NOTES TO 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, forums, telephone mentoring, one-on-one mentoring, coaching and e-learning. During the three
months ended March 31, 2021, we marketed our products and services under our Building Wealth with LegacyTM brand. During
the year ended December 31, 2020, we marketed our products and services under two brands: Building Wealth with LegacyTM;
and Homemade Investor by Tarek El Moussa.
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 three days in length, on site or remotely, although we have suspended providing on-site
mentorships as a result of the COVID-19 pandemic) and telephone mentoring (10 to 16 weekly one-on-one or one-on-many telephone sessions).
Mentoring involves a subject matter expert interacting with the student remotely or in person and guiding the student, for example, through
his or her first real estate transaction, providing a real hands-on experience.
We were founded in 1996, and through a reverse merger, became
a publicly-held company in November 2014.
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. In March 2020, as a result of the COVID-19 coronavirus pandemic, and the resulting worldwide restrictions on travel and social
distancing, we temporarily ceased conducting live sales and fulfillment and furloughed substantially all of our employees. We resumed
online operations in July 2020, and live operations on a limited basis, in November 2020. The Company expects to conduct additional live
events as lockdown restrictions continue to ease and hopes to return to a normal schedule over the coming months. The Company will continue
following strict safety protocols at the live events. 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.
We are not able to fully quantify the impact that these factors will have on our financial results, but expect developments related to
COVID-19 to continue to affect the Company’s financial performance in 2021 and beyond.
Our operations are managed
through three operating segments: (i) North America, (ii) United Kingdom, and (iii) Other Foreign Markets.
Since January 1, 2020, we have operated
under two brands:
|
●
|
Building Wealth with Legacy TM:
provides practical, high-quality and value-based educational training on the topics of personal finance, entrepreneurship, real estate,
financial markets and investing strategies and techniques. This training program encompasses hands-on experience and the true spirit
of investing from beginner to educated investor. In response to the limitations on travel and the social distancing protocols arising
out of the Coronavirus pandemic, the Company began marketing its Legacy EducationTM products transitioning to brand
name Building Wealth with LegacyTM. During the three months ended March 31, 2021, we marketed our products and services
exclusively under this brand.
|
|
|
|
|
●
|
Homemade Investor by Tarek El MoussaTM introduces people to the investor mindset, real estate investing strategies, and ways to generate cash flow that are designed to help build a foundation of knowledge for their financial goals. Homemade Investor events offered nationwide free workshops, 3-day trainings and large stage events with Tarek presenting as the keynote speaker, all selling into our advanced training products.
|
Basis of Presentation.
The terms “Legacy Education Alliance, Inc.,” the “Company,”
“we,” “our,” “us” or “Legacy” as used in this report refer collectively to Legacy Education
Alliance, Inc., a Nevada corporation (“Legacy”), the registrant, which was formerly known as Priced In Corp., and, unless
the context otherwise requires, together with its wholly-owned subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation,
other operating subsidiaries and any predecessor of Legacy Education Alliance Holdings, including Tigrent Inc., a Colorado corporation.
All intercompany balances and transactions have been eliminated in consolidation. As discussed in Note 4 “Discontinued Operations”,
the sale of the assets and deferred revenues of Legacy Education Alliance International Ltd (Legacy UK), and liquidations of Legacy Education
Alliance Hong Kong Limited (Legacy HK), Legacy Education Alliance Australia Pty, Ltd. (Legacy Australia) and Tigrent Learning Canada,
Inc. (Tigrent Canada) are reflected as discontinued operations in the consolidated financial statements.
The accompanying unaudited
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, 2020 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 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 three months ended March 31, 2021
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.
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 March
31, 2021 and December 31, 2020, we did not have a CDAR balance.
Restricted Cash.
Restricted cash balances consist
primarily of funds on deposit with credit card and other payment processors. These balances do not have the benefit of federal deposit
insurance and are subject to the financial risk of the parties holding these funds. Restricted cash balances held by credit card processors
are unavailable to us unless, and for a period of time after, we discontinue the use of their services. Because a portion of these funds
can be accessed and converted to unrestricted cash in less than one year in certain circumstances, that portion is considered a current
asset. Restricted cash is included with cash and cash equivalents in our consolidated statements of cash flows.
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 consolidated balance sheet.
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:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$
|
1,159
|
|
|
$
|
1,500
|
|
Restricted cash
|
|
|
630
|
|
|
|
1,180
|
|
Total cash, cash equivalents, and restricted cash shown in the cash flow statement
|
|
$
|
1,789
|
|
|
$
|
2,680
|
|
Convertible Instruments
The Company evaluates and
accounts for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
Applicable GAAP requires companies
to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according
to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other GAAP with changes
in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument
would be considered a derivative instrument.
The Company accounts for
convertible instruments (when it has been determined that the embedded conversion options should not be bifurcated from their host instruments)
as follows: The Company records when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded
in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term
of the related debt.
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 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 the assets and deferred
revenues of Legacy UK, and liquidations of Legacy HK, Legacy Australia and Tigrent Canada meet this criterion. Accordingly, the assets,
deferred revenues, and income statement of these entities were transferred to discontinued operations to close out the business. See Note
4 “Discontinued Operations”, for additional disclosures regarding these entities.
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.
Recently Issued Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2020-06 – Debt – Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible
Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the guidance on the issuer’s accounting
for convertible debt instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible
instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature
in such debt. Instead, they will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The
elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible
instrument that was within the scope of those models before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of
the if-converted method for calculating diluted earnings per share, and the treasury stock method will be no longer available. The provisions
of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2023, with early adoption permitted no earlier than fiscal
years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated 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 $0.0 thousand and $6.0 thousand for the three months ended March 31, 2021 and 2020, respectively, which are reported as a separate
line item in the consolidated statements of changes in stockholders’ deficit.
On April 20, 2021, pursuant to the 2015 Incentive Plan, we awarded
a total of 945,000 shares of restricted stock to senior management, which are subject to a two-year or three-year cliff vesting, a total
of 790,000 shares of restricted stock to key employees, which are subject to a three-year cliff vesting, and a total of 550,000 shares
of restricted stock to the independent members of the Board of Directors, which are subject to a two-year cliff vesting. We also granted
300,000 shares of restricted stock to external consultants, which were fully vested at the grant date. The grant date price per share
was $0.0631 for a total grant date fair value of $163.1 thousand.
Note 4 - Discontinued Operations
On January 27, 2021, Legacy
Education Alliance Australia PTY Ltd (“LEA Australia”), a wholly owned subsidiary of Legacy Education Alliance, Inc. (“LEAI”),
appointed Brent Leigh Morgan and Christopher Stephen Bergin, both of the firm of Rodgers Reidy, 326 William Street, Melbourne VIC 3000
Australia, as Joint and Several Liquidators of LEA Australia, to supervise a Creditors Voluntary Liquidation of LEA Australia. Subject
to the approval of the creditors of LEA Australia at a meeting to be held on February 23, 2021 AEDT (February 22, 2021 EST), the Joint
Liquidators will wind down the business of LEA Australia and make distributions, if any, to its creditors in accordance with the applicable
provisions of the Australian Corporations Act of 2001. The first meeting of creditors of LEA Australia was held on February 24, 2021 (AEDT),
at which no resolutions were proposed by the creditors, no nominations for a Committee of Inspection were made, and no alternative liquidator
was proposed.
On March 2, 2021, Legacy Education
Alliance Holdings, Inc. the sole shareholder of Legacy Education Alliance Hong Kong Ltd (“LEA Hong Kong”), a subsidiary of
the Company, adopted a resolution to wind up voluntarily the affairs of LEA Hong Kong and to appoint Cosimo Borrelli and Li Chung Ngai
(also known as Anson Li), both of Borrelli Walsh Limited, Level 17, Tower 1, Admiralty Centre, 18 Harcourt Road, Hong Kong as Joint and
Several Liquidators of LEA Hong Kong. At a meeting of the creditors of LEA Hong Kong held on March 2, 2021, the creditors similarly approved
the voluntary winding up of LEA Hong Kong and the appointment of Cosimo Borrelli and Li Chung Ngai (also known as Anson Li), as Joint
and Several Liquidators. The Joint and Several Liquidators will wind up the business of LEA Hong Kong and make distributions, if any,
to its creditors in accordance with the applicable provisions of the Companies (Winding Up and Miscellaneous Provisions) Ordinance of
Hong Kong.
On March 7, 2021, Tigrent
Learning Canada Inc. (“Tigrent Canada”), a wholly owned subsidiary of Legacy Education Alliance, Inc., filed an assignment
in bankruptcy under section 49 of the Canada Bankruptcy and Insolvency Act (the “Act”) in the Office of the Superintendent
of Bankruptcy Canada, District of Ontario, Division of Toronto, Court No. 31-2718213. Also on March 7, 2021, A. Farber & Partners
was appointed trustee of the estate of Tigrent Canada. The trustee will wind down the business of Tigrent Canada and make distributions,
if any, to its creditors in accordance with the applicable provisions of the Act. At the First Meeting of Creditors held on March 23,
2021, the creditors of Tigrent Canada approved the appointment of A. Farber & Partners as trustee of the estate of Tigrent Canada.
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 did 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 consolidated financial statements.
The major classes of assets
and liabilities of the entities classified as discontinued operations were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Major classes of assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
14
|
|
Deferred course expenses
|
|
|
—
|
|
|
|
806
|
|
Current assets – discontinued operations
|
|
|
—
|
|
|
|
820
|
|
Other assets
|
|
|
34
|
|
|
|
34
|
|
Total major classes of assets – discontinued operations
|
|
$
|
34
|
|
|
$
|
854
|
|
Major classes of liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,716
|
|
|
$
|
3,698
|
|
Accrued course expenses
|
|
|
599
|
|
|
|
593
|
|
Other accrued expenses
|
|
|
450
|
|
|
|
1,582
|
|
Deferred revenue
|
|
|
5,327
|
|
|
|
5,413
|
|
Total major classes of liabilities – discontinued operations
|
|
$
|
10,092
|
|
|
$
|
11,286
|
|
The financial results of
the discontinued operations are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Revenue
|
|
$
|
40
|
|
|
$
|
1,760
|
|
Total operating costs and expenses
|
|
|
907
|
|
|
|
1,210
|
|
(Loss) Income from discontinued operations
|
|
|
(867
|
)
|
|
|
550
|
|
Other expense, net
|
|
|
(80
|
)
|
|
|
(4
|
)
|
Income tax benefit
|
|
|
1,118
|
|
|
|
—
|
|
Net income from discontinued operations
|
|
$
|
171
|
|
|
$
|
546
|
|
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 stock options and warrants, and the if-converted method for convertible notes. Under the if-converted method, the convertible
notes are assumed to have been converted at the beginning of the period or at time of issuance, if later, and the resulting common shares
are included in the denominator. 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 91,500 and 178,151 for the three months ended March 31, 2021 and 2020, respectively.
The calculations of basic
and diluted EPS are as follows:
|
|
Three Months Ended March 31, 2021
|
|
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
Net
|
|
|
Shares
|
|
|
Per
|
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
(in thousands, except per share data)
|
|
|
(in thousands, except per share data)
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
253
|
|
|
|
23,279
|
|
|
|
|
|
|
$
|
3,033
|
|
|
|
23,163
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
(1
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
(23
|
)
|
|
|
(178
|
)
|
|
|
|
|
Amounts available to common stockholders
|
|
$
|
252
|
|
|
|
23,187
|
|
|
$
|
0.01
|
|
|
$
|
3,010
|
|
|
|
22,985
|
|
|
$
|
0.13
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts allocated to unvested restricted shares
|
|
|
1
|
|
|
|
92
|
|
|
|
|
|
|
|
23
|
|
|
|
178
|
|
|
|
|
|
Shares of common stock to be issued for convertible note
|
|
|
—
|
|
|
|
1,750
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts reallocated to unvested restricted shares
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
|
|
Amounts available to stockholders and assumed conversions
|
|
$
|
252
|
|
|
|
25,029
|
|
|
$
|
0.01
|
|
|
$
|
3,010
|
|
|
|
23,163
|
|
|
$
|
0.13
|
|
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).
|
For the three-month
ended March 31, 2021, the Company has the derivative liabilities measured at fair value on a recurring basis which are valued at
level 3 measurement. At December 31, 2020, the Company does not have any financial assets or liabilities measured and recorded at
fair value on its consolidated balance sheet on a recurring basis.
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 consolidated
balance sheet date, including receivables, payables and accrued liabilities approximate their fair value.
Note 7 – Short-Term and Long-Term Debt
|
|
As of
March 31,
2021
|
|
|
As of
December 31,
2020
|
|
|
|
(in thousands)
|
|
Senior Secured Convertible Debenture, as Issued – Related Party
|
|
$
|
375
|
|
|
$
|
—
|
|
Debt Discount – Related Party
|
|
|
(375
|
)
|
|
|
—
|
|
Senior Secured Convertible Debenture, Net – Related Party
|
|
|
—
|
|
|
|
—
|
|
Paycheck Protection Program loan
|
|
|
1,900
|
|
|
|
1,900
|
|
Total long-term debt, net of current portion
|
|
$
|
1,900
|
|
|
$
|
1,900
|
|
The following is a summary
of scheduled debt maturities by year (in thousands):
2021
|
|
$
|
—
|
|
2022
|
|
|
2,275
|
|
Total debt
|
|
$
|
2,275
|
|
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 used 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.
On March 8, 2021, the
Company issued a $375 thousand Senior Secured Convertible Debenture (“Debenture”) to Legacy Tech Partners, LLC
(“LTP”), a related party. The Debenture accrues interest at a rate of 10% and is due on the earlier of the occurrence of
certain liquidity events with respect to the Company and March 8, 2022. The Debenture may be converted at any time after the issue
date into shares of the Company’s Common Stock (the “Conversion Shares”) at a price equal to $0.05 per share.
Together with each Conversion Share a warrant will be issued with a strike price of $0.05 per share and an expiration date of March
8, 2026 (the “Warrants”). LTP has an obligation to lend the Company an additional $625 thousand under the same terms
prior to March 31, 2022, and an option to fund an additional $4 million under the same terms prior to March 8, 2024. LTP also has
the option to extend the maturity date of each loan it makes to the Company, including the initial loan of $375 thousand for a term
not to exceed four years from the original maturity date of that loan. Net proceeds were $314 thousand after legal fees of $61
thousand, which are included in our consolidated statement of operations for the three months ended March 31, 2021. The Debenture is
secured by a lien on all the Company’s assets. The Company’s U.S. subsidiaries entered into Guaranties on March 9, 2021
in favor of LTP under which such subsidiaries guaranteed the Company’s obligations under the Debenture and granted LTP a lien
on all assets of such subsidiaries. The use of proceeds from the Debenture will be to extinguish liabilities of the Company and to
fund the development of the Education Technology (EdTech) business. The Warrants will not be listed for trading on any national
securities exchange. The Warrants and the shares issuable upon conversion of the Debenture are not being registered under the
Securities Act of 1933, as amended (the “Securities Act”). The aggregate number of shares issuable upon conversion of
the Debenture and upon the exercise of the Warrants may not exceed 19.9% of the number of shares of the Common Stock outstanding
immediately after giving effect to the issuance of shares upon conversion of the Debenture and the exercise of the Warrants. On May
4, 2021 LTP exercised its conversion rights with respect to $330 thousand of the outstanding principal at the Conversion Price
resulting in the issuance of 6.6 million shares of Common Stock to LTP. In addition, an equal number of warrants will be issued
within 10 trading days of the conversion exercised date. The cash receipt date, March 10, 2021, was used for the market value of
stock on measurement date, at $0.155 per common share, resulting in the recognition of debt discount and additional paid-in capital
of $375 thousand, respectively, within the consolidated balance sheet for the three-months ended March 31, 2021, which is the
lesser-of (1) debenture amount or (2) market value of the exercised option. The Company evaluated the convertible debenture under
ASC 470-20 and recognized a debt discount of $375,000 related to the beneficial conversion feature during the three months ended
March 31, 2021, with a corresponding credit to additional paid-in capital. The debt discount is being accreted to interest expense
over the term of the note.
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 2020 and 2021.
We recorded income tax expense
of $1.1 million and income tax benefit of $127.0 thousand for the three months ended March 31, 2021 and 2020, respectively. Our effective
tax rate was 92.7% and (5.4%) for the three months ended March 31, 2021 and 2020, respectively. Our effective tax rates differed
from the U.S. statutory corporate tax rate of 21% primarily because of our reduced operations while also recognizing revenues from the
expiration of student contracts.
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 March 31, 2021 and December 31, 2020, we retained a valuation allowance of $3.6 million
and $3.6 million, respectively, for a certain number of our international subsidiaries.
During the three months ended
March 31, 2021 and 2020, there were no material changes in uncertain tax positions. We do not expect any significant changes to unrecognized
tax benefits in this and 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 March 31, 2021 and December 31, 2020, 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 consolidated statements of operations and comprehensive income.
Our federal income
tax returns for the years subsequent to 2018 are subject to examination by the Internal Revenue Service. Our state tax returns for all
years after 2018 or 2017, 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 2014 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 March 31, 2021 and December 31, 2020, including foreign subsidiaries, without
FDIC coverage were $0.4 million and $0.8 million, respectively.
Revenue.
A significant portion of our revenue was derived from the Rich Dad
brands, as a result of contracts with students entered into prior to the expiration, in 2019, of our License Agreement with Rich Dad Operating
Company, LLC. For the three months ended March 31, 2021 and 2020, Rich Dad brands provided 49.4% and 70.9% 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
March 31,
|
|
As a percentage of total revenue
|
|
2021
|
|
|
2020
|
|
North America
|
|
|
66.4
|
%
|
|
|
99.3
|
%
|
U.K.
|
|
|
33.6
|
%
|
|
|
0.7
|
%
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
Total consolidated revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating results for the
segments are as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Segment revenue
|
|
(In thousands)
|
|
North America
|
|
$
|
1,740
|
|
|
$
|
8,300
|
|
U.K.
|
|
|
880
|
|
|
|
60
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
Total consolidated revenue
|
|
$
|
2,620
|
|
|
$
|
8,360
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
North America
|
|
$
|
1,412
|
|
|
$
|
3,796
|
|
U.K.
|
|
|
716
|
|
|
|
77
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
Total consolidated gross profit
|
|
$
|
2,128
|
|
|
$
|
3,873
|
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expenses.
|
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
North America
|
|
$
|
2
|
|
|
$
|
14
|
|
U.K.
|
|
|
1
|
|
|
|
4
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
3
|
|
|
$
|
18
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
North America
|
|
$
|
2,859
|
|
|
$
|
3,834
|
|
U.K.
|
|
|
618
|
|
|
|
1,266
|
|
Other foreign markets
|
|
|
189
|
|
|
|
192
|
|
Total consolidated identifiable assets
|
|
$
|
3,666
|
|
|
$
|
5,292
|
|
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 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 March 31, 2021, we have deferred revenue of $7.6 million related to contractual commitments with customers where the
performance obligation will be satisfied over time, which ranges from six to twenty-four months. The revenue associated with these performance
obligations is recognized as the obligation is satisfied. As of March 31, 2021, 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 2020 (see
Note 1 “General”).
The following tables disaggregate
our segment revenue by revenue source:
|
|
Three Months Ended March 31, 2021
|
|
|
Three Months Ended March 31, 2020
|
|
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
|
|
|
1,728
|
|
|
|
880
|
|
|
|
—
|
|
|
|
2,608
|
|
|
|
6,268
|
|
|
|
60
|
|
|
|
—
|
|
|
|
6,328
|
|
Products
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
394
|
|
|
|
—
|
|
|
|
—
|
|
|
|
394
|
|
Coaching and Mentoring
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
960
|
|
|
|
—
|
|
|
|
—
|
|
|
|
960
|
|
Online and Subscription
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
562
|
|
|
|
—
|
|
|
|
—
|
|
|
|
562
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116
|
|
|
|
—
|
|
|
|
—
|
|
|
|
116
|
|
Total revenue
|
|
|
1,740
|
|
|
|
880
|
|
|
|
—
|
|
|
|
2,620
|
|
|
|
8,300
|
|
|
|
60
|
|
|
|
—
|
|
|
|
8,360
|
|
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 T&B Seminars, Inc., and Rich Dad. Total royalty
expenses included in our Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2021 and 2020
were $0.0 million and $0.1 million, respectively. Our License Agreement with our Rich Dad brand licensor expired on September 30, 2019.
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 March 31, 2021 and
December 31, 2020, were $0.6 million and $1.1 million, respectively. These balances are included on the 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 March 31, 2021 and December 31, 2020, 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
(the “Court”) 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 General Counsel and former Chief
Executive Officer were named as defendants to a civil conspiracy count. The suit, as originally filed, primarily related to the
alleged obligation of Tigrent to indemnify the Plaintiff pursuant to an October 6, 2010 Forbearance Agreement. The suit, as originally
filed, included 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 with the Court against Tigrent Inc. (“Tigrent”), Legacy Education Alliance
Holding, Inc. (“Holdings”), and certain shareholders of the Company. The Second Amended Complaint included 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,
which included 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 current General Counsel, 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.
On January 4, 2021, a Settlement Agreement and Mutual Release was entered into by and between TBPI, M. Barry Strudwick, Carl Weiss and
Susan Weiss (the “Strudwick Parties”) and Tigrent Inc., Legacy Education Alliance, Inc., Legacy Education Alliance Holdings,
Inc., Mr. May, and Steven Barre (Defendants) pursuant to which the Strudwick Parties agreed to dismiss the lawsuit with prejudice against
all parties and the Company agreed to pay the aggregate sum of $400,000 payable in one installment of $100,000 on February 18, 2021 and
five quarterly installments of $60,000 commencing on May 19, 2021, which the Company has accrued for within accounts payable and other
long-term liability for the current and long-term portions, respectively, in the Consolidated Balance Sheets as of March 31, 2021 and
December 31, 2020, respectively. The parties also exchanged mutual releases as part of the Settlement Agreement. The lawsuit was dismissed
by order of the Court on January 12, 2021.
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. On November
19, 2020, the administrators filed notice of their proposal to move from administration to a creditors’ voluntary liquidation and
on December 9, 2020, notice was filed with Companies House that Paul Zalkin and Nicholas Simmonds were appointed as liquidators of Legacy
UK to commence its winding up. Further details regarding the resolution of 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. On December 8, 2020 we paid $390.6 thousand in cash and transferred our residential properties in the value
of $363 thousand as settlement of intercompany debts of two of our subsidiaries, LEAI Property Development UK, Ltd. and LEAI Property
Investment UK, Ltd., totaling $924 thousand to Legacy UK.
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 “High 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 High 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 High 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 High 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 High 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 High 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 27, 2020, ELE UK filed an application with the High Court of Appeal, Royal Courts of Justice
(“Court of Appeals”) for a hearing to renew its application for permission to appeal the High Court’s order and a
hearing was set for February 11, 2021. On October 30, 2020, the High 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. At a hearing held on December 16, 2020, the High Court issued an order lifting the
restraint on advertising the petition for a winding up order and that the matter be listed on January 13, 2021 for winding up and
awarding costs to the creditor. However, at a meeting held on January 11, 2021 (“Creditors’ Meeting”), the
creditors of Elite Legacy Education UK Ltd (“ELE UK”), a wholly owned subsidiary of Legacy Education Alliance, Inc.
(“LEAI”), approved a Proposal for a Company Voluntary Arrangement (the “Arrangement”) under the UK
Insolvency Act 1986 (the “IA”) and the UK Insolvency Rules 2016 (the “IR”). As a result, the
Petitioner’s claims will be administered under the terms of the CVA and, at the request of ELE UK, the hearing on its
application to renew its appeal of the High Court’s order was lifted.
In the Matter of Elite
Legacy Education UK Ltd., Proposal for a Company Voluntary Arrangement. At a meeting held on January 11, 2021 (“Creditors’
Meeting”), the creditors of Elite Legacy Education UK Ltd (“ELE UK”), a wholly owned subsidiary of Legacy Education
Alliance, Inc. (“LEAI”), approved a Proposal for a Company Voluntary Arrangement (the “Arrangement”) under the
UK Insolvency Act 1986 (the “IA”) and the UK Insolvency Rules 2016 (the “IR”). Under the terms of the Arrangement,
CVR Global LLP has been appointed as Supervisor of ELE UK for the purposes of administering the Arrangement. At the Creditors Meeting,
the creditors also approved a modification to the Arrangement whereby any tax refunds due to ELE UK would be paid to the Supervisor and
made available for distribution to creditors. The Supervisor will wind down the business of ELE UK and make distributions to ELE UK’s
non-student creditors in accordance with the applicable provisions of the IA and the IR, on and subject to the terms and conditions set
forth in the Arrangement in satisfaction of the non-student creditors’ respective claims against ELE UK. Student creditors of ELE
UK will be provided the opportunity to receive trainings from an independent training provider on and subject to the terms and conditions
set forth in the Arrangement in satisfaction of their respective claims against ELE UK. Pursuant to the Arrangement, and at its conclusion,
the remaining assets of ELE UK, if any, would be distributed to LEAI. As a result of the CVR, the Winding-Up Petition, CR-2020-001958,
filed in the High Court of Justice, Business and Property Courts of England and Wales has been dismissed. At this time, LEAI management
is unable to anticipate any distributions that would be received from ELE UK.
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.
Lease Position as of March 31, 2021 and
December 31, 2020
The table below presents the lease related assets and liabilities recorded
on the Company’s Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Balance Sheet Line
|
|
Classification on the Balance Sheet
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
|
Operating lease right of use assets
|
|
|
$
|
39
|
|
|
$
|
45
|
|
|
|
|
Total lease assets
|
|
|
$
|
39
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
Current operating lease liabilities
|
|
|
$
|
26
|
|
|
$
|
25
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities
|
|
|
Long-term operating lease liabilities
|
|
|
$
|
13
|
|
|
$
|
20
|
|
|
|
|
Total lease liabilities
|
|
|
$
|
39
|
|
|
$
|
45
|
|
Lease cost for the three months ended March
31, 2021 and 2020
The table below presents the lease related costs recorded on the Company’s
Consolidated Statements of Operations for the three months ended March 31, 2021 and 2020:
|
|
|
|
|
Three Months Ended March 31,
|
|
Lease cost
|
|
Classification
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
(in thousands)
|
|
Operating lease cost
|
|
|
General
and administrative expenses
|
|
|
$
|
6
|
|
|
$
|
7
|
|
|
|
|
Total lease cost
|
|
|
$
|
6
|
|
|
$
|
7
|
|
Other Information
The table below presents supplemental
cash flow information related to leases for the three months ended March 31, 2021 and 2020:
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
(in thousands)
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
6
|
|
|
$
|
18
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets/(decrease) of lease liability due to cancellation of leases
|
|
$
|
—
|
|
|
$
|
(49
|
)
|
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 March 31, 2021 and December 31, 2020:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2021
|
|
|
2020
|
|
Weighted average remaining lease term - operating leases
|
|
|
1.50 years
|
|
|
|
1.75 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
Paycheck Protection Program Note Agreement
On April 20, 2021, Elite Legacy
Education, Inc (ELE), a wholly-owned subsidiary of the Company, closed on an unsecured Paycheck Protection Program Note agreement (the
“Promissory Note”) to borrow $1,899,832 from Cross River Bank, the lender, pursuant to the Paycheck Protection Program (“PPP”),
originally created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, and extended to “second draw”
PPP loans as described below. The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified
costs. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, utilities, and certain covered operating
expenses. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. The loan has an interest rate of 1.0% per
annum and a term of 60 months. Payments will be deferred in accordance with the CARES Act, as modified by the Paycheck Protection Program
Flexibility Act of 2020; however, interest will accrue during the deferral period. If all or any portion of the loan is not forgiven in
accordance with the terms of the program, ELE will be obligated to make monthly payments of principal and interest in amounts to be calculated
after the amount of loan forgiveness, if any, is determined to repay the balance of the loan in full prior to maturity. The Promissory
Note contains customary events of default relating to, among other things, payment defaults and breaches of representations. ELE may prepay
the loan at any time prior to maturity with no prepayment penalties.
Debenture, Warrant and Guaranty Agreements;
Exercise of Conversion Rights
On May 4, 2021 Legacy Education Alliance, Inc., a Nevada corporation
(the “Company”) issued a 10% Subordinated Secured Convertible Debenture (“Subordinated Debenture”) in the principal
amount of $25 thousand to Michel Botbol, the Company’s Chairman and Chief Executive Officer. The Subordinated Debenture accrues
interest at a rate of 10% and is due on the earlier of the occurrence of certain liquidity events with respect to the Company and May
4, 2022. The Subordinated Debenture may be converted at any time after the issuance date into shares of the Company’s Common Stock
(the “Conversion Shares”) at a price equal to $0.05 per share (“Conversion Price”). Together with each Conversion
Share, a warrant will be issued with a strike price of $0.05 per share and an expiration date of May 4, 2026 (the “Warrants”).
Mr. Botbol also has the option to extend the maturity date of the loan for a term not to exceed four years from the original maturity
date of that loan. The Subordinated Debenture is secured by a lien on all the Company’s assets subordinated to the lien granted
to Legacy Tech Partners, LLC (“LTP”). The Company’s U.S. subsidiaries are required to enter into Guaranties in favor
of Botbol under which such subsidiaries guaranteed the Company’s obligations under the Debenture and granted Botbol a lien on all
assets of such subsidiaries subject to the lien held by LTP. The use of proceeds from the Debenture will be to extinguish liabilities
of the Company and to fund working capital, general corporate purposes and the development of administrative functions. The Warrants will
not be listed for trading on any national securities exchange. The Warrants and the shares issuable upon conversion of the Debenture are
not being registered under the Securities Act of 1933, as amended (the “Securities Act”). The aggregate number of shares issuable
upon conversion of the Debenture and upon the exercise of the Warrants may not exceed 19.9% of the number of shares of the Common Stock
outstanding immediately after giving effect to the issuance of shares upon conversion of the Debenture and the exercise of the Warrants.
On May 4, 2021 Mr. Botbol exercised his conversion rights with respect to the entire $25 thousand of outstanding principal at the Conversion
Price resulting in the issuance of 500 thousand shares of Common Stock to him. In addition, an equal number of warrants will be issued
within 10 trading days of the conversion exercised date.