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 June 30, 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 six months ended June 30, 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/(loss) 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 June 2018, an accounting
update was issued to simplify the accounting for nonemployee share-based payment transactions resulting from expanding the scope
of
ASC Topic 718, Compensation-Stock Compensation
, to include share-based payment transactions for acquiring goods and services
from nonemployees. An entity should apply the requirements of
ASC Topic 718
to nonemployee awards except for specific guidance
on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards
vest and the pattern of cost recognition over that period). The amendments specify that
ASC Topic 718
applies to all share-based
payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by
issuing share-based payment awards. The amendments also clarify that
ASC Topic 718
does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to
customers as part of a contract accounted for under
ASC Topic 606, Revenue from Contracts with Customers
. The amendments
in this accounting update are effective for public business entities for fiscal years beginning after December 15, 2018, including
interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date of
ASC
Topic 606
. We are evaluating whether to early adopt this accounting update during the remainder of 2018.
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 $56.0 thousand for the three months ended
June 30, 2018 and 2017, and $114.0 thousand and $107.0 thousand for the six months ended June 30, 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 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 1,120,927 for the six months ended June 30, 2018 and 1,095,792 for the three months ended June 30, 2018
because we had a net loss in the 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 1,120,927 and 1,478,615 for the three months ended June 30, 2018 and 2017, and
1,095,792 and 1,413,045 for the six months ended June 30, 2018 and 2017.
The
calculations of basic and diluted EPS are as follows:
|
|
Three Months Ended June 30, 2018
|
|
|
Three
Months Ended June 30, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Loss
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Share
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(2,415
|
)
|
|
|
23,008
|
|
|
|
|
|
|
$
|
1,947
|
|
|
|
22,763
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127
|
)
|
|
|
(1,479
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(2,415
|
)
|
|
|
23,008
|
|
|
$
|
(0.10
|
)
|
|
$
|
1,820
|
|
|
|
21,284
|
|
|
$
|
0.09
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
127
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,479
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(135
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(2,415
|
)
|
|
|
23,008
|
|
|
$
|
(0.10
|
)
|
|
$
|
1,812
|
|
|
|
22,763
|
|
|
$
|
0.08
|
|
|
|
Six
Months Ended June 30, 2018
|
|
|
Six
Months Ended June 30, 2017
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Loss
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Share
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(3,272
|
)
|
|
|
23,008
|
|
|
|
|
|
|
$
|
1,637
|
|
|
|
22,697
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102
|
)
|
|
|
(1,413
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(3,272
|
)
|
|
|
23,008
|
|
|
$
|
(0.14
|
)
|
|
$
|
1,535
|
|
|
|
21,284
|
|
|
$
|
0.07
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
102
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,413
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(3,272
|
)
|
|
|
23,008
|
|
|
$
|
(0.14
|
)
|
|
$
|
1,528
|
|
|
|
22,697
|
|
|
$
|
0.07
|
|
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 June
30, 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 June 30, 2018
|
|
Warrant derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 did not continue to be a reporting company under the Securities Exchange
Act of 1934 during the two-year period after closing, the exercise price would 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
|
|
|
June 30,
2018
|
|
|
December 31, 2017
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.38
|
|
|
$
|
0.48
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
1.93
|
%
|
|
|
1.53
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
55
|
%
|
|
|
62.5
|
%
|
|
|
63.5
|
%
|
Term
|
|
|
3 years
|
|
|
|
0.0 year
|
|
|
|
0.5 year
|
|
As
of June 30, 2018 and December 31, 2017, the fair value of the total warrants' derivative liability is $0 and $24,233, respectively,
and were recorded in other accrued expenses in the Condensed Consolidated Balance Sheets. We recognized a gain on the derivative
liability of $2,438 and $15,624 for the three months ended June 30, 2018 and 2017, and $24,233 and $87,425 for the six months
ended June 30, 2018 and 2017, which is recorded in other income, net in the Condensed Consolidated Statements of Operations and
Comprehensive Income.
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
|
|
|
(24,233
|
)
|
Balance at June 30, 2018
|
|
|
—
|
|
The
following table summarizes information about warrants outstanding as of June 30, 2018:
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
Weighted-average exercise price
|
|
$
|
0.75
|
|
Remaining life (in years)
|
|
|
—
|
|
Note
7 - Income Taxes
We
recorded an income tax benefit of $640.0 thousand and income tax expense of ($107.0) thousand for the three months ended June
30, 2018 and 2017, respectively. We recorded an income tax benefit of $243 and $226.0 thousand for the six months ended June 30,
2018 and 2017, respectively. Our effective tax rate was 20.9% and 5.2% for the three months ended June 30, 2018 and 2017, and
6.9% and (16.0)% for the six months ended June 30, 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 June 30, 2018 and December 31, 2017, valuation allowances of $4.9 million and $4.7 million have been provided
against net operating loss carryforwards and other deferred tax assets, respectively. We increased our valuation allowance by
$0.07 million for the six months ended June 30, 2018 and decreased our valuation allowance by $0.5 million for the six months ended
June 30, 2017.
As
of June 30, 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 $0.4 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 and six months ended June 30, 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
Internal Revenue Service completed its examination of the corporation’s federal income tax returns for the years 2013-2015
resulting in no changes.
The
Canadian Revenue Agency completed its examination of the corporation’s 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 June 30, 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 June 30, 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 six months ended June 30, 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 June 30,
2018 and December 31, 2017, including foreign subsidiaries, without FDIC coverage were $2.1 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 68.5% and 70.1% for the three months ended June 30, 2018 and 2017, and 71.1% and 71.9% for the six months
ended June 30, 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
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
As a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
52.5
|
%
|
|
|
58.2
|
%
|
|
|
57.3
|
%
|
|
|
58.0
|
%
|
U.K.
|
|
|
23.6
|
%
|
|
|
22.1
|
%
|
|
|
22.0
|
%
|
|
|
23.1
|
%
|
Other foreign markets
|
|
|
23.9
|
%
|
|
|
19.7
|
%
|
|
|
20.7
|
%
|
|
|
18.9
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating
results for the segments are as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Segment revenue
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,237
|
|
|
$
|
15,262
|
|
|
$
|
29,186
|
|
|
$
|
27,944
|
|
U.K.
|
|
|
5,944
|
|
|
|
5,786
|
|
|
|
11,209
|
|
|
|
11,141
|
|
Other foreign markets
|
|
|
6,041
|
|
|
|
5,160
|
|
|
|
10,582
|
|
|
|
9,088
|
|
Total consolidated revenue
|
|
$
|
25,222
|
|
|
$
|
26,208
|
|
|
$
|
50,977
|
|
|
$
|
48,173
|
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Segment gross profit contribution *
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
(459
|
)
|
|
$
|
2,961
|
|
|
$
|
3,397
|
|
|
$
|
4,514
|
|
U.K.
|
|
|
1,719
|
|
|
|
2,023
|
|
|
|
2,846
|
|
|
|
3,793
|
|
Other foreign markets
|
|
|
914
|
|
|
|
1,234
|
|
|
|
344
|
|
|
|
1,529
|
|
Total consolidated gross profit
|
|
$
|
2,174
|
|
|
$
|
6,218
|
|
|
$
|
6,587
|
|
|
$
|
9,836
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Depreciation and amortization expenses
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
28
|
|
|
$
|
27
|
|
|
$
|
53
|
|
|
$
|
56
|
|
U.K.
|
|
|
10
|
|
|
|
5
|
|
|
|
14
|
|
|
|
9
|
|
Other foreign markets
|
|
|
3
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
41
|
|
|
$
|
32
|
|
|
$
|
70
|
|
|
$
|
65
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Segment identifiable assets
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
North America
|
|
$
|
10,449
|
|
|
$
|
15,364
|
|
U.K.
|
|
|
6,384
|
|
|
|
9,090
|
|
Other foreign markets
|
|
|
5,583
|
|
|
|
2,566
|
|
Total consolidated identifiable assets
|
|
$
|
22,416
|
|
|
$
|
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 $55.1 million
related to contractual commitments with customers where 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 June 30, 2018
|
|
|
Three Months Ended June 30, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seminars
|
|
$
|
8,134
|
|
|
$
|
4,690
|
|
|
$
|
3,971
|
|
|
$
|
16,795
|
|
|
$
|
9,873
|
|
|
$
|
4,060
|
|
|
$
|
2,321
|
|
|
$
|
16,254
|
|
Products
|
|
|
2,578
|
|
|
|
1,029
|
|
|
|
1,078
|
|
|
|
4,685
|
|
|
|
2,787
|
|
|
|
1,011
|
|
|
|
1,306
|
|
|
|
5,104
|
|
Coaching and Mentoring
|
|
|
1,291
|
|
|
|
206
|
|
|
|
986
|
|
|
|
2,483
|
|
|
|
1,301
|
|
|
|
609
|
|
|
|
1,533
|
|
|
|
3,443
|
|
Online and Subscription
|
|
|
385
|
|
|
|
13
|
|
|
|
6
|
|
|
|
404
|
|
|
|
31
|
|
|
|
6
|
|
|
|
—
|
|
|
|
37
|
|
Other
|
|
|
849
|
|
|
|
6
|
|
|
|
0
|
|
|
|
855
|
|
|
|
1,270
|
|
|
|
100
|
|
|
|
—
|
|
|
|
1,370
|
|
Total revenue
|
|
$
|
13,237
|
|
|
$
|
5,944
|
|
|
$
|
6,041
|
|
|
$
|
25,222
|
|
|
$
|
15,262
|
|
|
$
|
5,786
|
|
|
$
|
5,160
|
|
|
$
|
26,208
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
Six Months Ended June 30, 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seminars
|
|
$
|
18,316
|
|
|
$
|
8,120
|
|
|
$
|
6,597
|
|
|
$
|
33,033
|
|
|
$
|
17,306
|
|
|
$
|
7,292
|
|
|
$
|
3,995
|
|
|
$
|
28,593
|
|
Products
|
|
|
5,852
|
|
|
|
2,382
|
|
|
|
2,004
|
|
|
|
10,238
|
|
|
|
5,834
|
|
|
|
2,737
|
|
|
|
2,916
|
|
|
|
11,487
|
|
Coaching and Mentoring
|
|
|
2,748
|
|
|
|
644
|
|
|
|
1,971
|
|
|
|
5,363
|
|
|
|
3,026
|
|
|
|
971
|
|
|
|
2,177
|
|
|
|
6,174
|
|
Online and Subscription
|
|
|
952
|
|
|
|
24
|
|
|
|
10
|
|
|
|
986
|
|
|
|
56
|
|
|
|
10
|
|
|
|
—
|
|
|
|
66
|
|
Other
|
|
|
1,318
|
|
|
|
39
|
|
|
|
0
|
|
|
|
1,357
|
|
|
|
1,722
|
|
|
|
131
|
|
|
|
—
|
|
|
|
1,853
|
|
Total revenue
|
|
$
|
29,186
|
|
|
$
|
11,209
|
|
|
$
|
10,582
|
|
|
$
|
50,977
|
|
|
$
|
27,944
|
|
|
$
|
11,141
|
|
|
$
|
9,088
|
|
|
$
|
48,173
|
|
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, Martin Roberts and Kathy Ireland. Total royalty expenses included in our Condensed Consolidated
Statements of Operations and Comprehensive Income/(Loss) were $1.6 million for the three months ended June 30, 2018 and 2017,
and $3.2 million and $2.5 million for the six months ended June 30, 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 June 30, 2018 and December
31, 2017, were $3.4 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 June 30, 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.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
You
should read the following discussion of our financial condition and results of operations with our audited consolidated financial
statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31,
2017. This discussion contains forward-looking statements and involves numerous risks, uncertainties, assumptions and other important
factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical
results, any future results, or performance or achievements expressed or implied by such forward-looking statements. See “Cautionary
Statement Regarding Forward-Looking Information.”
Business
Overview
We
are a provider of practical, high-quality, and value-based educational training on the topics of personal finance, entrepreneurship,
real estate and financial markets investing strategies and techniques. Our programs are offered through a variety of formats and
channels, including free-preview workshops, basic training classes, symposiums, telephone mentoring, one-on-one mentoring, coaching
and e-learning, primarily under the Rich Dad® Education brand (“Rich Dad”) which was created in 2006 under license
from entities affiliated with Robert Kiyosaki, whose teachings and philosophies are detailed in the book titled,
Rich Dad Poor
Dad.
In addition to Rich Dad, we market our products and services under 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.
Our
students pay for their courses in full up-front or through payment agreements with independent third parties. Under United States
of America generally accepted accounting principles (“U.S. GAAP”), we recognize revenue when our students take their
courses or the term for taking their course expires, which could be several quarters after the student purchases a program and
pays the fee. Over time, we have taken steps to shorten many of our course contracts from two-year contracts to one-year contracts,
which is expected to accelerate revenue recognition as services are delivered faster and/or contract terms expire sooner. We also
continue to expand our innovative symposium-style course delivery model into other markets. Our symposiums combine multiple advanced
training courses in one location, allowing us to achieve certain economies of scale that reduce costs and improve margins while
also accelerating U.S. GAAP revenue recognition, while at the same time, enhancing our student's experience, particularly, for
example, through the opportunity to network with other students.
We
also provide a richer experience for our students through one-on-one mentoring (two to four days in length, on site or remotely)
and telephone mentoring (10 to 16 weekly one-on-one or one-on-many telephone sessions). Mentoring involves a subject matter expert
interacting with the student remotely or in person and guiding the student, for example, through his or her first real estate
transaction, providing a real hands-on experience.
We
were founded in 1996 and became a public reporting company in November 2014. Today we are a global company with approximately
200 employees that has cumulatively served more than two million students from more than 150 countries and territories over the
course of our operating history.
We
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.
In
addition to our international expansion efforts, we are diversifying our product offerings through the introduction of established
brands into new markets and the development of new brands. Overall, we currently offer ten brands, which include:
|
●
|
Brick Buy Brick™:
Initially launched in the UK, Brick Buy Brick is now also available in the North America and the other foreign markets in
which we operate. The program introduces our students to the tools and strategies used by successful investors to make money
work for them through real estate investing.
|
|
|
|
|
●
|
Building Wealth:
A program that offers students training on how to build and preserve wealth, start or manage a business, and benefit through
investing in property regardless of market conditions.
|
|
|
|
|
●
|
Making Money from
Property with Martin Roberts™: A property-based curriculum focused on how and why to buy property at auction in the
U.K. Based on the teachings of Martin Roberts, renowned U.K. TV personality, property expert, journalist, and author of
Making
Money from Property
, our Making Money from Property program is designed to show investors tested strategies to buy at
auction, as well as the difference between income and capital growth strategies, negotiating transactions, and buying properties
overseas.
|
|
|
|
|
●
|
Perform in Property
TM
is the first British training program of its kind. Joining forces with gallant Olympians, Legacy sets out to empower
students to take control of their financial future by providing three tiers of reality-based training and time-tested resources.
The Perform in Property brand is designed to help students achieve the level of performance and financial independence they
desire.
|
|
|
|
|
●
|
Rich Dad® Education:
Our flagship brand based on the teachings of Robert Kiyosaki, an entrepreneur, investor, educator, and author of the best-selling
personal finance books of all time,
Rich Dad Poor Dad
. Mr. Kiyosaki has written more than 15 books with combined sales
of more than 26 million copies.
|
|
|
|
|
●
|
Rich Dad® Stock
Education: In our Rich Dad Stock Education program, we teach students how to become savvy investors who can potentially create
winning trades and profits in any market condition through the development of personal trading plans that are compatible with
their current financial situation, the level of risk they are comfortable with, and their long-term financial goals.
|
|
|
|
|
●
|
Robbie Fowler Property
Academy™: Designed to teach investment strategies individuals can use to achieve a potential clear path towards long-term
wealth, the goal of our Property Academy training program is to provide a comprehensive property investment education. We
teach our students the investment strategies currently implemented throughout the UK, such as Social Housing, Buy-To-Let,
Lease Options, and Land Development.
|
|
|
|
|
●
|
Teach Me to Trade
TM
is a brand designed for students who want to learn the core concepts of trading in the financial markets. Beginners
and veteran traders alike can benefit from the Teach Me to Trade brand as it focuses on broad market concepts aimed at helping
traders gain an understanding of the foundations for success in a new trading business. It teaches how to develop a
game plan, develop a business-minded approach to trading and appreciate the vital skills needed to invest in the financial
markets.
|
|
|
|
|
●
|
Trade Up Investor
Education™: Built on the belief that a successful investor is an educated investor and developed in partnership with
Investor’s Business Daily®, a leading financial news and research organization since 1984, students are offered
educational training designed to help them increase their knowledge of stock and options trading.
|
|
|
|
|
●
|
Women In Wealth™:
Created to inspire women of all ages and backgrounds to potentially achieve financial security, Women In Wealth seeks to empower
women with a strong financial education and help them learn the potential benefits of real estate investing to create cash
flow and build financial independence.
|
Recent
Developments
The
company announced that it has established separate subsidiaries in the U.K. and the U.S. to focus solely on real estate investment
and development activities. The properties acquired by the Company include two rental-income flats in Birmingham, West Midlands,
which is the second largest city in the U.K. In addition to providing rental income to the Company, these and other acquired properties
will be used as case studies to demonstrate various strategies and techniques taught in Legacy’s various property investing
classes in the U.K.
In
June 2018, we entered into an agreement to join forces with kathy ireland® Worldwide (kiWW®) to promote our respective
brands. Under the agreement, Kathy Ireland®, world famous and widely respected fashion model, businessperson and entrepreneur,
will act as Brand Ambassador promoting our world class suite of real estate and financial markets education products and services
in alignment with Ms. Ireland's message of entrepreneurship and social responsibility.
RESULTS OF OPERATIONS
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
25,222
|
|
|
$
|
26,208
|
|
|
$
|
50,977
|
|
|
$
|
48,173
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
15,397
|
|
|
|
13,220
|
|
|
|
29,611
|
|
|
|
26,083
|
|
Advertising and sales expenses
|
|
|
5,998
|
|
|
|
5,131
|
|
|
|
11,570
|
|
|
|
9,722
|
|
Royalty expenses
|
|
|
1,653
|
|
|
|
1,639
|
|
|
|
3,209
|
|
|
|
2,532
|
|
General and administrative expenses
|
|
|
5,198
|
|
|
|
4,231
|
|
|
|
10,046
|
|
|
|
8,572
|
|
Total operating costs and expenses
|
|
|
28,246
|
|
|
|
24,221
|
|
|
|
54,436
|
|
|
|
46,909
|
|
Income/(loss) from operations
|
|
|
(3,024
|
)
|
|
|
1,987
|
|
|
|
(3,459
|
)
|
|
|
1,264
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
|
(5
|
)
|
Other income (expense), net
|
|
|
(27
|
)
|
|
|
69
|
|
|
|
(48
|
)
|
|
|
152
|
|
Total other income (expense), net
|
|
|
(31
|
)
|
|
|
67
|
|
|
|
(56
|
)
|
|
|
147
|
|
Income/(loss) before income taxes
|
|
|
(3,055
|
)
|
|
|
2,054
|
|
|
|
(3,515
|
)
|
|
|
1,411
|
|
Income tax (expense) benefit
|
|
|
640
|
|
|
|
(107
|
)
|
|
|
243
|
|
|
|
226
|
|
Net income/(loss)
|
|
$
|
(2,415
|
)
|
|
$
|
1,947
|
|
|
$
|
(3,272
|
)
|
|
$
|
1,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per common share
|
|
$
|
(0.10
|
)
|
|
$
|
0.09
|
|
|
$
|
(0.14
|
)
|
|
$
|
0.07
|
|
Diluted earnings/(loss) per common share
|
|
$
|
(0.10
|
)
|
|
$
|
0.08
|
|
|
$
|
(0.14
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
23,008
|
|
|
|
21,284
|
|
|
|
23,008
|
|
|
|
21,284
|
|
Diluted weighted average common shares outstanding
|
|
|
23,008
|
|
|
|
22,763
|
|
|
|
23,008
|
|
|
|
22,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(2,415
|
)
|
|
$
|
1,947
|
|
|
$
|
(3,272
|
)
|
|
$
|
1,637
|
|
Foreign currency translation adjustments, net of tax of $0
|
|
|
1,407
|
|
|
|
(980
|
)
|
|
|
986
|
|
|
|
(1,278
|
)
|
Total comprehensive income/(loss)
|
|
$
|
(1,008
|
)
|
|
$
|
967
|
|
|
$
|
(2,286
|
)
|
|
$
|
359
|
|
Our operating results
are expressed as a percentage of revenue in the table below:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
61
|
|
|
|
50.4
|
|
|
|
58.1
|
|
|
|
54.1
|
|
Advertising and sales expenses
|
|
|
23.8
|
|
|
|
19.5
|
|
|
|
22.7
|
|
|
|
20.2
|
|
Royalty expenses
|
|
|
6.6
|
|
|
|
6.3
|
|
|
|
6.2
|
|
|
|
5.2
|
|
General and administrative expenses
|
|
|
20.6
|
|
|
|
16.1
|
|
|
|
19.7
|
|
|
|
17.8
|
|
Total operating costs and expenses
|
|
|
112.0
|
|
|
|
92.3
|
|
|
|
106.7
|
|
|
|
97.3
|
|
Income/(loss) from operations
|
|
|
(12.0
|
)
|
|
|
7.7
|
|
|
|
(6.7
|
)
|
|
|
2.7
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
Total other income (expense), net
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
0.3
|
|
Income/(loss) before income taxes
|
|
|
(12.1
|
)
|
|
|
7.9
|
|
|
|
(6.9
|
)
|
|
|
3.0
|
|
Income tax (expense) benefit
|
|
|
2.5
|
|
|
|
(0.5
|
)
|
|
|
0.5
|
|
|
|
0.4
|
|
Net income/(loss)
|
|
|
(9.6
|
)%
|
|
|
7.4
|
%
|
|
|
(6.4
|
)%
|
|
|
3.4
|
%
|
Outlook
Cash sales were $52.3
million for the six months ended June 30, 2018 compared to $51.2 million for the six months ended June 30, 2017, an increase of
$1.1 million or 2.1%. The increase was driven primarily by a $2.1 million increase in our North America segment, which was partially
offset by a $1.0 million decrease in our Other Foreign Markets segment. We believe that cash sales remain an important metric when
evaluating our operating performance. Pursuant to U.S. GAAP, we recognize revenue when our students take their courses or the term
for taking their course expires, which could be several quarters after the student purchases a program. Our students pay for their
courses in full up-front or through payment agreements with independent third parties.
Our financial results were impacted by expenses
incurred in executing on our strategy of brand and product diversification, including significant upfront sales and advertising
expense and direct course expenses to develop, test, and market these new brands and product offerings and to fund our U.K. property
development activities. Our financial results also were impacted by increases in labor costs and software costs in connection with
our new ERP system which was placed into production in January 2018. We have taken steps to ensure our expenses are in line with
our projected cash sales and liquidity requirements for the remainder of 2018.
We anticipate cash sales
to increase throughout 2018, particularly as new brands gain greater traction in our more established markets, and as we continue
to expand internationally and hone our selling and marketing strategy in new markets.
Cash Sales 2018 and 2017 in Percentages
and Dollars
OPERATING SEGMENTS
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. The proportion of our total revenue attributable to each segment is
as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
As a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
52.5
|
%
|
|
|
58.2
|
%
|
|
|
57.3
|
%
|
|
|
58.0
|
%
|
U.K.
|
|
|
23.6
|
%
|
|
|
22.1
|
%
|
|
|
22.0
|
%
|
|
|
23.1
|
%
|
Other foreign markets
|
|
|
23.9
|
%
|
|
|
19.7
|
%
|
|
|
20.7
|
%
|
|
|
18.9
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
Segment revenue
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
13,237
|
|
|
$
|
15,262
|
|
|
$
|
29,186
|
|
|
$
|
27,944
|
|
U.K.
|
|
|
5,944
|
|
|
|
5,786
|
|
|
|
11,209
|
|
|
|
11,141
|
|
Other foreign markets
|
|
|
6,041
|
|
|
|
5,160
|
|
|
|
10,582
|
|
|
|
9,088
|
|
Total consolidated revenue
|
|
$
|
25,222
|
|
|
$
|
26,208
|
|
|
$
|
50,977
|
|
|
$
|
48,173
|
|
Revenue 2018 and 2017 in Dollars
and Percentages
North America
Over the past several
years, our North America business shifted its focus to consist primarily of
Rich Dad™ Education
brand offerings. Revenue
derived from the Rich Dad brands was $10.6 million and $13.5 million or as a percentage of total segment revenue was 80.3% and
88.2% for the three months ended June 30, 2018 and 2017, and $22.7 million and $24.8 million or as a percentage of total segment
revenue was 77.9% and 88.9% for the six months ended June 30, 2018 and 2017. The majority pertained to real estate-related education,
with the balance pertaining to financial markets and entrepreneurial education. We are continuing to develop non-Rich Dad brands,
such as Woman in Wealth
TM
, Building Wealth, Teach Me to Trade
TM
and Brick Buy Brick
TM
along with
other brands to diversify our business, although our business to date in these brands has not been material to our Company as a
whole.
The North America segment
revenue was $13.2 million and $15.2 million or as a percentage of total revenue was 52.5% and 58.2% for the three months ended
June 30, 2018 and 2017, $29.2 million and $27.9 million or as a percentage of total revenue was 57.3% and 58.0% for the six months
ended June 30, 2018 and 2017. The decrease in revenue of $2.0 million or 13.3% during the three months ended June 30, 2018 compared
to the same period in 2017, was due to a decrease in recognition of revenue from decreased attendance (i.e. fulfillment) of $3.2
million or 23.2%, partially offset by an increase in revenue from expired contracts of $1.2 million or 94.4%. The increase in revenue
of $1.3 million or 4.7% during the six months ended June, 2018 compared to the same period in 2017, was due to an increase in revenue
from expired contracts of $2.5 million or 96.3%, partially offset by a decrease in recognition of revenue from decreased attendance
(i.e. fulfillment) of $1.2 million or 5.1%.
U.K.
In contrast to our North
America segment, our U.K. segment is more diversified amongst several different brands. Revenue derived from the Rich Dad brands
was $1.0 million and $1.4 million or as a percentage of total segment revenue was 16.9% and 24.0% for the three months ended June
30, 2018 and 2017, and $3.4 million and $2.8 million or as a percentage of total segment revenue was 30.5% and 25.5% for the six
months ended June 30, 2018 and 2017. The majority pertained to real estate-related education, with the balance pertaining to financial
markets education.
The U.K. segment revenue
was $6.0 million and $5.8 million or as a percentage of total revenue was 23.6% and 22.1% for the three months ended June 30, 2018
and 2017, and $11.2 million and $11.1 million or as a percentage of total revenue was 22.0% and 23.1% for the six months ended
June 30, 2018 and 2017. The increase in revenue of $0.2 million for the three months ended June 30, 2018 compared to the same period
in 2017, was due to increased attendance (i.e. fulfillment) of $0.1 million or 1.0%, and increase in recognition of revenue from
expired contracts of $0.1 million or 8.8%. The increase of $0.1 million in revenue for the six months ended June 30, 2018
compared to the same period in 2017, was due to increased attendance (i.e. fulfillment) of $0.4 million or 4.1%, partially offset
by a decrease in recognition of revenue from expired contracts of $0.3 million or 12.0%.
Other Foreign Markets
We operate in other
foreign markets, including Australia, New Zealand, South Africa, Hong Kong and other European, Asian and African countries. Our
Other Foreign Markets segment continues to gain traction and has shown significant growth in revenue. Revenue derived from the
Rich Dad brands was $5.7 million and $3.5 million or as a percentage of total segment revenue was 93.6% and 68.1% for the three
months ended June 30, 2018 and 2017, and $10.1 million and $7.0 million or as a percentage of total segment revenue was 95.3% and
77.4% for the six months ended June 30, 2018 and 2017.
The
Other Foreign Markets segment revenue was $6.0 million and $5.1 million or as a percentage of total revenue was 23.9% and 19.7%
for the three months ended June 30, 2018 and 2017, and $10.6 million and $9.1 million or as a percentage of total revenue was 20.7%
and 18.9% for the six months ended June 30, 2018 and 2017. The increase in revenue of $0.9 million or 17.1% during
the three months ended June 30, 2018 compared to the same period in 2017,
was due to increased attendance (i.e. fulfillment) of $0.3 million or 7.7% and increase in recognition of revenue from expired
contracts of $0.6 million or 48.5%. The increase in revenue of $1.5 million or 16.4% during the six months ended June 30, 2018
compared to the same period in 2017, was due to increased attendance (i.e. fulfillment) of $0.5 million or 6.9% and increase in
recognition of revenue from expired contracts of $1.0 million or 62.4%.
Three Months Ended June 30, 2018 Compared to Three Months
Ended June 30, 2017
Revenue
Revenue was $25.2 million
for the three months ended June 30, 2018 compared to $26.2 million for the three months ended June 30, 2017. Revenue decreased
$1.0 million or 3.8% during the three months ended June 30, 2018 compared to the same period in 2017. The decrease in revenue was
due to decreased attendance (i.e. fulfillment) of $2.9 million or 12.9%, partially offset by an increase in revenue from expired
contracts of $1.9 million or 50.5%.
Cash sales were $24.7
million for the three months ended June 30, 2018 compared to $26.8 million for the three months ended June 30, 2017, a decrease
of $2.1 million or 7.8%. The decrease was driven primarily by a $0.8 million decrease in our U.K. segment, a $0.7 million decrease
in our North America segment, and a $0.6 million decrease in our Other Foreign Markets segment.
Operating Expenses
Total operating costs
and expenses were $28.2 million for the three months ended June 30, 2018 compared to $24.2 million for the three months ended June
30, 2017, an increase of $4.0 million or 16.5%. The increase was primarily due to a $2.2 million increase in direct course expenses,
a $0.9 million increase in advertising and sales expenses and a $0.9 million increase general and administrative expenses.
Direct course expenses
Direct course
expenses relate to our free preview workshops, basic training and advanced training, and consist of instructor fees, facility
costs, salaries, commissions and fees associated with our field representatives and related travel expenses. Direct course
expenses were $15.4 million for the three months ended June 30, 2018 compared to $13.2 million for the three months ended
June 30, 2017, an increase of $2.2 million or 16.5%, which was primarily related to increases in sales and training
compensation, due to improved internal sales performance metrics, venue expenses, and mentor fulfilment costs. We have
adjusted our sales compensation programs to align them with sales forecasts for the balance of 2018.
Advertising and sales expenses
We generally obtain
most of our potential customers through internet-based advertising. Advertising and sales expenses consist of purchased media
to generate registrations to our free preview workshops and costs associated with supporting customer recruitment. We obtain the
majority of our customers through free preview workshops. These preview workshops are offered in various metropolitan areas in
North America, United Kingdom, and other international markets. Prior to the actual workshop, we spend a significant amount of
money in the form of advertising through various media channels.
Advertising and
sales expenses were $6.0 million for the three months ended June 30, 2018 compared to $5.1 million for the three months ended
June 30, 2017, an increase of $0.9 million, or 16.9 %. As a percentage of revenue, advertising and sales expenses were
23.8% and 19.5% of revenue for the three months ended June 30, 2018 and 2017, an increase of 4.3%. This increase
is related to our efforts to diversify our product offerings through the introduction and the development of our proprietary
brands as we incurred significant upfront costs to develop, test, and market these new brands and new product offerings.
Royalty expenses
We have licensing and
related agreements with RDOC, whereby we have exclusive rights to develop, market, and sell Rich Dad Education-branded live seminars,
training courses, and related products worldwide. In connection with these agreements and our other licensing agreements, we are
required to pay royalties. Royalty expenses were $1.6 million for the three months ended June 30, 2018 and 2017.
General and administrative expenses
General
and administrative expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expenses and
travel expenses for the corporate staff, as well as depreciation and amortization expenses. General and administrative expenses
were $5.2 million for the three months ended June 30, 2018 compared to $4.3 million for the three months ended June 30, 2017, an
increase of $0.9 million, or 20.9
%. The increase was primarily
driven by increases in labor costs and software costs in connection with our new ERP system which was placed into production in
January 2018.
Income tax expense
We recorded an income
tax benefit of $640 thousand and income tax expense of ($107.0) thousand for the three months ended June 30, 2018 and 2017, respectively.
Our effective tax rate was 20.9% and 5.2% for the three months ended June 30, 2018 and 2017. 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 June
30, 2018 and December 31, 2017, valuation allowances of $4.9 million and $4.7 million have been provided against net operating
loss carryforwards and other deferred tax assets, respectively. Our valuation allowance increased by $0.2 million for the three
months ended June 30, 2018 and decreased $0.6 million for the three months ended June 30, 2017.
Net Income/(Loss)
Net loss was $2.4 million
or ($0.10) per basic and diluted common share for the three months ended June 30, 2018, compared to a net income of $2.0 million
or $0.09 per basic and $0.08 per diluted common share for the three months ended June 30, 2017, an increase in net loss of ($4.4)
million or ($0.19) per basic and ($0.18) per diluted common share. Net loss for the three months ended June 30, 2018 was primarily
due to increases of $4.0 million in operating expenses, decreases in revenue as a result of decreased attendance (i.e. fulfillment)
of $2.9 million or 12.9%, partially offset by an increase in revenue from expired contracts of $1.9 million or 50.5%. and an increase
of $0.7 million in tax benefits.
Six Months Ended June 30, 2018 Compared to Six Months
Ended June 30, 2017
Revenue
Revenue was $51.0 million
for the six months ended June 30, 2018 compared to $48.1 million for the six months ended June 30, 2017. Revenue increased $2.9
million or 6.0% during the six months ended June 30, 2018 compared to the same period in 2017. The increase in revenue was due
to increase in revenue from expired contracts of $3.3 million or 48.4%, partially offset by decreased attendance (i.e. fulfillment)
of $0.4 million or 1.0%.
Cash sales were $52.3
million for the six months ended June 30, 2018 compared to $51.2 million for the six months ended June 30, 2017, an increase of
$1.1 million or 2.1%. The increase was driven primarily by a $2.1 million increase in our North America segment, which was partially
offset by a $1.0 million decrease in our Other Foreign Markets segment.
Operating Expenses
Total operating costs
and expenses were $54.5 million for the six months ended June 30, 2018 compared to $46.9 million for the six months ended June
30, 2017, an increase of $7.6 million or 16.2%. The increase was primarily due to a $3.5 million increase in direct course expenses,
a $1.9 million increase in advertising and sales expenses, a $1.5 million increase general and administrative expenses and a $0.7
million increase in in royalty expense.
Direct course expenses
Direct course expenses
relate to our free preview workshops, basic training and advanced training, and consist of instructor fees, facility costs, salaries,
commissions and fees associated with our field representatives and related travel expenses. Direct course expenses were $29.6
million for the six months ended June 30, 2018 compared to $26.1 million for the six months ended June 30, 2017, an increase of
$3.5 million or 13.4%, which was primarily related to increases in sales and training compensation, due to improved internal sales
performance metrics, venue expenses, and mentor fulfilment costs. We have adjusted our sales compensation programs to align them
with sales forecasts for the balance of 2018.
Advertising and sales expenses
We generally obtain
most of our potential customers through internet-based advertising. Advertising and sales expenses consist of purchased media to
generate registrations to our free preview workshops and costs associated with supporting customer recruitment. We obtain the majority
of our customers through free preview workshops. These preview workshops are offered in various metropolitan areas in North America,
United Kingdom, and other international markets. Prior to the actual workshop, we spend a significant amount of money in the form
of advertising through various media channels.
Advertising
and sales expenses were $11.6 million for the six months ended June 30, 2018 compared to $9.7 million for the six months
ended June 30, 2017, an increase of $1.9 million, or 19.6%. As a percentage of revenue, advertising and sales expenses were
22.7% and 20.2% of revenue for the six months ended June 30, 2018 and 2017, an increase of 12.4%. This increase is primarily
related to our efforts to diversify our product offerings through the introduction and the development of our proprietary
brands as we incurred significant upfront costs to develop, test, and market these new brands and new
product offerings.
Royalty expenses
We
have licensing and related agreements with RDOC, whereby we have exclusive rights to develop, market, and sell Rich Dad Education-branded
live seminars, training courses, and related products worldwide. In connection with these agreements and our other licensing agreements,
we are required to pay royalties. Royalty expenses were $3.2 million for the six months ended June 30, 2018 compared to $2.5 million
for the six months ended June 30, 2017, an increase of $0.7 million, or 26.7% The increase was primarily related to a $0.6
million
increase in deferred license expenses associated with the timing of revenue recognition in the quarters and a $0.1 million increase
due to increased cash sales.
General and administrative expenses
General and administrative
expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expenses and travel expenses for
the corporate staff, as well as depreciation and amortization expenses. General and administrative expenses were $10.1 million
for the six months ended June 30, 2018 compared to $8.6 million for the six months ended June 30, 2017, an increase of $1.5 million,
or 17.4%. The increase was primarily driven by increases in labor costs and software costs in connection with our new ERP system
which was placed into production in January 2018.
Income tax expense
We recorded an income
tax benefit of $243 thousand and $226.0 thousand for the six months ended June 30, 2018 and 2017, respectively. Our effective tax
rate was 6.9% and (16.0)% for the six months ended June 30, 2018 and 2017. 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 June
30, 2018 and December 31, 2017, valuation allowances of $4.9 million and $4.7 million have been provided against net operating
loss carryforwards and other deferred tax assets, respectively. Our valuation allowance increased by $0.2 million for the six months
ended June 30, 2018 and decreased $0.5 million for the six months ended June 30, 2017.
Net Income/(Loss)
Net loss was
$3.3 million or ($0.14) per basic and diluted common share for the six months ended June 30, 2018, compared to a net income of
$1.6 million or $0.07 per basic and diluted common share for the six months ended June 30, 2017, an increase in net loss of ($4.9)
million or ($0.21) per basic and diluted common share. Net loss for the six months ended June 30, 2018, was negatively affected
by the increase in operating expenses, partially offset by the increase in revenue due to increased revenue from expired contracts
of $3.3 million or 48.4%, partially offset by decreased attendance (i.e. fulfillment) of $0.4 million or 1.0%.
Critical Accounting Policies
For a discussion of
our critical accounting policies and estimates that require the use of significant estimates and judgments,
see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies”
in our Annual
Report on Form 10-K for the year ended December 31, 2017.
LIQUIDITY AND CAPITAL RESOURCES
Known Trends and Uncertainties
In general, we believe
we will experience increased demand for our products and services as global economic conditions continue to improve. We believe
that our products and services appeal to those who seek increased financial freedom. If we experience a prolonged decline in demand
for our products and services, it could have a material adverse effect on our future operating results.
Historically, we
have funded our working capital and capital expenditures using cash and cash equivalents on hand. However, given our relatively
modest operating cash flows during the past two years combined, it has been necessary for us to manage our cash position to ensure
the future viability of our business. Our cash flows are subject to a number of risks and uncertainties, including, but not limited
to, earnings, seasonality, and fluctuations in foreign currency exchange rates. We have taken steps to ensure our expenses are
in line with our projected cash sales and liquidity requirements for the remainder of 2018 and based upon current and anticipated
levels of operations, we believe cash and cash equivalents on hand will be sufficient to fund our expected financial obligations
and anticipated liquidity requirements for the rest of 2018.
The following is a summary
of our cash flow activities for the periods stated (in thousands):
|
|
Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
(2,290
|
)
|
|
|
3,371
|
|
Net cash used in investing activities
|
|
|
(480
|
)
|
|
|
(103
|
)
|
Net cash used in financing activities
|
|
|
(6
|
)
|
|
|
(5
|
)
|
Effect of exchange rate differences on cash
|
|
|
(39
|
)
|
|
|
(14
|
)
|
Net increase/(decrease) in cash and cash equivalents and restricted cash
|
|
|
(2,815
|
)
|
|
|
3,249
|
|
Operating Cash Flows and Liquidity
Net cash used in operating
activities was $2.3 million in the six months ended June 30, 2018 compared to net cash provided by operating activities of $3.4
million in the six months ended June 30, 2017, representing a period-over-period decrease of $5.7 million. This decrease was primarily
the result of a decrease in current liabilities for deferred revenue in 2018 and lower earnings as a result of (i) increased advertising
and marketing expense primarily related to our efforts to diversify our product offerings through the introduction and the development
of our proprietary brands, and (ii) increased general and administrative expenses primarily driven by increases in labor costs
and software costs in connection with our new ERP system which was placed into production in January 2018.
Investing Cash Flows
Net cash used in investing
activities totaled $480.0 thousand in the six months ended June 30, 2018 and $103.0 thousand in the six months ended June 30, 2017,
representing our purchases of property and equipment.
Financing Cash Flows
Our consolidated capital
structure as of June 30, 2018 and December 31, 2017 was 100.0% equity.
Net cash used in financing
activities totaled $6.0 thousand and $5.0 thousand in the six months ended June 30, 2018 and 2017.
We expect that our working
capital deficit, which is primarily a result of our deferred revenue balance, will continue for the foreseeable future. As of June
30, 2018 and December 31, 2017, our consolidated current deferred revenue was $55.1 million and $57.2 million, respectively.
Our cash and cash equivalents
were, and continue to be, invested in short-term, liquid, money market funds. Restricted cash balances consisted primarily of funds
on deposit with credit card processors and cash collateral with our credit card vendors. Restricted cash balances held by credit
card processors are unavailable to us unless we discontinue sale of our products or discontinue the usage of a vendor’s credit
card. As sales of the products and services related to our domestic business have decreased, our credit card vendors have not returned
funds held as collateral, resulting in higher restricted cash balances.
Off-Balance Sheet Arrangements
We had no off-balance
sheet arrangements as of June 30, 2018.
Item 4. Controls and Procedures.
An evaluation of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities
Exchange Act of 1934) was carried out under the supervision and with the participation of our management, including our Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”). As of June 30, 2018, based upon that evaluation, the
CEO and CFO concluded that the design and operation of these disclosure controls and procedures were effective.
There has been no change
in our internal control over financial reporting that occurred during the three months ended June 30, 2018 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to a
number of contingencies, including litigation, from time to time. For further information regarding legal proceedings, see Note
11
Commitments and Contingencies
, to our condensed consolidated financial statements.
Item 1A. Risk Factors.
For information regarding
risk factors, please refer to Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31,
2017.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
There were no sales
or repurchases of the Company's equity securities during the three months ended June 30, 2018.
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
3.1
|
|
Second Amended and Restated Articles of Incorporation of the Registrant (Incorporated by reference to Exhibit 2.1 in the Company’s Form 8-K filed with the SEC on November 10, 2014)
|
3.2
|
|
Bylaws
of the Registrant (Incorporated by reference to Exhibit 3.2 in the Company’s Form 8-K filed with the SEC on November
10, 2014)
|
3.3
|
|
Amendment
to Bylaws of the Registrant (Incorporated by reference to Exhibit 3.2 in the Company’s Form 8-K filed with the
SEC on February 17, 2017)
|
3.4
|
|
Amendment
to Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 in the Company’s Form 8-K filed with the
SEC on January 12, 2018)
|
10.1
|
|
Second
Amendment to Rich Dad Operating Company, LLC License Agreement, dated January 25, 2018.
(1)
(Incorporated by reference
to Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on January 29, 2018)
|
10.2
|
|
Mutual
Waiver and Release of Claims, dated January 25, 2018 (Incorporated by reference to Exhibit 10.2 in the Company’s
Form 8-K filed with the SEC on January 29, 2018)
|
31.1*
|
|
Certification of The Chief Executive Officer under Section 302 of Sarbanes-Oxley Act of 2002
|
31.2*
|
|
Certification of The Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002
|
32.1*
|
|
Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
32.2*
|
|
Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
|
101*
|
|
The
following materials from Legacy Education Alliance, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June
30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of June
30, 2018 (Unaudited) and December 31, 2017, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss)
for the three and six months ended June 30, 2018 and 2017 (Unaudited), (iii) Condensed Consolidated Statement of Changes in
Stockholders’ Deficit for the six months ended June 30, 2018 (Unaudited), (iv) Condensed Consolidated Statements
of Cash Flows for the six months ended June 30, 2018 and 2017 (Unaudited) and (v) Notes to Condensed Consolidated Financial
Statements (Unaudited).
|
(1)
|
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
|
SIGNATURES
Pursuant to the requirements
of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
LEGACY EDUCATION ALLIANCE, INC.
|
|
|
Dated: August 14, 2018
|
By:
|
/s/ ANTHONY C. HUMPAGE
|
|
|
Anthony C. Humpage
Chief Executive Officer and Director
|
|
|
|
Dated: August 14, 2018
|
By:
|
/s/ CHRISTIAN A. J. BAEZA
|
|
|
Christian A. J. Baeza
|
|
|
Senior Vice President and Chief Financial Officer
|
30