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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

o

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended December 31, 2010

 

Commission file number: 0-27403

 

TIGRENT INC.

(Exact name of registrant as specified in its charter)

 

Colorado

 

84-1475486

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

1612 East Cape Coral Parkway, Cape Coral, Florida 33904

(Address of principal executive offices) (zip code)

 

Registrant’s telephone number, including area code: (239) 542-0643

 

Securities registered under Section 12(b) of the Act: None

 

Securities registered under Section 12(g) of the Act*:

 

Title of Each Class

 

Name of Exchange on which registered

Common Stock, no par value

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act*. Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days*. Yes x No o

 

Indicate by check mark whether the registrant has electronically submitted and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $2.8 million based on the closing sale price of the registrant’s common stock as traded on the NASD Over the Counter Electronic Bulletin Board on such date of $0.47 per share.

 

As of March 4, 2011, there were 13,088,587 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None

 


*On March 18, 2011, the registrant filed a Form 15 with the Securities and Exchange Commission to deregister its securities and suspend its obligations to file periodic reports under the Securities Exchange Act of 1934, as amended, except that the registrant has filed this Annual Report on Form 10-K for the year ended December 31, 2010.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

Item 1.

Business

3

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

15

Item 4.

Reserved

15

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

Item 6.

Selected Financial Data

17

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

31

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55

Item 9A.

Controls and Procedures

55

Item 9B.

Other Information

55

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

56

Item 11.

Executive Compensation

59

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

65

Item 13.

Certain Relationships and Related Transactions, and Director Independence

66

Item 14.

Principal Accounting Fees and Services

68

PART IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

69

 

Signatures

71

 

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In this Annual Report on Form 10-K (“Annual Report”), “Tigrent” and the terms “Company,” “we,” “us,” and “our” refer to Tigrent Inc. and its wholly-owned and majority-owned subsidiaries.

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Annual Report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involves risk and uncertainties. These forward-looking statements are principally contained in the Sections entitled Managements Discussion and Analysis of Financial Conditions and Results of Operations in Part II, Item 7 and Risk Factors in Part I, Item 1A.  Such forward-looking statements may be identified by words such as “may,” “will,” “should,” “could,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “continue” or similar statements. These forward-looking statements include, without limitation, statements about our market opportunity, our strategies, competition, expected activities and expenditures as we pursue our business plan, changes in our operating results for 2011, any benefit that we may achieve as a result of cash reduction efforts implemented in 2010, expected cash sales and adjusted EBITDA for 2011 and the adequacy of our available cash resources. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Forward-looking statements involve known and unknown risks and uncertainties which may cause our actual results in future periods to differ materially from what is currently anticipated, including our ability to execute on our 2011 operating plan, our ability to remain in compliance with our contractual obligations under existing licensing and other arrangements, our ability to maintain control over and reduce our operating expenses, as well as other risks and uncertainties set forth in cautionary statements made throughout various sections of this document. You should read these cautionary statements, particularly those set forth under the caption Risk Factors in Part I, Item 1A below, as being applicable to all related forward-looking statements wherever they appear in this document, in the materials referred to in this document, in the materials incorporated by reference into this document, or in our press releases. No forward-looking statement is a guarantee of future performance, and you should not place undue reliance on any forward-looking statement. Actual results could differ materially from those anticipated or implied by the forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof, we assume no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

 

PART I

 

ITEM 1.  BUSINESS

 

Overview

 

We are a provider of practical, high-quality and value-based training, conferences, publications, technology-based tools and mentoring to help customers become financially knowledgeable. We provide customers with comprehensive instruction and mentoring on the topics of real estate and financial instruments investing and entrepreneurship in the United States, the United Kingdom, and Canada. Our training is offered in non-accredited free preview workshops, as well as basic training, advanced courses, mentoring, and coaching.

 

In July 2006, we created Rich Dad Education, LLC (“RDE”) with Rich Global, LLC (“Rich Global”). This entity has provided basic training courses under the Rich Dad™ Education brand, which focuses on the real estate teachings and philosophies of Robert Kiyosaki as detailed in the book entitled, Rich Dad Poor Dad. The Rich Dad Poor Dad book series has sold millions of copies worldwide.  On May 26, 2010, we entered into definitive agreements with Rich Global and Rich Dad Operating Company, LLC (“RDO”) to restructure the agreements under which we license and operate under the Rich Dad brand.  Rich Global and RDO (together, the “Rich Dad Parties”) are entities controlled by Robert and Kim Kiyosaki. More details about the restructuring and the terms of the license agreements are discussed below under the section entitled Licensing Agreements with the Rich Dad Parties.

 

We currently have two Rich Dad™ Education offerings:

 

·     Rich Dad™ Learn to be Rich —focuses on real estate training; and

·     Rich Dad™ Stock Success —concentrates on financial instruments training.

 

We began offering our Rich Dad™ Learn to be Rich basic training to customers in the United States in 2006. In 2007, we expanded our Rich Dad™ Learn to be Rich training to include customers in Canada and the United Kingdom. During 2008, we created the Rich Dad™ Stock Success training and introduced it to customers in the United States and the United Kingdom. We began offering this training to our customers in Canada in 2009.

 

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For the year ended December 31, 2010, Rich Dad™ Education represented approximately 91.9% of our total revenue and our Proprietary brands represented approximately 8.1% of our total revenue. Our international business, which includes both Rich Dad™ Education and Proprietary brands, was approximately 23.5% of our total revenue.

 

Our Strategy

 

Our objective is to be a leading provider of training services and products that provide customers with the skills, knowledge and tools to achieve their personal and financial goals.

 

Our strategy is focused on the following areas:

 

·                  Enhanced sales and utilization of the Rich Dad brand. We intend to concentrate our marketing efforts on the Rich Dad brand, and increase lifetime customer value through cooperative marketing strategies among the various Rich Dad partners and make broader, coordinated use of the Rich Dad customer data base and other managed customer contact strategies.

 

·                  Focus on fulfillment of customer obligations. We intend to optimize the pace and improve the cost efficiency with which we fulfill our long term customer commitments. We have expanded the options for course fulfillment in order to reduce the number of expired contracts. We have increased the number of courses offered on electronic media and via the internet. Additionally, we have implemented an outreach program that involves contacting our customers by email and the U.S. mail as courses near expiration. Finally, we have implemented the concept of a symposium fulfillment experience, which we believe will play a significant role in our business model going forward. Symposiums allow us to hold several advanced classes in one location resulting in cost savings based on economies of scale.  These events have been well received by our customers, providing them with networking opportunities as well as bonus events and activities that have enhanced their experience.

 

·                  Enhanced eLearning. We intend to continue developing and promoting interactive and online distributed course content and enhanced technology platforms capable of streaming video, interactive e-learning, and distributed e-learning. We also plan on using social networking forums to further enhance the learning experience for our customers.

 

·                  Consistent quality assurance. We believe that to be an effective provider of training we need to ensure that our course offerings meet our strict quality assurance guidelines. To that end, we will continue to monitor and enforce standards for marketing, sales presentations, and training delivery throughout our organization.

 

Intellectual Property

 

We regard our training materials and products, trademarks, service marks, trade names, copyrights, and patents as proprietary. As such, we primarily rely on federal statutory and common law protections to uphold our interests in these materials. We market various courses and training programs under the Rich Dad brand, as a licensee, as well as our Proprietary brands, as described below under the section entitled Training Programs. While several of our proprietary materials may contain commonly used terms and do not afford us significant trademark protection, we also use employee and third party non-compete and confidentiality agreements as well as other contractual methods of protecting proprietary rights to safeguard our intellectual property.

 

Licensing Agreements with the Rich Dad Parties

 

In July 2006, we formed a limited liability company, RDE, with Rich Global to promote the financial philosophy espoused by Robert Kiyosaki in his book, Rich Dad Poor Dad. The profit interests of RDE were held 51% by us and the remaining 49% by Rich Global. Pursuant to a license agreement dated July 6, 2006 (“Rich Dad License Agreement”), Rich Global granted RDE a license to use the Rich Dad trademarks, trade names and other business information in seminars that it conducts in the United States, Canada and the United Kingdom.

 

On May 26, 2010, we entered into definitive agreements with the Rich Dad Parties to restructure the agreements under which we license and operate the Rich Dad brand.  The Rich Dad Parties are entities controlled by Robert and Kim

 

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Kiyosaki.  In connection with the restructuring, we entered into (i) a License Agreement with the Rich Dad Parties (the “2010 Rich Dad License Agreement”), relating to the Rich Dad brand, and (ii) a Settlement Agreement and Release with the Rich Dad Parties, (the “Settlement Agreement”), relating to the previous Rich Dad License Agreement for the Rich Dad brand. We and the Rich Dad Parties also committed to enter into a cooperative marketing agreement relating to the development and implementation of improved customer contact management strategies.

 

The 2010 Rich Dad License Agreement is for a term ending December 31, 2014.  Rich Global is a consenting party to the 2010 Rich Dad License Agreement with respect to the use of its database. The 2010 Rich Dad License Agreement gives us the non-exclusive right to sell and market Rich Dad products in live seminars and training courses in the United States, Canada and the United Kingdom. The 2010 Rich Dad License Agreement provides that we must establish escrow and cash collateral accounts in an aggregate amount equal to 30% of our deferred revenues during the term of the 2010 Rich Dad License Agreement (the “Reserve Goal”). The purpose of the escrow and cash collateral accounts is to ensure that we can fulfill our contractual commitments to the customers who purchased the Rich Dad and Tigrent courses. Until the Reserve Goal has been met, we will pay (i) to RDO a current royalty (“current royalty”) of 3% of the Gross Revenues and (ii) into the escrow account a deferred royalty of 5% of the Gross Revenues (“unfulfilled royalty”).  Under the 2010 Rich Dad License Agreement, the term “Gross Revenues” means gross revenues related to the Rich Dad brands, net of merchant fees, taxes, shipping, refunds, rebates, bad debt and sums paid to RDO’s third party coaching provider under a separate cross marketing agreement.

 

In addition, we are required by the 2010 Rich Dad License Agreement to pay into the cash collateral account on a monthly basis the amount by which the average cash balance of all unrestricted funds in our accounts for the prior 90 day period (excluding the proceeds from the sale of, or other realization upon, any non-core assets or any cash accounts from RDE made available to us) exceeds $6 million. Our merchant deposit reserve funds will also be credited to the Reserve Goal.  After the Reserve Goal has been met, we are required to pay RDO royalty payments equal to 10% of Gross Revenues in lieu of paying the current royalty to RDO and the unfulfilled royalty into the escrow account. If the combined amounts in the escrow account and the cash collateral account exceeds the Reserve Goal, the excess funds may be withdrawn from the escrow account twice each year and applied to the deferred fulfillment royalties that are due to RDO. In addition, on a quarterly basis, RDO may withdraw 40% of payments into the escrow account during the prior three-month period.

 

The 2010 Rich Dad License Agreement contains covenants relating to performance standards and cash operating profits. We are limited in making any capital expenditures with respect to any businesses other than the Rich Dad Education Business that exceed $500,000 per year without obtaining written approval from RDO. We must also consult with RDO prior to hiring a Chief Executive Officer, Chief Financial Officer or any other officer who reports directly to the Chief Executive Officer. RDO has the right to have one representative observe all meetings of our Board of Directors in a non-voting capacity.

 

In accordance with the terms of the Settlement Agreement, we issued 9.9% of our outstanding common stock (1,290,000 shares) to Rich Global and redeemed Rich Global’s 49% membership interest in RDE. Our common stock issued to Rich Global is subject to a shareholders’ agreement with us that gives Rich Global demand and piggyback registration rights after January 1, 2011. On March 18, 2011, we filed a Form 15 with the Securities and Exchange Commission (“SEC”) to deregister our common stock and suspend our reporting obligations under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended.  In connection with this action, we sought and obtained Rich Global’s consent to waive their demand and piggyback rights unless and until such time as we are again subject to the reporting obligations under the Exchange Act. Rich Global agreed to transfer the RDE assets to us, except for the data base of customer names and customer leads, resulting in full ownership by us of the business previously conducted by RDE.  We and Rich Global agreed to dissolve RDE and terminate the license and administrative services agreements associated with RDE. We have responsibility for any and all liabilities remaining in RDE, including but not limited to obligations related to the fulfillment of course work for the Rich Dad students. We agreed to release Rich Global from all general claims related to RDE and Rich Global agreed to release us from specific claims that it made against us and RDE in connection with its alleged default letter dated March 27, 2009. Among other things, the Settlement Agreement proposes enhanced cooperation in advertising, marketing, and educational programs between us and RDO through a customer contact and data base management strategy that emphasizes seamless support of the Rich Dad brand and its customers.

 

As of December 31, 2010, we owed approximately $3.6 million of current and deferred royalty payments, as defined in the 2010 Rich Dad License Agreement, of which approximately $2.8 million pertained to June 2010 through December 2010 activity. We suspended the 2010 royalty payments in conjunction with our mid-year business restructuring in an effort to conserve our available cash balances. On March 25, 2011, we entered into a credit agreement with the Rich Dad Parties that converted these royalties due into a promissory note with stated terms. See Note 14—Subsequent Event in the Notes to Consolidated Financial Statements for the year ended December 31, 2010 contained in Part II, Item 8 of this Annual Report

 

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for further information. This credit agreement effectively put us back in compliance with the terms set forth in the 2010 Rich Dad License Agreement. Beginning in 2011, we resumed paying royalties due relating to 2011 activity under the 2010 Rich Dad License Agreement.

 

Marketing

 

We acquire our customers through direct marketing activities using electronic media, such as email marketing, search engine optimization, social websites, and marketing and internet-based banner ads. We also utilize, to a lesser extent, telemarketing, television short-form commercials, radio advertising, direct mail, and newspaper advertising. Potential customers are invited to attend free two-hour preview workshops in their local areas, during which we offer follow-up three-day basic training courses. Customers that enroll and attend the basic training courses receive reference materials relevant to the subject matter. The basic training course is usually held over a weekend within two to four weeks of the initial free preview workshop. In 2010, approximately 21.8% of the attendees at the preview workshops enrolled in the basic training courses.

 

At the basic training courses, attendees are taught the fundamentals of the course topics and are encouraged to enroll in advanced, detailed courses covering specific topics addressed within the training segment. Our basic and advanced training programs are described below under the section entitled Training Programs.

 

In 2010, we also began offering our preview workshops and basic training courses in an online format.

 

Training Programs

 

For the year ended December 31, 2010, basic training courses accounted for 9.6% of our worldwide revenue and advanced training courses and mentoring accounted for 69.5% of our worldwide revenue. The remaining 20.9% of our worldwide revenue came from coaching and our other training services, products and programs.

 

Basic Training Courses

 

During 2010, we offered basic training courses under the following marketing programs and brands:

 

Rich Dad™ Education offers courses teaching real estate, financial instruments and entrepreneurship as well as philosophies taught by Robert Kiyosaki, author of Rich Dad Poor Dad. We currently have two Rich Dad™ Education courses, which are Rich Dad™ Learn to be Rich, which is focused on real estate investing, and Rich Dad™ Stock Success which is focused on investing in financial instruments. These courses concentrate on principles while allowing customers to apply what they have learned playing the board game, CASHFLOW® , which was developed by Mr. Kiyosaki. These courses are offered in the United States, the United Kingdom and Canada.

 

In the United Kingdom, we also offer products under the following brands:

 

Building Wealth™ offers a curriculum focused on real estate and the fundamentals of negotiating real estate purchases with sellers, rehabilitating distressed properties and leasing rental units to tenants to generate multiple sources of cash flow. Customers are taught the mechanics of completing a real estate transaction in their community, from making an offer to closing the transaction, with an emphasis on creative financing strategies.

 

Making Money from Property with Martin Roberts offers a real estate curriculum focused on property auctions. The seminar reflects the real estate expertise of Martin Roberts, a well-known U.K. presenter and property journalist who develops properties in the United Kingdom, Europe and Canada. Customers are taught about buying property at auctions, rental and capital growth strategies, negotiating transactions and buying properties overseas.

 

Teach Me To Trade® offers a curriculum focused on financial instrument trading strategies using software and specific teaching techniques designed by us. Customers are taught to understand the stock market, foreign exchange, options, futures, investment strategies, risks and how to improve returns in both bull and bear markets.

 

Women in Wealth™ teaches women how to take control of their financial circumstances, gain enough money and independence to achieve their financial goals and gain information on the latest wealth-building strategies and techniques.

 

Business Success Systems offers a business basics curriculum focused the many small business ideas and opportunities that are available to individuals. Customers are taught how to establish, run, sell or franchise these potential

 

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business opportunities. The education is based on practicalities of the legal and accounting requirements of setting up and running a business towards the product, placement and marketing both through traditional and internet avenues.

 

Advanced Training Courses

 

Customers who attend our basic training courses may choose to continue with advanced training courses in real estate or financial instruments investing or entrepreneurship skills. The advanced training courses of study under the Tigrent Learning brand include:

 

Real Estate Advanced Courses

 

Financial Instruments Advanced Courses

 

Entrepreneurial Advanced Courses

— Master Investor

 

— Master Trader™

 

— Master Entrepreneur

— Asset Protection & Tax Relief

 

— Cash Flow Options

 

— Buying & Selling Businesses

— Wholesale Buying

 

— Strategic Trading

 

— Network Marketing

— Discount Notes & Mortgages

 

— Spread Trader

 

— e-Commerce

— Properties in Probate

 

— Technical Mastery

 

— Business Expansion

— Mobile Homes & RV Parks

 

— Elite Options

 

— Product Development

— Foreclosures

 

— FACT (Futures & Commodity Trading)

 

— Business Financing

— Rehabbing Properties

 

— Asset Protection & Tax Relief

 

— Retail

— Short Sales & Mortgages

 

— H.I.T.S.™ (Hedging & Institutional Tactics & Strategies)

 

— Grant Writing

— Focus Forex

 

 

 

 

— Tax Liens

 

 

 

 

— Lease Options

 

 

 

 

— Commercial Real Estate

 

 

 

 

— Property Management & Cash Flow

 

 

 

 

— Domestic Land Development

 

 

 

 

— International Land Development

 

 

 

 

— Creative Real Estate Financing

 

 

 

 

— Real Estate Negotiating Techniques

 

 

 

 

— Apartment Conversion & Syndication (Canada)

 

 

 

 

— Distressed Property & Repossessions (UK)

 

 

 

 

— Asset Protection (UK)

 

 

 

 

— Lease Options/Purchase Options (UK)

 

 

 

 

— Houses of Multiple Occupancy (UK)

 

 

 

 

— Auction Training (UK)

 

 

 

 

 

Customers may access training content through multiple delivery channels, including:

 

·

 

Live instruction in classroom settings;

·

 

Onsite mentoring;

·

 

Telephonic coaching;

·

 

Electronic access to live online or pre-recorded on-demand programs;

·

 

Electronic media;

·

 

Conferences; and

·

 

Teleconferences.

 

Through strategic partners, customers can purchase a license to use supporting software for real estate or financial instruments investing. With either software program, a subscription-based data service is available for purchase which allows customers to interactively determine investment options and make better informed decisions about potential investments.

 

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Geographic Diversification

 

For the year ended December 31, 2010, 76.5% of our revenue was generated domestically and 23.5% from our foreign operations in Canada and the United Kingdom. For the year ended December 31, 2009, 88.9% of our revenue was generated in the U.S. and 11.1% internationally.

 

Competition

 

We compete, in a broad sense, with a number of organizations, including but not limited to: Armando Montelongo Worldwide, Inc., Investools Inc., Better Trades, Online Trading Academy, Stores Online and Nouveau Riche. These organizations also offer training on specific business subjects including real estate and stock market investing. However, we do not believe we compete directly with organizations that offer undergraduate and advanced degrees or continuing training programs.

 

Generally, competitive factors within the proprietary training market include the range and depth of course offerings, the quality of trainers, the quality of reference materials provided in connection with course studies and the cost of the training process. We believe that the range and depth of our course offerings, the quality of our trainers and reference materials are comparable or superior to those of our competitors. Typically, our trainers for our advanced courses have been active investors in their chosen field, have been trained by us and, to a large degree, are previous customers of our programs. Trainers for our advanced courses are chosen based on their knowledge and experience with the coursework covered, and are further qualified by meeting knowledge standards developed internally.

 

We have developed a broad line of training resource materials for real estate and financial products that support our course offerings. We believe that charges for our training courses are broadly consistent with those of our competitors.

 

Employees and Independent Contractors

 

On December 31, 2010, we had approximately 167 employees of whom 137, or 82.0%, were located in the United States and 30, or 18.0%, were located in the United Kingdom or Canada. In addition, we have approximately 100 independent contractors who are trainers, coaches and mentors. Our employees are not represented by a labor union, and we believe our relations with our employees are satisfactory. Our independent contractors are either paid commissions based upon the dollar value of the courses purchased by customers at our free preview workshops and basic training courses, or are paid fixed fees for teaching and mentoring advanced courses. Independent contractors are required to execute agreements with us that set forth their commission structures and contain customary confidentiality and non-competition provisions. The independent contractors also agree to comply with our Code of Conduct. The Code of Conduct is available on our corporate website, at http://www.tigrent.com on the “Investor Relations” page under “Corporate Governance.”

 

Available Information

 

We regularly filed reports with the Securities and Exchange Commission (“SEC”). These reports included Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other forms as required. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room located at 100 F Street NE, Washington, DC 20459. The public may obtain information from the public reference room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet website that contains the annual, quarterly, and current reports, proxy and information statements and other information that public companies (including us) file electronically with the SEC. Our electronic filings are available to the public at the SEC’s website, www.sec.gov.

 

We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports filed or furnished with the SEC available to the public through our website at www.tigrent.com. Information on our website is not part of this Annual Report on Form 10-K and is not incorporated by reference.

 

On March 18, 2011, in connection with our continuing efforts to reduce operating costs, we filed a Form 15 with the SEC to terminate the registration of our common stock under Section 12(g) of the Exchange Act and suspend our reporting obligations under Section 15(d) of the Exchange Act.

 

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ITEM 1A.  RISK FACTORS

 

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below in addition to the other cautionary statements, risks and information described elsewhere in this Annual Report on Form 10-K, as well as in our other filings with the SEC. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, it could have a material adverse effect on the Company, our business, financial condition, results of operations and/or our liquidity could be seriously harmed. In that event, the market price for our common stock will likely decline and you may lose all or part of your investment.

 

We have experienced significant negative cash flows from operations in fiscal 2010 and 2009. If this trend continues in the future, it could impair our ability to fund our working capital needs and adversely affect our financial condition.

 

Management currently projects that our available cash balances will be sufficient to maintain our operations during 2011. However, when considering all of the applicable operational and external risks and uncertainties, including, but not limited to cash contributions from new and ongoing business initiatives, our ability to effectively execute our strategies, negative outcomes from ongoing SEC investigations, and current and potential future litigation matters, we believe that we may not be adequately capitalized. We may seek to obtain additional capital through the issuance of equity or debt, which may dilute the equity holdings of our current investors.  In addition, we may seek to borrow additional capital from institutional and commercial banks or other sources to fund future operations on terms that may include restrictive covenants, liens on assets, high effective interest rates, and repayment provisions that reduce cash resources and limit future access to capital markets. We do not currently have any commitments for future external funding. Our ability to raise additional capital may be adversely impacted by the current economic environment. Since the fall of 2008, there has been significant deterioration in the credit and real estate markets that has not fully recovered as of the date of this report.  Continuing recessionary conditions in the economy threaten to cause further tightening of the credit and equity markets and more stringent lending and investing standards.  The persistence of these conditions could have a material adverse effect on our access to debt or equity capital. In addition, further deterioration in the economy could adversely affect our corporate results, which could adversely affect our financial condition and operations. In addition, our ability to raise additional capital may be adversely impacted by our financial results and liquidity position.  See the risk factors below entitled “Quotation of our common stock on the Pink Sheets® may adversely affect the liquidity, trading market and price of our common stock and our ability to raise capital.” and “We have filed to deregister our common stock under the Exchange Act, which could negatively affect the liquidity and trading prices of our common stock and result in less disclosure about the Company.” As a result of these and other factors, we do not know whether additional capital will be available when needed, or that, if available, we will be able to obtain additional capital on terms favorable to us or our stockholders. If we cannot generate the required revenues to sustain operations or obtain additional capital on acceptable terms, we will need to make further revisions to our business plan, sell or liquidate assets, file for bankruptcy or cease operations, which could cause our investors to suffer the loss of a significant portion or all of their investment in us.

 

Our failure to remain in compliance with the 2010 Rich Dad License Agreement could result in the termination of our license to the Rich Dad brand, which would materially adversely impact our business operating results and financial condition, given the high concentration of sales from course offerings under the Rich Dad® Education Brand

 

Our Rich Dad™ Education real estate and financial market course offerings accounted for approximately 94.1% of our total cash sales and 91.9% of total revenue in 2010. If sales from the Rich Dad™ Education Brand were to decrease for any reason or if our relationship with the Rich Dad Parties was terminated due to default under our agreements with the Rich Dad Parties, it would have a material adverse effect on our business, results of operations and financial condition. Our new agreements with the Rich Dad Parties are effective through December 31, 2014; however, there can be no assurances that our relationship will not terminate prior to that date if a default were to be declared. Under the 2010 Rich Dad License Agreement, we are required to pay (i) to RDO, a current royalty of 3% of Gross Revenues and (ii) into an escrow account, a deferred royalty of 5% of Gross Revenues. Failure to make any payments required under the 2010 Rich Dad License Agreement would give rise to an option in favor of RDO of declaring a default.  If RDO chose to declare us in default, and we failed to cure that default within 30 days of receipt of notice from RDO, RDO may, at its sole and absolute discretion, declare a material breach of the 2010 Rich Dad License Agreement and immediately terminate the agreement. As of December 31, 2010, we owed approximately $3.6 million of current and deferred royalty payments, as defined in the 2010 Rich Dad License Agreement, of which approximately $2.8 million pertained to June 2010 through December 2010 activity. We suspended the 2010 royalty payments in conjunction with our mid-year business restructuring in an effort to conserve our available cash balances. On March 25, 2011, we entered into a credit agreement with the Rich Dad Parties that converted these royalties due into a promissory note with stated terms. See Note 14—Subsequent Event in the Notes to Consolidated Financial Statements for the year ended December 31, 2010 contained in Part II, Item 8 of this Annual Report for further information. This credit agreement effectively put us back in compliance with the terms set forth in the 2010 Rich Dad

 

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License Agreement; however, there can be no assurance that we will not breach the terms of the 2010 Rich Dad License Agreement in the future.

 

Quotation of our common stock on the Pink Sheets® may adversely affect the liquidity, trading market and price of our common stock and our ability to raise capital.

 

Because our common stock is ineligible for quotation on The OTC Bulletin Board (the “OTCBB”) due to quoting inactivity under SEC Rule 15c2-11, our common stock is now quoted by OTC Markets Group, an automated quotation system under which broker-dealers publish quotes for trading in over-the-counter securities (also known as the Pink Sheets®).  Even if our common stock was more actively traded on the OTCBB, our stock would be ineligible for quotation as a result of the deregistration of our common stock under the Exchange Act.  The quotation of our common stock on the Pink Sheets® may reduce the price and liquidity of our common stock.  In addition, the quotation of our common stock on the Pink Sheets® may materially adversely affect our ability to raise capital on terms acceptable to us or at all.

 

We have filed to deregister our common stock under the Exchange Act, which could negatively affect the liquidity and trading prices of our common stock and result in less disclosure about the Company.

 

Given the increasing cost and resource demands of being a public company, the Company has decided to deregister its common stock under the Exchange Act and “go dark.” By going dark, our obligations to file reports with the SEC (including periodic reports, proxy statements, and tender offer statements) will cease and we expect that there will be a substantial decrease in the liquidity in our common stock even though stockholders may still continue to trade our common stock on the Pink Sheets®.  Further, the market’s interpretation of our motivation for “going dark” could vary from cost savings, to negative changes in our prospects, to serving insider interests, all of which may affect the overall price and liquidity of our common stock and our ability to raise capital on terms acceptable to us or at all.  In addition, companies with common stock quoted on the Pink Sheets® are not required to meet the reporting requirements set forth under the Exchange Act.  Although we plan to continue to provide at least limited financial information to allow for public trading of Company securities on the Pink Sheets®, there can no assurances that we will do so or that market makers will continue to make a market in our common stock.  As a result, investors may find it more difficult to dispose of or obtain accurate quotations as to the market value of our common stock, and the ability of our stockholders to sell our securities in the secondary market may be materially limited.

 

Our uses of cash are restricted under the license agreement with RDO.

 

The 2010 Rich Dad License Agreement requires us to establish and maintain a reserve account in an amount equal to 30% of our deferred revenue during the term of the 2010 Rich Dad License Agreement. The purpose of the reserve account is to ensure that we can fulfill our contractual commitments to the customers who purchase the Rich Dad courses. We will not be able to utilize the cash accumulated in the reserve account for general operating purposes. This restriction on the use of cash associated with the Rich Dad™ Education products impacts our liquidity and creates additional administrative obligations for us.

 

If we are unable to maintain a satisfactory relationship with RDO’s licensed third party provider of coaching services, it could have a material adverse impact on our business and financial results.

 

The Settlement Agreement with the Rich Dad Parties outlines an enhanced level of cooperation with RDO’s licensed third party provider of coaching services, which was realized during 2010. The failure to realize the benefits of the enhanced cooperation levels in the future, including cost savings, could have an adverse affect on our financial condition or results of operations.

 

If we are unable to successfully conclude the litigation, governmental investigations and inquiries pending against us, our business, financial condition, results of operations and growth prospects could be adversely affected.

 

Certain government agencies have instituted inquiries regarding us, including the SEC. We are also subject to various other lawsuits, investigations and claims covering a range of matters. See Note 13—Commitments and Contingencies in the Notes to Consolidated Financial Statements for the year ended December 31, 2010 contained in Part II, Item 8 of this Annual Report for a detailed discussion of these matters.

 

We cannot predict the ultimate outcome of these matters, and we expect to incur significant legal costs and other expenses in connection with them. Such costs and expenses could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock. We may be required to pay substantial damages or

 

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settlement costs in excess of our insurance coverage related to these matters, which could have further material adverse effects on our financial condition or results of operations.

 

While we continue to cooperate with the various government investigations, we cannot predict the duration or outcome of the investigations, and the investigations may expand, and other regulatory agencies may become involved. The outcome and costs associated with these investigations could have a material adverse effect on our business, financial condition, or results of operations, and the investigations could result in adverse publicity and divert the efforts and attention of our management team from our ordinary business operations. The government investigations and any related legal and administrative proceedings could also include the institution of administrative, civil injunctive or criminal proceedings against us and/or our current or former directors, officers, employees or independent contractors, the imposition of fines and penalties, suspensions and/or other remedies and sanctions. Such proceedings, fines, penalties and/or other remedies and sanctions could have a material adverse effect on our business, financial condition, or results of operations.

 

We may require additional capital, which may not be available on favorable terms, or at all.

 

Any additional equity or debt financing, if available at all, may be available only on terms that are not favorable to us. If we are able to raise capital through equity financings, your interest in us would be diluted, and the securities we issue may have rights, preferences and privileges that are senior to our common shares. If we raise capital through the issuance of debt, the incurrence and repayment of such debt could have a material adverse effect on our business, operating results, financial condition and results of operations. If we cannot obtain adequate capital or sources of credit on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected. See the risk factors above entitled “Quotation of our common stock on the Pink Sheets® may adversely affect the liquidity, trading market and price of our common stock and our ability to raise capital.” and “We have filed to deregister our common stock under the Exchange Act, which could negatively affect the liquidity and trading prices of our common stock and result in less disclosure about the Company.” for additional factors that may affect our ability to raise additional capital.

 

Our common stock will no longer be eligible to be publicly sold under Rule 144.

 

As a former shell company, our shares of common stock cannot be publicly resold under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), unless we comply with the requirements of Rule 144(i).  Two of the requirements of Rule 144(i) are that we be subject to the reporting requirements of the Exchange Act and that we have filed all reports and other materials required to be filed during the preceding 12 months. Because we have deregistered our common stock under the Exchange Act, we are no longer subject to the reporting requirements of the Exchange Act and therefore no longer meet the requirements set forth in Rule 144(i).  As a result, any resales of shares of our common stock must be made pursuant to either a registration statement under the Securities Act or another exemption from those registration requirements.  The exemption from registration provided in Section 4(1) of the Securities Act for resales by persons other than “an issuer, underwriter or a dealer” may be available to some of our shareholders.  However, under NASD regulations, because we were a shell company, that exemption may not be available for the resale of our securities by directors, executive officers, promoters or founders or their transferees. See NASD Regulation, Inc., CCH Federal Securities Law Reporter, 1990-2000 Decisions, Paragraph No. 77,681, the so-called “Worm-Wulff Letter.”

 

Uncertain economic conditions and other changes experienced by our customers, including the willingness to trade or invest in securities or real estate, could influence their willingness to spend their discretionary income on our course offerings, contributing — along with our ongoing restructuring activities — to uncertainty and forecasting risk regarding our future results of operations.

 

Uncertain economic conditions may affect our customers’ discretionary income, access to credit and ability and willingness to purchase our training courses and products. Economic conditions and consumer spending are influenced by a wide range of factors that are beyond our control in which we have significant forecasting risk. These conditions include but are not limited to:

 

·              Demand for training and our related products;

·              Conditions in the securities and investment markets;

·              Conditions in the real estate market;

·              Availability of mortgage financing and other forms of credit and consumer credit;

·              General economic and business conditions;

·              Adverse changes in consumer confidence levels;

·              General political developments; and

·              Adverse weather or natural or man-made disasters.

 

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A prolonged economic downturn or uncertainty over future economic conditions, particularly in the United States, could increase these effects on our business. In addition, our ongoing business restructuring efforts and related operational changes adds to the difficulty and risk of forecasting the timing, magnitude and direction of operational and financial outcomes with respect to our business.

 

We face significant competition in our markets.

 

Our success depends upon our ability to attract customers by providing high-quality courses and training materials, as well as to attract and retain quality trainers to provide those courses. The market for training courses for specific business issues, such as real estate or stock market investing, is intensely competitive. If we are unable to successfully compete, our business, operating results and financial condition will be materially harmed. Certain competitors may be able to secure alliances with customers and affiliates on more favorable terms, devote greater resources to marketing and promotional campaigns and devote substantially more resources to course development than we can. In addition, it is possible that certain competitors, or potential competitors, could reduce their pricing to levels that would make it difficult for us to compete. Increased competition may result in reduced operating margins, as well as loss of market share and brand recognition.

 

In addition, in order to compete effectively in our markets, we may need to change our business in significant ways. For example, we may change our pricing, product, or service offerings, make key decisions about technology changes or marketing strategies, or acquire additional businesses or technologies. Any of these actions could hurt our business, results of operations, and financial condition.

 

Laws and regulations can affect the operation of our business and may limit our ability to operate in certain jurisdictions.

 

Federal, state and international laws and regulations impact our operations and may limit our ability to obtain authorization to operate in some states or countries. Many federal, state and international governmental agencies assert authority to regulate providers of investment training programs. Failure to comply with these regulations could result in legal action instituted by the jurisdictions, including cease and desist and injunctive actions. In the event we are subject to such legal action, our reputation could be harmed and the demand for our course offerings could be significantly reduced. See Note 13—Commitments and Contingencies in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report, for a detailed discussion of regulatory proceedings in which we are currently involved. Future regulatory changes with respect to the various topics of our courses or the investment techniques we teach, could also impact the content of our course offerings, which in turn, could negatively impact future sales.

 

We could have liability or our reputation could be damaged if we do not protect customer data or if our information systems are breached.

 

We are dependent on information technology networks and systems to process, transmit and store electronic information and to communicate among our locations around the world and with our customers. Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information. We are also required at times to manage, utilize and store sensitive or confidential customer or employee data. As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of individually identifiable information. If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential customer or employee data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose customers.

 

Our ability to offer courses may be affected by natural disaster, strikes or other unpredictable events.

 

Natural disasters, external labor disruptions and other adverse events may affect our ability to conduct our business, resulting in a loss of revenue. Severe weather or natural disasters, such as floods and earthquakes, may reduce the ability of our course participants to travel to our courses. These natural disasters may also disrupt the printing and transportation of the materials used in our direct mail campaigns. Furthermore, postal strikes could occur in the countries where we operate which could delay and reduce delivery of our direct mail marketing materials. Transportation strikes could also occur in the countries where we operate, adversely affecting course offerings.

 

Our operations outside the United States subject us to additional risks inherent in international operations.

 

We currently operate in the United Kingdom and Canada in addition to our U.S. operations. As a result, we face risks that are inherent in international operations, including:

 

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·              Complexity of operations across borders;

·              Currency exchange rate fluctuations;

·              Multiple and possibly overlapping or conflicting tax laws;

·              Applicability of training concepts to foreign markets; and

·              Compliance with foreign regulatory requirements.

 

If we are unable to successfully manage these factors, our business could be adversely affected and our results of operations could suffer.

 

Our Board of Directors, without stockholder approval, may issue preferred stock that could dilute the voting power or other rights of our other stockholders and make it more difficult for a third party to acquire a majority of our outstanding voting stock.

 

Our Board of Directors, without stockholder approval, may issue up to 10 million shares of preferred stock. The Board of Directors can fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions, which could dilute the voting strength of the holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. Issuance of preferred stock could also have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding voting stock.

 

Our loss of any of our key executive personnel, or high performing trainers, could disrupt our operations and reduce our profitability.

 

The loss of the services of any key individuals may have a material adverse effect on our business. We currently do not maintain key man insurance on any member of our senior executive management team.

 

Our future success also depends on our ability to retain and attract high performing speakers and trainers. The loss and/or inability to retain these speakers and trainers, or to recruit suitable replacements, may affect our performance and reduce our profitability.

 

Any decrease in the popularity of the Rich Dad® Education Brand would have an adverse impact on our financial condition.

 

If the Rich Dad™ Education Brand were to experience a decrease in popularity, it would have a significant impact on our business, results of operations and financial condition. In the current economic environment, many individuals are not interested in purchasing real estate investment courses or products. The decreased interest in real estate investing could impact the Rich Dad™ Education Brand. Additionally, if Mr. and Mrs. Kiyosaki, the founders of the Rich Dad™ Education Brand, do not spend as much time in the public eye, it could impact the popularity of the Rich Dad™ Education Brand and consequently impact our sales of Rich Dad™ Education products.

 

If there is a material change in our relationships with our customers or in the demand by potential customers for our services, it could have a significant impact on our business.

 

Our success is dependent on our ability to successfully attract customers to programs that they feel will enhance their skill sets and enhance their earning power. Their level of satisfaction with our course offerings affects our reputation as they tell others about their experience. Our business could suffer if we fail to deliver quality programs at acceptable price points.

 

We have a negative per share book value.

 

The market price of our common stock was $0.15 per share at the close of business on March 4, 2011, and exceeded our December 31, 2010 book value, which was a stockholders’ deficit of $44.2 million, or $3.38 book value per share deficit. The lower book value per share compared to our market price per share increases the risk that our market price per share may decline in the future.

 

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We have material weaknesses in our internal control over financial reporting that could adversely affect our ability to report our financial condition and results of operations accurately and on a timely basis.

 

In connection with our assessment of internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, we identified material weaknesses in our internal control. For a discussion of our internal control over financial reporting and a description of the identified material weaknesses, see Item 9(A) Controls and Procedures.

 

Material weaknesses in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. We are developing remediation plans to strengthen our internal controls in response to the previously identified material weaknesses; however, our ability to make capital investments to that end is currently constrained. If we are unsuccessful in developing, implementing or following our remediation plans, or fail to update our internal controls as our business evolves, we may not be able to timely or accurately report our financial condition, results of operations or cash flows or maintain effective disclosure controls and procedures. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC, securities litigation and a general loss of investor confidence, any one of which could adversely affect our business prospects and the valuation of our common stock.

 

Furthermore, there are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. We could face additional litigation exposure and a greater likelihood of an SEC enforcement or regulatory action if further restatements were to occur or other accounting-related problems emerge. In addition, any future restatements or other accounting-related problems may adversely affect our financial condition, results of operations and cash flows.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

The following table sets forth our office locations as of March 4, 2011:

 

Purpose

 

Location

 

Own/lease

 

Approximate
square footage

 

Lease expiration

 

Executive offices

 

Cape Coral, FL

 

Own

 

40,734

 

 

U.S. operations and telemarketing headquarters

 

West Valley City, UT

 

Lease

 

12,400

 

August 2013

 

United Kingdom headquarters

 

London, England

 

Lease

 

2,727

 

April 2012

 

Canadian headquarters

 

Ontario, Canada

 

Lease

 

5,100

 

February 2014

 

Training center

 

Surrey, England

 

Lease

 

1,990

 

December 2011

 

 

 

 

 

 

 

62,951

 

 

 

 

We own the land and building of our executive offices in Cape Coral, Florida. Our executive office building is approximately 40,734 square feet and is situated on approximately 4.5 acres. We have hired a real estate broker to assist us with the sale of this facility, but there is no assurance that a sale will occur in 2011 or at all.

 

We lease approximately 12,400 square feet of office space in West Valley City, Utah for our U.S. operations and telemarketing headquarters. The lease expires in August 2013 and rent is payable monthly at rates increasing from $18,760 to $19,902 over the term of the lease.

 

We lease approximately 2,727 square feet of office space in London, England for our United Kingdom headquarters. The lease expires in April 2012 and our monthly rental rate is approximately $7,900.

 

We lease approximately 5,100 square feet of office space in Ontario, Canada for our Canadian headquarters. The lease expires in February 2014 and rent is payable monthly at rates increasing from approximately $2,760 to $3,150 over the term of the lease.

 

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We lease approximately 1,990 square feet of office space in Surrey, England which is being used as a training center. The lease expires in December 2011 and the rent is approximately $21,121 per month.

 

ITEM 3.  LEGAL PROCEEDINGS

 

See Note 13—Commitments and Contingencies in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report for information about legal proceedings in which we are involved.

 

ITEM 4.  RESERVED

 

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PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

On March 18, 2011, in connection with our continuing efforts to reduce operating costs, we filed a Form 15 with the SEC to terminate the registration of our common stock under Section 12(g) of the Exchange Act and suspend our reporting obligations under Section 15(d) of the Exchange Act.

 

During 2010 and 2009, our common stock was quoted on the OTCBB under the trading symbol “TIGE”. The following table shows the high and low sales prices of our common stock for each quarter in 2010 and 2009. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions, and may not represent actual transactions.

 

 

 

High

 

Low

 

Year ended December 31, 2010

 

 

 

 

 

Fourth Quarter

 

$

0.22

 

$

0.06

 

Third Quarter

 

$

0.47

 

$

0.18

 

Second Quarter

 

$

0.80

 

$

0.29

 

First Quarter

 

$

1.01

 

$

0.43

 

Year ended December 31, 2009

 

 

 

 

 

Fourth Quarter

 

$

1.43

 

$

0.41

 

Third Quarter

 

$

1.80

 

$

0.76

 

Second Quarter

 

$

1.65

 

$

0.55

 

First Quarter

 

$

1.25

 

$

0.26

 

 

Effective February 22, 2011, due to low trading volumes, our stock ceased to be quoted on the OTCBB and is currently being quoted on the OTCQB, which is the second of three tiers of the OTC Market Group. As of March 4, 2011, the closing price of our common stock, as reported on OTCQB, was $0.15. According to the records of our transfer agent, there were 131 shareholders of record of our common stock as of February 28, 2011. Because many of our shares of common stock are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of beneficial shareholders represented by these record holders.

 

Dividend Policy

 

We have not paid out any cash dividends for the past two years and do not anticipate paying any cash dividends on our common stock in the foreseeable future.

 

Equity Compensation Plan Information

 

The following table summarizes, as of December 31, 2010, the equity compensation plans under which we may issue shares of stock to our directors, officers, employees and consultants.

 

Plan Category

 

Number of common
shares to be issued
upon exercise of
outstanding options

 

Weighted average
exercise price of
outstanding options

 

Number of common
shares remaining
available for future
issuance under equity
compensation plans

 

2009 Incentive Plan, approved by security holders

 

900,000

(a)

NA

(a)

340,000

 

1998 Stock Option Plan, approved by security holders

 

73,000

 

$

2.30

 

 

 


(a)   On December 22, 2010, the Compensation Committee of the Board of Directors approved restricted stock award grants to certain Company officers pursuant to our 2009 Incentive Plan. The awards vest fully on December 22, 2014, or upon a “change of control,” as defined in the Plan.

 

See Note 8—Stock-Based Compensation in the Notes to Consolidated Financial Statements contained in Part II, 

 

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Item 8 of this Annual Report for information about our equity compensation plans.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

Not required.

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the periods indicated should be read in conjunction with our consolidated financial statements, related notes and the other financial data included elsewhere in our Annual Report on Form 10-K. In addition to historical information, this discussion contains forward-looking statements involving risks, uncertainties and assumptions that could cause our results to differ materially from expectations. See our preceding cautionary language under the title Cautionary Statement Regarding Forward-Looking Statements immediately preceding Part I, Item 1 under the title Business as well as the risk set forth in Part I, Item 1A. Risk Factors for factors that could cause future results to differ materially.

 

Business Overview

 

We are a provider of practical, high-quality and value-based training, conferences, publications, technology-based tools and mentoring to help customers become financially knowledgeable. We provide customers with comprehensive instruction and mentoring on the topics of real estate and financial instruments investing and entrepreneurship in the United States, the United Kingdom, and Canada. Our training is offered in non-accredited free preview workshops, as well as basic training, advanced courses, mentoring and coaching.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA

 

As used in our operating data, EBITDA is defined as net income (loss) excluding the impact of: interest expense; interest income; income tax provision; and depreciation and amortization. We define “Adjusted EBITDA” as EBITDA adjusted for: asset impairments; special items (including the costs associated with the SEC and the DOJ investigations and the related class action and derivative lawsuits); litigation settlement and related legal expenses related to non-core business activities; other income, net; stock-based compensation expense; equity loss from investments in real estate; severance expenses; the net change in deferred revenue; and the net change in deferred course expenses. Adjusted EBITDA is not a financial performance measurement according to accounting principles generally accepted in the United States (“GAAP”).

 

We use Adjusted EBITDA as a key measure in evaluating our operations and decision-making. We feel it is a useful measure in determining our performance since it takes into account the change in deferred revenue and deferred course expenses in combination with our operating expenses. We reference Adjusted EBITDA frequently, since it provides supplemental information that facilitates internal comparisons to historical operating performance of prior periods and external comparisons to competitors’ historical operating performance in our industry. We plan and forecast our business using Adjusted EBITDA, with comparisons of actual to planned and forecasted Adjusted EBITDA and we provide incentives to management based on Adjusted EBITDA goals. In addition, we provide Adjusted EBITDA because we believe investors and security analysts find it to be a useful measure for evaluating our performance.

 

Many costs to acquire customers have been expended before a customer attends any basic or advanced training. Those costs include media, travel, facilities and instructor fees for the preview workshops and are expensed when incurred. Licensing fees paid to Rich Global and telemarketing and speaker commissions are deferred and recognized when the related revenue is recognized. Revenue recognition of course fees paid by customers to enroll in any basic or advanced training courses at registration is deferred until (i) the course is attended by the customer, (ii) the customer has received the course content in an electronic format, (iii) the contract expires, or (iv) revenue is recognized through course breakage.  It is only after one of those four occurrences that revenue is considered earned. Thus, reporting in accordance with GAAP creates significant timing differences between the receipt and disbursement of cash with the recognition of the related revenue and expenses, both in our Consolidated Statements of Cash Flows and Consolidated Statements of Operations. As a result of these factors, our operating cash flows can vary significantly from our results of operations for the same period. For this reason, we believe Adjusted EBITDA is an important non-GAAP financial measure.

 

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Adjusted EBITDA has material limitations and should not be considered as an alternative to net income (loss), cash flows provided by operations, investing or financing activities or other financial statement data presented in the Consolidated Financial Statements as indicators of financial performance or liquidity. Items excluded from Adjusted EBITDA are significant components in understanding our financial performance. Because Adjusted EBITDA is not a financial measurement calculated in accordance with GAAP and is subject to varying calculations, Adjusted EBITDA as presented may not be comparable to other similarly titled measures of performance used by other companies.

 

The table below is a reconciliation of our net income to EBITDA and Adjusted EBITDA for the periods set forth below (in thousands):

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Net income (loss)

 

$

(697

)

$

9,779

 

Interest income

 

(339

)

(358

)

Interest expense

 

438

 

232

 

Income tax provision

 

1,053

 

2,438

 

Depreciation and amortization

 

775

 

995

 

EBITDA

 

1,230

 

13,086

 

Impairment of assets

 

4,661

 

2,162

 

Special items

 

24

 

315

 

Litigation settlement and related legal expenses

 

1,503

 

5,003

 

Other income, net

 

(261

)

(313

)

Stock-based compensation expense

 

3

 

77

 

Equity losses from investment in real estate

 

283

 

154

 

Severance expense

 

1,009

 

326

 

Net change in deferred revenue

 

(18,733

)

(34,793

)

Net change in deferred course costs

 

3,573

 

6,640

 

Adjusted EBITDA

 

$

(6,708

)

$

(7,343

)

 

Cash Sales

 

The following table provides a reconciliation of our cash sales by segment to our reported revenue. Cash sales performance is a metric used by management in assessing the performance of each of our business segments. We believe that our total cash sales of $83.9 million in 2010 is a reasonable reflection of our resized business model, as more fully discussed below. Deferred revenue represents the difference between our cash sales and the impact of applying our revenue recognition policies to those cash sales. Cash sales are not a financial performance measurement in accordance with GAAP; therefore we are presenting a table to reconcile the cash sales to revenue reported in accordance with GAAP (table presented in thousands):

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Cash received from course and product sales:

 

 

 

 

 

Proprietary brands

 

 

 

 

 

Real estate training

 

$

3,731

 

$

6,368

 

Financial markets training

 

1,197

 

3,260

 

Rich Dad™ Education

 

 

 

 

 

Real estate training

 

60,747

 

97,684

 

Financial markets training

 

18,227

 

28,819

 

Total consolidated cash received from course and product sales

 

83,902

 

136,131

 

Change in deferred revenue

 

 

 

 

 

(Increase)/decrease to deferred revenue:

 

 

 

 

 

Proprietary brands

 

 

 

 

 

Real estate training

 

2,235

 

9,839

 

Financial markets training

 

1,165

 

9,368

 

Rich Dad™ Education

 

 

 

 

 

Real estate training

 

15,898

 

23,934

 

Financial markets training

 

(565

)

(8,348

)

Total consolidated change in deferred revenue

 

18,733

 

34,793

 

Revenue:

 

 

 

 

 

Proprietary brands

 

 

 

 

 

Real estate training

 

5,966

 

16,207

 

Financial markets training

 

2,362

 

12,628

 

Rich Dad™ Education

 

 

 

 

 

Real estate training

 

76,645

 

121,618

 

Financial markets training

 

17,662

 

20,471

 

Total consolidated revenue for financial reporting purposes

 

$

102,635

 

$

170,924

 

 

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Executive Overview

 

We had a difficult operating year despite reporting only a modest consolidated net loss in 2010. The difficult economic environment, historically tight credit markets that limited access to funding for our customers, and decreased sales of our Rich Dad products all contributed to our negative cash outflow of $6.8 million. This net cash outflow was an improvement from the 2009 negative cash outflow of $12.8 million. During the past few years, we had attempted various expansion efforts. We had rolled out new proprietary course offerings in established market places, as well as attempted global expansion for both new and established course offerings. These expansion efforts were costly and primarily unsuccessful. Given the current economic climate and our declining cash position, we discontinued these expansion efforts, and during 2010, began focusing on increasing the profitability of our core licensed brand, Rich Dad™ Education. In addition, we reduced the number of events related to our Rich Dad brand in an effort to minimize market saturation. We also began focusing on maximizing the pace and cost efficiency with which we fulfill our long-term customer commitments to our Rich Dad customers. We also implemented significant cost reductions. See Management’s Plan below for a further discussion of our business.

 

On May 26, 2010, we entered into definitive agreements with the Rich Dad Parties to restructure the agreements under which we license and operate the Rich Dad brand.  The Rich Dad Parties are entities controlled by Robert and Kim Kiyosaki.  In connection with the restructuring, we entered into (i) a License Agreement with the Rich Dad Parties (the “2010 Rich Dad License Agreement”), relating to the Rich Dad brand, and (ii) a Settlement Agreement and Release with the Rich Dad Parties, (the “Settlement Agreement”), relating to the previous Rich Dad License Agreement for the Rich Dad brand. We and the Rich Dad Parties also committed to enter into a cooperative marketing agreement relating to the development and implementation of improved customer contact management strategies. See Licensing Agreements with the Rich Dad Parties, contained in Part I, Item 1 of this Annual Report on Form 10-K for more details about the restructuring and the terms of the license agreements with the Rich Dad Parties. As of December 31, 2010, we owed approximately $3.6 million of current and deferred royalty payments, as defined in the 2010 Rich Dad License Agreement, of which approximately $2.8 million pertained to June 2010 through December 2010 activity. We suspended the 2010 royalty payments in conjunction with our mid-year business restructuring in an effort to conserve our available cash balances. On March 25, 2011, we entered into a credit agreement with the Rich Dad Parties that converted these royalties due into a promissory note with stated terms. See Note 14—Subsequent Event in the Notes to Consolidated Financial Statements for the year ended December 31, 2010 contained in Part II, Item 8 of this Annual Report for further information. This credit agreement effectively put us back in compliance with the terms set forth in the 2010 Rich Dad License Agreement. Beginning in 2011, we resumed paying royalties due relating to 2011 activity under the 2010 Rich Dad License Agreement.

 

Management’s Plan

 

In response to the continued decline in profitability and the related impact on our cash position, we have taken a series of actions to improve the overall effectiveness of our marketing and have restructured our operational costs to be more consistent with our current revenues. More specifically, we have significantly reduced the number of live events, eliminated historically weak markets for live events and reduced the frequency in which we visit any one particular market. We believe these actions will improve the profitability of future live events. While we implemented many of these changes early in 2010, upon reevaluation, we made additional significant modifications to the event schedule in the third quarter of 2010 in order to optimize our operating structure.  The primary focus of the reduction of scheduled events was in the U.S. At the same time, we reduced the price of our basic training courses, which increased the percentage of customers who purchased basic training courses during the free preview workshops. See the Revenue section below, for additional operating statistics. In addition, we are striving to fulfill more of our advanced courses online in an effort to reduce costs. During the fourth quarter of 2010, we continued the development and testing of digitally-delivered programs, which are expected to decrease our event and

 

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fulfillment costs and lower our marketing costs.

 

In 2010, we implemented reductions in staff to align with our anticipated sales level. In addition, we decreased occupancy costs and reduced operating costs in all areas.  Many of these cost-cutting actions occurred during the third quarter of 2010. In October 2010, we sold two of our non-core assets and plan to continue to pursue the sale of the remaining non-core assets but cannot be assured when or if such sales will be completed. Also, as part of our analysis of ways to reduce costs and in light of the high cost of continuing to be a public reporting company under the Exchange Act and complying with the Sarbanes-Oxley Act of 2002, we are deregistering our common stock and suspending our reporting obligations under the Exchange Act. Although deregistering under the Exchange Act is expected to provide substantial savings as a result of the elimination of the costs of being a reporting company under the Exchange Act, it may also result in a less liquid market for our shares.

 

Outlook

 

We believe that our recent actions to reduce our overall operating costs through reductions in personnel and discretionary spending and suspending our reporting obligations under the Exchange Act, coupled with our restructured relationship with the Rich Dad Parties, will enable us to generate sufficient liquidity to fund our working capital needs through December 31, 2011. As of the date of this report, we are projecting improved operating results during 2011 compared to 2010. Although we expect our 2011 cash sales to remain relatively flat with 2010, we expect that a full year’s benefit from the cost reduction efforts that were implemented throughout 2010, as more fully discussed above, will provide some improvement in operating results. More specifically, our 2011 operating plan, as approved by our Board of Directors, calls for total cash sales of $81.5 million and adjusted EBITDA of $4.0 million, as those terms are defined under the caption entitled Non-GAAP Financial Measures above. The 2011 operating plan assumes, among other things, that we can effectively execute our business initiatives outlined above and that we do not encounter material negative outcomes as a result of the risks and uncertainties implicit in any plan or those described in the Risk Factors section contained in Part I. Item 1A. of this Annual Report on Form 10-K.  We believe that our year-to-date performance against the plan indicates that these anticipated results are achievable; however, there can be no assurance that this will be the case.

 

Recent Operating Activity

 

Our operating results for the quarter ended December 31, 2010 reflected a net loss of $5.7 million on revenue of $10.3 million. Revenue during this period was negatively impacted by:

 

·                  reduced preview workshop events offered, primarily during the second half of 2010 compared with the same period of 2009;

·                  reduced shipments of electronic media to our customers; and

·                  our fourth quarter estimate of breakage revenue, which had the effect of lowering revenue during the period.

 

As discussed in Management’s Plan above, we made the decision to significantly reduce the preview workshop events during the third quarter of 2010, and upon further evaluation, slightly increased the number of planned events during the fourth quarter of 2010, but still well below historical levels. Specifically, in the United States, we visited 26 markets in the fourth quarter of 2010 compared to 107 markets in the fourth quarter of 2009. During 2011, we plan on visiting approximately 184 markets in the U.S. The reduced number of preview events during the third quarter of 2010 had the effect of reducing our fourth quarter revenue since we fulfilled fewer basic and advanced training courses during the period. Also, we delayed the shipments of the electronic media to our customers which allowed us time to refresh the course materials. In addition, our breakage revenue estimate was negatively impacted by our October 2009 decision to extend our typical customer contract expiration date from one year to two years.

 

Our operating expenses, during the fourth quarter, included approximately $0.7 million of net expenses associated with litigation settlements and related legal expenses involving non-core activities of our business. Our general and administrative expenses for the quarter ended December 31, 2010 were $3.9 million, which was 48% lower than in the fourth quarter of 2009.

 

Net cash used in operating activities for the quarter ended December 31, 2010 was $0.8 million. This represents a significant improvement from $2.9 million used in the same period of 2009 and reflects the various cost-cutting measures and business optimization efforts that we have made during the most recent quarters of 2010, as more fully discussed in Management’s Plan above.

 

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Adjusted EBITDA, as described in our Non-GAAP Financial Measures above, for the quarter ended December 31, 2010 was negative $1.6 million, which was relatively consistent with the first three quarters of 2010. Adjusted EBITDA in 2010, by quarter, was as follows: first quarter — ($1.6) million; second quarter — ($1.9) million; third quarter — ($1.6) million; and fourth quarter — ($1.6) million.

 

Results of Operations

 

Our operating results, expressed as a percentage of revenue for the year ended December 31, 2010 (“2010”) and the year ended December 31, 2009 (“2009”) are set forth in the table below:

 

 

 

2010

 

2009

 

Revenue

 

100.0

%

100.0

%

Operating costs and expenses:

 

 

 

 

 

Direct course expenses

 

44.1

 

41.2

 

Advertising and sales expenses

 

29.5

 

30.4

 

General and administrative expenses

 

19.9

 

17.2

 

Impairment of assets

 

4.5

 

1.3

 

Litigation settlement expenses

 

1.5

 

2.9

 

Total operating costs and expenses

 

99.5

 

93.0

 

Income from operations

 

0.5

 

7.0

 

Other income (loss):

 

 

 

 

 

Other income, net

 

0.2

 

0.1

 

Interest income

 

0.3

 

0.2

 

Interest expense

 

(0.4

)

(0.1

)

Equity loss from investment in real estate

 

(0.3

)

(0.1

)

Total other income (loss)

 

(0.2

)

0.1

 

Income before income taxes

 

0.3

 

7.1

 

Income tax provision

 

(1.0

)

(1.4

)

Net income (loss)

 

(0.7

)%

5.7

%

 

Business Segments

 

We operate in two business segments: Proprietary brands and the Rich Dad™ Education Brand. The proportion of our total revenue attributable to each segment is as follows:

 

 

 

Years ended
December 31,

 

As a percentage of total revenue

 

2010

 

2009

 

Proprietary brands:

 

 

 

 

 

Real estate training

 

5.8

%

9.5

%

Financial markets training

 

2.3

 

7.4

 

Subtotal

 

8.1

 

16.9

 

Rich Dad™ Education:

 

 

 

 

 

Real estate training

 

74.7

 

71.2

 

Financial markets training

 

17.2

 

11.9

 

Subtotal

 

91.9

 

83.1

 

Total consolidated revenue for financial reporting purposes

 

100.0

%

100.0

%

 

Proprietary Brands

 

Real estate training

 

During the past two years, our real estate Proprietary brands have been primarily offered in the United Kingdom. We had some limited offerings in Canada during 2009.  We also tested various Proprietary brands during 2009, none of which are currently being offered. The Proprietary brands currently include Building Wealth ™, Making Money from Property with Martin Roberts and Women in Wealth™.  As discussed in the Our Strategy section of Part I, Item 1A - Business, our focus in the United States has been on enhancing the Rich Dad™ Education brand.

 

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Cash sales and revenue decreased to $3.7 million and $6.0 million, respectively, in 2010, compared with cash sales and revenue of $6.4 million and $16.2 million, respectively, in 2009.  The decrease in cash sales and revenue was primarily due to a reduction in the number of course events held and a decrease in revenue recognized from course breakage. Revenue from course breakage decreased to $0.9 million in 2010, as compared with $4.2 million in 2009.

 

Financial instruments training

 

EduTrades, the Proprietary brands financial instruments training division, began operations in July 2002 with the acquisition of Teach Me to Trade ®. Under this brand, we provide training to vocational investors in financial instruments, such as stocks, options, futures and foreign exchange. Our training provides skills and knowledge on trading fundamentals as well as advanced technical analysis to potential investors. We continue to offer Teach Me to Trade ® in the United Kingdom.

 

Cash sales and revenue decreased to $1.2 million and $2.4 million, respectively, in 2010, compared with cash sales and revenue of $3.3 million and $12.6 million, respectively, in 2009. The decrease in cash sales was primarily due to a reduction in the number of events held. Revenue was impacted by recognition of $0.3 million of course breakage in 2010 compared with $2.1 million of course breakage revenue recorded in 2009.

 

Rich Dad™ Education

 

In 2006, we created RDE in alliance with Rich Global, and launched the Rich Dad™ Education brand which is based on the investing principles and philosophy of Robert Kiyosaki as detailed in his best-selling book, Rich Dad Poor Dad. Our Rich Dad™ Education brands provide investor and entrepreneurship training in the United States, the United Kingdom and Canada. See Licensing Agreements with the Rich Dad Parties, contained in Part I, Item 1 of this Annual Report on Form 10-K for information pertaining to our licensing arrangements with Rich Global.

 

Real estate training

 

Cash sales and revenue decreased to $60.7 million and $76.6 million, respectively, in 2010 compared with cash sales and revenue of $97.7 million and $121.6 million, respectively, in 2009.  We believe the decrease in cash sales was primarily attributable to our decision to reduce the number of events held in an effort to increase the profitability of the events. Also, to a lesser extent, we believe that the overall decrease in consumer spending and tightening credit markets that impacted the housing market and increased the perception of lower profit potential from real estate investments had a negative impact on our business.

 

Revenue was also impacted by the recognition of $13.3 million of course breakage in 2010 compared with $23.0 million of course breakage revenue recorded in 2009.

 

Financial instruments training

 

Cash sales and revenue in 2010 were $18.2 million and $17.7 million, respectively, compared with $28.8 million and $20.5 million, respectively, in 2009. The decrease in cash sales in the third quarter of 2010 was primarily due to the decrease in the number of our free preview workshop events held, and the impact of the weak economy.

 

We will not have sufficient historical data necessary to allow us to record course breakage for Rich Dad financial instruments training until fiscal year 2011.

 

Year Ended December 31, 2010, compared to Year Ended December 31, 2009

 

As discussed in more fully in the above section entitled Management’s Plan, we have significantly reduced the number of live events held, eliminated historically weak markets for live events and reduced the frequency with which we visit any one particular market. We believe these actions will improve the profitability of each event on the live event schedule. While we implemented many of these changes early in 2010, upon reevaluation, we made additional significant modifications in the third quarter of 2010 in order to optimize our operating structure.  The primary focus of the reduction of scheduled events is in the U.S. During 2010, we implemented reductions in staff to align with our anticipated sales level. In addition, we have decreased occupancy costs and have reduced operating costs in all areas.  Many of these cost-cutting measures occurred throughout 2010, and therefore, a portion of the cost-cutting benefits were not fully reflected in 2010 operating results.

 

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Table of Contents

 

Revenue

 

Revenue in 2010 was $102.6 million compared with revenue of $170.9 million in 2009, a decrease of $68.3 million, or 40.0%. The decrease in revenue in 2010, compared with 2009, was primarily due to the reduction in the number of events we held in an effort to improve the profitability of each event and, to a lesser extent, the continuing decline in overall customer demand for our products and the related fulfillment of our training courses. Other factors contributing to the decreased revenue in 2010 included the decline in breakage revenue recognized during 2010 compared with 2009 (approximately $19.0 million) and the decline in electronic media sent to our customers during 2010 compared with 2009 (approximately $17.6 million). Breakage revenue in 2010, compared to 2009, was negatively impacted by the modified contract terms that we began offering in October 2009, which extended the typical contract expiration date from one year to two years. The decline in electronic media sent to our customers in 2010 compared with 2009 was the result of our decision made during the second half of 2010 to delay the sending of the CD-ROMs, in order to allow us time to freshen the content of the materials.

 

A reconciliation of cash sales to revenue is as follows (in thousands, except percentages):

 

 

 

Years ended
December 31,

 

% of Cash Received
Years ended
December 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Cash received from course and product sales:

 

 

 

 

 

 

 

 

 

Basic training sessions

 

$

8,046

 

$

14,947

 

9.6

%

11.0

%

Advanced courses

 

64,577

 

102,266

 

77.0

 

75.1

 

Product sales

 

6,748

 

11,673

 

8.0

 

8.6

 

Other

 

4,531

 

7,245

 

5.4

 

5.3

 

Total cash received from course and product sales

 

83,902

 

136,131

 

100.0

%

100.0

%

Net change in deferred revenue

 

18,733

 

34,793

 

 

 

 

 

Revenue for financial reporting purposes

 

$

102,635

 

$

170,924

 

 

 

 

 

 

The following table illustrates the number of training events, number of customers and average number of customers per course for the comparative periods:

 

 

 

Years ended
December 31,

 

% of
Category

 

 

 

2010

 

2009

 

2010

 

2009

 

Number of courses:

 

 

 

 

 

 

 

 

 

Free introductory workshops

 

2,266

 

3,594

 

66.5

%

69.1

%

Basic training sessions

 

489

 

756

 

14.3

 

14.5

 

Advanced live courses

 

476

 

690

 

14.0

 

13.3

 

Advanced electronic courses

 

176

 

160

 

5.2

 

3.1

 

Total

 

3,407

 

5,200

 

100.0

%

100.0

%

Number of attending customers:

 

 

 

 

 

 

 

 

 

Basic training sessions

 

18,391

 

26,493

 

68.8

%

65.7

%

Advanced live courses

 

5,977

 

10,209

 

22.3

 

25.3

 

Advanced electronic courses

 

2,379

 

3,605

 

8.9

 

9.0

 

Total

 

26,747

 

40,307

 

100.0

%

100.0

%

Average customers per paid course:

 

 

 

 

 

 

 

 

 

Basic training sessions

 

37.6

 

35.0

 

 

 

 

 

Advanced live courses

 

12.6

 

14.8

 

 

 

 

 

Average

 

25.3

 

25.4

 

 

 

 

 

 

We had approximately 285,000 total registrants during the year ended December 31, 2010, compared with approximately 442,000 total registrants during the year ended December 31, 2009, a decrease of 157,000, or 35.5%. Approximately 21.8% of the customers attending the free preview workshops in 2010 purchased one or more of our basic training courses, which was higher than the 18.3% in 2009. We believe that this increase is directly related to our decision to reduce the price of our basic training courses beginning in July 2010. For basic training and advanced training, the customer

 

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Table of Contents

 

pays the course fee at the time of registering for the program. See the section entitled above Business Segments for a further discussion of cash sales and revenue.

 

The following table provides the percentage of each media source used by prospective customers to register for our free preview workshops:

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Online advertising

 

61.3

%

52.4

%

Website

 

21.9

 

23.2

 

Direct mail

 

8.1

 

8.9

 

Newspaper

 

2.1

 

2.9

 

Television

 

0.9

 

2.4

 

Radio and Other

 

5.7

 

10.2

 

Total

 

100.0

%

100.0

%

 

Our trend of increasing online advertising and reducing television advertising continued during 2010 as we believe it is a more cost-efficient method of attracting potential customers.

 

Operating Expenses

 

Operating expenses as a percentage of revenue in 2010 and 2009, as disclosed in the various tables below, provides a comparable metric as if we had compared operating expenses as a percentage of cash sales in 2010 and 2009. Cash sales (a non-GAAP financial measure discussed above) declined 38.4% in 2010 compared with 2009 and revenue declined 40.0% in 2010 compared with 2009.

 

Direct course expenses

 

Direct course expenses relate to our free preview workshops, basic training and advanced training, and consist of instructor fees, facility costs, salaries, commissions and fees associated with our field representatives and related travel expenses.

 

The following table sets forth the changes in the significant components of direct course expenses (in thousands, except percentages):

 

 

 

Years ended
December 31,

 

% of Revenue
Years ended
December 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Fulfillment costs

 

$

14,175

 

$

22,904

 

13.8

 

13.4

 

Course events

 

15,071

 

19,993

 

14.7

 

11.7

 

Salaries, commissions and fees

 

13,079

 

22,998

 

12.7

 

13.5

 

Administrative fees and other

 

2,941

 

4,523

 

2.9

 

2.6

 

Total

 

$

45,266

 

$

70,418

 

44.1

 

41.2

 

 

The decrease in direct course expenses was primarily attributable to the decrease in the number of events held, the reduction in personnel and improved management and negotiation of seminar hotel rentals and travel expenses. The increase in course events, as a percentage of revenue, was primarily due to the costs associated with an additional conference held during 2010 compared with 2009.

 

Advertising and sales expenses

 

Advertising and sales expenses consist of purchased media to generate registrations to our free preview workshops, and costs associated with supporting customer recruitment.

 

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Table of Contents

 

We obtain the majority of our customers through free preview workshops. These preview workshops are offered in various metropolitan areas in the United States, the United Kingdom, and Canada.  Prior to the actual workshop, we spend a significant amount of money in the form of advertising through various media channels.

 

The following table presents the expense categories that comprise advertising and sales expenses and the expense categories as a percentage of total advertising and sales expenses (in thousands, except percentages):

 

 

 

Years ended
December 31,

 

% of Revenue
Years ended
December 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Internet

 

$

11,092

 

$

17,840

 

10.8

 

10.4

 

Direct mail

 

1,989

 

3,162

 

1.9

 

1.9

 

Television

 

361

 

2,026

 

0.4

 

1.2

 

Newspaper

 

789

 

2,074

 

0.8

 

1.2

 

Radio and other

 

2,822

 

7,231

 

2.7

 

4.2

 

Total media spending

 

17,053

 

32,333

 

16.6

 

18.9

 

Telemarketing sales commissions

 

3,453

 

3,783

 

3.3

 

2.2

 

RDE licensing fees

 

9,813

 

15,930

 

9.6

 

9.3

 

Advertising and sales expenses

 

$

30,319

 

$

52,046

 

29.5

 

30.4

 

 

Media spending decreased by 47.3% for the year ended December 31, 2010, compared with 2009. This decrease was primarily due to the decrease in the number of events held, and increased use of internet advertising.   Media spending decreased to $60 per registrant in 2010 from $73 per registrant in 2009, reflecting improved spending efficiency.

 

The allocation of our media spending as a percentage of total media spending is presented in the following table:

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Internet and website

 

65.0

%

55.2

%

Direct mail

 

11.7

 

9.8

 

Television

 

2.1

 

6.3

 

Newspaper and magazine

 

4.6

 

6.4

 

Radio and other

 

16.6

 

22.3

 

Total

 

100.0

%

100.0

%

 

We continue to redirect our media spending from television and print media to internet-based outlets.

 

General and administrative expenses

 

General and administrative expenses primarily consist of compensation, benefits, insurance, professional fees, facilities expense and travel for the corporate staff, as well as depreciation and amortization expenses.

 

The following table sets forth the changes in significant components of general and administrative expenses (in thousands, except percentages):

 

 

 

Years ended
December 31,

 

% of Revenue
Years ended
December 31,

 

 

 

2010

 

2009

 

2010

 

2009

 

Office and facility costs

 

$

2,791

 

$

3,883

 

2.7

 

2.3

 

Salaries, wages and benefits

 

11,743

 

15,275

 

11.4

 

8.9

 

Legal fees

 

1,595

 

2,984

 

1.6

 

1.8

 

Accounting and auditing fees

 

940

 

1,499

 

0.9

 

0.9

 

Other professional fees

 

959

 

2,153

 

1.0

 

1.2

 

Other

 

2,381

 

3,569

 

2.3

 

2.1

 

Total

 

$

20,409

 

$

29,363

 

19.9

 

17.2

 

 

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The decrease in general and administrative expenses was due primarily to the reduction in costs related to salaries, wages and benefits, and office and facility costs resulting from our significant personnel reductions as part of our continuing efforts to reduce our overall cost structure, consistent with our current business model. We also benefited from lower legal, accounting and other professional fees. During 2009, we incurred higher legal costs associated with outstanding general litigation matters than in 2010. Included in salaries, wages and benefits in 2010, is approximately $1.0 million of severance pay associated with our 2010 down-sizing and the departure of our former CEO. Severance expense in 2009 was $0.3 million. Other professional fees in 2009 included public relations expenses associated with our rebranding efforts, which did not recur in 2010.

 

Litigation settlement and related legal expenses

 

Litigation settlement and related legal expenses in 2010 and 2009 were $1.5 million and $5.0 million, respectively, and include costs associated with the settlement of lawsuits related to non-core real estate activites, together with their related legal costs.  The circumstances surrounding these matters are not typical or in the ordinary course of our business.

 

Impairment of assets

 

We recorded impairment charges during 2010 and 2009, as follows (in thousands):

 

 

 

2010

 

2009

 

Note receivable collaterized by land and building (SCB building) (a)

 

$

2,968

 

$

247

 

Investment in real estate (Tranquility Bay) (b)

 

726

 

1,661

 

Investment in real estate (Costa Rica) (c)

 

204

 

 

Land and building (corporate office) (d)

 

641

 

 

Software

 

122

 

103

 

MRS customer list

 

 

151

 

Total

 

$

4,661

 

$

2,162

 

 


(a) In connection with the sale of this note to an unrelated third party on October 5, 2010, we recorded an impairment charge during the quarter ended September 30, 2010 to decrease the note’s value to its fair market value.  In 2009, we incurred an impairment of $0.2 million on this note receivable in connection with a settlement agreement reached with the owner of the underlying property.

 

(b) In connection with a settlement agreement reached in October 2010, we transferred title of Tranquility Bay in exchange for a credit to us of $0.3 million against sums due and coming due under certain notes and a deferral of further payments under the notes until February 15, 2011. Based on the value received from this exchange, we recorded an impairment charge of $0.5 million during the quarter ended September 30, 2010. We had previously recorded an impairment charge on this property of $0.2 million during the first quarter of 2010. In 2009, we recorded a $1.7 million impairment charge on this property because of deteriorating real estate market conditions in Southwest Florida, where the property is located, and liens on the property.

 

(c) Based on inquiries we made regarding the salability of our non-core real estate investment in Costa Rica, we determined that the book value of our investment was higher than the estimated fair value and recorded an impairment charge, accordingly, during the third and fourth quarters of 2010.

 

(d) Based on our discussions with real estate brokers regarding the potential sale of our corporate headquarters, we recorded an impairment charge of $0.6 million during the quarter ended September 30, 2010, to reflect the estimated fair market value.

 

Income from operations

 

We had income from operations of $0.5 million in 2010, compared with $11.9 million income from operations in 2009. The $11.4 million decrease in income from operations was primarily due to the recording of breakage revenue of $23.0 million for the real estate component of our Rich Dad™ Education segment in the fourth quarter of 2009 compared with $13.3 million recorded during all of 2010. Also, as discussed above, the 2010 impairment charges were approximately $2.5 million higher in 2010 than in 2009, which also contributed to our decreased income from operations in 2010.

 

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Income tax provision

 

Our income tax provision in 2010 and 2009 was $1.1 million and $2.4 million, respectively. For both 2010 and 2009, we recorded state income tax expense pertaining to jurisdictions where we did not have sufficient net operating losses (“NOLs”) to offset taxable income. In 2010 and 2009, we recorded a full valuation allowance against all net deferred tax assets because there was not sufficient evidence to conclude that we would more likely than not realize those assets prior to expiration. Also in 2009, we utilized our remaining federal NOLs and available alternative minimum tax credits that had been generated in previous years.

 

Known Trends

 

In general, our financial results for the year ended December 31, 2010 were adversely affected by decreased demand for our products and services and the continuing weak economic conditions, including the rise in unemployment and the increased cost and decreased availability of consumer credit, particularly in the United States.

 

In response to the continued decline in sales and its impact on our cash position, we took a series of actions during 2010, many of which were implemented in the third quarter of 2010, aimed at increasing our profitability and cash flows.  These actions included the modification of the live event schedule to significantly reduce the number of live seminar events and limit our events to the markets believed to be the most profitable, the reduction of the offering price of the basic training courses in an attempt to increase the percentage of customers who purchase basic training courses, and significant staff reductions to reduce our operating cost structure to improve future profitability.  During 2010, we reduced our headcount by approximately 46%, representing an annual estimated cost savings of approximately $5.8 million, excluding the one-time impact of severance expense of approximately $1.0 million during 2010.  The primary focus of these actions has been in the U.S. Also, as part of our analysis of ways to reduce costs and in light of the high cost of continuing to be a public reporting company under the Exchange Act and complying with the Sarbanes-Oxley Act of 2002, we are deregistering our common stock and suspending our reporting obligations under the Exchange Act. Although deregistering under the Exchange Act is expected to provide substantial savings as a result of the elimination of the costs of being a reporting company under the Exchange Act, it may also result in a less liquid market for our shares.

 

Many of the actions discussed above were implemented during the third quarter of 2010, and as a result, the related benefits from these cost-cutting measures were not fully reflected in the current year’s operating results.

 

As of the date of this report, based on Management’s Plan and our recently achieved operating results, we believe that we have identified and implemented a sustainable core business model. However, our liquidity could be negatively impacted if we realize negative outcomes including those pertaining to the risks and uncertainties as described in the Risk Factors section contained in Part I. Item 1A. of this Annual Report on Form 10-K on form 10-K.

 

Liquidity and Capital Resources

 

Historically, we have funded our working capital and capital expenditures using cash and cash equivalents on hand.  However, we have sustained recurring negative cash flows from operations over the past several years. Unrestricted cash and cash equivalents have declined from $23.6 million at December 31, 2008 to $10.8 million at December 31, 2009 to $4.0 million at December 31, 2010. As discussed in the sections entitled Management’s Plan and Known Trends above, we have taken numerous actions to improve our cash flows going forward, and as a result of these actions, we believe that we will have sufficient liquidity to fund our working capital needs through December 31, 2011.  See Risk Factors contained in Part I, Item 1A of this Annual Report on Form 10-K, for items that could negatively impact our business.

 

As of December 31, 2010, we failed to make approximately $3.6 million of royalty payments ($2.8 million pertaining to 2010 activity) as required under the 2010 Rich Dad License Agreement. On March 25, 2011, we entered into a credit agreement with the Rich Dad Parties that converted these royalties due into a promissory note with stated terms. See Note 14—Subsequent Event in the Notes to Consolidated Financial Statements for the year ended December 31, 2010 contained in Part II, Item 8 of this Annual Report for further information. This credit agreement effectively put us back in compliance with the terms set forth in the 2010 Rich Dad License Agreement. Beginning in 2011, we resumed paying royalties due relating to 2011 activity under the 2010 Rich Dad License Agreement.

 

We expect that our working capital deficit, which is primarily a result of our significant deferred revenue balance, will continue for the foreseeable future. As of December 31, 2010, our consolidated deferred revenue was $63.2 million.

 

Net cash used for operating activities was $6.8 million in 2010 compared to $13.9 million for 2009. Despite the

 

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negative cash flows from operating activities in 2010, the reduction in the use of cash for operating activities during 2010 compared with the prior year reflects the implementation of the new business initiatives discussed in Management’s Plan above.

 

Net cash provided by investing activities was $0.4 million in 2010 compared to $3.3 million in 2009. During 2009, we received proceeds from the sale of our corporate aircraft of $3.7 million.

 

Net cash used for financing activities was $0.5 million in 2010, compared to $0.3 million in 2009.  The cash outlay of $0.5 million in 2010 represents payment on a note related to the litigation settlement on our investments in properties in Costa Rica.

 

Our cash equivalents were, and continue to be, invested in short-term, liquid, money market funds during 2010. Restricted cash balances consisted primarily of funds on deposit with credit card processors and cash collateral with our credit card vendors.  Restricted cash balances held by credit card processors are unavailable to us unless we discontinue sale of our products or discontinue the usage of a vendor’s credit card. As sales of the products and services related to our Proprietary brand have decreased, our credit card vendors have returned funds held as collateral, resulting in a decrease in our restricted cash balances.

 

We are committed to cash expenditures with respect to the contractual obligations set forth in the following table (in thousands):

 

 

 

Total
Debt

 

Operating
Lease
Commitments

 

Total
Contractual
Obligations

 

2011

 

$

879

 

$

590

 

$

1,469

 

2012

 

773

 

291

 

1,064

 

2013

 

307

 

200

 

507

 

2014

 

 

7

 

7

 

Total

 

$

1,959

 

$

1,088

 

$

3,047

 

 

Non-core investments

 

Costa Rica

 

As of December 31, 2010, our remaining ownership interest in Costa Rica and Panamanian entities included a hotel and beachfront land concession known as Monterey del Mar, S.A. (“MDM”) and Mar y Tierra del Oeste, S.A. (“MTO”), respectively.  We have a 67.5% ownership or beneficial interest in the entities totaling $1.2 million, which is included in Investments in real estate.  The MDM/MTO investment is accounted for in our condensed consolidated financial statements.  For the years ended December 31, 2010 and 2009, using the equity method of accounting, we recorded our share of the losses related to our interests in these entities of approximately $0.3 million and $0.2 million, respectively.

 

In addition, we own a 50% interest in Monterey del Llano, S.A. (“MDL”), which owns a one-third interest in Monterey Group, S.A. (“MG”), whose only asset is two and one-half acres of beachfront land adjacent to MDM/MTO, our hotel property. Our former Chairman and Chief Executive Officer, Mr. Whitney, indirectly owns approximately 50% of MDL and 22% of MG. MDL and MG are not operating entities and have no operating results. Therefore, we do not record an equity interest related to these entities.

 

We have engaged a real estate broker to assist us with the sale of the hotel, but there can be no assurance that a sale will occur in 2011 or at all.

 

Southwest Florida Investment

 

In 2004, we entered into a joint venture in which we acquired a 50% interest in Tranquility Bay of Southwest Florida, LLC (“Tranquility Bay”) which owns 74 acres of land zoned for residential development in Southwest Florida. The investment entity had no ongoing activity other than minimal costs of carrying the land. We recorded our share of these costs using the equity method of accounting. On August 25, 2009, we exercised our rights under a previously disclosed settlement agreement to receive the controlling membership interests in Tranquility Bay and control the real property that is owned by Tranquility Bay. The fair value of the real property was included in Investments in real estate at December 31, 2009.

 

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In October, 2010, we transferred ownership of Tranquility Bay in exchange for a credit to us of $0.3 million against sums due and coming due under the notes and a deferral of further payments under the notes until February 15, 2011.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. In addition to the estimates presented below, there are other items within our consolidated financial statements that require estimation, but are not deemed critical as defined below. We believe these estimates are reasonable and appropriate. However, if actual experience differs from the assumptions and other considerations used, the resulting changes could have a material effect on the financial statements taken as a whole.

 

Management believes that the following policies and estimates are critical because they involve significant judgments, assumptions and estimates. Management has discussed the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the disclosures presented below relating to those policies and estimates.

 

Long-Lived Assets

 

We evaluate the carrying amount of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We record an impairment loss when indications of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than assets’ carrying value. We evaluate the remaining life and recoverability of long-lived assets, including patents and trademarks, whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. At such time, we estimate the future cash flows expected from the use of the assets and their eventual dispositions and, if lower than the carrying amounts, adjust the carrying amount of the assets to their estimated fair value. Because of our changing business conditions including current and projected level of income, business trends, prospects and market conditions, our estimates of cash flows to be generated from our operations could change materially, resulting in the need to record additional impairment charges.

 

Revenue Recognition

 

We recognize revenue in accordance with Staff Accounting Bulletin, No. 104, Revenue Recognition (“SAB No. 104”), and ACS 605-25, Revenue Recognition — Multiple-Element Arrangements). We recognize revenue when: (i) persuasive evidence of an arrangement exists, (ii) delivery of product has occurred or services have been rendered, (iii) the price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. For product sales, these conditions are generally met upon shipment of the product to the customer or completion of the sale transaction. For training and service sales, these conditions are generally met upon presentation of the training seminar or delivery of the service.

 

Some of our training and consulting contracts contain multiple deliverable elements that include training along with other products and services. In accordance with ACS 605-25, sales arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the sales contract meet the following criteria: (i) the delivered training or product has value to the client on a standalone basis, (ii) there is objective and reliable evidence of the fair value of undelivered items, and (iii) delivery of any undelivered item is probable. The fair value of each element is generally determined by prices charged when sold separately. In certain arrangements, we offer these products bundled together at a discount. The discount is allocated pro-rata to each element based on the relative fair value of each element when fair value support exists for each element in the arrangements. The overall contract consideration is allocated among the separate units of accounting based upon their fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions. If the fair value of all undelivered elements exists, but fair value does not exist for one or more delivered elements, the residual method is used. Under the residual method, the amount of consideration allocated to the delivered items equals the total consideration less the aggregate fair value of the undelivered items. Fair value of the undelivered items is based upon the normal pricing practice for our existing training programs, consulting services, and other products, which are generally the prices of the items when sold separately.

 

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Each transaction is separated into its specific elements and revenue for each element is recognized according to the following policies:

 

Product

 

Recognition Policy

Seminars

 

Deferred upon sale and recognized when the seminar is attended or delivered on-line or by electronic media

Online courses

 

Deferred upon sale and recognized when the course is accessed over the delivery period

Coaching and mentoring sessions

 

Deferred and recognized as service is provided

Data subscriptions and renewals

 

Deferred and recognized on a straight-line basis over the subscription period

 

In the normal course of business, we recognize revenue based on the customer’s attendance of the course, event, mentoring training, coaching session or delivery of the software, data or course materials.

 

When the likelihood of attendance by the customer is remote and the customer contract has expired, course breakage is calculated based on the historical percentage of (i) customers who never attended a course, (ii) those customers who never attended a course subsequent to expiration, and (iii) the highest number of days in which 95% of customers who attended our courses did so subsequent to expiration. During the fourth quarter of 2009, we lengthened the typical contract expiration date from one year to two years.

 

We determine our course breakage rate based upon estimates developed from historical customer attendance patterns. Based on the historical information, we are able to estimate the likelihood of an expired course remaining unattended. To the extent new businesses do not have adequate historical data subsequent to course expiration, we recognize revenue based solely upon actual course attendance. Only at such time that we have developed verifiable and objective data from our historical data subsequent to course expiration do we apply course breakage based on the methodology described above.

 

Deferred revenue occurs from seminars, online courses, coaching sessions and website subscriptions and renewals in which payment is received before the service has been performed. Deferred revenue is recognized into revenue over the period that the services are performed.

 

Income Taxes

 

We account for income taxes using the asset and liability method in accordance with ASC 740, Income Taxes (“ASC 740”). Accounting for income taxes requires us to estimate our income taxes in each jurisdiction in which we operate. Due to differences in the recognition of items included in income for accounting and tax purposes, temporary differences arise which are recorded as deferred tax assets or liabilities. Deferred tax assets and liabilities are measured using enacted laws and tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Should any amounts be determined not to be recoverable, or assumptions change, we would be required to take a charge to establish a valuation allowance against such deferred tax assets.

 

ACS 740 also clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. ACS 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

Accounting for Litigation and Settlements

 

We are involved in various legal proceedings. Due to their nature, such legal proceedings involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties, and the possibility of governmental intervention. Management assesses the probability of loss for such contingencies and accrues a liability and/or discloses the relevant circumstances as appropriate. While certain of these matters involve substantial amounts, management believes, based on available information, that the ultimate resolution of such legal proceedings will not have a material adverse effect on our financial condition or results of operations.

 

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The critical accounting policies discussed above are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

For a discussion of recently issued accounting pronouncements and recently issued accounting pronouncements not yet adopted see Note 2—Significant Accounting Policies, in the Notes to Consolidated Financial Statements contained in Part II, Item 8 of this Annual Report.

 

Off-Balance Sheet Arrangements

 

We have not entered into any transaction, agreement or other contractual arrangement with an unconsolidated entity under which it has: (i) a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit; (ii) liquidity or market risk support to such entity for such assets; (iii) an obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument; or (iv) an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to, us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging, or research and development services with us.

 

Impact of Inflation

 

Inflation did not materially affect our business during the last several years.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required.

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Index to Consolidated Financial Statements

 

Tigrent Inc.

 

Report of Independent Registered Public Accounting Firm

32

Consolidated Balance Sheets as of December 31, 2010 and 2009

33

Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2010 and 2009

34

Consolidated Statements of Cash Flows for the Years Ended December 31, 2010 and 2009

35

Consolidated Statements of Changes in Stockholders’ Deficit for the Years Ended December 31, 2010 and 2009

36

Notes to Consolidated Financial Statements

37

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Tigrent Inc. and Subsidiaries

Cape Coral, Florida

 

We have audited the accompanying Consolidated Balance Sheets of Tigrent Inc. and Subsidiaries as of December 31, 2010 and 2009, and the related Consolidated Statements of Operations and Comprehensive Income (Loss), Stockholders’ Deficit and Cash Flows for each of the years in the two year period ended December 31, 2010. These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Consolidated Financial Statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Tigrent Inc. and Subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the two year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ EHRHARDT KEEFE STEINER & HOTTMAN PC

 

Ehrhardt Keefe Steiner & Hottman PC

 

 

March 31, 2011

 

Denver, Colorado

 

 

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TIGRENT INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

3,992

 

$

10,764

 

Restricted cash

 

12,573

 

12,725

 

Deferred course expenses, current portion

 

11,770

 

15,368

 

Prepaid expenses and other current assets

 

1,407

 

2,410

 

Inventory

 

262

 

506

 

Total current assets

 

30,004

 

41,773

 

Notes receivable, net of current portion

 

 

6,636

 

Property, equipment and intangible assets, net

 

2,066

 

3,396

 

Investments in real estate

 

1,208

 

2,377

 

Other assets

 

254

 

237

 

Total assets

 

$

33,532

 

$

54,419

 

 

 

 

 

 

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,345

 

$

3,741

 

Income taxes payable

 

1,188

 

1,450

 

Royalties payable

 

3,625

 

1,594

 

Accrued course expenses

 

752

 

1,341

 

Accrued salaries, wages and benefits

 

623

 

542

 

Other accrued expenses

 

2,935

 

3,098

 

Other current liabilities

 

899

 

993

 

Deferred revenue, current portion

 

62,661

 

81,404

 

Total current liabilities

 

76,028

 

94,163

 

Long-term debt, net of current portion

 

1,080

 

4,667

 

Other liabilities

 

664

 

531

 

Total liabilities

 

77,772

 

99,361

 

Commitments and contingencies

 

 

 

 

 

Tigrent Inc.’s stockholders’ deficit:

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, no par value, 25,000,000 shares authorized, 13,088,587 shares and 11,738,587 shares issued and outstanding as of December 31, 2010 and 2009, respectively

 

3,175

 

2,591

 

Paid-in capital

 

2,583

 

2,584

 

Cumulative foreign currency translation adjustment

 

(566

)

21

 

Accumulated deficit

 

(49,432

)

(48,872

)

Total Tigrent Inc.’s stockholders’ deficit

 

(44,240

)

(43,676

)

Noncontrolling interest

 

 

(1,266

)

Total stockholders’ deficit

 

(44,240

)

(44,942

)

Total liabilities and stockholders’ deficit

 

$

33,532

 

$

54,419

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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TIGRENT INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except per share data)

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Revenue

 

$

102,635

 

$

170,924

 

Operating costs and expenses:

 

 

 

 

 

Direct course expenses

 

45,266

 

70,418

 

Advertising and sales expenses

 

30,319

 

52,046

 

General and administrative expenses

 

20,409

 

29,363

 

Impairment of assets

 

4,661

 

2,162

 

Litigation settlement and related legal expenses

 

1,503

 

5,003

 

Total operating costs and expenses

 

102,158

 

158,992

 

Income from operations

 

477

 

11,932

 

Other income (expense):

 

 

 

 

 

Other income, net

 

261

 

313

 

Interest income

 

339

 

358

 

Interest expense

 

(438

)

(232

)

Equity loss from investment in real estate

 

(283

)

(154

)

Total other income (expense)

 

(121

)

285

 

Income before income taxes

 

356

 

12,217

 

Income tax provision

 

(1,053

)

(2,438

)

Net income (loss)

 

(697

)

9,779

 

Net income (loss) attributable to noncontrolling interest

 

183

 

(357

)

 

 

 

 

 

 

Net income (loss) attributable to Tigrent Inc.

 

$

(880

)

$

10,136

 

 

 

 

 

 

 

 

 

Basic and diluted net income (loss) per share attributable to Tigrent Inc.’s common shareholders

 

$

(0.07

)

$

0.86

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average common shares outstanding

 

12,484

 

11,739

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

Net income (loss)

 

$

(697

)

$

9,779

 

Foreign currency translation adjustments

 

66

 

(1,868

)

Comprehensive income (loss)

 

(631

)

7,911

 

Comprehensive income (loss) attributable to noncontrolling interest

 

380

 

(1,010

)

Comprehensive income (loss) attributable to Tigrent Inc.

 

$

(1,011

)

$

8,921

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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TIGRENT INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Years ended
December 31,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

(697

)

$

9,779

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

775

 

995

 

Impairment of assets

 

4,661

 

2,162

 

Forgiveness of accrued expenses, net of tax

 

1,061

 

 

Litigation settlement through issuance of secured long-term debt

 

 

2,600

 

Real estate investment received in litigation settlement

 

 

(110

)

Stock-based compensation expense

 

3

 

77

 

Equity loss from investments in real estate

 

283

 

154

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

152

 

767

 

Prepaid expenses and other current assets

 

849

 

64

 

Inventory

 

244

 

447

 

Deferred course expenses

 

3,573

 

6,640

 

Other assets

 

8

 

(21

)

Accounts payable

 

(396

)

(775

)

Accrued course expenses

 

(589

)

(99

)

Deferred revenue

 

(18,733

)

(34,793

)

Other accrued expenses

 

138

 

(2,394

)

Accrued salaries, wages and benefits

 

81

 

(309

)

Royalties payable

 

2,031

 

475

 

Other liabilities

 

4

 

(198

)

Income taxes payable

 

(262

)

651

 

Net cash used in operations

 

(6,814

)

(13,888

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(189

)

(404

)

Proceeds from repayment of notes receivable

 

184

 

188

 

Proceeds from the sale of assets

 

790

 

3,748

 

Investments in and advances to real estate investment

 

(344

)

(271

)

Net cash provided by investing activities

 

441

 

3,261

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on secured and unsecured debt

 

(465

)

(79

)

Distributions to noncontrolling interest

 

 

(256

)

Net cash used in financing activities

 

(465

)

(335

)

Effect of foreign currency exchange rates on cash and cash equivalents

 

66

 

(1,868

)

Net decrease in cash and cash equivalents

 

(6,772

)

(12,830

)

Cash and cash equivalents at beginning of year

 

10,764

 

23,594

 

Cash and cash equivalents at end of year

 

$

3,992

 

$

10,764

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

351

 

$

161

 

Income taxes

 

$

1,553

 

$

1,790

 

Supplemental disclosure of non-cash activity:

 

 

 

 

 

Note receivable converted to investment in real estate

 

$

 

$

2,627

 

Transfer of real estate investment for reduction of amounts due under certain notes payable

 

$

300

 

$

 

Common stock issued for purchase of noncontrolling interest

 

$

1,330

 

$

 

Satisfaction of note payable in connection with the sale of note receivable

 

$

2,848

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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TIGRENT INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Deficit

(in thousands)

 

 

 

Tigrent Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

foreign

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

currency

 

 

 

 

 

Total

 

 

 

Common stock

 

paid-in

 

translation

 

Accumulated

 

Noncontrolling

 

stockholders’

 

 

 

Shares

 

Amount

 

capital

 

adjustment

 

deficit

 

interest

 

deficit

 

Balance at December 31, 2008

 

11,739

 

$

2,591

 

$

2,507

 

$

1,236

 

$

(59,008

)

$

 

$

(52,674

)

Distributions to noncontrolling interest

 

 

 

 

 

 

(256

)

(256

)

Stock-based compensation expense

 

 

 

77

 

 

 

 

77

 

Foreign currency translation adjustment

 

 

 

 

(1,215

)

 

(653

)

(1,868

)

Net income (loss)

 

 

 

 

 

10,136

 

(357

)

9,779

 

Balance at December 31, 2009

 

11,739

 

2,591

 

2,584

 

21

 

(48,872

)

(1,266

)

(44,942

)

Purchase of noncontrolling interest, net of tax

 

1,290

 

580

 

 

(456

)

320

 

886

 

1,330

 

Stock-based compensation expense

 

60

 

4

 

(1

)

 

 

 

3

 

Foreign currency translation adjustment

 

 

 

 

(131

)

 

197

 

66

 

Net income (loss)

 

 

 

 

 

(880

)

183

 

(697

)

Balance at December 31, 2010

 

13,089

 

$

3,175

 

$

2,583

 

$

(566

)

$

(49,432

)

$

 

$

(44,240

)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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TIGRENT INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

Note 1—Business Description and Basis of Presentation

 

The consolidated financial statements include the accounts of Tigrent Inc. and its wholly-owned and majority-owned subsidiaries and affiliates (collectively referred to herein as the “Company,” “Tigrent,” “we,” “us” or “our”). All intercompany balances and transactions have been eliminated in consolidation.

 

We are a provider of practical, high-quality and value-based training, conferences, publications, technology-based tools and mentoring to help customers become financially knowledgeable. We provide customers with comprehensive instruction and mentoring on the topics of real estate and financial instruments investing and entrepreneurship in the United States, the United Kingdom, and Canada. Our training is offered in non-accredited free preview workshops, as well as basic training, advanced courses, mentoring and coaching.

 

Certain reclassifications have been made in the 2009 consolidated financial statements to conform to the 2010 presentation.

 

The financial statements have been prepared in contemplation of management’s plan for 2011, which assumes a viable operational and financial structure.

 

Management’s Plan

 

In response to the continued decline in profitability and the related impact on our cash position, we have taken a series of actions to improve the overall effectiveness of our marketing and have restructured our operational costs to be more consistent with our current revenues. More specifically, we have significantly reduced the number of live events, eliminated historically weak markets for live events and reduced the frequency in which we visit any one particular market. We believe these actions will improve the profitability of future live events. While we implemented many of these changes early in 2010, upon reevaluation, we made additional significant modifications to the event schedule in the third quarter of 2010 in order to optimize our operating structure.  The primary focus of the reduction of scheduled events was in the U.S. At the same time, we reduced the price of our basic training courses, which increased the percentage of customers who purchased basic training courses during the free preview workshops. In addition, we are striving to fulfill more of our advanced courses online in an effort to reduce costs. During the fourth quarter of 2010, we continued the development and testing of digitally-delivered programs, which are expected to decrease our event and fulfillment costs and lower our marketing costs.

 

In 2010, we implemented reductions in staff to align with our anticipated sales level. In addition, we decreased occupancy costs and reduced operating costs in all areas.  Many of these cost-cutting actions occurred during the third quarter of 2010. In October 2010, we sold two of our non-core assets and plan to continue to pursue the sale of our remaining non-core assets but cannot be assured when or if such sales will be completed. Also, as part of our analysis of ways to reduce costs and in light of the high cost of continuing to be a public reporting company under the Exchange Act and complying with the Sarbanes-Oxley Act of 2002, we are deregistering our common stock and suspending our reporting obligations under the Exchange Act. Although deregistering under the Exchange Act is expected to provide substantial savings as a result of the elimination of the costs of being a reporting company under the Exchange Act, it may also result in a less liquid market for our shares.

 

We believe that our recent actions to reduce our overall operating costs through reductions in personnel and discretionary spending and suspending our reporting obligations under the Exchange Act, coupled with our restructured relationship with Rich Global, LLC (“Rich Global”) and Rich Dad Operating Company, LLC (“RDO”) (together, the “Rich Dad Parties”), will enable us to generate sufficient liquidity to fund our working capital needs through December 31, 2011.  However, our liquidity would be negatively impacted if we realize negative outcomes from any of our applicable operational and external risks and uncertainties, including, but not limited to cash contributions from new and ongoing business initiatives, our ability to effectively execute our strategies, and costs associated with current or potential future litigation matters.

 

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Note 2—Significant Accounting Policies

 

Use of estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

 

Financial instruments

 

Financial instruments consist primarily of cash and cash equivalents, notes receivable, accounts payable, deferred course expense, accrued expenses, deferred revenue, and notes payable. GAAP requires the disclosure of the fair value of financial instruments, including assets and liabilities recognized in the balance sheets. Management estimates the aggregate fair value of the other financial instruments recognized on the balance sheet date (including receivables, payables and accrued liabilities) approximate their fair value.

 

Cash and cash equivalents

 

We consider all highly liquid instruments with an original maturity of three months or less to be 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. The amounts included in the consolidated financial statements are stated at cost which approximates fair value at the balance sheet date. We maintain deposits in banks which may exceed the federal deposit insurance available. Management believes the potential risk of loss on these accounts to be minimal.

 

Restricted cash

 

We use merchant account vendors to process credit card transactions. Under the terms of these agreements, the merchant account vendor has the right to withhold credit card funds to cover charge backs in the event we are unable to honor our commitments. Additionally, we may be required to maintain letters of credit in certain of the states in which we operate. At December 31, 2010 and December 31, 2009, we did not hold any letters of credit. We consider restricted cash as a current asset in the Consolidated Balance Sheet as merchant account vendors typically hold such reserve funds up to one year.

 

Inventory

 

Inventory consists primarily of books, videos and training materials held for sale to customers enrolled in our training programs. Inventory is stated at the lower of cost using the first-in, first-out method or market.

 

Property and equipment

 

Property and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets as presented in the following table:

 

Buildings

 

40 years

 

Furniture fixtures and equipment

 

5-7 years

 

Purchased software

 

3 years

 

 

Leasehold improvements are amortized over the shorter of the estimated useful asset life or the remaining term of the applicable lease.

 

In accordance with GAAP, we evaluate the carrying amount of our long-lived assets such as property and equipment, and definite-lived intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by the comparison of its carrying amount with the future net cash flows the asset is expected to generate. We look primarily to the undiscounted future cash flows in the assessment of whether or not long-lived assets have been impaired. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the assets.

 

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Revenue recognition

 

We recognize revenue in accordance with Staff Accounting Bulletin, No. 104, Revenue Recognition (“SAB No. 104”), and ACS 605-25, Revenue Recognition — Multiple-Element Arrangements). We recognize revenue when: (i) persuasive evidence of an arrangement exists, (ii) delivery of product has occurred or services have been rendered, (iii) the price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured. For product sales, these conditions are generally met upon shipment of the product to the customer or completion of the sale transaction. For training and service sales, these conditions are generally met upon presentation of the training seminar or delivery of the service.

 

Some of our training and consulting contracts contain multiple deliverable elements that include training along with other products and services. In accordance with ACS 605-25, sales arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the sales contract meet the following criteria: (i) the delivered training or product has value to the client on a standalone basis, (ii) there is objective and reliable evidence of the fair value of undelivered items and (iii) delivery of any undelivered item is probable. The fair value of each element is generally determined by prices charged when sold separately. In certain arrangements, we offer these products bundled together at a discount. The discount is allocated on a pro-rata basis to each element based on the relative fair value of each element when fair value support exists for each element in the arrangements. The overall contract consideration is allocated among the separate units of accounting based upon their fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent upon the delivery of additional items or meeting other specified performance conditions. If the fair value of all undelivered elements exists, but fair value does not exist for one or more delivered elements, the residual method is used. Under the residual method, the amount of consideration allocated to the delivered items equals the total consideration less the aggregate fair value of the undelivered items. Fair value of the undelivered items is based upon the normal pricing practice for our existing training programs, consulting services, and other products, which are generally the prices of the items when sold separately.

 

Each transaction is separated into its specific elements and revenue for each element is recognized according to the following policies:

 

Product

 

Recognition Policy

Seminars

 

Deferred upon sale and recognized when the seminar is attended or delivered on-line or by electronic media

Online courses

 

Deferred upon sale and recognized when the course is accessed over the delivery period

Coaching and mentoring sessions

 

Deferred and recognized as service is provided

Data subscriptions and renewals

 

Deferred and recognized on a straight-line basis over the subscription period

 

In the normal course of business, we recognize revenue based on the customers’ attendance of the course, event, mentoring training, coaching session or delivery of the software, data or course materials on-line or by delivery of course materials by electronic media.

 

When the likelihood of attendance by the customer is remote and the customer contract has expired, course breakage is calculated based on the historical percentage of (i) customers who never attended a course, (ii) those customers who never attended a course subsequent to expiration, and (iii) the highest number of days in which 95% of customers who attended our courses did so subsequent to expiration. During the fourth quarter of 2009, we lengthened the typical contract expiration date from one year to two years.

 

We determine our course breakage rate based upon estimates developed from historical customer attendance patterns. Based on the historical information, we are able to estimate the likelihood of an expired course remaining unattended. To the extent new businesses do not have adequate historical data subsequent to course expiration, we recognize revenue based solely upon actual course attendance. Only at such time that we have developed verifiable and objective data from our historical data subsequent to course expiration do we apply course breakage based on the methodology described above.

 

Deferred revenue occurs from seminars, online courses, coaching sessions and website subscriptions and renewals in which payment is received before the service has been performed. Deferred revenue is recognized into revenue as courses are attended in-person or on-line, coaching and mentor sessions are provided or material is delivered by electronic media.

 

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Table of Contents

 

Deferred course expenses

 

We defer licensing fees paid to Rich Global and commissions and fees paid to our speakers and telemarketers until such time as the revenue is earned. Our speakers, who are all independent contractors, earn commissions on the cash receipts received at our training events and are paid approximately 45 days after the training event. The deferred course expenses are tracked as a percentage of deferred revenue and based on whether the related sale was originated by telemarketers or in basic training courses. The deferred course expenses are expensed as the corresponding deferred revenue is recognized. We also capitalize the commissions and fees paid to our speakers and expense them as the corresponding deferred revenue is recognized.

 

Advertising and sales expenses

 

We expense advertising and sales costs as incurred. Advertising costs, rental fees for training facilities and direct sales expenses are expensed as incurred. Advertising paid in advance is recorded as prepaid until such time as the advertisement is published.

 

Income taxes

 

We account for income taxes in conformity with the requirements of ASC 740, Income Taxes, (“ASC 740”). Per ASC 740, the provision for income taxes is calculated using the asset and liability approach of accounting for income tax. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. We provide valuation allowances against the deferred tax assets if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based on all available information, we have recorded a full valuation against our deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted.

 

ACS 740 also clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. ACS 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.

 

Foreign currency translation

 

We account for foreign currency translation in accordance with ACS 830, Foreign Currency Translation. The functional currencies of the Company’s foreign operations are the reported local currencies. Translation adjustments result from translating our foreign subsidiaries’ financial statements into United States dollars. The balance sheet accounts of our foreign subsidiaries are translated into United States dollars using the exchange rate in effect at the balance sheet date. Revenue and expenses are translated using average exchange rates for each month during the fiscal year. The resulting translation gains or losses are recorded as a component of accumulated other comprehensive income in shareholders’ equity. Foreign currency transaction gains totaled approximately $0.1 million during each of 2010 and 2009, and were reported on our Consolidated Statements of Operations as a component of Other income, net.

 

Net income (loss) per share

 

Net income (loss) per share is computed by applying the provisions of ACS 260, Earnings Per Share. Basic net income (loss) per share is calculated using the weighted average number of common shares outstanding. Diluted income (loss) per share reflects the potential dilution that could occur from common shares issuable through stock options, warrants, restricted share grant awards and restricted performance shares, as appropriate. As of December 31, 2010 and 2009, in accordance with the treasury stock method, there were no dilutive effects of the outstanding stock options, restricted stock awards or warrants. At December 31, 2010, there were 73,000 stock options, 900,000 restricted share grant awards and no warrants outstanding. At December 31, 2009, we had 166,350 stock options and 41,667 warrants outstanding. The 600,000 restricted performance shares granted in 2008 and approved by our shareholders in September 2009, only would have vested if certain market and service conditions were met. In accordance with ASC 260, these shares were considered contingent

 

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Table of Contents

 

shares and since the market conditions had not been satisfied, these shares were not considered in either the basic or diluted net income per share calculation at December 31, 2009. These restricted performance shares were forfeited during 2010.

 

Stock-based compensation

 

We follow ASC 718, Stock Compensation, (“ASC 718”), which requires us to measure the cost of employee services received in exchange for all equity awards granted including stock options based on the estimated fair market value of the award as of the grant date. Compensation costs are recorded over the requisite service period which is generally the vesting period. We estimated forfeiture rates based on historical experience. See Note 8—Stock-Based Compensation, for additional disclosures regarding our stock-based compensation.

 

Comprehensive income (loss)

 

Comprehensive income (loss) includes changes to equity accounts that were not the result of transactions with shareholders. Comprehensive income (loss) is comprised of net income (loss) and other comprehensive income (loss) items. Our comprehensive income (loss) generally consists of changes in the cumulative foreign currency translation adjustment.

 

Recently Adopted Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB’) issued guidance that requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The guidance became effective for us with the reporting period beginning January 1, 2010, except for the Level 3 reconciliation disclosures that are effective for interim and annual periods beginning after December 15, 2010. Adoption of this new guidance did not have a material impact on our consolidated financial statements.

 

Other recent accounting pronouncements adopted by the Company during 2010 did not have a material impact to our consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force.  Under this new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration and the use of the relative selling price method is required. The new guidance eliminates the residual method of allocating arrangement consideration to deliverables and includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition.  This guidance will be effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Adoption of this new guidance is not expected to have a material impact on our consolidated financial statements.

 

Other recently issued accounting pronouncements are not expected to have a material impact to our future consolidated financial statements.

 

Note 3—Impairment of Assets

 

We test for impairment annually or when events or changes in circumstances indicate that an assets carrying amount may not be recoverable. In accordance with ASC 820, Fair Value Measurements and Disclosures, we used Level 3 inputs for our nonrecurring measurements, defined as unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities, to measure estimated fair market values. In estimating fair market values, we used market indicators such as appraisals, recent market activity and other related information.

 

We recorded impairment charges during 2010 and 2009, as follows (in thousands):

 

 

 

2010

 

2009

 

Note receivable collaterized by land and building (SCB building) (a)

 

$

2,968

 

$

247

 

Investment in real estate (Tranquility Bay) (b)

 

726

 

1,661

 

Investment in real estate (Costa Rica) (c)

 

204

 

 

Land and building (corporate office) (d)

 

641

 

 

Software

 

122

 

103

 

MRS customer list

 

 

151

 

Total

 

$

4,661

 

$

2,162

 

 

41



(a) As discussed more fully in Note 5 — Notes Receivable, we sold this note to an unrelated third party on October 5, 2010. Based on the known transaction value, we recorded an impairment charge during the quarter ended September 30, 2010 to decrease the note’s value to its fair market value.  In 2009, we incurred an impairment of $0.2 million on this note receivable in connection with a settlement agreement reached with the owner of the underlying property.

 

(b) As discussed more fully in Note 7 — Long-Term Debt, in October 2010, we transferred title of Tranquility Bay in connection with a legal settlement. Based on the value received from this transaction, we recorded an impairment charge of $0.5 million during the quarter ended September 30, 2010. We had previously recorded an impairment charge on this property of $0.2 million during the first quarter of 2010. In 2009, we recorded a $1.7 million impairment charge on this property because of deteriorating real estate market conditions in Southwest Florida, where the property is located, and liens on the property.

 

(c) We made inquiries regarding the salability of its non-core real estate investment in Costa Rica and as a result of this process, determined that the book value of our investment was higher than the estimated fair value and recorded an impairment charges, accordingly, during the third and fourth quarters of 2010.

 

(d) We have been in discussions with a real estate brokers regarding the potential sale of our corporate headquarters. Based on the estimated fair value, we recorded an impairment charge of $0.6 million during the quarter ended September 30, 2010.

 

Note 4—Certain Relationships and Related Transactions

 

As of December 31, 2010, our remaining ownership interest in Costa Rica and Panamanian entities included a hotel and beachfront land concession known as Monterey del Mar, S.A. (“MDM”) and Mar y Tierra del Oeste, S.A. (“MTO”), respectively. We have a 67.5% ownership or beneficial interest in the entities totaling $1.2 million, which is included in Investments in real estate. The MDM/MTO investment is accounted for in our consolidated financial statements. For the years ended December 31, 2010 and 2009, using the equity method of accounting, we recorded our share of the losses related to our interests in these entities of approximately $0.3 million and $0.2 million, respectively.

 

In addition, we own a 50% interest in Monterey del Llano, S.A. (“MDL”), which owns a one-third interest in Monterey Group, S.A. (“MG”), whose only asset is two and one-half acres of beachfront land adjacent to MDM/MTO, our hotel property. Our former Chairman and Chief Executive Officer, Mr. Whitney, indirectly owns approximately 50% of MDL and 22% of MG. MDL and MG are not operating entities and have no operating results. Therefore, we do not record an equity interest related to these entities. We have engaged a real estate broker to assist us with the sale of the hotel, but there can be no assurance that a sale will occur in 2011 or at all.

 

A committee of the Board of Directors is responsible for reviewing Costa Rica transactions regarding compliance with the applicable governance and related party transaction requirements.

 

As discussed more fully in Note 11 Noncontrolling Interest, in May 2010, we entered into new agreements with Rich Global, LLC and Rich Dad Operating Company, LLC (“RDO”) to restructure the agreements under which we license and operate the Rich Dad brand.  In connection with the restructuring, Rich Global, LLC became a 9.9% shareholder of the Company. In accordance with the terms of the 2010 Rich Dad License Agreement, we paid RDO, approximately $3.2 million during the year ended December 31, 2010. As of December 31, 2010, we owed approximately $3.6 million of current and deferred royalty payments, as defined in the 2010 Rich Dad License Agreement, of which approximately $2.8 million pertained to June 2010 through December 2010 activity. We suspended the 2010 royalty payments in conjunction with our mid-year business restructuring in an effort to conserve our available cash balances. On March 25, 2011, we entered into a credit agreement with the Rich Dad Parties that converted these royalties due into a promissory note with stated terms. See Note 14—Subsequent Event for further information. This credit agreement effectively put us back in compliance with the terms set forth in the 2010 Rich Dad License Agreement. Beginning in 2011, we resumed paying royalties due relating to 2011 activity under the 2010 Rich Dad License Agreement.

 

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Note 5—Notes Receivable

 

Notes receivable consists of the following (in thousands):

 

 

 

Years ended
December 31,

 

 

 

2010