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 a variety of brands including 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
, and Teach Me to Trade
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 upon the earlier of (i) when
our students take their courses or (ii) the term for taking their course expires, both of which could be several quarters after
the student purchases a program and pays the fee. We recognize revenue immediately when we sell our (i) proprietary products delivered
at time of sale and (ii) third party products sales. 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.
Our
operations are managed through three operating segments: (i) North America, (ii) United Kingdom, and (iii) 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, 2018 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 Loss are not necessarily indicative of amounts expected for the respective annual periods or any
other interim period.
Reclassification.
We
have reclassified certain amounts in our prior-period financial statements to conform to the current period’s presentation.
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.”
Going
Concern
.
The accompanying unaudited
condensed consolidated financial statements and notes have been prepared assuming we will continue as a going concern. For the
quarter ended June 30, 2019, we incurred a net loss, had an 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.
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.
Restricted Cash
The following table
provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum
to the total of the same such amounts in the consolidated cash flow statements:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
4,542
|
|
|
$
|
1,557
|
|
Restricted cash
|
|
|
6,476
|
|
|
|
5,080
|
|
Total cash, cash equivalents, and restricted cash shown in the cash flow statement
|
|
$
|
11,018
|
|
|
$
|
6,637
|
|
Restricted cash balances
consist primarily of reserves held by our credit card processors as collateral. Restricted cash balances held by credit card processors
are unavailable to us unless we terminate our contractual relationship with them and seek the return of these reserves per the
terms of the agreements. The timing of which varies, but usually not before 180 days after the termination of the merchant agreement.
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. As of June 30, 2019, we recognized income tax expense of $0.16 million related to the
remeasurement of our deferred tax balance.
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
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. Adoption of this accounting standard had no impact on our financial statements.
In
February 2016, the FASB issued ASU No 2016-02 “Leases” to increase the transparency and comparability about leases
among entities. Additional ASUs have been issued subsequent to ASU 2016-02 to provide supplementary clarification and implementation
guidance for leases related to, among other things, the application of certain practical expedients, the rate implicit in the
lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments
that depend on an index or rate and certain transition adjustments. ASU 2016-02 and these additional ASUs are now codified as
Accounting Standards Codification Standard 842 - “Leases” (“ASC 842”). ASC 842 supersedes the lease accounting
guidance in Accounting Standards Codification 840 “Leases” (“ASC 840”) and requires lessees to recognize
a lease liability and a corresponding lease asset for virtually all lease contracts. It also requires additional disclosures about
leasing arrangements. We elected to utilize the “package” of three expedients, as defined in ASC 842, which retain
the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. Our Condensed
Consolidated Financial Statements for the periods prior to the adoption of ASC 842 are not adjusted and are reported in accordance
with our historical accounting policy. As of the date of implementation on January 1, 2019, the impact of the adoption of ASC
842 resulted in the recognition of a right of use asset and lease payable obligation on our Condensed Consolidated Balance Sheets
of approximately $1.4 million. As the right of use asset and the lease payable obligation were the same upon adoption of ASC 842,
there was no cumulative effect impact on our retained earnings. See Note 12 –
Leases,
to our condensed consolidated
financial statements for further discussion.
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 adopted this standard effective January 1, 2019. Adoption
of this accounting standard had no material impact on our financial statements.
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 $29.0 thousand and $57.0 thousand for the three months ended
June 30, 2019 and 2018, and $57.0 thousand and $114.0 thousand for the six months ended June 30, 2019 and 2018, respectively,
which are reported as a separate line item in the condensed consolidated statements of changes in stockholders’ deficit.
Note
4 - Earnings Per Share (“EPS”)
Basic
EPS is computed by dividing net income (loss) 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 540,118 and 1,095,792
for the three months ended June 30, 2019 and 2018, and 559,286 and 1,120,927 for the six months ended June 30, 2019 and 2018, respectively,
because we had a net loss in those 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 540,118 and 1,095,792 for the three months ended June 30, 2019 and 2018, and
559,286 and 1,120,927 for the six months ended June 30, 2019 and 2018, respectively.
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).
|
We
did not have any financial liabilities measured and recorded at fair value on our condensed consolidated balance sheets on a recurring
basis as of June 30, 2019 and December 31, 2018.
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.
Note
6 - Short-Term and Long-Term Debt
(in thousands)
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
Promissory notes
|
|
$
|
881
|
|
|
$
|
500
|
|
Current portion of long-term debt
|
|
|
—
|
|
|
|
12
|
|
Total short-term borrowings and current portion of long-term debt
|
|
$
|
881
|
|
|
$
|
512
|
|
Long-term
debt consists of the following:
(in thousands)
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
Installment notes payable for equipment financing
|
|
$
|
—
|
|
|
$
|
20
|
|
Less: current portion
|
|
|
—
|
|
|
|
(12
|
)
|
Total long-term debt, net of current portion
|
|
|
—
|
|
|
$
|
8
|
|
The
following is a summary of scheduled debt maturities by year (in thousands):
2019
|
|
$
|
881
|
|
Total debt
|
|
$
|
881
|
|
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 ReGrowth 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 was initially 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, 2019, we executed an extension of the maturity date to September 13, 2019. During the initial
120 days of the extension period, the Promissory Note bears a fixed rate of 12% per annum and a fixed rate of 30% per annum thereafter
until all amounts due thereunder are paid.
On January 21, 2019,
we entered into a six-month Bridging Loan Agreement pursuant to which we borrowed the principal amount of £300 thousand from
D.J. Fatica Asset Management Ltd. The loan bears interest at a fixed rate of 12% per annum. The loan is secured by property owned
by LEAI Properties UK Ltd. On July 15, 2019, we paid the loan off in full.
Note
7 - Income Taxes
We did not record income
tax expenses during the three months ended June 30, 2019. We recorded an income tax benefit of $640.0 thousand for the three months
ended June 30, 2018, and income tax benefit of $60.0 thousand and $243.0 thousand for the six months ended June 30, 2019 and 2018,
respectively. Our effective tax rate was 0.0% and 20.9% for the three months ended June 30, 2019 and 2018, and 13.6% and 6.9% for
the six months ended June 30, 2019 and 2018, respectively. Our effective tax rates differed from the U.S. statutory corporate tax
rate of 21% primarily because of the mix of pre-tax income or loss earned in certain jurisdictions and the change in our valuation
allowance.
We
record a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be
realized. As of June 30, 2019, and December 31, 2018, valuation allowances of $7.3 million and $6.9 million, respectively have
been provided against net operating loss carryforwards and other deferred tax assets. Our valuation allowance increased by $0.4
million and $0.07 million for the six months ended June 30, 2019 and 2018, respectively.
As
of June 30, 2019, and December 31, 2018, we had total unrecognized tax benefits of $1.6 million, related to foreign and domestic
tax positions. Of this amount, the Company estimates that $0.09 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 six months ended June 30, 2019 and 2018, we had no material changes in uncertain tax positions. We record interest and penalties
related to unrecognized tax benefits within the provision for income taxes. We believe that no current tax positions that have
resulted in unrecognized tax benefits will significantly increase or decrease within one year. We file income tax returns in the
U.S. federal jurisdiction and in various state and foreign jurisdictions.
The
Internal Revenue Service completed its examination of the corporation’s federal income tax returns for the years 2013-2015
resulting in no changes.
The
Canadian Revenue Agency completed its examination of the corporation’s 2014-2016 goods and services tax (GST) and harmonized
sales tax (HST) returns. All issues have been settled.
The
Tax Cuts and Jobs Act (The Act,) was enacted on December 22, 2017 making significant changes to the Internal Revenue Code. Changes
include, but are not limited to, a reduction in the US federal corporate tax rate from 35% to 21%, requiring companies to pay
a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes
on certain foreign sourced earnings. As of June 30, 2019, we recognized income tax expense of $0.16 million related to the remeasurement
of our deferred tax balance.
Note
8 - Concentration of Risk
Cash
and cash equivalents
.
We
maintain deposits in banks in amounts that might exceed the federal deposit insurance available. Management believes the potential
risk of loss on these cash and cash equivalents to be minimal. All cash balances as of June 30, 2019 and December 31, 2018, including
foreign subsidiaries, without FDIC coverage were $3.2 million and $1.1 million, respectively.
On July 18, 2019, one
of our former merchant processors released a reserve of $2.0 million and has agreed to refund an additional $1.5 million in November
2019, subject to certain conditions. As a result of this transaction, our unrestricted cash position significantly improved. As
of June 30, 2019 and December 31, 2018, this amount was recorded as part of the restricted cash in our condensed consolidated balance
sheets.
Revenue
A
significant portion of our revenue is derived from the Rich Dad brands. For the three months ended June 30, 2019 and 2018, Rich
Dad brands provided 74.1% and 68.5% of our revenue, and 73.1% and 71.1% for the six months ended June 30, 2019 and 2018, respectively.
In addition, we have operations in North America, United Kingdom and Other foreign markets (see Note 9 —
Segment Information
).
Note
9 - Segment Information
We manage our business
in three segments based on geographic location for which operating managers are responsible to the Chief Executive Officer. These
segments include: (i) North America, (ii) United Kingdom, (iii) Other Foreign Markets. Operating results, as reported below, are
reviewed regularly by our Chief Executive Officer, or Chief Operating Decision Maker (“CODM”) and other members of
the executive team.
The
proportion of our total revenue attributable to each segment is as follows:
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
As
a percentage of total revenue
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
North America
|
|
|
59.0
|
%
|
|
|
52.5
|
%
|
|
|
60.0
|
%
|
|
|
57.3
|
%
|
U.K.
|
|
|
20.7
|
%
|
|
|
23.6
|
%
|
|
|
22.2
|
%
|
|
|
22.0
|
%
|
Other foreign
markets
|
|
|
20.3
|
%
|
|
|
23.9
|
%
|
|
|
17.8
|
%
|
|
|
20.7
|
%
|
Total
consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating
results for the segments are as follows:
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
Segment
revenue
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
|
(In
thousands)
|
|
North America
|
|
$
|
13,980
|
|
|
$
|
13,237
|
|
|
$
|
28,967
|
|
|
$
|
29,186
|
|
U.K.
|
|
|
4,898
|
|
|
|
5,944
|
|
|
|
10,702
|
|
|
|
11,209
|
|
Other foreign
markets
|
|
|
4,820
|
|
|
|
6,041
|
|
|
|
8,605
|
|
|
|
10,582
|
|
Total
consolidated revenue
|
|
$
|
23,698
|
|
|
$
|
25,222
|
|
|
$
|
48,274
|
|
|
$
|
50,977
|
|
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
Segment gross profit
contribution *
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
3,472
|
|
|
$
|
(459
|
)
|
|
$
|
7,767
|
|
|
$
|
3,397
|
|
U.K.
|
|
|
565
|
|
|
|
1,719
|
|
|
|
1,455
|
|
|
|
2,846
|
|
Other foreign
markets
|
|
|
451
|
|
|
|
914
|
|
|
|
(37
|
)
|
|
|
344
|
|
Total
consolidated gross profit
|
|
$
|
4,488
|
|
|
$
|
2,174
|
|
|
$
|
9,185
|
|
|
$
|
6,587
|
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales
expenses and royalty expenses.
|
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended
June 30,
|
|
Depreciation and
amortization expenses
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
41
|
|
|
$
|
28
|
|
|
$
|
72
|
|
|
$
|
53
|
|
U.K.
|
|
|
18
|
|
|
|
10
|
|
|
|
28
|
|
|
|
14
|
|
Other foreign
markets
|
|
|
1
|
|
|
|
3
|
|
|
|
2
|
|
|
|
3
|
|
Total
consolidated depreciation and amortization expenses
|
|
$
|
60
|
|
|
$
|
41
|
|
|
$
|
102
|
|
|
$
|
70
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Segment identifiable
assets
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
North America
|
|
$
|
15,399
|
|
|
$
|
11,566
|
|
U.K.
|
|
|
8,547
|
|
|
|
4,956
|
|
Other foreign
markets
|
|
|
3,589
|
|
|
|
4,038
|
|
Total
consolidated identifiable assets
|
|
$
|
27,535
|
|
|
$
|
20,560
|
|
Note
10 - Revenue Recognition
We
recognize revenue when our customers obtain control of promised goods or services, in an amount that reflects the consideration
which we expect to receive in exchange for those goods or services, in accordance with implemented Topic 606 - an update to Topic
605.
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. 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 $60.6 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 June 30, 2019. The revenue associated with these performance obligations is recognized as the obligation
is satisfied. We did not have a material change in financial position, results of operations, or cash flows and therefore there
is no cumulative impact recorded to opening equity.
The
following tables disaggregate our segment revenue by revenue source:
|
|
Three Months Ended June 30, 2019
|
|
|
Three Months Ended June 30, 2018
|
|
Revenue Type:
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign markets
|
|
|
Total Consolidated Revenue
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign markets
|
|
|
Total Consolidated Revenue
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seminars
|
|
$
|
8,532
|
|
|
$
|
3,220
|
|
|
$
|
1,990
|
|
|
$
|
13,742
|
|
|
$
|
8,134
|
|
|
$
|
4,690
|
|
|
$
|
3,971
|
|
|
$
|
16,795
|
|
Products
|
|
|
2,702
|
|
|
|
1,198
|
|
|
|
1,421
|
|
|
|
5,321
|
|
|
|
2,578
|
|
|
|
1,029
|
|
|
|
1,078
|
|
|
|
4,685
|
|
Coaching and Mentoring
|
|
|
1,400
|
|
|
|
317
|
|
|
|
1,330
|
|
|
|
3,047
|
|
|
|
1,291
|
|
|
|
206
|
|
|
|
986
|
|
|
|
2,483
|
|
Online and Subscription
|
|
|
430
|
|
|
|
2
|
|
|
|
79
|
|
|
|
511
|
|
|
|
385
|
|
|
|
13
|
|
|
|
6
|
|
|
|
404
|
|
Other
|
|
|
916
|
|
|
|
161
|
|
|
|
—
|
|
|
|
1,077
|
|
|
|
849
|
|
|
|
6
|
|
|
|
—
|
|
|
|
855
|
|
Total revenue
|
|
$
|
13,980
|
|
|
$
|
4,898
|
|
|
$
|
4,820
|
|
|
$
|
23,698
|
|
|
$
|
13,237
|
|
|
$
|
5,944
|
|
|
$
|
6,041
|
|
|
$
|
25,222
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2018
|
|
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
|
|
$
|
16,885
|
|
|
$
|
7,443
|
|
|
$
|
4,160
|
|
|
$
|
28,488
|
|
|
$
|
18,316
|
|
|
$
|
8,120
|
|
|
$
|
6,597
|
|
|
$
|
33,033
|
|
Products
|
|
|
5,484
|
|
|
|
2,449
|
|
|
|
1,801
|
|
|
|
9,734
|
|
|
|
5,852
|
|
|
|
2,382
|
|
|
|
2,004
|
|
|
|
10,238
|
|
Coaching and Mentoring
|
|
|
2,799
|
|
|
|
645
|
|
|
|
2,495
|
|
|
|
5,939
|
|
|
|
2,748
|
|
|
|
644
|
|
|
|
1,971
|
|
|
|
5,363
|
|
Online and Subscription
|
|
|
928
|
|
|
|
4
|
|
|
|
149
|
|
|
|
1,081
|
|
|
|
952
|
|
|
|
24
|
|
|
|
10
|
|
|
|
986
|
|
Other
|
|
|
2,871
|
|
|
|
161
|
|
|
|
—
|
|
|
|
3,032
|
|
|
|
1,318
|
|
|
|
39
|
|
|
|
—
|
|
|
|
1,357
|
|
Total revenue
|
|
$
|
28,967
|
|
|
$
|
10,702
|
|
|
$
|
8,605
|
|
|
$
|
48,274
|
|
|
$
|
29,186
|
|
|
$
|
11,209
|
|
|
$
|
10,582
|
|
|
$
|
50,977
|
|
Note 11 - Commitments and Contingencies
Licensing agreements
.
We are committed to
pay royalties for the usage of certain brands, as governed by various licensing agreements, including Rich Dad, Robbie Fowler and
Martin Roberts. Total royalty expenses included in our Condensed Consolidated Statements of Operations and Comprehensive Loss were
$1.3 million and $1.6 million for the three months ended June 30, 2019 and 2018, and $2.7 million and $2.8 million for the six
months ended June 30, 2019 and 2018, respectively.
Custodial and Counterparty Risk
.
We are subject to
custodial and other potential forms of counterparty risk in respect to a variety of contractual and operational matters. In the
course of ongoing Company-wide risk assessment, management monitors our arrangements that involve potential counterparty risk,
including the custodial risk associated with amounts prepaid to certain vendors and deposits with credit card and other payment
processors. Deposits held by our credit card processors at June 30, 2019 and December 31, 2018, were $6.4 million and $5.0 million, respectively.
These balances are included on the Condensed Consolidated Balance Sheets in restricted cash. While these balances reside in major
financial institutions, they are only partially covered by federal deposit insurance and are subject to the financial risk of
the parties holding these funds. When appropriate, we utilize Certificate of Deposit Account Registry Service (CDARS) to reduce
banking risk for a portion of our cash in the United States. A CDAR consists of numerous individual investments, all below the
FDIC limits, thus fully insuring that portion of our cash. At June 30, 2019 and December 31, 2018, 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.
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’s new ERP/CRM system. In May 2019,
we entered into a settlement agreement under which Oracle/NetSuite gave us $0.1 million in the form of accounts payable credit,
concluding the litigation in its entirety. We recognized the settlement in May 2019.
Tigrent Group Inc.
v. Process America, Inc., Case No 1:12-cv-01314-RLM, filed March 16, 2012 in the U.S. District Court for the Eastern District
of New York. In this case we sought the return of the $8.3 million credit card merchant reserve account deposit held by Process
America, a so-called “Independent Sales Organization” that places merchants with credit card processors. On November
12, 2012, PA filed for bankruptcy protection in the U.S. Bankruptcy Court for the Central District of California (“Bankruptcy
Court.”) On December 3, 2012, the Bankruptcy Court obtained jurisdiction of our dispute with PA. On June 21, 2013, the Tigrent
Group filed its proof of claim with Bankruptcy Court in the amount of $8.3 million. Subsequent to June 30, 2019, we received a
cash payment from PA in the amount of $0.4 million, as a distribution. This amount was recognized and reported as other income
in the condensed consolidated statements of operation for the three and six months ended June 30, 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 May 24, 2019, the Company and
its then General Counsel and now 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 includes claims for Breach of Contract, Permanent and Temporary Injunction, Breach of Fiduciary Duty, Civil Conspiracy, Tortious
Interference and Fraudulent Transfer. On March 20, 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. On May 24, 2019, with leave
from the court, TBPI filed its Third 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 against Tigrent, Breach of Fiduciary Duty against Tigrent, Damages for Violation
of Unfair and Deceptive Business Practices Act against Tigrent, Civil Conspiracy against Tigrent and Holdings, and various Counts
of Fraudulent Transfer against various shareholders of Tigrent, including the Company’s CEO, James E. May. On July 8, 2019,
the Court Denied the defendants’s Motions to Dismiss. The Company believes the claims of the plaintiff are without merit
and intends to defend this matter vigorously.
Note 12 - Leases
Right-of-Use Assets and Leases Obligations
The Company leases
office space and office equipment under non-cancelable operating leases, with terms typically ranging from one to three years,
subject to certain renewal options as applicable. The Company considers those renewal or termination options that are reasonably
certain to be exercised in the determination of the lease term and initial measurement of lease liabilities and right-of-use assets.
Lease expense for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12
months or less are not recorded on the balance sheet.
The Company determines
whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria
of a finance or operating lease. When available, the Company uses the rate implicit in the lease to discount lease payments to
present value; however, most of the Company’s leases do not provide a readily determinable implicit rate. Therefore, the
Company must discount lease payments based on an estimate of its incremental borrowing rate.
The Company does not
separate lease and nonlease components of contracts. There are no material residual value guarantees associated with any of the
Company’s leases. There are no significant restrictions or covenants included in the Company’s lease agreements other
than those that are customary in such arrangements.
Lease Position as of June 30, 2019
The table below presents
the lease related assets and liabilities recorded on the Company’s Condensed Consolidated Balance Sheets as of June 30,
2019:
(in thousands)
|
|
Classification
on the Balance Sheet
|
|
June 30,
2019
|
|
Assets
|
|
|
|
|
|
|
Operating
lease assets
|
|
Operating lease right of use
assets
|
|
$
|
1,038
|
|
|
|
Total lease assets
|
|
$
|
1,038
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Current operating lease liabilities
|
|
$
|
493
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Long-term operating lease liabilities
|
|
$
|
545
|
|
|
|
Total lease liabilities
|
|
$
|
1,038
|
|
Lease cost for the three and six
months ended June 30, 2019
The table below presents
the lease related costs recorded on the Company’s Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2019:
(in thousands)
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Six Months Ended June 30, 2018
|
|
Lease cost
|
|
Classification
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
General and administrative expenses
|
|
$
|
106
|
|
|
$
|
337
|
|
|
|
Total lease cost
|
|
$
|
106
|
|
|
$
|
337
|
|
Other Information
The table below presents
supplemental cash flow information related to leases for the six months ended June 30, 2019:
(in thousands)
|
|
Six
Months Ended
June 30,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows for operating
leases
|
|
$
|
337
|
|
Supplemental non-cash
amounts of lease liabilities arising from obtaining right-of-use assets
|
|
|
1,399
|
|
Lease Terms and Discount Rates
The table below presents certain information
related to the weighted average remaining lease terms and weighted average discount rates for the Company’s operating leases
as of June 30, 2019:
|
|
Six
Months Ended
June 30,
2019
|
|
Weighted average remaining lease term - operating
leases
|
|
|
1.40 years
|
|
Weighted average discount rate - operating leases
|
|
|
12.00
|
%
|
Undiscounted Cash Flows
The table below reconciles
the fixed component of the undiscounted cash flows for each of the first five years and the total remaining years to the operating
lease liabilities recorded on the Condensed Consolidated Balance Sheet as of June 30, 2019:
Amounts due
within twelve months of June 30,
|
|
Operating
Leases
|
|
|
|
(in thousands)
|
|
2019
|
|
$
|
929
|
|
2020
|
|
|
735
|
|
2021
|
|
|
112
|
|
Total minimum lease payments
|
|
|
1,776
|
|
Less: effect of
discounting
|
|
|
(738
|
)
|
Present value of future minimum lease payments
|
|
|
1,038
|
|
Less: current obligations
under leases
|
|
|
(493
|
)
|
Long-term lease obligations
|
|
$
|
545
|
|
There are no lease arrangements where
the Company is the lessor.