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 workshops, basic trainings, symposiums, telephone mentoring, one-on-one mentoring, coaching and e-learning, we market
our products and services under a variety of brands including Making Money from Property with Martin RobertsTM; Brick
Buy BrickTM; Building Wealth; Robbie Fowler Property AcademyTM; Women in WealthTM; Perform in
PropertyTM, and Teach Me to TradeTM. In October 2019, we launched our new proprietary line of coaching products
to support our students through every phase of their journey with us, from beginner to experienced investor. 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 Income/(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 September 30, 2019, we 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:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
7,718
|
|
|
$
|
1,557
|
|
Restricted cash
|
|
|
5,411
|
|
|
|
5,080
|
|
Total cash, cash equivalents, and restricted cash shown in the cash flow
statements
|
|
$
|
13,129
|
|
|
$
|
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 December 31, 2018, we recognized income tax expense of $0.2
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 may impact our condensed consolidated financial statements. We do
not believe that there are any other new accounting pronouncements that have been issued that would have a material impact on
our condensed consolidated 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 $1.7 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 $18.0 thousand and $31.0 thousand for the three months ended
September 30, 2019 and 2018, and $75.0 thousand and $145.0 thousand for the nine months ended September 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 667,915 for the three months ended September 30, 2018 and 968,264 for the nine months ended September 30, 2018, because we
had a net loss in 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 364,056 and 667,915 for the three months ended September 30,
2019 and 2018, and 493,495 and 968,264 for the nine months ended September 30, 2019 and 2018, respectively.
The
calculations of basic and diluted EPS are as follows:
|
|
Three Months Ended
September 30, 2019
|
|
|
Three Months Ended
September 30, 2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
|
|
Average
|
|
|
Loss
|
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
As reported
|
|
$
|
1,647
|
|
|
|
23,163
|
|
|
|
|
|
|
$
|
(1,221
|
)
|
|
|
23,005
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(26
|
)
|
|
|
(364
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
1,621
|
|
|
|
22,799
|
|
|
$
|
0.07
|
|
|
$
|
(1,221
|
)
|
|
|
23,005
|
|
|
$
|
(0.05
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
26
|
|
|
|
364
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested
restricted shares
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders
and assumed conversions
|
|
$
|
1,621
|
|
|
|
23,163
|
|
|
$
|
0.07
|
|
|
$
|
(1,221
|
)
|
|
|
23,005
|
|
|
$
|
(0.05
|
)
|
|
|
Nine Months Ended
September 30, 2019
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
|
|
Average
|
|
|
Loss
|
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
Loss
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
1,267
|
|
|
|
23,134
|
|
|
|
|
|
|
$
|
(4,493
|
)
|
|
|
23,007
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(27
|
)
|
|
|
(493
|
)
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
1,240
|
|
|
|
22,641
|
|
|
$
|
0.05
|
|
|
$
|
(4,493
|
)
|
|
|
23,007
|
|
|
$
|
(0.20
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
27
|
|
|
|
493
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(28
|
)
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
1,239
|
|
|
|
23,134
|
|
|
$
|
0.05
|
|
|
$
|
(4,493
|
)
|
|
|
23,007
|
|
|
$
|
(0.20
|
)
|
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 of 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 September 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
September 30,
2019
|
|
|
As of
December 31,
2018
|
|
Promissory notes
|
|
$
|
500
|
|
|
$
|
500
|
|
Current portion of long-term debt
|
|
|
—
|
|
|
|
12
|
|
Total short-term borrowings and current portion of long-term debt
|
|
$
|
500
|
|
|
$
|
512
|
|
Long-term
debt consists of the following:
(in thousands)
|
|
As of
September 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):
2020
|
|
$
|
500
|
|
Total debt
|
|
$
|
500
|
|
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 bore 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 bore interest at a fixed rate of 12% per annum and a fixed rate of 30% per
annum thereafter until all amounts due thereunder are paid. On September 13, 2019, we executed a second extension of the maturity
date to March 13, 2020. During the initial 120 days of the second 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 recorded an income
tax benefit of $51 thousand and $797 thousand for the three months ended September 30, 2019 and 2018, respectively. We recorded
an income tax benefit of $111 thousand and $1,040 thousand for the nine months ended September 30, 2019 and 2018, respectively.
Our effective tax rate was (3.2%) and 39.5% for the three months ended September 30, 2019 and 2018, and (9.6%) and 18.8% for the
nine months ended September 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 September
30, 2019, and December 31, 2018, valuation allowances of $7 million and $6.9 million, respectively have been provided against
net operating loss carryforwards and other deferred tax assets. Our valuation allowance increased by $0.1 million for each of
the nine months ended September 30, 2019 and 2018, respectively.
As
of September 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 $0.1 million, of the unrecognized tax benefits, if recognized, would
impact the effective tax rate. A substantial portion of our liability for uncertain tax benefits is recorded as a reduction of
net operating losses and tax credit carryforwards.
During
the nine months ended September 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 2017-2018 goods and services tax (GST) and harmonized sales tax (HST)
returns, resulting in an accrued assessment of $40 thousand, which is included within other accrued expenses.
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 $0.2 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 September 30, 2019 and December 31, 2018,
including foreign subsidiaries, without FDIC coverage were $6.5 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.
Revenue
A
significant portion of our revenue is derived from the Rich Dad brands. For the three months ended September 30, 2019 and 2018,
Rich Dad brands provided 71.0% and 72.3% of our revenue, and 72.4% and 71.4% for the nine months ended September 30, 2019 and
2018, respectively. In addition, we have operations in North America, United Kingdom and Other foreign markets (see Note 9 —
Segment Information).
On September 16, 2019,
we received notice from Rich Dad Operating Company, LLC (“RDOC”), indicating that RDOC does not intend to extend the
term of the September 1, 2013, Rich Dad Operating License Agreement (as amended, the “License Agreement”) by and between
the Company and RDOC. The term of the License Agreement expired on September 30, 2019. Notwithstanding the expiration of the License
Agreement, the Company may continue to use Licensed Intellectual Property, as defined in the License Agreement, including, but
not limited to, the Rich Dad trademark and stylized logo, for the purpose of honoring and fulfilling orders by its customers in
existence as of the date of the expiration of the Agreement.
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, and (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
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
As a percentage of total revenue
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
North America
|
|
|
55.7
|
%
|
|
|
56.1
|
%
|
|
|
58.5
|
%
|
|
|
56.9
|
%
|
U.K.
|
|
|
18.6
|
%
|
|
|
23.0
|
%
|
|
|
20.9
|
%
|
|
|
22.3
|
%
|
Other foreign markets
|
|
|
25.7
|
%
|
|
|
20.9
|
%
|
|
|
20.6
|
%
|
|
|
20.8
|
%
|
Total consolidated revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating
results for the segments are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Segment revenue
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
14,452
|
|
|
$
|
12,662
|
|
|
$
|
43,419
|
|
|
$
|
41,848
|
|
U.K.
|
|
|
4,816
|
|
|
|
5,191
|
|
|
|
15,518
|
|
|
|
16,400
|
|
Other foreign markets
|
|
|
6,668
|
|
|
|
4,704
|
|
|
|
15,273
|
|
|
|
15,286
|
|
Total consolidated revenue
|
|
$
|
25,936
|
|
|
$
|
22,557
|
|
|
$
|
74,210
|
|
|
$
|
73,534
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
2,559
|
|
|
$
|
1,621
|
|
|
$
|
10,326
|
|
|
$
|
5,018
|
|
U.K.
|
|
|
378
|
|
|
|
845
|
|
|
|
1,833
|
|
|
|
3,691
|
|
Other foreign markets
|
|
|
2,611
|
|
|
|
299
|
|
|
|
2,574
|
|
|
|
643
|
|
Total consolidated gross profit
|
|
$
|
5,548
|
|
|
$
|
2,765
|
|
|
$
|
14,733
|
|
|
$
|
9,352
|
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales
expenses and royalty expenses.
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
24
|
|
|
$
|
26
|
|
|
$
|
96
|
|
|
$
|
79
|
|
U.K.
|
|
|
13
|
|
|
|
11
|
|
|
|
41
|
|
|
|
25
|
|
Other foreign markets
|
|
|
1
|
|
|
|
1
|
|
|
|
3
|
|
|
|
4
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
38
|
|
|
$
|
38
|
|
|
$
|
140
|
|
|
$
|
108
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
North America
|
|
$
|
16,433
|
|
|
$
|
11,566
|
|
U.K.
|
|
|
9,106
|
|
|
|
4,956
|
|
Other foreign markets
|
|
|
4,271
|
|
|
|
4,038
|
|
Total consolidated identifiable assets
|
|
$
|
29,810
|
|
|
$
|
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 $61.2 million
related to contractual commitments with customers where the performance obligation will be satisfied over time, which ranges from
one to two years as of September 30, 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
September 30,
2019
|
|
|
Three Months Ended
September 30,
2018
|
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign
|
|
|
Total
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign
|
|
|
Total
|
|
Revenue Type:
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seminars
|
|
$
|
9,174
|
|
|
$
|
3,457
|
|
|
$
|
3,485
|
|
|
$
|
16,116
|
|
|
$
|
7,369
|
|
|
$
|
3,611
|
|
|
$
|
3,143
|
|
|
$
|
14,123
|
|
Products
|
|
|
2,753
|
|
|
|
852
|
|
|
|
1,457
|
|
|
|
5,062
|
|
|
|
2,916
|
|
|
|
984
|
|
|
|
643
|
|
|
|
4,543
|
|
Coaching and Mentoring
|
|
|
1,394
|
|
|
|
259
|
|
|
|
1,626
|
|
|
|
3,279
|
|
|
|
1,408
|
|
|
|
579
|
|
|
|
911
|
|
|
|
2,898
|
|
Online and Subscription
|
|
|
352
|
|
|
|
2
|
|
|
|
99
|
|
|
|
453
|
|
|
|
86
|
|
|
|
9
|
|
|
|
7
|
|
|
|
102
|
|
Other
|
|
|
779
|
|
|
|
246
|
|
|
|
1
|
|
|
|
1,026
|
|
|
|
883
|
|
|
|
8
|
|
|
|
—
|
|
|
|
891
|
|
Total revenue
|
|
$
|
14,452
|
|
|
$
|
4,816
|
|
|
$
|
6,668
|
|
|
$
|
25,936
|
|
|
$
|
12,662
|
|
|
$
|
5,191
|
|
|
$
|
4,704
|
|
|
$
|
22,557
|
|
|
|
Nine Months Ended
September 30,
2019
|
|
|
Nine Months Ended
September 30,
2018
|
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign
|
|
|
Total
|
|
|
North America
|
|
|
U.K.
|
|
|
Other foreign
|
|
|
Total
|
|
Revenue Type:
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seminars
|
|
$
|
26,059
|
|
|
$
|
10,900
|
|
|
$
|
7,645
|
|
|
$
|
44,604
|
|
|
$
|
25,685
|
|
|
$
|
11,731
|
|
|
$
|
9,740
|
|
|
$
|
47,156
|
|
Products
|
|
|
8,237
|
|
|
|
3,301
|
|
|
|
3,258
|
|
|
|
14,796
|
|
|
|
8,768
|
|
|
|
3,366
|
|
|
|
2,647
|
|
|
|
14,781
|
|
Coaching and Mentoring
|
|
|
4,193
|
|
|
|
904
|
|
|
|
4,121
|
|
|
|
9,218
|
|
|
|
4,156
|
|
|
|
1,223
|
|
|
|
2,882
|
|
|
|
8,261
|
|
Online and Subscription
|
|
|
1,280
|
|
|
|
6
|
|
|
|
248
|
|
|
|
1,534
|
|
|
|
1,038
|
|
|
|
33
|
|
|
|
17
|
|
|
|
1,088
|
|
Other
|
|
|
3,650
|
|
|
|
407
|
|
|
|
1
|
|
|
|
4,058
|
|
|
|
2,201
|
|
|
|
47
|
|
|
|
—
|
|
|
|
2,248
|
|
Total revenue
|
|
$
|
43,419
|
|
|
$
|
15,518
|
|
|
$
|
15,273
|
|
|
$
|
74,210
|
|
|
$
|
41,848
|
|
|
$
|
16,400
|
|
|
$
|
15,286
|
|
|
$
|
73,534
|
|
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
Income/(Loss) were $1.7 million and $1.2 million for the three months ended September 30, 2019 and 2018, and $4.4 million and $4.0 million
for the nine months ended September 30, 2019 and 2018, respectively.
On September 30, 2019,
the term of the License Agreement with RDOC expired. See Note 8 - Concentration of Risk, to our condensed consolidated financial
statements for further discussion.
Custodial
and Counterparty Risk.
We
are subject to custodial and other potential forms of counterparty risk in respect to a variety of contractual and operational
matters. In the course of ongoing Company-wide risk assessment, management monitors our arrangements that involve potential counterparty
risk, including the custodial risk associated with amounts prepaid to certain vendors and deposits with credit card and other
payment processors. Deposits held by our credit card processors at September 30, 2019 and December 31, 2018, were $5.4 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 September 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. (“PA”), 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 Inc., 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.
In July 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 nine months ended September 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.
On August 1, 2019, we entered
into a new non-cancelable 36-month operating lease agreement for an office space in our UK segment. As a result of this agreement,
we recognized a right of use asset and lease payable obligation in our Condensed Consolidated Balance Sheets of approximately $0.6
million, respectively.
Lease
Position as of September 30, 2019
The
table below presents the lease related assets and liabilities recorded on the Company’s Condensed Consolidated Balance Sheets
as of September 30, 2019:
(in thousands)
|
|
Classification on the Balance Sheet
|
|
September 30,
2019
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right of use assets
|
|
$
|
1,788
|
|
|
|
Total lease assets
|
|
$
|
1,788
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Current operating lease liabilities
|
|
$
|
894
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Long-term operating lease liabilities
|
|
$
|
832
|
|
|
|
Total lease liabilities
|
|
$
|
1,726
|
|
Lease
cost for the three and nine months ended September 30, 2019
The
table below presents the lease related costs recorded on the Company’s Condensed Consolidated Statements of Operations for
the three and nine months ended September 30, 2019:
(in thousands)
|
|
|
|
Three Months
Ended
September 30,
2019
|
|
|
Nine Months
Ended
September 30,
2018
|
|
Lease cost
|
|
Classification
|
|
|
|
|
|
|
Operating lease cost
|
|
General and administrative expenses
|
|
$
|
242
|
|
|
$
|
578
|
|
|
|
Total lease cost
|
|
$
|
242
|
|
|
$
|
578
|
|
Other
Information
The
table below presents supplemental cash flow information related to leases for the nine months ended September 30, 2019:
(in thousands)
|
|
Nine Months Ended
September 30,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
640
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets
|
|
$
|
2,335
|
|
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 September 30, 2019:
|
|
Nine Months Ended
September 30,
2019
|
|
Weighted average remaining lease term - operating leases
|
|
|
2.29
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 September 30, 2019:
Amounts due within twelve months of September
30,
|
|
Operating Leases
|
|
|
|
(in thousands)
|
|
2019
|
|
$
|
929
|
|
2020
|
|
|
735
|
|
2021
|
|
|
112
|
|
Total minimum lease payments
|
|
|
1,776
|
|
Less: effect of discounting
|
|
|
(50
|
)
|
Present value of future minimum lease payments
|
|
|
1,726
|
|
Less: current obligations under leases
|
|
|
(894
|
)
|
Long-term lease obligations
|
|
$
|
832
|
|
There
are no lease arrangements where the Company is the lessor.
Note 13 – Subsequent Events
Litigation
In the Matter of Legacy
Education Alliance International Ltd., CR-2019-007199. On October 28, 2019, an Application for Administration was filed in
the High Court of Justice, Business and Property Courts of England and Wales, whereby four creditors of Legacy Education Alliance,
International Ltd., one of our UK subsidiaries, seek an administration order with respect to the business affairs of the subsidiary,
the appointment of an administrator, and such other ancillary orders as the applicants may request or as the court deems appropriate.
We are opposing the Application for Administration. The matter was adjourned until November 15, 2019 to allow the parties the opportunity
to negotiate a Company Voluntary Arrangement (“CVA”), but there can be no assurances that an agreement with the claimants
will be reached or that an Order of Administration will not be issued.