|
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 29, 2017 (our “2017 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 continue as a going concern; our ability to obtain additional liquidity in amounts and on terms acceptable to the Company; our ability to reverse our trend of declining year over year revenues and negative cash flows from operations, and to maintain sufficient liquidity; our ability to successfully implement our new strategies including achieving our cost reduction goals; our ability to identify and execute upon strategic options for the Company; risks associated with the timely development, introduction, and customer acceptance of our courses and other products; 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 maintaining cyber security; risks associated with a majority of our common stock being beneficially owned by the Trust; our majority stockholder having significant influence over the composition of our Board of Directors (“Board”); our majority stockholders being the largest unsecured creditor of the Company; the conversion of the amounts borrowed by the Company under the Credit Agreement potentially resulting in substantial dilution; risks associated with the Credit Agreement; 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” and elsewhere in our 2017 Form 10-K and this Form 10-Q, 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 businesses 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 2.5 million IT professionals and managers. In fiscal year 2017, while presenting courses in 39 countries, we trained 53,170 course participants from approximately 4,700 organizations, including large national and multinational companies, government organizations, and small and medium-size companies.
We offer a broad library of intensive instructor-led and on-demand courses from one to five days in length, which at June 29, 2018 comprised 314 different course titles including 175 multi-day IT course titles, 88 multi-day management course titles, and 51 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, we now partner with other organizations to enhance and broaden the breadth of training we can offer to IT organizations, with the objective of providing an even broader course offering to enable us to more effectively meet an organization’s complete workforce needs. In terms of vendor partners, we reached an agreement in 2017 with Microsoft to become a Microsoft approved training partner, whereby we are offering Microsoft approved courses. As a result, we have been able to eliminate duplicate Microsoft course content. This commercial relationship with Microsoft also allows us to accept Microsoft training vouchers, which expands the potential customers we may serve. In March 2018, Learning Tree reached Microsoft Gold partner status in the data platform competency area. This designation is awarded by Microsoft to partners who achieve the highest level of performance as a partner both in terms of training volume and technical expertise. We also offer our customers the ability to take course titles that we do not have in our course library from approved “Partner” providers. Through these “Partner” providers, we now offer courses in a number of different vendor technologies and products, to include Cisco, Adobe, IBM, Red Hat, VMware, Hewlett Packard, and Amazon Web Services.
We are also working more closely with certification and accreditation organizations to offer training programs for IT professionals seeking to earn such certifications. 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 British Computing Society (BCS) Accredited Training Organization; and a Skills Framework for the Information Age (SFIA) Foundation Accredited Training Partner. We also maintain partnerships and offer courses with Computing Technology Industry Association (CompTIA), International Council of E-Commerce Consultants (EC-Council), International Consortium for Agile (ICAgile), Information Systems Control Association (ISACA), International Info System Security Certification Consortium (ISC)
2
, International Software Testing Qualifications Board (ISTQB), Lean Kanban, Scrum Alliance, and The Open Group (TOGAF). 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.
During the second quarter of this fiscal year we launched our first “bundled training” set of products, which blend different learning methods including live, instructor-led training, on-demand training modules, coaching and mentoring offerings, and in some cases, additional independent exercises. The intent is to provide attendees an immersive learning environment to rapidly gain mastery in a particular subject area. Studies have shown the use of self-paced, on-demand training has very low retention rates, yet we recognize the explosive growth of such training. Learning Tree now offers on-demand training by itself or complemented with additional training modalities that support a learner to more rapidly gain practical and usable skills with the goal of enhancing job performance. We expect to broaden our offerings of such “bundled training” products in the near future.
In addition to training, we offer a suite of Workforce Optimization Solutions to support an IT organization’s life-cycle of workforce development needs. These solutions help ensure an organization’s investment in training is relevant and leveraged to improving overall organization performance. The range of solutions includes helping organizations define their job roles, assessing the current skills of the staff, providing customized workshops to support learning specific to that organization’s needs, and even serving as an outsourced provider 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. In August 2017, the Company terminated its License Agreement, dated March 3, 2015, with Educinvest SPRL which provided for the license of Learning Tree courses to Educinvest in France. The French market is now being served by our UK operation. In fiscal year 2017, we generated approximately 37% of our revenues outside of the United States, and, for the nine months ended June 29, 2018 we generated approximately 42% of our revenues outside the United States. We coordinate, plan and deliver our courses at our own Education Centers, hotels, conference centers, other specially equipped facilities, and customer sites worldwide. We also offer courses through our proprietary live on-line learning platform, Learning Tree AnyWare™, which enables 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 without the need to travel or commute to the actual course site.
We use a well-defined systematic approach to develop and update both the Learning Tree proprietary course library and partner-provided courseware, 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 or Japanese.
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 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 typically work for other organizations either as full-time employees or as independent technical or management consultants.
STRATEGIC INITIATIVES
Business Strategy
The needs of organizations for training and professional development continue to evolve, particularly so in the IT technical, analyst, and management disciplines. Organizations, whether commercial companies or government agencies, are looking to ensure the investment in their IT workforce directly supports improved outcomes, including 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. As such, Learning Tree’s primary focus is evolving from being an IT training company for its customers’ employees to becoming a company that partners with the IT organizations of its customers to meet the full range of an organization’s training needs for its workforce. As such, in addition to our goal of maintaining our position as the premier provider of instructor led IT training and professional development, our business strategy has evolved to encompass three objectives:
|
●
|
Offer a full range of life-cycle workforce development capabilities that augment our 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, and mentoring of staff, along with supporting organizational process improvements; and to providing an outsourced service in which Learning Tree manages all of an organization’s learning initiatives. These additional solutions augment and support our traditional training service offerings. As an example, the use of Learning Tree’s automated skills assessments can provide customers with objective feedback on the strengths and weaknesses of their IT staff in their respective professional disciplines. Such information is particularly valuable in creating custom learning plans, including 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 beyond the classroom to support organizations in driving process changes, in areas as diverse as planning and budgeting, service management, and project management.
|
|
●
|
Add on-demand and blended 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, on-demand e-Learning (i.e. online courses without an instructor) continues to grow and gain market acceptance, given the convenience and lower costs of e-Learning in certain situations. Accordingly, Learning Tree believes a blended learning approach, in which we work with customers 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, during the second quarter we launched our first “bundled training” set of products, which are designed to provide various blended learning methods including live, instructor-led training, with on-demand training modules, coaching and mentoring offerings, and in some cases, additional independent exercises, all with the intent of providing attendees an immersive learning environment for them to rapidly gain mastery in a particular subject area. We are working to extend this model and work with other on-demand 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 course content for its training courses worldwide. In addition to our own proprietary courses, we strategically broadened 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 (ISC)
2
, 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 (CCSP). In regard to vendor partners, we have entered an agreement to offer official Microsoft courseware that will be taught by our instructors at our Education Centers. While causing us to retire some of our proprietary Microsoft courses, we are adding more than 70 Microsoft course titles, which will significantly broaden our Microsoft curriculum. In addition, the agreement also provides us with the ability to offer Microsoft on-demand courseware that can be taken any time. We are also now offering courses provided by other training providers for a wide range of courses, including training on Cisco, Adobe, IBM, Red Hat, VMware, Hewlett Packard, and Amazon Web Services 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 are experiencing growth in our business of supporting enterprise customers by providing them with Workforce Optimization Solutions and customized training products to meet their needs. However, we continue to experience a decline in 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, shortening the duration of some of our courses, offering blended learning “bundles” that augment our public courses with related on-demand courses, and partnering with certification organizations and other training providers to broaden and deepen the training products we offer. Our overall objective continues to be the reversal of the year-over-year declines in revenue we have experienced by stabilizing revenue from training offered to our clients at our Education Centers while growing revenue from enterprise clients through Workforce Optimization Solutions and other customized training products.
Comprehensive Cost Reduction Program
In addition to strategies to stabilize and grow our revenue in fiscal year 2018 and improve liquidity, we continued to reduce our operating expenses through an ongoing cost reduction program that was initiated in fiscal year 2016 (the “Cost Reduction Program”). As a result of this program, we reduced operating expenses by approximately $12.3 million in fiscal year 2017 compared to operating expenses in fiscal year 2016. We continue to realize results from the Cost Reduction Program as cost of revenues for the first nine months of fiscal year 2018 decreased to 57.6% of revenues compared to 58.4% for the first nine months of fiscal year 2017, and operating expenses decreased $2.0 million for the nine month period when compared to the same nine month period in fiscal year 2017. We intend to continue our Cost Reduction Program and take additional appropriate steps to streamline our operations and reduce or eliminate excess costs.
GOING CONCERN
Our registered independent public accounting firm has issued a report on our audited financial statements for the fiscal year ended September 29, 2017 that included 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 unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared assuming 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 29, 2017.
As discussed in more detail above and under “Liquidity and Capital Resources” in the Management’s Discussion and Analysis, the Company is continuing to execute its business strategies, its Comprehensive Cost Reduction Program and has entered into borrowing arrangements with The Kevin Ross Gruneich Legacy Trust (the “Trust”) and with Action Capital in order to improve our overall profitability, cash flow from operations and liquidity. The terms of the Credit Agreement also contain a subjective acceleration clause that can be triggered if the lender determines that we have Events of Default that would reasonably be expected to have a Material Adverse Effect, as defined in the Credit Agreement, and continuance thereof for ten (10) calendar days, which in turn would permit the lender to accelerate repayment of outstanding obligations. While the Company believes these efforts have improved our liquidity, and our ability to continue as a going concern, 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 ongoing cash flow and liquidity needs.
RECENT DEVELOPMENTS
Securities Purchase Agreement
and New Majority Stockholder
On January 17, 2018, Dr. David C. Collins and Mrs. Mary C. Collins first announced, through filing a Schedule 13D Amendment, their determination to reduce their ownership in the Company’s common stock by selling or otherwise disposing of some or all of their shares in the Company and to engage Kerlin Capital Group to assist in a review of their investment in the Company. Subsequently, on June 29, 2018, a Securities Purchase Agreement (the “Purchase Agreement”) was entered into among The David C. Collins 1997 Trust, The Mary C. Collins 1997 Trust, DCMA Holdings, L.P., The Adventures in Learning Foundation, The Collins Family Foundation, The Collins Family Trust, The Collins Charitable Remainder Unitrust No. 97-1, Dr. David C. Collins and Mary C. Collins (collectively, the “Collins Parties” which collectively represented the owners of a majority of the outstanding shares of common stock of the Company), the Trust, as the buyer, and the Company for specified sections contained therein. The Purchase Agreement provided for the Trust to purchase the Collins Parties beneficial ownership of 7,495,332 shares of the Company’s common stock, par value $0.0001 (the “Common Stock”), for a purchase price paid by the Trust of $7,495,332 or $1.00 per share (“Sale Transaction”). The Company was made party to the Purchase Agreement for the limited purposes specified in the Purchase Agreement that included providing certain disclosures to and post-transaction director nomination rights for the Trust, as the new majority stockholder of the Company. The Company received no proceeds from the Sale Transaction.
As part of the consummation of the Sale Transaction, Dr. Collins and Mrs. Collins each resigned as directors on the Board, as well as their other positions with the Company and its subsidiaries (“Collins Resignations”). At the request of the Collins Parties and the Trust, and in order to assist in facilitating the Sale Transaction between those parties, the Company provided the Trust with customary representations and warranties about the Company and its business. The Collins Parties and the Trust also each provided a release to the Company for any liability relating to the Company’s providing the representations and warranties in the Purchase Agreement. Additionally, the Collins Parties agreed to provide indemnification to the Company for specified pending or threatened claims, as well as for additional transaction expenses incurred by the Company in excess of the amount paid pursuant to the Reimbursement Agreement. Pursuant to the terms of the Purchase Agreement, the Collins Resignations and the Trust becoming the majority stockholder of the Company, the Company agreed to provide the Trust with director nomination rights, which were to: (i) appoint the Trust’s director nominee, Kevin Gruneich, as a Class III director, effective immediately following the consummation of the Sale Transaction and for Mr. Gruneich to be appointed Chairman of the Board and (ii) to nominate up to three additional directors to serve on the Board by January 31, 2019 provided that: (x) such director nominee(s) satisfies the reasonable qualifications required by written policies of the Company’s Nominating and Corporate Governance Committee of the Company; and (y) as a result of such appointment(s) the Company shall continue to be in compliance with applicable Securities and Exchange Commission (“SEC”) rules, stock exchange and/or OTCQX Market requirements and Board committee charters regarding the composition of the Board and its committees. Effective July 20, 2018, Jamie Candee and Sarah Gardial were appointed by the Board to fill two director vacancies with Ms. Candee and Ms. Gardial serving as a Class I director and a Class III Director, respectively. Both Ms. Candee and Ms. Gardial will stand for election at the Company’s next annual meeting in 2019 and then after their election will serve with the other directors in their respective class for the remainder of that class’s term. Each of Ms. Candee and Ms. Gardial were director candidates proposed to the Board by the Trust pursuant to these director nomination rights under the Purchase Agreement and were reviewed applying these requirements.
As a result of the interests of Dr. Collins and Mrs. Collins potentially being different than those of the Company and its other stockholders, the Board established an independent committee (“Independent Committee”) comprised of its three independent non-employee directors to evaluate and negotiate, on behalf of the Board and the Company, the Purchase Agreement and the Credit Agreement and the transactions contemplated thereby. The Independent Committee received the support and advice of Focus Investment Banking, LLC, as financial advisor to the Independent Committee in connection with the Credit Agreement.
The Trust Line of
Credit Agreement
On June 29, 2018, the Company also entered into the Credit Agreement. Pursuant to the terms of the Credit Agreement, the Company will have access to borrow up to $5.0 million of funds (“Commitment Amount”) from the Trust. The maturity date (the “Maturity Date”) of the Credit Agreement occurs as of the earlier of: (i) 10 years from the date of the closing of the Credit Agreement; or (ii) the date the Lender accelerates the Company’s obligations under the Credit Agreement because of the occurrence of an event of default (as defined in the Credit Agreement). The interest rate on amounts borrowed will be at a fixed rate of 5% per annum with interest only payments due by the Company on a quarterly basis. The obligations of the Company under the Credit Agreement shall be unsecured obligations that will rank
pari passu
with all other unsecured obligations of the Company.
The principal amount of sums that are borrowed by the Company under the Credit Agreement, up to the Commitment Amount, may be converted by the Trust into shares of Common Stock (“Conversion Shares”) at any time prior to the Maturity Date at a conversion price of $1.00 per share of Common Stock (“Conversion Price”), which is subject to downward adjustment as further discussed in Note 13 – “Debt” in the notes to our condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
Immediately after the execution of the Credit Agreement, the Company borrowed an initial advance under the Credit Agreement in the amount of $2.0 million, which principal amount may be converted into Conversion Shares at any time. Additional advances under the Credit Agreement may be drawn by the Company in increments of $250,000 and up to $1.0 million in a quarterly period, provided that the Company satisfies the pre-conditions to funding an advance which are further discussed in Note 13 – “Debt” in the notes to our condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
The foregoing description of the terms of the Purchase Agreement, the Credit Agreement, and the Reimbursement Agreement do not purport to be complete and are qualified in their entirety by reference to the Purchase Agreement, the Credit Agreement, and the Reimbursement Agreement, which are attached hereto as
Exhibit 10.1,
Exhibit 10.2, and Exhibit 10.3
, respectively, and are incorporated herein by reference.
Other Strategic Options
The Company is continuing to evaluate potential additional strategic options available to the Company. 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 2018
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 June 29, 2018, our third quarter of the prior fiscal year ended on June 30, 2017, and our fiscal year end for 2017 was September 29, 2017.
The following is an overview of our results of operations for the third quarter of fiscal year 2018, compared to the same quarter of fiscal year 2017:
|
•
|
Revenues decreased to $16.2 million from $16.4 million.
|
|
•
|
Gross profit percentage decreased to 40.4% of revenues from 41.6% of revenues.
|
|
•
|
Operating expenses declined by $0.4 million to $7.0 million from $7.4 million. Operating expenses were 42.9% of revenues compared to 44.9% of revenues.
|
|
•
|
Loss from operations was $0.4 million compared to a loss from operations of $0.5 million.
|
|
•
|
Net loss was $0.3 million compared to a net loss of $0.9 million.
|
In addition, the following are key balance sheet items at June 29, 2018 compared to September 29, 2017:
|
•
|
Cash and cash equivalents at June 29, 2018 decreased to $4.8 million compared to $5.1 million at September 29, 2017.
|
|
•
|
Net working capital (deficit) (current assets minus current liabilities) was $(11.2) million compared to $(10.4) million.
|
|
•
|
Total stockholders’ deficit increased to $(14.2) million compared to $(11.8) million.
|
The following is an overview of our results of operations for the nine months ended June 29, 2018, compared to the equivalent period of fiscal year 2017:
|
•
|
Revenues decreased to $47.0 million from $51.0 million.
|
|
•
|
Gross profit percentage increased to 42.4% of revenues from 41.6% of revenues.
|
|
•
|
Operating expenses declined by $2.0 million to $22.3 million from $24.3 million. Operating expenses were 47.6% of revenues compared to 47.7% of revenues.
|
|
•
|
Loss from operations was $2.4 million compared to a loss from operations of $3.1 million.
|
|
•
|
Net loss was $2.4 million compared to a net loss of $3.6 million.
|
RESULTS OF OPERATIONS
The following table summarizes our consolidated statements of operations for the periods indicated, expressed as percentages of our revenues:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
June 29,
2018
|
|
|
June 30,
2017
|
|
|
June 29,
2018
|
|
|
June 30,
2017
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of revenues
|
|
|
59.6
|
%
|
|
|
58.4
|
%
|
|
|
57.6
|
%
|
|
|
58.4
|
%
|
Gross profit
|
|
|
40.4
|
%
|
|
|
41.6
|
%
|
|
|
42.4
|
%
|
|
|
41.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Course development
|
|
|
4.5
|
%
|
|
|
4.0
|
%
|
|
|
4.4
|
%
|
|
|
4.3
|
%
|
Sales and marketing
|
|
|
19.9
|
%
|
|
|
19.5
|
%
|
|
|
20.8
|
%
|
|
|
20.1
|
%
|
General and administrative
|
|
|
18.5
|
%
|
|
|
21.4
|
%
|
|
|
21.8
|
%
|
|
|
22.6
|
%
|
Restructure charge
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
|
42.9
|
%
|
|
|
44.9
|
%
|
|
|
47.6
|
%
|
|
|
47.7
|
%
|
Loss from operations
|
|
|
-2.5
|
%
|
|
|
-3.3
|
%
|
|
|
-5.2
|
%
|
|
|
-6.1
|
%
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
-0.1
|
%
|
|
|
-0.3
|
%
|
|
|
-0.1
|
%
|
|
|
-0.1
|
%
|
Foreign exchange gain (loss)
|
|
|
1.4
|
%
|
|
|
-1.3
|
%
|
|
|
0.4
|
%
|
|
|
-0.2
|
%
|
Other, net
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
1.3
|
%
|
|
|
-1.6
|
%
|
|
|
0.3
|
%
|
|
|
-0.3
|
%
|
Loss from operation before provision for income taxes
|
|
|
-1.2
|
%
|
|
|
-4.9
|
%
|
|
|
-4.9
|
%
|
|
|
-6.4
|
%
|
Provision for income taxes
|
|
|
0.6
|
%
|
|
|
0.5
|
%
|
|
|
0.1
|
%
|
|
|
0.6
|
%
|
Loss from operations
|
|
|
-1.8
|
%
|
|
|
-5.4
|
%
|
|
|
-5.0
|
%
|
|
|
-7.0
|
%
|
THREE AND NINE MONTHS ENDED JUNE 29, 2018 COMPARED WITH THE THREE AND NINE MONTHS ENDED JUNE 30, 2017
Revenues.
Revenues from operations of $16.2 million in our third quarter of fiscal year 2018 were 1.2% lower than revenues of $16.4 million in the same quarter of fiscal year 2017. The decrease in revenues is primarily the result of a 0.4% decrease in the number of course participants compared to the number of participants in the third quarter of fiscal year 2017 and a 0.8% decrease in average revenue per participant. The decrease in the number of course participants during the third quarter of fiscal year 2018 was slightly mitigated from the Easter holiday occurring in the second quarter for fiscal year 2018 compared to occurring in the third quarter for fiscal year 2017. The week before and the week after Easter is historically a weaker period of course enrollments. The decrease in the average revenue per participant was caused primarily by continued pricing initiatives that are in place to attract new customers, which decrease was partially offset by changes in foreign exchange rates, primarily the United Kingdom, that positively impacted revenues by approximately 1.7% quarter over quarter. Revenues from customers who purchased courses under our U.S. Government General Service Administration (GSA) contract schedules totaled $4.3 million for the third quarter of fiscal year 2018, which was 1.6% higher than the third quarter of fiscal year 2017.
During our third quarter of fiscal year 2018, we trained 12,589 course participants, a 0.4% decrease from the 12,637 course participants we trained in our third quarter of fiscal year 2017. During our third quarter of fiscal year 2018, we provided 38,734 attendee-days of training, compared to 38,631 attendee-days of training in the same quarter in fiscal year 2017.
Our revenues from operations of $47.0 million during our first nine months of fiscal year 2018 were 7.9% lower than revenues of $51.0 million in the same period of fiscal year 2017. The decrease in revenues primarily resulted from a 4.3% decrease in average revenue per participant and a 3.8% decrease in the number of course participants when compared to the first nine months of fiscal year 2017. The decrease in average revenue per participant was caused primarily by the continued lower average revenue from the continued use of pricing initiatives during the period to attract new and retain existing course attendees, and changes in foreign exchange rates. Revenues were positively impacted by approximately 2.5% period over period as a result of changes in foreign exchange rates. Revenues from customers who purchased courses under our U.S. Government GSA contract schedules totaled $9.8 million for the first nine months of fiscal year 2018 which was 14.5% lower than the first nine months of fiscal year 2017.
During our first nine months of fiscal year 2018, we trained 36,926 course participants, a 3.8% decrease from the 38,379 course participants we trained in our first nine months of fiscal year 2017. During our first nine months of fiscal year 2018, we provided 112,894 attendee-days of training, compared to 119,336 attendee-days in the same period in fiscal year 2017.
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 third quarter of fiscal year 2018, we presented 1,134 events, an 8.1% increase from 1,049 events during the same period in fiscal year 2017. Our cost of revenues for our third quarter of fiscal year 2018 was $9.7 million, or 59.6% of revenues, compared to $9.6 million, or 58.4% of revenues, in the same period in fiscal year 2017. Accordingly, our gross profit percentage for our third quarter of fiscal year 2018 was 40.4% compared to 41.6% 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 2018 primarily reflects the 0.8% decrease in average revenue per participant and a 1.3% increase in cost per participant. The increase in cost per participant is primarily the result of a 0.9% increase in the cost of revenues and the 0.4% decrease in the number of course participants. The 0.9% increase in the costs of revenues reflect the 8.1% increase in the number of events, more events including the use of third party content and certification exam fees all partially offset from the impact of our on-going Cost Reduction Program first implemented in fiscal year 2016. 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 2018, we presented 3,329 events, a 1.8% increase from 3,271 events during the same period in fiscal year 2017. Our cost of revenues for our first nine months of fiscal year 2018 was $27.1 million, or 57.6% of revenues, compared to $29.8 million, or 58.4% of revenues, in the same period in fiscal year 2017. Accordingly, our gross profit percentage for our first nine months of fiscal year 2018 was 42.4% compared to 41.6% 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 2018 primarily reflects a 5.6% decrease in the cost per participant partially offset by the 4.3% decrease in revenue per participant. The decrease in cost per participant is primarily the result of a 9.2% decrease in the cost of revenues and the 3.8% decrease in participants. The 9.2% decrease in the costs of revenues reflect the impact of our continuing Cost Reduction Program implemented in fiscal year 2016, as well as lower real estate costs due to renegotiated leases for smaller space at select education centers, closure of select AnyWare centers, and the positive impact on expenses from changes in foreign exchange rates.
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. Our Comprehensive Cost Reduction Program focused on finding more efficient ways to develop, offer and maintain new and existing courses.
During our third quarter of fiscal year 2018, course development expenses were 4.5% of revenues, compared to 4.0% in the third quarter of fiscal year 2017. Overall spending on course development in our third quarter of fiscal year 2018 was $0.7 million, the same as in our third quarter of fiscal year 2017.
Course development expense during our first nine months of fiscal year 2018 was $2.1 million, a decrease of $0.1 million compared to $2.2 million in the same period of fiscal year 2017.
In our third quarter of fiscal year 2018, we introduced four new IT course titles, eight new management course titles and one new one-day course title. We retired 12 IT course titles, two management course titles and 19 one-day course titles. At the end of our third quarter of fiscal year 2018, our library of instructor-led courses numbered 314 titles compared with 310 titles at the end of the same quarter of fiscal year 2017. At the end of our third quarter of fiscal year 2018, we had 175 multi-day IT titles in our course library, compared with 159 multi-day titles at the end of the same quarter of fiscal year 2017. Our library of multi-day management titles numbered 88 at the end of our third quarter of fiscal year 2018, compared to 71 at the end of the third quarter of fiscal year 2017. Our library of one-day courses numbered 51 at the end of our third quarter of fiscal year 2018, compared to 80 at the end of the same quarter of fiscal year 2017.
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 third quarter of fiscal year 2018 were 19.9% of revenues, compared to 19.5% in the same quarter of fiscal year 2017. Sales and marketing expenses were $3.2 million in our third quarter of fiscal year 2018, the same as during our third quarter of fiscal year 2017.
Sales and marketing expenses from operations during our first nine months of fiscal year 2018 were $9.8 million, a decrease of $0.5 million compared to $10.3 million in the same period of fiscal year 2017. The decrease is driven primarily by decreases in direct marketing costs and personnel expenses as part of our cost reduction program.
General and Administrative Expenses.
General and administrative expenses in our third quarter of fiscal year 2018 were 18.5% of revenues, compared with 21.4% for the same quarter in fiscal year 2017. General and administrative expenses during our third quarter of fiscal year 2018 were $3.0 million, a decrease of $0.5 million, compared to $3.5 million in our third quarter of fiscal year 2017. The decrease generally reflects the results of the ongoing Cost Reduction Program and the reimbursement of transaction amounts previously expensed.
General and administrative expenses during our first nine months of fiscal year 2018 were $10.3 million, a decrease of $1.2 million compared to $11.5 million in the same period of fiscal year 2017, primarily the result of our ongoing Cost Reduction Program.
Restructure Charge.
We previously determined our Reston, Virginia facility was surplus classroom space and, in March 2017, we re-evaluated the estimated cash flows from sublease rentals and operating expenses of our outstanding restructuring liability. As a result, we recorded an additional $0.4 million restructuring charge in our second quarter of fiscal year 2017. In our first quarter of fiscal year 2018, we recorded an additional $0.1 million restructuring charge to adjust estimated cash flows due to an increase in operating expenses related to the increase in property taxes.
In December 2017, we executed the early termination of our Education Center located in Toronto, Canada. To secure the early termination, we paid surrender and broker fees of $0.2 million which was recorded as a restructuring charge in the first quarter of fiscal year 2018, giving a total of $0.3 million recorded as a restructuring charge in the first quarter of fiscal year 2018.
There were no restructuring charges recorded in our third quarter of fiscal year 2018.
Loss from Operations.
Our loss from operations for our third quarter of fiscal year 2018 was $0.4 million, compared to a loss from operations of $0.5 million for our third quarter of fiscal year 2017.
For the first nine months of fiscal year 2018, our loss from operations was $2.4 million compared to a loss of $3.1 million in the first nine months of fiscal year 2017. The loss from operations for the first nine months of fiscal years 2018 and 2017 include the $0.3 million and $0.4 million restructuring charges, respectively.
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 2018, we had other income of $0.2 million compared to other expense of $0.3 million in the third quarter of fiscal year 2017, primarily from net foreign exchange gains for the third quarter of fiscal year 2018 compared to net foreign exchange losses for the third quarter of fiscal year 2017.
During our first nine months of fiscal year 2018, other income totaled $0.1 million compared to other expense of $0.2 million in our first nine months of fiscal year 2017.
Income Taxes.
Our income tax provision in our third quarters of fiscal year 2018 and 2017 was $0.1 million. The provisions for these quarters are primarily related to state income taxes, the true up of estimates to actual returns filed, and the income tax expense of the Company's foreign subsidiaries.
Our income tax provision for our first nine months of fiscal year 2018 was less than $0.1 million, compared to a $0.3 million provision for our first nine months of fiscal year 2017, and are primarily related to state income taxes, the true up of estimates to actual returns filed, and the income tax expense of the Company's foreign subsidiaries, except in the first nine months of fiscal year 2018, when the Company released the valuation allowance attributable to the minimum tax credit carryforward, which is now refundable under the 2017 Act.
Net Loss.
The net loss for our third quarter of fiscal year 2018 was $0.3 million, compared to a net loss of $0.9 million for our third quarter of fiscal year 2017.
Our net loss for our first nine months of fiscal year 2018 was $2.4 million compared to net loss of $3.6 million for our first nine months of fiscal year 2017.
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 Annual Report on Form 10-K for the fiscal year ended September 29, 2017.
FLUCTUATIONS IN QUARTERLY RESULTS
Historically, our quarterly operating results have fluctuated, which is expected to continue in the future. Typically, our first and fourth fiscal quarters have higher revenues and income from operations than do our second and third fiscal quarters. Fluctuations in quarterly results are caused by many factors including: (i) the frequency of course events; (ii) the number of weeks during which courses can be conducted in a quarter; (iii) the timing, timely delivery, frequency and size of and response to our marketing and advertising campaigns; (iv) the timing of our introduction of new course titles; (v) the mix between course events held at customer sites and course events held in our education centers and hotels due to differing gross profit margins; (vi) competitive forces within markets we serve; (vii) our ability to attract customers and meet their expectations; (viii) currency fluctuations and other risks inherent in international operations; (ix) natural disasters, external strikes, acts of war or terrorism and other external factors; and (x) general economic conditions and industry-specific slowdowns.
Fluctuations in quarter-to-quarter results can also occur as a result of differences in timing of marketing and development expenditures and for seasonal factors. Our quarterly revenues and income fluctuate due to the seasonal spending patterns of our customers, which are affected by factors including: (i) cyclic or one-time budgetary considerations; (ii) factors specific to their business or industry; (iii) weather, holiday and vacation considerations; and (iv) other considerations. Our customers are widely diversified across industries and geographies, with varying fiscal years including many whose fiscal years coincide with the United States government’s September 30 budget year, many who are on the calendar year, and many whose fiscal years coincide with the UK and Canadian governments’ March 31 budget year. We also see seasonal variations in our business as a result of other factors, including summer vacations, especially in Europe.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity.
As of the third quarter of fiscal year 2018, which ended June 29, 2018, we reported an accumulated deficit of $19.8 million, compared to $17.4 million at the end of fiscal year 2017. While we have reported negative cash flow from operations for the nine months ended June 29, 2018, and for the previous five fiscal years as our revenues have declined each year during this period, the negative cash flow has been significantly reduced. For the nine months ended June 29, 2018, we used $1.9 million of cash for operating activities compared to $3.3 million of cash for the nine months ended June 30, 2017. At June 29, 2018, our capital resources consisted of cash and cash equivalents of $4.8 million, compared to $5.1 million at September 29, 2017.
During the third quarter of fiscal year 2018 we entered into the Credit Agreement with the Trust and immediately borrowed $2.0 million, which amount is included in our cash and cash equivalents at June 29, 2018. We expect in the near term that we will continue to fund our operations with our cash and cash equivalents. To provide us with additional liquidity to fund our operations, at June 29, 2018; (i) we have access to up to $3.0 million of additional unsecured borrowing under the Credit Agreement upon satisfying the applicable requirements for further advances and (ii) under our existing AC Financing Agreement with Action Capital Corporation, we are permitted to borrow up to $3.0 million with eligible U.S. subsidiary accounts receivable as security for such borrowings. We potentially may have access to additional liquidity through repatriation of cash from our foreign subsidiaries, however, the ability to repatriate such cash will depend on local regulations of our foreign subsidiaries, including those that require maintaining certain levels of capital. Accordingly, there is no assurance that we will be able to repatriate cash from our foreign subsidiaries at the time we may want to do so.
Our registered independent public accounting firm’s report on our audited financial statements for the year ended September 29, 2017 that is included in our 2017 Form 10-K contained an explanatory paragraph related to the Company’s ability to continue as a going concern. Since the filing of our 2017 Form 10-K, we have continued to take steps to stabilize revenues and decrease our expenses on a year-over-year basis for fiscal year 2018 and beyond through our Cost Reduction Program. The borrowing capacity under our new Credit Agreement entered into on June 29, 2018 and under our existing AC Financing Agreement coupled with our ongoing cost reduction efforts has improved our future liquidity outlook. The terms of the Credit Agreement also contain a subjective acceleration clause that can be triggered if the lender determines that we have Events of Default that would reasonably be expected to have a Material Adverse Effect, as defined in the Credit Agreement, and continuance thereof for ten (10) calendar days, which in turn would permit the lender to accelerate repayment of outstanding obligations.
To address the decline in revenue, we continue executing upon 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. Another strategy is to grow our position as a leading worldwide provider of training and workforce development to IT professionals and managers through the continued growth of our Workforce Optimization Solutions. 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.
We accelerated our Cost Reduction Program and for fiscal year 2017 exceeded our goal of significantly reducing our fiscal year total costs compared to the Company’s total costs for fiscal year 2016. These reductions were initiated to right-size the Company’s operations, modernize its business operations to meet customer demand and preserve capital. We continue to realize results from the Cost Reduction Program as cost of revenues for the first nine months of fiscal year 2018 decreased to 57.6% of revenues compared to 58.4% for the first nine months of fiscal year 2017, and operating expenses decreased $2.0 million for the nine month period when compared to the same nine month period in fiscal year 2017.
The stabilization of revenues and reduction in costs are integral to our goal of achieving a minimum of a break-even operating income line and a positive cash flow from operations. 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 June 29, 2018, our net working capital deficit (current assets minus current liabilities) was $(11.2) million, a $0.8 million increase from the $(10.4) million working capital deficit balance at September 29, 2017. Current assets decreased $0.5 million during the period while current liabilities increased $0.3 million during the period.
Cash Flows.
Our cash and cash equivalents were $4.8 million at June 29, 2018 compared to $5.1 million at September 29, 2017.
|
|
Nine months ended
|
|
|
|
|
|
(in thousands)
|
|
June 29, 2018
|
|
|
June 30, 2017
|
|
|
Net Change
|
|
Cash used in operating activities
|
|
$
|
(1,885
|
)
|
|
$
|
(3,315
|
)
|
|
$
|
1,430
|
|
Cash used in investing activities
|
|
|
(162
|
)
|
|
|
(20
|
)
|
|
|
(142
|
)
|
Cash provided by (used in) financing activities
|
|
|
1,573
|
|
|
|
(58
|
)
|
|
|
1,631
|
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
166
|
|
|
|
(43
|
)
|
|
|
209
|
|
Net decrease in cash and cash equivalents
|
|
$
|
(308
|
)
|
|
$
|
(3,436
|
)
|
|
$
|
3,128
|
|
Cash used in operating activities was $1.9 million for the first nine months of fiscal year 2018, compared to $3.3 million for the first nine months of fiscal year 2017, primarily due to net loss for the current nine month period of $2.4 million compared to a net loss of $3.6 million for the first nine months of fiscal year 2017 and the return of lease deposits related to our Education Center in London, UK. Cash used in investing activities of $0.2 million for the first nine months of fiscal year 2018 represents minimal capital spending for equipment and leasehold improvements. Cash provided by financing activities increased by $1.6 million in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017 as a result of borrowing $2.0 million under the Line of Credit Agreement less debt issuance costs and payments on the Euston Financing Agreements.
Capital Requirements.
During the nine months ended June 29, 2018, we made capital expenditures of $0.2 million. We plan to purchase less than $0.3 million in equipment and other capital assets during the remainder of fiscal year 2018. On December 21, 2017, we negotiated the early termination of the lease for our education center in Toronto, Canada. The lease originally scheduled to end on October 31, 2020 ended on March 31, 2018. We paid an early termination fee of approximately $0.1 million. Our other contractual obligations as of June 29, 2018 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 2017 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 nine years from June 29, 2018. 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 Form 2017 10-K. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.
RECENT ACCOUNTING PRONOUNCEMENTS
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements. See Note 10 – “Recent Accounting Pronouncements” in the notes to our condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q.
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 fourth quarter of fiscal year 2018.
Effect of Exchange Rates.
Approximately 45% 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, 2018 were constant for our fourth quarter of fiscal year 2018, then we would expect foreign exchange rates to negatively impact fourth quarter revenues by approximately 0.6% when compared to the fourth quarter of fiscal year 2017. We would also expect an offsetting effect from exchange rates on our overall expenses, though this effect is less pronounced because more of our expenses are denominated in U.S. dollars, including our corporate management and centralized IT, marketing and course development activities which are located here in the United States.
Fourth Quarter Revenues.
We currently expect revenues for our fourth quarter of fiscal year 2018 of between $18.4 million and $19.4 million, compared to revenues of $19.6 million in our fourth quarter of fiscal year 2017.
Fourth Quarter Gross Profit.
We expect a gross profit percentage in our fourth quarter of fiscal year 2018 of between 45.5% and 46.5% compared to 46.5% in our fourth quarter of fiscal year 2017.
Fourth Quarter Operating Expenses.
We expect overall operating expenses for our fourth quarter of fiscal year 2018 to be between $7.2 million and $7.6 million, compared to $7.4 million in the same quarter a year earlier.
Fourth Quarter Income from Operations.
We expect fourth quarter operating income between $0.8 million and income of $1.8 million compared with operating income of $1.8 million in our fourth quarter of fiscal year 2017.
Fourth Quarter Other Income (Expense), Net.
We expect fourth quarter other expense to be less than $0.1 million compared to other expense of $0.2 million in the fourth quarter of fiscal year 2017.
Fourth Quarter Pre-Tax Income.
Overall, we expect to report a pre-tax income for our fourth quarter of fiscal year 2018 of between $0.7 million and income of $1.8 million, compared with pre-tax income of $1.6 million in our fourth quarter of fiscal year 2017.
We are continuing to seek ways to drive operating efficiencies and lower our cost structure in the fourth quarter of fiscal year 2018 to preserve and improve our capital resources in the near term.