucoff. Because our Common Stock is not currently listed on a national securities exchange, we have used the definition of
independence of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an independent
director is a person other than an officer or employee of the Company or any other individual having a relationship with the Company
that, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. The NASDAQ listing rules provide that a director cannot be independent if:
|
●
|
The director is,
or at any time during the past three years was, an employee of the Company;
|
|
|
|
|
●
|
The director or
a family member of the director accepted any compensation from the Company in excess of $120,000 during any period of 12 consecutive
months within the three years preceding the independence determination (subject to certain exclusions, including, among other
things, compensation for board or board committee service);
|
|
|
|
|
●
|
A family member
of the director is, or at any time during the past three years was, an executive officer of the Company;
|
|
|
|
|
●
|
The director or
a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which
the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed
5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain
exclusions);
|
|
|
|
|
●
|
The director or
a family member of the director is employed as an executive officer of an entity where, at any time during the past three
years, any of the executive officers of the Company served on the compensation committee of such other entity; or
|
|
|
|
|
●
|
The director or
a family member of the director is a current partner of the Company’s outside auditor, or at any time during the past
three years was a partner or employee of the Company’s outside auditor, and who worked on the Company’s audit.
|
ITEM
8—LEGAL PROCEEDINGS
The
Company is subject to the legal proceedings and claims discussed below.
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’ 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.
ITEM
9—MARKET PRICE OF AND DIVIDENDS ON REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
Common Stock has been quoted on the OTCQB electronic quotation system under the symbol “LEAI”. The following table
sets forth the high and low bid prices of our Common Stock for the periods indicated. These quotations reflect inter-dealer prices,
without retail mark-up, markdown or commissions, and may not represent actual transactions.
|
|
High
|
|
|
Low
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
0.5
|
|
|
$
|
0.2
|
|
Third Quarter
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
Second Quarter
|
|
$
|
0.4
|
|
|
$
|
0.2
|
|
First Quarter
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
Year ended December 31, 2015
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
0.6
|
|
|
$
|
0.1
|
|
Third Quarter
|
|
$
|
0.5
|
|
|
$
|
0.2
|
|
Second Quarter
|
|
$
|
1.4
|
|
|
$
|
0.4
|
|
First Quarter
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
Holders
As
of May 3, 2017, there were approximately 284 stockholders of record for our Common Stock. The number of stockholders does not
include beneficial owners holding shares through nominee names.
Dividends
We
have not declared any cash dividends since inception and do not anticipate paying any dividends in the near future. The payment
of dividends is within the discretion of the Board of Directors and will depend on our earnings, capital requirements, financial
condition, and other relevant factors. There are no restrictions that currently limit our ability to pay dividends on its Common
Stock other than those generally imposed by applicable state law.
Warrants
and Options
NA
Equity Compensation Plan Information
The following table
summarizes the equity compensation plans under which our equity securities could be issued as of December 31, 2016:
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
|
Number
of
Securities to be
Issued Upon
Exercise of
Outstanding Options, Warrants
and Rights
|
|
|
Weighted
Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
|
|
|
Number
of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities
Reflected in
Column (a))
|
|
Equity
compensation plans approved by shareholders
|
|
|
0
|
|
|
|
N/A
|
|
|
|
3,329,514
|
|
Equity compensation
plans not approved by shareholders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
NA
|
|
Totals
|
|
|
0
|
|
|
|
0
|
|
|
|
3,329,514
|
|
ITEM
10—RECENT SALES OF UNREGISTERED 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. The value of
the warrants was $14,866. We had previously received $459,173 in net cash proceeds related to this private offering, which was
recorded in restricted cash and other accrued expenses on our Condensed Consolidated Balance Sheets in the first quarter of 2015.
The $459,173 in net cash proceeds is now recorded in Cash and cash equivalents and 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.
ITEM
11 – DESCRIPTION OF REGISTRANT’S SECURITIES TO BE REGISTERED
The
following description summarizes certain important terms of our capital stock. Because this description is only a summary, it
does not contain all the information that may be important to you. For a complete description of the matters set forth in this
section, you should refer to our Amended and Restated Articles of Incorporation and our Bylaws, forms of which are included as
exhibits to this Registration Statement, and to the applicable provisions of Nevada law, the state in which we are incorporated.
General
Our
authorized capital stock consists of:
|
●
|
200,000,000
shares of common stock, par value $0.0001 per share (“Common Stock”); and
|
|
|
|
|
●
|
20,000,000
shares of preferred stock, par value $0.0001 par value per share.
|
As of May 12, 2017,
there were zero shares of preferred stock and 22,630,927 shares of Common Stock outstanding. Our Board of Directors is authorized
to issue additional shares of our capital stock without shareholder approval.
Dividends
Subject
to preferences that may be applicable to any outstanding shares of our preferred stock, holders of shares of our Common Stock
are entitled to receive ratably such dividends, if any, as our Board of Directors may declare on the Common Stock out of funds
legally available for that purpose.
Voting
Rights
Holders
of shares of our Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders.
A majority of the votes cast at a meeting of the shareholders at which a quorum is present is required for any action by the shareholders,
including the election of directors, except as may otherwise be required by law. Holders of shares of our Common Stock do not
have cumulative voting rights in the election of directors.
Liquidation
Upon
our liquidation, dissolution or winding up, holders of shares of our Common Stock would be entitled to share ratably in all assets
remaining after the payment of all debts and other liabilities and the liquidation preferences of any outstanding shares of our
preferred stock.
Future
Issuance of Stock
Preferred
Stock
There
are no shares of preferred stock issued or outstanding. Our Board of Directors may, without further action by our shareholders,
from time to time, direct the issuance of shares of preferred stock in one or more series and may, at the time of issuance, determine
the rights, preferences and limitations of each series. Satisfaction of any dividend preferences of outstanding shares of preferred
stock would reduce the amount of funds available for the payment of dividends on shares of our Common Stock. Holders of shares
of preferred stock may be entitled to receive a preference payment in the event of our liquidation, dissolution or winding up
before any payment is made to the holders of shares of our Common Stock. Under certain circumstances, the issuance of shares of
preferred stock may render more difficult or tend to discourage a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of our securities or the removal of incumbent management. Our Board of Directors may, without shareholder
approval, issue shares of preferred stock with voting and conversion rights that could adversely affect the holders of shares
of our Common Stock.
On
February 16, 2017, the Company adopted a Rights Agreement, pursuant to which a dividend was declared of one preferred stock purchase
right (a “Right”) for each share of Common Stock, of the Company outstanding at the close of business on March 2,
2017. The Rights are designed to ensure that the Board of Directors has sufficient time to consider any proposal from a third
party that might result in a change in control of the Company, make sure that all stockholders receive fair and equal treatment
in the event of any such a proposal, and encourage any potential acquiror to negotiate with the Board of Directors. In addition,
the Plan will guard against partial tender offers, open market accumulations and other coercive tactics aimed at gaining control
of the Company without paying all stockholders a full control premium for their shares. The Plan was not adopted in response to
any specific takeover offer. The Rights will cause substantial dilution to a person or group that acquires 20% or more of the
Common Stock on terms not approved by the Company’s Board of Directors (a “Triggering Event”).
The
Rights are not exercisable until a Triggering Event occurs. If the Rights become exercisable then each registered holder shall
be permitted to purchase from the Company one one-thousandth (1/1,000) of a share of Series A Junior Participating Preferred Stock,
par value $0.0001 per share (the “Series A Preferred”), of the Company at a price of $2.50 per one one-thousandth
(1/1,000) of a share of Series A Preferred (the “Purchase Price”). Upon exercise of the purchase of the Series A Preferred,
each holder of a Right will thereafter have the right to receive in lieu of the Series A Preferred that number of shares of Common
Stock having a market value of two times the then current Purchase Price of one Right. The Series A Preferred has certain rights,
powers and preferences as set forth in the Certificate of Designation of Series A Junior Participating Preferred Stock, including
dividend, liquidation and voting rights.
The
Rights will expire on February 15, 2019, subject to the Company’s right to extend such date, unless earlier redeemed or
exchanged by the Company or terminated. The Rights will at no time have any voting rights. The Rights may be redeemed in whole,
but not in part, at a price of $0.001 per Right by the Board of Directors at any time prior to a Triggering Event. Until a Right
is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company beyond those as an existing stockholder.
Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company for so long as the Rights
are then redeemable, and after the Rights are no longer redeemable, the Company may amend or supplement the Rights Agreement in
any manner that does not adversely affect the interests of the holders of the Rights. The foregoing summary of the Rights Agreement
is qualified in its entirety by the terms set forth in the Rights Agreement.
Common
Stock
The
authorized but unissued shares of our Common Stock are available for future issuance without shareholder approval. We may use
these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate
acquisitions and as incentive compensation. The existence of authorized but unissued shares of our Common Stock could render more
difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Transfer
Agent
Our
transfer agent is V Stock Transfer, and can be reached at the following address: 18 Lafayette Place, Woodmere, New York 11598.
ITEM
12 – INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section
78.138 of the Nevada Revised Statutes(“NRS”), provides that a director or officer will not be individually liable
to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity
as a director or officer unless it is proven that (i) the director’s or officer’s acts or omissions constituted a
breach of his or her fiduciary duties, and (ii) such breach involved intentional misconduct, fraud or a knowing violation of the
law.
Section
78.7502 of NRS permits a company to indemnify its directors and officers against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with a threatened, pending or completed action, suit or proceeding if
the officer or director (i) is not liable pursuant to NRS 78.138 or (ii) acted in good faith and in a manner the officer or director
reasonably believed to be in or not opposed to the best interests of the corporation and, if a criminal action or proceeding,
had no reasonable cause to believe the conduct of the officer or director was unlawful.
Section
78.751 of NRS permits a Nevada company to indemnify its officers and directors against expenses incurred by them in defending
a civil or criminal action, suit or proceeding as they are incurred and in advance of final disposition thereof, upon receipt
of an undertaking by or on behalf of the officer or director to repay the amount if it is ultimately determined by a court of
competent jurisdiction that such officer or director is not entitled to be indemnified by the company. Section 78.751 of NRS further
permits the company to grant its directors and officers additional rights of indemnification under its articles of incorporation
or bylaws or otherwise.
Section
78.752 of NRS provides that a Nevada company may purchase and maintain insurance or make other financial arrangements on behalf
of any person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the
company as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise, for
any liability asserted against him and liability and expenses incurred by him in his capacity as a director, officer, employee
or agent, or arising out of his status as such, whether or not the company has the authority to indemnify him against such liability
and expenses.
Our
Bylaws provide that
our officers and directors
shall be indemnified by us to the fullest extent legally permissible under Nevada law.
Our
Bylaws also require that the expenses of an officer or director incurred in defending a civil or criminal action, suit or proceeding
must be paid by us as they are incurred and in advance of the final disposition of the action, suit proceeding, upon receipt of
an undertaking by or on behalf of the officer or director to repay the amount if it is ultimately determined by a court of competent
jurisdiction that such officer or director is not entitled to be indemnified by the company.
Disclosure
of Commission Position on Indemnification for Securities Act Liabilities
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to our directors, officers
and persons controlling us, we have been advised that it is the Securities and Exchange Commission’s opinion that such indemnification
is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable.
ITEM
13 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Legacy Education Alliance, Inc.
Index to Consolidated Financial Statements
48
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders
Legacy Education Alliance, Inc.
Cape Coral, FL
We have audited the accompanying consolidated
balance sheets of Legacy Education Alliance, Inc. and its subsidiaries (collectively, the “Company”) as of December
31, 2016 and 2015 and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’
deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance
with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. The Company
is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of Legacy Education Alliance, Inc. and its subsidiaries
as of December 31, 2016 and 2015 and the results of their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
March 31, 2017
LEGACY
EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(In
thousands, except share data)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,711
|
|
|
$
|
4,881
|
|
Restricted cash
|
|
|
3,148
|
|
|
|
2,946
|
|
Deferred course expenses
|
|
|
9,067
|
|
|
|
9,211
|
|
Prepaid expenses and other current assets
|
|
|
3,458
|
|
|
|
2,169
|
|
Inventory
|
|
|
348
|
|
|
|
492
|
|
Total current assets
|
|
|
17,732
|
|
|
|
19,699
|
|
Property and equipment, net
|
|
|
1,130
|
|
|
|
1,226
|
|
Deferred tax asset, net
|
|
|
1,295
|
|
|
|
—
|
|
Other assets
|
|
|
207
|
|
|
|
200
|
|
Total assets
|
|
$
|
20,364
|
|
|
$
|
21,125
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,344
|
|
|
$
|
2,451
|
|
Royalties payable
|
|
|
175
|
|
|
|
163
|
|
Accrued course expenses
|
|
|
1,082
|
|
|
|
1,226
|
|
Accrued salaries, wages and benefits
|
|
|
840
|
|
|
|
1,258
|
|
Other accrued expenses
|
|
|
2,052
|
|
|
|
2,372
|
|
Long-term debt, current portion
|
|
|
11
|
|
|
|
10
|
|
Deferred revenue, current portion
|
|
|
54,389
|
|
|
|
60,698
|
|
Total current liabilities
|
|
|
61,893
|
|
|
|
68,178
|
|
Long-term debt, net of current portion
|
|
|
31
|
|
|
|
42
|
|
Deferred revenue, net of current portion
|
|
|
235
|
|
|
|
71
|
|
Other liabilities
|
|
|
379
|
|
|
|
45
|
|
Total liabilities
|
|
|
62,538
|
|
|
|
68,336
|
|
Commitments and contingencies (Note 15)
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 20,000,000 shares authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 200,000,000 shares authorized, 22,630,927 and 21,845,927 shares issued and outstanding at December 31, 2016 and December 31, 2015, respectively
|
|
|
2
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
11,073
|
|
|
|
10,905
|
|
Cumulative foreign currency translation adjustment
|
|
|
2,668
|
|
|
|
1,680
|
|
Accumulated deficit
|
|
|
(55,917
|
)
|
|
|
(59,798
|
)
|
Total stockholders’ deficit
|
|
|
(42,174
|
)
|
|
|
(47,211
|
)
|
Total liabilities and stockholders’ deficit
|
|
$
|
20,364
|
|
|
$
|
21,125
|
|
LEGACY
EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations and Comprehensive Income (Loss)
(In
thousands, except per share data)
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
89,196
|
|
|
$
|
87,161
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
47,843
|
|
|
|
48,201
|
|
Advertising and sales expenses
|
|
|
19,484
|
|
|
|
20,293
|
|
Royalty expenses
|
|
|
4,341
|
|
|
|
5,446
|
|
General and administrative expenses
|
|
|
15,055
|
|
|
|
16,317
|
|
Total operating costs and expenses
|
|
|
86,723
|
|
|
|
90,257
|
|
Income (loss) from operations
|
|
|
2,473
|
|
|
|
(3,096
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
(5
|
)
|
|
|
(7
|
)
|
Other income, net
|
|
|
472
|
|
|
|
392
|
|
Total other income
|
|
|
467
|
|
|
|
385
|
|
Income (loss) before income taxes
|
|
|
2,940
|
|
|
|
(2,711
|
)
|
Income tax benefit/(expense)
|
|
|
941
|
|
|
|
(15
|
)
|
Net income (loss)
|
|
$
|
3,881
|
|
|
$
|
(2,726
|
)
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.18
|
|
|
$
|
(0.13
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
0.17
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
21,092
|
|
|
|
20,910
|
|
Diluted weighted average common shares outstanding
|
|
|
22,133
|
|
|
|
20,910
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,881
|
|
|
$
|
(2,726
|
)
|
Foreign currency translation adjustments, net of tax of $0
|
|
|
988
|
|
|
|
1,310
|
|
Total comprehensive income (loss)
|
|
$
|
4,869
|
|
|
$
|
(1,416
|
)
|
LEGACY
EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Deficit
(In
thousands)
|
|
Common stock
|
|
|
Additional paid-in
|
|
|
Cumulative foreign currency translation
|
|
|
Accumulated
|
|
|
Total stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
adjustment
|
|
|
deficit
|
|
|
deficit
|
|
Balance at December 31, 2014
|
|
|
20,001
|
|
|
|
2
|
|
|
|
10,547
|
|
|
|
370
|
|
|
|
(57,072
|
)
|
|
|
(46,153
|
)
|
Issuance of common stock for cash
|
|
|
960
|
|
|
|
—
|
|
|
|
459
|
|
|
|
—
|
|
|
|
—
|
|
|
|
459
|
|
Issuance of common stock for services
|
|
|
885
|
|
|
|
—
|
|
|
|
63
|
|
|
|
—
|
|
|
|
—
|
|
|
|
63
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
(164
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(164
|
)
|
Foreign currency translation adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,310
|
|
|
|
—
|
|
|
|
1,310
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,726
|
)
|
|
|
(2,726
|
)
|
Balance at December 31, 2015
|
|
|
21,846
|
|
|
|
2
|
|
|
|
10,905
|
|
|
|
1,680
|
|
|
|
(59,798
|
)
|
|
|
(47,211
|
)
|
Issuance of common stock for services
|
|
|
785
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Share-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
168
|
|
|
|
—
|
|
|
|
—
|
|
|
|
168
|
|
Foreign currency translation adjustment, net of tax of $0
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
988
|
|
|
|
—
|
|
|
|
988
|
|
Net Income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,881
|
|
|
|
3,881
|
|
Balance at December 31, 2016
|
|
|
22,631
|
|
|
$
|
2
|
|
|
$
|
11,073
|
|
|
$
|
2,668
|
|
|
$
|
(55,917
|
)
|
|
$
|
(42,174
|
)
|
LEGACY
EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(In
thousands)
|
|
Years Ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,881
|
|
|
$
|
(2,726
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
146
|
|
|
|
185
|
|
Gain on change in fair value of derivatives
|
|
|
82
|
|
|
|
(136
|
)
|
Share-based compensation
|
|
|
168
|
|
|
|
63
|
|
Deferred income taxes
|
|
|
(1,297
|
)
|
|
|
(18
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(319
|
)
|
|
|
(1,145
|
)
|
Deferred course expenses
|
|
|
(407
|
)
|
|
|
(720
|
)
|
Prepaid expenses and other receivable
|
|
|
(1,389
|
)
|
|
|
201
|
|
Inventory
|
|
|
118
|
|
|
|
(341
|
)
|
Other assets
|
|
|
(4
|
)
|
|
|
(11
|
)
|
Accounts payable-trade
|
|
|
1,137
|
|
|
|
(73
|
)
|
Royalties payable
|
|
|
12
|
|
|
|
59
|
|
Accrued course expenses
|
|
|
(67
|
)
|
|
|
212
|
|
Accrued salaries, wages and benefits
|
|
|
(396
|
)
|
|
|
701
|
|
Other accrued expenses
|
|
|
(1,617
|
)
|
|
|
324
|
|
Deferred revenue
|
|
|
(1,945
|
)
|
|
|
6,205
|
|
Other liabilities
|
|
|
334
|
|
|
|
—
|
|
Net cash provided by (use d in) operating
activities
|
|
|
(1,563
|
)
|
|
|
2,780
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(55
|
)
|
|
|
(81
|
)
|
Net cash used in investing activities
|
|
|
(55
|
)
|
|
|
(81
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(10
|
)
|
|
|
(9
|
)
|
Proceeds from private offering of securities
|
|
|
—
|
|
|
|
459
|
|
Net cash provided by (used in) financing activities
|
|
|
(10
|
)
|
|
|
450
|
|
Effect of exchange rate differences on cash
|
|
|
(1,542
|
)
|
|
|
(1,200
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(3,170
|
)
|
|
|
1,949
|
|
Cash and cash equivalents, beginning of period
|
|
$
|
4,881
|
|
|
$
|
2,932
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,711
|
|
|
$
|
4,881
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
8
|
|
|
$
|
8
|
|
Cash paid during the period for income taxes, net of refunds received
|
|
$
|
12
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activity:
|
|
|
|
|
|
|
|
|
Derivative liability from issuance of warrants
|
|
$
|
—
|
|
|
$
|
164
|
|
LEGACY EDUCATION ALLIANCE, INC. AND
SUBSIDIARIES
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’ 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.
ITEM
14
—
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There
have been no disagreements on accounting and financial disclosures from the inception of our company through the date of this
Report. Our audited consolidated financial statements have been included in this annual report in reliance upon MaloneBailey,
LLP, Independent Registered Public Accounting Firm, as an expert in accounting and auditing.
ITEM
15 — FINANCIAL STATEMENTS AND EXHIBITS
(a)
(1) Financial Statements
See
the Indices to Consolidated Financial Statements set forth on pages 48.
(a)
(2) Financial Statement Schedules
None.
The financial statement schedules are omitted because they are inapplicable or the requested information is shown in our consolidated
financial statements or related notes thereto.
(b)
Exhibits
Exhibit
No.
|
|
Title
|
|
Method
of filing
|
2.1
|
|
Agreement and Plan of Merger, dated as of November 10, 2014, by and among Priced In Corp, Priced in Corp. Subsidiary, Tigrent Inc. and Legacy Education Alliance Holdings, Inc.
|
|
Incorporated
by reference to Exhibit 2.1 in the Company’s Form 8-K filed with the SEC on November 10, 2014.
|
3.1
|
|
Second Amended and Restated Articles of Incorporation of the Registrant
|
|
Incorporated
by reference to Exhibit 3.1 in the Company’s Form 8-K filed with the SEC on November 10, 2014.
|
3.2
|
|
Certificate of Designation of Registrant
|
|
Incorporated
by reference to Exhibit 3.1 in the Company’s Form 8-K filed with the SEC on February 17, 2017.
|
3.3
|
|
Bylaws of the Registrant
|
|
Incorporated
by reference to Exhibit 3.2 in the Company’s Form 8-K filed with the SEC on November 10, 2014.
|
3.4
|
|
Amendment to Bylaws of Registrant
|
|
Incorporated
by reference to Exhibit 3.2 in the Company’s Form 8-K filed with the SEC on February 17, 2017.
|
4.1
|
|
Rights Agreement dated as of February 16, 2017, between Legacy Education Alliance, Inc. and VStock Transfer, LLC, which includes the Form of Certificate of Designation of Series A Junior Participating Preferred Stock as Exhibit A, the Form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C.
|
|
Incorporated
by reference to Exhibit 4.1 in the Company’s Form 8-K filed with the SEC on February 17, 2017.
|
10.1
|
|
Bill of Sale, Assignment and Assumption Agreement dated as of September 10, 2014, by and between Tigrent Inc. and Legacy Education Alliance Holdings, Inc.
|
|
Incorporated
by reference to Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on November 10, 2014.
|
10.2
|
|
Form of Indemnification Agreement
|
|
Incorporated
by reference to Exhibit 10.2 in the Company’s Form 8-K filed with the SEC on November 10, 2014.
|
10.3
|
|
Senior Executive Employment Agreement, dated October 2013, of Anthony C. Humpage
|
|
Incorporated
by reference to Exhibit 10.3 in the Company’s Form 8-K/A filed with the SEC on February 11, 2015.
|
10.4
|
|
Assignment of Executive Employment of Anthony C. Humpage, dated November 10, 2014.
|
|
Incorporated
by reference to Exhibit 10.4 in the Company’s Form 8-K/A filed with the SEC on February 11, 2015.
|
10.5
|
|
Royalty
Payment Agreement dated March 15, 2013
(1
)
|
|
Incorporated
by reference to Exhibit 10.5 in the Company’s Form 8-K/A filed with the SEC on February 11, 2015.
|
10.6
|
|
License
Agreement, dated September 1, 2013
(1)
|
|
Incorporated
by reference to Exhibit 10.6 in the Company’s Form 8-K/A filed with the SEC on February 11, 2015.
|
10.7
|
|
Settlement
and Amendment to the 2013 License Agreement, dated April 22, 2014
(1)
|
|
Incorporated
by reference to Exhibit 10.7 in the Company’s Form 8-K/A filed with the SEC on February 11, 2015.
|
10.8
|
|
Supplement
to Talent Endorsement Agreement with Robbie Fowler, dated January 1, 2013
(1)
|
|
Incorporated
by reference to Exhibit 10.8 in the Company’s Form 8-K/A filed with the SEC on February 11, 2015.
|
10.9
|
|
Talent Endorsement Agreement with Robbie Fowler, dated January 1, 2015.
|
|
|
10.10
|
|
Talent Endorsement Agreement with Martin Roberts, dated April 20, 2017.
|
|
|
10.11
|
|
2015 Incentive Plan
|
|
Incorporated
by reference to Appendix B to the Company’s Definitive Proxy Statement on Schedule 14A for the 2015 Annual Meeting of
Shareholders filed with the SEC on June 16, 2015.
|
10.12
|
|
Form of Registration Rights Agreement
|
|
Incorporated
by reference to Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on June 17, 2015.
|
10.13
|
|
Form of Warrant
|
|
Incorporated
by reference to Exhibit 10.3 in the Company’s Form 8-K filed with the SEC on June 17, 2015.
|
10.14
|
+
|
Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (2015 Incentive Plan)
|
|
Incorporated
by reference to Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on July 22, 2015.
|
21.1
|
|
List of Subsidiaries
|
|
Incorporated
by reference to Exhibit 21.1 in the Company’s Form 10-K filed with the SEC on March 31, 2017.
|
+
Executive management contract or compensatory plan or arrangement.
(1)
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized, this 12
th
day of May, 2017.
|
LEGACY
EDUCATION ALLIANCE, INC.
|
|
|
|
|
By:
|
/s/
CHRISTIAN A. J. BAEZA
|
|
|
Christian
A. J. Baeza
|
|
|
Chief
Financial Officer
|
50
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