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
and
Brick Buy Brick
. Our products and services are offered in the United
States, Canada, the United Kingdom, and other international markets.
Our students pay
for courses up-front or through payment agreements with independent third parties, and under U.S. generally accepted accounting
principles (“GAAP”), we recognize revenue when our students take their courses. Over the past 18 months 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 are also utilizing a symposium style course
delivery model wherein we hold multiple Elite courses in one location. Using one location allows us to achieve certain economies
of scale that reduce costs and improve margins, as well as enhance the student experience.
In addition to our Elite
courses, we offer 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) that provide a richer experience for our students. Mentoring involves a subject matter
expert visiting the student in person and guiding the student, for example, through his or her first real estate transaction, providing
a real hands-on experience.
We
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 international markets. In 2014, we expanded
our footprint to include Africa, Europe, and Asia, holding events in 21 countries. As we’ve established traction in these
markets, we have moved forward on opening offices in South Africa and Hong Kong during the first six months of 2015.
Reverse
Merger and Recapitalization.
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) Priced In Corp., a Nevada corporation (“PRCD”), (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 are
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, Tigrent Inc. controls the surviving
entity through control of Legacy’s Board of Directors as a result of the appointment of the existing directors of Tigrent
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. See
Note 10 Capital
Stock and Recapitalization
, for further disclosures regarding our recapitalization effects on our consolidated financial statements.
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
Reclassifications.
Certain amounts reported in the consolidated financial statements for the prior periods have been reclassified to conform
to the current reporting presentation.
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, 2015 and 2014, 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:
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Buildings
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40 years
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Furniture fixtures and equipment
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3-7 years
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Purchased software
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3 years
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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:
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Product
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Recognition
Policy
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Seminars
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Deferred
upon payment and recognized when the seminar is attended or delivered on-line
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Online
courses
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Deferred
upon sale and recognized over the delivery period
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Coaching
and mentoring sessions
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Deferred
and recognized as service is provided
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Data
subscriptions and renewals
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Deferred
and recognized on a straight-line basis over the subscription period
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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 $20.2 million and $34.1 million, respectively in 2015 and 2014.
Our reserve for course attendance after expiration was $1.3 million and $1.5 million at December 31, 2015 and 2014, respectively.
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 $16.5 million and $18.7 million in advertising expense for the years
ended December 31, 2015 and 2014, 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 is approximately
$0.2 million and $0.3 million of prepaid media costs as of December 31, 2015 and 2014, respectively.
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 $63 thousand and
$22 thousand for the years ended December 31, 2015 and 2014, 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
February 2016, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards
Update (“ASU”)
No 2016-02 “Leases”
(Topic 842)
. The standard requires companies that lease
valuable assets like aircraft, real estate, and heavy equipment to recognize on their balance sheets the assets and liabilities
generated by contracts longer than a year. The standard also requires companies to disclose in the footnotes to their financial
statements information about the amount, timing, and uncertainty for the payments they make for the lease agreements. This standard
is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. We expect to
adopt this standard when effective, and the impact on our financial statements is not currently estimable.
In
January 2016, the FASB issued
ASU
No 2016-01, “
Recognition and Measurement of Financial
Assets and Financial Liabilities”, Financial Instruments – Overall (Subtopic 825-10)
. The new guidance is intended
to improve the recognition and measurement of financial instruments. This guidance requires that financial assets and financial
liabilities must be separately presented by measurement category and form of financial asset on the balance sheet or the accompanying
notes to the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15,
2017. The standard includes a requirement that businesses must report changes in the fair value of their own liabilities in other
comprehensive income instead of earnings, and this is the only provision of the update for which the FASB is permitting early
adoption. We expect to adopt this guidance when effective, and do not expect this guidance to have a significant impact on our
financial statements.
In
November 2015, the FASB issued ASU No 2015-17,
“Balance Sheet Classification of Deferred Taxes”, Income Taxes (Topic
740)
, 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 may choose to use either retrospective or prospective application. Early adoption
is permitted. We expect to adopt this guidance when effective, and do not expect this guidance to have a significant impact on
our financial statements.
In
September 2015, the FASB issued ASU No 2015-16, “
Simplifying the Accounting for Measurement-Period Adjustments”,
Business Combinations (Topic 805)
, 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 is effective for fiscal years and interim periods beginning after December 15, 2015, and
requires prospective application. Early adoption is permitted. We expect to adopt this guidance when effective, and do not expect
this guidance to have a significant impact on our financial statements.
In
July 2015, the FASB issued ASU No 2015-11, “
Simplifying the Measurement of Inventory
”,
Inventory (Topic
330)
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 is 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 (Subtopic 225-20)
” (“ASU 2015-01”). 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 is effective for fiscal years
beginning after December 15, 2015, and early adoption is permitted. Accordingly, the standard is effective for us on January 1,
2016. We do not expect that the standard will have a material effect on our financial statement presentation going forward.
In
August 2014, the FASB
issued ASU
No. 2014-15, “
Presentation of Financial Statements-Going
Concern (Topic 205-40)
” (“ASU 2014-15”). Under the standard, management is required to evaluate for each
annual and interim reporting period whether it is a probable that the entity will not be able to meet its obligations as they
become due within one year after the date that financial statements are issued, or are available to be issued, where applicable.
ASU 2014-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early
adoption is permitted. Accordingly, the standard is effective for us on January 1, 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.
In
May 2014, the FASB
issued ASU
No. 2014-09, “
Revenue from Contracts with Customers
(Topic 606)
” (“ASU 2014-09”). 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. ASU 2014-09 is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. Accordingly, the standard
is effective for us on January 1, 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.
In
April 2014, the FASB issued ASU No. 2014-08, “
Presentation of Financial Statements (Topic 205) and Property, Plant, and
Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”
(“ASU
2014-08”) that changes the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation
may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of
a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal
represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU
2014-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Early adoption
is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements
previously issued or available for issuance. Accordingly, the standard is effective for us on January 1, 2015. We do not expect
that the standard will have a material impact on our financial condition, results of operations, and disclosures when adopted.
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, 2015 and 2014, including foreign subsidiaries,
without FDIC coverage was $3.8 million and $2.3 million, respectively.
Revenue
A
significant portion of our revenue is derived from the Rich Dad brands. For the years ended December 31, 2015 and 2014, Rich Dad
brands provided 77% and 87% 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):
|
|
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As
of December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Land
|
|
$
|
782
|
|
|
$
|
782
|
|
|
Buildings
|
|
|
785
|
|
|
|
785
|
|
|
Software
|
|
|
2,607
|
|
|
|
2,607
|
|
|
Equipment
|
|
|
1,926
|
|
|
|
2,253
|
|
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Furniture and fixtures
|
|
|
335
|
|
|
|
720
|
|
|
Building and leasehold improvements
|
|
|
1,170
|
|
|
|
1,156
|
|
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Property and equipment
|
|
|
7,605
|
|
|
|
8,303
|
|
|
Less: accumulated depreciation
|
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(6,379
|
)
|
|
|
(6,979
|
)
|
|
Property and equipment, net
|
|
$
|
1,226
|
|
|
$
|
1,324
|
|
Depreciation
expense on property and equipment in each of the years ended December 31, 2015 and 2014 was approximately $0.2 million.
Note
5—Long-Term Debt
Long-term
debt consists of the following (in thousands):
|
|
|
As
of December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Installment notes payable for equipment financing
|
|
$
|
52
|
|
|
$
|
61
|
|
|
Long-term debt
|
|
|
52
|
|
|
|
61
|
|
|
Less: current portion
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
Total long-term debt, net of current portion
|
|
$
|
42
|
|
|
$
|
52
|
|
The
following is a summary of scheduled long-term debt maturities by year (in thousands):
2016
|
|
$
|
10
|
|
2017
|
|
|
11
|
|
2018
|
|
|
11
|
|
2019
|
|
|
12
|
|
2020
|
|
|
8
|
|
Total long-term debt
|
|
$
|
52
|
|
Note 6—Share-Based
Compensation
The
Company has one 2015 Equity Plan, the 2015 Incentive Plan, Tigrent Inc., has two incentive stock plans; the 2009 Incentive Plan
and the 2012 Incentive Plan, which cover some of our current employees and directors. The financial activity pertaining to our
employees and directors under the 2009 Incentive Plan, the 2012 Incentive Plan and the 2015 Incentive Plan (collectively, the
“Incentive Plans”) is reflected in our consolidated financial statements, presented herein, and therefore, we are
providing our historical disclosures pertaining to those plans. All references to share quantities and values in the ensuing descriptions
reflect historical information from Tigrent Inc. and have not been adjusted for the impact of the Merger.
2015
Incentive 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. 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, 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.
2009
Incentive Plan
The
2009 Incentive Plan, which was approved by Tigrent stockholders on September 2, 2009, provides for the issuance of up to
1.3 million shares of Tigrent’s common stock. The 2009 Incentive Plan allows for the granting of a broad range of award
types, including stock options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units,
performance shares and performance units and other stock awards. Employees, directors, officers and consultants are eligible to
receive awards. The purpose of the 2009 Incentive Plan is to motivate participants to achieve long range goals, attract and retain
eligible employees, provide incentives competitive with other similarly situated companies and align the interest of employees
and directors with those of our stockholders. The 2009 Incentive Plan is administered by the Compensation Committee of the Board
of Directors. As of December 31, 2015, an aggregate of 165,000 shares remain available for further grants under this plan.
2012
Incentive Plan
The
2012 Incentive Plan, which was approved by Tigrent stockholders on May 23, 2012, provides for the issuance of up to 750,000
shares of our common stock. This incentive plan supplements the 2009 Incentive Plan. The 2012 Incentive Plan allows for the granting
of a broad range of award types, including stock options (incentive and non-qualified), stock appreciation rights, restricted
stock, restricted stock units, performance shares and performance units and other stock awards. Employees, directors, officers
and consultants are eligible to receive awards. The purpose of the 2012 Incentive Plan is to motivate participants to achieve
long range goals, attract and retain eligible employees, provide incentives competitive with other similarly situated companies
and align the interest of employees and directors with those of our stockholders. The Incentive Plan is administered by the Compensation
Committee of the Board of Directors.
On
April 30, 2013 the Compensation Committee granted restricted performance stock award grants for an aggregate of 200,000 shares
of common stock to an officer pursuant to the 2012 Incentive Plan. The actual restricted shares that vest could be up to 300,000
shares if this officer exceeds performance criteria (as defined). If targets are met, the award vests 50,000 shares per year based
on performance through 2017 or fully upon a “change of control” as defined in the Incentive Plan. In 2014, the first
tranche of 50,000 restricted shares did not vest as the performance targets were not met. As of December 31, 2015, an aggregate
of 480,000 shares remain available for further grants under the 2012 Incentive Plan.
The
following table reflects the activity of the restricted shares for the Incentive Plans, combined:
|
Restricted Stock Activity (in thousands)
|
|
Number of shares
|
|
|
Weighted average grant date value
|
|
|
Unvested at December 31, 2013
|
|
|
945
|
|
|
$
|
0.12
|
|
|
Granted
|
|
|
120
|
|
|
|
0.08
|
|
|
Forfeited
|
|
|
(100
|
)
|
|
|
0.06
|
|
|
Vested
|
|
|
(360
|
)
|
|
|
0.08
|
|
|
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
|
|
Compensation
Expense and Related Valuation Techniques
In accordance with
ASC 718, we record compensation expense for all stock based payment awards made to employees and directors under Tigrent’s
Incentive Plans based on the market value of its common stock on the date of issuance. The value of the portion of the awards
that is ultimately expected to vest is recognized as an expense over the requisite service periods on a straight-line basis. Unrecognized
compensation expense associated with unvested share-based payment awards, consisting entirely of unvested restricted stock, was
approximately $350,000 and $61,000 at December 31, 2015 and 2014, respectively. That cost is expected to be recognized over
a weighted-average period of 2.4 years.
Our
stock-based compensation expense was less than $0.1 million for each of the two years ended December 31, 2015 and 2014, 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 2015 and 2014.
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 2015 and 2014, 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.
As
of December 31, 2015 and 2014, we had approximately $3.9 million and $3.6 million of federal net operating loss carryforwards,
approximately $25.1 million and $21.7 million of foreign net operating loss carryforwards and approximately $10.2 million and
$9.3 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,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
3,552
|
|
|
$
|
8,760
|
|
|
Non-U.S.
|
|
|
(6,263
|
)
|
|
|
(1,335
|
)
|
|
Total income (loss) before income taxes
|
|
$
|
(2,711
|
)
|
|
$
|
7,425
|
|
|
Provision (benefit) for taxes:
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State
|
|
|
33
|
|
|
|
58
|
|
|
Non-U.S.
|
|
|
—
|
|
|
|
—
|
|
|
Total current
|
|
|
33
|
|
|
|
58
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
State
|
|
|
(18
|
)
|
|
|
2
|
|
|
Non-U.S.
|
|
|
—
|
|
|
|
—
|
|
|
Total deferred
|
|
|
(18
|
)
|
|
|
2
|
|
|
Total income tax expense (benefit)
|
|
$
|
15
|
|
|
$
|
60
|
|
|
Effective income tax rate
|
|
|
(0.6
|
)%
|
|
|
0.8
|
|
As a result of the Merger
discussed in Note 1, and the subsequent issuance of 3,000 shares of Legacy Education Alliance, Inc. common stock, as of December
31, 2014, Tigrent Inc. owned slightly less than 80% of the Company. Tigrent Inc. is, therefore, no longer considered part of the
affiliated group as defined in IRC §1504 and can no longer be included in the Company’s consolidated income tax returns
filed for subsequent tax years. At December 31, 2014, the tax attributes of Tigrent Inc., including its attributable portion of
the consolidated net operating loss carryovers determined pursuant to Reg. §1.1502-21, were separate attributes realizable
only by Tigrent Inc. The value of these tax attributes and the corresponding valuation allowance were approximately $1.3 million.
During the year ended December 31, 2015, we decreased the valuation allowance by $672 thousand.
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,
|
|
|
|
|
|
2015
|
|
|
|
2014
|
|
|
Computed expected federal tax expense
|
|
$
|
(949
|
)
|
|
$
|
2,599
|
|
|
Decrease in valuation allowance
|
|
|
(672
|
)
|
|
|
(4,320
|
)
|
|
State income net of federal benefit
|
|
|
203
|
|
|
|
376
|
|
|
Non-U.S. income taxed at different rates
|
|
|
848
|
|
|
|
172
|
|
|
Uncertain tax positions expense
|
|
|
(27
|
)
|
|
|
2
|
|
|
Foreign exchange adjustment
|
|
|
411
|
|
|
|
360
|
|
|
Foreign tax rate adjustment
|
|
|
180
|
|
|
|
847
|
|
|
Other
|
|
|
21
|
|
|
|
24
|
|
|
Income tax expense (benefit)
|
|
$
|
15
|
|
|
$
|
60
|
|
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,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
5,703
|
|
|
$
|
4,827
|
|
|
Accrued compensation, bonuses, severance
|
|
|
336
|
|
|
|
75
|
|
|
Allowance for bad debt
|
|
|
46
|
|
|
|
36
|
|
|
Intangible amortization
|
|
|
104
|
|
|
|
152
|
|
|
Impaired assets
|
|
|
240
|
|
|
|
240
|
|
|
Accrued expenses
|
|
|
29
|
|
|
|
32
|
|
|
Deferred revenue
|
|
|
2,712
|
|
|
|
4,308
|
|
|
Depreciation
|
|
|
241
|
|
|
|
260
|
|
|
Tax credits
|
|
|
97
|
|
|
|
97
|
|
|
Valuation allowance
|
|
|
(7,196
|
)
|
|
|
(7,868
|
)
|
|
Total deferred tax assets
|
|
$
|
2,312
|
|
|
$
|
2,159
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Deferred course expenses
|
|
$
|
(2,312
|
)
|
|
$
|
(2,159
|
)
|
|
Total deferred tax liabilities
|
|
|
(2,312
|
)
|
|
|
(2,159
|
)
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax expense related to the foreign currency translation adjustment for the both years ended December 31, 2015 and 2014 was $0.4
million, and was fully offset by a corresponding decrease in the valuation allowance. These amounts, 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, 2015 and 2014 are negative. Accordingly, no U.S. federal or state income taxes have been
provided thereon.
The
liability pertaining to uncertain tax positions was $1.7 million at December 31, 2015 and 2014. 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, 2015 and 2014, respectively and is included in other liabilities in the accompanying
Consolidated Balance Sheets. There was no penalty and interest expense accrued related to uncertain tax positions for the years
ended December 31, 2015 and 2014. 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,
|
|
|
|
|
|
2015
|
|
|
|
2014
|
|
|
Unrecognized tax benefits - January 1
|
|
$
|
1,744
|
|
|
$
|
1,915
|
|
|
Gross increases - tax positions in prior period
|
|
|
—
|
|
|
|
2
|
|
|
Gross decreases - tax positions in prior period
|
|
|
(27
|
)
|
|
|
(173
|
)
|
|
Unrecognized tax benefits - December 31
|
|
$
|
1,717
|
|
|
$
|
1,744
|
|
The
total liability for unrecognized tax benefits at December 31, 2015 and 2014, 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, 2015 and 2014, are as follows:
|
|
|
As of December 31,
|
|
|
|
|
|
2015
|
|
|
|
2014
|
|
|
Reduction of net operating loss carryforwards
|
|
$
|
1,656
|
|
|
$
|
1,676
|
|
|
Reduction of tax credit carryforwards
|
|
|
5
|
|
|
|
5
|
|
|
Total reductions of deferred tax assets
|
|
|
1,661
|
|
|
|
1,681
|
|
|
Noncurrent tax liability (reflected in Other long-term liabilities)
|
|
|
56
|
|
|
|
63
|
|
|
Total liability for unrecognized tax benefits
|
|
$
|
1,717
|
|
|
$
|
1,744
|
|
We
do not expect any significant changes to unrecognized tax benefits in the next year.
At
December 31, 2015 and 2014, 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.
During 2015,
the Canadian Revenue Agency concluded their audit of the Rich Dad Education Ltd. corporate income tax returns for the years ended
December 31, 2010 and 2011. The audit did not result in any changes and the accruals included in our consolidated financial statements
are adequate.
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.
See
Note 15—
Commitments and Contingencies
for additional discussion.
Note 10—
Capital Stock and Recapitalization
Recapitalization
As
discussed in Note 1—
Business Description and Basis of Presentation
, effective November 10, 2014, PRCD, formerly
an inactive public company, was acquired by a wholly-owned subsidiary of Tigrent Inc., and changed its name to Legacy Education
Alliance, Inc. (the “Company”). In conjunction with the Merger, the Company was recapitalized, resulting in a capital
structure outlined below. The historical numbers of common shares presented in our consolidated financial statements were converted
to equivalent shares post- Merger, at a rate of approximately 1.07 to 1.00. In connection with the Merger accounting, approximately
$7.8 million was reclassified from Common Stock to Additional paid-in capital.
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, 2015, 21,845,927 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. Further, our Common Stock may be reserved for issuance upon exercise of stock purchase rights designed to deter
hostile takeovers, commonly known as a “poison pill.”
Preferred
Stock
As
of December 31, 2015, no shares of our preferred stock were outstanding.
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. 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
was 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 1,129,478 and 854,167 for the years ended December 31, 2015 and 2014, respectively.
The
calculations of basic and diluted EPS are as follows:
|
|
|
Year ended December 31, 2015
|
|
|
|
|
Net Loss
|
|
|
Weighted
Average
Shares
Outstanding
|
|
|
Loss
Per
Share
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(2,726
|
)
|
|
|
21,846
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(2,726
|
)
|
|
|
21,846
|
|
|
$
|
(0.12
|
)
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
Stock options added under the treasury stock method
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(2,726
|
)
|
|
|
21,846
|
|
|
$
|
(0.12
|
)
|
|
|
|
Year ended December 31, 2014
|
|
|
|
|
Net Income
|
|
|
Weighted
Average
Shares
Outstanding
|
|
|
Earnings
Per
Share
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
7,365
|
|
|
|
16,542
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(380
|
)
|
|
|
(854
|
)
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
6,985
|
|
|
|
15,688
|
|
|
$
|
0.45
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
380
|
|
|
|
—
|
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
854
|
|
|
|
|
|
|
Stock options added under the treasury stock method
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(401
|
)
|
|
|
—
|
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
6,964
|
|
|
|
16,542
|
|
|
$
|
0.42
|
|
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, 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)
|
|
|
Warrant derivative liabilities
|
|
$
|
27,266
|
|
$
|
-
|
|
$
|
-
|
|
|
$
|
27,266
|
|
Note
13 - Derivative Liability
In
June 2015, we granted warrants to purchase 959,924 units of the Company’s common stock through a private offering of units
(“Units”) in conjunction with an equity raise. 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, 2015
|
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.25
|
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
1.31
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Volatility factor
|
|
|
55
|
%
|
|
|
61.0
|
%
|
|
Term
|
|
|
3 years
|
|
|
|
2.5 years
|
|
As
of December 31, 2015, the fair value of the total warrants' derivative liability is $27,266, and recorded in Other accrued expenses
in the Consolidated Balance Sheets. We recognized a gain on the derivative liability of $136,266 for the year ended December 31,
2015, 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 balance sheet:
Fair value at issuance date
|
|
$
|
163,532
|
|
Gain on change of fair value
|
|
|
(136,266
|
)
|
Balance at December 31, 2015
|
|
$
|
27,266
|
|
The
following table summarizes information about warrants outstanding as of December 31, 2015:
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
Weighted-average exercise price
|
|
$
|
0.75
|
|
Remaining life (in years)
|
|
|
2.5
|
|
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
|
|
2015
|
|
|
2014
|
|
|
U.S.
|
|
|
66.8
|
%
|
|
|
73.1
|
%
|
|
Canada
|
|
|
6.4
|
%
|
|
|
6.3
|
%
|
|
U.K.
|
|
|
19.9
|
%
|
|
|
17.0
|
%
|
|
Other foreign markets
|
|
|
6.9
|
%
|
|
|
3.6
|
%
|
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating
results for the segments are as follows:
|
|
|
Years ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Segment revenue
|
|
(In thousands)
|
|
|
United States
|
|
$
|
58,258
|
|
|
$
|
70,502
|
|
|
Canada
|
|
|
5,600
|
|
|
|
6,072
|
|
|
U.K.
|
|
|
17,306
|
|
|
|
16,377
|
|
|
Other foreign markets
|
|
|
5,997
|
|
|
|
3,557
|
|
|
Total consolidated revenue
|
|
$
|
87,161
|
|
|
$
|
96,508
|
|
|
|
|
Years ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
|
United States
|
|
$
|
14,210
|
|
|
$
|
20,765
|
|
|
Canada
|
|
|
1,079
|
|
|
|
814
|
|
|
U.K.
|
|
|
1,763
|
|
|
|
2,191
|
|
|
Other foreign markets
|
|
|
(3,831
|
)
|
|
|
(262
|
)
|
|
Total consolidated gross profit
|
|
$
|
13,221
|
|
|
$
|
23,508
|
|
*
Segment gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Years ended
|
|
|
|
|
December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
|
United States
|
|
$
|
154
|
|
|
$
|
190
|
|
|
Canada
|
|
|
5
|
|
|
|
3
|
|
|
U.K.
|
|
|
26
|
|
|
|
23
|
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
185
|
|
|
$
|
216
|
|
|
|
|
As of December 31,
|
|
|
|
|
2015
|
|
|
2014
|
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
|
United States
|
|
$
|
13,537
|
|
|
$
|
10,999
|
|
|
Canada
|
|
|
846
|
|
|
|
1,334
|
|
|
U.K.
|
|
|
4,672
|
|
|
|
4,524
|
|
|
Other foreign markets
|
|
|
2,070
|
|
|
|
870
|
|
|
Total consolidated identifiable assets
|
|
$
|
21,125
|
|
|
$
|
17,727
|
|
For
the years ended December 31, 2015 and 2014, our long-lived assets in the U.S. were approximately $1.2 million and $1.3 million,
respectively. For the years ended December 31, 2015 and 2014, 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, 2015 and 2014 were $5.4 million and $6.3 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, 2015 and 2014 was approximately $1.0 million and $0.8 million, respectively. Except for
a condominium lease with our Chief Executive Officer, there are no other related party leases.
At
December 31, 2015 (Successor), future remaining minimum lease commitments for all non-cancelable operating leases are as
follows (in thousands):
2016
|
|
$
|
453
|
|
2017
|
|
|
241
|
|
2018
|
|
|
136
|
|
2019
|
|
|
6
|
|
2020
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
836
|
|
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,
2015 and 2014 were $2.9 million and $1.5 million. These balances are included on the Consolidated Balance Sheets in restricted
cash in 2015 and 2014. 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, 2015
and 2014, 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. Defendants have moved for summary judgment, which we will oppose, and which has not been ruled
on by the Court.
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.
Tigrent
and Tranquility Bay of Southwest Florida, LLC v
.
Gulf Gateway Enterprises, LLC, Dunlap Enterprises, LLC, Anthony Scott
Dunlap, Peter Gutierrez, and Ignacio Guigou
, Case No. 11-CA-000342 filed January 28, 2011 in the 20
th
Judicial
Circuit, Lee County, FL Civil Division. This is a suit brought by the Company and its affiliate, Tranquility Bay of Southwest
Florida, LLC (“TBSWF”), of which the Company is the sole member. This suit (hereinafter referred to as
Tigrent
v. GGE
) was brought to enforce the terms of a settlement agreement with the defendants that resolved a prior mortgage foreclosure
suit brought by the Company to foreclose on property owned by TBSWF in Lee County, Florida (the “2009 Settlement”).
Pursuant to the 2009 Settlement, the Company acquired the membership interest in TBSWF and the defendants made certain representations
and warranties, and undertook certain obligations, regarding TBSWF and the property it owned. In the 2011 lawsuit, the Company
and TBSWF alleged that the defendants breached the 2009 Settlement Agreement. The defendants and Drevid, LLC, another party to
the 2009 Settlement, filed various counter- and cross-complaints against the Company and TWBSF for transferring the real property
owned by TBSWF to a third party in 2010, allegedly in violation of the 2009 Settlement. Trial was held in the 20
th
Judicial Circuit, Lee County Florida and on August 4, 2014, the Court entered an order entering judgment in favor of the Company
and TBSWF on the defendants’ counterclaims and Drevid LLC’s cross-claims and awarding the Company and TBSWF $0.3 million
in damages. The Company and TWBSF have filed a motion for its attorneys’ fees and pre-judgment interest on August 7, 2014.
On August 8, 2014, the defendants and Drevid have filed Motions to Alter or Amend the Judgment and for New Trial and/or Rehearing.
On October 22, 2014, the Court granted our motion for attorneys' fees and prejudgment interest and reserved jurisdiction to determine
the amount of such fees and costs to be awarded to us. Also, on October 22, 2014, the Court denied the defendants' and Drevid's
motions to Alter or Amend the Judgment and for a New Trial and/or Rehearing.
Subsequently,
on November 3, 2014, the defendants and Drevid (the “Appellants”) filed a Notice of Appeal with the Second District
Court, Case No. 2D14-5190. On February 3, 2016, the Second District Court issued an opinion affirming the trial court’s
order. At the same time, the Court awarded the motion for fees on appeal. On March 8, 2016, the Court issued its mandate thereby
permitting the fee claims to proceed.
In
a matter related to Tigrent Inc. et al. v. Gulf Gateway Enterprises, LLC, et al., Case No. 11-CA-000342, as described above, the
law firm of Aloia and Roland, LLP has filed a lawsuit captioned
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 that placed by Aloia and Roland,
LLP on the real property that was owned by TBSWF and transferred in 2010 that was the subject of the
Tigrent v. GGE
lawsuit
described in the immediately preceding paragraph. This mortgage was placed on the real property prior to the Company acquiring
the total membership interest in TBSWF. The placing of the mortgage on the real property was found by the court in
Tigrent
v. GGE
to be a breach by the defendants and Drevid of the 2009 Settlement Agreement for which judgment was entered in favor
of the Company and TBSWF. The Company is not a party to the lawsuit. TBSWF has defenses in this matter, although there can be
no guarantee of a favorable outcome. TBSW has also asserted a counterclaim against both the law firm of Aloia and Roland, LLP
as well as Frank Aloia, Jr., individually, alleging the following causes of action: 1) Legal Malpractice; 2) Breach of Fiduciary
Duty; and 3) Constructive Fraud. In addition, TBSWF has made demand for indemnification on the
Tigrent v. GGE
defendants
and Drevid, LLC under the 2009 Settlement Agreement. The matter is continuing to proceed towards a likely trial in 2016.
Tranquility
Bay of Southwest Florida, LLC v. Michael A. Schlosser; Rebecca H. Schlosser; Drevid, LLC; Anthony Scott Dunlap; Kayleen A. Dunlap;
Dunlap Enterprises, LLC; GGE, LLC; Peter Gutierrez, and Ignacio Guigou
, Case No. 14-CA-003160, filed October 30, 2014 in the
Circuit Court of the 20
th
Judicial Circuit for Lee County, Florida. In another matter related to
Tigrent Inc. et
al. v. Gulf Gateway Enterprises, LLC, et al.
, Case No. 11-CA-000342, as described above, TBSWF seeks a declaratory judgment
against all defendants that (i) a promissory note allegedly issued to Michael Schlosser by Dunlap Enterprises, LLC on behalf of
TBSWF in 2009 in the principal amount of approximately $2.2 million plus interest through August 3, 2014 (the “First
Schlosser
Note
”) is invalid and unforceable, (ii) a promissory note allegedly issued to Michael Schlosser by Dunlap Enterprises,
LLC on behalf of TBSWF in 2009 in the principal amount of approximately $2.5 million plus interest through August 3, 2014 (the
“Second Schlosser Note”) is invalid and unenforceable, (iii) Dunlap Enterprises, LLC lacked the authority to execute
both the First and Second Schlosser Notes on behalf of TBSWF, (iv) TBWSF received no consideration for the purported execution
of either the First or Second Schlosser Note, (v) that the Schlosser Notes are in fact a consolidation of debt incurred by defendants
Anthony Scott Dunlap, Kayleen Dunlap, Dunlap Enterprises, LLC, and GGE, LLC, (vi) all rights to the Schlosser Notes were previously
assigned to Drevid, LLC, (vii) the First Schlosser Note was surrendered and destroyed in 2009, and (viii) such other and further
relief as deemed just and proper by the Court. The Schlosser Notes were issued prior to the Company acquiring the complete membership
interest in TBSWF. Michael Schlosser is affiliated with Drevid, LLC, a party to the Tigrent v. GGE lawsuit described above. The
failure to inform the Company and TBSWF of the existence of the First Schlosser Note was found by the court in Tigrent v. GGE
to be a breach by the defendants and Drevid of the 2009 Settlement for which judgment was entered in favor of the Company and
TBSWF. The Company is not a party to either of the Notes. In addition, TBSWF seeks indemnification from Mr. Dunlap, Dunlap Enterprises,
LLC, Mr. Guigou and Mr. Gutierrez under the 2009 Settlement for fees and costs incurred by TBSWF in defending against claims by
Michael Schlosser and Rebecca Schlosser under the Schlosser Notes, including damages and prejudgment interest, and any additional
relief deemed just and proper by the Court. Drevid, LLC has filed a counterclaim in this action seeking payment from TBSWF under
the Second Schlosser Note. TBSWF recently was permitted to amend its complaint to allege fraud and breach of fiduciary duty claims
against Defendants Michael Schlosser and Anthony Scott Dunlap.
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. In this case (hereinafter referred to as “
Watson v. WEG
”), Jeffrey Watson (“Watson”)
alleged against Whitney Education Group, Inc., a subsidiary of the Company, causes of action for breach of contract, breach of
fiduciary duty, violation of Florida’s Deceptive and Unfair Trade Practices Act, breach of contractual obligation of good
faith, constructive fraud, conspiracy to commit fraud, declaratory judgment, fraud in the inducement, Florida RICO conspiracy,
and federal RICO conspiracy, 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 the WEG had a student referral agreement.
Watson seeks compensatory damages in an unspecified amount, punitive damages, treble damages, injunctive relief, declaratory relief,
and fees and costs. The Company is defending and indemnifying Mr. Whitney subject to and in accordance with the Company’s
by-laws. WEG has filed a motion to dismiss, which is still awaiting a ruling from the court.
In
related matters,
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. These matters arose out of two mortgage foreclosure actions by Huron River Area Credit Union against
Jeffrey Watson (“Watson”), which involve the real property that is the subject of the
Watson v. WEG
matter,
above. Watson filed a cross-complaint against the Company’s Whitney Education Group subsidiary, n/k/a Rich Dad Education
Inc., (“WEG”) and Russell A. Whitney, the Company’s founder and former Chief Executive Officer. In his cross-complaints,
Watson alleges causes of action for common law indemnity, breach of contract, breach of the Florida Unfair and Deceptive Trade
Practices Act, and conspiracy to commit fraud based on the purchase land and improvements in Lee County, Florida from Gulfstream
Realty and Development, an entity affiliated with Mr. Whitney, and with whom the WEG had a student referral agreement. Watson
is seeking unspecified compensatory damages, punitive damages, attorney’s fees and costs. The Company is defending and indemnifying
Mr. Whitney subject to and in accordance with the Company’s by-laws. WEG has filed a motion to dismiss in each case, which
are still awaiting a ruling from the court.
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
We
have evaluated significant events and transactions that occurred after the balance sheet date through March 28, 2016 and determined
that there were no events or transactions that would require recognition or disclosure in our consolidated financial statements
for the year ended December 31, 2015.