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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

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FORM 10-Q 

 

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(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended July 1, 2016

Or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to

 Commission File Number: 0-27248

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 Learning Tree International, Inc.

(Exact name of registrant as specified in its charter)

 

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Delaware	95-3133814
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
13650 Dulles Technology Drive Herndon, VA	20171
(Address of principal executive offices)	(Zip Code)

 

703-709-9119

(Registrant’s telephone number, including area code)

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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     ☐  No

 

Indicate by check mark whether the registrant has submitted electronically 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    ☐  No

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐	(do not check if smaller reporting company)	Smaller reporting company	☒

 

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

 

 The number of shares of common stock, $.0001 par value, outstanding as of August 10, 2016 was 13,224,349.

 

 

 LEARNING TREE INTERNATIONAL, INC.

 

FORM 10-Q July 1, 2016

 

TABLE OF CONTENTS

 

		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of July 1, 2016 (unaudited) and October 2, 2015	3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months and nine months ended July 1, 2016 (unaudited) and July 3, 2015 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended July 1, 2016 (unaudited) and July 3, 2015 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	23
Item 5.	Other Information	23
Item 6.	Exhibits	24
SIGNATURES		25
EXHIBIT INDEX		26

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.           FINANCIAL STATEMENTS.  

 

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

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

 

 

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except per share data) 

Unaudited 

 

 

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

 

 

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited

 

 

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

  

 

 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(tables in thousands, except per share data)

Unaudited

 

 

 

 

 

 

 

 

Item 2.            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.   

 

The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q (“Report” or “Form 10-Q”) and our consolidated financial statements and notes included in our Annual Report on Form 10-K, for the fiscal year ended October 2, 2015 (our “2015 10-K”). We use the terms “we,” “our,” “us” and “Learning Tree” to refer to Learning Tree International, Inc. and our subsidiaries unless the context indicates otherwise.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”). You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Report. Our forward-looking statements, including the Future Outlook section contained herein, relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans, expense reduction initiatives and the adequacy of our funding. Other statements contained in this Report that are not historical facts are also forward-looking statements. 

 

We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on our beliefs and assumptions made by us and information currently available to us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

 

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include those related to the following: risks associated with the timely development, introduction, and customer acceptance of our courses; efficient delivery and scheduling of our courses; technology development and new technology introduction; competition; international operations, including currency fluctuations; attracting and retaining qualified personnel; intellectual property, including having to defend potential infringement claims; risks associated with cyber security; changing economic and market conditions; and adverse weather conditions, strikes, acts of war or terrorism and other external events. Please refer to the risk factors under “Item 1A. Risk Factors” beginning on page 10 and elsewhere in our 2015 10-K, as well as in our other filings with the Securities and Exchange Commission (“SEC”).

 

The risks included in our filings are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We do not undertake and specifically disclaim any obligation to update such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as otherwise required by law.

 

 

OVERVIEW

 

We are a leading worldwide vendor-independent provider to business and government organizations for the training and education of their information technology (“IT”) professionals and managers. Since our founding in 1974, we have provided high-quality training to over 2.4 million IT professionals and managers.

 

Our objective is to provide our customers with job-focused, hands-on learning experiences that best meet their needs for the development of their professional IT staff and managers. We design our courses to provide participants an unbiased perspective of both the strengths and limitations of software and hardware products and an understanding of how to compare and integrate multiple platforms and technologies from various vendors. Drawing from the expertise of our international team of instructors, each course incorporates multiple points of view concerning IT applications used throughout the world. Our IT courses are designed to be highly interactive, with virtually all of our courses involving “hands-on” training on networked state-of-the-art workstations so that participants can practice and assimilate the skills being taught. Participants spend a significant portion of each hands-on course working on computer-based exercises and participating in group workshops and class interactions. As a result, they return to their jobs with the confidence to immediately apply the new skills and knowledge they have gained. Participants receive or are provided access to extensive course materials that facilitate learning and serve as a post-course reference tool.

  

 

 Our management courses, while including core concepts and theory, focus heavily on providing practical skills, tools, and techniques that participants can apply immediately upon returning to their jobs. Participants work extensively in group exercises that provide the opportunity for them to practice applying the key concepts in real-world situations. These real-world scenarios are primarily delivered through our performance-based management training platform. Our courses bring the real world to life in the classroom through the use of computer-based and rich-media simulations, supplemented with substantial amounts of hands-on exercises and group activities, facilitated by experts in their respective fields.

 

We market and deliver our courses through locally staffed operations in the United States, the United Kingdom, Canada, Sweden and Japan, and, pursuant to our License Agreement entered into in connection with the sale of our former French subsidiary, in France. We currently generate approximately 40% of our revenues internationally. Our sophisticated infrastructure and logistics capabilities allow us to coordinate, plan and deliver Learning Tree courses at our education centers and external hotel and conference facilities worldwide. We also present standard or customized courses at customer facilities whenever and wherever desired, with quality standards that are identical to those of courses presented in our Learning Tree Education Centers.

 

We also offer courses through Learning Tree AnyWare™ — our web-based attendance platform. With the use of our AnyWare™ product, our clients anywhere in the world can participate in any course event being taught at any of our education centers, without the need to travel or commute to the actual course site. Our clients can take our courses at work, home, or at one of our AnyWare™ Learning Centers. Worldwide, we currently have a total of 31 stand-alone AnyWare™ Learning Centers as well as a dedicated AnyWare™ Learning Center within each of our Education Centers which provide our customers convenient access to our courses via our AnyWare™ platform in a setting optimized for learning and training and give our customers firsthand experience with our on-line capabilities. As acceptance of the AnyWare™ product has increased in the United States and Canada, and with our customers increasingly attending courses from home or their office using our AnyWare™ platform, we are evaluating the costs and benefits of maintaining all of our stand-alone AnyWare™ Learning Centers as part of our ongoing review of our business operations.  

 

We use a well-defined systematic approach to develop and update the Learning Tree course library so as to provide training that is immediately applicable by course participants to their work in a broad range of applications and industries. After assessing market need, courses may be translated into Swedish and Japanese. Our License Agreement with Educinvest determines which courses are translated into French. Our proprietary course development process also allows us to efficiently and effectively customize our courses to specific customer requirements for delivery at their sites. In the United Kingdom, our courses can be used to gain a Master’s degree in Professional Computing at Staffordshire University under a program administered by the Faculty of Computing, Engineering and Technology. We are a trusted continuing professional education (“CPE”) provider of the International Information Systems Security Certification Consortium. In addition, we are on the National Association of State Boards of Accountancy National Registry of CPE sponsors; a Registered Education Provider of the Project Management Institute; an APMG International Accredited Training Organization; an International Institute of Business Analysis (“IIBA”) Endorsed Education Provider; and a SFIA Foundation Accredited Training Partner.

 

Our instructors are not full time employees of Learning Tree; rather, they are practicing professionals who apply the same IT and management skills they teach in our classrooms while working on development and management projects as independent consultants or full-time employees elsewhere when they are not teaching. This ensures that our instructors stay at the forefront of their respective disciplines, and also enables us to structure our business so over half of our course delivery costs are variable. On average, each of our expert instructors teaches about nine courses per year on an “as needed” basis.

 

STRATEGIC INITIATIVES

 

The Company has been experiencing a decline in course attendance. To address this decline, the Company has been executing upon new strategies to increase the number of attendees in our courses and expand our overall customer base. One of the strategies implemented worldwide is to Guarantee To Run (GTR) a higher percentage of our courses than in the past, which makes these courses more attractive to potential attendees that schedule their training in advance of the scheduled course date and want the certainty of the course being delivered on that date. While increasing the number of GTR courses will increase our direct costs, we believe that the certainty of a course being delivered along with the number of pricing promotions we are now offering will generate additional revenues to offset this increase in direct costs with the goal of increasing profitability. The number of pricing promotions to attract more attendees and the increase in one-day courses have the impact of lowering our overall average revenue per participant. Other strategies being initiated include leveraging resellers and other partner models to increase our sales reach, amplifying the growth of our internal sales teams, and partnering with certification organizations and other appropriate training providers to broaden and deepen the training products we offer. Our overall objective is to stabilize the training offered via our Education Centers, and reverse the year-over-year declines in revenue.

   

 

An additional core strategy is to grow our position as a leading worldwide provider of training and workforce development to IT professionals and managers and to become the provider of choice for large national and multinational companies, medium-size companies and government organizations. Over the past few years, we have started working with clients to address the life cycle of organizational performance challenges. To that end, we introduced IT Workforce Optimization Solutions during the 2016 fiscal year, which is a comprehensive suite of services to support IT organizations in: defining organizational structure, processes, and job roles; assessing current staff skills and abilities; and implementing performance improvements by enhancing the skills and abilities of staff and helping to implement process improvements. Workforce Optimization Solutions augments and enhances our core training capabilities enabling Learning Tree to partner with our customers in helping them develop a high-performing organization through workforce development and process improvement.

 

As part of Workforce Optimization Solutions, we released a skills assessment solution that ultimately will be aligned with the competencies as defined by the non-profit organization, Skills Assessment for the Information Age (SFIA) Foundation. Our current skills assessment library contains more than 9,000 questions that cover 67 different roles across many IT disciplines. We have developed an automated, online tool for individuals to complete assessments, and we are working with several companies that are using our skills assessment solution for helping them assess current competencies of their staff as input to developing individual learning plans.

 

Through Workforce Optimization Solutions, we have been successfully providing Project Acceleration Workshops for organizations. These workshops combine a training component for an organization, while leveraging that training to support work on a specific customer project. A Project Acceleration Workshop might be focused on creating a Work Break Down (WBS) structure for a project, and as such our instructor would provide training to a customer project team on that subject. But the Workshop would then focus on the creation of a WBS for a specific customer project, so that at the end of the Workshop, the customer project team has a tangible product that can be used to help manage that project. We have received positive feedback on the value of these workshops by both attendees and the customer organizations.

 

While we do believe Workforce Optimization Solutions is a meaningful strategy for the Company and its future growth, the Company does not expect that this strategy will have a significant impact on the Company’s revenues for the remainder of this fiscal year.

 

We continue to invest in our sales functions as we make the transition from direct marketing to direct sales. We believe this investment along with Workforce Optimization Solutions will enable us to achieve our goal of reversing the year over year declines in revenue that we have been experiencing and have positive operating income for fiscal year 2017. Although we will be working diligently to accomplish these goals, there is no assurance that we will achieve them, and if so, by the effective timing of fiscal year 2017.

 

Comprehensive Cost Reduction Program

 

We have accelerated our comprehensive cost reduction program with the goal of significantly reducing our fiscal year 2017 overall expenses in the range of $11.0 to $12.0 million when compared to the Company’s expenses for fiscal year 2016. These targeted cost reductions are in addition to approximately $6.2 million in overall cost reductions already achieved during the first nine months of fiscal year 2016 when compared to the Company’s expenses for the first nine months of fiscal year 2015. These reductions have been initiated to right-size the Company’s operations, modernize its business operations to meet customer demand and preserve capital. In order to implement these cost reductions for the 2017 fiscal year, we have taken or are taking the following steps:

 

●

Eliminating our direct mail course catalog advertising program effective immediately. Besides being a “green initiative”, we believe that our overall customer-base has shifted the manner in which it selects and purchases courses away from printed catalogs toward greater use of digital channels, such as website, social media and digital advertising.

●

Making our course notes available electronically and only producing a paper copy if requested by our attendee.

●

Complete a reduction in force of 26 full time equivalent employees in North America.

●

Reduced the compensation paid to our Board of Directors, effective August 1, 2016, which our directors unanimously agreed to do as part of our cost reduction program.

●

Reducing our real estate costs, which will begin with our Education Center lease in the Chicago area that is expiring and will not be replaced. As other facility leases expire, additional cost reductions will be evaluated.

 

 As part of this program, Learning Tree will continue to review and take appropriate actions to streamline its operations in order to reduce or eliminate excess costs.

 

In addition, Learning Tree is exploring other strategic options available to it to enhance shareholder value. Learning Tree does not expect to comment further or update the market with any additional information on the strategic options it is evaluating, unless and until its Board of Directors deems disclosure appropriate or necessary.

 

 

KEY METRICS OF OUR THIRD QUARTER AND NINE MONTHS OF FISCAL YEAR 2016

 

We use the 52/53-week fiscal year method to better align our external financial reporting with the manner in which we operate our business. Under this method, each fiscal quarter ends on the Friday closest to the end of the calendar quarter. Accordingly, our third quarter of the current fiscal year ended on July 1, 2016 and encompassed 13 weeks, while our third quarter of the prior fiscal year ended on July 3, 2015 and also encompassed 13 weeks. The nine months ended July 1, 2016 and July 3, 2015 also both encompassed 39 weeks

 

Following the sale of our subsidiary in France, Learning Tree International S.A. (“LTRE(FR)”) in March 2015, we reclassified the historical operating results, including operating statistics of LTRE(FR), to discontinued operations. The following discussions reflect comparisons of our continuing operations excluding LTRE(FR).

 

 The following is an overview of our results of continuing operations, and net losses for the third quarter of fiscal year 2016 which ended July 1, 2016, compared to the same quarter of fiscal year 2015 which ended July 3, 2015:

 

•

Revenues decreased to $21.1 million from $22.7 million.

 

•

Gross profit increased to 37.2% of revenues from 36.7% of revenues.

 

•

Operating expenses decreased by $1.6 million to $10.8 million from $12.4 million. Operating expenses were 51.3% of revenues compared to 54.5% of revenues.

 

•

Loss from operations was $3.0 million compared to a loss from operations of $4.0 million.

 

•

Net loss totaled $2.8 million compared to a net loss of $4.3 million.

 

The following is an overview of our results of continuing operations, discontinued operations, and net losses for the nine months ended July 1, 2016, compared to the equivalent period of fiscal year 2015:

 

•

Revenues decreased to $59.9 million from $69.3 million

 

•

Gross profit declined to 37.0% of revenues from 39.3% of revenues.

 

•

Operating expenses decreased by $5.1 million to $32.6 million from $37.7 million. Operating expenses were 54.5% of revenues compared to 54.4% of revenues.

 

•

Loss from operations was $10.5 million, the same as the nine months ended July 3, 2015.

 

•

Net loss totaled $10.5 million compared to a net loss of $13.3 million.

 

 

RESULTS OF OPERATIONS

 

The following table summarizes our consolidated statements of operations for the periods indicated, expressed as a percentage of our revenues for these periods:

 

		Three months ended								Nine months ended
		July 1, 2016				July 3, 2015				July 1, 2016				July 3, 2015
Revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of revenues			62.8	%			63.3	%			63.0	%			60.7	%
Gross profit			37.2	%			36.7	%			37.0	%			39.3	%
Operating expenses:
Course development			6.4	%			11.3	%			6.7	%			9.2	%
Sales and marketing			22.4	%			23.7	%			23.7	%			24.6	%
General and administrative			22.5	%			19.5	%			24.1	%			20.6	%
			51.3	%			54.5	%			54.5	%			54.4	%
Loss from operations			-14.1	%			-17.8	%			-17.5	%			-15.1	%
Other income (expense):
Interest income, net			0.0	%			0.0	%			0.0	%			0.0	%
Foreign exchange losses			0.7	%			-0.2	%			0.3	%			0.5	%
Other, net			0.2	%			0.0	%			0.0	%			0.0	%
			0.9	%			-0.2	%			0.3	%			0.5	%
Loss from continuing operation before provision for income taxes			-13.2	%			-18.0	%			-17.2	%			-14.6	%
Provision for income taxes			0.2	%			1.0	%			0.3	%			0.6	%
Loss from continuing operations			-13.4	%			-19.0	%			-17.5	%			-15.2	%
Discontinued operations (Note 11)
Loss from discontinued operations (including loss on disposal of $2,501), net of tax			0.0	%			0.0	%			0.0	%			-4.0	%
Net loss			-13.4	%			-19.0	%			-17.5	%			-19.2	%

 

 

THREE MONTHS AND NINE MONTHS ENDED JULY 1, 2016 COMPARED WITH THE THREE MONTHS AND NINE MONTHS ENDED JULY 3, 2015

 

Revenues. Revenues from continuing operations of $21.1 million in our third quarter of fiscal year 2016 were 7.2% lower than revenues of $22.7 million in the same quarter of fiscal year 2015. The decrease in revenues primarily resulted from a 13.2% decrease in average revenue per participant partially offset by a 6.9% increase in the number of course participants. The decrease in the average revenue per participant was caused primarily by lower average revenue per participant from one-day courses which we began introducing in the second quarter of fiscal year 2015, lower average revenue from implementation of periodic pricing promotions to attract new course attendees, and changes in foreign exchange rates, that negatively impacted revenues by approximately 1.1% quarter over quarter. The increase in the number of course participants compared to the same quarter of our prior year was primarily due to higher attendance as a result of our pricing promotions and our one-day courses. Revenues from customers who purchased courses under our U.S. Government General Service Administration (“GSA”) contract schedules were $2.2 million lower for the third quarter of fiscal year 2016 compared to the third quarter of fiscal year 2015.

 

During our third quarter of fiscal year 2016, we trained 14,823 course participants, a 6.9% increase from the 13,862 course participants we trained in our third quarter of fiscal year 2015.

 

During our third quarter of fiscal year 2016, we provided 43,842 attendee-days of training, 12.3% fewer than the 50,003 attendee-days of training we provided in the same quarter in fiscal year 2015. In our IT courses, we provided 27,373 attendee-days of training during our third quarter of fiscal year 2016, a 7.3% decrease from the 29,527 attendee-days in the corresponding period in fiscal year 2015. In our management courses, we provided 16,469 attendee-days of training, during our third quarter of fiscal year 2016, a 19.6% decrease from the 20,476 attendee-days in the corresponding period in fiscal year 2015.   

  

 

Our revenues from continuing operations of $59.9 million during our first nine months of fiscal year 2016 were 13.5% lower than revenues of $69.3 million in the same period of fiscal year 2015. The decrease in revenues primarily resulted from a 2.6% decrease in the number of course participants and an 11.2% decrease in average revenue per participant. The decrease in the number of course participants compared to the same nine month period of our prior year is primarily due to the continued decline in enrollments in the United Kingdom and Sweden. The 11.2% decrease in average revenue per participant was caused primarily by the lower average revenue per participant from one-day courses which we began introducing in the second quarter of fiscal year 2015, lower average revenue from the use of periodic pricing promotions to attract new course attendees, and changes in foreign exchange rates. Revenues were negatively impacted by approximately 2.1% period over period as a result of changes in foreign exchange rates.

 

During our first nine months of fiscal year 2016, we trained 40,291 course participants, a 2.6% decrease from the 41,378 course participants we trained in our first nine months of fiscal year 2015. 

 

During our first nine months of fiscal year 2016, we provided 124,018 attendee-days of training, 15.6% fewer than the 146,981 attendee-days in the same period in fiscal year 2015. In our IT courses during our first nine months of fiscal year 2016, we provided 78,431 attendee-days of training, an 11.0% decrease from the 88,095 attendee-days in the corresponding period in fiscal year 2015. In our management courses during our first nine months of fiscal year 2016, we provided 45,587 attendee-days of training, a 22.6% decrease from the 58,886 attendee-days in the corresponding period in fiscal year 2015.

 

Cost of Revenues. Our cost of revenues from continuing operations primarily includes the costs of course instructors and their travel expenses, course materials, classroom facilities, equipment, freight and refreshments.

 

 During our third quarter of fiscal year 2016, we presented 1,319 events, an 11.4% increase from 1,184 events during the same period in fiscal year 2015. The increase was primarily due to the decision to GTR more courses in order to support the pricing promotions during the period. Our cost of revenues for our third quarter of fiscal year 2016 was $13.2 million, or 62.8% of revenues, compared to $14.4 million, or 63.3% of revenues, in the same period in fiscal year 2015. Accordingly, our gross profit percentage for our third quarter of fiscal year 2016 was 37.2% compared to 36.7% in the same period of the prior fiscal year.

 

The change in cost of revenues as a percentage of revenues in our third quarter of fiscal year 2016 primarily reflects the 13.2% decrease in revenue per participant that was offset by a 13.8% decrease in cost per participant. The decrease in cost per participant is primarily the result of a 7.9% decrease in the cost of revenues and the 6.9% increase in participants. Changes in foreign exchange rates do not materially affect our gross profit percentage, since fluctuations in exchange rates affect our cost of revenues by approximately the same percentage as they affect our revenues.

 

During our first nine months of fiscal year 2016, we presented 3,661 events, an 8.3% increase from 3,381 events during the same period in fiscal year 2015. The increase was primarily due to our decision to GTR more courses and the addition of one-day courses during the first nine months of fiscal year 2016. Our cost of revenues for our first nine months of fiscal year 2016 was $37.7 million, or 63.0% of revenues, compared to $42.0 million, or 60.7% of revenues, in the same period in fiscal year 2015. Accordingly, our gross profit percentage for our first nine months of fiscal year 2016 was 37.0% compared to 39.3% in the same period of the prior fiscal year.

 

The change in cost of revenues as a percentage of revenues during our first nine months of fiscal year 2016 primarily reflects the 11.2% decrease in revenue per participant partially offset by a 7.8% decrease in the cost per participant. The decrease in cost per participant is primarily the result of a 10.2% decrease in the cost of revenues partially offset by the 2.6% decrease in participants.

 

Course Development Expenses. Costs incurred to develop new courses and update our existing courses are expensed when incurred and are included in course development expenses. These costs are principally for internal product development staff and for subject matter experts.

 

During our third quarter of fiscal year 2016, course development expenses were 6.4% of revenues, compared to 11.3% in our third quarter of fiscal year 2015. Overall spending on course development in our third quarter of fiscal year 2016 was $1.4 million, compared to $2.6 million spent on course development in our third quarter of fiscal year 2015. The $1.2 million decrease in course development expenses quarter over quarter was primarily due to the development of a series of one-day courses during the third quarter of fiscal year 2015 that did not occur during the third quarter of fiscal year 2016 and lower personnel expenses during the third quarter of fiscal year 2016.

  

Course development expense during our first nine months of fiscal year 2016 was $4.0 million, a decrease of $2.4 million compared to $6.4 million in the same period of fiscal year 2015.

 

 

In our third quarter of fiscal year 2016, we introduced nine new multi-day IT course titles, one new multi-day management course title, and four one day course titles. We retired nine one-day course titles during the third quarter of fiscal year 2016. At the end of our third quarter of fiscal year 2016, our library of instructor-led courses numbered 374 titles compared with 274 titles at the end of the same quarter of fiscal year 2015. At the end of our third quarter of this fiscal year, we had 136 multi-day IT titles in our course library, compared with 121 multi-day titles at the end of the same quarter of fiscal year 2015. Our library of multi-day management titles numbered 71 at the end of our third quarter of fiscal year 2016, compared to 67 at the end of the same quarter of fiscal year 2015. Our library of 1-Day Boot Camp courses numbered 167 at the end of our third quarter of fiscal year 2016, compared to 86 at the end of the same quarter of fiscal year 2015. 

  

Sales and Marketing Expenses. Sales and marketing expenses include the costs of designing, producing and distributing direct mail and media advertisements; distributing marketing e-mails; maintaining and further developing our website; compensation and travel for sales and marketing personnel; and information systems to support these activities.

 

Sales and marketing expenses in our third quarter of fiscal year 2016 were 22.4% of revenues, compared to 23.7% in the same quarter of fiscal year 2015. Sales and marketing expenses were $4.7 million in our third quarter of fiscal year 2016, compared to $5.4 million during our third quarter of fiscal year 2015. The decrease is driven primarily by decreases in direct marketing costs when compared to the third quarter of fiscal year 2015. Changes in foreign exchange rates during the third quarter of fiscal year 2016 caused total sales and marketing expenses to decrease by about 2.2% compared to the same period of fiscal year 2015.

 

Sales and marketing expenses during our first nine months of fiscal year 2016 were $14.2 million, a decrease of $2.8 million compared to $17.0 million in the same period of fiscal year 2015. The decrease was primarily due to a $2.4 million decrease in direct marketing costs and $0.4 million of reduced personnel expense. Changes in foreign exchange rates included in these figures caused total sales and marketing expenses to decrease by about 2.8% for the first nine months of fiscal year 2016 compared to the same period of fiscal year 2015.

 

 General and Administrative Expenses. General and administrative expenses in our third quarter of fiscal year 2016 were 22.5% of revenues, compared with 19.5% for the same quarter in fiscal year 2015. General and administrative expenses during our third quarter of fiscal year 2016 were $4.7 million, compared to $4.4 million in our third quarter of fiscal year 2015. The increase was primarily due to a $0.3 million increase in outside professional services. Changes in foreign exchange rates during the first quarter of fiscal year 2016 caused total general and administrative expenses to decrease by approximately 1.2% compared to the same period of fiscal year 2015.

 

 General and administrative expenses during our first nine months of fiscal year 2016 were $14.4 million, an increase of $0.1 million compared to $14.3 million in the same period of fiscal year 2015. The increase was due primarily to a $0.3 million increase in outside professional services, partially offset by a $0.1 million decrease in personnel cost and a $0.1 million decrease in facilities cost. Changes in foreign exchange rates had a 1.8% favorable impact on the nine months expenses incurred by our foreign subsidiaries.

 

Other Income (Expense), Net. Other income (expense), net consists primarily of interest income and foreign currency transaction gains and losses.

 

During our third quarter of fiscal year 2016, we had other income of $0.2 million compared to other expense of less than $0.1 million in the third quarter of fiscal year 2015, both primarily from foreign exchange gains or losses.

 

During our first nine months of fiscal year 2016 other expense totaled $0.2 million compared to other income of $0.3 million in our first nine months of fiscal year 2015 both primarily from foreign exchange gains or losses.

 

Income Taxes. Our income tax provision in our third quarter of fiscal year 2016 was less than $0.1 million, compared to $0.2 million in our third quarter of fiscal year 2015. Our third quarter of fiscal year 2016 and 2015 provisions are primarily related to the income tax expense of the Company's foreign subsidiaries.

 

Our income tax provision for our first nine months of fiscal year 2016 was $0.2 million, compared to $0.4 million for our first nine months of fiscal year 2015, and are primarily related to US State taxes and the income tax expense of the Company's foreign subsidiaries.

 

Loss from Continuing Operations. Our loss from continuing operations for our third quarter of fiscal year 2016 was $2.8 million compared to a loss of $4.3 million for our third quarter of fiscal year 2015.

 

For the first nine months of fiscal year 2016, our loss from continuing operations was $10.5 million, which is the same as the loss in the first nine months of fiscal year 2015.

  

 

Loss from Discontinued Operations. For the first nine months of fiscal year 2016, we did not have any activity from discontinued operations, compared to our loss from discontinued operations of $2.8 million in the first nine months of fiscal year 2015.

  

Net Loss. Our net loss for our third quarter of fiscal year 2016 was $2.8 million compared to net loss of $4.3 million for our third quarter of fiscal year 2015.

 

Our net loss for our first nine months of fiscal year 2016 was $10.5 million compared to net loss of $13.3 million for our first nine months of fiscal year 2015.

 

Effects of Foreign Exchange Rates. Although our consolidated financial statements are stated in U.S. dollars, all of our subsidiaries outside of the U.S. have functional currencies other than the U.S. dollar. Gains and losses arising from the translation of the balance sheets of our subsidiaries from the functional currencies to U.S. dollars are reported as adjustments to stockholders’ equity. Fluctuations in exchange rates, including those recently experienced following a referendum on June 23, 2016 in which voters in the United Kingdom approved an exit from the European Union (referred to as “Brexit”), may also have an effect on our results of operations. The strengthening of the U.S. dollar against the functional currencies of most of our foreign subsidiaries has negatively impacted our results of operations. Since both revenues and expenses are generally denominated in our subsidiaries’ local currency, changes in exchange rates that have an adverse effect on our foreign revenues are partially offset by a favorable effect on our foreign expenses. The impact of future exchange rates on our results of operations cannot be accurately predicted, including those related to Brexit. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates, and therefore we continue to be subject to such risks. Even if we undertake such hedging transactions in the future, there can be no assurance that any hedging techniques we implement would be successful in eliminating or reducing the effects of currency fluctuations. See Item 1A “Risk Factors” in this Form 10-Q and in our 2015 10-K.

 

 

FLUCTUATIONS IN QUARTERLY RESULTS

 

Our quarterly results are affected by many factors, including the number of weeks during which courses can be conducted in a quarter, the nature and extent of our marketing, the timing of the introduction of new courses, competitive forces within the markets we serve, the mix of our course events between IT and management and customer site or education center venues, and currency fluctuations.

 

In addition, we use the 52/53-week fiscal year method to better align our external financial reporting with the manner in which we operate our business. Under this method, each fiscal quarter ends on the Friday closest to the end of the calendar quarter. Accordingly, our third quarter of the current fiscal year ended July 1, 2016 encompassed 13 weeks, while our third quarter of the prior fiscal year ended July 3, 2015 also encompassed 13 weeks.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity at July 1, 2016 included cash and cash equivalents on hand of $9.1 million. During the first nine months of fiscal year 2016, our total cash and cash equivalents decreased by $8.9 million, primarily as a result of the need to use cash to fund our operating activities of $7.7 million and cash used for capital expenditures of $1.1 million.

 

At July 1, 2016, our net working capital deficit (current assets minus current liabilities) was $(10.0) million, an $8.1 million decrease from our working capital balance at October 2, 2015. Current assets decreased $10.7 million during the nine month period, due primarily to decreases in trade accounts receivable and cash. Current liabilities decreased $2.6 million during the period, primarily due to decreases in accounts payable and accrued expenses.

 

 Cash Flows from Continuing Operations. Our cash and cash equivalents from continuing operations decreased $8.9 million to $9.1 million at July 1, 2016 from $17.9 million at October 2, 2015.

 

		Nine months ended
(in thousands)		July 1, 2016				July 3, 2015				Net Change
Cash used in operating activities of continuing operations		$	(7,691	)		$	(8,763	)		$	1,072
Cash used in investing activities of continuing operations			(1,104	)			(2,240	)			1,136
Effects of exchange rate changes on cash and cash equivalents of continuing operations			(86	)			(196	)			110
Net decrease in cash and cash equivalents of continuing operations		$	(8,881	)		$	(11,199	)		$	2,318

 

 

Cash used in continuing operating activities decreased $1.1 million in the first nine months of fiscal year 2016, compared to the first nine months of fiscal year 2015. Cash used in investing activities decreased by $1.1 million in the first nine months of fiscal year 2016 compared to the first nine months of fiscal 2015, due to decreased capital spending for equipment and leasehold improvements.     

  

Liquidity. The continued decline in operating performance has resulted in net cash being used in operating activities, and we expect the net cash usage to continue until the Company returns to profitability. Our ability to access the capital markets is limited. We have no outstanding debt or line-of-credit agreements. We anticipate we will continue to rely primarily on our balance of cash and cash equivalents on hand, cash flows from operations, and other lease financing available to us to finance our operational cash needs. As described above, we have implemented a comprehensive cost reduction program while continuing to invest in our sales function to reverse the year-over-year decline in revenue. With these actions, we believe that such funds will be sufficient to satisfy our anticipated cash requirements for the foreseeable future.  

 

Capital Requirements. During the nine months ended July 1, 2016, we made capital expenditures of $1.1 million for leasehold improvements and the purchase of network computer and other equipment. Additionally, $1.2 million of leasehold improvement costs were funded directly by the landlord to the contractor performing such improvements. We have no plans to purchase additional equipment and other capital assets during the remainder of fiscal year 2016. Our contractual obligations as of July 1, 2016 are consistent in all material respects with our fiscal year-end disclosure in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources–Capital Requirements” of our 2015 10-K.

 

We have a number of operating leases for our administrative offices and education center classroom facilities located worldwide. These leases expire at various dates over the next 11 years. In addition to requiring monthly or quarterly payments for rent, some of the leases contain asset retirement provisions whereby we are required to return the leased facility back to a specified condition at the expiration of the lease.

 

 

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

 

 Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. We believe some of the more critical estimates and policies that affect our financial condition and results of operations are in the areas of revenue recognition, operating leases, AROs, stock-based compensation and income taxes. For more information regarding our critical accounting estimates and policies, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies” of our 2015 10-K. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

 

 

FUTURE OUTLOOK

 

Our clients are shortening the average time from initial enrollment in a course to their actual attendance. This shorter buying cycle has reduced our visibility for future enrollments and has made forecasting future financial results more difficult. We have taken this into consideration in developing our forward-looking outlook for our fourth quarter of fiscal year 2016. In addition, while the fourth quarter of fiscal year 2016 has 13 weeks, the same as in the fourth quarter of fiscal year 2015,  the fiscal year 2016 fourth quarter includes the Fourth of July holiday week in the U.S., which fell in the third quarter in fiscal year 2015. We typically do not run courses the week of July 4^th in the U.S.

 

 

Effect of Exchange Rates. Approximately 40% of our business annually is conducted in currencies other than U.S. dollars and fluctuations in exchange rates will affect future revenues and expenses when translated into U.S. dollars. If the exchange rates as of August 1, 2016 remain constant for the remainder of our fourth quarter of fiscal year 2016, then we would expect foreign exchange rates to negatively impact fourth quarter revenues from continuing operations by approximately 2.4% when compared to the fourth quarter of fiscal year 2015. To the extent that the U.S. dollar rises against the functional currencies of our foreign subsidiaries, we would expect to experience further negative impact to our fourth quarter 2016 revenues. As a large percentage of our overhead costs are U.S. dollar-based, we would expect the corresponding positive impact to expense to be substantially less.

 

 

Fourth Quarter Revenues. We currently expect revenues from continuing operations for our fourth quarter of fiscal year 2016 of between $22.1 million and $23.1 million, compared to revenues of $25.6 million in our fourth quarter of fiscal year 2015.

 

Fourth Quarter Gross Profit. We expect a gross profit percentage from continuing operations in our fourth quarter of fiscal year 2016 of between 42.3% and 43.3% compared to 46.3% in our fourth quarter of fiscal year 2015.

  

Fourth Quarter Operating Expenses. We expect overall operating expenses from continuing operations for our fourth quarter of fiscal year 2016 to be between $10.3 million and $11.3 million, compared to $11.1 million in our fourth quarter of fiscal year 2015.

 

Fourth Quarter Loss from Operations. As a result of the above factors, we expect to incur a fourth quarter operating loss of between $0.3 million and $2.0 million compared with an operating profit of $0.8 million in our fourth quarter of fiscal year 2015.

 

Fourth Quarter Other Income (Expense), Net. We expect fourth quarter other expense to be less than $0.1 million.

 

Fourth Quarter Pre-Tax Loss. Overall, we expect to report a pre-tax loss for our fourth quarter of fiscal year 2016 of between $0.3 million and $2.1 million, compared with pre-tax income of $0.8 million in our fourth quarter of fiscal year 2015.

 

Impact of the Comprehensive Cost Reduction Program on the Fourth Quarter. We expect that the negative impact of employee severance costs related to our cost reduction program being implemented during the fourth quarter of fiscal 2016 will be offset by the related cost savings from the ongoing monthly reduction in salary and benefit costs. We are targeting for our other cost reduction initiatives, as generally described under “Strategic Initiatives - Comprehensive Cost Reduction Program” in this Management’s Discussion and Analysis on page 14, to be in place for the start of fiscal year 2017, however, if we are able to implement these initiatives sooner than expected, the Company may realize slight savings in the fourth quarter of fiscal year 2016.

 

 

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Disclosure under this item is not required for a Smaller Reporting Company.

 

Item 4.

CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

As of the end of the period covered by this report, management performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.

  

 Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that we believe have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

  

 

PART II—OTHER INFORMATION

 

Item 1.

LEGAL PROCEEDINGS.

 

As of July 1, 2016, other than routine legal proceedings and claims incidental to our business, we are not involved in any legal proceedings that we believe could reasonably be expected to have a material adverse effect on our financial condition or results of operations.

 

Item 1A.

RISK FACTORS.

 

Our working capital requirements may negatively affect our liquidity and capital resources.

 

Our working capital needs have exceeded, and are anticipated to continue to exceed for the near future, our cash flows from operations. Accordingly, we have historically relied on our cash and cash equivalents to satisfy our working capital needs. If we do not increase our revenues or gain access to additional capital, whether through a line or credit or other sources of capital, which may not be available on satisfactory terms or in adequate amounts, then our cash and cash equivalents will continue to decline which will have an adverse impact upon our liquidity and capital resources.   

 

We may be unable to realize our business strategy of improving operating performance, growing our business and generating savings and improvements.

 

We have been implementing strategic and other initiatives, including the recently implemented Comprehensive Cost Reduction Program that are designed to improve our operating performance, increase revenues and grow our business. The failure to achieve the goals of these initiatives could have a material adverse effect on our financial condition and our business as a whole. There is no assurance that we will be able to pursue, successfully implement or realize the expected benefits of any initiative or that we will be able to sustain improvements made to date.

 

Our operations in the United Kingdom pose additional risks to our profitability and operating results.

 

Following a referendum on June 23, 2016 in which voters in the United Kingdom (“U.K.”) approved an exit from the European Union ("EU"), it is expected that the U.K. government will initiate a process to leave the EU (often referred to as “Brexit”), including negotiating the terms of the U.K.’s future relationship with the EU. Such an exit from the EU is unprecedented, and it is unclear how the U.K.’s access to the EU Single Market, and the wider commercial, legal and regulatory environment, will impact our U.K. operations and customers. Our U.K. operations service customers in the U.K. as well as in other countries in the EU, and these operations could be disrupted by Brexit, particularly if there is a change in the U.K.’s relationship to the EU Single Market. Even prior to any change to the U.K.’s relationship with the EU, the announcement of Brexit may create economic uncertainty surrounding the terms of the U.K.’s exit and its consequences could adversely impact customer confidence resulting in customers reducing their spending budgets on our products and services, which would adversely affect our businesses and results of operations.

 

The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations that resulted in the strengthening of the U.S. dollar against foreign currencies in which we conduct business. The further strengthening of the U.S. dollar against the U.K. currency and other currencies of most of our foreign subsidiaries has negatively impacted our results of operations. In addition, the losses arising from the translation of the balance sheets of our foreign subsidiaries from the functional foreign currencies to U.S. dollars that we have been experiencing are reported as adjustments to our consolidated stockholders’ equity, which has contributed to our current negative stockholders’ equity. We do not hedge the risks associated with fluctuations in exchange rates, and therefore we continue to be subject to such risks.

 

 

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

Item 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

Item 4.

MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

Item 5.

OTHER INFORMATION.

 

None.

 

 

Item 6.

EXHIBITS.

  

Exhibit No.		Document Description		Incorporation by Reference
31.1		Certification of Chief Executive Officer. Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.		Filed herewith.
31.2		Certification of Chief Financial Officer. Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.		Filed herewith.
32.1		Certification of Chief Executive Officer. Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
32.2		Certification of Chief Financial Officer. Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
101 INS		XBRL Instance Document.		Filed herewith.
101 SCH		XBRL Taxonomy Extension Schema Document.		Filed herewith.
101 CAL		XBRL Taxonomy Extension Calculation Linkbase Document.		Filed herewith.
101 DEF		XBRL Taxonomy Extension Definition.		Filed herewith.
101 LAB		XBRL Taxonomy Extension Label Linkbase Document.		Filed herewith.
101 PRE		XBRL Taxonomy Extension Presentation Linkbase Document.		Filed herewith.

  

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

August 15, 2016 

 

		LEARNING TREE INTERNATIONAL, INC.
		By:  /s/ Richard A. Spires
		Richard A. Spires
		Chief Executive Officer (Principal Executive Officer)
		By:  /s/ David W. Asai
		David W. Asai
		Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

Exhibit No.		Document Description		Incorporation by Reference
31.1		Certification of Chief Executive Officer. Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.		Filed herewith.
31.2		Certification of Chief Financial Officer. Pursuant to Rule 13a-14(a)/15(d)-14(a) under the Securities Exchange Act of 1934, as amended.		Filed herewith.
32.1		Certification of Chief Executive Officer. Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
32.2		Certification of Chief Financial Officer. Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Filed herewith.
101 INS		XBRL Instance Document.		Filed herewith.
101 SCH		XBRL Taxonomy Extension Schema Document.		Filed herewith.
101 CAL		XBRL Taxonomy Extension Calculation Linkbase Document.		Filed herewith.
101 DEF		XBRL Taxonomy Extension Definition.		Filed herewith.
101 LAB		XBRL Taxonomy Extension Label Linkbase Document.		Filed herewith.
101 PRE		XBRL Taxonomy Extension Presentation Linkbase Document.		Filed herewith.

   

 

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