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 training courses, forums, telephone mentoring, one-on-one mentoring, coaching and e-learning. During
the nine months ended September 30, 2022, we marketed our products and services under our Building Wealth with LegacyTM
brand. During the year ended December 31, 2021, we marketed our products and services under two brands: Building Wealth with LegacyTM;
and Homemade Investor by Tarek El Moussa.
Our
students pay for their courses in full up-front or through payment agreements with independent third parties. Under United States of
America generally accepted accounting principles (“U.S. GAAP”), we recognize revenue upon the earlier of (i) when our students
take their courses or (ii) the term for taking their course expires, both of which could be several quarters after the student purchases
a program and pays the associated fee. We recognize revenue immediately when we sell our (i) proprietary products delivered at time of
sale and (ii) third-party product 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 telephone
mentoring (10 to 16 weekly one-on-one or one-on-many telephone sessions). Mentoring involves a subject matter expert interacting with
the student remotely or in-person and guiding the student, for example, through his or her first real estate transaction, providing a
real hands-on experience.
We
were founded in 1996, and through a reverse merger, became a publicly-held company in November 2014.
Historically,
our operations have relied heavily on our and our students’ ability to travel and attend live events where large groups of people
gather in local markets within each of the segments in which we operate. Due to the COVID-19 pandemic, and the resulting worldwide restrictions
on travel and social distancing, we have temporarily suspended live events and shifted to online live training and on-demand training
to our students.
Historically,
our operations have been managed through three operating segments: (i) North America, (ii) United Kingdom, and (iii) Other Foreign Markets.
Basis
of Presentation.
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, 2021 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, 2022 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 U.S. 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. U.S. GAAP requires us to make estimates and judgments in several
areas, including, but not limited to, those related to deferred revenues, reserve for breakage, deferred costs, revenue recognition,
commitments and contingencies, fair value of financial instruments, useful lives of property and equipment, right-of-use assets, and
income taxes. These estimates are based on management’s knowledge about current events and expectations about actions we may undertake
in the future. Actual results could differ materially from those estimates.
Cash
and Cash Equivalents.
We
consider all highly liquid instruments with an original maturity of three months or less to be cash or cash equivalents. We continually
monitor and evaluate our investment positions and the creditworthiness of the financial institutions with which we invest and maintain
deposit accounts. When appropriate, we utilize Certificate of Deposit Account Registry Service (“CDARS”) to reduce banking
risk for a portion of our cash in the United States. A CDAR consists of numerous individual investments, all below the FDIC limits, thus
fully insuring that portion of our cash. At September 30, 2022 and December 31, 2021, 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:
Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Cash and cash equivalents | |
$ | 37 | | |
$ | 576 | |
Restricted cash | |
| 112 | | |
| 374 | |
Total cash, cash equivalents, and restricted cash shown in the cash flow statement | |
$ | 149 | | |
$ | 950 | |
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815 - Derivatives
and Hedging Activities.
Applicable
U.S. 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 U.S. 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.
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 included current federal and state
income tax expense, as well as deferred federal and state income tax expense.
Losses
from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from
the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses
in jurisdictions for which no benefit can be realized. The effects of unusual and infrequent items are recognized in the impacted interim
period as discrete items.
The
estimated annual effective tax rate may be affected by nondeductible expenses and by our projected earnings mix by tax jurisdiction.
Adjustments to the estimated annual effective income tax rate are recognized in the period during which such estimates are revised.
We
have established valuation allowances against our deferred tax assets, including net operating loss carryforwards and income tax credits.
Valuation allowances take into consideration our expected ability to realize these deferred tax assets and reduce the value of such assets
to the amount that is deemed more likely than not to be realizable. Our ability to realize these deferred tax assets is dependent on
achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual
results and expected trends on a quarterly basis. A change in our valuation allowance would impact our income tax expense/benefit and
our stockholders’ deficit and could have a significant impact on our results of operations or financial condition in future periods.
Discontinued
Operations.
ASC
205-20-45, Presentation of Financial Statements Discontinued Operations requires discontinued operations to be reported if the disposal
of a business component represents a strategic shift that has a major effect on an entity’s operations and financial reports. We
have determined that the sale of the assets and deferred revenues of Legacy UK, and liquidations of Legacy HK, Legacy Australia and Tigrent
Canada meet this criterion. Accordingly, the assets, deferred revenues, and income statement of these entities were transferred to discontinued
operations to close out the business. See Note 4 - Discontinued Operations, for additional disclosures regarding these entities.
Note
2 - New Accounting Pronouncements
Accounting
Standards Adopted in the Current Period.
We
have implemented all new accounting pronouncements that are in effect and that management believes would materially affect our financial
statements.
Recently
Issued Accounting Pronouncements.
In
August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06
– Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s
Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
The ASU simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for
(1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result,
entities will not separately present in equity an embedded conversion feature in such debt. Instead, they will account for a convertible
debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest
expense and increase reported net income for entities that have issued a convertible instrument that was within the scope of those models
before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings
per share, and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning
after December 15, 2023, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is
currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
Note
3 - Share-Based Compensation
We
account for share-based awards under the provisions of ASC 718, Compensation—Stock Compensation. Accordingly, share-based
compensation cost is measured at the grant date based on the fair value of the award and we expense these costs using the straight-line
method over the requisite service period.
Share-based
compensation expenses related to our restricted stock grants were $14 thousand and $51.0 thousand for the three months ended September
30, 2022 and 2021, respectively, and $63.80 thousand and $82.0 thousand for the nine months ended September 30, 2022 and 2021, respectively,
which are reported as a separate line item in the consolidated statements of changes in stockholders’ deficit.
On
May 5, 2022, pursuant to the 2015 Incentive Plan, we granted 250,000 shares of restricted stock to an external consultant, which are
fully vested at the grant date. The grant date price per share was $0.165 for a total grant date fair value of $41.3 thousand.
Note
4 - Discontinued Operations
On
January 27, 2021, Legacy Australia, a wholly owned subsidiary of the Company, 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 Legacy Australia
(“Australia Liquidators”), to supervise a Creditors Voluntary Liquidation of Legacy Australia. Subject to the approval of
the creditors of Legacy Australia at a meeting held on February 23, 2021, Australian Eastern Daylight Time (“AEDT”) (February
22, 2021, EST), the Australia Liquidators will wind down the business of Legacy 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 Legacy 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 11, 2022, the proof of debt was rejected by the liquidator of Legacy
UK and extended twenty-one days from the receipt of the notice to provide additional documentation supporting the claim to the Court
of England. The additional information was submitted to the Legacy UK liquidators on March 21, 2022.
On
March 2, 2021, Legacy Education Alliance Holdings, Inc. the sole shareholder of Legacy Hong Kong, a subsidiary of the Company, adopted
a resolution to wind up voluntarily the affairs of Legacy 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 Legacy Hong Kong (“Hong Kong Liquidators”). At a meeting of the creditors of Legacy Hong Kong held on March 2, 2021, the
creditors similarly approved the voluntary winding up of Legacy Hong Kong and the appointment of Cosimo Borrelli and Li Chung Ngai (also
known as Anson Li), as the Hong Kong Liquidators. The Hong Kong Liquidators will wind up the business of Legacy 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 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 UK, one of our UK subsidiaries, obtained an order from the High Court of Justice, Business
and Property Courts of England and Wales (the “English Court”) with respect to the business and affairs of Legacy UK. Pursuant
to the Administration Order of November 15, 2019 from the English Court, the two individuals appointed as administrators engaged a third
party to market Legacy UK’s business and assets for sale to one or more third parties. On November 26, 2019, Legacy UK’s
assets and deferred revenues sold for £300 thousand (British pounds) to Mayflower Alliance LTD. We did not receive any proceeds
from the sale of Legacy UK. Further details, including the resolution of claims and liabilities, and other information regarding the
administration may not be forthcoming for several months. The impact of this transaction is reflected as a discontinued operation in
the consolidated financial statements. We are awaiting outcome from the meeting of the creditors on March 25, 2022.
The
major classes of assets and liabilities of the entities classified as discontinued operations were as follows:
Schedule of Assets and Liabilities
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Major classes of assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | — | | |
$ | — | |
Deferred course expenses | |
| — | | |
| — | |
Discontinued operations-current assets | |
| — | | |
| — | |
Other assets | |
| 32 | | |
| 33 | |
Total major classes of assets - discontinued operations | |
$ | 32 | | |
$ | 33 | |
Major classes of liabilities | |
| | | |
| | |
Accounts payable | |
$ | 3,297 | | |
$ | 3,638 | |
Accrued course expenses | |
| 515 | | |
| 587 | |
Other accrued expenses | |
| 1,784 | | |
| 439 | |
Deferred revenue | |
| 5,055 | | |
| 5,181 | |
Total major classes of liabilities - discontinued operations | |
$ | 10,651 | | |
$ | 9,845 | |
The
financial results of the discontinued operations are as follows:
Schedule of Discontinued Operations Income Statement
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Revenue | |
$ | - | | |
$ | 40 | |
Total operating costs and expenses | |
| - | | |
| 907 | |
(Loss) Income from discontinued operations | |
| - | | |
| (867 | ) |
Other expense, net | |
| - | | |
| (80 | ) |
Income tax benefit | |
| - | | |
| 1,118 | |
Net income from discontinued operations | |
$ | - | | |
$ | 171 | |
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 1,186,685 and 2,328,043 for the three months ended September 30, 2022
and 2021, respectively, and 1,305,018 and 1,438,505 for the nine months ended September 30, 2022 and 2021, respectively.
The
calculations of basic and diluted EPS are as follows:
Schedule of Calculations of Basic and Diluted EPS
| |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
| |
| | |
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 | |
$ | (1,054 | ) | |
| 34,683 | | |
$ | (0.03 | ) | |
$ | 420 | | |
| 27,812 | | |
| | |
Amounts allocated to unvested restricted shares and warrants | |
| — | | |
| — | | |
| | | |
| (22 | ) | |
| (1,439 | ) | |
| | |
Amounts available to common stockholders | |
$ | (1,054 | ) | |
| 34,683 | | |
$ | (0.03 | ) | |
$ | 398 | | |
| 26,373 | | |
$ | 0.02 | |
Diluted: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Amounts allocated to unvested restricted shares | |
| — | | |
| — | | |
| | | |
| 23 | | |
| 1,439 | | |
| | |
Stock warrants | |
| — | | |
| — | | |
| | | |
| — | | |
| 3,964 | | |
| | |
Shares of common stock to be issued for convertible note | |
| — | | |
| — | | |
| | | |
| 31 | | |
| 10,000 | | |
| | |
Amounts reallocated to unvested restricted shares | |
| — | | |
| — | | |
| | | |
| (23 | ) | |
| — | | |
| | |
Amounts available to stockholders and assumed conversions | |
$ | (1,054 | ) | |
| 34,683 | | |
$ | (0.03 | ) | |
$ | 429 | | |
| 41,776 | | |
$ | 0.01 | |
| |
Three Months Ended September 30, 2022 | | |
Three Months Ended September 30, 2021 | |
| |
| | |
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 | |
$ | 346 | | |
| 35,696 | | |
| | | |
$ | (195 | ) | |
| 33,064 | | |
| | |
Amounts allocated to unvested restricted shares | |
| — | | |
| — | | |
| | | |
| - | | |
| - | | |
| | |
Amounts available to common stockholders | |
$ | 346 | | |
| 35,696 | | |
$ | 0.01 | | |
$ | (195 | ) | |
| 33,064 | | |
$ | (0.01 | ) |
Diluted: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Amounts allocated to unvested restricted shares | |
| — | | |
| — | | |
| | | |
| - | | |
| - | | |
| | |
Amounts reallocated to unvested restricted shares | |
| — | | |
| — | | |
| | | |
| - | | |
| — | | |
| | |
Amounts available to stockholders and assumed conversions | |
$ | 346 | | |
| 35,696 | | |
$ | 0.01 | | |
$ | (195 | ) | |
| 33,064 | | |
$ | (0.01 | ) |
Note
6 - Fair Value Measurements
ASC
820, Fair Value Measurements and Disclosures (“ASC 820”) 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 and |
|
|
|
|
● |
Inputs
that are derived principally from or corroborated by observable market data by correlation or other means; and |
|
● |
Level
3-Inputs that are unobservable and reflect our assumptions used in pricing the asset or liability based on the best information available
under the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). |
For
the three month ended September 30, 2022, the Company has the derivative liabilities measured at fair value on a recurring basis which
are valued at level 3 measurement. At December 31, 2021, the Company did 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 either to the length of maturity or interest rates that approximate prevailing market rates.
Note
7 - Short-Term and Long-Term Debt
Schedule of Short-term and Long-term Debt
(in thousands) | |
As of
September 30, 2022 | | |
As of
December 31, 2021 | |
Senior Secured Convertible Debenture | |
| 500 | | |
$ | 500 | |
EIDL Loan | |
| 200 | | |
| | |
Debt Discount | |
| (382 | ) | |
| (467 | ) |
Senior Secured Convertible Debenture, net | |
| 318 | | |
| 33 | |
Paycheck Protection Program loan | |
| 1,000 | | |
| 1,000 | |
Paycheck Protection Program loan 2 | |
| 766 | | |
| 1,900 | |
IPFS Insurance Premium Note Payable | |
| — | | |
| 11 | |
Total debt | |
| 2,084 | | |
| 2,944 | |
Less current portion of long-term debt | |
| (344 | ) | |
| (1,011 | ) |
Total long-term debt, net of current portion | |
$ | 1,740 | | |
$ | 1,933 | |
Short-term
related party debt:
Schedule Short-term Related Party Debt
(in thousands) | |
As of
September 30, 2022 | | |
As of
December 31, 2021 | |
Senior Secured Convertible Debenture - related party | |
$ | 1,178 | | |
$ | 346 | |
Debt Discount-related party | |
| - | | |
| (204 | ) |
Senior Secured Convertible Debenture - related party, net | |
$ | 1,178 | | |
$ | 142 | |
The
following is a summary of scheduled debt maturities by year (in thousands):
Schedule of Debt Maturities
| |
| | |
2022 | |
$ | 1,216 | |
2023 | |
| 353 | |
2024 | |
| 353 | |
2025 | |
| 353 | |
2026 | |
| 353 | |
Thereafter | |
| 633 | |
Total debt | |
$ | 3,262 | |
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 $1,899,832. The First Draw PPP Loan bears interest at a fixed rate of 1% per annum and is payable in 17 equal monthly
payments of interest only and a final payment of the full principal plus interest for one month. Under the terms of the CARES Act, PPP
loan recipients can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Such forgiveness will be
determined, subject to limitations, based on the use of loan proceeds for payroll costs and mortgage interest, rent or utility costs
and the maintenance of employee and compensation levels.
In
March 2021, ELE was notified that PPBI sold substantially all of its PPP loans, including the First Draw PPP 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 the First Draw 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 $900 thousand in principal and $11 thousand in interest. The remaining outstanding principal balance of $1.0
million was originally due on April 24, 2022. On March 29, 2022, the documents to extend the maturity date to April 24, 2025 was signed.
The extension agreement was executed on April 1, 2022. The loan is a term of sixty (60) months at 1.0% interest rate with monthly payments
in the amount of $29 thousand. Interest paid was $16 thousand and $0.0 for the nine months ended September 30, 2022 and 2021, respectively.
Senior
Secured Convertible Debenture and Exercise of Conversion Rights.
On
March 8, 2021, the Company issued a $375 thousand Senior Secured Convertible Debenture (“LTP Debenture”) to Legacy Tech Partners,
LLC (“LTP”), a related party. The LTP Debenture accrues interest at a rate of 10% and is due on the earlier of the occurrence
of certain liquidity events with respect to the Company and March 8, 2022. The LTP Debenture may be converted at any time after the issue
date into shares of the Company’s Common Stock (the “LTP Conversion Shares”) at a price equal to $0.05 per share. Together
with each LTP 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 “LTP Warrants”). Under the term of the original LTP Debenture, LTP had an obligation to lend the Company an additional
$625 thousand under the same terms prior to June 30, 2022, and an option to fund an additional $4 million under the same terms prior
to March 8, 2024. LTP also has the option to extend the maturity date of each loan it makes to the Company, including the initial loan
of $375 thousand for a term not to exceed four years from the original maturity date of that loan. Net proceeds were $314 thousand after
legal fees of $61 thousand, which are included in our consolidated statement of operations for the year ended December 31, 2021. The
LTP Debenture is secured by a lien on all the Company’s assets. The Company’s U.S. subsidiaries entered into guaranties on
March 9, 2021 in favor of LTP under which such subsidiaries guaranteed the Company’s obligations under the LTP Debenture and granted
LTP a lien on all assets of such subsidiaries. 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. The aggregate number of shares issuable upon
conversion of the LTP Debenture and upon the exercise of the LTP 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 LTP Debenture and the exercise of
the LTP Warrants. At the annual meeting of stockholders of the Company held on July 2, 2021, the stockholders approved the future issuance
of shares to LTP upon conversion under the LTP Debenture in excess of the 19.9% limitation, but no such shares have been issued. On May
4, 2021, LTP exercised its conversion rights with respect to $330 thousand of the outstanding principal at the conversion price resulting
in the issuance of 6.6 million shares of common stock to LTP. In addition, an equal number of warrants were issued on June 11, 2021 (see
Note 8 – Stock Warrants). The cash receipt date, March 10, 2021, was used for the market value of stock on measurement date,
at $0.155 per common share, resulting in the recognition of debt discount and additional paid-in capital of $375 thousand, respectively,
within the consolidated balance sheet for the year ended December 31, 2021, which represents the intrinsic value of the conversion option.
The Company evaluated the convertible debenture under ASC 470-20 and recognized a debt discount of $375 thousand related to the beneficial
conversion feature during the year ended December 31, 2021, with a corresponding credit to additional paid-in capital. The related amortization
of the debt discount to interest expense for the nine months ended September 30, 2022 and 2021 were $14 thousand and $0.0 thousand, respectively.
On
August 27, 2021, the Company amended the terms of the LTP Debenture to reduce LTP’s maximum funding obligation from $1 million
to $675 thousand and to require LTP to fund the remaining principal balance of $300 thousand no later than October 15, 2021. On October
15, 2021, the Company received $100 thousand of the remaining $300 thousand funding obligation of LTP. On October 27, 2021, LTP funded
the remaining funding obligation of $200 thousand. The Company evaluated the convertible debenture under ASC 470-20 and recognized a
debt discount of $228 thousand related to the beneficial conversion feature during the year ended December 31, 2021, with a corresponding
credit to additional paid-in capital. The related amortization of the debt discount to interest expense for the nine months ended September
30, 2022 and 2021 amounted to $194 thousand and $0.0 thousand, respectively.
On
March 8, 2022, the Company defaulted on the LTP Debenture in the remaining amount left unconverted of $46 thousand and $9 thousand accrued
interest. There was no acceleration of interest rate and no triggering of guarantees under the note agreement to increase any debt obligations.
Second
Draw Paycheck Protection Program Note Agreement.
On
April 20, 2021, ELE closed on an unsecured Paycheck Protection Program Note agreement (the “Promissory Note”) to borrow $1,899,832
from Cross River Bank, the lender, pursuant to the PPP, and extended to “Second Draw” PPP loans as described below (the “Second
Draw PPP Loan”). The PPP is intended to provide loans to qualified businesses to cover payroll and certain other identified costs.
Funds from the loan may only be used for certain purposes, including payroll, benefits, rent, utilities, and certain covered operating
expenses. All or a portion of the loan may be forgivable, as provided by the terms of the PPP. The Second Draw PPP Loan has an interest
rate of 1.0% per annum and a term of 60 months. Payments will be deferred in accordance with the CARES Act, as modified by the Paycheck
Protection Program Flexibility Act of 2020; however, interest will accrue during the deferral period. If all or any portion of the loan
is not forgiven in accordance with the terms of the program, ELE will be obligated to make monthly payments of principal and interest
in amounts to be calculated after the amount of loan forgiveness, if any, is determined to repay the balance of the loan in full prior
to maturity. The Promissory Note contains customary events of default relating to, among other things, payment defaults and breaches
of representations. ELE may prepay the loan at any time prior to maturity with no prepayment penalties. ELE got forgiveness for this
loan as of September 30, 2022 for an amount of $1.14 million.
Debenture,
Warrant and Guaranty Agreements, and Exercise of Conversion Rights.
On
May 4, 2021, the Company issued a 10% Subordinated Secured Convertible Debenture (“Subordinated Debenture”) in the principal
amount of $25 thousand to Michel Botbol, the Company’s Chairman and Chief Executive Officer at the time. 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 was convertible at any time after the issuance date into shares of the Company’s
common stock (the “Botbol Conversion Shares”) at a price equal to $0.05 per share (“Conversion Price”). Together
with each Botbol Conversion Share, a warrant would be issued with a strike price of $0.05 per share and an expiration date of May 4,
2026 (the “Botbol Warrants”). Mr. Botbol also had 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 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 Subordinated 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 Subordinated Debenture was to extinguish
liabilities of the Company and to fund working capital, general corporate purposes and the development of administrative functions. The
aggregate number of shares issuable upon conversion of the Subordinated Debenture and upon the exercise of the Botbol 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 Subordinated Debenture and the exercise of the Botbol 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 on May 4, 2021 (see Note 8 – Stock Warrants).
The Botbol Warrants will not be listed for trading on any national securities exchange. The Botbol Warrants and the shares issuable upon
conversion of the Subordinated Debenture are not being registered under the Securities Act.
Senior
Secured Convertible Debenture, Advisory Agreement, and Intercreditor Agreement.
On
August 27, 2021, the Company issued a $500 thousand Senior Secured Convertible Debenture (the “GLD Debenture”) to GLD Legacy
Holdings, LLC (“GLD”). The GLD 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 or August 27, 2026. The GLD Debenture may be converted at any time after the issue
date into shares of the Company’s common stock (the “GLD Conversion Shares”) at a price equal to $0.05 per share. Together
with each GLD 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 “GLD Warrants”). The cash receipt date, August 27, 2021, was used for the market value of stock on measurement
date, at $0.10 per common share, resulting in the recognition of debt discount and additional paid-in capital of $500 thousand, respectively,
within the consolidated balance sheet for the year ended December 31, 2021, which represents the intrinsic value of the conversion option.
The Company evaluated the convertible debenture under ASC 470-20 and recognized a debt discount of $500 thousand related to the beneficial
conversion feature during the year ended December 31, 2021, with a corresponding credit to additional paid-in capital. The related amortization
of the debt discount to interest expense for the nine months ended September 30, 2022 and 2021 was $25 thousand and $0.0 thousand,
respectively. Net proceeds were $485.2 thousand after legal fees and transaction expenses of $14.8 thousand, which are included in our
consolidated statement of operations for the year ended December 31, 2021. GLD has an option to lend the Company an additional $500 thousand
under the same terms prior to December 31, 2023. The GLD Debenture is secured by a lien on all the Company’s assets. The Company’s
U.S. subsidiaries entered into guaranties on August 27, 2021, in favor of GLD under which such subsidiaries guaranteed the Company’s
obligations under the GLD Debenture and granted GLD a lien on all assets of such subsidiaries. The proceeds from the GLD Debenture were
used for 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. The GLD Warrants will not be listed for trading on any national securities exchange. The GLD
Warrants and the shares issuable upon conversion of the GLD Debenture are not being registered under the Securities Act. The aggregate
number of shares issuable upon conversion of the GLD Debenture and upon the exercise of the GLD 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 GLD
Debenture and the exercise of the GLD Warrants. Under the terms of the GLD Debenture, and until all of the obligations of the Company
under the GLD Debenture have been paid in full, GLD may appoint one member to the board of directors of the Company, subject to the review
and approval of the GLD appointed candidate by the Nominating and Governance Committee of the Company. In lieu of cash compensation,
the GLD appointed director will receive a grant of 150,000 restricted shares of common stock of the Company upon appointment to the board.
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 315,000 shares of common stock of the Company and will receive 315,000
shares of common stock thereafter on each anniversary until the GLD Debenture has been repaid in full.
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”). The Intercreditor Agreement
also appoints Barry Kostiner as Servicing Agent (as defined therein) to act on behalf of 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
(as defined below).
The
Company received a “Notice of Breach and Obligation to Cure to Avoid Event of Default” from GLD dated May 11, 2022 (the “Notice”).
Pursuant to the Notice, GLD informed the Company of certain alleged breaches of the terms of the GLD Debenture by the Company, and that
the Company has 30 days to cure or GLD would consider an event of default under the GLD Debenture to have occurred.
On
July 15, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with GLD with respect to the
GLD Debenture, and LTP with respect to the LTP Debenture (with the GLD Debenture, the “Debentures” and each sometimes, a
“Debenture”).
Pursuant
to the Forbearance Agreement, GLD and LTP each agreed to forbear from exercising its rights against the Company under the applicable
Debenture until the earlier of (i) a default under the Forbearance Agreement or a new default under such Debenture or (ii) October 15,
2022 (the “Forbearance Period”).
Prior
to the expiration of the Forbearance Period, the Company agreed to cause a sale of the GLD Debenture to ABCImpact I, LLC, a Delaware
limited liability company (“ABCImpact”), or as directed by ABCImpact, at a purchase price equal to the outstanding balance
due and payable on the GLD Debenture by no later than October 15, 2022, which shall be in full and complete satisfaction of the Company’s
obligations to GLD under the GLD Debenture.
The
Company also paid $25,000 in satisfaction of GLD’s legal fees, pursuant to the terms of the Forbearance Agreement.
Until
the date that the GLD Debenture is sold to ABCImpact and the LTP Debenture has been repaid in full, the Company shall cause Mayer and
Associates LLC, a shareholder of the Company, to be restricted from exercising its existing option for 18,400,000 shares of Company common
stock at $.0001 per share.
As
partial consideration for GLD entering into the Forbearance Agreement, the Company agreed to issue to GLD 2,100,000 shares of the common
stock of the Company at a price per share of $.0001 (the “GLD Consideration Shares”), which GLD Consideration Shares (i)
at the time of their issuance thereafter shall be subject to all applicable restrictions under relevant securities laws and (ii) shall
be registered for resale on a Registration Statement on Form S-1 (the “Form S-1”). In addition, as partial consideration
for LTP entering into the Forbearance Agreement, the Company agreed to issue to LTP 1,600,000 shares of the common stock of the Company
at a price per share of $.0001 (the “LTP Consideration Shares”). The issuance of the GLD Consideration Shares and the LTP
Consideration Shares are subject to restrictions as described in the Forbearance Agreement and will not trigger any anti-dilution provisions
of any convertible securities of the Company that may be held by GLD or LTP or their affiliates in whatever form, including the Debentures.
The
Company also agreed to use its best efforts to effect a spin-off of an existing to-be-determined subsidiary of the Company, pursuant
to the terms described in the Forbearance Agreement.
Following
the occurrence of any of the Events of Default (as defined in the Forbearance Agreement), each of LTP and GLD may exercise any or all
remedies as provided under the Forbearance Agreement, the applicable Debenture or applicable law.
IPFS
Premium Finance Agreement.
On
July 30, 2021, the Company entered into a premium finance agreement for insurance coverage in the amount of $26 thousand at an interest
rate of 5.55% for 10 months. The balance remaining as of September 30, 2022, is $4.0 thousand.
Economic
Injury Disaster Loan.
On
April 25, 2022, the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the
SBA under is Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on
the business operations. Pursuant to that certain Loan Authorization and Agreement (the “SBA Loan Agreement”), the principal
amount of the EIDL Loan was $200,000, with proceeds to be used for working capital purposes disbursed on May 3, 2021. Interest accrues
at a rate of 3.75% per annum. Installment payments, including principal and interest, are due monthly beginning 24 months from the date
of the EIDL Loan in the amount of $1 thousand. The balance of principal and interest is payable 30 years from the date of the SBA note.
Convertible
Promissory Note.
On
May 17, 2022 the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) and issued and sold to TLC
Management & Consulting LLC (the “Investor”), a Convertible Promissory Note (the “May Note”) in the principal
amount of $110,000 (the “May Loan”), less an original issue discount of $10,000. Also pursuant to the Purchase Agreement,
in connection with the issuance of the May Note, the Company issued a common stock purchase warrant (the “May Warrant”) to
the Investor, pursuant to which the Investor has the right to purchase Company common stock at 100% coverage as provided in the May Warrant.
The
maturity date of the May Note is 12 months from the issue date with an option to extend for up to 6 months in the sole discretion of
the Company, and is the date upon which the principal sum as well as interest and other fees, shall be due and payable. The May Note
bears interest commencing on May 17, 2022 at a fixed rate of 6% per annum.
The
Company intends to use the net proceeds from the sale of the May Note for business development, including for acquisitions, general corporate
and working capital.
The
then outstanding and unpaid principal and interest shall be converted into fully paid and non-assessable shares of Company common stock
on the 10th trading day after the effective date of a registration statement registering the shares (the “Mandatory
Conversion Date”). The per share conversion price into which principal and interest under the May Note shall be convertible into
shall be a 20% discount to the VWAP (as defined in the May Note) for the ten trading day period ending on the latest complete trading
day prior to the Mandatory Conversion Date (the “May Note Conversion Price”). The May Note Conversion Price is subject to
adjustment pursuant to customary terms described in the May Note.
The
Company may prepay the May Note, provided that it shall pay an amount in cash equal to the sum of 110% multiplied by the principal then
outstanding plus interest.
The
May Note contains customary events of default for a transaction such as the May Loan which entitle the Investor, among other things,
to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the May Note. Any principal and
interest on the May Note which is not paid when due shall bear interest at the rate of the lesser of (i) 12% per annum; and (ii) the
maximum amount permitted by law from the due date thereof until the same is paid.
Pursuant
to the Purchase Agreement, the Company granted to the Investor registration rights whereby the Company shall register for resale all
of the common stock underlying the May Note and May Warrant, as set forth on Exhibit C to the Purchase Agreement.
The
May Warrant has an exercise price of 125% of the offering price per share of Company common stock (or unit, if units are offered in the
Uplist Offering (as defined in Exhibit C of the Purchase Agreement)) at which the Uplist Offering is made, subject to adjustment as provided
in the May Warrant. The exercise period of the May Warrant commences on the consummation of the Uplist Offering and ending on the five
year anniversary thereof.
The
exercise of the May Warrant is subject to a beneficial ownership limitation of 4.99% of the number of shares of common stock outstanding
immediately after giving effect to such exercise.
ABCImpact
Loans.
Between
June 9, 2022 and September 30, 2022, the Company borrowed an aggregate of $722,000 from ABCImpact, evidenced by a series
of 10% Convertible Debentures. Pursuant to the debentures, ABCImpact has the option to loan up to $5,000,000 to the Company in total.
ABCImpact
in a recently-formed entity in which an affiliate of Barry Kostiner, the Company’s Chief Executive Officer and sole director, has
a non-controlling passive interest.
The
maturity date of each debenture is the earlier of 12 months from the issue date and the date of a Liquidity Event (as defined in the
debentures), and is the date upon which the principal and interest shall be due and payable. The debentures each bear interest at a fixed
rate of 10% per annum. Any overdue accrued and unpaid interest shall entail a late fee at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted by applicable law, which shall accrue daily from the date such interest is due through and including
the date of actual payment in full.
The
Company uses the net proceeds from the loans from ABCImpact for general corporate purposes and working capital.
The
then outstanding and unpaid principal and interest shall be converted into shares of Company common stock and an equal number of common
stock purchase warrants at the option of ABCImpact, at a conversion price per share of $0.05, subject to adjustment (including pursuant
to certain dilutive issuances) pursuant to the terms of the each debenture. The debentures are subject to a beneficial ownership limitation
of 4.99% (or 9.99% in ABCImpact’s discretion).
The
Company may not prepay the debentures without the prior written consent of ABCImpact.
The
debentures each contain customary events of default for a transaction such as the transactions contemplated therein. If any event of
default occurs, the outstanding principal amount under a debenture, plus accrued but unpaid interest, liquidated damages and other amounts
owing through the date of acceleration, shall become, at ABCImpact’s election, immediately due and payable in cash at the Mandatory
Default Amount. “Mandatory Default Amount” means the sum of (a) the greater of (i) the outstanding principal amount of the
subject debenture, plus all accrued and unpaid interest, divided by the conversion price on the date the Mandatory Default Amount is
either (A) demanded or otherwise due or (B) paid in full, whichever has a lower conversion price, multiplied by the VWAP (as defined
in each debenture) on the date the Mandatory Default Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has
a higher VWAP, or (ii) 130% of the outstanding principal amount of the subject debenture, plus 100% of accrued and unpaid interest hereon,
and (b) all other amounts, costs, expenses and liquidated damages due in respect of the subject debenture.
The
warrants underlying each debenture has an exercise price per share of $0.05, subject to adjustment (including pursuant to certain dilutive
issuances) pursuant to the terms of the warrant. The exercise period of each warrant is for five years from the issue date.
The
exercise of the warrant is subject to a beneficial ownership limitation of 4.99% (or 9.99%) of the number of shares of common stock outstanding
immediately after giving effect to such exercise.
The
shares underlying the debentures and the warrants have “piggy-back” registration rights afforded to them.
Note
8 - Stock Warrants
On
May 4, 2021, the Company issued 500,000 warrants to M. Botbol, a then-related party, in connection with conversion of a 10% subordinated
convertible debenture in the amount of $25,000 (see Note 7 – Short-Term and Long-Term Debt). The warrants entitle
the holder to purchase one share of common stock at an exercise price of $0.05 per share at any time on or after the inception date,
May 4, 2021, through May 4, 2026, the expiration date. The warrants will not be listed for trading on any national securities exchange.
On
June 11, 2021, the Company issued 6,583,500 warrants to LTP, a related party, in connection with conversion of a 10% subordinated convertible
debenture in the amount of $330,000 of outstanding principal (see Note 7 – Short-Term and Long-Term Debt). The warrants
entitle the holder to purchase one share of common stock at an exercise price of $0.05 per share at any time on or after the inception
date, June 11, 2021, through March 8, 2026, the expiration date. The warrants are not listed for trading on any national securities exchange.
A
summary of the warrant activities for the nine months ended September 30, 2022, is as follows:
Schedule of Warrant Activities
| |
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 | |
| 7,083,500 | | |
$ | 0.05 | | |
| - | | |
| - | |
Balance as of December 31, 2021 | |
| 7,083,500 | | |
$ | 0.05 | | |
| 4.3 | | |
| 850 | |
Exercisable as of September 30, 2022 | |
| 7,083,500 | | |
$ | 0.05 | | |
| 4.1 | | |
| 850 | |
1 |
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying warrants and the closing stock
price of $ 0.17 for our common stock on September 30, 2022. |
Note
9 - Income Taxes
We
recorded income tax benefit of $0 and $0.118 million for the three months ended September 30, 2022 and 2021, respectively. We recorded
income tax benefit of $0.1 million for and expense of $0.8 million for the nine months ended September 30, 2022 and 2021, respectively.
Our effective tax rate was 0% and 37.7% for the three months ended September 30, 2022 and 2021 and 33.2% and 76.2% for the nine months
ended September 30, 2022 and 2021, respectively. Our effective tax rates differed from the U.S. statutory corporate tax rate of 21% primarily
because of our reduced operations while also recognizing revenues from the expiration of student contracts.
The
Company assessed the weight of all available positive and negative evidence and determined it was more likely than not that future earnings
will be sufficient to realize the associated deferred tax assets. As of September 30, 2022 and December 31, 2021, we retained a valuation
allowance of $3.5 million and $3.5 million, respectively, for a certain number of our international subsidiaries.
During
the nine months ended September 30, 2022 and 2021, 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
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 2019 are subject to examination by the Internal Revenue Service. Our state tax
returns for all years after 2019 or 2018, 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 2015 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, 2022 and December 31, 2021, including
foreign subsidiaries, without FDIC coverage were $0.7 million and $0.04 million, respectively.
Revenue.
Historically,
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 and nine months ended
September 30, 2022, there was no revenue from Rich Dad brands. For the three and nine months ended September 30, 2021, Rich Dad brands
provided 53.8% and 58.9%, respectively, of our revenue. In addition, we historically had operations in North America, United Kingdom
and Other Foreign Markets (see Note 11 -Segment Information).
The
License Agreement with Rich Dad Operating Company, LLC pursuant to which we licensed the Rich Dad Education brand expired on September
30, 2019. Notwithstanding the expiration of the License Agreement, the Company may continue to use Licensed Intellectual Property, as
defined in the License Agreement, including, but not limited to, the Rich Dad trademark and stylized logo, for the purpose of honoring
and fulfilling orders by its customers in existence as of the date of the expiration of the Agreement.
Note
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 historically have included: (i) North America, (ii) United Kingdom, and (iii) Other Foreign Markets. We no longer
operate in the Other Foreign Markets segment. Operating results, as reported below, are reviewed regularly by our Chief Executive Officer.
The
proportion of our total revenue attributable to each segment is as follows:
Schedule of Total Revenue Attributable to Each Segment
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
As a percentage of total revenue | |
| | |
| |
North America | |
| 100.0 | % | |
| 63.5 | % |
U.K. | |
| 0.0 | % | |
| 36.5 | % |
Other foreign markets | |
| — | % | |
| - | % |
Total consolidated revenue | |
| 100.0 | % | |
| 100.0 | % |
Operating
results for the segments are as follows:
Schedule of Operating Results for Segments
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
Segment revenue | |
| |
North America | |
$ | 410 | | |
$ | 4,672 | |
U.K. | |
| - | | |
| 2,689 | |
Other foreign markets | |
| — | | |
| - | |
Total consolidated revenue | |
$ | 410 | | |
$ | 7,361 | |
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
Segment gross profit contribution * | |
| |
North America * | |
$ | (28 | ) | |
$ | 1,919 | |
U.K. * | |
| 1 | | |
| 2,199 | |
Other foreign markets * | |
| — | | |
| 1 | |
Total consolidated gross profit * | |
$ | (27 | ) | |
$ | 4,119 | |
* |
Segment
gross profit is calculated as revenue less direct course expenses, advertising and sales expenses and royalty expenses. |
| |
2022 | | |
2021 | |
| |
Nine Months Ended September 30, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
Depreciation and amortization expenses | |
| |
North America | |
$ | - | | |
$ | 2 | |
U.K. | |
$ | - | | |
| 2 | |
Other foreign markets | |
| — | | |
| — | |
Total consolidated depreciation and amortization expenses | |
$ | - | | |
$ | 4 | |
Schedule of Segment Identifiable Assets
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
| |
(In thousands) | |
Segment identifiable assets | |
| |
North America | |
$ | 446 | | |
| 1,348 | |
U.K. | |
$ | 55 | | |
| 126 | |
Other foreign markets | |
$ | 165 | | |
| 175 | |
Total consolidated identifiable assets | |
$ | 666 | | |
$ | 1,649 | |
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, 2022, we have deferred revenue of
$4.1 million related to contractual commitments with customers where the performance obligation will be satisfied over time, which ranges
from six to twenty-four months. The revenue associated with these performance obligations is recognized as the obligation is satisfied.
As of September 30, 2022, we maintain a reserve for breakage of $0.02 million for the fulfillment of our obligation to students whose
contracts expired during our COVID-19 60-day operational hiatus during Q3 2020 (see Note 1 - General).
The
following tables disaggregate our segment revenue by revenue source:
Schedule of Segment Revenue
| |
Nine Months Ended September 30, 2022 | | |
Nine Months Ended September 30, 2021 | |
Revenue Type: | |
North America | | |
U.K. | | |
Other foreign markets | | |
Total Consolidated Revenue | | |
North America | | |
U.K. | | |
Other foreign markets | | |
Total Consolidated Revenue | |
| |
(In thousands) | | |
(In thousands) | |
Seminars | |
$ | 408 | | |
| — | | |
$ | — | | |
$ | 408 | | |
$ | 4,300 | | |
$ | 880 | | |
| — | | |
$ | 5,180 | |
Products | |
| 2 | | |
| — | | |
| — | | |
| 2 | | |
| 198 | | |
| — | | |
| — | | |
| 198 | |
Coaching and Mentoring | |
| | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Online and Subscription | |
| — | | |
| — | | |
| — | | |
| — | | |
| 11 | | |
| — | | |
| — | | |
| 11 | |
Other | |
| | | |
| — | | |
| — | | |
| — | | |
| 163 | | |
| 1,809 | | |
| — | | |
| 1,972 | |
Total revenue | |
$ | 410 | | |
| — | | |
$ | — | | |
$ | 410 | | |
$ | 4,672 | | |
$ | 2,689 | | |
| — | | |
$ | 7,361 | |
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. There were no royalty expenses included in our Consolidated Statement of Operations and Comprehensive Income for
the nine months ended September 30, 2022 and 2021. Our License Agreement with our Rich Dad brand licensor expired on September 30, 2019.
Notwithstanding the expiration of the License Agreement, the Company may continue to use the 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.
Purchase
commitments.
From
time to time, the Company enters into non-cancellable commitments to purchase professional services, Information Technology licenses
and support, and training courses in future periods. There were no purchase commitments made by the Company for the nine months ended
September 30, 2022 and 2021.
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., a Colorado
corporation (“Tigrent”) and several 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 (“October 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, 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 October 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 October 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 , the Company, Holdings, Mr. May, and Steven Barre pursuant to which the Strudwick Parties agreed to dismiss
the lawsuit with prejudice against all parties and the Company agreed to pay the aggregate sum of $400 thousand payable in one installment
of $100 thousand on February 18, 2021 and five quarterly installments of $60 thousand commencing on May 19, 2021, which the Company has
accrued for within accounts payable as of December 31, 2021, and within accounts payable and other long-term liability for the current
and long-term portions as of December 31, 2021, within the Consolidated Balance Sheets. The parties also exchanged mutual releases as
part of the settlement agreement. The lawsuit was dismissed by order of the Court on January 12, 2021. Through September 30, 2022, the
Company has paid $340 thousand of the total settlement. The final settlement payment was due 450 days after February 18, 2021 in the
amount of $60 thousand and is in default. On May 25, 2022, a Motion for Judgement after default of settlement agreement was filed which
triggered an entitled immediate entry of judgement of $160 thousand.
In
the Matter of Legacy Education Alliance International, Ltd. On October 28, 2019, an Application for Administration was filed in the
English Court, whereby four creditors of Legacy UK sought an administration order with respect to the business affairs of the subsidiary,
the appointment of an administrator, and such other ancillary orders as the applicants may request or as the court deemed appropriate.
On November 15, 2019, the creditors obtained an Administration Order from the English Court. Under the terms of the Administration Order,
two individuals have been appointed as administrators of Legacy UK and will manage Legacy UK and operate its affairs, business and property
under the jurisdiction of the English Court. The administrators engaged a third party to market Legacy UK’s business and assets
for sale to one or more third parties. On November 26, 2019, Legacy UK’s assets and deferred revenues sold for £300 thousand
(British pounds) to Mayflower Alliance LTD. We will not receive any proceeds from the sale of Legacy UK. On November 19, 2020, the administrators
filed notice of their proposal to move from administration to a creditors’ voluntary liquidation and on December 9, 2020, notice
was filed with Companies House that Paul Zalkin and Nicholas Simmonds were appointed as liquidators of Legacy UK to commence its winding
up. Further details regarding the resolution of claims and liabilities may not be known for several months. Because there are a number
of intercompany relationships between the Company and Legacy UK, the financial impact of any future claims in relation to the administration
and disposition of Legacy UK, outside of those included in the discontinued operations of Legacy UK (see Note 4 - Discontinued
Operations), is unknown to us at this time, as is the timing and other conditions and effects of the administrative process. On December
8, 2020 we paid $390.6 thousand in cash and transferred our residential properties in the value of $363 thousand as settlement of intercompany
debts of two of our subsidiaries, LEAI Property Development UK, Ltd. and LEAI Property Investment UK, Ltd., totaling $924 thousand to
Legacy UK.
In
the Matter of Elite Legacy Education UK Ltd. On March 18, 2020, a Winding-Up Petition, CR-2020-001958, was filed in the English Court
against one of our UK subsidiaries, Elite Legacy Education UK Ltd. (“ELE UK”), by one of its creditors (“Petitioner”)
pursuant to which the Petitioner was claiming a debt of £461,459.70 plus late payment interest and statutory compensation was due
and owing. The Petitioner sought an order from the English Court to wind up the affairs of ELE UK under the UK Insolvency Act of 1986.
ELE UK has disputed the claim of the Petitioner and on June 11, 2020, ELE UK obtained a court order vacating the hearing on the Petition
originally set for June 24, 2020. On July 24, 2020, the English Court entered an order finding that there was a genuine dispute on substantial
grounds with respect to £392,761.70 of the Petitioner’s claim, and that only £68,698 plus late payment interest and
statutory compensation was due and owing. The English Court further restrained the Petitioner from advertising its Winding-Up Petition
until August 14, 2020 and, provided ELE UK pays the Petitioner the sums awarded under the English Court’s order, plus late payment
interest and statutory compensation on or before August 14, 2020, the Petitioner’s Winding-Up Petition would be dismissed. On August
10, 2020, ELE UK filed its Notice of Appeal in which it sought permission to appeal the English Court’s ruling. On October 23,
2020, the Court denied ELE UK permission to appeal whereupon ELE UK filed an application to renew its application for permission to appeal
(“Renewal Application”), which Renewal Application would be heard at a subsequent oral hearing on a date not yet determined.
On October 27, 2020, ELE UK filed an application with the High Court of Appeal, Royal Courts of Justice (“Court of Appeals”)
for a hearing to renew its application for permission to appeal the English Court’s order and a hearing was set for February 11,
2021. On October 30, 2020, the English Court entered a Consent Order restraining Petitioner from advertising its Winding-Up Petition
until ELE UK’ s Renewal Application is determined at the oral hearing or until further order of the court, whichever is earlier.
At a hearing held on December 16, 2020, the English Court issued an order lifting the restraint on advertising the petition for a winding
up order and that the matter be listed on January 13, 2021 for winding up and awarding costs to the creditor. However, at a meeting held
on January 11, 2021 (“Creditors’ Meeting”), the creditors of ELE UK 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”).
As a result, the Petitioner’s claims will be administered under the terms of the CVA and, at the request of ELE UK, the hearing
on its application to renew its appeal of the English Court’s order was lifted.
Other
Legal Proceedings.
In
the Matter of Elite Legacy Education UK Ltd., Proposal for a Company Voluntary Arrangement. At the Creditors’ Meeting, the
creditors of ELE UK approved the CVA under the IA) and 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. 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 English Court has been dismissed.
At this time, our management is unable to anticipate any distributions that would be received from ELE UK.
Mr.
Kostiner, our Chairman, Chief Executive Officer, and Interim Principal Financial and Accounting Officer is a named defendant in three
legal proceedings which are described below.
In
Re Argon Credit, LLC, et al., Debtors, Case No. 16-39654 (U.S. Bankr. Ct. N.D. Ill. Eastern Division). On December 16, 2016, Argon
Credit, LLC (“Argon”) and Argon X, LLC (collectively the “Debtors”) filed petitions for relief under chapter
11 of title 11 of the United States Code. On January 11, 2017, Debtors’ bankruptcy cases were converted to chapter 7 cases. On
December 14, 2018, the chapter 7 trustee filed an adversary proceeding as case number 18-ap-00948 (the “Bankruptcy Complaint”)
against multiple defendants, including Barry Kostiner, asserting claims for aiding and abetting breach of fiduciary duty. As to Mr. Kostiner,
the Bankruptcy Complaint alleged that, while an employee of the Debtor, he aided and abetted the former CEO of Argon, Raviv Wolfe, in
breaching his fiduciary duties to Argon, by, among other things, knowingly participating in a scheme to funnel assets away from the Debtors
and their creditors, double pledging Argon’s assets, and knowingly submitting false or misleading financial reports to the Debtors’
secured lender to conceal the transfer of Argon’s assets. On July 11, 2019, Mr. Kostiner, appearing through counsel, filed an answer
denying all allegations against him set forth in the Bankruptcy Complaint.
On
August 12, 2021, the trustee filed a Motion for the Entry of an Order Pursuant to Bankruptcy Rule 9019 Approving Settlement with Mr.
Kostiner. Under the terms of the proposed settlement, Mr. Kostiner would pay the trustee $35,000 in exchange for dismissal with prejudice
from the suit and the exchange of mutual releases (the “Proposed Settlement”). Each of the trustee and Mr. Kostiner concluded
that the Proposed Settlement was in their respective best interests in light of the contested nature of the Complaint, the costs that
both parties would incur in connection with the litigation of same the uncertain outcome from protracted litigation. The trustee argued
that the Proposed Settlement was reasonable based upon: (a) the range of potential outcomes taking into account the defenses that Mr.
Kostiner could assert; (b) the likelihood of recovering more given Mr. Kostiner’s financial condition; (c) Argon Credit’s
director and officers’ liability insurance policy had been exhausted; and (d) the Debtors’ pre-petition lender had recently
filed a complaint against many of the parties originally named by the trustee in its adversary proceeding, including Mr. Kostiner, and
this action further reduces the likelihood of recovery against Mr. Kostiner, because at a minimum, he will be forced to pay to defend
that action. On September 3, 2021, the Bankruptcy Court issued an order approving the settlement, and on November 18, 2021, the Bankruptcy
Court issued an order granting the motion to voluntarily dismiss the proceeding against Mr. Kostiner.
Fund
Recovery Services, LLC v. RBC Capital Markets, LLC, et al., Case No. 1:20-cv-5730 (N.D. Ill. Eastern Division). On September 25,
2020, Fund Recovery Services, LLC (“Fund”), as assignee of Princeton Alterative Income Fund, L.P. (“PAIF”) filed
a complaint in the above-referenced action asserting a variety of claims against 37 defendants, including Mr. Kostiner. On May 15, 2021,
Fund filed an amended complaint against 34 of the defendants, including Mr. Kostiner (the “Amended Complaint”). The claims
against Mr. Kostiner in the Amended Complaint include: (i) violation of 18 U.S.C. 1962(2) by the conduct and participation in a RICO
enterprise through a pattern of racketeering activity; (ii) violation of 18 U.S.C. 1962(d) by conspiracy to engage in a pattern of racketeering
activity; (iii) fraud/intentional misrepresentation; (iv) aiding and abetting fraud/intentional misrepresentation; (v) fraudulent concealment;
(vi) aiding and abetting fraudulent concealment; (vii) fraudulent/intentional inducement; (viii) conversion; (ix) aiding and abetting
conversion; (x) civil conspiracy; and (xi) tortious interference with contractual relations. The Amended Complaint seeks damages of approximately
$240 million jointly and severally against all defendants, together with treble and punitive damages, among other relief.
The
Amended Complaint, as it pertains to Mr. Kostiner, covers much of the same conduct that is the subject of the Bankruptcy Complaint described
above and stems from a transaction that Argon entered into with Spartan Specialty Finance, LLC (“Spartan”). Argon, a consumer
finance platform that made high-interest, unsecured loans to credit-impaired borrowers, financed its loans through a revolving credit
facility provided by PAIF. Mr. Kostiner was the sole member of Spartan and was also, for a period of time, the Vice President of Capital
Markets at Argon. Argon and Spartan entered into an agreement whereby Spartan agreed to purchase a portfolio of loans from Argon. Spartan
financed the acquisition by obtaining a loan from Hamilton Funding (“Hamilton”). The Amended Complaint alleges that PAIF
had a perfected security interest in the loans that Argon improperly sold to Spartan (which were financed by Hamilton Funding), and that
defendants, including Mr. Kostiner, engaged in a scheme to induce PAIF to initially lend funds, later to increase its credit line, and
ultimately convert and deprive PAIF of its property by numerous acts of fraud.
On
July 1, 2021, defendants, including Mr. Kostiner, filed a consolidated motion to dismiss the Amended Complaint in its entirety against
them, based on the following arguments: (a) the RICO claims (Counts (1)-(2)) are time-barred; (b) Fund lacks standing to bring Counts
1-11; (c) Fund is collaterally estopped from litigating the issues that are the subject of the Amended Complaint; (d) the allegations
in the Amended Complaint fail to satisfy the requirements of Rules 8 and 9(b) of the Federal Rules of Civil Procedure; (e) the Amended
Complaint failed to allege a duty sufficient to support its allegations in Counts 1-7; (f) Fund failed to adequately plead the elements
of a valid RICO claim; and (g) Fund failed to adequately plead the elements of any of its state law claims (Counts 3-13). This motion
is fully briefed and awaits resolution by the Court.
On
February 22, 2022, PAIF filed a Revised Second Amended Complaint (“RSA Complaint”) against 25 defendants, including Mr. Kostiner.
The RSA Complaint incorporates information from witness statements and journal entries from alleged Argon insiders. The claims against
Mr. Kostiner in the RSA Complaint include: (i) fraud/intentional misrepresentation; (ii) aiding and abetting fraud/intentional misrepresentation;
(iii) fraudulent concealment; (iv) aiding and abetting fraudulent concealment; (v) fraudulent/intentional inducement; (vi) conversion;
(vii) aiding and abetting conversion; (viii) civil conspiracy; and (ix) tortious interference with contractual relations. The Amended
Complaint seeks damages of approximately $240 million jointly and severally against all defendants, together with treble and punitive
damages, among other relief.
On September 30, 2022, the Court denied PAIF’s motion for leave to file the RSA Complaint and ruled that since
plaintiff cannot assert a viable RICO claim, the Court directed the Clerk to enter judgment dismissing plaintiff’s civil RICO claims
with prejudice and dismissing plaintiffs state-law claims for lack of supplemental jurisdiction.
In
re Spartan Specialty Finance I SPV, LLC, Case No. 16-22881-rdd (S.D.N.Y. Bankr. Ct.). On June 29, 2016, Spartan filed a petition
for relief under chapter 11 of title 11 of the United States Code. It did so in order to resolve a loan dispute that it had with Hamilton,
including Hamilton’s alleged right to access cash accounts that Spartan had pledged as collateral. On May 26, 2017, the bankruptcy
court approved a Stipulation and Agreement Resolving Debtor’s Motion for Use of Cash Collateral and Fixing Amount of Secured Claim,
between Hamilton, Spartan, and Mr. Kostiner, in his individual capacity. Spartan’s bankruptcy petition was dismissed as part of
the Court’s approval of the settlement.
Except
for the actions set forth above, there is no material litigation, arbitration or governmental proceeding currently pending against us
or any members of our management team in their capacity as such, and we and our officers and directors have not been subject to any such
proceeding in the 12 months preceding the date of this report.
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 one to three years,
subject to certain renewal options as applicable. We consider those renewal or termination options that are reasonably certain to be
exercised in the determination of the lease term and initial measurement of lease liabilities and right-of-use assets. Lease expense
for lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not
recorded on the balance sheet.
We
determine whether a contract is or contains a lease at inception of the contract and whether that lease meets the classification criteria
of a finance or operating lease. When available, we use the rate implicit in the lease to discount lease payments to present value; however,
most of our leases do not provide a readily determinable implicit rate. Therefore, we must discount lease payments based on an estimate
of its incremental borrowing rate.
We
do not separate lease and nonlease components of contracts. There are no material residual value guarantees associated with any of our
leases. There are no significant restrictions or covenants included in our lease agreements other than those that are customary in such
arrangements.
Lease
Position as of September 30, 2022 and December 31, 2021
The
table below presents the lease related assets and liabilities recorded on the Company’s Consolidated Balance Sheets as of September
30, 2022 and December 31, 2021:
Schedule of Lease Related Assets and Liabilities
| |
| |
September 30, | | |
December 31, | |
Balance Sheet Line | |
Classification on the Balance Sheet | |
2022 | | |
2021 | |
| |
| |
(in thousands) | |
Assets | |
| |
| | |
| |
Operating lease assets | |
Operating lease right of use assets | |
$ | — | | |
$ | 20 | |
Total lease assets | |
Total lease assets | |
$ | — | | |
$ | 20 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current liabilities: | |
| |
| | | |
| | |
Operating lease liabilities | |
Current operating lease liabilities | |
$ | — | | |
$ | 20 | |
Noncurrent liabilities: | |
| |
| | | |
| | |
Operating lease liabilities | |
Long-term operating lease liabilities | |
$ | — | | |
$ | - | |
Total lease liabilities | |
Total lease liabilities | |
$ | — | | |
$ | 20 | |
Lease
cost for the nine months ended September 30, 2022 and 2021
The
table below presents the lease related costs recorded on the Company’s Consolidated Statements of Operations for the nine months
ended September 30, 2022 and 2021:
Schedule of Operating Lease Cost
| |
| |
| | |
| |
| |
| |
Nine Months Ended September 30, | |
Lease cost | |
Classification | |
2022 | | |
2021 | |
| |
| |
(in thousands) | |
Operating lease cost | |
General and administrative expenses | |
$ | 20 | | |
$ | 20 | |
Total lease cost | |
Total lease cost | |
$ | 20 | | |
$ | 20 | |
Other
Information
The
table below presents supplemental cash flow information related to leases for the nine months ended September 30, 2022 and 2021:
Schedule of Cash Flow Information Related to Leases
| |
2022 | | |
2021 | |
| |
Nine Months Ended
September 30, | |
| |
2022 | | |
2021 | |
| |
(in thousands) | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating cash flows for operating leases | |
$ | 20 | | |
$ | 20 | |
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, 2022 and December 31, 2021:
Schedule of Weighted Average Remaining Lease Terms and weighted Average Discount Rates
| |
September 30, 2022 | | |
December 31, 2021 | |
Weighted average remaining lease term - operating leases | |
| .50 years | | |
| .75 years | |
Weighted average discount rate - operating leases | |
| 12.00 | % | |
| 12.00 | % |
There
are no lease arrangements where the Company is the lessor.
Note
15 – Subsequent Events
The
Company evaluated subsequent events and transactions that occurred after the consolidated balance sheet date up to November 14, 2022,
the date that the financial statements were issued.
ABCImpact
Loans.
Between
October 3, 2022 and November 10, 2022, the Company borrowed an aggregate of $698,000 from ABCImpact, evidenced by 10% Convertible Debentures.
Pursuant to the debentures, ABCImpact has the option to loan up to $5,000,000 to the Company in total.
The
maturity date of each debenture is the earlier of 12 months from the issue date and the date of a Liquidity Event (as defined in the
debentures), and is the date upon which the principal and interest shall be due and payable. The debentures bear interest at a fixed
rate of 10% per annum. Any overdue accrued and unpaid interest shall entail a late fee at an interest rate equal to the lesser of 18%
per annum or the maximum rate permitted by applicable law, which shall accrue daily from the date such interest is due through and including
the date of actual payment in full.
The
Company intends to use the net proceeds from the loans for general corporate purposes and working capital.
The
then outstanding and unpaid principal and interest under each debenture shall be converted into shares of Company common stock and an
equal number of common stock purchase warrants at the option of ABCImpact, at a conversion price per share of $0.05, subject to adjustment
(including pursuant to certain dilutive issuances) pursuant to the terms of the debenture. The debentures are subject to a beneficial
ownership limitation of 4.99% (or 9.99% in ABCImpact’s discretion).
The
Company may not prepay the debentures without the prior written consent of ABCImpact.
The
debentures contain customary events of default for transactions such as the loans. If any event of default occurs, the outstanding principal
amount under the debentures, plus accrued but unpaid interest, liquidated damages and other amounts owing through the date of acceleration,
shall become, at ABCImpact’s election, immediately due and payable in cash at the Mandatory Default Amount. “Mandatory Default
Amount” means the sum of (a) the greater of (i) the outstanding principal amount of the debenture, plus all accrued and unpaid
interest, divided by the conversion price on the date the Mandatory Default Amount is either (A) demanded or otherwise due or (B) paid
in full, whichever has a lower conversion price, multiplied by the VWAP (as defined in the debenture) on the date the Mandatory Default
Amount is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, or (ii) 130% of the outstanding principal
amount of the debenture, plus 100% of accrued and unpaid interest hereon, and (b) all other amounts, costs, expenses and liquidated damages
due in respect of the debenture.
The
warrants have an exercise price per share of $0.05, subject to adjustment (including pursuant to certain dilutive issuances) pursuant
to the terms of the warrants. The exercise period of the warrants is for five years from the issue date.
The
exercise of the warrants is subject to a beneficial ownership limitation of 4.99% (or 9.99%) of the number of shares of common stock
outstanding immediately after giving effect to such exercise.
The
shares underlying the debentures and the warrants have “piggy-back” registration rights afforded to them.
Default
Under Forbearance Agreement.
On
October 7, 2022, GLD provided the Company with formal, written notice that the Company is in default under the terms of the Forbearance
Agreement and the GLD intends to exercise all available rights and remedies at law and/or at equity. Pursuant to the Forbearance Agreement,
upon the occurrence of an Event of Default, GLD may release a Confession of Judgment from escrow and enter judgment against the Company
for the outstanding principal balance due under the GLD Note, and any accrued, but unpaid interest. GLD has the option to exercise any
or all remedies provided under the Forbearance Agreement, the GLD Note or applicable law.
In
addition, the Company continued to trigger Events of Default commencing as of October 15, 2022, when the next set of obligations came
due under the Forbearance Agreement. The Company can give no assurance that it will cure any Events of Default or that GLD will not exercise
any and all of its rights under the Forbearance Agreement.