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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 December 30, 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 Suite 400 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 February 1, 2017 was 13,224,349.  

 

  

 LEARNING TREE INTERNATIONAL, INC.

 

FORM 10-Q—December 30, 2016

 

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of December 30, 2016 (unaudited) and September 30, 2016	3
	Condensed Consolidated Statements of Operations for the three months ended December 30, 2016 (unaudited) and January 1, 2016 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the three months ended December 30, 2016 (unaudited) and January 1, 2016 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Removed and Reserved	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
SIGNATURES		26
EXHIBIT INDEX		27

  

  

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 interim 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 September 30, 2016 (our “2016 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 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 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: our ability to obtain additional liquidity in amounts and on terms acceptable to the Company; ability to reverse our trend of declining year over year revenues, and maintain liquidity; ability to successfully implement our new strategies to achieve our cost reduction goals; 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; implementation of partnerships with third party providers of courses and or course material; 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 14 and elsewhere in our 2016 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  

 

Learning Tree is a leading worldwide provider to business and government organizations for the workforce development and training of their information technology (“IT”) professionals and managers. Since our founding in 1974, we have provided high-quality predominantly vendor independent training to more than 2.4 million IT professionals and managers. In fiscal year 2016, while presenting courses in 32 countries, we trained 55,110 course participants from approximately 5,500 organizations, including large national and multinational companies, government organizations, and small and medium-size companies.

 

  

We offer a broad, predominately proprietary, library of intensive instructor-led courses from one to five days in length, which at December 30, 2016 comprised 326 different course titles including 139 multi-day IT course titles, 71 multi-day management course titles, and 116 one-day course titles. Learning Tree courses provide education and training across a wide range of technical and management disciplines, including operating systems, databases, computer networks, computer and network security, web development, programming languages, software engineering, open source applications, project management, business skills, leadership and professional development.

 

In addition to training, we offer a suite of Workforce Optimization Solutions to support an IT organization’s life-cycle of workforce development needs. Our solutions help ensure that an organization’s investment in training is relevant and leveraged to improving overall organization performance. These solutions range from helping organizations define their job roles, to assessing the current skills of the staff, providing coaching and mentoring of staff, and even serving as an outsourcer of an organization’s learning and training requirements.

 

We market and present our courses and solutions through locally staffed operations in the United States, the United Kingdom, Canada, Sweden and Japan and, through a licensee arrangement in France. In fiscal year 2016, we generated approximately 37% of our revenues outside of the United States. We coordinate, plan and deliver our courses at our own Education Centers, external hotel and conference facilities and customer sites worldwide. We also offer courses through our proprietary live on-line learning platform, Learning Tree AnyWare™, which enable individuals located anywhere in the world to use their Internet browser to participate online in instructor-led classes being conducted live in our Education Centers, at customer locations, or at specially equipped facilities.

 

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, Japanese, and French by our licensee in France. Our proprietary course development process enables us to efficiently and effectively customize our courses to specific customer requirements for delivery at their sites.

 

We have continued to investigate technology-based training formats and how they might effectively be integrated into our training programs. We developed Learning Tree AnyWare™, our proprietary live online learning platform that integrates participants in remote online locations into live class events in another location. Remote participants use an ordinary Internet connection to connect to our AnyWare™ classroom interface. Once logged in, remote AnyWare™ class participants see and hear their classroom-based instructor and classmates in real time, and view the instructor’s annotations on two in-class MagnaLearn™ projection screens. They are able to participate in discussions, ask questions, work in breakout sessions, and complete the same hands-on exercises under the guidance of an expert instructor as their in-class counterparts. They gain the full benefit of our proprietary courseware, and achieve the same level of knowledge and skill transfer as in-class participants. Through AnyWare™, we effectively apply technology to leverage the strengths of our classroom offerings providing greater flexibility for our customers by providing them with more scheduled course dates from which to choose. With the use of our AnyWare™ product, our clients anywhere in the world can choose to participate in any course event being taught at any of our Education Centers, at customer locations, or at specially equipped facilities, without the need to travel or commute to the actual course site.

 

Our instructors are not full time employees of Learning Tree; rather, they are practicing professionals with expert subject knowledge. Our average instructor has over 20 years of “hands-on, real world” experience in the fields that they teach. Learning Tree instructors teach an average of approximately seven course events per year on an “as-needed” basis. During the rest of the year, they work for other organizations either as full-time employees or as independent technical or management consultants.  

 

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; an AXELOS Global Best Practice Strategic Partner; a GCHQ Certified Cyber Security Training Provider; a BCS Accredited Training Organization; and a SFIA Foundation Accredited Training Partner.

 

  

STRATEGIC INITIATIVES

 

Business Strategy

 

The needs of organizations for training and professional development are evolving, and particularly so in the IT technical, analyst, and management disciplines. Organizations, whether they are companies or government agencies, are looking to ensure the investment in their workforce directly supports improved outcomes, to include more successful project delivery, improved delivery processes and product quality, and ultimately improved business or mission outcomes. Further, from an individual learner’s perspective, the rise of e-learning solutions has provided significant new options for self-directed learning at one’s own pace. As such, Learning Tree is evolving from a primary focus on being an IT training company to a company that partners with IT organizations to meet the full range of IT and technology needs for their workforce development. As such, our business strategy has evolved to encompass three objectives:

 

	●	Offer a full range of Workforce Optimization Solutions that augment our traditional hands-on, instructor-led training capabilities. Our Workforce Optimization Solutions cover the life-cycle of workforce development needs, from helping organizations define their organization structures, processes, and job roles; to assessing the current knowledge, skills and abilities (KSAs) of the staff; to supporting the implementation of the means to enhance the KSAs through training, coaching, mentoring of staff along with supporting organizational process improvements; and to providing an outsourcing service in which Learning Tree provides the full management of an organization’s learning initiatives. These additional solutions augment and support our traditional training service offerings. These solutions can also help ensure that an organization’s investment in training is relevant and leveraged to improving overall organization performance. As an example, the use of Learning Tree’s automated skills assessments can provide staff members objective feedback on their strengths and weaknesses in their professional disciplines; such information is particularly valuable in creating custom learning plans, to include recommended training courses to maximize a staff member’s effectiveness on the job. From an organizational perspective, our instructors, who are practitioners in their field, can go well beyond the classroom to support organizations in driving process changes, in areas as diverse as planning and budgeting, service management, and agile project implementation.
	●	Add e-Learning capabilities to our training solutions. Based on existing studies, instructor-led training currently remains the best way to learn a subject area. Yet we recognize that self-directed e-Learning (meaning online courses without an instructor) continues to grow and gain market acceptance, given the convenience and cost factors involved. Learning Tree believes that a “blended learning” approach, in which we work with an organization to harness the best of both instructor-led and e-learning is the most effective way to deliver our courses and for attendees to learn today. To that end, we have and will continue to work with our clients to develop customized e-Learning modules that are optimized to augment related instructor-led classes. We can extend this model and work with other e-Learning platform providers, tailoring our classes to maximize the effectiveness of a blended learning solution.
	●	Provide a comprehensive suite of training courses to meet the needs of IT organizations. Learning Tree develops and maintains its own proprietary courseware for its training courses worldwide. In addition to our own proprietary library of courses, we have begun to strategically broaden our course offerings by adding titles from certification organizations, hardware and software vendors, and from other training vendors. As an example, we are partnering with ISC2, an organization offering cyber security professional certifications, to offer their courses for preparation of the exams to become a Certified Information Systems Security Professional (CISSP) and a Certified Cloud Security Professional (CISP). In regards to vendor partners, we have recently entered an agreement to offer official Microsoft courseware that will be taught by our instructors at our Education Centers. We are also now offering courses provided by another training provider for a wide range of courses on Cisco and Adobe products. By providing a comprehensive suite of training courses to IT organizations, we are able to more effectively partner in providing the full complement of courses needed by our customers.

  

We continue to experience a decline in course attendance at our public courses that are taught at our Education Centers. To address this decline, the Company has been working to leverage 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 as described above. Our overall objective is to stabilize the revenue from training offered via our Education Centers, grow our revenue from Workforce Optimization Solutions for enterprise clients, and reverse the year-over-year declines in revenue.

 

   

Comprehensive Cost Reduction Program

 

We have implemented our comprehensive cost reduction program for fiscal year 2017 with the objective of significantly reducing our overall expenses in the range of $10.0 million to $12.0 million when compared to our expenses for fiscal year 2016. These reductions were initiated to right-size our operations, modernize our business operations to meet changing customer demand and preserve capital. We have taken the following actions:

 

	●	Eliminated our direct mail course catalog advertising program. In addition to 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.
	●	Made our course notes available electronically and only produce a paper copy if requested by our attendee.
	●	Completed a reduction in force of 26 full time equivalent employees in North America during the fourth quarter of fiscal year 2016.
	●	Reduced the compensation paid to our Board of Directors. Effective August 1, 2016, our directors are compensated for meeting fees and serving as Committee chairmen, but do not receive any monthly or yearly fee.
	●	Reduced our real estate costs, through the elimination or nonrenewal of certain leased facilities and negotiation for replacement facilities. As other facility leases expire, additional cost reductions will be evaluated.

 

 As part of this program, Learning Tree continues to review and take appropriate actions in fiscal year 2017 to streamline its operations in order to reduce or eliminate excess costs.

 

 

Other Strategic Options

 

Learning Tree is continuing to explore other strategic options available to it to enhance stockholder 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. 

 

 

Going Concern

 

The independent auditors' report accompanying our September 30, 2016 financial statements contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. This means unless we are able to reduce our dependence on our remaining cash and cash equivalents to fund operations and improve our overall liquidity that there is substantial doubt about the Company’s ability to continue as an ongoing business.

 

The financial statements included in this Form 10-Q have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. As a result, the financial statements included in this Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

 

As discussed in more detail above, the Company is executing upon new business strategies, its Comprehensive Cost Reduction Program and recently entered into a lending arrangement with Action Capital in order to improve our overall profitability, cash flows from operations and liquidity. While the Company believes that these efforts will result in improving our liquidity and our continued operation, there is no assurance that we will be successful in executing upon some or all of these strategies at levels necessary to address the Company’s cash flow and liquidity needs and continue as a going concern. As a result, there is substantial doubt about the Company’s ability to continue as an on-going business. 

 

The Company is continuing to evaluate obtaining additional sources of capital and financing in order to improve its liquidity, and it has engaged a financial advisor to assist in these efforts. There is no assurance that additional capital and/or financing will be available to the Company, and even if available, whether it will be on terms acceptable to us or in amounts required.  

 

  

KEY METRICS OF OUR FIRST QUARTER OF FISCAL YEAR 2017

 

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 first quarter of the current fiscal year ended on December 30, 2016 and encompassed 13 weeks, and our first quarter of the prior fiscal year ended on January 1, 2016 and also encompassed 13 weeks.

 

 

The following is an overview of our results of operations for the first quarter of fiscal year 2017 which ended December 30, 2016, compared to the same quarter of fiscal year 2016:

 

	•	Revenues decreased to $18.6 million from $20.1 million.
	•	Gross profit percentage increased to 42.9% of revenues from 41.1% of revenues.
	•	Operating expenses declined by $2.0 million to $8.5 million from $10.5 million. Operating expenses were 45.6% of revenues compared to 52.4% of revenues.
	•	Loss from operations was $0.5 million compared to a loss of $2.3 million.
	•	Net loss totaled $0.4 million compared to a net loss of $2.3 million.

 

In addition, the following are key balance sheet items at December 30, 2016 compared to September 30, 2016:

 

	•	Cash and cash equivalents decreased to $7.2 million compared to $8.5 million.
	•	Net working capital (current assets minus current liabilities) decreased to $(11.0) million compared to $(10.5) 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
		December 30, 2016				January 1, 2015
Revenues			100.0	%			100.0	%
Cost of revenues			57.1	%			58.9	%
Gross profit			42.9	%			41.1	%
Operating expenses:
Course development			4.1	%			6.5	%
Sales and marketing			19.3	%			23.0	%
General and administrative			22.2	%			22.9	%
			45.6	%			52.4	%
Loss from operations			-2.7	%			-11.3	%
Other income (expense):
Interest income, net			0.1	%			0.1	%
Foreign exchange losses			1.0	%			0.3	%
Other, net			0.0	%			0.0	%
			1.1	%			0.4	%
Loss from operation before provision for income taxes			-1.6	%			-10.9	%
Provision for income taxes			0.4	%			0.4	%
Net loss			-2.0	%			-11.3	%

  

  

THREE MONTHS ENDED DECEMBER 30, 2016 COMPARED WITH THE THREE MONTHS ENDED JANUARY 1, 2016

 

Revenues. Revenues from operations of $18.6 million in our first quarter of fiscal year 2017 were 7.8% lower than revenues of $20.1 million in the same quarter of fiscal year 2016. The decrease in revenues is primarily the result of an 11.1% decrease in average revenue per participant partially offset by a 3.7% increase in the number of course participants. The decrease in the average revenue per participant was caused primarily by certain pricing initiatives put in place to attract new customers and by changes in foreign exchange rates, primarily the United Kingdom, which negatively impacted revenues by approximately 4.8% quarter over quarter. As a result of the pricing initiatives, the number of course participants increased compared to the same quarter of our prior year. Revenues from customers who purchased courses under our U.S. Government General Service Administration (“GSA”) contract schedules totaled $3.3 million for the first quarter of fiscal year 2017 which was $0.7 million lower than the first quarter of fiscal year 2016.

 

During our first quarter of fiscal year 2017, we trained 13,374 course participants, a 3.7% increase from the 12,901 course participants we trained in our first quarter of fiscal year 2016.  During our first quarter of fiscal year 2017, we provided 41,586 attendee-days of training, compared to 41,260 attendee-days of training in the same quarter in fiscal year 2016.

 

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

 

 During our first quarter of fiscal year 2017, we presented 1,162 events, a 6.5% increase from 1,091 events during the same period in fiscal year 2016 primarily due to increased activity in the United Kingdom. Our cost of revenues for our first quarter of fiscal year 2017 was $10.6 million, or 57.1% of revenues, compared to $11.9 million, or 58.9% of revenues, in the same period in fiscal year 2016. Accordingly, our gross profit percentage for our first quarter of fiscal year 2017 was 42.9% compared to 41.1% in the same period of the prior fiscal year.

 

  

The change in cost of revenues as a percentage of revenues in our first quarter of fiscal year 2017 primarily reflects the 11.1% decrease in average 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 10.7% decrease in the costs of revenues and the 3.7% increase in participants. The 10.7% decrease in the costs of revenues reflect lower real estate costs due to closure of an education center and select anyware centers, as well as the impact of our cost reduction program instituted in fiscal year 2016, and the positive impact on expenses from changes in foreign exchange rates. 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.

 

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 first quarter of fiscal year 2017, course development expenses were 4.1% of revenues, compared to 6.5% in our first quarter of fiscal year 2016. Overall spending on course development in our first quarter of fiscal year 2017 was $0.8 million, compared to $1.3 million in our first quarter of fiscal year 2016.

 

In our first quarter of fiscal year 2017, we introduced one new IT course title and one new management course title. We retired two IT course titles and 23 one-day course titles. At the end of our first quarter of fiscal year 2017, our library of instructor-led courses numbered 326 titles compared with 346 titles at the end of the same quarter of fiscal year 2016. At the end of our first quarter of fiscal year 2017, we had 139 multi-day IT titles in our course library, compared with 121 multi-day titles at the end of the same quarter of fiscal year 2016. Our library of multi-day management titles numbered 71 at the end of our first quarter of fiscal year 2017, the same as at the end of the first quarter of fiscal year 2016. Our library of one day courses numbered 116 at the end of our first quarter of fiscal year 2017, compared to 154 at the end of the same quarter of fiscal year 2016.

 

Sales and Marketing Expenses. Sales and marketing expenses include the costs of 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 first quarter of fiscal year 2017 were 19.3% of revenues, compared to 23.0% in the same quarter of fiscal year 2016. Sales and marketing expenses were $3.6 million in our first quarter of fiscal year 2017, compared to $4.6 million during our first quarter of fiscal year 2016. The decrease was driven primarily by reductions in direct marketing costs and personnel expenses as part of our cost reduction program.

 

 General and Administrative Expenses. General and administrative expenses in our first quarter of fiscal year 2017 were 22.2% of revenues, compared with 22.9% for the same quarter in fiscal year 2016. General and administrative expenses during our first quarter of fiscal year 2017 were $4.1 million, a decrease of $0.5 million, compared to $4.6 million in our first quarter of fiscal year 2016.

 

Loss from Operations. Our loss from operations for our first quarter of fiscal year 2017 was $0.5 million compared to a loss from operations of $2.3 million for our first quarter of fiscal year 2016.

 

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

 

During our first quarter of fiscal year 2017, we had other income of $0.2 million compared to other income of $0.1 million in the first quarter of fiscal year 2016, both primarily from net foreign exchange gains.

 

Income Taxes. Our income tax provision in our first quarter of fiscal year 2017 was $0.1 million, compared to $0.1million in our first quarter of fiscal year 2016. The provisions for each of these quarters are primarily related to the income tax expense of the Company's foreign subsidiaries.

 

Net Loss. Our net loss for our first quarter of fiscal year 2017 was $0.4 million compared to a net loss of $2.3 million for our first quarter of fiscal year 2016.

 

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 may also have an effect on our results of operations. The strengthening of the U.S. dollar against the functional currencies 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. 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 our 2016 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.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity. As of and for the first quarter of fiscal year 2017 which ended December 30, 2016, we reported an accumulated deficit of $15.7 million. We have also reported negative cash flow from operations in fiscal year 2016 and for the previous four fiscal years as our revenues have declined each year over year during this period. At December 30, 2016, our capital resources consisted of cash and cash equivalents of $7.2 million. While we have, and continue to take steps to stabilize revenues and decrease our operating costs on a year over year basis for fiscal year 2017, unless we are able to improve our liquidity in the future, there is substantial doubt about the Company’s ability to continue as a going concern. Our registered independent public accounting firm’s report on our audited financial statements for the year ended September 30, 2016 that is included in our 2016 Form 10-K contained an explanatory paragraph related to the Company’s ability to continue as a going concern.

 

We have been executing upon new strategies to increase the number of attendees in our public courses and expand our overall customer base. Many of these strategies relate to pricing initiatives to attract new customers or to re-engage old customers that have not used our services in many years.

 

We have accelerated our Comprehensive Cost Reduction Program with the goal of significantly reducing our fiscal year 2017 overall expenses when compared to the Company’s expenses for fiscal year 2016. These reductions have been initiated to right-size the Company’s operations, modernize its business operations to meet customer demand and preserve capital. We are starting to see the results of the cost reduction program as costs of revenue decreased $1.3 million quarter over quarter, and operating expense decreased $2.1 million quarter over quarter.

 

To further address our liquidity needs in the near term, on January 12, 2017, we entered into a Financing Agreement with Action Capital, which provides the Company with access to borrow through advances of funds up to a maximum aggregate principal amount of $3.0 million. Pursuant to the Financing Agreement, the amount advanced to the Company will be based upon an agreed advance rate of up to 85% of the net amount of certain customer accounts receivable of the Company that are approved by Action Capital and assigned to it as collateral. The amounts advanced under the Financing Agreement will also be secured by the Company’s accounts receivable from its U.S. operations. Through the date of this Form 10-Q, we have not borrowed any funds under the Financing Agreement.

 

We are also continuing to evaluate additional sources of capital and financing. We have retained the services of a financial advisor to assist us in assessing strategic options available to the Company to improve liquidity. However, there is no assurance that additional capital and/or financing will be available to the Company, and even if available, whether it will be on terms acceptable to us or in amounts required.

 

The stabilization of revenues and reduction in costs are integral to our goal of achieving a break even operating income line and a positive cash flow from operations for fiscal year 2017. We cannot provide assurances that our plans will not change, that changed circumstances will not result in the depletion of our capital resources more rapidly than we currently anticipate, or that we will be successful in securing additional liquidity.

 

   

At December 30, 2016, our net working capital deficit (current assets minus current liabilities) was $(11.0) million, a $0.5 million decrease from our working capital balance at September 30, 2016. Current assets decreased $3.6 million during the period, due primarily to decreases in trade accounts receivable and cash. Current liabilities decreased $3.1 million during the period, primarily due to decreases in deferred revenues and trade accounts payable and accrued expenses.

 

 Cash Flows. Our cash and cash equivalents decreased $1.3 million to $7.2 million at December 30, 2016 from $8.5 million at September 30, 2016. 

 

		Three months ended
(in thousands)		December 30, 2016				January 1, 2016				Net Change
Cash used in operating activities of continuing operations		$	(1,103	)		$	(2,637	)		$	1,534
Cash used in investing activities of continuing operations			(5	)			(653	)			648
Effects of exchange rate changes on cash and cash equivalents of continuing operations			(213	)			(261	)			48
Net decrease in cash and cash equivalents of continuing operations		$	(1,321	)		$	(3,551	)		$	2,230

  

 

Cash used in operating activities decreased $1.5 million in the first three months of fiscal year 2017, compared to the first three months of fiscal year 2016 primarily due to the net loss for the current period of $0.4 million compared to a net loss of $2.3 million for the first three months of fiscal year 2016. Cash used in investing activities decreased by $0.6 million in the first three months of fiscal year 2017 compared to the first three months of fiscal 2016, due to decreased capital spending for equipment and leasehold improvements.

         

Capital Requirements. During the three months ended December 30, 2016, we made capital expenditures of less than $0.1 million. We plan to purchase less than $0.5 million in equipment and other capital assets during the remainder of fiscal year 2017. Our contractual obligations as of December 30, 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 2016 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 ten 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.

  

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

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 consolidated 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 2016 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

 

This presentation sets forth select expected future results of the Company based on estimates, assumptions and information available to the Company as of the filing of this Form 10-Q. Since the financial and other information presented below are estimates of future results and performance, the actual results and outcomes may be different and such differences may be material.

 

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 second quarter of fiscal year 2017.

 

 

Effect of Exchange Rates. Approximately 37% 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 February 1, 2017 were constant for our second quarter of fiscal year 2017, then we would expect foreign exchange rates to negatively impact second quarter revenues by approximately 1.7% when compared to the second quarter of fiscal year 2016. To the extent that the U.S. dollar continues its rise against the functional currencies of our foreign subsidiaries, we would expect to experience further negative impact to our second quarter 2017 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.

 

Second Quarter Revenues. We currently expect revenues for our second quarter of fiscal year 2017 of between $15.9 million and $16.9 million, compared to revenues of $18.7 million in our second quarter of fiscal year 2016.

 

Second Quarter Gross Profit. We expect a gross profit percentage in our second quarter of fiscal year 2017 of between 42.1% and 43.1% compared to 32.3% in our second quarter of fiscal year 2016.

 

Second Quarter Operating Expenses. We expect overall operating expenses for our second quarter of fiscal year 2017 to be between $8.1 million and $9.1 million, compared to $11.3 million in the same quarter a year earlier.

 

Second Quarter Loss from Operations. As a result of the above factors, we expect to incur a second quarter operating loss of between $1.0 million and $2.0 million compared with an operating loss of $5.2 million in our second quarter of fiscal year 2016.

 

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

 

Second Quarter Pre-Tax Loss. Overall, we expect to report a pre-tax loss for our second quarter of fiscal year 2017 of between $1.0 million and $2.0 million, compared with a pre-tax loss from operations of $5.3 million in our second quarter of fiscal year 2016.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.  

 

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 December 30, 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.

 

Item1A.

RISK FACTORS.

 

There were no material changes to the risk factors as previously disclosed under Part I, Item 1A of the 2016 10-K. The risks described in the 2016 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also adversely affect our business, financial condition, or future results.

 

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
10.4		Employment Agreement between Registrant and Magnus Nylund, dated as of January 26, 2017 **		Incorporated by reference from Registrant’s Current Report on Form 8-K filed January 27, 2017.
10.32		First Amendment to the Employment Agreement between Registrant and Dr. David C. Collins, dated September 20, 2016**		Incorporated by reference from Registrant’s Annual Report on Form 10-K /A for the fiscal year ended September 30, 2016
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.

 

** This exhibit is a management contract, compensatory plan or arrangement.

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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.

 

February 9, 2017

 

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
10.4		Employment Agreement between Registrant and Magnus Nylund, dated as of January 26, 2017 **		Incorporated by reference from Registrant’s Current Report on Form 8-K filed January 27, 2017.
10.32		First Amendment to the Employment Agreement between Registrant and Dr. David C. Collins, dated September 20, 2016**		Incorporated by reference from Registrant’s Annual Report on Form 10-K /A for the fiscal year ended September 30, 2016
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.

 

** This exhibit is a management contract, compensatory plan or arrangement.

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