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, and, (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 our accounting policies disclosed therein, except for those discussed in
Note
2 - New Accounting Pronouncements, - “Accounting Standards Adopted in the Current Period.”
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 September 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 nine months ended September 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. 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.
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 11, “
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 2016-16 was 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 $31.0 thousand and $61.0 thousand for the three months ended September 30,
2018 and 2017, and $145.0 thousand and $168.0 thousand for the nine months ended September 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 667,915 for the three months ended September 30, 2018
and 968,264 for the nine months ended September 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 667,915 and 1,746,748 for the three months ended September 30, 2018 and 2017, and 968,264 and 1,525,502
for the nine months ended September 30, 2018 and 2017.
The calculations of
basic and diluted EPS are as follows:
|
|
Three Months Ended September 30, 2018
|
|
|
Three Months Ended September 30, 2017
|
|
|
|
Net Loss
|
|
|
Weighted
Average
Shares
Outstanding
|
|
|
Loss Per
Share
|
|
|
Net Income
|
|
|
Weighted
Average
Shares
Outstanding
|
|
|
Earnings
Per Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
As reported
|
|
$
|
(1,221
|
)
|
|
|
23,005
|
|
|
|
|
|
|
$
|
1,393
|
|
|
|
23,022
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(106
|
)
|
|
|
(1,747
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(1,221
|
)
|
|
|
23,005
|
|
|
$
|
(0.05
|
)
|
|
$
|
1,287
|
|
|
|
21,275
|
|
|
$
|
0.06
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
106
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,747
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(114
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(1,221
|
)
|
|
|
23,005
|
|
|
$
|
(0.05
|
)
|
|
$
|
1,279
|
|
|
|
23,022
|
|
|
$
|
0.06
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 30, 2017
|
|
|
|
Net Loss
|
|
|
Weighted
Average
Shares
Outstanding
|
|
|
Loss Per
Share
|
|
|
Net Income
|
|
|
Weighted
Average
Shares
Outstanding
|
|
|
Earnings
Per Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
As reported
|
|
$
|
(4,493
|
)
|
|
|
23,007
|
|
|
|
|
|
|
$
|
3,030
|
|
|
|
22,807
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(203
|
)
|
|
|
(1,526
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(4,493
|
)
|
|
|
23,007
|
|
|
$
|
(0.20
|
)
|
|
$
|
2,827
|
|
|
|
21,281
|
|
|
$
|
0.13
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
203
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
1,526
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(217
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(4,493
|
)
|
|
|
23,007
|
|
|
$
|
(0.20
|
)
|
|
$
|
2,813
|
|
|
|
22,807
|
|
|
$
|
0.12
|
|
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 September 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 September 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. The vesting period expired
at June 30, 2018.
Because these warrants
had full reset adjustments that would preclude the instrument from being considered as index to the Company’s stock, it
was subject to derivative liability treatment under
ASC 815-40-15
, which required as of the date the warrants were 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
|
|
|
September 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 September 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. There was no gain or loss associated with the
derivative liability recognized during the three months ended September 30, 2018. We recognized a gain on the derivative liability
of $9,573 for the three months ended September 30, 2017. We recognized a gain on the derivative liability of $24,233 and $ $96,998
for the nine months ended September 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 September 30, 2018
|
|
|
—
|
|
Note 7—Short-Term and Long-Term
Debt
Below is the summary
of short-term borrowings and current portion of long-term debt (in thousands):
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Promissory note
|
|
$
|
500
|
|
|
$
|
-
|
|
Current portion of long-term debt
|
|
|
12
|
|
|
|
11
|
|
Total short-term borrowings and current portion of long-term debt
|
|
$
|
512
|
|
|
$
|
11
|
|
Long-term debt consists
of the following (in thousands):
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Installment notes payable for equipment financing
|
|
$
|
23
|
|
|
$
|
31
|
|
Long-term debt
|
|
|
23
|
|
|
|
31
|
|
Less: current portion
|
|
|
(12
|
)
|
|
|
(11
|
)
|
Total long-term debt, net of current portion
|
|
$
|
11
|
|
|
$
|
20
|
|
The following is a
summary of scheduled debt maturities by year (in thousands):
2018
|
|
$
|
3
|
|
2019
|
|
|
512
|
|
2020
|
|
|
8
|
|
Total debt
|
|
$
|
523
|
|
On September 13, 2018,
we entered into a Promissory Note and Mortgage and Security Agreement pursuant to which we borrowed the principal amount of $500.0
thousand from USA Growth Fund LLC. At closing, we received $459,269 in net proceeds after closing costs and other fees and costs.
The Promissory Note, repayment of which is due on March 13, 2019, was issued in an aggregate principal amount of $500.0 thousand
and bears interest at a fixed rate of 12% per annum during the initial 120 days of the term of the Promissory Note, and a fixed
rate of 30% per annum until all amounts due under the Promissory Note are paid in full. Pursuant to the Mortgage and Security Agreement,
repayment of the Promissory Note is secured by a first mortgage on the property located at 1612 East Cape Coral Parkway, Cape Coral,
FL. 33904.
Note 8 - Income Taxes
We recorded an income
tax benefit of $797.0 thousand and income tax expense of ($119.0) thousand for the three months ended September 30, 2018 and 2017,
respectively. We recorded an income tax benefit of $1,040.0 thousand and $107.0 thousand for the nine months ended September 30,
2018 and 2017, respectively. Our effective tax rate was 39.5% and 7.9% for the three months ended September 30, 2018 and 2017,
and 18.8% and (3.7)% for the nine months ended September 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 September
30, 2018 and December 31, 2017, valuation allowances of $4.7 million have been provided against net operating loss carryforwards
and other deferred tax assets, respectively. There were no significant changes in our valuation allowance during the three months
ended September 30, 2018. Our valuation allowance decreased $0.4 million for the nine months ended September 30, 2017.
As of September 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 $0.04 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
nine months ended September 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 September 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 September 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 nine months ended September 30, 2018.
Note 9 - 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 September 30, 2018 and December 31, 2017, including
foreign subsidiaries, without FDIC coverage were $2.6 million and $5.3 million, respectively.
Revenue. A significant
portion of our revenue is derived from the Rich Dad brands. Revenue derived from the Rich Dad brands as a percentage of total
revenue was 72.3% and 71.8% for the three months ended September 30, 2018 and 2017, and 71.4% and 71.7% for the nine months ended
September 30, 2018 and 2017, respectively. In addition, we have operations in the North America, the United Kingdom and other
foreign markets (see Note 10 —
Segment Information
).
Note 10 - 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 and other
members of the executive team.
The proportion of our total revenue attributable
to each segment is as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
As a percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
56.1
|
%
|
|
|
59.8
|
%
|
|
|
56.9
|
%
|
|
|
58.6
|
%
|
U.K.
|
|
|
23.0
|
%
|
|
|
21.6
|
%
|
|
|
22.3
|
%
|
|
|
22.6
|
%
|
Other foreign markets
|
|
|
20.9
|
%
|
|
|
18.6
|
%
|
|
|
20.8
|
%
|
|
|
18.8
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating results
for the segments are as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Segment revenue
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
12,662
|
|
|
$
|
15,091
|
|
|
$
|
41,848
|
|
|
$
|
43,035
|
|
U.K.
|
|
|
5,191
|
|
|
|
5,457
|
|
|
|
16,400
|
|
|
|
16,598
|
|
Other foreign markets
|
|
|
4,704
|
|
|
|
4,687
|
|
|
|
15,286
|
|
|
|
13,775
|
|
Total consolidated revenue
|
|
$
|
22,557
|
|
|
$
|
25,235
|
|
|
$
|
73,534
|
|
|
$
|
73,408
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Segment gross profit contribution *
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,621
|
|
|
$
|
4,224
|
|
|
$
|
5,018
|
|
|
$
|
8,738
|
|
U.K.
|
|
|
845
|
|
|
|
1,222
|
|
|
|
3,691
|
|
|
|
5,015
|
|
Other foreign markets
|
|
|
299
|
|
|
|
249
|
|
|
|
643
|
|
|
|
1,778
|
|
Total consolidated gross profit
|
|
$
|
2,765
|
|
|
$
|
5,695
|
|
|
$
|
9,352
|
|
|
$
|
15,531
|
|
*
|
Segment gross profit
is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
Depreciation and amortization expenses
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
26
|
|
|
$
|
24
|
|
|
$
|
79
|
|
|
$
|
80
|
|
U.K.
|
|
|
11
|
|
|
|
5
|
|
|
|
25
|
|
|
|
14
|
|
Other foreign markets
|
|
|
1
|
|
|
|
1
|
|
|
|
4
|
|
|
|
1
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
38
|
|
|
$
|
30
|
|
|
$
|
108
|
|
|
$
|
95
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Segment identifiable assets
|
|
2018
|
|
|
2017
|
|
(In thousands)
|
|
|
|
North America
|
|
$
|
11,263
|
|
|
$
|
15,364
|
|
U.K.
|
|
|
7,468
|
|
|
|
9,090
|
|
Other foreign markets
|
|
|
5,565
|
|
|
|
2,566
|
|
Total consolidated identifiable assets
|
|
$
|
24,296
|
|
|
$
|
27,020
|
|
Note
11 – 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 $58.1 million
related to contractual commitments with customers where the performance obligation will be satisfied over time, which ranges from
one to two years as of September 30, 2018. 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 September 30, 2018
|
|
|
Three Months Ended September 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
|
|
$
|
7,369
|
|
|
$
|
3,611
|
|
|
$
|
3,143
|
|
|
$
|
14,123
|
|
|
$
|
11,255
|
|
|
$
|
3,901
|
|
|
$
|
1,687
|
|
|
$
|
16,843
|
|
Products
|
|
|
2,916
|
|
|
|
984
|
|
|
|
643
|
|
|
|
4,543
|
|
|
|
3,218
|
|
|
|
1,186
|
|
|
|
1,188
|
|
|
|
5,592
|
|
Coaching and Mentoring
|
|
|
1,408
|
|
|
|
579
|
|
|
|
911
|
|
|
|
2,898
|
|
|
|
737
|
|
|
|
412
|
|
|
|
1,811
|
|
|
|
2,960
|
|
Online and Subscription
|
|
|
86
|
|
|
|
9
|
|
|
|
7
|
|
|
|
102
|
|
|
|
37
|
|
|
|
12
|
|
|
|
—
|
|
|
|
49
|
|
Other
|
|
|
883
|
|
|
|
8
|
|
|
|
—
|
|
|
|
891
|
|
|
|
(156
|
)
|
|
|
(54
|
)
|
|
|
1
|
|
|
|
(209
|
)
|
Total revenue
|
|
$
|
12,662
|
|
|
$
|
5,191
|
|
|
$
|
4,704
|
|
|
$
|
22,557
|
|
|
$
|
15,091
|
|
|
$
|
5,457
|
|
|
$
|
4,687
|
|
|
$
|
25,235
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
Nine Months Ended September 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
|
|
$
|
25,685
|
|
|
$
|
11,731
|
|
|
$
|
9,740
|
|
|
$
|
47,156
|
|
|
$
|
28,561
|
|
|
$
|
11,193
|
|
|
$
|
5,682
|
|
|
$
|
45,436
|
|
Products
|
|
|
8,768
|
|
|
|
3,366
|
|
|
|
2,647
|
|
|
|
14,781
|
|
|
|
9,052
|
|
|
|
3,923
|
|
|
|
4,104
|
|
|
|
17,079
|
|
Coaching and Mentoring
|
|
|
4,156
|
|
|
|
1,223
|
|
|
|
2,882
|
|
|
|
8,261
|
|
|
|
3,763
|
|
|
|
1,383
|
|
|
|
3,988
|
|
|
|
9,134
|
|
Online and Subscription
|
|
|
1,038
|
|
|
|
33
|
|
|
|
17
|
|
|
|
1,088
|
|
|
|
93
|
|
|
|
22
|
|
|
|
—
|
|
|
|
115
|
|
Other
|
|
|
2,201
|
|
|
|
47
|
|
|
|
—
|
|
|
|
2,248
|
|
|
|
1,566
|
|
|
|
77
|
|
|
|
1
|
|
|
|
1,644
|
|
Total revenue
|
|
$
|
41,848
|
|
|
$
|
16,400
|
|
|
$
|
15,286
|
|
|
$
|
73,534
|
|
|
$
|
43,035
|
|
|
$
|
16,598
|
|
|
$
|
13,775
|
|
|
$
|
73,408
|
|
Note
12 - 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 $1.2 million and $1.1 million for the three months ended September
30, 2018 and 2017, and $4.4 million and $3.7 million for the nine months ended September 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 September 30, 2018 and
December 31, 2017, were $3.7 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
September 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, and, (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
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. Ms. Ireland was the keynote speaker at
Legacy Education Alliance’s 2018 Hall of Fame Award Ceremony in Las Vegas that was held on October 20, 2018.
On September 13, 2018, we entered into
a Promissory Note and Mortgage and Security Agreement pursuant to which we borrowed the principal amount of $500.0 thousand from
USA Growth Fund LLC. At closing, we received $459,269 in net proceeds after closing costs and other fees and costs. The Promissory
Note, repayment of which is due on March 13, 2019, was issued in an aggregate principal amount of $500.0 thousand and bears interest
at a fixed rate of 12% per annum during the initial 120 days of the term of the Promissory Note, and a fixed rate of 30% per annum
until all amounts due under the Promissory Note are paid in full. Pursuant to the Mortgage and Security Agreement, repayment of
the Promissory Note is secured by a first mortgage on the property located at 1612 East Cape Coral Parkway, Cape Coral, FL. 33904.
RESULTS
OF OPERATIONS
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
22,557
|
|
|
$
|
25,235
|
|
|
$
|
73,534
|
|
|
$
|
73,408
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
12,929
|
|
|
|
13,411
|
|
|
|
42,540
|
|
|
|
39,494
|
|
Advertising and sales expenses
|
|
|
5,691
|
|
|
|
5,010
|
|
|
|
17,261
|
|
|
|
14,732
|
|
Royalty expenses
|
|
|
1,172
|
|
|
|
1,119
|
|
|
|
4,381
|
|
|
|
3,651
|
|
General and administrative expenses
|
|
|
4,584
|
|
|
|
4,114
|
|
|
|
14,630
|
|
|
|
12,686
|
|
Total operating costs and expenses
|
|
|
24,376
|
|
|
|
23,654
|
|
|
|
78,812
|
|
|
|
70,563
|
|
Income/(loss) from operations
|
|
|
(1,819
|
)
|
|
|
1,581
|
|
|
|
(5,278
|
)
|
|
|
2,845
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(5
|
)
|
|
|
(2
|
)
|
|
|
(13
|
)
|
|
|
(7
|
)
|
Other income (expense), net
|
|
|
(194
|
)
|
|
|
(67
|
)
|
|
|
(242
|
)
|
|
|
85
|
|
Total other income (expense), net
|
|
|
(199
|
)
|
|
|
(69
|
)
|
|
|
(255
|
)
|
|
|
78
|
|
Income/(loss) before income taxes
|
|
|
(2,018
|
)
|
|
|
1,512
|
|
|
|
(5,533
|
)
|
|
|
2,923
|
|
Income tax (expense) benefit
|
|
|
797
|
|
|
|
(119
|
)
|
|
|
1,040
|
|
|
|
107
|
|
Net income/(loss)
|
|
$
|
(1,221
|
)
|
|
$
|
1,393
|
|
|
$
|
(4,493
|
)
|
|
$
|
3,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings/(loss) per common share
|
|
$
|
(0.05
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
0.13
|
|
Diluted earnings/(loss) per common share
|
|
$
|
(0.05
|
)
|
|
$
|
0.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
23,005
|
|
|
|
21,275
|
|
|
|
23,007
|
|
|
|
21,281
|
|
Diluted weighted average common shares outstanding
|
|
|
23,005
|
|
|
|
23,022
|
|
|
|
23,007
|
|
|
|
22,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(1,221
|
)
|
|
$
|
1,393
|
|
|
$
|
(4,493
|
)
|
|
$
|
3,030
|
|
Foreign currency translation adjustments, net of tax of $0
|
|
|
334
|
|
|
|
(1,714
|
)
|
|
|
1,320
|
|
|
|
(2,992
|
)
|
Total comprehensive income/(loss)
|
|
$
|
(887
|
)
|
|
$
|
(321
|
)
|
|
$
|
(3,173
|
)
|
|
$
|
38
|
|
Our
operating results are expressed as a percentage of revenue in the table below:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
57.3
|
|
|
|
53.1
|
|
|
|
57.9
|
|
|
|
53.8
|
|
Advertising and sales expenses
|
|
|
25.2
|
|
|
|
19.9
|
|
|
|
23.5
|
|
|
|
20.1
|
|
Royalty expenses
|
|
|
5.2
|
|
|
|
4.4
|
|
|
|
5.9
|
|
|
|
4.9
|
|
General and administrative expenses
|
|
|
20.3
|
|
|
|
16.4
|
|
|
|
19.9
|
|
|
|
17.3
|
|
Total operating costs and expenses
|
|
|
108.0
|
|
|
|
93.8
|
|
|
|
107.2
|
|
|
|
96.1
|
|
Income/(loss) from operations
|
|
|
(8.0
|
)
|
|
|
6.2
|
|
|
|
(7.2
|
)
|
|
|
3.9
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
Total other income (expense), net
|
|
|
(0.9
|
)
|
|
|
(0.3
|
)
|
|
|
(0.3
|
)
|
|
|
0.1
|
|
Income/(loss) before income taxes
|
|
|
(8.9
|
)
|
|
|
5.9
|
|
|
|
(7.5
|
)
|
|
|
4.0
|
|
Income tax (expense) benefit
|
|
|
3.5
|
|
|
|
(0.1
|
)
|
|
|
1.4
|
|
|
|
0.1
|
|
Net income/(loss)
|
|
|
(5.4
|
)%
|
|
|
5.8
|
%
|
|
|
(6.1
|
)%
|
|
|
4.1
|
%
|
Outlook
Cash
sales were $75.6 million for the nine months ended September 30, 2018 compared to $75.7 million for the nine months ended September
30, 2017, a slight decrease of $0.1 million or 0.1%. The decrease was driven primarily by a $2.3 million decrease in our Other
Foreign Markets segment and a $0.6 million decrease in our U.K. segment, which was partially offset by a $2.8 million increase
in our North America 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 professional fees and software costs in connection with our new ERP system which was placed into production in January 2018.
In early Q3 of this year we took steps to reduce our expenses to improve profitability and cash flow. Because of these actions,
our net loss improved by $1.2 million or 49.4% and our operating cash flow improved by $0.6 million or 28.3% this quarter as compared
with the prior quarter. We anticipate this trend to continue in Q4.
We
anticipate consolidated 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, and, (iii) Other Foreign Markets. The proportion of our total revenue attributable to each segment
is as follows:
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
As a percentage of total revenue
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
North America
|
|
|
56.1
|
%
|
|
|
59.8
|
%
|
|
|
56.9
|
%
|
|
|
58.6
|
%
|
U.K.
|
|
|
23.0
|
%
|
|
|
21.6
|
%
|
|
|
22.3
|
%
|
|
|
22.6
|
%
|
Other foreign markets
|
|
|
20.9
|
%
|
|
|
18.6
|
%
|
|
|
20.8
|
%
|
|
|
18.8
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
Segment revenue
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
(In thousand)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
12,662
|
|
|
|
15,091
|
|
|
|
41,848
|
|
|
|
43,035
|
|
U.K
|
|
|
5,191
|
|
|
|
5,457
|
|
|
|
16,400
|
|
|
|
16,598
|
|
Other foreign markets
|
|
|
4,704
|
|
|
|
4,687
|
|
|
|
15,286
|
|
|
|
13,775
|
|
Total consolidated revenue
|
|
$
|
22,557
|
|
|
$
|
25,235
|
|
|
$
|
73,534
|
|
|
$
|
73,408
|
|
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 $13.3 million or as a percentage of total segment
revenue was 83.7% and 87.5% for the three months ended September 30, 2018 and 2017, and $33.3 million and $38.0 million or as
a percentage of total segment revenue was 79.6% and 88.4% for the nine months ended September 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 $12.7 million and $15.1 million or as a percentage of total revenue was 56.1% and 59.8% for
the three months ended September 30, 2018 and 2017, $41.8 million and $43.0 million or as a percentage of total revenue was 56.9%
and 58.6% for the nine months ended September 30, 2018 and 2017. The decrease in revenue of $2.4 million or 15.9% during the three
months ended September 30, 2018 compared to the same period in 2017, was due to a decrease in revenue from expired contracts of
$2.1 million or 47.7% and a decrease in recognition of revenue from decreased attendance (i.e. fulfillment) of $0.3 million or
3.5%. The decrease in revenue of $1.2 million or 2.8% during the nine months ended September 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 $1.7 million or 4.6%,
partially offset by an increase in revenue from expired contracts of $0.5 million or 6.8%.
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 $1.1 million and $1.0 million or as a percentage of total segment revenue was 20.9% and 19.0% for
the three months ended September 30, 2018 and 2017, and $4.5 million and $3.8 million or as a percentage of total segment revenue
was 27.4% and 22.7% for the nine months ended September 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 $5.2 million and $5.4 million or as a percentage of total revenue was 23.0% and 21.6% for the three months
ended September 30, 2018 and 2017, and $16.4 million and $16.6 million or as a percentage of total revenue was 22.3% and 22.6%
for the nine months ended September 30, 2018 and 2017. The decrease in revenue of $0.2 million or 3.7% for the three months ended
September 30, 2018 compared to the same period in 2017, was due to a decrease in recognition of revenue from expired contracts
of $0.4 million or 32.7%, partially offset by an increased attendance (i.e. fulfillment) of $0.2 million or 5.4%. The decrease
in revenue of $0.2 million or 1.2% for the nine months ended September 30, 2018 compared to the same period in 2017, was due to
a decrease in recognition of revenue from expired contracts of $0.8 million or 19.8%, partially offset by an increased attendance
(i.e. fulfillment) of $0.6 million or 4.5%.
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 $4.6 million and $3.8 million or as a percentage of total segment revenue was 98.1% and 81.6% for
the three months ended September 30, 2018 and 2017, and $14.7 million and $10.8 million or as a percentage of total segment revenue
was 96.1% and 78.7% for the nine months ended September 30, 2018 and 2017.
The
Other Foreign Markets segment revenue was $4.7 million and $4.7 million or as a percentage of total revenue was 20.9% and 18.6%
for the three months ended September 30, 2018 and 2017, and $15.3 million and $13.8 million or as a percentage of total revenue
was 20.8% and 18.8% for the nine months ended September 30, 2018 and 2017. Revenue was flat in the both periods, three months
ended September 30, 2018 and 2017. The increase in revenue of $1.5 million or 10.9% during the nine months ended September 30,
2018 compared to the same period in 2017, was due to increase in recognition of revenue from expired contracts of $1.8 million
or 83.9%, partially offset by a decreased attendance (i.e. fulfillment) of $0.3 million or 2.3%.
Three
months ended September 30, 2018 Compared to Three months ended September 30, 2017
Revenue
Revenue
was $22.6 million for the three months ended September 30, 2018 compared to $25.2 million for the three months ended September
30, 2017. Revenue decreased $2.6 million or 10.3% during the three months ended September 30, 2018 compared to the same period
in 2017. The decrease in revenue was due to a decrease in revenue from expired contracts of $1.7 million or 27.3% and decreased
attendance (i.e. fulfillment) of $0.9 million or 5.0%.
Cash
sales were $23.3 million for the three months ended September 30, 2018 compared to $24.5 million for the three months ended September
30, 2017, a decrease of $1.2 million or 4.9%. The decrease was driven primarily by a $1.4 million decrease in our Other Foreign
Markets segment and a $0.6 million decrease in our U.K. segment, partially offset by an increase of $0.8 million in our North
America segment.
Operating
Expenses
Total
operating costs and expenses were $24.4 million for the three months ended September 30, 2018 compared to $23.6 million for the
three months ended September 30, 2017, an increase of $0.8 million or 3.4%. The increase was primarily due to a $0.7 million increase
in advertising and sales expenses, a $0.5 million increase general and administrative expenses, and a $0.1 million increase in
royalty expenses, partially offset by a $0.5 million decrease in direct course expenses.
Direct
course expenses
Direct
course expenses relate to our free preview workshops, basic training and advanced training, and consist of instructor fees, facility
costs, salaries, commissions and fees associated with our field representatives and related travel expenses. Direct course expenses
were $12.9 million for the three months ended September 30, 2018 compared to $13.4 million for the three months ended September
30, 2017, a decrease of $0.5 million or 3.7%, which was primarily related to decreases in preview product costs and sales and
training compensation, due to a slight decrease in cash sales along with adjustments to our sales compensation programs. 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 $5.7 million for the three months ended September 30, 2018 compared to $5.0 million for the three months
ended September 30, 2017, an increase of $0.7 million, or 14.0 %. As a percentage of revenue, advertising and sales expenses
were 25.2% and 19.9% of revenue for the three months ended September 30, 2018 and 2017, an increase of 5.3%. 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 $1.2 million for the three months ended September 30, 2018 compared to
$1.1 million for the three months ended September 30, 2017, a slight increase of $0.1 million or 9.1%.
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 $4.6 million for the three months ended September 30, 2018 compared to $4.1 million for the three months ended September
30, 2017, an increase of $0.5 million, or 12.2 %. The increase was primarily driven by increases in professional fees 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 $797.0 thousand and income tax expense of ($119.0) thousand for the three months ended September
30, 2018 and 2017, respectively. Our effective tax rate was 39.5% and 7.9% for the three months ended September 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 September 30, 2018 and December 31, 2017, valuation allowances of $4.7 million have been provided against net
operating loss carryforwards and other deferred tax assets, respectively. There were no significant changes in our valuation allowance
during the three months ended September 30, 2018 and 2017.
Net
Income/(Loss)
Net loss was $1.2 million
or ($0.05) per basic and diluted common share for the three months ended September 30, 2018, compared to a net income of $1.4 million
or $0.06 per basic and diluted common share for the three months ended September 30, 2017, an increase in net loss of ($2.6) million
or ($0.11) per basic and diluted common share. Net loss for the three months ended September 30, 2018 was primarily due to decreases
in revenue as a result of decrease in revenue from expired contracts of $1.7 million or 27.3% and decreased attendance (i.e. fulfillment)
of $0.9 million or 5.0%.
Nine
months ended September 30, 2018 Compared to Nine months ended September 30, 2017
Revenue
Revenue
was $73.5 million for the nine months ended September 30, 2018 compared to $73.4 million for the nine months ended September 30,
2017. Revenue increased $0.1 million or 0.1% during the nine months ended September 30, 2018 compared to the same period in 2017.
The increase in revenue was due to increase in revenue from expired contracts of $1.4 million or 11.4%, partially offset by decreased
attendance (i.e. fulfillment) of $1.3 million or 2.2%.
Cash
sales were $75.6 million for the nine months ended September 30, 2018 compared to $75.7 million for the nine months ended September
30, 2017, a slight decrease of $0.1 million or 0.1%. The decrease was driven primarily by a $2.3 million decrease in our Other
Foreign Markets segment and a $0.6 million decrease in our U.K. segment, which was partially offset by a $2.8 million increase
in our North America segment.
Operating
Expenses
Total
operating costs and expenses were $78.8 million for the nine months ended September 30, 2018 compared to $70.6 million for the
nine months ended September 30, 2017, an increase of $8.2 million or 11.6%. The increase was primarily due to a $3.0 million increase
in direct course expenses, a $2.6 million increase in advertising and sales expenses, a $1.9 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 $42.5 million for the nine months ended September 30, 2018 compared to $39.5 million for the nine months ended September
30, 2017, an increase of $3.0 million or 7.6%, 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 $17.3 million for the nine months ended September 30, 2018 compared to $14.7 million for the nine months
ended September 30, 2017, an increase of $2.6 million, or 17.7%. As a percentage of revenue, advertising and sales expenses were
23.5% and 20.1% of revenue for the nine months ended September 30, 2018 and 2017, an increase of 3.4%. 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 $4.4 million for the nine months ended September 30, 2018 compared to $3.7 million
for the nine months ended September 30, 2017, an increase of $0.7 million, or 18.9%. The increase was primarily related to
increase in deferred license expenses associated with the timing of revenue recognition in the quarters.
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 $14.6 million for the nine months ended September 30, 2018 compared to $12.7 million for the nine months ended September
30, 2017, an increase of $1.9 million, or 15.0%. The increase was primarily driven by increases in professional fees 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 $1,040.0 thousand and $107.0 thousand for the nine months ended September 30, 2018 and 2017,
respectively. Our effective tax rate was 18.8% and (3.7)% for the nine months ended September 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 September 30, 2018 and December 31, 2017, valuation allowances of $4.7 million have been provided against net
operating loss carryforwards and other deferred tax assets, respectively. There were no significant changes in our valuation allowance
during the nine months ended September 30, 2018. Our valuation allowance decreased $0.4 million for the nine months ended September
30, 2017.
Net
Income/(Loss)
Net
loss was $4.5 million or ($0.20) per basic and diluted common share for the nine months ended September 30, 2018, compared to
a net income of $3.0 million or $0.13 per basic and $0.12 per diluted common share for the nine months ended September 30, 2017,
an increase in net loss of ($7.5) million or ($0.33) per basic and ($0.32) per diluted common share. Net loss for the nine months
ended September 30, 2018, was negatively affected by the increase in operating expenses.
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 fiscal year 2019.
The
following is a summary of our cash flow activities for the periods stated (in thousands):
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(1,643
|
)
|
|
|
4,822
|
|
Net cash used in investing activities
|
|
|
(839
|
)
|
|
|
(114
|
)
|
Net cash provided by (used in) financing activities
|
|
|
491
|
|
|
|
(8
|
)
|
Effect of exchange rate differences on cash
|
|
|
157
|
|
|
|
(1,050
|
)
|
Net increase/(decrease) in cash and cash equivalents and restricted cash
|
|
|
(1,834
|
)
|
|
|
3,650
|
|
Operating
Cash Flows and Liquidity
Net
cash used in operating activities was $1.6 million in the nine months ended September 30, 2018 compared to net cash provided by
operating activities of $4.8 million in the nine months ended September 30, 2017, representing a period-over-period decrease of
$6.4 million. This decrease was primarily the result of decreased 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 professional fees
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 $839.0 thousand in the nine months ended September 30, 2018 and $114.0 thousand in the
nine months ended September 30, 2017, representing our purchases of property and equipment.
Financing
Cash Flows
Our
consolidated capital structure as of September 30, 2018 and December 31, 2017 was 100.0% equity.
Net
cash provided by financing activities totaled $491.0 thousand during the nine months ended September 30, 2018 compared to
net cash used in financing activities of $8.0 thousand in the nine months ended September 30, 2017. Net cash provided by
financing activities during the nine months ended September 30, 2018, primarily represents the proceeds from issuance of the
Promissory Note, due March 13, 2019. The Promissory note was issued in an aggregate principal amount of $500.0 thousand and
bear interest at a fixed rate of 12% per annum during the initial 120 days of the term of the Promissory note, and a fixed
rate of 30% per annum until all amounts due under the Promissory note are paid in full.
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 September 30, 2018 and December 31, 2017, our consolidated current deferred revenue was $58.1 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 September 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 September 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 September 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 12
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 September 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)
|
4.1
|
|
Promissory Note dated September 13, 2018 with an aggregate principal amount of $500,000 issued by the Registrant to USA Regrowth Fund LLC, and Oregon limited liability company.*
|
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 September
30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September
30, 2018 (Unaudited) and December 31, 2017, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss)
for the three and nine months ended September 30, 2018 and 2017 (Unaudited), (iii) Condensed Consolidated Statement of Changes
in Stockholders’ Deficit for the nine months ended September 30, 2018 (Unaudited), (iv) Condensed Consolidated
Statements of Cash Flows for the nine months ended September 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:
November 14, 2018
|
By:
|
/s/
ANTHONY C. HUMPAGE
|
|
|
Anthony
C. Humpage
Chief
Executive Officer and Director
|
|
|
|
Dated:
November 14, 2018
|
By:
|
/s/
CHRISTIAN A. J. BAEZA
|
|
|
Christian
A. J. Baeza
|
|
|
Senior
Vice President and Chief Financial Officer
|