NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - General
Business
Description.
We are a provider of practical, high-quality, and value-based educational training on the topics of personal
finance, entrepreneurship, real estate and financial markets investing strategies and techniques. Our programs are offered through
a variety of formats and channels, including free-preview workshops, basic training classes, symposiums, telephone mentoring,
one-on-one mentoring, coaching and e-learning, primarily under the Rich Dad® Education brand (“Rich Dad”) which
was created in 2006 under license from entities affiliated with Robert Kiyosaki, whose teachings and philosophies are detailed
in the book titled,
Rich Dad Poor Dad.
In addition to Rich Dad, we market our products and services under a variety of
brands, including
Martin Roberts, The Independent Woman, Women in Wealth, Brick Buy Brick
and
Elite Business Star
.
Our products and services are offered in the United States, Canada, the United Kingdom and Other Foreign Markets.
Basis
of Presentation.
The terms “Legacy Education Alliance, Inc.,” the “Company,” “we,” “our,”
“us” or "Legacy" as used in this report refer collectively to Legacy Education Alliance, Inc., a Nevada
corporation (“Legacy”), the registrant, which was formerly known as Priced In Corp., and, unless the context otherwise
requires, together with its wholly-owned subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation, other operating
subsidiaries and any predecessor of Legacy Education Alliance Holdings, including TIGE.
The accompanying
unaudited condensed consolidated financial statements presented herein are for us and our consolidated subsidiaries, each of which
is a wholly-owned subsidiary. The accompanying condensed consolidated balance sheet as of December 31, 2016 was derived from our
audited consolidated financial statements and does not include all disclosures required under United States of America generally
accepted accounting principles (“U.S. GAAP”), for annual financial statements. 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 year ended December 31, 2016 and reflect all normal recurring adjustments that
are, in the opinion of management, necessary to present fairly our results of operations and financial position. Amounts reported
in our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) are not necessarily indicative of amounts
expected for the respective annual periods or any other interim period.
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 the policies disclosed therein. The accompanying
unaudited condensed consolidated financial statements we present in this report have been prepared in accordance with those policies.
Use
of Estimates.
The preparation of condensed consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Income
Tax in Interim Periods.
We conduct operations in separate legal entities in different jurisdictions. As a result, income tax
amounts are reflected in these condensed consolidated financial statements for each of those jurisdictions. Tax laws and tax rates
vary substantially in these jurisdictions and are subject to change based on the political and economic climate in those countries.
We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision
or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary
income or loss to determine the income tax provision or benefit allocated to the interim period.
Losses
from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded
from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from
the losses in jurisdictions for which no benefit can be realized. The effects of unusual and infrequent items are recognized in
the impacted interim period as discrete items.
The
estimated annual effective tax rate may be affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction.
Adjustments to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We
have established valuation allowances against our deferred tax assets, including net operating loss carryforwards and income tax
credits. Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the
value of such assets to the amount that is deemed more likely than not to be realizable. Our ability to realize these deferred
tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review
our forecast in relation to actual results and expected trends on a quarterly basis. A change in our valuation allowance would
impact our income tax expense/benefit and our stockholders’ deficit and could have a significant impact on our results of
operations or financial condition in future periods.
Note
2 - New Accounting Pronouncements
Adoption
of Accounting Standards
We
have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our
financial statements.
New
Accounting Standards
In
January 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)
2017-01, “
Business Combinations,
” which clarifies the definition of a Business and improves the guidance for
determining whether a transaction involves the purchase or disposal of a business or an asset. This standard is effective for
fiscal years and interim periods beginning after December 15, 2017 and should be applied prospectively on or after the effective
date. Early adoption is permitted only for the transactions that have not been reported in financial statements that have been
issued or made available for issuance. We are currently evaluating the effect that the adoption of this standard will have
on our financial statements and expect to adopt this standard when effective.
In
November 2016, the FASB issued ASU 2016-18, “
Statement of Cash Flows: Restricted Cash,
” which provides guidance
about the presentation of changes in restricted cash and restricted cash equivalents on the statement of cash flows. This standard
is effective for fiscal years and interim periods beginning after December 15, 2017 and will be applied using a retrospective
transition method to each period presented. Early adoption was permitted. We are currently evaluating the effect that
the adoption of this standard will have on our financial statements and expect to adopt this standard when effective.
In
October 2016, the FASB issued ASU 2016-16, “
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory,
”
which removes the prohibition against the immediate recognition of the current and deferred income tax effects of intra-entity
transfers of assets other than inventory. This standard is effective for fiscal years and interim periods beginning after December
15, 2017 and will be applied using a modified retrospective basis. Early adoption was permitted. We are currently
evaluating the effect that the adoption of this standard will have on our financial statements and expect to adopt this standard
when effective.
In
August 2016, the FASB issued ASU 2016-15, “
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash
Payments
.” This ASU provides guidance and clarification in regards to the classification of eight types of receipts
and payments in the statement of cash flows, including debt repayment or extinguishment costs, settlement of zero-coupon bonds,
proceeds from the settlement of insurance claims, distributions received from equity method investees and cash receipts from beneficial
interest in securitization transactions. This standard is effective for fiscal years and interim periods beginning after December
15, 2017 and will be applied using a retrospective transition method to each period presented. Early adoption is permitted. We
expect to adopt this standard when effective, and do not expect this guidance to have a significant impact on our financial statements.
In
March 2016, FASB issued ASU No 2016-09 “
Compensation – Stock compensation
.” The new guidance is intended
to simplify some provisions in stock compensation accounting, including the accounting for income taxes, forfeitures, and statutory
tax withholding requirements, as well as classification in the statement of cash flows. This standard is effective for fiscal
years and interim periods beginning after December 15, 2016. Early adoption was permitted. We adopted this standard in the first
quarter of 2017. The adoption of this guidance did not have a significant impact on our financial statements. As permitted by
the standard, we will account for forfeitures of share-based payments when they occur.
In
February 2016, the FASB issued ASU No 2016-02 “Leases”
(Topic 842)
. The standard requires companies that lease
valuable assets like aircraft, real estate, and heavy equipment to recognize on their balance sheets the assets and liabilities
generated by contracts longer than a year. The standard also requires companies to disclose in the footnotes to their financial
statements information about the amount, timing, and uncertainty for the payments they make for the lease agreements. This standard
is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. We expect to
adopt this standard when effective, and the impact on our financial statements is not currently estimable.
In
January 2016, the FASB issued ASU No 2016-01, “
Recognition and Measurement of Financial Assets and Financial Liabilities,”
Financial Instruments – Overall (Subtopic 825-10)
. The new guidance is intended to improve the recognition and measurement
of financial instruments. This guidance requires that financial assets and financial liabilities must be separately presented
by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements.
This guidance is effective for fiscal years and interim periods beginning after December 15, 2017. The standard includes a requirement
that businesses must report changes in the fair value of their own liabilities in other comprehensive income instead of earnings,
and this is the only provision of the update for which the FASB is permitting early adoption. We expect to adopt this guidance
when effective, and do not expect this guidance to have a significant impact on our financial statements.
Note
3 - Share-Based Compensation
We
account for share-based awards under the provisions of ASC 718, “
Compensation—Stock Compensation
.” Accordingly,
share-based compensation cost is measured at the grant date based on the fair value of the award and we expense these costs using
the straight-line method over the requisite service period.
Share-based
compensation expenses related to our restricted stock grants were $51.0 thousand and $37.0 thousand for the three months ended
March 31, 2017 and 2016, respectively, which are reported as a separate line item in the condensed consolidated statement of changes
in stockholders’ deficit.
See
Note 6 -
Share-Based Compensation
, in the Notes to Consolidated Financial Statements for the year ended December 31, 2016,
included in our 2016 Annual Report for further discussion.
Note 4 - Earnings Per Share (“EPS”) (Restated)
Basic
EPS is computed by dividing net income by the basic weighted-average number of shares outstanding during the period.
Diluted
EPS is computed by dividing net income by the diluted weighted-average number of shares outstanding during the period and, accordingly,
reflects the potential dilution that could occur if securities or other agreements to issue common stock, such as stock options,
were exercised, settled or converted into common stock and were dilutive. The diluted weighted-average number of shares used in
our diluted EPS calculation is determined using the treasury stock method.
Unvested awards
of share-based payments with rights to receive dividends or dividend equivalents, such as our restricted stock awards, are considered
to be participating securities, and therefore, the two-class method is used for purposes of calculating EPS. Under the two-class
method, a portion of net income is allocated to these participating securities and is excluded from the calculation of EPS allocated
to common stock. Our restricted stock awards are subject to forfeiture and restrictions on transfer until vested and have identical
voting, income and distribution rights to the unrestricted common shares outstanding. Our
weighted average unvested restricted stock awards outstanding were 1,346,746 and 885,486 for the three months ended March
31, 2017 and 2016, respectively.
The
calculations of basic and diluted EPS are as follows:
|
|
Three
Months Ended March 31, 2017
|
|
|
Three
Months Ended March 31, 2016
|
|
|
|
Net
Loss
|
|
|
Weighted
Average Shares Outstanding
|
|
|
Loss
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
|
|
$
|
(310
|
)
|
|
|
22,631
|
|
|
|
|
|
|
$
|
593
|
|
|
|
21,846
|
|
|
|
|
|
Amounts
allocated to unvested restricted shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24
|
)
|
|
|
(885
|
)
|
|
|
|
|
Amounts
available to common stockholders
|
|
$
|
(310
|
)
|
|
|
22,631
|
|
|
$
|
(0.01
|
)
|
|
$
|
569
|
|
|
|
20,961
|
|
|
$
|
0.03
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
allocated to unvested restricted shares
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
24
|
|
|
|
—
|
|
|
|
|
|
Non participating
share units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
885
|
|
|
|
|
|
Amounts
reallocated to unvested restricted shares
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Amounts
available to stockholders and assumed conversions
|
|
$
|
(310
|
)
|
|
|
22,631
|
|
|
$
|
(0.01
|
)
|
|
$
|
593
|
|
|
|
21,846
|
|
|
$
|
0.03
|
|
Note
5 - Fair Value Measurements
ASC
820,
“Fair Value Measurements and Disclosures”
defines fair value, establishes a consistent framework for measuring
fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things,
maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
ASC
820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date.
ASC
820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market
assumptions.
In
accordance with ASC 820, these two types of inputs have created the following fair value hierarchy:
●
|
Level
1-Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets;
|
|
|
●
|
Level
2-Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the asset or liability, including:
|
|
●
|
Quoted
prices for similar assets or liabilities in active markets
|
|
|
|
|
●
|
Quoted
prices for identical or similar assets or liabilities in markets that are not active
|
|
|
|
|
●
|
Inputs
other than quoted prices that are observable for the asset or liability
|
|
|
|
|
●
|
Inputs
that are derived principally from or corroborated by observable market data by correlation or other means; and
|
●
|
Level
3-Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information
available under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash
flows).
|
The
following table presents the derivative financial instruments, our only financial liabilities measured and recorded at fair value
on our condensed consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of March
31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
Fair Value Measurements at
Reporting Date Using
|
|
|
|
|
|
Amount
|
|
|
Quoted
Prices in
Active
Markets
for Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
As of March 31, 2017
|
|
Warrant derivative liabilities
|
|
$
|
37,008
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
37,008
|
|
As of December 31, 2016
|
|
Warrant derivative liabilities
|
|
$
|
108,809
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
108,809
|
|
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.
See
Note – 6
Derivative Liability,
for further discussion.
Note
6 - Derivative Liability
In
June 2015, we granted warrants to purchase 959,924 shares of the Company’s common stock through a private offering of units
(“Units”). Each Unit included one share of Common Stock, par value $0.0001 per share, and a three-year Warrant to
purchase one share of Common Stock at an initial exercise price per share equal to $0.75, subject to adjustment for certain corporate
transactions such as a merger, stock-split or stock dividend and, if the Company does not continue to be a reporting company under
the Securities Exchange Act of 1934 during the two-year period after closing, the exercise price will be reduced to $0.01 per
share. Each Unit includes limited registration rights for the investors for the shares of Common Stock and the shares of Common
Stock that would be issued upon the exercise of a Warrant ("Underlying Shares") when and if we register our shares of
Common Stock in a different offering, subject to certain excluded registered offerings. The Company has also issued to the placement
agent warrants to purchase our shares of Common Stock equal to 10% of the total shares sold in the offering, or 95,992 shares.
Because
these warrants have full reset adjustments that would preclude the instrument from being considered as index to the Company’s
stock, it is subject to derivative liability treatment under
ASC 815-40-15
, which requires as of the date the warrants
are issued, the derivative liability to be measured at fair value and re-evaluated at the end of each reporting period.
Key
assumptions used to determine the fair value of the warrants follows:
|
|
At Issuance
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Market value of stock on measurement date
|
|
$
|
0.55
|
|
|
$
|
0.42
|
|
|
$
|
0.42
|
|
Risk-free interest rate
|
|
|
1.12
|
%
|
|
|
1.03
|
%
|
|
|
1.20
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility factor
|
|
|
55
|
%
|
|
|
66.4
|
%
|
|
|
68.8
|
%
|
Term
|
|
|
3 years
|
|
|
|
1.25 years
|
|
|
|
1.5 years
|
|
As of March 31,
2017 and December 31, 2016, the fair value of the total warrants' derivative liability is $37,008 and $108,809, respectively, and
recorded in other accrued expenses in the Condensed Consolidated Balance Sheets. We recognized a gain on the derivative liability
of $71,801 and $5,186 for the three months ended March 31, 2017 and 2016, which is recorded in other income, net in the Condensed
Consolidated Statements of Operations and Comprehensive Income (Loss).
The
following table summarizes the derivative liability included in other accrued expenses in the Condensed Consolidated Balance Sheets:
Balance at December 31, 2016
|
|
$
|
108,809
|
|
Gain on change of fair value
|
|
|
(71,801
|
)
|
Balance at March 31, 2017
|
|
$
|
37,008
|
|
The
following table summarizes information about warrants outstanding as of March 31, 2017:
Total # of warrants issued and outstanding
|
|
|
1,055,916
|
|
Weighted-average exercise price
|
|
$
|
0.75
|
|
Remaining life (in years)
|
|
|
1.25
|
|
Note 7 - Income Taxes (Restated)
The company recorded
an income tax benefit of $333.0 thousand and an income tax expense of $10.0 thousand for the three months ended March 31, 2017
and 2016, respectively. Our effective tax rate was (51.8)% and 1.7% for the three months ended March 31, 2017 and 2016, respectively.
Our effective tax rates differed from the U.S. statutory corporate tax rate of 35.0% primarily because of the mix of pre-tax income
or loss earned in certain jurisdictions and the change in our valuation allowance.
During
the three months ended December 31, 2016, we determined that valuation allowances against U.S. and U.K. (Rich Dad Education Limited
only) deferred taxes were no longer required. Release of these valuation allowances resulted in a $2.4 million tax benefit, partially
offset by tax on current period book income and other permanent and timing differences resulting in an income tax benefit. Release
of the valuation allowances decreased our effective tax rate by 83.1%.
We
record a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be
realized. As of March 31, 2017 and December 31, 2016, valuation allowances of $4.5 million have been provided against net operating
loss carryforwards and other deferred tax assets. Our valuation allowance decreased by $0.5 million for the three months ended
March 31, 2016. There was no change in valuation allowance during the three months ended March 31, 2017.
As
of March 31, 2017 and December 31, 2016, we had total unrecognized tax benefits of $1.7 million, related to foreign and domestic
tax positions. Of this amount, the Company estimates that $0.6 million, of the unrecognized tax benefits, if recognized, would
impact the effective tax rate. A substantial portion of our liability for uncertain tax benefits is recorded as a reduction of
net operating losses and tax credit carryforwards.
During
the three months ended March 31, 2017 and 2016, we had no material changes in uncertain tax positions. We record interest and
penalties related to unrecognized tax benefits within the provision for income taxes. We believe that no current tax positions
that have resulted in unrecognized tax benefits will significantly increase or decrease within one year. We file income tax returns
in the U.S. federal jurisdiction and in various state and foreign jurisdictions.
The
company was notified by the Internal Revenue Service that its federal income tax returns for the years 2013-2015 were selected
for examination. The company believes its provision for income taxes is adequate; however any assessment would affect the company’s
results of operations and possibly cash flows.
We
were also notified by the Canadian Revenue Agency that our 2014-2016 goods and services tax (GST) and harmonized sales tax (HST)
returns are being audited.
Note
8 - Concentration of Risk
Cash
and cash equivalents
. We maintain deposits in banks in amounts that might exceed the federal deposit insurance available.
Management believes the potential risk of loss on these cash and cash equivalents to be minimal. Cash balances as of March 31,
2017 and December 31, 2016, including foreign subsidiaries, without FDIC coverage were $2.4 million and $1.0 million, respectively.
Revenue.
A
significant portion of our revenue is derived from the Rich Dad brands. Revenue derived from the Rich Dad brands as a percentage
of total revenue was 73.0% and 74.0% for the three months ended March 31, 2017 and 2016, respectively. In addition, we have operations
in the U.S., Canada, the United Kingdom and other foreign markets (see Note 9 —
Segment Information
).
Note 9 - Segment Information (Restated)
We
manage our business in four operating segments based on geographic location for which operating managers are responsible to the
Chief Operations Officer. As such, operating results, as reported below, are reviewed regularly by our Chief Operating 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
|
|
2017
|
|
|
2016
|
|
U.S.
|
|
|
54.8
|
%
|
|
|
63.4
|
%
|
Canada
|
|
|
2.9
|
%
|
|
|
5.1
|
%
|
U.K.
|
|
|
24.4
|
%
|
|
|
22.2
|
%
|
Other foreign markets
|
|
|
17.9
|
%
|
|
|
9.3
|
%
|
Total consolidated revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating
results for the segments are as follows:
|
|
Three
Months Ended
March 31,
|
|
Segment revenue
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
United States
|
|
$
|
12,044
|
|
|
$
|
14,424
|
|
Canada
|
|
|
638
|
|
|
|
1,155
|
|
U.K.
|
|
|
5,355
|
|
|
|
5,049
|
|
Other foreign markets
|
|
|
3,928
|
|
|
|
2,110
|
|
Total consolidated revenue
|
|
$
|
21,965
|
|
|
$
|
22,738
|
|
|
|
Three
Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Segment gross profit contribution *
|
|
(In thousands)
|
|
United States
|
|
$
|
1,593
|
|
|
$
|
3,706
|
|
Canada
|
|
|
(40
|
)
|
|
|
195
|
|
U.K.
|
|
|
1,770
|
|
|
|
1,479
|
|
Other foreign markets
|
|
|
295
|
|
|
|
(536
|
)
|
Total consolidated gross
profit
|
|
$
|
3,618
|
|
|
$
|
4,844
|
|
*
|
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expense.
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Depreciation and amortization expenses
|
|
(In thousands)
|
|
United States
|
|
$
|
28
|
|
|
$
|
33
|
|
Canada
|
|
|
1
|
|
|
|
1
|
|
U.K.
|
|
|
4
|
|
|
|
5
|
|
Other foreign markets
|
|
|
—
|
|
|
|
—
|
|
Total consolidated depreciation and amortization expenses
|
|
$
|
33
|
|
|
$
|
39
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Segment identifiable assets
|
|
(In thousands)
|
|
United States
|
|
$
|
12,011
|
|
|
$
|
12,331
|
|
Canada
|
|
|
827
|
|
|
|
730
|
|
U.K.
|
|
|
9,618
|
|
|
|
3,508
|
|
Other foreign markets
|
|
|
1,013
|
|
|
|
3,795
|
|
Total consolidated identifiable
assets
|
|
$
|
23,469
|
|
|
$
|
20,364
|
|
Note
10 - Commitments and Contingencies
Licensing agreements
.
We are committed to pay royalties for the usage of certain brands, as governed by various licensing agreements, including Rich
Dad, Robbie Fowler and Martin Roberts. Total royalty expenses included in our Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) were $0.9 million and $1.0 million for the three months ended March 31, 2017 and 2016, 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 March 31, 2017 and December 31, 2016, were $3.6 million and
$3.1 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 March 31, 2017 and December 31, 2016,
we did not have a CDAR balance.
Purchase commitments
.
From time to time, the Company enters into non-cancelable commitments to purchase professional services, information technology
licenses and support, and training courses in future periods. The amounts of these non-cancelable commitments made by the Company
at March 31, 2017 and December 31, 2016 were approximately $0.4 million and $0.7 million, respectively.
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.
A substantial
settlement payment or judgment in excess of our accruals could have a material adverse effect on our financial position,
results of operations or cash flows. While the outcome of these proceedings cannot be predicted with certainty, we do not
expect any of these existing matters, individually or in the aggregate, to have a material adverse effect upon our financial
position, results of operations or cash flows. There have been no material changes to the legal proceedings disclosed in the
litigation section of Note 15 -
Commitments and Contingencies
, in the Notes to Consolidated Financial Statements for
the year ended December 31, 2016, included in our 2016 Annual Report.
Watson
v. Whitney Education Group, Inc. Russ Whitney, United Mortgage Corporation, Gulfstream Realty and Development, Inc. Douglas Realty,
Inc. and Paradise Title Services, Inc.
, first filed September 21, 2007 in the 20
th
Judicial Circuit, Lee County,
FL, Case No. 07-CA-011207;
Huron River Area Credit Union v. Jeffrey Watson/ Watson v. Whitney Education Group, Inc. and Russell
Whitney
, Case No. 2008-CA-5870-NC; and
Huron River Area Credit Union v. Jeffrey Watson/ Watson v. Whitney Education Group,
Inc. and Russell Whitney,
Case No. 2008-CA-5877-NC, both filed June 6, 2008 in the 12
th
Judicial Circuit, Sarasota
County, FL Civil Division. In these related cases, Jeffrey Watson (“Watson”) alleged against a subsidiary of the Company
causes of action based upon losses Watson alleges he incurred as the result of his purchase of real property from Gulfstream Realty
and Development, an entity affiliated with Mr. Whitney, and with whom we had a student referral agreement. On February 6, 2017,
we entered into a Settlement Agreement and General Release whereby all claims against the Company and Mr. Whitney were fully and
finally settled and released, and all three cases dismissed with prejudice without any admission of wrongdoing in exchange for
the payment of $30,000 by the Company to the Plaintiff.
Note 11 - Restatements
The
Company is restating its Condensed Consolidated Balance Sheet as of March 31, 2017, and the Condensed Consolidated Statement of
Operations and Comprehensive Income (Loss), Condensed Consolidated Statement of Changes in Stockholders' Deficit, and Condensed
Consolidated Statement of Cash Flow for the period ended March 31, 2017. The restatement shows the previously filed financial
statements, the restatement adjustments and as restated columns for the Condensed Consolidated Balance Sheet as of March 31, 2017,
and the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss), Condensed Consolidated Statement of Changes
in Stockholders' Deficit, and Condensed Consolidated Statement of Cash Flow for the period ended March 31, 2017. The restatement
of our financial statements in this Form 10-Q/A reflects the correction of certain identified errors related to revenue, deferred
revenue, and deferred expenses that affected the timing of our recognition of revenue and deferred transactions that impacted
the first quarter of 2017. The errors relate to our assessment of revenue recognition, deferred revenue, and deferred expenses
associated with our student attendance (i.e. fulfillment) and expired contracts. The restatement also reflects the correction
of errors related to the income tax effects of such revenue errors as well as the correction of certain other tax items in the
quarter ended March 31, 2017.
The
following table represents the Condensed Consolidated Balance Sheet as previously reported, restatement adjustments, and as restated
as of March 31, 2017:
LEGACY EDUCATION ALLIANCE, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
|
|
As
Previously Reported
March 31, 2017
|
|
|
Restatement
Adjustments
|
|
|
As
Restated
March 31, 2017
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,973
|
|
|
$
|
|
|
|
$
|
2,973
|
|
Restricted cash
|
|
|
3,669
|
|
|
|
|
|
|
|
3,669
|
|
Deferred course
expenses
|
|
|
9,818
|
|
|
|
(34
|
)
|
|
|
9,784
|
|
Prepaid expenses
and other current assets
|
|
|
3,707
|
|
|
|
|
|
|
|
3,707
|
|
Inventory
|
|
|
363
|
|
|
|
|
|
|
|
363
|
|
Total current
assets
|
|
|
20,530
|
|
|
|
(34
|
)
|
|
|
20,496
|
|
Property and equipment, net
|
|
|
1,179
|
|
|
|
|
|
|
|
1,179
|
|
Deferred tax asset, net
|
|
|
1,497
|
|
|
|
11
|
|
|
|
1,508
|
|
Other assets
|
|
|
286
|
|
|
|
|
|
|
|
286
|
|
Total assets
|
|
$
|
23,492
|
|
|
$
|
(23
|
)
|
|
$
|
23,469
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,226
|
|
|
$
|
|
|
|
$
|
3,226
|
|
Royalties payable
|
|
|
322
|
|
|
|
|
|
|
|
322
|
|
Accrued course
expenses
|
|
|
2,296
|
|
|
|
|
|
|
|
2,296
|
|
Accrued salaries,
wages and benefits
|
|
|
857
|
|
|
|
|
|
|
|
857
|
|
Other accrued
expenses
|
|
|
2,406
|
|
|
|
|
|
|
|
2,406
|
|
Long-term debt,
current portion
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
Deferred revenue,
current portion
|
|
|
55,268
|
|
|
|
850
|
|
|
|
56,118
|
|
Total current
liabilities
|
|
|
64,386
|
|
|
|
850
|
|
|
|
65,236
|
|
Long-term debt, net of current portion
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
Deferred revenue, net of current portion
|
|
|
688
|
|
|
|
|
|
|
|
688
|
|
Other liabilities
|
|
|
591
|
|
|
|
(343
|
)
|
|
|
248
|
|
Total liabilities
|
|
|
65,693
|
|
|
|
507
|
|
|
|
66,200
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock,
$0.0001 par value, 20,000,000 shares authorized, none issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.0001 par value, 200,000,000 shares authorized, 22,630,927 and 22,630,927 shares issued and outstanding at March
31, 2017 and December 31, 2016, respectively
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
Additional paid-in
capital
|
|
|
11,124
|
|
|
|
|
|
|
|
11,124
|
|
Cumulative foreign
currency translation adjustment
|
|
|
2,370
|
|
|
|
|
|
|
|
2,370
|
|
Accumulated deficit
|
|
|
(55,697
|
)
|
|
|
(530
|
)
|
|
|
(56,227
|
)
|
Total stockholders’
deficit
|
|
|
(42,201
|
)
|
|
|
(530
|
)
|
|
|
(42,731
|
)
|
Total liabilities and stockholders’
deficit
|
|
$
|
23,492
|
|
|
$
|
(23
|
)
|
|
$
|
23,469
|
|
The
following table represents the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss) as previously reported,
restatement adjustments, and as restated as of March 31, 2017:
LEGACY
EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In
thousands, except per share data)
|
|
Three Months Ended March 31,
2017
|
|
|
|
As Previously Reported
|
|
|
Restatement Adjustments
|
|
|
As Restated
|
|
Revenue
|
|
$
|
22,815
|
|
|
$
|
(850
|
)
|
|
$
|
21,965
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct course expenses
|
|
|
12,829
|
|
|
|
34
|
|
|
|
12,863
|
|
Advertising and sales expenses
|
|
|
4,591
|
|
|
|
|
|
|
|
4,591
|
|
Royalty expenses
|
|
|
893
|
|
|
|
|
|
|
|
893
|
|
General and administrative expenses
|
|
|
4,341
|
|
|
|
|
|
|
|
4,341
|
|
Total operating costs and expenses
|
|
|
22,654
|
|
|
|
34
|
|
|
|
22,688
|
|
Income (loss) from operations
|
|
|
161
|
|
|
|
(884
|
)
|
|
|
(723
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
Other income, net
|
|
|
83
|
|
|
|
|
|
|
|
83
|
|
Total other income, net
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
Income (loss) before income taxes
|
|
|
241
|
|
|
|
(884
|
)
|
|
|
(643
|
)
|
Income tax benefit (expense)
|
|
|
(21
|
)
|
|
|
354
|
|
|
|
333
|
|
Net income (loss)
|
|
$
|
220
|
|
|
$
|
(530
|
)
|
|
$
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
Diluted earnings (loss) per common share
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
21,284
|
|
|
|
|
|
|
|
22,631
|
|
Diluted weighted average common shares outstanding
|
|
|
22,631
|
|
|
|
|
|
|
|
22,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
220
|
|
|
$
|
(530
|
)
|
|
$
|
(310
|
)
|
Foreign currency translation adjustments, net of
tax of $0
|
|
|
(298
|
)
|
|
|
|
|
|
|
(298
|
)
|
Total comprehensive income (loss)
|
|
$
|
(78
|
)
|
|
$
|
(530
|
)
|
|
$
|
(608
|
)
|
The
following table represents the Condensed Consolidated Statement of Changes in Stockholders' Deficit as previously reported, restatement
adjustments, and as restated as of March 31, 2017:
LEGACY
EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
(In
thousands)
|
|
|
|
|
|
|
|
Additional
|
|
|
Cumulative
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
foreign
|
|
|
Accumulated
|
|
|
stockholder
|
|
|
|
|
|
stockholder
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
adjustment
|
|
|
deficit
|
|
|
deficit
|
|
|
|
|
|
deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Restatement
|
|
|
As
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
Restated
|
|
Balance at December 31,
2016
|
|
|
22,631
|
|
|
$
|
2
|
|
|
$
|
11,073
|
|
|
$
|
2,668
|
|
|
$
|
(55,917
|
)
|
|
$
|
(42,174
|
)
|
|
|
-
|
|
|
$
|
(42,174
|
)
|
Share-based
compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
51
|
|
|
|
—
|
|
|
|
—
|
|
|
|
51
|
|
|
|
-
|
|
|
|
51
|
|
Foreign
currency translation adjustment, net of tax of $0
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(298
|
)
|
|
|
—
|
|
|
|
(298
|
)
|
|
|
-
|
|
|
|
(298
|
)
|
Net
Income (loss)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
220
|
|
|
|
220
|
|
|
|
(530
|
)
|
|
|
(310
|
)
|
Balance
at March 31, 2017 (Restated)
|
|
|
22,631
|
|
|
$
|
2
|
|
|
$
|
11,124
|
|
|
$
|
2,370
|
|
|
$
|
(55,697
|
)
|
|
$
|
(42,201
|
)
|
|
|
(530
|
)
|
|
$
|
(42,731
|
)
|
The
following table represents the Condensed Consolidated Statement of Cash Flow as previously reported, restatement adjustments,
and as restated as of March 31, 2017:
LEGACY EDUCATION ALLIANCE, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
As
|
|
|
|
|
|
|
|
|
As
|
|
|
|
previously
|
|
|
Restatement
|
|
|
As
|
|
|
previously
|
|
|
|
reported
|
|
|
Adjustments
|
|
|
Restated
|
|
|
reported
|
|
|
|
2017
|
|
|
2017
|
|
|
2017
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
220
|
|
|
$
|
(530
|
)
|
|
$
|
(310
|
)
|
|
$
|
593
|
|
Adjustments
to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
33
|
|
|
|
|
|
|
|
33
|
|
|
|
39
|
|
Gain on change in fair value
of derivatives
|
|
|
(72
|
)
|
|
|
|
|
|
|
(72
|
)
|
|
|
(5
|
)
|
Share-based compensation
|
|
|
51
|
|
|
|
|
|
|
|
51
|
|
|
|
37
|
|
Deferred income taxes
|
|
|
(201
|
)
|
|
|
(354
|
)
|
|
|
(555
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(502
|
)
|
|
|
|
|
|
|
(502
|
)
|
|
|
(454
|
)
|
Deferred course expenses
|
|
|
(751
|
)
|
|
|
34
|
|
|
|
(717
|
)
|
|
|
(54
|
)
|
Prepaid expenses and other receivable
|
|
|
(229
|
)
|
|
|
|
|
|
|
(229
|
)
|
|
|
(261
|
)
|
Inventory
|
|
|
(12
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
30
|
|
Other assets
|
|
|
(27
|
)
|
|
|
|
|
|
|
(27
|
)
|
|
|
—
|
|
Accounts payable-trade
|
|
|
(143
|
)
|
|
|
|
|
|
|
(143
|
)
|
|
|
1,509
|
|
Royalties payable
|
|
|
146
|
|
|
|
|
|
|
|
146
|
|
|
|
144
|
|
Accrued course expenses
|
|
|
1,205
|
|
|
|
|
|
|
|
1,205
|
|
|
|
628
|
|
Accrued salaries, wages and
benefits
|
|
|
16
|
|
|
|
|
|
|
|
16
|
|
|
|
(271
|
)
|
Other accrued expenses
|
|
|
432
|
|
|
|
|
|
|
|
432
|
|
|
|
(589
|
)
|
Deferred revenue
|
|
|
982
|
|
|
|
850
|
|
|
|
1,832
|
|
|
|
(1,034
|
)
|
Other
liabilities
|
|
|
212
|
|
|
|
|
|
|
|
212
|
|
|
|
—
|
|
Net cash
provided by operating activities
|
|
|
1,360
|
|
|
|
-
|
|
|
|
1,360
|
|
|
|
312
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(81
|
)
|
|
|
|
|
|
|
(81
|
)
|
|
|
(20
|
)
|
Net cash
used in investing activities
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
(81
|
)
|
|
|
(20
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Net cash
used in financing activities
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
(2
|
)
|
Effect of exchange rate differences
on cash
|
|
|
(14
|
)
|
|
|
|
|
|
|
(14
|
)
|
|
|
513
|
|
Net increase
in cash and cash equivalents
|
|
|
1,262
|
|
|
|
-
|
|
|
|
1,262
|
|
|
|
803
|
|
Cash and cash equivalents,
beginning of period
|
|
$
|
1,711
|
|
|
$
|
-
|
|
|
$
|
1,711
|
|
|
$
|
4,881
|
|
Cash and cash equivalents,
end of period
|
|
$
|
2,973
|
|
|
$
|
-
|
|
|
$
|
2,973
|
|
|
$
|
5,684
|
|