Notes
to Consolidated Financial Statements
Note 1—Business
Description and Basis of Presentation
Business
Description. We are a provider of practical, high-quality, and value-based educational training on the topics of personal finance,
entrepreneurship, real estate, and financial markets investing strategies and techniques. Our programs are offered through a variety
of formats and channels, including free-preview workshops, basic training classes, symposiums, telephone mentoring, one-on-one
mentoring, coaching and e-learning primarily under the Rich Dad® Education brand (“Rich Dad”) which was created
in 2006 under license from entities affiliated with Robert Kiyosaki, whose teachings and philosophies are detailed in the book
titled,
Rich Dad Poor Dad.
In addition to Rich Dad, we market our products and services under a variety of brands, 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 has accelerated 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 students’ 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
historically managed our business in four segments based on geographic location. These segments included our historical core
markets of the United States, Canada, and the United Kingdom, with the fourth segment including all 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) The North America, (ii) the United Kingdom, and
(iii) Other Foreign Markets.
Merger
.
On November 10, 2014, we entered into an Agreement and Plan of Merger dated as of such date (the “Merger Agreement”)
by and among (i) PRCD, a Nevada corporation, (ii) Priced In Corp. Subsidiary, a Colorado corporation and a wholly-owned subsidiary
of PRCD (“PRCD Sub”), (iii) Tigrent Inc., a Colorado corporation (“TIGE”), and (iv) Legacy Education Alliance
Holdings, Inc., a Colorado corporation and a wholly-owned subsidiary of TIGE (“Legacy Holdings”). On November 10,
2014, pursuant to the Merger Agreement, PRCD Sub merged with and into Legacy Holdings (the “Merger”), with Legacy
Holdings surviving the Merger and becoming our wholly owned subsidiary and we acquired the business of Legacy Holdings.
Basis
of Presentation.
The terms “Legacy Education Alliance, Inc.,” the “Company,” “we,” “our,”
“us” or “Legacy” as used in this report refer collectively to Legacy Education Alliance, Inc., a Nevada
corporation (“Legacy”), the registrant, which was formerly known as Priced In Corp., and, unless the context otherwise
requires, together with its wholly-owned subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation, other operating
subsidiaries and any predecessor of Legacy Education Alliance Holdings, including Tigrent Inc., a Colorado corporation. All intercompany
balances and transactions have been eliminated in consolidation.
Note 2—Significant
Accounting Policies
Going Concern
. The accompanying consolidated financial
statements and notes have been prepared assuming we will continue as a going concern. For the year ended December 31, 2018, we
incurred a net loss, generated negative cash flow from operations, had a accumulated deficit and a working capital deficit. These
circumstances raise substantial doubt as to our ability to continue as a going concern. Our ability to continue as a going concern
is dependent upon our ability to generate profits by expanding current operations globally as well as reducing our costs and increasing
our operating margins, and to sustain adequate working capital to finance our operations. The failure to achieve the necessary
levels of profitability and cash flows would be detrimental to us. The consolidated financial statements do not include any adjustments
that might be necessary if we are unable to continue as a going concern.
Cash
and cash equivalents.
We consider all highly liquid instruments with an original maturity of three months or less to be cash
or cash equivalents. We continually monitor and evaluate our investment positions and the creditworthiness of the financial institutions
with which we invest and maintain deposit accounts. When appropriate, we utilize Certificate of Deposit Account Registry Service
(CDARS) to reduce banking risk for a portion of our cash in the United States. A CDAR consists of numerous individual investments,
all below the FDIC limits, thus fully insuring that portion of our cash. At December 31, 2018 and 2017, we did not have a CDAR
balance.
Restricted cash.
Restricted
cash balances consist primarily of funds on deposit with credit card and other payment processors. These balances do not have
the benefit of federal deposit insurance and are subject to the financial risk of the parties holding these funds. Restricted
cash balances held by credit card processors are unavailable to us unless, and for a period of time after, we discontinue the
use of their services. Because a portion of these funds can be accessed and converted to unrestricted cash in less than one year
in certain circumstances, that portion is considered a current asset. Restricted cash is included with cash and cash equivalents
in our consolidated statements of cash flows.
Financial
Instruments.
Financial instruments consist primarily of cash and cash equivalents, notes receivable, 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. Our only financial liabilities measured and recorded
at fair value on our consolidated balance sheets on a recurring basis are derivative financial instruments. Management believes
the carrying value of the other financial instruments recognized on the consolidated balance sheets (including receivables, payables
and accrued liabilities) approximate their fair value.
Inventory.
Inventory consists primarily of books, videos and training materials held for sale to students enrolled in our training programs.
Inventory is stated at the lower of cost or market using the first-in, first-out method.
Deposits
with credit card processors.
The deposits with our credit card processors are held due to arrangements under which our credit
card processors withhold credit card funds to cover charge backs in the event we are unable to honor our commitments.
Property,
equipment and Impairment of long lived assets.
Property and equipment is stated at cost less accumulated depreciation. Depreciation
is calculated using the straight-line method over the estimated useful lives of the assets as presented in the following table:
Buildings
|
|
40 years
|
Furniture fixtures and equipment
|
|
3-7 years
|
Purchased software
|
|
3 years
|
Leasehold
improvements are amortized over the shorter of the estimated useful asset life or the remaining term of the applicable lease.
In
accordance with U.S. GAAP, we evaluate the carrying amount of our long-lived assets such as property and equipment, and finite-lived
intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets held and used is measured by the comparison of its carrying
amount with the future net cash flows the asset is expected to generate. We look primarily to the undiscounted future cash flows
in the assessment of whether or not long-lived assets have been impaired. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds
the estimated fair value of the asset.
Revenue
recognition.
We recognize revenue
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.
We
adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1,
2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts
are not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. Revenue amounts presented
in our condensed consolidated financial statements are recognized net of sales tax, value-added taxes, and other taxes.
In the normal course
of business, we recognize revenue based on the customers’ attendance of the course, mentoring training, coaching session
or delivery of the software, data or course materials on-line. After a customer contract expires we record breakage revenue less
a reserve for cases where we allow a customer to attend after expiration. We have deferred revenue of $57.4 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 December 31, 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:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Revenue Type:
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign markets
|
|
|
Total Consolidated Revenue
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign markets
|
|
|
Total Consolidated Revenue
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Seminars
|
|
$
|
32,745
|
|
|
$
|
14,612
|
|
|
$
|
12,444
|
|
|
$
|
59,801
|
|
|
$
|
37,781
|
|
|
$
|
14,678
|
|
|
$
|
8,123
|
|
|
$
|
60,583
|
|
Products
|
|
|
11,342
|
|
|
|
4,215
|
|
|
|
3,474
|
|
|
|
19,031
|
|
|
|
11,953
|
|
|
|
4,830
|
|
|
|
5,212
|
|
|
|
21,995
|
|
Coaching and Mentoring
|
|
|
5,372
|
|
|
|
1,552
|
|
|
|
3,952
|
|
|
|
10,876
|
|
|
|
4,979
|
|
|
|
1,802
|
|
|
|
5,751
|
|
|
|
12,532
|
|
Online and Subscription
|
|
|
1,112
|
|
|
|
43
|
|
|
|
16
|
|
|
|
1,171
|
|
|
|
137
|
|
|
|
31
|
|
|
|
1
|
|
|
|
169
|
|
Other
|
|
|
2,483
|
|
|
|
47
|
|
|
|
—
|
|
|
|
2,530
|
|
|
|
2,297
|
|
|
|
153
|
|
|
|
1
|
|
|
|
2,451
|
|
Total revenue
|
|
$
|
53,054
|
|
|
$
|
20,469
|
|
|
$
|
19,886
|
|
|
$
|
93,409
|
|
|
$
|
57,147
|
|
|
$
|
21,494
|
|
|
$
|
19,089
|
|
|
$
|
97,730
|
|
Deferred
course expenses.
We defer licensing fees and commissions and fees paid to our speakers and telemarketers until such time as
the revenue is earned. Our speakers, who are all independent contractors, earn commissions on the cash receipts received at our
training events and are paid approximately 45 days after the training event. The deferred course expenses are expensed as
the corresponding deferred revenue is recognized. We also capitalize the commissions and fees paid to our speakers and expense
them as the corresponding deferred revenue is recognized.
Advertising
expenses.
We expense advertising as incurred. Advertising paid in advance is recorded as a prepaid expense until such time
as the advertisement is published.
Income
taxes.
We account for income taxes in conformity with the requirements of ASC 740,
Income Taxes
(“ASC 740”).
Per ASC 740, the provision for income taxes is calculated using the asset and liability approach of accounting for income taxes.
We recognize deferred tax assets and liabilities, at enacted income tax rates, based on the temporary differences between the
financial reporting basis and the tax basis of our assets and liabilities. We include any effects of changes in income tax rates
or tax laws in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all
of a deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred
tax asset.
ASC
740 also clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes
a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it
is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position
and must assume that the tax position will be examined by taxing authorities. ASC 740 also provides guidance on derecognition,
classification, interest and penalties, disclosures and transition.
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.
The
Tax Cuts and Jobs Act (The Act,) was enacted on December 22, 2017 making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a reduction in the US federal corporate tax rate from 35% to 21%, requiring companies to pay
a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes
on certain foreign sourced earnings. As of December 31, 2018, we recognized income tax expense of $0.16 million related to the
remeasurement of our deferred tax balance.
Foreign
currency translation
. We account for foreign currency translation in accordance with ASC 830,
Foreign Currency Translation
.
The functional currencies of the Company’s foreign operations are the reported local currencies. Translation adjustments
result from translating our foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts
of our foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet date.
Revenue and expenses are translated using average exchange rates for each month during the fiscal year. The resulting translation
gains or losses are recorded as a component of accumulated other comprehensive income in stockholders’ deficit. Business
is generally transacted in a single currency not requiring meaningful currency transaction costs. We do not practice hedging as
the risks do not warrant the costs.
Share-based
compensation.
We account for share-based awards under the provisions of ASC 718, “
Compensation—Stock Compensation
.”
Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and we expense these
costs using the straight-line method over the requisite service period. See Note 6 -
Share-Based Compensation
, for additional
disclosures regarding our share-based compensation.
Comprehensive
income.
Comprehensive income includes changes to equity accounts that were not the result of transactions with stockholders.
Comprehensive income is comprised of net income and other comprehensive income items. Our comprehensive income generally consists
of changes in the cumulative foreign currency translation adjustment.
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 adopted this accounting update effective January
1, 2019.
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 adopted this standard effective January
1, 2019.
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—Concentration
Risk
Cash
and Cash Equivalents
We
maintain deposits in banks which may exceed the federal deposit insurance available. Management believes the potential risk of
loss on these cash and cash equivalents to be minimal. All cash balances as of December 31, 2018 and 2017, including foreign subsidiaries,
without FDIC coverage was $1.1 million and $5.3 million.
Revenue
A significant portion
of our revenue is derived from the Rich Dad brands. For the years ended December 31, 2018 and 2017, Rich Dad brands provided 74.0%
and 72.1% of our revenue. In addition, we have operations in North America, United Kingdom and Other foreign markets (See Note 14—
Segment Information
).
Note 4—Property and Equipment
Property
and equipment consists of the following (in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
782
|
|
|
$
|
782
|
|
Buildings
|
|
|
1,549
|
|
|
|
785
|
|
Software
|
|
|
2,606
|
|
|
|
2,606
|
|
Equipment
|
|
|
2,010
|
|
|
|
2,082
|
|
Furniture and fixtures
|
|
|
307
|
|
|
|
335
|
|
Building and leasehold improvements
|
|
|
1,243
|
|
|
|
1,229
|
|
Property and equipment
|
|
|
8,497
|
|
|
|
7,819
|
|
Less: accumulated depreciation
|
|
|
(6,617
|
)
|
|
|
(6,632
|
)
|
Property and equipment, net
|
|
$
|
1,880
|
|
|
$
|
1,187
|
|
Depreciation
expense on property and equipment in each of the years ended December 31, 2018 and 2017 was approximately $0.1 million.
Note
5— Short-Term and Long-Term Debt
|
|
As of December 31,
|
|
|
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 December 31,
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Installment notes payable for equipment financing
|
|
$
|
20
|
|
|
$
|
31
|
|
Less: current portion
|
|
|
(12
|
)
|
|
|
(11
|
)
|
Total long-term debt, net of current portion
|
|
$
|
8
|
|
|
$
|
20
|
|
The
following is a summary of scheduled debt maturities by year (in thousands):
2019
|
|
$
|
512
|
|
2020
|
|
|
8
|
|
Total long-term debt
|
|
$
|
520
|
|
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
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 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. On March 8
th
, 2019, we executed an extension of the maturity date to September 13, 2019.
Note 6—Share-Based
Compensation
The
Company has one 2015 Equity Plan, the 2015 Incentive Plan.
The
2015 Incentive Plan was approved by the stockholders at our annual meeting of stockholders on July 16, 2015. The 2015 Incentive
Plan reserves 5,000,000 shares of our Common Stock for stock options, restricted stock, and a variety of other types of equity
awards. We believe that long-term incentive compensation programs align the interests of management, employees and the stockholders
to create long-term stockholder value. We believe that equity based incentive compensation plans, such as the Incentive Plan,
increase our ability to achieve this objective, and, by allowing for several different forms of long-term equity based incentive
awards, help us to recruit, reward, motivate and retain talented employees and other service providers. The text of the 2015 Incentive
Plan is included in the attachment marked as Appendix B to the Company’s Proxy Statement on Schedule 14A filed with the
Securities and Exchange Commission on June 16, 2015.
During the year ended
December 31, 2018, pursuant to the 2015 Incentive Plan, we awarded 120,000 shares of restricted stock to members of the Board of
Directors, which are subject to a two-year cliff vesting. The grant date price per share was $0.22 for a total grant date fair
value of $0.03 million.
During
the year ended December 31, 2017, pursuant to the 2015 Incentive Plan we awarded 280,002 shares of restricted stock to our employees,
which are subject to a three-year cliff vesting and 120,000 shares of restricted stock to members of the Board of Directors, which
are subject to a two-year cliff vesting. The grant date price per share was $0.33 for a total grant date fair value of $0.1 million.
The
following table reflects the activity of the restricted shares:
Restricted Stock Activity (in thousands)
|
|
Number of shares
|
|
|
Weighted average grant date value
|
|
Unvested at December 31, 2016
|
|
|
1,647
|
|
|
$
|
0.30
|
|
Granted
|
|
|
400
|
|
|
|
0.33
|
|
Forfeited
|
|
|
(23
|
)
|
|
|
0.40
|
|
Vested
|
|
|
(600
|
)
|
|
|
0.34
|
|
Unvested at December 31, 2017
|
|
|
1,424
|
|
|
$
|
0.21
|
|
Granted
|
|
|
120
|
|
|
|
0.22
|
|
Forfeited
|
|
|
(7
|
)
|
|
|
0.40
|
|
Vested
|
|
|
(668
|
)
|
|
|
0.40
|
|
Unvested at December 31, 2018
|
|
|
869
|
|
|
$
|
0.04
|
|
Compensation
Expense and Related Valuation Techniques
We account for share-based
awards under the provisions of ASC 718,
“Share-Based Payment,”
which established the accounting for share-based
awards exchanged for employee services. Accordingly, share-based compensation cost is measured at the grant date based on the fair
value of the award and we expense these costs using the straight-line method over the requisite service period. Unrecognized compensation
expense associated with unvested share-based awards, consisting entirely of unvested restricted stock, was approximately $106,489
and $347,000 at December 31, 2018 and 2017, respectively. This cost is expected to be recognized over a weighted-average period
of 1.5 years.
Our
stock-based compensation expense was approximately $0.2 million in each of the years ended December 31, 2018 and 2017 and is
included in general and administrative expenses in the accompanying Consolidated Statements of Operations and Comprehensive Income.
There were no related income tax effects in either year.
Note 7—Employee
Benefit Plan
We have a 401(k) employee savings plan for eligible employees that provides for a matching contribution from us, determined
each year at our discretion. The Company provided for a matching contribution of $0.2 million in fiscal year 2018 and did not
match, and therefore incurred no expense, during 2017.
Note 8—Income
Taxes
We
recognize deferred tax assets and liabilities, at enacted income tax rates, based on the temporary differences between the financial
reporting basis and the tax basis of our assets and liabilities. We include any effects of changes in income tax rates or tax
laws in the provision for income taxes in the period of enactment. When it is more likely than not that a portion or all of a
deferred tax asset will not be realized in the future, we provide a corresponding valuation allowance against the deferred tax
asset.
We
have retained full valuation allowances of $6.9 million and 4.7 million against the deferred tax assets of our United States (as
of December 31, 2018) Australian, Canadian, U.K. (only Legacy Education Alliance International Limited), Hong Kong, and South
Africa subsidiaries as of December 31, 2018 and December 31, 2017, respectively. The most significant negative factor that was
considered in determining whether a valuation allowance was required is a cumulative recent history of losses in all jurisdictions
for the entities mentioned above.
In
the fourth quarter of 2018, we determined that a $1.9 million valuation allowance against U.S.deferred taxes was required. The
company assessed the weight of all available positive and negative evidence and determined it was not more likely than not that
future earnings will be sufficient to realize the deferred tax assets in the U.S.
As
of December 31, 2018 and 2017, we had approximately $8.4 million and $0.0 million of federal net operating loss carryforwards,
approximately $25.0 million and $22.8 million of foreign net operating loss carryforwards, and approximately $14.3 million and
$6.0 million of state net operating loss carryforwards, respectively. The foreign loss carryforwards begin to expire in 2027 and
the state net operating loss carryforwards begin to expire in 2024.
Our
sources of income (loss) and income tax provision (benefit) are as follows (in thousands):
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
U.S.
|
|
$
|
(5,369
|
)
|
|
$
|
4,733
|
|
Non-U.S.
|
|
|
(4,118
|
)
|
|
|
1,552
|
|
Total income (loss) before income taxes
|
|
$
|
(9,487
|
)
|
|
$
|
6,285
|
|
Provision (benefit) for taxes:
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(56
|
)
|
|
$
|
221
|
|
State
|
|
|
38
|
|
|
|
101
|
|
Non-U.S.
|
|
|
—
|
|
|
|
—
|
|
Total current
|
|
|
(18
|
)
|
|
|
322
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
584
|
|
|
|
1,521
|
|
State
|
|
|
—
|
|
|
|
—
|
|
Non-U.S.
|
|
|
(97
|
)
|
|
|
146
|
|
Total deferred expense (benefit)
|
|
|
487
|
|
|
|
1,667
|
|
Total income tax expense (benefit)
|
|
$
|
469
|
|
|
$
|
1,989
|
|
Effective income tax rate
|
|
|
(14.8
|
)%
|
|
|
31.6
|
%
|
During
the years ended December 31, 2018 and 2017, we increased the valuation allowance by $2.2 million and $0.2 million, respectively.
The
difference between the tax provision at the statutory federal income tax rate and the tax provision attributable to income (loss)
from continuing operations before income taxes is as follows (in thousands):
|
|
Years
ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Computed expected federal
tax expense
|
|
$
|
(1,992
|
)
|
|
$
|
2,200
|
|
Increase (Decrease) in valuation allowance
|
|
|
2,215
|
|
|
|
165
|
|
State income net of federal benefit
|
|
|
39
|
|
|
|
65
|
|
Non-U.S. income taxed at different rates
|
|
|
16
|
|
|
|
(400
|
)
|
Uncertain tax positions expense
|
|
|
(16
|
)
|
|
|
21
|
|
Foreign exchange adjustment
|
|
|
361
|
|
|
|
(266
|
)
|
Foreign tax rate adjustment
|
|
|
1
|
|
|
|
72
|
|
Impact of change in enacted rates
|
|
|
1
|
|
|
|
108
|
|
Other
|
|
|
(156
|
)
|
|
|
24
|
|
Income tax expense
(benefit)
|
|
$
|
469
|
|
|
$
|
1,989
|
|
We recorded an income
tax expense of $.5 million and $2.0 million for the year ended December 31, 2018 and 2017, respectively.
Our effective tax rate
was (14.8)% and 31.6% for the year ended December 31, 2018 and 2017. Our effective tax rate 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,
the change in our valuation allowance and the remeasurement of our deferred tax balances from the Tax Cuts and Job Act that was
enacted on December 22, 2017.
Deferred
income tax assets and liabilities reflect the net tax effects of (i) temporary differences between the carrying amount of
assets and liabilities for financial reporting purposes and the amounts for income tax purposes and (ii) operating loss carryforwards.
The tax effects of significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
7,543
|
|
|
$
|
4,856
|
|
Accrued compensation, bonuses, severance
|
|
|
19
|
|
|
|
245
|
|
Interest Expense
|
|
|
9
|
|
|
|
—
|
|
Intangible amortization
|
|
|
|
|
|
|
12
|
|
Impaired assets
|
|
|
240
|
|
|
|
240
|
|
Accrued expenses
|
|
|
|
|
|
|
7
|
|
Deferred revenue
|
|
|
|
|
|
|
522
|
|
Depreciation
|
|
|
30
|
|
|
|
58
|
|
Charitable Contribution Carryover
|
|
|
2
|
|
|
|
2
|
|
Restricted Stock Awards
|
|
|
|
|
|
|
46
|
|
Tax credits
|
|
|
118
|
|
|
|
118
|
|
Valuation allowance
|
|
|
(6,870
|
)
|
|
|
(4,655
|
)
|
Total deferred tax assets
|
|
$
|
1,091
|
|
|
$
|
1,451
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred course expenses
|
|
$
|
(994
|
)
|
|
$
|
(1,010
|
)
|
Total deferred tax liabilities
|
|
|
(994
|
)
|
|
|
(1,010
|
)
|
Net deferred tax asset
|
|
$
|
97
|
|
|
$
|
441
|
|
Deferred
tax expense related to the foreign currency translation adjustment for the years ended December 31, 2018 and 2017 was $0.4 million
and $(0.3) million, respectively, and was fully offset by a corresponding decrease at December 31, 2018 and an increase at December
31, 2017 in the valuation allowance with the exception of $0.02 million and $(0.2) million for Elite Legacy Education UK Limited
for the years ended December 31, 2018 and 2017, respectively, whose valuation allowance was released effective December 31, 2016.
These amounts (except for Elite Legacy Education UK Limited), which net to zero, are reported in other comprehensive income. The
deferred tax assets presented above for net operating losses and credits have been reduced by liabilities for unrecognized tax
benefits.
The
Company does not expect to repatriate earnings from its foreign subsidiaries because the cumulative earnings and profits of the
foreign subsidiaries as of December 31, 2018 and 2017 are negative. Accordingly, no U.S. federal or state income taxes have been
provided thereon.
The
liability pertaining to uncertain tax positions was $1.6 million at December 31, 2018 and 2017. In accordance with GAAP, we recorded
expense that increased the total liability pertaining to uncertain tax positions which was more than offset by a decrease in the
total liability attributable to foreign currency fluctuations and tax rate adjustments. A significant portion of the liability
pertaining to uncertain tax positions is recorded as a reduction of the value of net operating loss carryovers.
We
include interest and penalties in the liability for uncertain tax positions. Accrued interest and penalties on uncertain tax positions
were approximately $0.04 million at December 31, 2018 and 2017, and is included in other liabilities in the accompanying Consolidated
Balance Sheets. If applicable, we recognize interest and penalties related to uncertain tax positions as tax expense.
The
following is a tabular reconciliation of the total amounts of unrecognized tax benefits:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Unrecognized tax benefits - January 1
|
|
$
|
1,657
|
|
|
$
|
1,636
|
|
Gross increases - tax positions in prior period
|
|
|
2
|
|
|
|
21
|
|
Gross decreases - tax positions in prior period
|
|
|
(19
|
)
|
|
|
—
|
|
Unrecognized tax benefits - December 31
|
|
$
|
1,640
|
|
|
$
|
1,657
|
|
The
total liability for unrecognized tax benefits at December 31, 2018 and 2017, is netted against deferred tax assets related to
net operating loss carryforwards in the Consolidated Balance Sheets. The total liability for unrecognized tax benefits at December
31, 2018 and 2017, are as follows:
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Reduction of net operating loss carryforwards
|
|
$
|
309
|
|
|
$
|
437
|
|
Reduction of tax credit carryforwards
|
|
|
—
|
|
|
|
—
|
|
Total reductions of deferred tax assets
|
|
|
309
|
|
|
|
437
|
|
Noncurrent tax liability (reflected in Other long-term liabilities)
|
|
|
1,331
|
|
|
|
1,220
|
|
Total liability for unrecognized tax benefits
|
|
$
|
1,640
|
|
|
$
|
1,657
|
|
We
do not expect any significant changes to unrecognized tax benefits in the next year.
The
Company estimates $0.09 million and $1.2 million, of the unrecognized tax benefits, if recognized, would impact the effective
tax rate at December 31, 2018 and 2017, respectively. At December 31, 2018 a substantial portion of our liability for uncertain
tax benefits is recorded as a reduction of net operating losses and tax credit carryforwards.
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.
Our
federal income tax returns have been examined and reported upon by the Internal Revenue Service through December 31, 2015, and
the years subsequent to 2015 are subject to examination. Our state tax returns for years ranging from 2010 and 2011 are still
open and subject to examination. In addition, our Canadian tax returns and United Kingdom tax returns for all years after
2011 are subject to examination.
The
Tax Cuts and Jobs Act (The Act,) was enacted on December 22, 2017 making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a reduction in the US federal corporate tax rate from 35% to 21%, requiring companies to pay
a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes
on certain foreign sourced earnings. As of December 31, 2018, we recognized income tax expense of $0.163 million related to the
remeasurement of our deferred tax balance.
Note 9—Certain
Relationships and Related Transactions
Licensing
Agreements with the Rich Dad Parties
Our primary
business relies on our license of the Rich Dad brand and related marks and intellectual property. The following transactions summarize
our license to use the Rich Dad trademarks, trade names and other business information worldwide (the “Rich Dad Intellectual
Property Rights”):
Effective
September 1, 2013, we entered into licensing and related agreements with Rich Dad Operating Company, LLC (“RDOC”)
(collectively, the “2013 License Agreement”) that replaced the 2010 License Agreement. Compared to the 2010 License
Agreement, the 2013 License Agreement broadened the field of use to include real estate investing, business strategies, stock
market investment techniques, stock/paper assets, cash management, asset protection, entrepreneurship and other financially-oriented
subjects. The 2013 License Agreement also (i) reduced the royalty rate payable to RDOC compared to the 2010 Rich Dad License Agreement;
(ii) broadened the Company’s exclusivity rights to include education seminars delivered in any medium; (iii) eliminated
the cash collateral requirements and related financial covenants contained in the 2010 License Agreement; (iv) continues our right
to pay royalties via a promissory note that is convertible to preferred shares upon the occurrence of a Change in Control (as
defined in the 2013 License Agreement); (v) eliminated approximately $1.6 million in debt from our consolidated balance sheet
as a result of debt forgiveness provided for in the agreement terminating the 2010 License Agreement; and (vi) converted another
approximately $4.6 million in debt to 1,549,882 shares of our Common Stock. Either party may terminate the 2013 License Agreement
upon certain circumstances, including and uncured breach by the non-terminating party.
On April 22, 2014, we
entered into an agreement with RDOC (the “2014 Amendment”) to, among other things, amend the 2013 License Agreement
to halve the royalty payable by us to RDOC to 2.5% for the whole of 2014, (ii) cancel approximately $1.3 million in debt owed by
us to RDOC, (iii) reimburse us for certain legal expenses, and (iv) cancel RDOC’s right to appoint one member of our Board
of Directors.
The
2013 License Agreement and the GEO Settlement Agreement were assigned to our wholly-owned subsidiary, Legacy Education Alliance
Holdings, Inc. on September 10, 2014.
On
January 25, 2018, we entered into a Second Amendment with RDOC (the “Second Amendment”) that amends certain terms
of the 2013 License Agreement and extends the term of the 2013 License Agreement to September 1, 2019. In addition, the Company
and two of its officers, and RDOC and certain individuals affiliated with RDOC entered into a Mutual Waiver and Release of Claims.
(See the Form 8-K filed on January 29, 2018 for further discussion.)
License
Agreement with Robbie Fowler
We
entered into a Talent Endorsement Agreement with an effective date of January 1, 2015 with Robbie Fowler that supplements an earlier
November 2, 2012 Agreement and a Talent Endorsement Agreement with an effective date of January 1, 2013, both with Mr. Fowler
(collectively, the “Fowler License Agreement”). The Fowler License Agreement grants us the exclusive right to use
Robbie Fowler’s name, image, and likeness in connection with the advertisement, promotion, and sale in the United Kingdom
of a property training course developed by us. . The Fowler License Agreement will expire by its terms on January 1, 2020. Under
the Fowler License Agreement, we pay Mr. Fowler a royalty on revenues realized from the sale of Robbie Fowler-branded property
courses and affiliated products, after deductions for value added taxes, returns and refunds.
License
Agreement with Martin Roberts
In
2009, we entered into a Talent Endorsement Agreement with Martin Roberts that grants us the exclusive right to use Martin Roberts’,
name, image, and likeness, as well as the rights to use the name of Mr. Roberts’s published book entitled “Making
Money From Property,” in connection with the advertisement, promotion, and sale in the United Kingdom of a property training
course developed by us. We entered into a subsequent Talent Endorsement Agreement with an effective date of April 20th, (the “Supplemental
Agreement”) that grants us the non-exclusive right to use Martin Roberts’ name, image and likeness, as well as the
rights to use the name of Mr. Roberts’ published book entitled “Making Money From Property”, in connection with
the advertisement, promotion, and sale of educational training, products and materials related to real estate, securities and
options trading and investment, as well as, general wealth building and investing strategies, principles and motivation. The term
of the license granted under the Supplemental Agreement is for an initial six months period expiring on October 20, 2017 and will
continue thereafter unless (i) terminated by one party upon the event of certain specified defaults of the party, or (ii) by either
party without cause upon thirty (30) days prior written notice to the other party. Under the Supplemental Agreement with Mr. Roberts,
we pay Mr. Roberts a royalty on revenues realized from the sale of Robbie Fowler-branded property courses and affiliated products
that are collected within thirty (30) days after a Company-sponsored Martin Roberts-branded event, after deductions for value
added taxes, banking charges, returns, refunds, and third party commissions. For sales to clients introduced to us directly by
Mr. Roberts and his associated websites as well as other marketing and promotional activities Mr. Roberts or his associated companies
may wish to undertake from time to time that are not part of a Company sponsored event and which result in the sale of ours basic
training her marketing and promotional activities, Mr. Roberts is entitled to 50% of gross revenue from such sales of directly
introduced clients.
Note 10—Capital
Stock
Share
Capital
Our
authorized share capital consists of 200,000,000 shares of Common Stock, par value $0.0001 per share, and 20,000,000 shares of
preferred stock, par value $0.0001 per share.
Common
Stock
As
of December 31, 2018, 23,120,852 shares of our Common Stock were outstanding. The outstanding shares of our Common Stock are validly
issued, fully paid and non-assessable.
Holders
of Common Stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of Common Stock
do not have cumulative voting rights. Directors are elected by a plurality of the votes cast by the shares entitled to vote in
the election at a meeting at which a quorum is present. The vote of the stockholders of a majority of the stock having voting
power present in person or represented by proxy shall be sufficient to decide any questions brought before such meeting, other
than the election of directors, unless the question is one upon which by express provision of the statutes or of the Articles
of Incorporation, a different vote is required in which case such express provisions shall govern and control the decision of
such question. Holders of Common Stock representing ten percent (10%) of the Company’s capital stock issued, outstanding
and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders.
Holders
of our Common Stock are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally
available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate
pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference
over the Common Stock. The Common Stock has no pre-emptive, subscription or conversion rights and there are no redemption provisions
applicable to the Common Stock.
In
addition, our authorized but unissued common shares could be used by our Board of Directors for defensive purposes against a hostile
takeover attempt, including (by way of example) the private placement of shares or the granting of options to purchase shares
to persons or entities sympathetic to, or contractually bound to support, management. We have no such present arrangement or understanding
with any person. However, our Common Stock have been reserved for issuance upon exercise of stock purchase rights designed to
deter hostile takeovers, commonly known as a “poison pill.”
On February 14, 2017,
TIGE completed the distribution of 15,998,326 shares of Common Stock in Legacy approved by the Board of Directors of TIGE on October
4, 2016. Pursuant to the distribution, 1.00105 shares of Legacy Common Stock were distributed for each share of stock held in
TIGE.
On
February 15, 2017, we adopted a limited duration Shareholder Rights Plan (the “Plan”). Under the Plan, one preferred
stock purchase right will be distributed for each share of common stock held by stockholders of record on March 2, 2017.
The rights will trade with the common stock and will not be separable or exercisable until such time as the Plan is triggered.
The Plan was scheduled to expire on February 15, 2019, subject to the Company’s right to extend such date, unless earlier
redeemed or exchanged by the Company or terminated.
On
November 12, 2018, the Board of Directors of Legacy Education Alliance, Inc. (the “Company”) approved an amendment
(the “Amendment”) to the Rights Agreement dated as of February 16, 2017 by and between the Company and VStock Transfer
LLC, as Rights Agent (the “Rights Agreement”), to (i) extend the Final Expiration Date, as defined in the Rights Agreement,
to the close of business on February 15, 2021, and (ii) to provide for the construction of the Rights Agreement and all other
related documents in a manner consistent with the extension of the Final Expiration Date.
The
extension of the Final Expiration Date under the Rights Agreement was entered into to ensure that the Board of Directors would
continue to have sufficient time to consider any proposal from a third party that might result in a change in control of the Company,
to ensure that all stockholders receive fair and equal treatment in the event of any such a proposal, and to encourage any potential
acquirer to negotiate with the Board of Directors. In addition, extending the Rights Agreement will guard against partial tender
offers, open market accumulations and other coercive tactics aimed at gaining control of the Company without paying all stockholders
a full control premium for their shares. The Rights Agreement was not amended in response to any specific takeover offer.
Preferred
Stock
As
of December 31, 2018, no shares of our preferred stock were outstanding.
Our
authorized preferred stock is “blank check” preferred. Accordingly, subject to limitations prescribed by law, our
Board is expressly authorized, at its discretion, to adopt resolutions to issue shares of preferred stock of any class or series,
to fix the number of shares of any class or series of preferred stock and to change the number of shares constituting any series
and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether the dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation
preferences of the shares constituting any series of the preferred stock, in each case without any further action or vote by our
stockholders.
Note
11—Earnings Per Share (“EPS”)
Basic
EPS is computed by dividing net income by the basic weighted-average number of shares outstanding during the period.
Diluted
EPS is computed by dividing net income by the diluted weighted-average number of shares outstanding during the period and, accordingly,
reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options,
were exercised, settled or converted into common stock and were dilutive. The diluted weighted-average number of shares used in
our diluted EPS calculation is determined using the treasury stock method.
Unvested
awards of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards,
are considered to be participating securities, and therefore, the two-class method is used for purposes of calculating EPS. Under
the two-class method, a portion of net income is allocated to these participating securities and is excluded from the calculation
of EPS allocated to common stock. Our restricted stock awards are subject to forfeiture and restrictions on transfer until vested
and have identical voting, income and distribution rights to the unrestricted common shares outstanding.
Our
weighted average unvested restricted stock awards outstanding were 843,095 and 1,347,229 for the years ended December 31, 2018
and 2017. Weighted average unvested restricted stock awards outstanding as of December 31, 2018 were not included in the computation
of our diluted EPS, as inclusion would have been anti-dilutive, however for the year ended December 31, 2017, they were included
as they would have been dilutive.
The
calculations of basic and diluted EPS are as follows:
|
|
Years Ended December 31, 2018
|
|
|
Years Ended December 31, 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
|
|
$
|
(9,956
|
)
|
|
|
23,014
|
|
|
|
|
|
|
$
|
4,296
|
|
|
|
22,857
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(253
|
)
|
|
|
(1,347
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
(9,956
|
)
|
|
|
23,014
|
|
|
$
|
(0.43
|
)
|
|
$
|
4,043
|
|
|
|
21,510
|
|
|
$
|
0.19
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
253
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,347
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
(9,956
|
)
|
|
|
23,014
|
|
|
$
|
(0.43
|
)
|
|
$
|
4,027
|
|
|
|
22,857
|
|
|
$
|
0.18
|
|
Note
12—Fair Value Measurements
ASC
820
,
“Fair Value Measurements and Disclosures”
defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure requirements about fair value measurements.
ASC 820
requires entities
to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair
value.
ASC 820
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date.
ASC 820
specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market
assumptions.
In
accordance with
ASC 820
, these two types of inputs have created the following fair value hierarchy:
|
●
|
Level
1—Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
|
|
|
●
|
Level
2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the asset or liability, including:
|
|
●
|
Quoted
prices for similar assets or liabilities in active markets
|
|
|
|
|
●
|
Quoted
prices for identical or similar assets or liabilities in markets that are not active
|
|
|
|
|
●
|
Inputs
other than quoted prices that are observable for the asset or liability
|
|
|
|
|
●
|
Inputs
that are derived principally from or corroborated by observable market data by correlation or other means; and
|
|
●
|
Level
3—Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best
information available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected
cash flows).
|
The
following table presents the derivative financial instruments, our only financial liabilities measured and recorded at fair value
on our consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of December 31, 2018
and 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 December 31, 2018
|
|
Warrant derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2017
|
|
Warrant derivative liabilities
|
|
$
|
24,233
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,233
|
|
See
Note – 13
Derivative Liability,
for further discussion.
Note
13—Derivative Liability
In June 2015, we granted warrants to purchase
959,924 shares of the Company’s common stock through a private offering of units (“Units”). Each Unit included
one share of Common Stock, par value $0.0001 per share, and a three-year Warrant to purchase one share of Common Stock at an initial
exercise price per share equal to $0.75, subject to adjustment for certain corporate transactions such as a merger, stock-split
or stock dividend and, if the Company 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
|
|
|
December 31,
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 months
|
|
|
|
0.5 year
|
|
As of December 31,
2018 and December 31, 2017, the fair value of the total warrants' derivative liability is $0 and $24,233 and are recorded in other
accrued expenses in the Consolidated Balance Sheets. We recognized a gain on the change of fair value of the derivative liability
of $24,233 and of $84,576 for the years ended December 31, 2018 and 2017, which is recorded in other income, net in the Consolidated
Statements of Operations and Comprehensive Income (Loss).
The
following table summarizes the derivative liability included in our consolidated balance sheets:
Balance at December 31, 2017
|
|
$
|
24,233
|
|
Gain on change of fair value
|
|
|
(24,233
|
)
|
Balance at December 31, 2018
|
|
$
|
—
|
|
The
following table summarizes information about warrants outstanding as of December 31, 2018:
Total # of warrants issued and outstanding
|
|
|
—
|
|
Weighted-average exercise price
|
|
$
|
—
|
|
Remaining life (in years)
|
|
|
—
|
|
Note 14—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. These segments included our historical core markets of the United States, Canada, and the United
Kingdom, with the fourth segment including all 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) The
North America, (ii) the 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:
|
|
Years Ended
December 31,
|
|
As a percentage of total revenue
|
|
2018
|
|
|
2017
|
|
North America
|
|
|
56.8
|
%
|
|
|
58.5
|
%
|
U.K.
|
|
|
21.9
|
%
|
|
|
22.0
|
%
|
Other foreign markets
|
|
|
21.3
|
%
|
|
|
19.5
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating
results for the segments are as follows:
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Segment revenue
|
|
(In thousands)
|
|
North America
|
|
$
|
53,054
|
|
|
$
|
57,147
|
|
U.K.
|
|
|
20,469
|
|
|
|
21,494
|
|
Other foreign markets
|
|
|
19,886
|
|
|
|
19,089
|
|
Total consolidated revenue
|
|
$
|
93,409
|
|
|
$
|
97,730
|
|
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
North America
|
|
$
|
6,157
|
|
|
$
|
11,606
|
|
U.K.
|
|
|
3,166
|
|
|
|
5,890
|
|
Other foreign markets
|
|
|
848
|
|
|
|
1,726
|
|
Total consolidated gross profit
|
|
$
|
10,171
|
|
|
$
|
19,222
|
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Years Ended
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
North America
|
|
$
|
103
|
|
|
$
|
105
|
|
U.K.
|
|
|
37
|
|
|
|
19
|
|
Other foreign markets
|
|
|
6
|
|
|
|
1
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
146
|
|
|
$
|
125
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
North America
|
|
$
|
11,566
|
|
|
$
|
15,364
|
|
U.K.
|
|
|
4,956
|
|
|
|
9,090
|
|
Other foreign markets
|
|
|
4,038
|
|
|
|
2,566
|
|
Total consolidated identifiable assets
|
|
$
|
20,560
|
|
|
$
|
27,020
|
|
Our long-lived assets
in the U.S. were approximately $1.1 million and $1.2 million for the year ended December 31, 2018 and 2017, and our international
long-lived assets were approximately $0.8 million and $0.1 million for the same periods.
Note
15—Commitments and Contingencies
Licensing
agreements.
On
January 25, 2018, we entered into a Material Definitive Agreement that resulted in a Second Amendment with RDOC (the “Second
Amendment”) that amends certain terms of the 2013 License Agreement and extends the term of the 2013 License Agreement to
September 1, 2019. In addition, the Company and two of its officers, and RDOC and certain individuals affiliated with RDOC entered
into a Mutual Waiver and Release of Claims.
Under
the terms of the Second Amendment, the Company has been granted a worldwide license to use certain intellectual property of RDOC
to develop, market, sell, and conduct Rich Dad Education branded educational products and services in real estate investing, business
strategies, stock market investment techniques, stock/paper assets, cash management, asset protection, and other financially oriented
subjects in any form of communication or media, in exchange for which the Company agreed to pay a monthly royalty to RDOC.
Under
the terms of the Mutual Release, the Company and two of its officers, Anthony Humpage and James E. May, on the one hand, and RDOC
and two of its officers, Mike Sullivan and Shane Caniglia, as well as Robert Kiyosaki and Kim Kiyosaki, on the other, exchanged
mutual releases of claims that any of them had or might have had with respect to matters in existence prior to the execution of
the Mutual Release.
We
are committed to pay royalties for the usage of certain brands, as governed by various licensing agreements, including Rich Dad,
Robbie Fowler and Martin Roberts. Total royalty expenses included in our Consolidated Statement of Operations and Comprehensive
Income (Loss) for the years ended December 31, 2018 and 2017 were $4.7 million and $4.7 million.
Operating
leases.
We lease office space for administrative and training requirements. These leases expire have varying expiration dates
and some of them have renewal options and purchase options. In addition, certain office space leases provide for rent adjustment
increases. The accompanying Consolidated Statements of Operations and Comprehensive Income (Loss) reflect rent expense on a straight-line
basis over the term of the lease.
Rent expense for the
years ended December 31, 2018 and 2017 was approximately $0.9 million and $1.1 million. Except for a condominium lease with our
Chief Executive Officer, there are no other related party leases.
At
December 31, 2018, future remaining minimum lease commitments for all non-cancelable operating leases are as follows (in thousands):
2019
|
|
$
|
475
|
|
Total minimum lease payments
|
|
$
|
475
|
|
Purchase
commitments
. From time to time, the Company enters into non-cancelable commitments to purchase professional services, Information
Technology licenses and support, and training courses in future periods. There were no purchase commitments made by the Company
at December 31, 2018 and 2017, respectively.
Custodial and Counterparty
Risk
. The Company is subject to custodial and other potential forms of counterparty risk in respect of a variety of contractual
and operational matters. In the course of ongoing company-wide risk assessment, management monitors the Company arrangements
that involve potential counterparty risk, including the custodial risk associated with amounts prepaid to certain vendors and deposits
with credit card and other payment processors. Deposits held by our credit card processors at December 31, 2018 and 2017 were $5.0
million and $2.8 million. These balances are included on the Consolidated Balance Sheets in restricted cash in 2018 and 2017.
While
these balances reside in major financial institutions, they are only partially covered by federal deposit insurance and are subject
to the financial risk of the parties holding these funds. When appropriate, we utilize Certificate of Deposit Account Registry
Service (CDARS) to reduce banking risk for a portion of our cash in the United States. A CDAR consists of numerous individual
investments, all below the FDIC limits, thus fully insuring that portion of our cash. At December 31, 2018 and 2017, we did not
have a CDAR balance.
Litigation.
Elite Legacy Education, Inc. v. Netsuite, Inc., Oracle Corporation and Oracle America, Inc
. On August 17, 2018, we
submitted a demand for arbitration against Respondents NetSuite, Inc., Oracle Corporation, and Oracle America, Inc. (collectively,
“Oracle/NetSuite”) to JAMS in San Francisco, California for declaratory relief, breach of contract, breach of the
covenant of good faith and fair dealing, conversion, and unjust enrichment to address the deficient performance and subsequent
unwarranted and malicious threats to suspend performance altogether from Respondents Oracle/NetSuite arising out of the Company
new ERP/CRM system. Respondents have submitted counter claims for breach of contract and declaratory relief. This matter is currently
scheduled for hearing on the merits on May 8-10, 2019.
Tranquility Bay of
Pine Island, LLC v. Tigrent, Inc., et al
. On March 16, 2017, suit was filed in the Twentieth Judicial Circuit In and For Lee
County, Florida by Tranquility Bay of Pine Island, LLC (“TBPI”) against Tigrent Inc. and various of its present and
former shareholders, officers and directors. By amendment dated August 14, 2018, the Company and its then General Counsel and
now Interim Chief Executive Officer were named as defendants to a civil conspiracy count. The suit primarily relates to the alleged
obligation of Tigrent to indemnify the Plaintiff pursuant to an October 6, 2010 Forbearance Agreement. The suit contains includes
claims for Breach of Contract, Permanent and Temporary Injunction, Breach of Fiduciary Duty, Civil Conspiracy, Tortious Interference
and Fraudulent Transfer. On March 18, 2019, the Court dismissed the complaint in its entirety with leave to amend. On April 11,
2019, TBPI filed its Second Amended Complaint in Twentieth Judicial Circuit In and For Lee County, Florida against Tigrent Inc.
(“Tigrent”), Legacy Education Alliance Holding, Inc. (“Holdings), and certain shareholders of the Company. The
suit includes claims for Breach of Contract Breach of Fiduciary Duty against Tigrent, Civil Conspiracy against Tigrent and Holdings,
and various Counts of Fraudulent Transfer against various shareholders of the Company. The Company believes the claims of the
plaintiff are without merit and intends to defend this matter vigorously.
Tigrent Group Inc., Rich
Dad Education, LLC, and Tigrent Enterprises Inc. v. Cynergy Holding, LLC, Bank of America, N.A., BA Merchant Services, LLC, BMO
Harris Bank, N.A. and Moneris Solutions Corporation, was originally filed in the U.S. District Court for the Eastern District
of New York (No. 13 Civ. 03708) on June 28, 2013, but, due to a challenge to federal jurisdiction, was subsequently recommenced
in the Supreme Court of New York, County of Queens (No. 703951/2013), on September 19, 2013.
On November 1, 2017,
we announced we would receive an aggregate sum of Five Million Dollars ($5,000,000.00) to settle litigation brought to recover
funds withheld from it in connection with the processing of credit card sales from 2007 through 2011. Under the terms of the settlement
agreement entered into on October 31, 2017, Legacy has since received $5 million from Cynergy Holdings, LLC, Bank of America, N.A.,
BA Merchant Services, LLC, BMO Harris Bank, N.A., and Moneris Solutions, Inc. (“Defendants”). As part of the settlement,
Legacy has agreed to dismiss the litigation currently pending in the Supreme Court of the State of New York, County of Queens without
admission of wrongdoing on the part of any party. After accounting for outstanding legal fees, the net amount Legacy received from
the settlement was $4,332,798. For more information on the terms of the settlement, please refer to the Current Report on Form
8-K filed by the Company with the Securities and Exchange Commission on November 1, 2017. A copy of the Form 8-K is available on
the Company’s website at (http://ir.legacyeducationalliance.com/all-sec-filings).
We
are involved from time to time in routine legal matters incidental to our business, including disputes with students and requests
from state regulatory agencies. Based upon available information, we believe that the resolution of such matters will not have
a material adverse effect on our consolidated financial position or results of operations.