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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☑	QUARTERLY report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

☐	TRANSITION report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

Commission file number 0-33347

 

Ambassadors Group, Inc.

 

 (Exact name of registrant as specified in its charter)

 

 

 

Registrant’s Telephone Number, Including Area Code: (509) 568-7742

 

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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.

 

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).

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

The number of shares outstanding of the registrant’s Common Stock, $0.01 par value, as of May 8, 2015 was 17,300,706.

 

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AMBASSADORS GROUP, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Loss	3
	Consolidated Statements of Cash Flows	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4.	Controls and Procedures	19
PART II – OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 6.	Exhibits	20
SIGNATURES		21
EXHIBIT INDEX

 

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PART I

FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

 

AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of March 31, 2015 and December 31, 2014

(in thousands, except share and per share data)

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

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the three months ended March 31, 2015 and 2014

(in thousands, except per share amounts)

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

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)

For the three months ended March 31, 2015 and 2014

(in thousands)

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

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the three months ended March 31, 2015 and 2014

(in thousands)

 

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

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

1. The Company

Ambassadors Group, Inc. (the “Company”, “we”, “us” or “our”) is an educational company primarily engaged in organizing and promoting differentiated worldwide travel programs for students and professionals.  These consolidated financial statements include the accounts of Ambassadors Group, Inc., and our wholly owned subsidiaries, Ambassador Programs, Inc., and Ambassadors Unlimited, LLC. All significant intercompany accounts and transactions, which are of a normal recurring nature, are eliminated in consolidation.

Through September 2014, we operated an education oriented research website, BookRags.com, which provided study guides, lesson plans, and other educational resources to students and teachers.  This business was operated by BookRags, Inc. (“BookRags”) our then wholly-owned subsidiary.  In September 2014, we consummated the sale of the BookRags subsidiary.  All activities related to BookRags have been reflected as discontinued operations for all periods presented.  For additional information, see Note 8 of Notes to Consolidated Financial Statements.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), have been condensed or omitted in accordance with such rules and regulations, although management believes the disclosures are adequate to prevent the information presented from being materially misleading. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2015 are not indicative of the results that may be expected for the year ending December 31, 2015.

It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.

3. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09).  The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective.  The new standard is effective for annual and interim reporting periods beginning after December 15, 2016.  Early adoption is not permitted.  The standard permits the use of either the retrospective or cumulative effect transition method.  We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures.  We have not yet selected a transition method nor have we determined the effect of the standard on our financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (ASU 2014-15). This ASU requires management to evaluate whether there is substantial doubt about its ability to continue as a going concern.  This standard is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. Upon adoption, we will use this new standard to assess going concern.

Management has assessed the impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to us, or are not anticipated to have a material impact on our consolidated financial statements.

4. Investments and Fair Value Measurements

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market, and we consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance.

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Our financial instruments are measured and recorded at fair value. Our non-financial assets, including property and equipment and goodwill, are measured at fair value upon acquisition, reviewed at least annually for impairment, and are fully assessed if there is an indicator of impairment. An adjustment would be made to the fair value of non-financial assets if an impairment charge is recognized.

Fair value is determined for assets and liabilities using a three-tiered hierarchy, based upon significant levels of inputs as follows:

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Level 1 – Quoted prices in active markets for identical assets or liabilities.

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Level 2 – Observable inputs, other than Level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

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Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The below tables summarize the composition of our investments at March 31, 2015 and December 31, 2014 (in thousands).  For both periods, all investments have been recorded to short-term available-for-sale securities on the consolidated balance sheet.

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following tables detail the fair value measurements of assets and liabilities within the three levels of the fair value hierarchy at March 31, 2015 and December 31, 2014 (in thousands):

¹ At March 31, 2015 and December 31, 2014, municipal securities consisted solely of holdings in short-term municipal security funds.

Municipal securities are classified as Level 1 assets because market prices are readily available for these investments. Level 2 financial assets and liabilities represent the fair value of our foreign currency exchange contracts that were valued using pricing models that take into account the contract terms, as well as multiple inputs where applicable, such as currency rates.

5. Derivative Financial Instruments

The majority of our travel programs take place outside of the United States, and most foreign suppliers require payment in currency other than the U.S. dollar. Accordingly, we are exposed to foreign currency risk relative to changes in foreign currency exchange rates between those currencies and the U.S. dollar for our non-directly delivered programs. We use forward contracts that allow us to acquire foreign currency at a fixed price for a specified point in time to provide a hedge against foreign currency risk. All of our derivatives are cash flow hedges and at March 31, 2015, all contracts qualified for cash flow hedge accounting.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income or loss and reclassified into earnings in the same period during which the hedged transaction is recognized in earnings; this is primarily during the second and third quarters of the year when our student travel programs occur. Gains or losses representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At March 31, 2015, the following forward contracts were outstanding (in thousands):

The fair value of our forward contracts were as follows (in thousands):

 

		March 31, 2015
		Derivatives designated as hedging instruments								Total Net
		Assets				Liabilities				Liabilities
Forward contracts		$	-			$	2,137			$	2,137

 

		December 31, 2014
		Derivatives designated as hedging instruments								Total Net
		Assets				Liabilities				Liabilities
Forward contracts		$	14			$	1,359			$	1,345

The net asset and liability derivatives at March 31, 2015 and December 31, 2014 are reported in the consolidated balance sheet as current and long-term foreign currency exchange contracts.

6. Accumulated Other Comprehensive Income (Loss)

Unrealized gains or losses related to derivative securities are recorded in accumulated other comprehensive income (loss) (“AOCI”). The change in unrealized gains or losses related to derivative securities are recorded in other comprehensive income (loss) net of income taxes in the period the change occurred. When derivative securities designated as cash flow hedges are used to pay vendors, the effective portion of the hedge is reclassified into the income statement and recorded in net revenue, non-directly delivered programs.

Unrealized gains or losses related to available-for-sale securities are recorded in AOCI. The change in unrealized gains or losses related to available-for-sale securities are recorded in other comprehensive income net of income taxes in the period the change occurred. When securities are sold and a realized gain or loss is recognized, the amount is reclassified from AOCI to the income statement and recorded in interest and dividend income. During the three months ended March 31, 2015 and 2014, there were no realized gains or losses recognized in the income statement for the sale of investments.

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

For the three months ended March 31, 2015 and 2014, a summary of AOCI balances and gains (losses) recognized in OCI are as follows (in thousands):

 

		Accumulated Other Comprehensive Income (Loss)
		Derivative Securities								Available-for-sale securities
		Three months ended March 30,								Three months ended March 30,
		2015				2014				2015				2014
Balance, beginning of period		$	(1,142	)		$	(192	)		$	165			$	(357	)
Change before reclassification			(793	)			196				(70	)			175
Reclassification into foreign currency and other income (expense)			(99	)			-				-
Effect of incomes taxes			-				(68	)			-				(61	)
Other comprehensive income (loss), net of income taxes			(892	)			128				(70	)			114
Balance, end of period		$	(2,034	)		$	(64	)		$	95			$	(243	)

 

7. Stock-Based Compensation

Under our Stock Incentive Plan (the “Plan”), we may grant stock-based incentive compensation awards to eligible employees and non-employee directors in the form of distribution equivalent rights, incentive stock options, non-qualified stock options, performance share awards, performance unit awards, restricted stock awards, restricted stock units awards, stock appreciation rights, tandem stock appreciation rights, unrestricted stock awards or any combination of the foregoing, as may be best suited to the circumstances of the particular employee, director or consultant. As of March 31, 2015, we had 1,521,408 shares authorized under the Plan available for future stock-based compensation.

Stock Options

Under the terms of the Plan, options to purchase shares of our common stock are granted at a price set by the Compensation Committee of the Board of Directors (the “Compensation Committee”), not to be less than the par value of a share of common stock, and if granted as performance-based compensation or as incentive stock options, not to be less than the fair market value of the stock on the date of grant. The Compensation Committee establishes the vesting period of the awards, which is generally set at 25 percent per year for four years. Options may be exercised any time after they vest for a period up to 10 years from the grant date.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model was developed for use in estimating the fair value of options. Option valuation models require the input of highly subjective assumptions, particularly for the expected term and stock price volatility. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. Our employee stock options do not trade on a secondary exchange; therefore, employees do not derive a benefit from holding stock options unless there is an appreciation in the market price of our stock above the grant price. Such an increase in stock price would benefit all shareholders commensurately.

We did not grant stock options during the three months ended March 31, 2015 or 2014.

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

A summary of option activity under the Plan as of March 31, 2015, and the changes during the three months then ended is presented below:

 

During the three months ended March 31, 2015 and 2014, the total intrinsic value of stock options exercised was zero and the total fair value of options which vested was zero. The aggregate intrinsic value of outstanding and exercisable stock options was zero, based on our $2.53 closing stock price at March 31, 2015. Compensation expense recognized in the consolidated statement of operations for stock options was $37 thousand and $0.1 million for the three months ended March 31, 2015 and 2014, respectively, before the effect of income taxes. As of March 31, 2015, total unrecognized stock-based compensation expense related to non-vested stock options was approximately $0.3 million, which is expected to be recognized over approximately 2.7 years.

Restricted Stock Grants

Under the terms of the Plan, restricted stock awards and restricted stock units are granted by the Compensation Committee on the same terms as options. The Compensation Committee also establishes the vesting period of the awards.  The fair value of restricted stock awards and restricted stock units are based on the market price of our shares on the grant date.

A summary of the activity of non-vested restricted stock awards and restricted stock units under the Plan as of March 31, 2015, and the changes during the three months then ended is presented below:

At March 31, 2015, the aggregate value of non-vested restricted stock awards and restricted stock units was $0.8 million and $0.6 million, respectively, before applicable income taxes, based on a $2.53 closing stock price at March 31, 2015.  During the three months ended March 31, 2015 and 2014, the weighted-average grant date fair value of restricted stock awards which vested was $25 thousand and $7 thousand, respectively. Compensation expense recognized in the consolidated statement of operations for restricted stock awards was $0.1 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively, before the effect of income taxes. Compensation expense recognized in the consolidated statement of operations for restricted stock units was $42 thousand and $9 thousand for the three months ended March 31, 2015 and 2014, respectively, before the effect of income taxes. As of March 31, 2015, total unrecognized stock-based compensation expense related to restricted stock awards and restricted stock units was approximately $0.6 million and $0.6 million, respectively, which is expected to be recognized over approximately 2.5 years and 3.5 years, respectively.

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Performance Stock Awards

Under the terms of the Plan, performance stock awards are granted by the Compensation Committee to key executive employees. Performance stock awards are based on achieving key internal metrics measured at the end of each fiscal year over a three year performance period. If performance objectives are achieved as determined by the Compensation Committee, common stock is granted. The fair value of these awards is determined on the date of grant based on our share price. A forfeiture rate of 14 percent is used as a best estimate of future forfeitures. Compensation expense related to performance stock units is evaluated quarterly to determine the likelihood that performance metrics will be achieved during the performance period.

A summary of the activity of performance stock units under the Plan as of March 31, 2015, and the changes during the three months then ended is presented below:

Performance stock units outstanding on March 31, 2015 are payable upon the achievement of certain internal metrics over a performance period of January 1, 2015 through December 31, 2015. As of March 31, 2015, there was $0.7 million of unrecognized compensation expense related to performance share unit awards, which will be recognized over a weighted average period of time as internal metrics are anticipated to be achieved.

8. Discontinued Operations

In September 2014, we consummated the sale of BookRags for $5.0 million, subject to a $0.4 million escrow arrangement to be released in 2015.  The amount subject to escrow is disclosed as restricted cash on the consolidated balance sheet.  All activities related to BookRags have been reflected as discontinued operations on our consolidated financial statements for the period ended March 31, 2014.  There were no discontinued operations for the period ending March 31, 2015.

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table summarizes the results of discontinued operations for the periods indicated (in thousands):

 

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

10. Supplemental Disclosures of Consolidated Statements of Cash Flows

Our non-cash investing and financing activities during the three months ended March 31, 2015 and 2014 were as follows (in thousands):

 

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AMBASSADORS GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

We are subject to the possibility of various loss contingencies, including claims, suits and complaints, arising in the ordinary course of business. We consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted and whether new accruals are required.

Under our Bylaws, our directors and officers have certain rights to indemnification by us against certain liabilities that may arise by reason of their status or service as directors or officers. We maintain director and officer insurance, which covers certain liabilities arising from our obligation to indemnify our directors and officers and former directors in certain circumstances. No material indemnification liabilities were accrued at March 31, 2015.

 

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Item 2.

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

 

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q.

 

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. Forward-looking statements may appear throughout this report, including without limitation, statements in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. For a detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements, please refer to Item 1A Risk Factors disclosure in our Annual Report on Form 10-K filed on March 25, 2015. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Introduction

Ambassadors Group, Inc. is a leading provider of educational travel experiences primarily engaged in organizing and promoting worldwide educational travel programs for students. We operate student and adult travel programs primarily using the People to People International brand under a long-term license agreement. We have been traveling students on People to People programs for over 50 years and have over 500,000 alumni. We believe that our association with that brand and experience in the educational travel industry give us both a strong awareness in the market and a high level of credibility.

Our core program offering under the People to People brand is international destination trips for U.S. students in the 11 to 17 year old age group (“Student Ambassador Programs”). Student Ambassador Programs make up the majority of our program offerings and are the center of our strategic focus. In addition, under the People to People brand, we also offer Leadership Ambassador Programs, domestic destination travel programs for U.S. students and international students from all over the world focused on leadership and education.  We also offer Citizens Ambassador Programs, professional travel programs for adults.

Prior to September 2014, we operated BookRags, an education oriented research website, which provided study guides, lesson plans and other educational resources to students and teachers. This wholly-owned subsidiary was sold in September 2014, and results of operations have been reflected as discontinued operations for all periods presented.

Our operating results depend primarily on the number of travelers who attend our programs (“travelers”), the fees we are able to charge for each traveler, net of pass-through expenses associated with non-directly delivered programs such as airfare and third-party tour operator fees (“total revenue”), and the direct costs associated with the traveler’s itinerary on directly delivered programs including airfare, hotel charges, meal costs, event and location fees, chaperone costs, tour manager fees, and the cost of in-country travel (“cost of sales”). Our business is highly seasonal, and our gross revenue and cost of sales are typically at their highest levels in the second and third quarters. Our marketing and sales efforts are conducted year-round and expenses are recognized when incurred.  Revenue associated with these marketing and sales expenses is generally recognized upon travel in the second and third quarter of the following fiscal year.  As a result, we are typically unprofitable in the first and fourth quarter of each year.

 

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Executive Summary

This June and July we will be sending over 200 groups and over 12,000 travelers from all over the U.S. to all parts of the world, including Europe, Japan, and Australia.  Preparing for the upcoming travel season and delivering our programs safely is our top priority.

Over the past several years our travel numbers have been steadily declining, and we anticipate that to continue again in 2015.  In response to this trend we made the decision to largely eliminate our traditional direct-to-consumer marketing approach due to the high costs and consistently declining effectiveness of direct mail marketing.  Whether alternative marketing strategies will prove to be feasible or viable is unclear and there is no assurance that these declines will reverse or become less severe.  We are continuing to evaluate our marketing channel alternatives.

We remain highly committed to right-sizing our business to match our revenue stream and during the first quarter of 2015, our operating expenditures from continuing operations are down 29.6 percent compared to the first quarter of 2014.

Results of Operations

Comparison of the Three Months Ended March 31, 2015 with the Three Months Ended March 31, 2014

Consolidated financial results for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

 

		Three Months Ended March 31,
		2015				2014				$ Change				% Change
Total revenue		$	270			$	560			$	(290	)			-52	%
Cost of goods sold			127				380				(253	)			-67	%
Gross margin			143				180				(37	)			-21	%
Selling and marketing expenses			4,530				6,672				(2,142	)			-32	%
General and administrative expenses			2,317				2,921				(604	)			-21	%
Restructuring costs			-				108				(108	)			-100	%
Operating loss			(6,704	)			(9,521	)			2,817				30	%
Other income			92				134				(42	)			-31	%
Loss before income tax benefit			(6,612	)			(9,387	)			2,775				30	%
Income tax benefit			-				1,556				(1,556	)			-100	%
Net loss from continuing operations		$	(6,612	)		$	(7,831	)		$	1,219				16	%
Net income from discontinued operations		$	-			$	280				(280	)			-100	%

   

During the first quarter of 2015, we traveled 114 delegates compared to 183 delegates with total revenue from continuing operations of $0.3 million compared to $0.4 million in the prior year quarter. We are a seasonal business and the majority of our revenue is earned during our peak travel months of June and July each year; therefore, we typically report low revenue and a net loss during the first quarter.  Gross margin from continuing operations for the quarter was $0.1 million compared to $0.2 million in the first quarter of 2014, and gross margin percentage was 36.7 percent compared to 32.1 percent in the prior year period.

 

First quarter operating expenses from continuing operations were $6.8 million compared to $9.7 million in the prior year period, a $2.9 million, or 30 percent, decrease year-over-year.  Sales and marketing expenses were down 32.1 percent primarily related to lower marketing expenditures and reduced personnel expense based on headcount reductions year-over-year.  The Company is in the midst of changing its go to market and sales strategy and as a result, anticipates lower overall marketing expenditures throughout 2015 compared to prior years.  In addition, as a result of a headcount reduction initiated during the first quarter of 2015, personnel expenditures are also anticipated to be lower over prior years.  General and administrative costs are down $0.8 million compared to the first quarter of 2014, primarily due from a reduction in depreciation expense as well as lower expenditures overall from cost saving initiatives.

 

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During the current year period, we did not record income tax expense due to the valuation allowance on our deferred tax assets recorded during the second quarter of 2014.  The prior year period includes an income tax benefit of $1.6 million. The difference from our statutory rate of 34 percent during 2014 was primarily due to the impact of tax exempt interest earned in relation to projected net income at March 31, 2014 for the year ended December 31, 2014.

 

During the third quarter of 2014, we consummated the sale of our wholly-owned subsidiary BookRags.  All prior year activities related to BookRags are reflected as discontinued operations.

 

During the first quarter of 2015, we reported a net loss of $6.6 million, or $0.39 per diluted share, compared to a net loss of $7.6 million, or $0.45 per diluted share, in 2014.

 

Key Performance Non-GAAP Financial Indicators

We analyze our performance on a net income, cash flow and liquidity basis in accordance with GAAP as well as on a non-GAAP operating, cash flow and liquidity basis referred to below as “non-GAAP operating results” or “non-GAAP cash flows and liquidity measures.” These measures and related discussions are presented as supplementary information in this analysis to enhance the readers’ understanding of, and highlight trends in, our core financial results. Any non-GAAP financial measure used by us should not be considered in isolation or as a substitute for measures of performance or liquidity prepared in accordance with GAAP.

Net Enrollments

 

Net enrollments on a forward looking basis consist of all active participants, which we define as those who have enrolled in our programs, including travel that has already been completed, less those who have already withdrawn for the travel year referenced. This is a point in time measurement that we use as an indication of expected future gross revenues for our travel programs. Enrolled revenue consists of estimated gross receipts to be recognized in the future upon travel of an active participant and may not result in the actual gross receipts eventually recognized due both to withdrawals from our programs and expected future enrollments.

 

Deployable Cash

We use deployable cash as a liquidity measure calculated as the sum of cash, cash equivalents, short-term available-for-sale securities and prepaid program costs and expenses, less the sum of accounts payable, accrued expenses and other short-term liabilities (excluding deferred taxes) and participant deposits. We believe the deployable cash measurement is useful in understanding cash available to deploy for current and future business opportunities, as it represents an estimate of excess cash available for capital deployment. This non-GAAP measure is based on conservative assumptions, such as all participants’ deposits being forfeited, and should not be construed as the maximum amount of cash sources available to run our business.

 

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Free Cash Flow

Free cash flow is calculated as cash flow from operations less the purchase of property, equipment and intangible assets. Management believes this non-GAAP measure is useful to investors in understanding the cash generated or distributed within the current period for future use in operations.

Liquidity and Capital Resources

 

Total assets at March 31, 2015 were $87.5 million compared to $114.8 million one year ago.  Cash, cash equivalents and short-term available-for-sale securities increased $14.2 million to $78.6 million at March 31, 2015 compared to the balance at March 31, 2014.  Long-term assets totaled $1.8 million at March 31, 2015 compared to $32.0 million at March 31, 2014, a decrease primary caused by the sale of our corporate headquarters building during the fourth quarter of 2014, significantly reducing the net book value of property and equipment, and the sale of BookRags during the third quarter of 2014, resulting in the elimination of all intangible assets and goodwill that had been recorded upon its purchase.  Total liabilities were $55.6 million, including $50.3 million in participant deposits for future travel.  Participant deposits are down 17.0 percent from one year ago.

 

Net cash provided by operations was $17.4 million during the three months ended March 31, 2015 compared to net cash provided by operations of $19.4 million during the three months ended March 31, 2014. This $2.0 million decrease was primarily due to a $7.1 million unfavorable change in participant deposits due to a lower delegate count compared to 2014, partially offset by a lower change in our prepaid accounts as well as a decline in net loss year-over-year. Net cash used in investing activities was $14.9 million during the first three months of 2015 compared to $16.2 million during the first three months of 2014.

 

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported disclosures of assets, liabilities, revenue and expenses. Our estimates are based on our experience and our interpretation of economic, political, regulatory, and other factors that affect our business.  We consider that our most critical accounting estimates are related to the valuation of available-for-sale securities, foreign currency exchange contracts, revenue recognition, and contingencies and litigation as they require us to make assumptions that may be highly uncertain at the time the accounting estimates were made and changes in them are reasonably likely to occur from period to period.  There are other items within our consolidated financial statements that require estimation but are not deemed to be critical.  Changes in estimates used in these and other items could have a material impact on our consolidated financial statements. For a more complete discussion, please refer to our consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed on March 25, 2015.

 

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Item 4.

Controls and Procedures

 

(a) Evaluation of disclosure controls and procedures

 

As of March 31, 2015, the end of the period covered by this report, our chief executive officer and principal finance and accounting officer reviewed, evaluated and concluded that our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) were effective.  These controls and procedures are designed to ensure information required to be disclosed in our Form 10-Q filed or submitted under the Exchange Act is recorded, processed, summarized, and reported on a timely basis, and has been accumulated and communicated to our management including our interim chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting

 

In the three months ended March 31, 2015, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II

OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

On various dates between May 2004 and May 2011, our Board of Directors authorized the repurchase of shares of our Common Stock in the open market or through private transactions (the “Repurchase Plan”). During the quarter ended March 31, 2015, there were no shares repurchased under the Repurchase Plan. As of March 31, 2015, approximately $13.1 million was available to repurchase shares of our Common Stock under the Repurchase Plan.

Item 6.

Exhibits

 

(1) Filed herewith.

(2) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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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.

 

 

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EXHIBIT INDEX

 

 

(1) Filed herewith.

(2) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that Section.  Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

 

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