NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
Note 1 - General
Business Description.
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, forums, telephone mentoring, one-on-one mentoring, coaching and
e-learning. We market our products and services under two brands: Legacy Real Estate 101TM and Homemade Investor by
Tarek El MoussaTM. 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. In December 2019, we held our first virtual
(online) symposium and our first Legacy Investor Forum, and entered into the Development Agreement with T&B Seminars, Inc.
for the development of the Homemade Investor by Tarek El Moussa brand.
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 and forums 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.
Historically, our operations
have relied heavily on our and our students’ ability to travel and attend live events where large groups of people gather
in local markets within each of the segments in which we operate. As a result of the COVID-19 coronavirus pandemic, and the resulting
worldwide restrictions on travel and social distancing, we have temporarily ceased conducting live sales and fulfillment and furloughed
substantially all of our employees. We have simplified our product offerings and restructured our compensation program with respect
to both employees and independent contractors to reduce costs and improve margins. Currently, our sales operations are limited
to online sales events selling into our suite of online, on-demand, and over-the-phone products. Our product fulfilment operations
similarly are limited to online, on-demand, and over-the-phone activities. The ultimate impact from COVID-19 on the Company’s
operations and financial results during 2020 will depend on, among other things, the ultimate severity and scope of the pandemic,
the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, the rate
at which historically large increases in unemployment rates will decrease, if at all, and whether, and the speed with which the
economy recovers.
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, Inc., including Tigrent Inc., a Colorado corporation. All intercompany balances and transactions
have been eliminated in consolidation. As discussed in Note 4 “Discontinued Operations”, the sale of Legacy Education
Alliance International Ltd (Legacy UK) assets and deferred revenue is reflected as a discontinued operation in the condensed consolidated
financial statements.
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, 2019 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 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 consolidated
financial statements and notes have been prepared assuming we will continue as a going concern. For the nine months ended September
30, 2020 we had an accumulated deficit, a working capital deficit and a negative cash flow from operating activities. 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 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.
Conformity with GAAP
requires the use of estimates and judgments that affect the reported amounts in our consolidated financial statements and accompanying
notes. These estimates form the basis for judgments we make about the carrying values of our assets and liabilities, which are
not readily apparent from other sources. We base our estimates and judgments on historical information and on various other assumptions
that we believe are reasonable under the circumstances. GAAP requires us to make estimates and judgments in several areas, including,
but not limited to, those related to deferred revenues, reserve for breakage, deferred costs, revenue recognition, commitments
and contingencies, fair value of financial instruments, useful lives of property and equipment, right-of-use assets, and income
taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake
in the future. Actual results could differ materially from those estimates.
As a result of the COVID-19 coronavirus
pandemic, and the resulting worldwide restrictions on travel and social distancing, we have temporarily ceased conducting live
sales and fulfillment and furloughed substantially all of our employees. The ultimate impact from COVID-19 on the Company’s
operations and financial results during 2020 will depend on, among other things, the ultimate severity and scope of the pandemic,
the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, the rate
at which historically large increases in unemployment rates will decrease, if at all, and whether, and the speed with which the
economy recovers. We are not able to fully quantify the impact that these factors will have on our financial results during 2020
and beyond, but expect developments related to COVID-19 to materially affect the Company’s financial performance in 2020.
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 September 30, 2020 and December 31, 2019, 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 condensed consolidated
statements of cash flows.
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. These deposits are included in restricted cash on our condensed
consolidated balance sheet.
The following table
provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets
that sum to the total of the same such amounts in the condensed consolidated cash flow statements:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
1,794
|
|
|
$
|
3,839
|
|
Restricted cash
|
|
|
1,356
|
|
|
|
2,389
|
|
Total cash, cash equivalents, and restricted cash shown in the cash flow statement
|
|
$
|
3,150
|
|
|
$
|
6,228
|
|
Property Held for Sale
In determining whether
to classify an asset as held for sale, we consider whether: (i) management has committed to a plan to sell the asset; (ii) the
asset is available for immediate sale in its present condition; (iii) we have initiated a program to locate a buyer; (iv) we believe
that the sale of the asset is probable; (v) the due diligence period per the sales agreement has expired and a closing date has
been set; (vi) we are actively marketing the asset for sale at a price that is reasonable in relation to its current value; and
(vii) actions required for us to complete the plan indicate that it is unlikely that any significant changes will be made to the
plan.
If all of the above criteria
are met, we classify the asset as held for sale. The assets associated with those assets that are held for sale are classified
separately on the condensed consolidated balance sheets for the most recent reporting period. We considered the carrying value
of our headquarter property and its improvements to be the realizable value based on the projected net sales proceeds. For the
nine months ended September 30, 2020 and 2019, respectively, there was $959 thousand and $0 property classified as property held
for sale. See Note 14 “Subsequent Events”.
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.
We record our interim
provision for income taxes by applying our estimated annual effective tax rate to our year-to-date pre-tax income and adjusting
for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting
of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used
for income tax reporting purposes, including for depreciation and amortization, warranty and vacation accruals, and deductions
related to allowances for doubtful accounts receivable and inventory reserves. Our provision for income taxes included current
federal and state income tax expense, as well as deferred federal and state income tax expense.
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.
Discontinued Operations.
ASC 205-20-45, “Presentation
of Financial Statements Discontinued Operations” requires discontinued operations to be reported if the disposal of a
business component represents a strategic shift that has a major effect on an entity’s operations and financial reports.
We have determined that the sale of Legacy UK meets this criterion. Accordingly, the assets, deferred revenues, and income statement
of Legacy UK were transferred to discontinued operations to close out the business. See Note 4 “Discontinued Operations”,
for additional disclosures regarding Legacy UK.
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.
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 $9.0 thousand and $18.0 thousand for the three months ended September 30,
2020 and 2019, respectively, and $23.0 thousand and $75.0 thousand for the nine months ended September 30, 2020 and 2019, respectively,
which are reported as a separate line item in the condensed consolidated statements of changes in stockholders’ deficit.
During the quarter
ended September 30, 2020, pursuant to the 2015 Incentive Plan, we awarded an aggregate of 80,000 shares of restricted stock to
the independent members of the Board of Directors, which are subject to a two-year cliff vesting, with 50% tranche on each anniversary.
The grant date price per share was $0.10 for a total grant date fair value of $8.0 thousand. We also granted 100,000 shares of
restricted stock to a third party consultant as part of the agreement for his services, which were fully vested at the grant date.
The grant date price per share was $0.07 for a total grant date fair value of $6.8 thousand.
Note 4 - Discontinued Operations
On October 28, 2019, four
creditors of Legacy Education Alliance International Ltd. (“Legacy UK”), one of our UK subsidiaries, obtained an order
from the High Court of Justice, Business and Property Courts of England and Wales (the “English Court”) with respect
to the business and affairs of Legacy UK. Pursuant to the Administration Order of November 15, 2019, from the English Court, the
two individuals appointed as administrators engaged a third-party to market Legacy UK’s business and assets for sale to one
or more third parties. On November 26, 2019, Legacy UK’s assets and deferred revenues sold for £300 thousand (British
pounds) to Mayflower Alliance LTD. We will not receive any proceeds from the sale of Legacy UK. Further details, including the
resolution of claims and liabilities, and other information regarding the administration may not be forthcoming for several months.
The impact of this transaction is reflected as a discontinued operation in the condensed consolidated financial statements.
The major classes of
assets and liabilities of Legacy UK were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Major classes of liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
3,322
|
|
|
|
3,408
|
|
Accrued course expenses
|
|
|
558
|
|
|
|
472
|
|
Other accrued expenses
|
|
|
506
|
|
|
|
619
|
|
Total major classes of liabilities - discontinued operations
|
|
$
|
4,386
|
|
|
$
|
4,499
|
|
The financial results of the discontinued
operations are as follows:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
3,881
|
|
|
$
|
—
|
|
|
$
|
12,200
|
|
Total operating costs and expenses
|
|
|
—
|
|
|
|
4,336
|
|
|
|
—
|
|
|
|
12,870
|
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
(455
|
)
|
|
|
—
|
|
|
|
(670
|
)
|
Interest income (expense)
|
|
|
—
|
|
|
|
60
|
|
|
|
—
|
|
|
|
(2
|
)
|
Other expense, net
|
|
|
—
|
|
|
|
(31
|
)
|
|
|
—
|
|
|
|
(258
|
)
|
Net loss from discontinued operations
|
|
$
|
—
|
|
|
$
|
(426
|
)
|
|
$
|
—
|
|
|
$
|
(930
|
)
|
Note 5 - 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.
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 114,282 and 364,056 for the three months ended September 30, 2020 and 2019, respectively,
and 146,109 and 493,495 for the nine months ended September 30, 2020 and 2019, respectively.
The calculations of
basic and diluted EPS are as follows:
|
|
Three Months Ended September 30, 2020
|
|
|
Three Months Ended September 30, 2019
|
|
|
|
Net Income
|
|
|
Weighted Average Shares Outstanding
|
|
|
Earnings Per Share
|
|
|
Net Income
|
|
|
Weighted Average Shares Outstanding
|
|
|
Earnings Per Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
As reported
|
|
$
|
4,689
|
|
|
|
23,252
|
|
|
|
|
|
|
$
|
1,647
|
|
|
|
23,163
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(23
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
(364
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
4,666
|
|
|
|
23,138
|
|
|
$
|
0.20
|
|
|
$
|
1,621
|
|
|
|
22,799
|
|
|
$
|
0.07
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
23
|
|
|
|
114
|
|
|
|
|
|
|
|
26
|
|
|
|
364
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
4,666
|
|
|
|
23,252
|
|
|
$
|
0.20
|
|
|
$
|
1,621
|
|
|
|
23,163
|
|
|
$
|
0.07
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
Nine Months Ended September 30, 2019
|
|
|
|
Net Income
|
|
|
Weighted Average Shares Outstanding
|
|
|
Earnings Per Share
|
|
|
Net Income
|
|
|
Weighted Average Shares Outstanding
|
|
|
Earnings Per Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
As reported
|
|
$
|
11,525
|
|
|
|
23,192
|
|
|
|
|
|
|
$
|
1,267
|
|
|
|
23,134
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(73
|
)
|
|
|
(146
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
(493
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
11,452
|
|
|
|
23,046
|
|
|
$
|
0.50
|
|
|
$
|
1,240
|
|
|
|
22,641
|
|
|
$
|
0.05
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
73
|
|
|
|
146
|
|
|
|
|
|
|
|
27
|
|
|
|
493
|
|
|
|
|
|
Non participating share units
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(73
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
11,452
|
|
|
|
23,192
|
|
|
$
|
0.49
|
|
|
$
|
1,239
|
|
|
|
23,134
|
|
|
$
|
0.05
|
|
Note 6 - 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 or financial assets measured and recorded at fair value on our condensed consolidated balance sheets on a
recurring basis as of September 30, 2020 and December 31, 2019.
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 7 – Short-Term and Long-Term
Debt
(in thousands)
|
|
As of September 30,
2020
|
|
|
As of December 31,
2019
|
|
Promissory notes
|
|
$
|
1,000
|
|
|
$
|
500
|
|
Paycheck Protection Program loan
|
|
|
1,900
|
|
|
|
—
|
|
Total debt
|
|
|
2,900
|
|
|
|
500
|
|
Less current portion of long-term debt
|
|
|
(1,000
|
)
|
|
|
(500
|
)
|
Total long-term debt, net of current portion
|
|
$
|
1,900
|
|
|
$
|
—
|
|
The following is a
summary of scheduled debt maturities by year (in thousands):
2020
|
|
$
|
1,000
|
|
2021
|
|
|
—
|
|
2022
|
|
|
1,900
|
|
Total debt
|
|
$
|
2,900
|
|
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 (“Corporate HQ”). 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. The
extension matured on March 13, 2020, though the lender agreed to extend the maturity date until a new Promissory Note with a different
lender was obtained on August 6, 2020, on which date the outstanding principal balance and interests were paid in full. The new
Promissory Note was issued in the amount of $1.0 million, net proceeds were $396.7 thousand after closing costs and after paying
off the outstanding principal in the amount of $500 thousand, plus accrued interest, under a Promissory Note held by USA Regrowth
Fund LLC, and bore interest at a fixed rate of 12% per annum and was initially due on August 6, 2021. The new Promissory Note was
fully paid off on October 1, 2020. See Note 14 “Subsequent Events”.
On April 27, 2020,
Elite Legacy Education, Inc., a subsidiary of the Company, entered into a Promissory Note in favor of Pacific Premier Bank, the
lender, through the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) established
pursuant to the CARES Act. The unsecured loan (the “PPP Loan”) proceeds were in the amount of $1,899,832, matures on
April 24, 2022, bears interest at a fixed rate of 1% per annum, and is payable in 17 equal monthly payments of interest only and
a final payment of the full principal plus interest for one month. Under the terms of the CARES Act, PPP Loan recipients can apply
for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be determined, subject
to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs and the maintenance
of employee and compensation levels. The Company intends to use a significant portion of the PPP Loan proceeds for qualifying expenses,
but no assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part.
Note 8 - Income Taxes
In response to liquidity
issues that businesses are facing as a result of the recent novel coronavirus (“COVID-19”) global pandemic, the Coronavirus
Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 by the U.S. government.
The CARES Act allows for Net Operating Losses (NOLs) to offset 100% of taxable income retroactive to 2019. Under prior rules, only
80% of taxable income could be offset by NOLs. As a result of the application of the CARES Act, our tax liability was positively
impacted by a net benefit of $88.0 thousand. In addition, the CARES Act temporarily increases the deductible interest expense limitation
for tax years beginning in 2019 and 2020.
We recorded income
tax expense of $1.17 million and income tax expense benefit of $51 thousand for the three months ended September 30, 2020 and 2019,
respectively. We recorded income tax expense of $2.17 million and an income tax benefit of $111 thousand for the nine months ended
September 30, 2020 and 2019, respectively. Our effective tax rate was 25.0% and (3.2%) for the three months ended September 30,
2020 and 2019, and 18.9% and (9.6%) for the nine months ended September 30, 2020 and 2019, respectively. Our effective tax rates
differed from the U.S. statutory corporate tax rate of 21% primarily because of a reversal of a valuation allowance across several
jurisdictions.
The Company assessed the
weight of all available positive and negative evidence and determined it was more likely than not that future earnings will be
sufficient to realize the associated deferred tax assets. As of September 30, 2020 and December 31, 2019, we retained a valuation
allowance of $3.8 million and $4.7 million, respectively, for a certain number of our international subsidiaries.
During the nine months
ended September 30, 2020 and 2019 there were no material changes in uncertain tax positions. We do not expect any significant changes
to unrecognized tax benefits in the next year. We estimate $0.3 million and $0.3 million of the unrecognized tax benefits, which
if recognized, would impact the effective tax rate at September 30, 2020 and December 31, 2019, respectively. 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.
We are not currently
under examination in any jurisdiction. In the event of any future tax assessments, we have elected to record the income taxes and
any related interest and penalties as income tax expense on our condensed consolidated statements of operations and comprehensive
income.
Our federal
income tax returns for the years subsequent to 2017 are subject to examination by the Internal Revenue Service. Our state tax returns
for all years after 2017 or 2016, depending on each state’s jurisdiction, are subject to examination. In addition, our Canadian
tax returns and United Kingdom tax returns for all years after 2013 are subject to examination.
Note 9 - Concentration 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, 2020 and December 31, 2019, including foreign
subsidiaries, without FDIC coverage were $1.1 million and $2.5 million, respectively.
Revenue.
A significant portion
of our revenue was derived from the Rich Dad brands. For the three months ended September 30, 2020 and 2019, Rich Dad brands provided
83.2% and 80.4% of our revenue. For the nine months ended September 30, 2020 and 2019, Rich Dad brands provided 80.3% and 82.7%
of our revenue. In addition, we have operations in North America, United Kingdom and Other foreign markets (see Note 10 —
Segment Information).
The License Agreement
with Rich Dad Operating Company, LLC pursuant to which we licensed the Rich Dad Education brand 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 10 - 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
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
North America
|
|
|
79.4
|
%
|
|
|
65.6
|
%
|
|
|
78.2
|
%
|
|
|
70.0
|
%
|
U.K.
|
|
|
0.5
|
%
|
|
|
4.2
|
%
|
|
|
1.7
|
%
|
|
|
5.4
|
%
|
Other foreign markets
|
|
|
20.1
|
%
|
|
|
30.2
|
%
|
|
|
20.1
|
%
|
|
|
24.6
|
%
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Segment revenue
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
7,285
|
|
|
$
|
14,452
|
|
|
$
|
21,188
|
|
|
$
|
43,419
|
|
U.K.
|
|
|
47
|
|
|
|
935
|
|
|
|
457
|
|
|
|
3,318
|
|
Other foreign markets
|
|
|
1,849
|
|
|
|
6,668
|
|
|
|
5,441
|
|
|
|
15,273
|
|
Total consolidated revenue
|
|
$
|
9,181
|
|
|
$
|
22,055
|
|
|
$
|
27,086
|
|
|
$
|
62,010
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
6,001
|
|
|
$
|
2,559
|
|
|
$
|
13,795
|
|
|
$
|
10,326
|
|
U.K.
|
|
|
13
|
|
|
|
108
|
|
|
|
459
|
|
|
|
383
|
|
Other foreign markets
|
|
|
1,353
|
|
|
|
2,611
|
|
|
|
4,110
|
|
|
|
2,574
|
|
Total consolidated gross profit
|
|
$
|
7,367
|
|
|
$
|
5,278
|
|
|
$
|
18,364
|
|
|
$
|
13,283
|
|
*
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
|
(In thousands)
|
|
North America
|
|
$
|
8
|
|
|
$
|
24
|
|
|
$
|
36
|
|
|
$
|
96
|
|
U.K.
|
|
|
4
|
|
|
|
0
|
|
|
|
11
|
|
|
|
19
|
|
Other foreign markets
|
|
|
1
|
|
|
|
1
|
|
|
|
8
|
|
|
|
3
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
13
|
|
|
$
|
25
|
|
|
$
|
55
|
|
|
$
|
118
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
North America
|
|
$
|
5,857
|
|
|
$
|
16,433
|
|
U.K.
|
|
|
2,080
|
|
|
|
2,504
|
|
Other foreign markets
|
|
|
2,115
|
|
|
|
4,272
|
|
Total consolidated identifiable assets
|
|
$
|
10,052
|
|
|
$
|
23,209
|
|
Note 11 - Revenue Recognition
We recognize revenue
when our customers obtain control of promised goods or services, in an amount that reflects the consideration which we expect to
receive in exchange for those goods or services, in accordance with implemented Topic 606 - an update to Topic 605. 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. As of September 30, 2020, we have deferred revenue of
$21.5 million related to contractual commitments with customers where the performance obligation will be satisfied over time, which
ranges from six to eighteen months. The revenue associated with these performance obligations is recognized as the obligation is
satisfied. As of September 30, 2020, we maintain a reserve for breakage of $2.2 million for the fulfillment of our obligation to
students whose contracts expired during our COVID-19 60-day operational hiatus during Q2 (see Note 1 “General”).
The following tables
disaggregate our segment revenue by revenue source:
|
|
Three Months Ended September 30, 2020
|
|
|
Three Months Ended September 30, 2019
|
|
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
|
|
|
6,857
|
|
|
|
47
|
|
|
|
1,809
|
|
|
|
8,713
|
|
|
|
9,174
|
|
|
|
446
|
|
|
|
3,485
|
|
|
|
13,105
|
|
Products
|
|
|
70
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70
|
|
|
|
2,753
|
|
|
|
371
|
|
|
|
1,457
|
|
|
|
4,581
|
|
Coaching and Mentoring
|
|
|
7
|
|
|
|
—
|
|
|
|
3
|
|
|
|
10
|
|
|
|
1,394
|
|
|
|
35
|
|
|
|
1,626
|
|
|
|
3,055
|
|
Online and Subscription
|
|
|
351
|
|
|
|
—
|
|
|
|
37
|
|
|
|
388
|
|
|
|
352
|
|
|
|
7
|
|
|
|
99
|
|
|
|
458
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
779
|
|
|
|
76
|
|
|
|
1
|
|
|
|
856
|
|
Total revenue
|
|
|
7,285
|
|
|
|
47
|
|
|
|
1,849
|
|
|
|
9,181
|
|
|
|
14,452
|
|
|
|
935
|
|
|
|
6,668
|
|
|
|
22,055
|
|
|
|
Nine Months Ended September 30, 2020
|
|
|
Nine Months Ended September 30, 2019
|
|
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
|
|
|
17,921
|
|
|
|
457
|
|
|
|
5,073
|
|
|
|
23,451
|
|
|
|
26,059
|
|
|
|
2,125
|
|
|
|
7,645
|
|
|
|
35,829
|
|
Products
|
|
|
477
|
|
|
|
—
|
|
|
|
—
|
|
|
|
477
|
|
|
|
8,237
|
|
|
|
906
|
|
|
|
3,258
|
|
|
|
12,401
|
|
Coaching and Mentoring
|
|
|
1,066
|
|
|
|
—
|
|
|
|
230
|
|
|
|
1,296
|
|
|
|
4,193
|
|
|
|
163
|
|
|
|
4,121
|
|
|
|
8,477
|
|
Online and Subscription
|
|
|
1,301
|
|
|
|
—
|
|
|
|
138
|
|
|
|
1,439
|
|
|
|
1,280
|
|
|
|
8
|
|
|
|
248
|
|
|
|
1,536
|
|
Other
|
|
|
423
|
|
|
|
—
|
|
|
|
—
|
|
|
|
423
|
|
|
|
3,650
|
|
|
|
116
|
|
|
|
1
|
|
|
|
3,767
|
|
Total revenue
|
|
|
21,188
|
|
|
|
457
|
|
|
|
5,441
|
|
|
|
27,086
|
|
|
|
43,419
|
|
|
|
3,318
|
|
|
|
15,273
|
|
|
|
62,010
|
|
Note 12 - Commitments and Contingencies
Licensing agreements.
We are committed to
pay royalties for the usage of certain brands, as governed by various licensing agreements, including Rich Dad, and Homemade Investor.
Total royalty expenses included in our Condensed Consolidated Statements of Operations and Comprehensive income were $0.0 million
and $1.3 million for the three months ended September 30, 2020 and 2019, respectively, and $0.1 million and $3.2 million for the
nine months ended September 30, 2020 and 2019, respectively.
Custodial
and Counterparty Risk.
We
are subject to custodial and other potential forms of counterparty risk in respect to a variety of contractual and operational
matters. In the course of ongoing Company-wide risk assessment, management monitors our arrangements that involve potential counterparty
risk, including the custodial risk associated with amounts prepaid to certain vendors and deposits with credit card and other
payment processors. Deposits held by our credit card processors at September 30, 2020 and December 31, 2019, were $1.4 million
and $2.3 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, 2020 and December 31, 2019,
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.
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 entered into by Tigrent in connection
with the transfer to TBPI of certain real property located in Lee County, Florida known as Tranquility Bay. 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, 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 the Florida Deceptive and Unfair Trade Practices Act, 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 June
23, 2020, the Court entered summary judgment in favor of Tigrent with respect to TBPI’s claims against Tigrent alleging (i)
breach of fiduciary duty, (ii) violation of the Florida Deceptive and Unfair Trade Practices Act, and (iii) indemnification against
certain attorney’s fees claimed to have been incurred by TBPI. On September 17, 2020, the Court (i) granted summary judgment
in favor of Tigrent and Holdings on TBPI’s claim for conspiracy; (ii) denying TBPI’s motion for summary judgment against
Tigrent in which TBPI sought a declaration by the Court that claims against TBPI in in a lawsuit to which neither Tigrent nor Holdings
is a party (“Third Party Lawsuit”) were within the scope of Tigrent’s indemnity obligations under the Forbearance
Agreement; and (iii) denying TBPI’s motion for summary judgment in which TBPI sought a declaration by the Court that TBPI’s
attorney’s fees incurred the Third Party Lawsuit were also within the scope of Tigrent’s indemnity obligations under
the Forbearance Agreement. On August 18, 2020, TBPI voluntarily dismissed all shareholder defendants, other than Mr. May and Steven
Barre, Tigrent’s former Chief Executive Officer. The Company believes the claims of the plaintiff are without merit and intends
to defend this matter vigorously.
In
the Matter of Legacy Education Alliance International, Ltd. On October 28, 2019, an Application for Administration was filed
in the High Court of Justice, Business and Property Courts of England and Wales (the “English Court”), whereby four
creditors of Legacy Education Alliance, International Ltd (“Legacy UK”), one of our UK subsidiaries, sought 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 deemed appropriate. On November 15, 2019, the creditors obtained an Administration
Order from the English Court. Under the terms of the Administration Order, two individuals have been appointed as administrators
of Legacy UK and will manage Legacy UK and operate its affairs, business and property under the jurisdiction of the English Court.
The administrators engaged a third-party to market Legacy UK’s business and assets for sale to one or more third parties.
On November 26, 2019, Legacy UK’s assets and deferred revenues sold for £300 thousand (British pounds) to Mayflower
Alliance LTD. We will not receive any proceeds from the sale of Legacy UK. The Administrator has asserted claims against two of
our other UK subsidiaries, LEAI Property Development UK Ltd. and LEAI Property Investment UK Ltd., in an aggregate amount totaling
£622,166. We are currently negotiating a resolution of these claims, but there can be no assurances that an agreement will
be reached or what the impact that any such agreement will have on our financial performance. Further details regarding the resolution
of other claims and liabilities may not be known for several months. Because there are a number of intercompany relationships
between the Company and Legacy UK, the financial impact of any future claims in relation to the administration and disposition
of Legacy UK, outside of those included in the discontinued operations of Legacy UK (see Note 4 “Discontinued Operations”),
is unknown to us at this time, as is the timing and other conditions and effects of the administrative process.
In the Matter of
Elite Legacy Education UK Ltd. On March 18, 2020, a Winding-Up Petition, CR-2020-001958, was filed in the High Court of Justice,
Business and Property Courts of England and Wales (the “Court”) against one of our UK subsidiaries, Elite Legacy Education
UK Ltd. (“ELE UK”), by one of its creditors (“Petitioner”) pursuant to which the Petitioner was claiming
a debt of £461,459.70 plus late payment interest and statutory compensation was due and owing. The Petitioner sought an order
from the Court to wind up the affairs of ELE UK under the UK Insolvency Act of 1986. ELE UK has disputed the claim of the Petitioner
and on June 11, 2020, ELE UK obtained a court order vacating the hearing on the Petition originally set for June 24, 2020. On July
24, 2020, the Court entered an order finding that there was a genuine dispute on substantial grounds with respect to £392,761.70
of the Petitioner’s claim, and that only £68,698 plus late payment interest and statutory compensation was due and
owing. The Court further restrained the Petitioner from advertising its Winding-Up Petition until August 14, 2020 and, provided
ELE UK pays the Petitioner the sums awarded under the Court’s order, plus late payment interest and statutory compensation
on or before August 14, 2020, the Petitioner’s Winding-Up Petition would be dismissed. On August 10, 2020, ELE UK filed its
Notice of Appeal in which it sought permission to appeal the Court’s ruling. On October 23, 2020, the Court denied ELE UK
permission to appeal whereupon ELE UK filed an application to renew its application for permission to appeal (“Renewal Application”),
which Renewal Application would be heard at a subsequent Oral Hearing on a date not yet determined. On October 30, 2020, the Court
entered a Consent Order restraining Petitioner from advertising its Winding Up Petition until ELE UK’ s Renewal Application
is determined at the Oral Hearing or until further order of the Court, whichever is earlier.
Note
13 - Leases
Right-of-Use
Assets and Leases Obligations
We
lease 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. We consider 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.
We
determine 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, we use the rate implicit in the lease to discount lease payments to
present value; however, most of our leases do not provide a readily determinable implicit rate. Therefore, we must discount lease
payments based on an estimate of its incremental borrowing rate.
We
do not separate lease and nonlease components of contracts. There are no material residual value guarantees associated with any
of our leases. There are no significant restrictions or covenants included in our lease agreements other than those that are customary
in such arrangements.
During
the quarter ended September 30, 2020, we cancelled all of our outstanding lease arrangements for office space and equipment. As
of October 1, 2020, we entered into a new lease for our headquarter office, see Note 14 “Subsequent Events”.
Lease
Position as of September 30, 2020 and December 31, 2019
The
table below presents the lease related assets and liabilities recorded on the Company’s Condensed Consolidated Balance Sheets
as of September 30, 2020 and December 31, 2019:
|
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
Classification on the Balance Sheet
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right of use assets
|
|
$
|
—
|
|
|
$
|
122
|
|
|
|
Total lease assets
|
|
$
|
—
|
|
|
$
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Current operating lease liabilities
|
|
$
|
—
|
|
|
$
|
86
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
Long-term operating lease liabilities
|
|
$
|
—
|
|
|
$
|
27
|
|
|
|
Total lease liabilities
|
|
$
|
—
|
|
|
$
|
113
|
|
Lease
cost for the three and nine months ended September 30, 2020 and 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, 2020 and 2019:
|
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease cost
|
|
Classification
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
General and administrative expenses
|
|
$
|
13
|
|
|
$
|
14
|
|
|
$
|
43
|
|
|
$
|
26
|
|
|
|
Total lease cost
|
|
$
|
13
|
|
|
$
|
14
|
|
|
$
|
43
|
|
|
$
|
26
|
|
Other
Information
The
table below presents supplemental cash flow information related to leases for the nine months ended September 30, 2020 and 2019:
|
|
Nine Months Ended
September 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
35
|
|
|
$
|
26
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets/(decrease) of lease liability due to cancellation of leases
|
|
$
|
(79
|
)
|
|
$
|
75
|
|
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, 2020 and December 31, 2019:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted average remaining lease term - operating leases
|
|
|
0.0 years
|
|
|
|
1.67 years
|
|
Weighted average discount rate - operating leases
|
|
|
12.00
|
%
|
|
|
12.00
|
%
|
There
are no lease arrangements where the Company is the lessor.
Note
14 – Subsequent Events
Impact
from COVID-19 Coronavirus.
Historically,
our operations have relied heavily on our and our students’ ability to travel and attend live events where large groups
of people gather in local markets within each of the segments in which we operate. On March 11, 2020, the World Health Organization
(WHO) declared the COVID-19 outbreak as a pandemic. As a result of worldwide restrictions on travel and social distancing, in
March 2020 we temporarily ceased conducting live sales and fulfillment and furloughed substantially all of our employees. We resumed
sales operations in June 2020 with online sales events selling into our suite of online, on-demand, and over-the-phone products.
We also resumed online, on-demand, and over-the-phone fulfillment activities in June 2020. These activities required the re-engagement
by the Company of some furloughed employees and independent contractors. We have simplified our product offerings and restructured
our compensation program with respect to both employees and independent contractors to reduce costs and improve margins, but there
can be no assurances that the Company will be effective in selling its products and services, or what the impact such activities
will have on our financial performance.
The
Company conducted its first live in-person preview workshops in Miami, Ft. Lauderdale, Boca Raton and West Palm Beach, Florida
over a four-day period commencing November 4, 2020. The workshops were a prelude to a three-day basic training event to be held
in Ft. Lauderdale, Florida on November 20-22, 2020. The Company will be following strict safety protocols at the live events.
The Company expects to conduct additional live events in other areas as lockdown restrictions continue to ease and hopes to return
to a normal schedule over the coming months.
The
ultimate impact from COVID-19 on the Company’s operations and financial results during 2020 will depend on, among other
things, the ultimate severity and scope of the pandemic, the pace at which governmental and private travel restrictions and public
concerns about public gatherings will ease, the rate at which historically large increases in unemployment rates will decrease,
if at all, and whether, and the speed with which the economy recovers. We are not able to fully quantify the impact that these
factors will have on our financial results during 2020 and beyond, but expect developments related to COVID-19 to materially affect
the Company’s financial performance in 2020.
Sale
of Property, Cancellation of Promissory Note and Entry Into Operating Lease
On October 1, 2020,
1612 E. Cape Coral Parkway Holding Co., LLC (“Seller”), a subsidiary of the Company, closed on the sale of the real
property and improvements located at 1612 E. Cape Coral Parkway, Cape Coral, Florida (the “Property”) for $2.5 million
to Daniel Thom, as Trustee of Torstonbo Trust, a Florida revocable trust (“Buyer). A portion of the proceeds realized by
the Seller from the sale of the Property were used to satisfy Seller’s obligations under a Promissory Note (“Note”)
and Mortgage, Assignment of Rents, and Security Agreement (collectively, the “Loan Documents”) entered into on August
6, 2020 with Northern Equity Group, Inc., JKH Ventures, Inc., and Donald Ross, LLC pursuant to which Seller had borrowed the principal
amount of $1 million. The Seller’s obligations under the Loan Documents were secured by a first mortgage on the Property.
The net proceeds realized by the Seller from the sale of the Property were $1.24 million after deductions for repayment of the
Note, broker commissions, and other fees, and costs. See Note 7 “Short-Term and Long-Term Debt”.
The Property served
as the Company’s headquarters until its sale date. On October 1, 2020, the Company relocated its headquarter to 1490 N.E.
Pine Island Road, Suite 5D, Cape Coral, FL 33909 and entered into a two year operating lease for the new 1,600 square feet office
and warehouse space. The new lease provides the Company an option to extend the term of the lease for a third year. The lease
obligation is approximately $32 thousand plus other costs for shared services, maintenance and sales tax over the course of its
life.