UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices, including zip code) | (Registrant’s telephone number, including area code) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large Accelerated filer: | ☐ | Accelerated filer: | ☐ |
| ☒ | Smaller reporting company: | ||
| Emerging growth company: |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
☐
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Legacy Education Alliance, Inc. |
Number
of shares of Legacy Education Alliance, Inc. Common Stock, $0.0001 par value, outstanding as of November 15, 2021:
Index to Quarterly Report
on Form 10-Q for
Quarter Ended September 30, 2021
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
Some of the statements in this Quarterly Report on Form 10-Q under the headings “Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make written or oral forward-looking statements in our periodic reports on Forms 10-Q and 8-K, in press releases and other written materials and in oral statements made by our officers, directors or employees to third parties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are often characterized by the use of words such as “outlook, “believes,” “estimates,” “expects,” “projects,” “may,” “intends,” “plans,” “anticipates,” “foresees,” “future,” or by discussions of strategy, plans or intentions; including, but not limited to, our discussions regarding the results projected from the introduction of new brands, products and services, expansion into new geographic markets, combinations with third parties, including, but not limited to our licensors; the development of ecommerce capabilities; projections of international growth; projected increase in profitability from our symposium-style course delivery model that should lead to increased margins; our ability to address or manage corruption concerns in certain locations in which we operate; our ability to address and manage cyber-security risks; our ability to protect our intellectual property, on which our business is substantially dependent; our expectations regarding future divided payments; our ability to manage our relationships with credit card processors, and our expectations regarding the impact of general economic conditions on our business; the effects of the COVID-19 pandemic on the global and national economies and on our business operations and financial results; and the estimates and matters described under the caption “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our assumptions used for the purposes of the forward-looking statements represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances, including the development, acceptance and sales of our products and our ability to raise additional funding sufficient to implement our strategy. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties, and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements are set forth in this report, in our latest Annual Report on Form 10-K, including but not limited to “Part I, Item 1A. Risk Factors” and “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” therein, and in our other filings with the Securities and Exchange Commission (the “SEC”). There may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements. Although we believe the assumptions underlying our forward-looking statements are reasonable, any of these assumptions, and, therefore, also the forward-looking statements based on these assumptions could themselves prove to be inaccurate. In addition, to the extent any inconsistency or conflict exists between the information included in this report and the information included in our prior reports and other filings with the SEC, the information contained in this report updates and supersedes such information.
Forward-looking statements are based on current plans, estimates, assumptions and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them publicly in light of new information or future events.
Presentation of Financial Statements
The terms “Legacy Education Alliance, Inc.,” the “Company,” “we,” “our,” “us” or “Legacy” as used in this report refer collectively to Legacy Education Alliance, Inc., a Nevada corporation (“Legacy”), the registrant, which was formerly known as Priced In Corp., and, unless the context otherwise requires, together with its wholly-owned subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation, other operating subsidiaries and any predecessor of Legacy Education Alliance Holdings, Inc., including Tigrent Inc., a Colorado corporation (“TIGE”).
This Form 10-Q includes financial statements and related notes that present the consolidated financial position, results of operations, comprehensive income, and cash flows of Legacy and its subsidiaries.
ii
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
LEGACY EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Deferred course expenses | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Inventory | ||||||||
| Discontinued operations current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use assets | ||||||||
| Other assets | ||||||||
| Discontinued operations-other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Royalties payable | ||||||||
| Accrued course expenses | ||||||||
| Accrued salaries, wages and benefits | ||||||||
| Operating lease liability, current portion | ||||||||
| Other accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Short-term related party debt, net of unamortized debt discount of $ | ||||||||
| Current portion of long-term debt, net of unamortized debt discount of $ | ||||||||
| Discontinued operations-current liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net of current portion and net of unamortized debt discount of $ | ||||||||
| Deferred tax liability, net | ||||||||
| Other long-term liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred stock, $ | ||||||||
| Common stock, $ | ||||||||
| Additional paid-in capital | ||||||||
| Cumulative foreign currency translation adjustment | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See Notes to Unaudited Consolidated Financial Statements
1
LEGACY EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Direct course expenses | ||||||||||||||||
| Advertising and sales expenses | ||||||||||||||||
| Royalty expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| Income (loss) from operations | ( |
) | ||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense), net | ( |
) | ( |
) | ||||||||||||
| Gain on forgiveness of PPP Loan | ||||||||||||||||
| Total other income (expense), net | ( |
) | ( |
) | ||||||||||||
| Income (loss) from continuing operations before income taxes | ( |
) | ||||||||||||||
| Income tax (expense) benefit | ( |
) | ( |
) | ( |
) | ||||||||||
| Net income (loss) from continuing operations | ( |
) | ||||||||||||||
| Income from discontinued operations | ||||||||||||||||
| Net income from discontinued operations | $ | $ | ||||||||||||||
| Net income (loss) | $ | ( |
) | $ | $ | $ | ||||||||||
| Basic earnings (loss) per common share - continuing operations | $ | ( |
) | $ | $ | $ | ||||||||||
| Basic earnings (loss) per common share - discontinued operations | $ | |||||||||||||||
| Basic earnings (loss) per common share | $ | ( |
) | $ | $ | $ | ||||||||||
| Diluted earnings (loss) per common share - continuing operations | $ | ( |
) | $ | $ | $ | ||||||||||
| Diluted earnings (loss) per common share - discontinued operations | ||||||||||||||||
| Diluted earnings (loss) per common share | $ | ( |
) | $ | $ | $ | ||||||||||
| Basic weighted average common shares outstanding | ||||||||||||||||
| Diluted weighted average common shares outstanding | ||||||||||||||||
| Comprehensive income: | ||||||||||||||||
| Net income (loss) | $ | ( |
) | $ | $ | $ | ||||||||||
| Foreign currency translation adjustments, net of tax of $ |
( |
) | ||||||||||||||
| Total comprehensive income | $ | $ | $ | $ | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements
2
LEGACY EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
(Unaudited)
(In thousands)
| Cumulative foreign | ||||||||||||||||||||||||
| Additional | currency | Total | ||||||||||||||||||||||
| Common stock | paid-in | translation | Accumulated | stockholders’ | ||||||||||||||||||||
| Shares | Amount | capital | adjustment | deficit | deficit | |||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax of $ | — | |||||||||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax of $ | — | ( | ) | ( | ) | |||||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Share-based compensation expense | — | — | — | — | ||||||||||||||||||||
| Issuance of common stock | — | — | — | — | — | |||||||||||||||||||
| Foreign currency translation adjustment, net of tax of $0 | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Cumulative foreign | ||||||||||||||||||||||||
| Additional | currency | Total | ||||||||||||||||||||||
| Common stock | paid-in | translation | Accumulated | stockholders’ | ||||||||||||||||||||
| Shares | Amount | capital | adjustment | deficit | deficit | |||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Beneficial conversion feature for senior secured convertible debenture – related party | — | |||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax of $ | — | |||||||||||||||||||||||
| Net Income | — | |||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Common stock and warrants issued for notes payable to related party from conversion of senior secured convertible debt – related party debt discount | ||||||||||||||||||||||||
| Beneficial conversion feature for senior secured convertible debenture – related party | — | |||||||||||||||||||||||
| Share-based compensation expense | ||||||||||||||||||||||||
| Foreign currency translation adjustment, net of tax of $ | — | ( | ) | ( | ) | |||||||||||||||||||
| Net Income | — | — | — | — | ||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||
| Beneficial conversion feature for senior secured convertible debenture | — | — | — | — | ||||||||||||||||||||
| Foreign currency translation adjustment, net of tax of $0 | — | — | — | — | ||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
See Notes to Unaudited Consolidated Financial Statements
3
LEGACY EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | $ | ||||||
| Less net income from discontinued operations | ||||||||
| Net income from continuing operations | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash lease expense | ||||||||
| Gain on the sale of fixed assets and investment property | ( | ) | ||||||
| Share-based compensation | ||||||||
| Amortization of debt discount | ||||||||
| Gain on debt extinguishment (PPP loan forgiveness) | ( | ) | ||||||
| Deferred income taxes | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Deferred course expenses | ||||||||
| Prepaid expenses and other receivable | ||||||||
| Inventory | ||||||||
| Other assets | ||||||||
| Accounts payable-trade | ( | ) | ||||||
| Royalties payable | ( | ) | ( | ) | ||||
| Accrued course expenses | ( | ) | ( | ) | ||||
| Accrued salaries, wages and benefits | ( | ) | ||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Other accrued expenses | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities - continuing operations | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities - discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of investment property | ||||||||
| Net cash provided by investing activities - continuing operations | ||||||||
| Net cash used in investing activities - discontinued operations | ||||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Principal payments on debt | ( | ) | ( | ) | ||||
| Proceeds from issuance of debt | ||||||||
| Proceeds from borrowing Paycheck Protection Program loan | ||||||||
| Proceeds from debentures including related parties | ||||||||
| Net cash provided by financing activities - continuing operations | ||||||||
| Net cash provided by financing activities - discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate differences on cash | ( | ) | ||||||
| Net decrease in cash and cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| Cash and cash equivalents and restricted cash, beginning of period, including cash in discontinued operations | $ | $ | ||||||
| Cash and cash equivalents and restricted cash, end of period | $ | $ | ||||||
| Supplemental disclosures: | ||||||||
| Cash paid during the period for interest | $ | $ | ||||||
| Cash received the period for income taxes, net of payments | $ | ( | ) | $ | ||||
| Supplemental disclosure of non-cash activity: | ||||||||
| Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets/(decrease) of lease liability due to cancellation of leases | $ | $ | ( | ) | ||||
| Common stock and warrants issued from conversion of senior convertible debenture – related party | $ | $ | ||||||
| Initial recognition of beneficial conversion feature for senior secured convertible debt | $ | $ | ||||||
| Note payable issued for insurance policy financing | $ | $ | ||||||
See Notes to Unaudited Consolidated Financial Statements
4
LEGACY EDUCATION ALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - General
Business Description.
We are a provider of practical, high-quality, and value-based educational training on the topics of personal finance, entrepreneurship, real estate, and financial markets investing strategies and techniques. Our programs are offered through a variety of formats and channels, including free workshops, basic trainings, forums, telephone mentoring, one-on-one mentoring, coaching and e-learning. During the nine months ended September 30, 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 MoussaTM.
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 courses expire, both of which could be several quarters after the student purchases a program and pays the fee. We recognize revenue immediately when we sell (i) our proprietary products delivered at time of sale and (ii) products fulfilled by third parties. 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 temporarily 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, for example, through his or her first real estate transaction. During the third quarter of 2021, we resumed providing on-site mentorships on a limited basis.
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 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 of 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
Since January 1, 2020, we have operated under two brands:
| ● | Building Wealth with LegacyTM: 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 the fourth quarter of 2020, the Company began transitioning to its proprietary brand name Building Wealth with LegacyTM. During the nine months ended September 30, 2021, we marketed our products and services exclusively under this brand. |
5
| ● | 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 free workshops nationwide, 3-day trainings and large stage events with Tarek presenting as the keynote speaker, all selling into our advanced training products. In November 2020, we suspended conducting Homemade Investor by Tarek El MoussaTM sales events to focus on developing our proprietary Building Wealth with LegacyTM brand. |
Basis of Presentation.
The terms “Legacy Education Alliance, Inc.,” the “Company,” “we,” “our,” “us” or “Legacy” as used in this report refer collectively to Legacy Education Alliance, Inc., a Nevada corporation (“Legacy”), the registrant, which was formerly known as Priced In Corp., and, unless the context otherwise requires, together with its wholly-owned subsidiary, Legacy Education Alliance Holdings, Inc., a Colorado corporation, other operating subsidiaries and any predecessor of Legacy Education Alliance Holdings, Inc. including Tigrent Inc., a Colorado corporation. All intercompany balances and transactions have been eliminated in consolidation. As discussed in Note 4 “Discontinued Operations”, the sale of 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 nine months ended September 30, 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.
6
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. On September 30, 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:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash, cash equivalents, and restricted cash shown in the cash flow statement | $ | $ | ||||||
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.
7
Stock Warrants.
The Company accounts for stock warrants as equity in accordance with ASC 480 – Distinguishing Liabilities from Equity. Stock warrants are accounted for a derivative in accordance with ASC 815 – Derivatives and Hedging, if the stock warrants contain other terms that could potentially require “net cash settlement” and therefore, do not meet the scope exception for treatment as a derivative.
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 includes 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.
8
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.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The application of this guidance will not have a material impact on our financial statements.
In 2019, the FASB issued ASU No. 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes.” This standard simplifies the accounting and disclosure requirements for income taxes by clarifying existing guidance to improve consistency in application of ASC 740. This standard also removed the requirement to calculate income tax expense for the stand-alone financial statements of wholly owned subsidiaries. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2020. Different components of the guidance require retrospective, modified retrospective or prospective adoption, and early adoption is permitted. We adopted this guidance in the first quarter of 2021, and the impact on our financial statements was not material.
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 $
On
April 20, 2021, pursuant to the 2015 Incentive Plan, we awarded a total of
On
August 27, 2021, we granted
9
Note 4 - Discontinued Operations
On January 27, 2021, Legacy Education Alliance Australia PTY Limited (“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 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 Limited (“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.
The major classes of assets and liabilities of the entities classified as discontinued operations were as follows:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Major classes of assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Deferred course expenses | ||||||||
| Discontinued operations-current assets | ||||||||
| Other assets | ||||||||
| Total major classes of assets - discontinued operations | $ | $ | ||||||
| Major classes of liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued course expenses | ||||||||
| Other accrued expenses | ||||||||
| Deferred revenue | ||||||||
| Total major classes of liabilities - discontinued operations | $ | $ | ||||||
10
The financial results of the discontinued operations are as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (in thousands) | ||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Total operating costs and expenses | ||||||||||||||||
| (Loss) income from discontinued operations | ( | ) | ||||||||||||||
| Other expense, net | ( | ) | ||||||||||||||
| Income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
| Net income from discontinued operations | $ | $ | $ | $ | ||||||||||||
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
Weighted average unvested restricted stock awards outstanding for the three months ended September 30, 2021 were not included in the computation of our diluted EPS, as inclusion would have been anti-dilutive, however for the three months ended September 30, 2020 and nine months ended September 30, 2021 and 2020, they were included as they would have been dilutive.
11
The calculations of basic and diluted EPS are as follows:
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||
| Average | Loss | Average | Earnings | |||||||||||||||||||||
| Net | Shares | Per | Net | Shares | Per | |||||||||||||||||||
| Loss | Outstanding | Share | Income | Outstanding | Share | |||||||||||||||||||
| (in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||
| Basic: | ||||||||||||||||||||||||
| As reported | $ | ( | ) | $ | ||||||||||||||||||||
| Amounts allocated to unvested restricted shares | — | — | ( | ) | ( | ) | ||||||||||||||||||
| Amounts available to common stockholders | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
| Diluted: | ||||||||||||||||||||||||
| Amounts allocated to unvested restricted shares | — | — | ||||||||||||||||||||||
| Amounts reallocated to unvested restricted shares | — | ( | ) | |||||||||||||||||||||
| Amounts available to stockholders and assumed conversions | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 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 | $ | $ | ||||||||||||||||||||||
| Amounts allocated to unvested restricted shares and warrants | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Amounts available to common stockholders | $ | $ | $ | $ | ||||||||||||||||||||
| Diluted: | ||||||||||||||||||||||||
| Amounts allocated to unvested restricted shares | ||||||||||||||||||||||||
| Stock warrants | ||||||||||||||||||||||||
| Incremental shares to be issued for convertible note | — | |||||||||||||||||||||||
| Amounts reallocated to unvested restricted shares | ( |
) | ( |
) | ||||||||||||||||||||
| Amounts available to stockholders and assumed conversions | $ | $ | $ | $ | ||||||||||||||||||||
12
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). |
As of September 30, 2021 and 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 its financial instruments approximates their fair value due either to the length of maturity interest rates that approximate prevailing market rates.
13
Note 7 - Short-Term and Long-Term Debt
| (in thousands) | As of September 30, 2021 |
As of December 31, 2020 |
||||||
| Senior Secured Convertible Debenture | $ | $ | ||||||
| Debt Discount | ( |
) | ||||||
| Senior Secured Convertible Debenture, net | ||||||||
| Paycheck Protection Program loan | ||||||||
| Paycheck Protection Program loan 2 | ||||||||
| IPFS Insurance Premium Note Payable | ||||||||
| Total debt, net of debt discount | ||||||||
| Less current portion of long-term debt | ( |
) | ||||||
| Total long-term debt, net of current portion | $ | $ | ||||||
Short-term related party debt:
| (in thousands) | As of September 30, 2021 | As of December 31, 2020 | ||||||
| Senior Secured Convertible Debenture - related party | $ | $ | ||||||
| Debt Discount-related party | ( | ) | ||||||
| Senior Secured Convertible Debenture - related party, net | $ | $ | ||||||
The following is a summary of scheduled debt maturities by year (in thousands):
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total debt, net of debt discount | $ |
First Draw Paycheck Protection Program Note Agreement.
On
April 27, 2020, Elite Legacy Education, Inc. (“ELE”), a subsidiary of the Company, entered into a Promissory Note in favor
of Pacific Premier Bank (“PPBI”), the lender, through the Small Business Administration (“SBA”) Paycheck Protection
Program (“PPP”) established pursuant to the CARES Act. The unsecured loan (the “First Draw PPP Loan”) proceeds
were in the amount of $
In March 2021, ELE was notified
that PPBI sold substantially all of its PPP loans, including ELE’s loan, to The Loan Source, Inc. (“TLS”), which, together
with its servicing partner, ACAP SME, LLC, took over the forgiveness and ongoing servicing process for ELE’s PPP loan. On August
4, 2021, ELE received notice from TLS that its First Draw PPP Loan had been partially forgiven in the amount of $
14
Senior Secured Convertible Debenture and Exercise of Conversion Rights.
On
March 8, 2021, the Company issued a $
On August 27, 2021, the Company
amended the terms of the LTP Debenture to reduce LTP’s maximum funding obligation from $
Second Draw 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 $
15
Debenture, Warrant and Guaranty Agreements, and Exercise of Conversion Rights.
On
May 4, 2021, Legacy Education Alliance, Inc., a Nevada corporation (the “Company”), issued a
Senior Secured Convertible Debenture, Advisory Agreement, and Intercreditor Agreement
On
August 27, 2021, the Company issued a $
16
Pursuant to the terms of the
GLD Debenture, on August 27, 2021, the Company entered into an Advisory Services Agreement with GLD Advisory Services, LLC, (GLDAS) an
affiliate of GLD. GLDAS will provide the Company and its subsidiaries with business, finance and organizational strategy, advisory, consulting
and other services related to the business of the Company. In lieu of cash compensation, on the effective date of the agreement, August
27, 2021, GLDAS received fully vested
On August 27, 2021, in connection with the GLD Debenture, the Company entered into an Intercreditor Agreement with GLD, LTP, and Barry Kostiner, a related party. LTP and GLD agreed that LTP’s and GLD’s respective rights under the LTP Debenture and GLD Debenture would rank equally and ratably in all respects to one another including, without limitation, rights in collateral, right and priority of payment and repayment of principal, interest, and all fees and other amounts. The Intercreditor Agreement also appoints Barry Kostiner as Servicing Agent to act on behalf of all GLD and LTP, subject to the terms of the agreement, with respect to (a) enforcing GLD’s and LTP’s rights and remedies, and the Company’s obligations, under the Debentures.
IPFS Premium Finance Agreement
On
July 30, 2021, the Company entered into a premium finance agreement for insurance coverage in the amount of $
Note 8 - Stock Warrants
On
May 4, 2021, the Company issued
On
June 11, 2021, the Company issued
A summary of the warrant activities for the nine months ended September 30, 2021, is as follows:
| Warrants Outstanding | ||||||||||||||||
| Number
of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | Aggregate Intrinsic Value (in 000’s)1 | |||||||||||||
| Balance as of January 1, 2021 | ||||||||||||||||
| Granted | $ | - | ||||||||||||||
| Balance as of September 30, 2021 | $ | |||||||||||||||
| Exercisable as of September 30, 2021 | $ | |||||||||||||||
| 1 | The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock price of $ |
17
Note 9 - 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
We
recorded income tax benefit of $
The
Company assessed the weight of all available positive and negative evidence and determined it was more likely than not that future earnings
will be sufficient to realize the associated deferred tax assets. As of September 30, 2021 and December 31, 2020, we retained a valuation
allowance of $
During
the nine months ended September 30, 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 $
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 10 - Concentration Risk
Cash and cash equivalents.
We
maintain deposits in banks in amounts that might exceed the federal deposit insurance available. Management believes the potential risk
of loss on these cash and cash equivalents to be minimal. All cash balances as of September 30, 2021 and December 31, 2020, including
foreign subsidiaries, without FDIC coverage were $
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 September 30, 2021
and 2020, Rich Dad brands provided
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.
18
Note 11 - Segment Information
We manage our business in three segments based on geographic location for which operating managers are responsible to the Chief Executive Officer. These segments include: (i) North America, (ii) United Kingdom, and (iii) Other Foreign Markets. Operating results, as reported below, are reviewed regularly by our Chief Executive Officer, or Chief Operating Decision Maker (“CODM”) and other members of the executive team.
The proportion of our total revenue attributable to each segment is as follows:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| As a percentage of total revenue | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| North America | % | % | % | % | ||||||||||||
| U.K. | — | % | % | % | % | |||||||||||
| Other foreign markets | — | % | % | — | % | % | ||||||||||
| Total consolidated revenue | % | % | % | % | ||||||||||||
Operating results for the segments are as follows:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Segment revenue | (In thousands) | (In thousands) | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| U.K. | ||||||||||||||||
| Other foreign markets | ||||||||||||||||
| Total consolidated revenue | $ | $ | $ | $ | ||||||||||||
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Segment gross profit contribution * | (In thousands) | (In thousands) | ||||||||||||||
| North America | $ | ( | ) | $ | $ | $ | ||||||||||
| U.K. | ( | ) | ||||||||||||||
| Other foreign markets | ||||||||||||||||
| Total consolidated gross profit | $ | ( | ) | $ | $ | $ | ||||||||||
| * | Segment gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expenses. |
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Depreciation and amortization expenses | (In thousands) | (In thousands) | ||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| U.K. | ||||||||||||||||
| Other foreign markets | ( | ) | ||||||||||||||
| Total consolidated depreciation and amortization expenses | $ | $ | $ | $ | ||||||||||||
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Segment identifiable assets | (In thousands) | |||||||
| North America | $ | $ | ||||||
| U.K. | ||||||||
| Other foreign markets | ||||||||
| Total consolidated identifiable assets | $ | $ | ||||||
19
Note 12 - 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 September 30, 2021, we have deferred revenue of
$
The following tables disaggregate our segment revenue by revenue source:
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||
| North America | U.K. | Other foreign markets | Total Consolidated Revenue | North America | U.K. | Other foreign markets | Total Consolidated Revenue | |||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
| Revenue Type: | ||||||||||||||||||||||||||||||||
| Seminars | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Products | ||||||||||||||||||||||||||||||||
| Coaching and Mentoring | ||||||||||||||||||||||||||||||||
| Online and Subscription | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||||||||||
| North America | U.K. | Other foreign markets | Total Consolidated Revenue | North America | U.K. | Other foreign markets | Total Consolidated Revenue | |||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||
| Revenue Type: | ||||||||||||||||||||||||||||||||
| Seminars | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Products | ||||||||||||||||||||||||||||||||
| Coaching and Mentoring | ||||||||||||||||||||||||||||||||
| Online and Subscription | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
20
Note 13 - 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.
Custodial and Counterparty Risk.
We
are subject to custodial and other potential forms of counterparty risk in respect to a variety of contractual and operational matters.
In the course of ongoing Company-wide risk assessment, management monitors our arrangements that involve potential counterparty risk,
including the custodial risk associated with amounts prepaid to certain vendors and deposits with credit card and other payment processors.
Deposits held by our credit card processors at September 30, 2021 and December 31, 2020, were $
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
Holdings, 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 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 $
21
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 £
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 £
Other Legal Proceedings.
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 “CVA”) under the UK Insolvency Act 1986 (the “IA”) and the UK Insolvency Rules 2016 (the “IR”). Under the terms of the CVA, 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 CVA 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 CVA in satisfaction of the non-student creditors’ respective claims against ELE UK. During the quarter ended September 30, 2021, and pursuant to the CVA, student creditors of ELE UK were provided the opportunity to receive trainings from an independent training provider in satisfaction of their respective claims against ELE UK; as a result, all obligations of ELE UK to student creditors have been satisfied. Pursuant to the CVA, 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.
22
Note 14 - 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
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 non-lease 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 September 30, 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 September 30, 2021 and December 31, 2020:
| Classification on the Balance Sheet | September 30, 2021 | December 31, 2020 | ||||||
| (in thousands) | ||||||||
| Operating lease right of use assets | $ | $ | ||||||
| Total lease assets | $ | $ | ||||||
| Current operating lease liabilities | $ | $ | ||||||
| Long-term operating lease liabilities | $ | $ | ||||||
| Total lease liabilities | $ | $ | ||||||
Lease cost for the three and nine months ended September 30, 2021 and 2020
The table below presents the lease related costs recorded on the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| Classification | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
| General and administrative expenses | $ | $ | $ | $ | ||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
23
Other Information
The table below presents supplemental cash flow information related to leases for the nine months ended September 30, 2021 and 2020:
| Nine
Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| (in thousands) | ||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows for operating leases | $ | $ | ||||||
| Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets/(decrease) of lease liability due to cancellation of leases | ( | ) | ||||||
Lease Terms and Discount Rates
The table below presents certain information related to the weighted average remaining lease terms and weighted average discount rates for the Company’s operating leases as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | |||||||
| Weighted average remaining lease term - operating leases | ||||||||
| Weighted average discount rate - operating leases | % | % | ||||||
There are no lease arrangements where the Company is the lessor.
Note 15 - Subsequent Events
On
October 15, 2021, the Company entered into a Stock Purchase and Option Agreement (“the Purchase Agreement”) with NCW, LLC,
a Wyoming limited liability company, pursuant to which, subject to certain conditions, (i) NCW purchased
On November 4, 2021, Cary Sucoff, a member of the Board of Directors (the “Board”) of the Company and of its Nominating & Corporate Governance Committee (Chair) and its Audit Committee, resigned as a Board member, effective immediately. Mr. Sucoff’s resignation is not related to any disagreement with the Company’s operations, policies, or practices. Effective November 4, 2021, the Company amended the terms of the 315,000 restricted common shares granted to Mr. Sucoff, so that all of such shares are fully vested.
On
November 4, 2021, Peter W. Harper, a member of the board and of its Audit Committee (Chair) and its Compensation Committee, resigned
as a Board member, effective immediately. Mr. Harper’s resignation is not related to any disagreement with the Company’s
operations, policies, or practices. Effective November 4, 2021, the Company amended the terms of the
On November 4, 2021, James E. May, the General Counsel and Secretary of the company and its subsidiaries, resigned from all such roles effective immediately.
On November 8, 2021, Vanessa Guzmán-Clark, the Vice President and Chief Financial Officer of the Company, resigned from all such roles effective immediately. Mr. Barry Kostiner, a member of the Board and Manager of Capital Markets, will assume the interim role of principal financial and accounting officer of the Company. Mr. Kostiner shall be appointed Secretary of the Company.
24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
You should read the following discussion of our financial condition and results of operations with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. This discussion contains forward-looking statements and involves numerous risks, uncertainties, assumptions and other important factors that could cause the actual results, performance or our achievements, or industry results, to differ materially from historical results, any future results, or performance or achievements expressed or implied by such forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Information.”
Business Overview
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 nine months ended September 30, 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 MoussaTM.
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 temporarily 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). During the third quarter of 2021, we resumed providing on-site mentorships on a limited basis. 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. Today we are a global company that has cumulatively served more than two million students from more than 150 countries and territories over the course of our operating history.
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 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 of 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.
25
Since January 1, 2020, we have operated under two brands:
| ● | Building Wealth with LegacyTM: 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 the fourth quarter of 2020, the Company began transitioning to its proprietary brand name Building Wealth with LegacyTM. During the nine months ended September 30, 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 free workshops nationwide, 3-day trainings and large stage events with Tarek presenting as the keynote speaker, all selling into our advanced training products. In November 2020, we suspended conducting Homemade Investor by Tarek El MoussaTM sales events to focus on developing our proprietary Building Wealth with LegacyTM brand. |
Recent Developments
Impact from COVID-19 Pandemic.
Historically, our operations have relied heavily on our and our students’ ability to travel and attend live events where large groups of people gather in local markets within each of the segments in which we operate. On March 11, 2020, the World Health Organization (WHO) declared the COVID-19 outbreak as a pandemic. As a result of worldwide restrictions on travel and social distancing, in March 2020 we temporarily ceased conducting live sales and fulfillment and furloughed substantially all of our employees. We resumed sales operations in June 2020 with online sales events selling into our suite of online, on-demand, and over-the-phone products. We also resumed online, on-demand, and over-the-phone fulfillment activities in June 2020. We resumed live operations on a limited basis, in November 2020, with events in Florida. The Company expects to conduct additional live events in other areas as lockdown restrictions continue to ease and hopes to return to a normal schedule over the coming months. The 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.
The ultimate impact from COVID-19 on the Company’s operations and financial results will depend on, among other things, the ultimate severity and scope of the pandemic, the efficacy and public acceptance of the various vaccinations against COVID-19, the pace at which governmental and private travel restrictions and public concerns about public gatherings will ease, the rate at which historically large increases in unemployment rates will decrease, if at all, and the speed with which the economy recovers. We are not able to fully quantify the impact that these factors will have on our financial results, but expect developments related to COVID-19 to continue to affect the Company’s financial performance in 2021 and beyond.
26
Results of Operations
Our financial results in the third quarter of 2021 were negatively impacted by the COVID-19 pandemic, slower than we anticipated establishment of our new Homemade Investor brand, as well as the effect of winding down our Rich Dad brand and other matters as disclosed in the litigation section of Note 13 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements.
Our Results of Operations in 2021 and 2020 were as follows:
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| (in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Revenue | $ | 1,379 | $ | 7,439 | $ | 7,361 | $ | 21,564 | ||||||||
| Operating costs and expenses: | ||||||||||||||||
| Direct course expenses | 675 | 1,234 | 1,899 | 5,077 | ||||||||||||
| Advertising and sales expenses | 729 | 64 | 1,343 | 1,977 | ||||||||||||
| Royalty expenses | — | 9 | — | 68 | ||||||||||||
| General and administrative expenses | 1,172 | 1,129 | 3,568 | 3,607 | ||||||||||||
| Total operating costs and expenses | 2,576 | 2,436 | 6,810 | 10,729 | ||||||||||||
| Income (loss) from operations | (1,197 | ) | 5,003 | 551 | 10,835 | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (35 | ) | (105 | ) | (421 | ) | (208 | ) | ||||||||
| Other income (expense), net | 9 | (16 | ) | 6 | (23 | ) | ||||||||||
| Gain on forgiveness of PPP Loan | 910 | — | 910 | — | ||||||||||||
| Total other income (expense), net | 884 | (121 | ) | 495 | (231 | ) | ||||||||||
| Income (loss) from continuing operations before income taxes | (313 | ) | 4,882 | 1,046 | 10,604 | |||||||||||
| Income tax (expense) benefit | 118 | (926 | ) | (797 | ) | (1,921 | ) | |||||||||
| Net income (loss) from continuing operations | (195 | ) | 3,956 | 249 | 8,683 | |||||||||||
| Income from discontinued operations | — | 733 | 171 | 2,842 | ||||||||||||
| Net income from discontinued operations | — | 733 | 171 | 2,842 | ||||||||||||
| Net income (loss) | $ | (195 | ) | $ | 4,689 | $ | 420 | $ | 11,525 | |||||||
| Basic earnings (loss) per common share - continuing operations | $ | (0.01 | ) | $ | 0.17 | $ | 0.02 | $ | 0.38 | |||||||
| Basic earnings (loss) per common share - discontinued operations | — | 0.03 | 0.00 | 0.12 | ||||||||||||
| Basic earnings (loss) per common share | $ | (0.01 | ) | $ | 0.20 | $ | 0.02 | $ | 0.50 | |||||||
| Diluted earnings (loss) per common share - continuing operations | $ | (0.01 | ) | $ | 0.17 | $ | 0.01 | $ | 0.37 | |||||||
| Diluted earnings (loss) per common share - discontinued operations | — | 0.03 | 0.00 | 0.12 | ||||||||||||
| Diluted earnings (loss) per common share | $ | (0.01 | ) | $ | 0.20 | $ | 0.01 | $ | 0.49 | |||||||
| Basic weighted average common shares outstanding | 33,064 | 23,138 | 26,373 | 23,046 | ||||||||||||
| Diluted weighted average common shares outstanding | 33,064 | 23,252 | 41,776 | 23,192 | ||||||||||||
| Comprehensive income: | ||||||||||||||||
| Net income (loss) | $ | (195 | ) | $ | 4,689 | $ | 420 | $ | 11,525 | |||||||
| Foreign currency translation adjustments, net of tax of $0 | 336 | (704 | ) | 387 | 524 | |||||||||||
| Total comprehensive income | $ | 141 | $ | 3,985 | $ | 807 | $ | 12,049 | ||||||||
27
Our operating results are expressed as a percentage of revenue in the table below:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | 100% | 100% | 100% | 100% | ||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Direct course expenses | 49.0 | 16.6 | 25.8 | 23.5 | ||||||||||||
| Advertising and sales expenses | 52.9 | 0.9 | 18.2 | 9.2 | ||||||||||||
| Royalty expenses | — | 0.1 | 0.0 | 0.3 | ||||||||||||
| General and administrative expenses | 85.0 | 15.1 | 48.5 | 16.7 | ||||||||||||
| Total operating costs and expenses | 186.9 | 32.7 | 92.5 | 49.7 | ||||||||||||
| Income (loss) from operations | (86.9 | ) | 67.3 | 7.5 | 50.3 | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense, net | (2.5 | ) | (1.4 | ) | (5.7 | ) | (1.0 | ) | ||||||||
| Other income (expense), net | 0.7 | (0.2 | ) | 0.0 | (0.1 | ) | ||||||||||
| Gain on forgiveness of PPP Loan | 66.0 | — | 12.4 | — | ||||||||||||
| Total other income (expense), net | 64.2 | (1.6 | ) | 6.7 | (1.1 | ) | ||||||||||
| Income (loss) from continuing operations before income taxes | (22.7 | ) | 65.7 | 14.2 | 49.2 | |||||||||||
| Income tax (expense) benefit | 8.6 | (12.5 | ) | (10.8 | ) | (8.9 | ) | |||||||||
| Net income (loss) from continuing operations | (14.1 | ) | 53.2 | 3.4 | 40.3 | |||||||||||
| Income from discontinued operations | — | 9.9 | 2.3 | 13.2 | ||||||||||||
| Net income from discontinued operations | — | 9.9 | 2.3 | 13.2 | ||||||||||||
| Net income (loss) | (14.1 | )% | 63.1 | % | 5.7 | % | 53.5 | % | ||||||||
Outlook
Cash sales were $1.4 million for the nine months ended September 30, 2021 compared to $3.6 million for the nine months ended September 30, 2020, a decrease of $2.2 million or 61.1%. The decrease was driven by a $2.2 million decrease in our North American segment.
We believe that cash sales remain an important metric when evaluating our operating performance. Pursuant to 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. Our students pay for their courses in full up-front or through payment agreements with independent third parties.
Operating Segments
Our operations are managed through three operating segments: (i) North America, (ii) the United Kingdom, and (iii) Other Foreign Markets. The proportion of our total revenue attributable to each segment is as follows:
| Three
Months Ended September 30, | Nine
Months Ended September 30, | |||||||||||||||
| As a percentage of total revenue | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| North America | 100.0 | % | 97.0 | % | 63.5 | % | 96.7 | % | ||||||||
| U.K. | — | % | 0.6 | % | 36.5 | % | 1.1 | % | ||||||||
| Other foreign markets | — | % | 2.4 | % | — | % | 2.2 | % | ||||||||
| Total consolidated revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
28
North America
Revenue derived from the Rich Dad brands in our North America segment was $0.7 million and $5.7 million or as a percentage of total segment revenue was 53.8% and 79.2% for the three months ended September 30, 2021 and 2020 and $2.5 million and $16.2 million or as a percentage of total segment revenue was 54.3% and 77.5% for the nine months ended September 30, 2021 and 2020, respectively. The majority pertained to real estate-related education, with the balance pertaining to financial markets training. Revenue derived from our Homemade Investor brand was $101.0 thousand and $112.0 thousand or as a percentage of total segment revenue was 7.3% and 1.6% for the three months ended September 30, 2021 and 2020 and $447.0 thousand and $492.0 thousand or as a percentage of total segment revenue was 9.6% and 2.4% for the nine months ended September 30, 2021 and 2020, respectively.
The North America segment revenue was $1.4 million and $7.2 million or as a percentage of total revenue was 100.0% and 97.0% for the three months ended September 30, 2021 and 2020, and $4.7 million and $20.9 million or as a percentage of total revenue was 63.5% and 96.7% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in revenue of $5.8 million or 80.6% during the three months ended September 30, 2021 compared to the same period in 2020, was due to a decrease in recognition of revenue from attendance (i.e. fulfillment) of $0.6 million or 52.5% and decrease in revenue from expired contracts of $5.2 million or 86.2%. The decrease in revenue of $16.2 million or 77.5% during the nine months ended September 30, 2021 compared to the same period in 2020, was due to a decrease in recognition of revenue from attendance (i.e. fulfillment) of $5.8 million or 77.8% and decrease in revenue from expired contracts of $10.4 million or 77.5%.
U.K.
Revenue derived from the Rich Dad brands in our U.K. segment was $0.0 and $47.0 thousand or as a percentage of total segment revenue was 0.0% and 100.0% for the three months ended September 30, 2021 and 2020 and $1.8 million and $0.2 million or as a percentage of total revenue was 66.7% and 66.7% for the nine months ended September 30, 2021 and 2020, respectively. The majority pertained to real estate-related education, with the balance pertaining to financial markets education.
The U.K. segment revenue was $0.0 and $47.0 thousand or as a percentage of total revenue was 0.0% and 0.6% for the three months ended September 30, 2021 and 2020 and $2.7 million and $0.2 million or as a percentage of total revenue was 36.5% and 1.1% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in revenue of $47.0 thousand or 100% for the three months ended September 30, 2021 compared to the same period in 2020, was due to a decrease in revenue from expired contracts of $11.0 thousand and $36.0 thousand decrease in attendance revenue (i.e. fulfillment). The increase in revenue of $2.5 million for the nine months ended September 30, 2021 compared to the same period in 2020, was due to an increase in revenue from expired contracts of $2.4 million and $0.1 million increase in attendance revenue (i.e. fulfillment). During the quarter ended June 30, 2021, we satisfied all outstanding obligations to students of our subsidiary Elite Legacy Education UK LTD (ELE UK) within the U.K. segment. There was no change during the current quarter ended September 30, 2021.
Other Foreign Markets
Historically, we have operated in other foreign markets, including Australia, New Zealand, South Africa, Hong Kong and other European, Asian and African countries. During the three and nine months ended September 30, 2021, as a result of the COVID-19 pandemic, we placed in liquidation certain entities that operated in this segment, resulting in zero revenues and expenses from continuing operations in the other foreign markets segment for the three and nine months ended September 30, 2021. Our other foreign markets segment revenue for the three and nine months ended September 30, 2020 was $0.2 million and $0.5 million or as a percentage of total revenue was 2.4% and 2.2%, respectively.
Three months ended September 30, 2021 Compared to Three months ended September 30, 2020
Revenue
Revenue was $1.4 million for the three months ended September 30, 2021, compared to $7.4 million for the three months ended September 30, 2020. Revenue decreased $6.0 million or 81.1% during the three months ended September 30, 2021 compared to the same period in 2020. The decrease in revenue was mainly due to the decrease in recognition of revenue from expired contracts of $5.2 million or 86.2% and decreased attendance (i.e. fulfillment) of $0.8 million or 60.1%. The decrease in attendance was mainly due to governmental and private travel restrictions and students’ concerns around public gatherings and social distancing as a result of the coronavirus pandemic.
Cash sales were $0.7 million for the three months ended September 30, 2021, compared to $0.3 million for the three months ended September 30, 2020, an increase of $0.4 million or 133.3%. The increase was driven by a $0.4 million increase due to the Company resuming live events in its North American segment.
29
Operating expenses
Total operating costs and expenses were $2.6 million for the three months ended September 30, 2021 compared to $2.4 million for the three months ended September 30, 2020, an increase of $0.2 million. The increase was due to a $0.6 million increase in advertising and sales expenses and $0.1 million increase in general and administrative expenses, partially offset by a $0.5 million decrease in direct course expenses.
Direct course expenses
Direct course expenses relate to our free preview workshops, basic and elite training, and individualized mentoring programs, consisting of instructor fees, facility costs, salaries, commissions, and fees associated with our field representatives and related travel expenses. Direct course expenses were $0.7 million for the three months ended September 30, 2021, compared to $1.2 million for the three months ended September 30, 2020, a decrease of $0.5 million or 41.7%, which was related to decreases in sales and training compensation, due to the economic impact of the COVID-19 pandemic on consumers.
Advertising and sales expenses
We generally obtain most of our potential customers through internet-based advertising. Advertising and sales expenses consist of purchased media to generate registrations to our free preview workshops and costs associated with supporting customer recruitment. We obtain the majority of our customers through free preview workshops. These preview workshops are offered in various metropolitan areas in North America, United Kingdom, and other international markets. Prior to the actual workshop, we spend a significant amount of money in the form of advertising through various media channels.
Advertising and sales expenses were $0.7 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively, an increase of $0.6 million. As a percentage of revenue, advertising and sales expenses were 52.9% and 0.9% of revenue for the three months ended September 30, 2021 and 2020, an increase of 52.0%. The increase in advertising and sales expenses was due to resuming live events in our North American segment.
Royalty expenses
We are required to pay royalties under the licensing and related agreements pursuant to which we develop, market, and sell Rich Dad and Homemade Investor branded live seminars, training courses, and related products worldwide. Royalty expenses were $0.0 thousand for the three months ended September 30, 2021, compared to $9.0 thousand for the three months ended September 30, 2020, a decrease of $9.0 thousand as a result of the Company selling courses under its proprietary brand Building Wealth with Legacy TM exclusively.
General and administrative expenses
General and administrative expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expenses and travel expenses for the corporate staff, as well as depreciation and amortization expenses. General and administrative expenses were $1.2 million for the three months ended September 30, 2021 compared to $1.1 million for the three months ended September 30, 2020, an increase of $0.1 million, or 9.1%. The increase in general and administrative expenses was a direct result of supporting live events.
Gain on forgiveness of PPP Loan
In March, 2021, we were notified that PPBI sold substantially all of its PPP loans, including ELE’s loan, to The Loan Source, Inc. (“TLS”), which, together with its servicing partner, ACAP SME, LLC, took over the forgiveness and ongoing servicing process for ELE’s PPP loan. On August 4, 2021, we received notice from TLS that its First Draw PPP Loan had been partially forgiven in the amount of $899 thousand in principal and $11 thousand in interest. Thus, during the three months ended September 30, 2021, we recognized the gain on forgiveness of PPP Loan in the total amount of $910 thousand (see Note 7 – “Short-Term and Long-Term Debt” to our Consolidated financial statements for further discussion).
30
Income tax expense
We recorded income tax benefit of $0.1 million and income tax expense of $1.0 million for the three months ended September 30, 2021 and 2020, respectively. Our effective tax rate was 37.7% and 19.5% for the three months ended September 30, 2021 and 2020, respectively. Our effective tax rates differed from the U.S. statutory corporate tax rate of 26%, primarily because of the mix of pre-tax income or loss earned in certain jurisdictions.
We record a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. As of September 30, 2021 and December 31, 2020, valuation allowances of $3.4 million and $3.7 million, respectively have been provided against net operating loss carryforwards and other deferred tax assets.
Net income (loss) from continuing operations
Net loss from continuing operations was ($0.2) million or ($0.01) per basic and diluted common share for the three months ended September 30, 2021 compared to net income from continuing operations of $4.0 million or $0.17 per basic and diluted common share for the three months ended September 30, 2020, a decrease in net income from continuing operations of $4.2 million or $0.18 per basic and diluted common share.
Net income from discontinued operations
There was no net income (loss) from discontinued operations for the three months ended September 30, 2021. Net income from discontinued operations was $0.7 million or $0.03 per basic and diluted common share for the three months ended September 30, 2020.
Net income (loss)
Net loss was ($0.2) million or ($0.1) per basic and diluted common share for the three months ended September 30, 2021, compared to a net income of $4.7 million or $0.20 per basic and diluted common share for the three months ended September 30, 2020, a decrease in net income of $4.9 million or $0.21 per basic and diluted common share.
Nine months ended September 30, 2021 Compared to Nine months ended September 30, 2020
Revenue
Revenue was $7.4 million for the nine months ended September 30, 2021 compared to $21.6 million for the nine months ended September 30, 2020. Revenue decreased $14.2 million or 65.7% during the nine months ended September 30, 2021 compared to the same period in 2020. The decrease in revenue was mainly due to a decrease in recognition of revenue from expired contracts of $8.2 million or 59.9% and decreased attendance (i.e. fulfillment) of $6.0 million or 76.4%. The decrease in attendance was mainly due to governmental and private travel restrictions and students’ concerns around public gatherings and social distancing as a result of the coronavirus pandemic.
Cash sales were $1.4 million for the nine months ended September 30, 2021 compared to $3.6 million for the nine months ended September 30, 2020, a decrease of $2.2 million or 61.1%. The decrease was driven by a $2.2 million decrease in our North American segment.
Operating expenses
Total operating costs and expenses were $6.8 million for the nine months ended September 30, 2021 compared to $10.9 million for the nine months ended September 30, 2020, a decrease of $4.1 million or 37.6%. The decrease was primarily due to a $3.2 million decrease in direct course expenses, a $0.7 million decrease in advertising and sales expenses, a $0.1 million decrease in general and administrative expenses and a $0.1 million decrease in royalty expenses. These decreases were related to disruptions in operations and sales activities due to the impact of the COVID-19 pandemic.
31
Direct course expenses
Direct course expenses relate to our free preview workshops, basic and elite training, and individualized mentoring programs, consisting of instructor fees, facility costs, salaries, commissions, and fees associated with our field representatives and related travel expenses. Direct course expenses were $1.9 million for the nine months ended September 30, 2021, compared to $5.1 million for the nine months ended September 30, 2020, a decrease of $3.2 million or 62.7%, which was related to decreases in sales and training compensation, due to the economic impact of the COVID-19 pandemic on consumers.
Advertising and sales expenses
We generally obtain most of our potential customers through internet-based advertising. Advertising and sales expenses consist of purchased media to generate registrations to our free preview workshops and costs associated with supporting customer recruitment. We obtain the majority of our customers through free preview workshops. These preview workshops were offered in various metropolitan areas in North America, United Kingdom, and other international markets. Prior to the actual workshop, we spend a significant amount of money in the form of advertising through various media channels.
Advertising and sales expenses were $1.3 million and $2.0 million for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $0.7 million, or 35.0%. As a percentage of revenue, advertising and sales expenses were 18.2% and 9.2% of revenue for the nine months ended September 30, 2021 and 2020, a decrease of 9.0%.
Royalty expenses
We are required to pay royalties under the licensing and related agreements pursuant to which we develop, market, and sell Homemade Investor branded live seminars, training courses, and related products worldwide. Royalty expenses were $0.0 million for the nine months ended September 30, 2021 compared to $0.1 million for the nine months ended September 30, 2020, a decrease of $0.1 million as a result of the Company selling courses under its proprietary brand Building Wealth with Legacy TM exclusively.
General and administrative expenses
General and administrative expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expenses and travel expenses for the corporate staff, as well as depreciation and amortization expenses. General and administrative expenses were $3.6 million and $3.7 million for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $0.1 million or 2.7%.
Gain on forgiveness of PPP Loan
In March, 2021, we were notified that PPBI sold substantially all of its PPP loans, including ELE’s loan, to The Loan Source, Inc. (“TLS”), which, together with its servicing partner, ACAP SME, LLC, took over the forgiveness and ongoing servicing process for ELE’s PPP loan. On August 4, 2021, we received notice from TLS that its First Draw PPP Loan had been partially forgiven in the amount of $899.0 thousand in principal and $11.0 thousand in interest. Thus, during the nine months ended September 30, 2021, we recognized the gain on forgiveness of PPP Loan in the total amount of $910.0 thousand (see Note 7 – “Short-Term and Long-Term Debt” to our Consolidated financial statements for further discussion).
Income tax expense
We recorded income tax expense of $0.8 million and $1.9 million for the nine months ended September 30, 2021, and 2020, respectively. Our effective tax rate was 76.2% and 18.1% for the nine months ended September 30, 2021, and 2020, respectively. Our effective tax rates differed from the U.S. statutory corporate tax rate of 21.0%, primarily because of the mix of pre-tax income or loss earned in certain jurisdictions.
We record a valuation allowance when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. As of September 30, 2021, and December 31, 2020, valuation allowances of $3.4 million and $3.7 million, respectively have been provided against net operating loss carryforwards and other deferred tax assets.
32
Net income from continuing operations
Net income from continuing operations was $0.2 million or $0.2 per basic and $0.1 per diluted common share for the nine months ended September 30, 2021, compared to net income from continuing operations of $8.7 million or $0.38 per basic and $0.37 per diluted common share for the nine months ended September 30, 2020, a decrease in net income from continuing operations of $8.5 million or $0.36 per basic and diluted common share.
Net income from discontinued operations
Net income from discontinued operations was $0.2 million or $0.00 per basic and diluted common share for the nine months ended September 30, 2021, compared to net income from discontinued operations for the nine months ended September 30, 2020, of $2.8 million or $0.12 per basic and diluted common share, a decrease in net income from discontinued operations of $2.6 million or $0.12 per basic and diluted common share.
Net income
Net income was $0.4 million or $0.2 per basic and $0.1 per diluted common share for the nine months ended September 30, 2021, compared to a net income of $11.5 million or $0.50 per basic and $0.49 diluted common share for the nine months ended September 30, 2020, a decrease in net income of $11.1 million or $0.48 per basic and diluted common share.
Critical Accounting Policies
For a discussion of our critical accounting policies and estimates that require the use of significant estimates and judgments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Known Trends and Uncertainties
In general, we believe that our products and services appeal to those who seek increased financial freedom. If we experience a prolonged decline in demand for our products and services, it could have a material adverse effect on our future operating results.
Historically, we have funded our working capital and capital expenditures using cash and cash equivalents. However, given our decreased operating cash flows during the past two years combined, it has become necessary for us to incur in long-term debt and in equity transactions to ensure the future viability of our business. Our cash flows are subject to a number of risks and uncertainties, including, but not limited to, earnings, favorable terms from our merchant processors, seasonality, and fluctuations in foreign currency exchange rates.
We continue to take steps to ensure our expenses are in line with our projected cash sales and liquidity requirements for 2021 and based upon current and anticipated levels of operations, we believe cash and cash equivalents on hand will not be sufficient to fund our expected financial obligations and anticipated liquidity requirements for the fiscal year 2021. However, we are exploring alternative sources of capital, but there can be no assurances any such capital will be obtained. For the nine months ended September 30, 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.
33
The following is a summary of our cash flow activities for the periods stated (in thousands):
| Nine
Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | (4,270 | ) | (5,077 | ) | ||||
| Net cash provided by investing activities | — | 370 | ||||||
| Net cash provided by financing activities | 2,792 | 2,400 | ||||||
| Effect of exchange rate differences on cash | 98 | (771 | ) | |||||
| Net decrease in cash and cash equivalents and restricted cash | (1,380 | ) | (3,078 | ) | ||||
Operating Cash Flows and Liquidity
Net cash used in operating activities was $4.3 million in the nine months ended September 30, 2021 compared to net cash used in operating activities of $5.1 million in the nine months ended September 30, 2020, representing a period-over-period increase of $0.8 million. This increase was primarily the result of the Company resuming live events in its North American segment.
Investing Cash Flows
There was no cash used in or provided by investing activity in the nine months ended September 30, 2021. Net cash provided by investing activities totaled $370 thousand in the nine months ended September 30, 2020, representing our sale of property and equipment and investment property in the nine months ended September 30, 2020.
Financing Cash Flows
Our consolidated capital structure as of September 30, 2021, was 18% debt and 82% equity. As of December 31, 2020, our consolidated capital structure was 14% debt and 86% equity.
Net cash provided by financing activities totaled $2.8 million during the nine months ended September 30, 2021, representing our proceeds from issuance of the Senior Secured Convertible Debenture to related party and proceeds from borrowings of the second Paycheck Protection Program loan. Net cash provided by financing activities totaled $2.4 million during the nine months ended September 30, 2020, representing our proceeds from issuance of the Paycheck Protection Program loan and the net proceeds of the new Promissory Note.
We expect that our working capital deficit, which is primarily a result of our deferred revenue balance, will continue for the foreseeable future. As of September 30, 2021, and December 31, 2020, our consolidated current deferred revenue was $4.3 million and $10.4 million, respectively.
Our cash and cash equivalents were, and continue to be, invested in short-term, liquid, money market funds. Restricted cash balances consisted primarily of funds on deposit with credit card processors and cash collateral with our credit card vendors. Restricted cash balances held by credit card processors are unavailable to us unless we discontinue sale of our products or discontinue the usage of a vendor’s credit card. As sales of the products and services related to our domestic business have decreased, our credit card vendors have not returned funds held as collateral, resulting in higher restricted cash balances.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2021.
34
Item 4. Controls and Procedures.
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. As of September 30, 2021, based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were not effective.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation to assess the effectiveness of our internal control over financial reporting as of September 30, 2021, based upon criteria set forth in the Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment, as of September 30, 2021, we have determined that we presently do not have an internal control system or procedures that are effective and may be relied upon in connection with our financial reporting. The weaknesses in our internal control system that were identified by our management generally include weakness that present a reasonable possibility that a material misstatement of our annual or interim financial statements will not be identified, prevented or detected on a timely basis, and specifically include:
| ● | Financial Reporting Systems: The weakness in our internal control system identified by our management relate to the implementation of our new ERP system, which went into production on January 1, 2018. Our ERP software is not able to produce complete and accurate information in regard to revenues and deferred revenues for consistent financial reporting purposes. |
If we fail to effectively remediate any of these material weaknesses or other material weaknesses or deficiencies in our control environment that may be identified in the future, we may be unable to accurately report our financial results or report them within the time frames required by law or exchange regulations, to the extent applicable, which would have a negative impact on us and our share price.
This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Quarterly Report. As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, there were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are subject to a number of contingencies, including litigation, from time to time. For further information regarding legal proceedings, see Note 13 – “Commitments and Contingencies”, to our Consolidated financial statements.
Item 1A. Risk Factors.
For information regarding risk factors, please refer to Part I, Item 1A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and the Cautionary Note Regarding Forward Looking Statements as set forth in our Current Report on Form 10-K filed with the SEC on April 9, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
As previously disclosed, on March 8, 2021, Legacy Education Alliance, Inc., a Nevada corporation (the “Company”), issued a Senior Secured Convertible Debenture (“Debenture”) to Legacy Tech Partners, LLC (“LTP”), a Delaware limited liability company and a related party, under which LTP loaned the Company the principal sum of $375 thousand (the “Initial Loan”). The Initial Loan 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 Initial Loan 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”). 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. The proceeds from the LTP Debenture were used to extinguish liabilities of the Company and to fund the development of the Education Technology (EdTech) business. On May 4, 2021 LTP exercised its conversion rights with respect to $330 thousand of the outstanding principal of the Initial Loan 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 were issued on June 11, 2021.
As previously disclosed, on May 4, 2021, the Company issued a 10% Subordinated Debenture in the principal amount of $25 thousand to Michel Botbol, the Company’s Chairman and Chief Executive Officer. The Subordinated Debenture called for interest at a rate of 10% and would have been 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 were issued to Mr. Botbol on May 4, 2021.
36
On August 27, 2021, the Company issued a $500 thousand Senior Secured Convertible Debenture (“Debenture”) to GLD Legacy Holdings, LLC, (GLD). 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 August 27, 2026. 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 August 27, 2026 (the “Warrants”). 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. No warrants have been issued as of September 30, 2021. Proceeds from the GLD Debenture will be used as working capital for the development of the Company’s Legacy EdTech business and for working capital for the operation of the Company’s seminar business.
There were no other sales or repurchases of the Company’s equity securities during the nine months ended September 30, 2021.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
37
Item 6. Exhibits
| * | Filed herewith. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LEGACY EDUCATION ALLIANCE, INC. | ||
| Dated: November 15, 2021 | By: | /s/ MICHEL BOTBOL |
| Michel Botbol | ||
| Chairman of the Board and Chief Executive Officer | ||
| Dated: November 15, 2021 | By: | /s/ Barry Kostiner |
| Barry Kostiner | ||
| Board of Director and Interim Principal Financial and Accounting Officer | ||
39