NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1 - General
Business Description.
We are a provider of practical, high-quality, and value-based educational training on the topics of personal finance, entrepreneurship,
real estate and financial markets investing strategies and techniques. Our programs are offered through a variety of formats and
channels, including free-preview workshops, basic training classes, symposiums, telephone mentoring, one-on-one mentoring, coaching
and e-learning, primarily under the Rich Dad® Education brand (“Rich Dad”) which was created in 2006 under license
from entities affiliated with Robert Kiyosaki, whose teachings and philosophies are detailed in the book titled,
Rich Dad Poor
Dad.
In addition to Rich Dad, we market our products and services under the brands, Making Money from Property with Martin
Roberts
TM
; Brick Buy Brick
TM
; Building Wealth; Robbie Fowler Property Academy
TM
; Women in Wealth
TM
;
Perform in Property
TM
, Teach Me to Trade
TM
, and Trade Up Investor Education
TM
. Our products and
services are offered in North America, the United Kingdom and Other Foreign Markets.
Basis of Presentation.
The terms “Legacy Education Alliance, Inc.,” the “Company,” “we,” “our,” “us”
or "Legacy" as used in this report refer collectively to Legacy Education Alliance, Inc., a Nevada corporation (“Legacy”),
the registrant, which was formerly known as Priced In Corp., and, unless the context otherwise requires, together with its wholly-owned
subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation, other operating subsidiaries and any predecessor
of Legacy Education Alliance Holdings, including TIGE.
The accompanying unaudited
Condensed Consolidated Financial Statements presented in this report are for us and our consolidated subsidiaries, each of which
is a wholly-owned subsidiary. All significant intercompany transactions have been eliminated. These interim financial statements
should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2017 and reflect all normal recurring adjustments that are, in the opinion of management, necessary to
present fairly our results of operations and financial position. Amounts reported in our Condensed Consolidated Statements of
Operations and Comprehensive Income (Loss) are not necessarily indicative of amounts expected for the respective annual periods
or any other interim period.
We historically managed
our business in four segments based on geographic location. These segments included our historical segments of the United States,
Canada, and the United Kingdom, and Other Foreign Markets. During the three months ended December 31, 2017, the Company’s
management decided to combine the previously reported United States and Canada segments into the North America segment effective
for the 2017 year-end reporting and since such date our operations have been managed through three operating segments: (i) North
America, (ii) United Kingdom, (iii) Other Foreign Markets.
Significant Accounting
Policies.
Our significant accounting policies have been disclosed in
Note 2 - Significant Accounting Policies
in our
most recent Annual Report on Form 10-K. There have been no changes to the policies disclosed therein, except for the Revenue Recognition
policy subsequent to adoption of the “Revenue from Contracts with Customers” accounting guidance as discussed under
“New Accounting Standards” and under “Revenue Recognition” below.
Revenue Recognition
.
We adopted Topic 606 Revenue from Contracts with Customers with a date of initial adoption of January 1, 2018. As a result, we
have changed our accounting policy for revenue recognition and applied Topic 606 using the modified retrospective basis. Typically,
this approach would result in recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening
balance of equity at January 1, 2018. The company did not have a material change in financial position, results of operations,
or cash flows and therefore there is no cumulative impact recorded to opening equity.
There have been no
other changes to the accounting policies, which are disclosed in our most recent Annual Report on Form 10-K. The accompanying
unaudited Condensed Consolidated Financial Statements we present in this report have been prepared in accordance with our policies.
For further discussion, (see Note 10, “
Revenue Recognition.
”)
Use of Estimates.
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Tax in Interim
Periods.
We conduct operations in separate legal entities in different jurisdictions. As a result, income tax amounts are
reflected in these condensed consolidated financial statements for each of those jurisdictions. Tax laws and tax rates vary substantially
in these jurisdictions and are subject to change based on the political and economic climate in those countries. We file our tax
returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on
an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or
loss to determine the income tax provision or benefit allocated to the interim period.
Losses from jurisdictions
for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated
annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions
for which no benefit can be realized. The effects of unusual and infrequent items are recognized in the impacted interim period
as discrete items.
The estimated annual
effective tax rate may be affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction. Adjustments
to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We have established
valuation allowances against our deferred tax assets, including net operating loss carryforwards and income tax credits. Valuation
allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets
to the amount that is deemed more likely than not to be realizable. Our ability to realize these deferred tax assets is dependent
on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation
to actual results and expected trends on a quarterly basis. A change in our valuation allowance would impact our income tax expense/benefit
and our stockholders’ deficit and could have a significant impact on our results of operations or financial condition in
future periods.
Tax Cuts and Jobs
Act
The Tax Cuts and Jobs
Act (The Act,) was enacted on December 22, 2017 making significant changes to the Internal Revenue Code. Changes include, but
are not limited to, a reduction in the US federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced
earnings. All amounts recognized associated with the Tax Act as of March 31, 2018 are provisional. Given the complexity of the
Tax Act, we are still evaluating the tax impact and obtaining the information required to complete the accounting. The date we
expect to complete the accounting is not currently determinable while we continue to obtain the information required to complete
the accounting. Given the provisional amounts recognized in 2017, and the fact that we have not changed our provisional estimates,
the impact of measurement period adjustments was not material during the three months ended March 31, 2018.
Note 2 - New Accounting Pronouncements
Accounting Standards Adopted in the
Current Period
We have implemented
all new accounting pronouncements that are in effect and that management believes would materially affect our financial statements.
In
May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-09,
“Revenue from Contracts
with Customers (Topic 606),”
updated by ASU No. 2015-14 “
Deferral of the Effective Date
,” which provides
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede
most current revenue recognition guidance. In August 2015, the effective date for the standard was deferred by one year and the
standard is now effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption
is permitted based on the original effective date. The standard allows companies to choose either full retrospective or modified
retrospective adoption method.
We
completed our analysis during 2017 and there is no material change to our financial position, results of operations, and cash
flows. We adopted ASU No. 2014-09 and its amendment on a modified retrospective basis effective January 1, 2018. Although there
is no material impact, we have expanded disclosures in our notes to our condensed consolidated financial statements related to
revenue recognition under the new standard. We have implemented changes to our accounting policies and practices, business processes,
systems, and controls to support the new revenue recognition and disclosure requirements. (see Note 10, “
Revenue Recognition
”
for further discussion).
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. Our analysis of ASU 2016-18 was completed during 2017 and there is no
material change to our financial position, results of operations, and cash flows. We adopted ASU 2016-18 effective January 1,
2018.
In August 2016, the
FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230).”
The ASU addresses eight specific cash flow
issues with the objective of reducing the existing diversity in practice. The standard is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017, and early adoption is permitted. Our analysis of ASU 2016-15 was
completed during 2017 and there is no material change to our financial position, results of operations, and cash flows. We adopted
ASU 2016-15 effective January 1, 2018.
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. Our analysis of ASU 2016-16was completed
during 2017 and there is no material change to our financial position, results of operations, and cash flows. We adopted ASU 2016-16
effective January 1, 2018.
In January 2016, the
FASB issued ASU No 2016-01, “
Recognition and Measurement of Financial Assets and Financial Liabilities,” Financial
Instruments – Overall (Subtopic 825-10)
. The new guidance is intended to improve the recognition and measurement of
financial instruments. This guidance requires that financial assets and financial liabilities must be separately presented by
measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements. This
guidance was 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.
Our analysis of ASU No 2016-01 was completed during 2017 and there is no material change to our financial position, results of
operations, and cash flows. We adopted ASU No 2016-01 effective January 1, 2018.
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 was 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 adopted this standard in the first quarter of 2018. The adoption of this guidance did not have a significant
impact on our financial statements. The future impact of this guidance will depend on the nature of our future activities, and
fewer transactions may be treated as acquisitions (or disposals) of businesses after adoption.
New Accounting
Standards to be Adopted in Future Periods
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 July 2017, the
Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-11,
I “
Accounting for Certain Financial Instruments With Down Round Features
” and II “
Replacement of the
Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests With a Scope Exception
”. This standard is effective for fiscal years and interim periods beginning
after December 15, 2018. Early adoption is 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.
Note 3 - Share-Based Compensation
We account for share-based
awards under the provisions of ASC 718, “
Compensation—Stock Compensation
.” Accordingly, share-based compensation
cost is measured at the grant date based on the fair value of the award and we expense these costs using the straight-line method
over the requisite service period.
Share-based compensation
expenses related to our restricted stock grants were $57.0 thousand and $51.0 thousand for the three months ended March 31, 2018
and 2017, respectively, which are reported as a separate line item in the condensed consolidated statement of changes in stockholders’
deficit.
See Note 6 -
Share-Based
Compensation
, in the Notes to Consolidated Financial Statements for the year ended December 31, 2017, included in our 2017
Annual Report for further discussion.
Note 4 – Earnings (Loss) 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. For periods in which we recognize
losses, the calculation of diluted loss per share is the same as the calculation of basic loss per share. We excluded unvested
restricted stock awards from the diluted weighted-average number of shares used in our diluted EPS calculation of 1,146,342 and
1,346,746 for the three months ended March 31, 2018 and 2017 because we had a net loss in both periods.
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 1,146,342 and 1,346,746 for the three months ended March 31, 2018 and 2017, respectively.
The calculations of
basic and diluted EPS are as follows:
|
|
Three Months Ended March 31, 2018
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Loss
|
|
|
|
|
|
Average
|
|
|
Loss
|
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Share
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
As reported
|
|
$
|
(857
|
)
|
|
|
23,008
|
|
|
|
|
|
|
$
|
(310
|
)
|
|
|
22,631
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(857
|
)
|
|
|
23,008
|
|
|
$
|
(0.04
|
)
|
|
$
|
(310
|
)
|
|
|
22,631
|
|
|
$
|
(0.01
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(857
|
)
|
|
|
23,008
|
|
|
$
|
(0.04
|
)
|
|
$
|
(310
|
)
|
|
|
22,631
|
|
|
$
|
(0.01
|
)
|
Note 5 - Fair Value Measurements
ASC 820,
“Fair
Value Measurements and Disclosures”
defines fair value, establishes a consistent framework for measuring fair value
and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC 820 defines fair
value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date.
ASC 820 specifies
a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.
In accordance with
ASC 820, these two types of inputs have created the following fair value hierarchy:
|
●
|
Level
1-Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active
markets;
|
|
●
|
Level
2-Inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, for substantially the full term of
the asset or liability, including:
|
|
●
|
Quoted
prices for similar assets or liabilities in active markets
|
|
●
|
Quoted
prices for identical or similar assets or liabilities in markets that are not active
|
|
●
|
Inputs
other than quoted prices that are observable for the asset or liability
|
|
●
|
Inputs
that are derived principally from or corroborated by observable market data by correlation
or other means; and
|
|
●
|
Level
3-Inputs that are unobservable and reflect our assumptions used in pricing the asset
or liability based on the best information available under the circumstances (e.g., internally
derived assumptions surrounding the timing and amount of expected cash flows).
|
The following table
presents the derivative financial instruments, our only financial liabilities measured and recorded at fair value on our condensed
consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of March 31, 2018 and December
31, 2017:
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
|
|
|
|
Amount
|
|
|
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
As of March 31, 2018
|
|
Warrant derivative liabilities
|
|
$
|
2,438
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,438
|
|
As of December 31, 2017
|
|
Warrant derivative liabilities
|
|
$
|
24,233
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,233
|
|
Financial Instruments.
Financial instruments consist primarily of cash and cash equivalents, accounts payable, deferred course expenses, accrued
expenses, deferred revenue, and debt. U.S. GAAP requires the disclosure of the fair value of financial instruments, including
assets and liabilities recognized in the balance sheets. Management believes the carrying value of the other financial instruments
recognized on the condensed consolidated balance sheet date, including receivables, payables and accrued liabilities approximate
their fair value.
See Note – 6
Derivative Liability,
for further discussion.
Note 6 - Derivative Liability
In June 2015, we granted
warrants to purchase 959,924 shares of the Company’s common stock through a private offering of units (“Units”).
Each Unit included one share of Common Stock, par value $0.0001 per share, and a three-year Warrant to purchase one share of Common
Stock at an initial exercise price per share equal to $0.75, subject to adjustment for certain corporate transactions such as
a merger, stock-split or stock dividend and, if the Company does not continue to be a reporting company under the Securities Exchange
Act of 1934 during the two-year period after closing, the exercise price will be reduced to $0.01 per share. Each Unit includes
limited registration rights for the investors for the shares of Common Stock and the shares of Common Stock that would be issued
upon the exercise of a Warrant ("Underlying Shares") when and if we register our shares of Common Stock in a different
offering, subject to certain excluded registered offerings. The Company has also issued to the placement agent warrants to purchase
our shares of Common Stock equal to 10% of the total shares sold in the offering, or 95,992 shares.
Because these warrants
have full reset adjustments that would preclude the instrument from being considered as index to the Company’s stock, it
is subject to derivative liability treatment under
ASC 815-40-15
, which requires as of the date the warrants are issued,
the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.
Key assumptions used to determine the fair
value of the warrants follows:
|
|
At Issuance
|
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.42
|
|
|
$
|
0.48
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
1.77
|
%
|
|
|
1.53
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
55
|
%
|
|
|
62.9
|
%
|
|
|
63.5
|
%
|
Term
|
|
|
3 years
|
|
|
|
0.25 year
|
|
|
|
0.5 year
|
|
As of March 31, 2018
and December 31, 2017, the fair value of the total warrants' derivative liability is $2,438 and $24,233, respectively, and recorded
in other accrued expenses in the Condensed Consolidated Balance Sheets. We recognized a gain on the derivative liability of $21,795
and $71,801 for the three months ended March 31, 2018 and 2017, which is recorded in other income, net in the Condensed Consolidated
Statements of Operations and Comprehensive Income (Loss).
The following table
summarizes the derivative liability included in other accrued expenses in the Condensed Consolidated Balance Sheets:
Balance at December 31, 2017
|
|
$
|
24,233
|
|
Gain on change of fair value
|
|
|
(21,795
|
)
|
Balance at March 31, 2018
|
|
$
|
2,438
|
|
The following table summarizes information
about warrants outstanding as of March 31, 2018:
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
Weighted-average exercise price
|
|
$
|
0.75
|
|
Remaining life (in years)
|
|
|
0.25
|
|
Note 7 - Income Taxes
We recorded an income
tax expense of $397.0 thousand and an income tax benefit of $333.0 thousand for the three months ended March 31, 2018 and 2017,
respectively. Our effective tax rate was 86.1% and (51.8)% for the three months ended March 31, 2018 and 2017, respectively. Our
effective tax rates differed from the U.S. statutory corporate tax rate of 21% and 35%, for the same periods, primarily because
of the mix of pre-tax income or loss earned in certain jurisdictions and the change in our valuation allowance.
We record a valuation
allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. As of March
31, 2018 and December 31, 2017, valuation allowances of $4.9 million and $4.7 million, respectively have been provided against
net operating loss carryforwards and other deferred tax assets. Our valuation allowance increased by $.2 million and $.04 million
for the three months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018
and December 31, 2017, we had total unrecognized tax benefits of $1.7 million, related to foreign and domestic tax positions.
Of this amount, the Company estimates that $1.2 million, of the unrecognized tax benefits, if recognized, would impact the effective
tax rate. A substantial portion of our liability for uncertain tax benefits is recorded as a reduction of net operating losses
and tax credit carryforwards.
During the three months
ended March 31, 2018 and 2017, we had no material changes in uncertain tax positions. We record interest and penalties related
to unrecognized tax benefits within the provision for income taxes. We believe that no current tax positions that have resulted
in unrecognized tax benefits will significantly increase or decrease within one year. We file income tax returns in the U.S. federal
jurisdiction and in various state and foreign jurisdictions.
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.
The Canadian Revenue
Agency completed its examination of the corporations 2014-2016 goods and services tax (GST) and harmonized sales tax (HST) returns.
All issues have been settled.
The Tax Cuts and Jobs
Act (The Act,) was enacted on December 22, 2017 making significant changes to the Internal Revenue Code. Changes include, but are
not limited to, a reduction in the US federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced
earnings. As of December 31, 2018, we have not completed our assessment of the accounting impact of the tax effects on the Company
due to the Act; however, we have made a reasonable estimate of the effects on our existing deferred tax balances. We will continue
to refine our estimate as additional analysis is completed and additional guidance is issued, however we do not expect a significant
net impact on our underlying financial statements as we have cumulative losses in our foreign subsidiaries.
All amounts recognized
associated with the Tax Act as of March 31, 2018 are provisional. Given the complexity of the Tax Act, we are still evaluating
the tax impact and obtaining the information required to complete the accounting. The date we expect to complete the accounting
is not currently determinable while we continue to obtain the information required to complete the accounting. Given the provisional
amounts recognized in 2017, and the fact that we have not changed our provisional estimates, the impact of measurement period
adjustments was not material during the three months ended March 31, 2018.
Note 8 - Concentration of Risk
Cash and cash equivalents
.
We maintain deposits in banks in amounts that might exceed the federal deposit insurance available. Management believes the potential
risk of loss on these cash and cash equivalents to be minimal. Cash balances as of March 31, 2018 and December 31, 2017, including
foreign subsidiaries, without FDIC coverage were $6.6 million and $5.3 million, respectively.
Revenue. A significant
portion of our revenue is derived from the Rich Dad brands. Revenue derived from the Rich Dad brands as a percentage of total revenue
was 73.4% and 73.0% for the three months ended March 31, 2018 and 2017, respectively. In addition, we have operations in the North
America, the United Kingdom and other foreign markets (see Note 9 —
Segment Information
).
Note 9 - Segment Information
We historically managed
our business in four segments based on geographic location for which operating managers are responsible to the Chief Executive
Officer. Our historical segments were the United States, Canada, the United Kingdom, and Other Foreign Markets. During the three
months ended December 31, 2017, the Company’s management decided to combine the United States and Canada segments into the
North America segment effective for the 2017 year-end reporting and since such date, our operations have been managed through
three operating segments: (i) North America, (ii) United Kingdom, (iii) Other Foreign Markets. Operating results, as reported
below, are reviewed regularly by our Chief Executive Officer, or Chief Operating Decision Maker (“CODM”) and other
members of the executive team.
The proportion of our total revenue attributable
to each segment is as follows:
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
As a percentage of total revenue
|
|
|
|
|
|
|
|
North America
|
|
|
62.0
|
%
|
|
|
57.7
|
%
|
|
U.K.
|
|
|
20.4
|
%
|
|
|
24.4
|
%
|
|
Other foreign markets
|
|
|
17.6
|
%
|
|
|
17.9
|
%
|
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating results
for the segments are as follows:
|
|
|
Three Months Ended
March 31,
|
|
|
Segment revenue
|
|
2018
|
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
North America
|
|
$
|
15,949
|
|
|
$
|
12,682
|
|
|
U.K.
|
|
|
5,265
|
|
|
|
5,355
|
|
|
Other foreign markets
|
|
|
4,541
|
|
|
|
3,928
|
|
|
Total consolidated revenue
|
|
$
|
25,755
|
|
|
$
|
21,965
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
Segment gross profit contribution *
|
|
2018
|
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
North America
|
|
$
|
3,856
|
|
|
$
|
1,553
|
|
|
U.K.
|
|
|
1,127
|
|
|
|
1,770
|
|
|
Other foreign markets
|
|
|
(570
|
)
|
|
|
295
|
|
|
Total consolidated gross profit
|
|
$
|
4,413
|
|
|
$
|
3,618
|
|
*
|
Segment gross profit
is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
|
Three Months Ended
March 31,
|
|
|
Depreciation and amortization expenses
|
|
2018
|
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
North America
|
|
$
|
25
|
|
|
$
|
29
|
|
|
U.K.
|
|
|
4
|
|
|
|
4
|
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
29
|
|
|
$
|
33
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
Segment identifiable assets
|
|
2018
|
|
|
2017
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
North America
|
|
$
|
15,832
|
|
|
$
|
15,364
|
|
|
U.K.
|
|
|
7,681
|
|
|
|
9,090
|
|
|
Other foreign markets
|
|
|
5,273
|
|
|
|
2,566
|
|
|
Total consolidated identifiable assets
|
|
$
|
28,786
|
|
|
$
|
27,020
|
|
Note 10 – Revenue Recognition
We recognize revenue
when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect
to receive in exchange for those goods or services, in accordance with implemented Topic 606 - an update to Topic 605, which was
the revenue recognition standard in effect for each of the two years in the period ended December 31, 2017.
We adopted Topic 606
using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for
reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and
continue to be reported in accordance with our historic accounting under Topic 605. Revenue amounts presented in our condensed
consolidated financial statements are recognized net of sales tax, value-added taxes, and other taxes.
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 have deferred revenue of $57.5 million related to
contractual commitments with customers that the performance obligation will be satisfied over time, which ranges from one to two
years. The revenue associated with these performance obligations is recognized as the obligation is satisfied. We did not have
a material change in financial position, results of operations, or cash flows and therefore there is no cumulative impact recorded
to opening equity.
The following tables
disaggregate our segment revenue by revenue source:
|
|
Three Months Ended March 31,
2018
|
|
|
Three Months Ended March 31,
2017
|
|
Revenue Type:
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign markets
|
|
|
Total Consolidated Revenue
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign markets
|
|
|
Total Consolidated Revenue
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Seminars
|
|
$
|
10,182
|
|
|
$
|
3,430
|
|
|
$
|
2,626
|
|
|
$
|
16,238
|
|
|
$
|
7,433
|
|
|
$
|
3,232
|
|
|
$
|
1,674
|
|
|
$
|
12,339
|
|
Products
|
|
|
3,274
|
|
|
|
1,353
|
|
|
|
926
|
|
|
|
5,553
|
|
|
|
3,047
|
|
|
|
1,726
|
|
|
|
1,610
|
|
|
|
6,383
|
|
Coaching and Mentoring
|
|
|
1,457
|
|
|
|
438
|
|
|
|
985
|
|
|
|
2,880
|
|
|
|
1,725
|
|
|
|
362
|
|
|
|
644
|
|
|
|
2,731
|
|
Online and Subscription
|
|
|
567
|
|
|
|
11
|
|
|
|
4
|
|
|
|
582
|
|
|
|
25
|
|
|
|
4
|
|
|
|
—
|
|
|
|
29
|
|
Other
|
|
|
469
|
|
|
|
33
|
|
|
|
0
|
|
|
|
502
|
|
|
|
452
|
|
|
|
31
|
|
|
|
—
|
|
|
|
483
|
|
Total revenue
|
|
$
|
15,949
|
|
|
$
|
5,265
|
|
|
$
|
4,541
|
|
|
$
|
25,755
|
|
|
$
|
12,682
|
|
|
$
|
5,355
|
|
|
$
|
3,928
|
|
|
$
|
21,965
|
|
Note 11 - Commitments and Contingencies
Licensing agreements
.
We are committed to pay royalties for the usage of certain brands, as governed by various licensing agreements, including Rich
Dad, Robbie Fowler and Martin Roberts. Total royalty expenses included in our Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss) were $1.6 million and $0.9 million for the three months ended March 31, 2018 and 2017, respectively.
Custodial and Counterparty
Risk
. We are subject to custodial and other potential forms of counterparty risk in respect to a variety of contractual and
operational matters. In the course of ongoing Company-wide risk assessment, management monitors our arrangements that involve
potential counterparty risk, including the custodial risk associated with amounts prepaid to certain vendors and deposits with
credit card and other payment processors. Deposits held by our credit card processors at March 31, 2018 and December 31, 2017,
were $3.1 million and $2.8 million, respectively. These balances are included on the Condensed Consolidated Balance Sheets in
restricted cash. While these balances reside in major financial institutions, they are only partially covered by federal deposit
insurance and are subject to the financial risk of the parties holding these funds. When appropriate, we utilize Certificate of
Deposit Account Registry Service (CDARS) to reduce banking risk for a portion of our cash in the United States. A CDAR consists
of numerous individual investments, all below the FDIC limits, thus fully insuring that portion of our cash. At March 31, 2018
and December 31, 2017, we did not have a CDAR balance.
Litigation.
We
and certain of our subsidiaries, from time to time, are parties to various legal proceedings, claims and disputes that have arisen
in the ordinary course of business. These claims may involve significant amounts, some of which would not be covered by insurance.