UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the period ended September 30, 2016

 

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

 

For the transition period from            to           

 

Commission file number: 001-35898

 

LINDBLAD EXPEDITIONS HOLDINGS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware		27-4749725
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

96 Morton Street, 9th Floor, New York, New York, 10014

(Address of principal executive offices)

 

(212) 261-9000

(Issuer’s telephone number)

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

As of November 1, 2016, 45,968,480 shares of common stock, par value $0.0001 per share, were issued and outstanding.

 

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC.

Quarterly Report On Form 10-Q

For The Quarter Ended September 30, 2016

 

Table of Contents

 

		Page(s)
PART I FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2016 (Unaudited) and December 31, 2015	1
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)	2
	Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity for the Nine Months Ended September 30, 2016 (Unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)	4
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	35
ITEM 4.	Controls and Procedures	35
PART II OTHER INFORMATION
ITEM 1.	Legal Proceedings	36
ITEM 1A.	Risk Factors	36
ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	36
ITEM 3.	Defaults Upon Senior Securities	36
ITEM 4.	Mine Safety Disclosures	36
ITEM 5.	Other Information	36
ITEM 6.	Exhibits	36
SIGNATURES		37

  

 

PART 1:

FINANCIAL INFORMATION

 

Item 1:

Financial Statements

 

Lindblad Expeditions Holdings, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

		As of
		September 30,				December 31,
		2016				2015
		(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents		$	149,017			$	206,903
Restricted cash and marketable securities			10,367				8,460
Inventories			1,591				1,746
Marine operating supplies			4,195				4,969
Prepaid expenses and other current assets			20,742				12,266
Total current assets			185,912				234,344
Property and equipment, net			164,486				125,471
Goodwill and other intangibles			27,953				-
Other long-term assets			13,334				12,355
Operating rights			5,683				6,227
Deferred tax assets			4,497				3,216
Total assets		$	401,865			$	381,613
LIABILITIES
Current Liabilities:
Unearned passenger revenues		$	84,620			$	76,604
Accounts payable and accrued expenses			19,943				25,968
Long-term debt - current			1,750				1,750
Total current liabilities			106,313				104,322
Long-term debt, less current portion			164,020				162,693
Other long-term liabilities			699				677
Total liabilities			271,032				267,692
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST			4,856				-
STOCKHOLDERS’  EQUITY
Preferred stock, $0.0001 par value, 1,000,000 shares authorized; 0 shares issued and outstanding			-				-
Common stock, $0.0001 par value, 200,000,000 shares authorized; 45,968,480 and 45,224,881 issued and outstanding as of September 30, 2016 and December 31, 2015, respectively			5				5
Additional paid-in capital			46,590				48,073
Retained earnings			79,382				65,843
Total stockholders’ equity			125,977				113,921
Total liabilities, redeemable noncontrolling interest and stockholders’ equity		$	401,865			$	381,613

 

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

 

 

Lindblad Expeditions Holdings, Inc.

Condensed Consolidated Statements of Income

(In thousands, except share and per share data)

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Tour revenues		$	70,774			$	58,561			$	186,218			$	163,513
Cost of tours			32,446				25,444				87,111				71,331
Gross profit			38,328				33,117				99,107				92,182
Operating expenses:
General and administrative			12,915				9,684				36,740				27,518
Selling and marketing			10,164				9,482				29,294				26,919
Merger-related expenses			-				5,503				-				13,266
Depreciation and amortization			5,080				2,689				14,523				8,336
Total operating expenses			28,159				27,358				80,557				76,039
Operating income			10,169				5,759				18,550				16,143
Other (expense) income:
(Loss) gain on foreign currency			(5	)			148				(291	)			(46	)
Gain on transfer of assets			-				-				-				7,502
Other income, net			(38	)			(24	)			(38	)			5,000
Interest expense, net			(2,476	)			(2,948	)			(7,914	)			(8,026	)
Total other (expense) income			(2,519	)			(2,824	)			(8,243	)			4,430
Income before income taxes			7,650				2,935				10,307				20,573
Income tax expense (benefit)			203				(1,481	)			(3,113	)			389
Net income		$	7,447			$	4,416			$	13,420			$	20,184
Net income (loss) attributable to noncontrolling interest			29				-				(119	)			-
Net income attributable to Lindblad		$	7,418			$	4,416			$	13,539			$	20,184
Weighted average shares outstanding
Basic			45,776,443				45,004,393				45,639,608				44,814,354
Diluted			46,541,257				46,456,315				46,329,880				45,544,382
Earnings per share attributable to Lindblad
Basic		$	0.16			$	0.10			$	0.30			$	0.45
Diluted		$	0.16			$	0.10			$	0.29			$	0.44

 

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

 

 

Lindblad Expeditions Holdings, Inc.

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity

(In thousands, except share data)

(Unaudited)

 

										Additional								Total				Redeemable
		Common Stock								Paid-In				Retained				Stockholders’				Noncontrolling
		Shares				Amount				Capital				Earnings				Equity				Interest
Balance as of December 31, 2015			45,224,881			$	5			$	48,073			$	65,843			$	113,921			$	-
Stock-based compensation			199,044				-				3,982				-				3,982				-
Option shares exercised and exchanged			280,347				-				(2,695	)			-				(2,695	)			-
Repurchase of warrants			-				-				(5,420	)			-				(5,420	)			-
Acquisition of Natural Habitat, Inc.			264,208				-				2,650				-				2,650				4,975
Net income (loss)			-				-				-				13,539				13,539				(119	)
Balance as of September 30, 2016			45,968,480			$	5			$	46,590			$	79,382			$	125,977			$	4,856

 

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

 

Lindblad Expeditions Holdings, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited) 

		For the Nine Months Ended September 30,
		2016				2015
Cash Flows From Operating Activities
Net income		$	13,420			$	20,184
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			14,523				8,336
Amortization of National Geographic fee			2,180				670
Amortization of debt discount, deferred financing and other costs			2,582				2,733
Stock-based compensation			3,982				3,641
Deferred income taxes			(3,709	)			385
Loss on currency translation			291				46
Gain on transfer of assets			-				(7,502	)
Changes in operating assets and liabilities
Inventories and marine operating supplies			1,505				761
Prepaid expenses and other current assets			1,098				1,092
Unearned passenger revenues			(8,620	)			538
Other long-term assets			(3,159	)			-
Other long-term liabilities			22				192
Accounts payable and accrued expenses			(8,430	)			(716	)
Net cash provided by operating activities			15,685				30,360
Cash Flows From Investing Activities
Purchase of investment in CFMF			-				(68,088	)
Acquisition of Natural Habitat, Inc., net of cash acquired			(9,946	)			-
Purchases of property and equipment			(50,598	)			(8,143	)
Advance from shareholder			-				1,501
Purchase of restricted cash and marketable securities			(1,907	)			(949	)
Net cash used in investing activities			(62,451	)			(75,679	)
Cash Flows From Financing Activities
Proceeds from long-term debt			-				175,000
Net proceeds from merger			-				186,806
Payments to shareholders for the merger			-				(90,000	)
Payment of deferred financing costs			(1,565	)			(10,944	)
Repayments of long-term debt			(1,312	)			(41,441	)
Proceeds used in exchange of option shares			(2,695	)			(4,850	)
Repurchase of warrants			(5,420	)			-
Net cash (used in) provided by financing activities			(10,992	)			214,571
Effect of exchange rate changes on cash			(128	)			(179	)
Net (decrease) increase in cash and cash equivalents			(57,886	)			169,073
Cash and cash equivalents as of beginning of period			206,903				39,679
Cash and cash equivalents as of end of period		$	149,017			$	208,752
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	7,427			$	4,550
Income taxes		$	992			$	387
Non-cash investing and financing activities:
Acquisition of Natural Habitat, Inc.:
Total purchase price consideration		$	20,025			$	-
Consideration consisted of:
Cash paid to acquire Natural Habitat, Inc.		$	(14,850	)		$	-
Non-cash consideration - long-term debt			(2,525	)			-
Non-cash consideration - Lindblad restricted shares			(2,650	)			-
Investment in CFMF liquidation of Junior debt asset, warrant		$	-			$	84,903
CFMF liquidation of Junior debt long-term debt, additional paid-in capital			-				(84,903	)
Transfer from inventories and marine operating supplies			-				(414	)
Transfer to property and equipment, net			-				414
Additional paid-in capital exercise proceeds of option shares			1,123				2,240
Additional paid-in capital exchange proceeds used for option shares			(1,123	)			(2,240	)

  

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

Lindblad Expeditions Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – BUSINESS

 

Organization

 

Lindblad Expeditions Holdings, Inc., a Delaware corporation, and its consolidated subsidiaries (the “Company” or “Lindblad”) currently operate a fleet of six owned expedition ships and four seasonal charter vessels under the Lindblad brand.

 

Lindblad’s mission is to offer life-changing adventures on all seven continents and pioneering innovative ways to allow its guests to connect with exotic and remote places. Lindblad’s expedition ships are customized, nimble and intimately-scaled vessels that are able to venture where larger cruise ships cannot, thus allowing Lindblad to offer up-close experiences in the planet’s wild and remote places and capitals of culture. Many of these expeditions involve travel to remote places with limited infrastructure and ports (such as Antarctica and the Arctic) or places that are best accessed by a ship (such as the Galápagos, Alaska, Baja’s Sea of Cortez, Costa Rica, and Panama), and foster active engagement by guests. Each expedition ship is designed to be comfortable and inviting, while being fully equipped with state-of-the-art tools for in-depth exploration. The Company also has an alliance with the National Geographic Society (“National Geographic”), which often provides lecturers and National Geographic experts, including photographers, writers, marine biologists, naturalists, field researchers, and film crews.

 

Natural Habitat Acquisition

 

On May 4, 2016, the Company acquired an 80.1% ownership interest in Natural Habitat, Inc. (“Natural Habitat”), an adventure travel and ecotourism company based in Colorado. Natural Habitat is managed by Benjamin L. Bressler, its founder and President (“Mr. Bressler”), who retains a 19.9% noncontrolling interest. With the acquisition of Natural Habitat, the Company has expanded its land-based offerings. Natural Habitat offers eco-conscious expeditions from Antarctica to Zambia with a multitude of adventures in between. Natural Habitat’s itineraries include world-class polar bear tours in Churchill, Canada, Alaskan grizzly bear adventures, small-group Galápagos tours and African safaris. In addition to its land offerings, Natural Habitat offers select itineraries on seven small chartered vessels for parts of the year. Since 2003, Natural Habitat has partnered with the World Wildlife Fund (“WWF”) to offer conservation travel, sustainable travel that directly protects nature. This agreement with WWF extends through 2023.

 

The Company recorded this transaction using the acquisition method for business combinations. The Company measured the identifiable assets, liabilities and noncontrolling interest of Natural Habitat at their fair market value as of the acquisition date and separately measured goodwill at its fair market value as of the acquisition date. The total purchase price consideration of approximately $20.0 million consisted of $14.8 million cash, a $2.5 million unsecured promissory note, which is included in long-term debt, and $2.7 million in Lindblad restricted common stock (264,208 shares). Assets acquired consisted of current assets, including cash acquired, of $14.5 million, property and equipment of $2.1 million and goodwill and other intangibles of $28.3 million. Liabilities assumed consisted of accounts payable and accrued expenses of $2.5 million, unearned passenger revenues of $15.0 million, and deferred tax liabilities of $2.4 million. A redeemable noncontrolling interest in a consolidated subsidiary of $5.0 million was assumed. Natural Habitat’s results of operations for the period beginning May 5, 2016 and ending September 30, 2016 are included in the Company’s condensed consolidated statements of income.

 

 

Merger with Capitol

 

Capitol Acquisition Corp. II (“Capitol”) was originally incorporated in Delaware on August 9, 2010 as a blank check company to acquire, through a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination, one or more businesses or entities.

 

On July 8, 2015, Capitol completed a series of mergers whereby Lindblad Expeditions, Inc. (“LEX”), a New York corporation, became Capitol’s wholly-owned subsidiary. As consideration for the mergers, the total purchase price consisted of an aggregate of (i) $90.0 million in cash (a portion of which was paid as transaction bonuses) and (ii) 20,017,787 shares of Capitol common stock. Capitol also assumed outstanding LEX stock options and converted such options into options to purchase an aggregate of 3,821,696 shares of Capitol common stock with an exercise price of $1.76 per share.

 

As a result of the mergers, LEX became a direct wholly-owned subsidiary of Capitol. Immediately following the mergers, Capitol, which had no operations, changed its name to Lindblad Expeditions Holdings, Inc. and therefore Lindblad has presented LEX’s information as that of the Company.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited interim condensed consolidated financial statements and footnotes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding unaudited interim financial information. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Income, Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of the results of operations to be expected for the full year due to seasonality and other factors. Certain information and footnote disclosures normally included in the condensed consolidated financial statements in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC. All intercompany balances and transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. Accordingly, these unaudited interim condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto for the year ended December 31, 2015 contained in the Annual Report on Form 10-K filed with the SEC on March 14, 2016.

 

Principles of Consolidation

 

The condensed consolidated financial statements of the Company as of September 30, 2016 and December 31, 2015 included Lindblad Expeditions Holdings, Inc. and its consolidated subsidiaries. Natural Habitat’s balance sheet as of September 30, 2016 and results of operations for the period beginning May 5, 2016 and ending September 30, 2016 are included in the Company’s condensed consolidated financial statements.

 

Reclassifications

 

Certain items in the condensed consolidated financial statements of the Company have been reclassified to conform to the 2016 classification. The reclassifications had no effect on previously reported results of operations or retained earnings.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, and also affect the amounts of revenues and expenses reported for each period. Actual results could differ from those which result from using such estimates. Management utilizes various estimates, including but not limited to determining the estimated lives of long-lived assets, determining the fair value of assets acquired and liabilities assumed in business combinations, the fair value of the Company’s common stock and related warrants, the valuation of securities underlying stock-based compensation, income tax expense, the valuation of deferred tax assets, the value of contingent consideration, and to assess its litigation, other legal claims and contingencies. The results of any changes in accounting estimates are reflected in the condensed consolidated financial statements in the period in which the changes become evident. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the period that they are determined to be necessary.

 

 

Revenue Recognition

 

Tour revenues consist of guest ticket revenues recognized from the sale of guest tickets and other tour revenues from the sale of pre- and post-expedition excursions, hotel accommodations, land-based expeditions, air transportation to and from the ships, goods and services rendered onboard that are not included in guest ticket prices, trip insurance, and cancellation fees. Revenues from the sale of guest tickets and other tour revenues are recognized gross, as the Company has the primary obligation in the arrangement, has discretion in supplier selection and is involved in the determination of the service specifications.

 

The Company’s tour guests remit deposits in advance of tour embarkation. Guest tour deposits consist of guest ticket revenues as well as revenues from the sale of pre- and post-expedition excursions, hotel accommodations, land-based expeditions, air transportation to and from the ships, and trip insurance. Guest tour deposits represent unearned revenues and are initially included in unearned passenger revenues in the condensed consolidated balance sheet when received. Guest deposits are subsequently recognized as tour revenues on the date of embarkation. Tour expeditions average ten days in duration. For tours of owned vessels in excess of ten days, where the tour days span a quarter, the Company recognizes revenue based upon expedition days earned. Guest cancellation fees are recognized as tour revenues at the time of the cancellation. Revenues from the sale of additional goods and services rendered onboard are recognized upon purchase.

 

Earnings per Common Share

 

Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common shares outstanding and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the dilutive incremental common shares issuable upon the exercise of stock options (if such option is an equity instrument, using the treasury stock method). For the three and nine months ended September 30, 2016, the Company determined, using the treasury method, there were 764,814 and 690,272 dilutive common shares, respectively, related to stock options. For the three and nine months ended September 30, 2015, the Company determined, using the treasury method, there were 1,451,922 and 730,028 dilutive common shares, respectively, related to stock options.

 

As of September 30, 2016, there were 202,091 unvested restricted shares and restricted share units granted to non-employee directors and employees at a weighted-average value of $9.90 per share. The Company determined these shares were anti-dilutive and were not considered in the calculation of diluted weighted average shares outstanding.

 

As of September 30, 2016, 12,040,937 warrants to purchase common stock at a price of $11.50 per share were outstanding. The Company determined these warrants were anti-dilutive and were not considered in the calculation of diluted weighted average shares outstanding.

 

On July 8, 2015, as a result of the mergers, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-40-45 and related to the reverse merger treatment and recapitalization, all historical weighted average common shares were adjusted by the exchange ratios established by the merger agreement.

 

 

For the three and nine months ended September 30, 2016 and 2015, the Company calculated earnings per share in accordance with FASB ASC 260 and 805-40-45 as follows:

 

(In thousands, except share and per share data)		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
Net income attributable to Lindblad for basic and diluted earnings per share		$	7,418			$	4,416			$	13,539			$	20,184
Weighted average shares outstanding: Total weighted average shares outstanding, basic			45,776,443				45,004,393				45,639,608				44,814,354
Effect of dilutive securities:
Assumed exercise of stock options, treasury method			764,814				1,451,922				690,272				730,028
Total weighted average shares outstanding, diluted			46,541,257				46,456,315				46,329,880				45,544,382
Weighted average shares  outstanding
Basic			45,776,443				45,004,393				45,639,608				44,814,354
Diluted			46,541,257				46,456,315				46,329,880				45,544,382
Earnings per share attributable to Lindblad
Basic		$	0.16			$	0.10			$	0.30			$	0.45
Diluted		$	0.16			$	0.10			$	0.29			$	0.44

 

As of September 30, 2016, there were 45,968,480 shares outstanding. The Company is authorized to issue 200,000,000 shares of common stock, par value $0.0001, and 1,000,000 shares of preferred stock, par value $0.0001. The Company’s Board of Directors and stockholders approved a 2015 Long-Term Incentive Plan (the “2015 Plan”), which includes the authority to issue up to 2,500,000 shares of Lindblad’s common stock under the 2015 Plan. As of September 30, 2016, options to purchase an aggregate of 2,130,848 shares of the Company’s common stock with a weighted average exercise price of $2.57 per share were outstanding (including options assumed in the mergers) and 2,066,188 common shares were available for award under the 2015 Plan. In 2016, the Company’s Board of Directors and stockholders approved a new equity incentive plan (the “2016 CEO Share Allocation Plan”), which includes the authority to issue up to 1,000,000 shares of Lindblad’s common stock that are contributed to the Company by its CEO under the 2016 CEO Share Allocation Plan.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with an original maturity of three months or less, as well as deposits in financial institutions, to be cash and cash equivalents.

 

Concentration of Credit Risk

 

The Company maintains cash in several financial institutions in the U.S. and other countries which, at times, may exceed the federally insured limits. Accounts held in the U.S. are guaranteed by the Federal Deposit Insurance Corporation up to certain limits. The Company has not experienced any losses in such accounts. As of September 30, 2016 and December 31, 2015, the Company’s cash held in financial institutions outside of the U.S. amounted to $6.8 million and $3.9 million, respectively.

 

 

Restricted Cash and Marketable Securities

 

Included in “Restricted cash and marketable securities” on the accompanying condensed consolidated balance sheets are restricted cash and marketable securities, consisting of six-month certificates of deposit and short-term investments. Restricted cash and marketable securities consist of the following:

 

		As of
		September 30,				December 31,
(In thousands)		2016				2015
Restricted cash and marketable securities:
Credit negotiation and credit card processor reserves		$	5,030			$	5,030
Federal Maritime Commission escrow			3,911				2,233
Certificates of deposit and other restricted securities			1,426				1,197
Total restricted cash and marketable securities		$	10,367			$	8,460

 

The amounts held in restricted cash and marketable securities represent principally funds required to be held in certificates of deposit by certain vendors and regulatory agencies and are classified as restricted assets since such amounts cannot be used by the Company until the restrictions are removed by those vendors and regulatory agencies. Interest income is recognized when earned.

 

The Company has classified marketable securities, principally money market funds, as trading securities which are recorded at market value. Unrealized gains and losses are included in current operations. Gains and losses on the disposition of securities are recognized by the specific identification method in the period in which they occur.

 

In order to operate guest tour expedition vessels from U.S. ports, the Company is required to post a performance bond with the Federal Maritime Commission or escrow all unearned guest deposits plus an additional 10% in restricted accounts. To satisfy this requirement, the Company entered into an agreement with a financial institution to escrow all unearned guest revenues collected for sailings from U.S. ports.

 

A $5.0 million cash reserve as of September 30, 2016 and December 31, 2015 is required for credit card deposits by third-party credit card processors. The above arrangements are included in restricted cash and marketable securities on the accompanying condensed consolidated balance sheets.

 

Amounts in the escrow accounts include cash, certificates of deposit and marketable securities. Cost of these short-term investments approximates fair value.

 

Inventories and Marine Operating Supplies

 

Inventories consist primarily of gift shop merchandise and other items for resale and are stated at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method.

 

Marine operating supplies consist primarily of fuel, provisions, spare parts, items required for maintenance, and supplies used in the operation of marine expeditions. Marine operating supplies are stated at the lower of cost or net realizable value. Cost is determined using the first-in first-out method.

 

Property and Equipment, Net

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization were computed using the straight line method over the estimated useful lives of the assets, as follows:

 

		Years
Vessels and vessel improvements			15-25
Furniture, vehicles and equipment			5
Computer hardware and software			5
Leasehold improvements, including expedition sites and port facilities			Shorter of lease term or related asset life

 

 

The ship-based tour and expedition industry is very capital intensive and as of September 30, 2016 and December 31, 2015, the Company owned and operated six vessels and has two new coastal vessels under construction and one purchased vessel under renovation. Therefore, the Company has a capital program that it develops for the improvement of its vessels, expedition sites and for asset replacements in order to enhance the effectiveness and efficiency of its operations; comply with, or exceed all relevant legal and statutory requirements related to health, environment, safety, security and sustainability; and gain strategic benefits or provide newer improved product innovations to its guests.

 

Vessel and site improvement costs that add value to the Company’s vessels and expedition sites, such as those discussed above, are capitalized to the vessels and site improvements and depreciated over the shorter of the improvements or the vessel’s estimated remaining useful life, while costs of repairs and maintenance, including minor improvement costs and drydock expenses, are charged to expense as incurred and included in other vessels operating expenses. Drydock costs primarily represent planned major maintenance activities that are incurred when a vessel is taken out of service for scheduled maintenance. For U.S. flagged ships, the statutory requirement is an annual docking and U.S. Coast Guard inspections, normally conducted in drydock. Internationally flagged ships have scheduled dockings approximately every 12 months, for a period of up to three to six weeks.

 

For the nine months ended September 30, 2016, the Company had $50.6 million in capital expenditures, which includes capitalized interest, added to property and equipment, net which included $26.9 million for the purchase and renovation of its National Geographic Endeavour II, formerly the Via Australis, and $20.1 million for the two newbuild coastal vessels. The Company began to capitalize interest in January 2016 for its two newbuild coastal vessels and its renovation improvements to the National Geographic Endeavour II under accounting guidance in ASC 835-20, which requires companies to capitalize interest cost incurred during the construction of assets. The capitalized interest has been and will continue to be added to the historical cost of the assets and depreciate over the useful lives. For the nine months ended September 30, 2016, the Company recognized $0.9 million in capitalized interest in property and equipment, net on the accompanying condensed consolidated balance sheet.

 

Goodwill and Other Intangible Assets

 

Goodwill and other intangible assets include the cost of the acquired business in excess of the fair value of the tangible net assets recorded in connection with the acquisition of Natural Habitat (see Note 1 – Business). SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), requires the Company to assess goodwill for impairment annually or more frequently if a triggering event occurs. For goodwill, the Company’s policy is to assess for impairment during each fiscal year’s third quarter. The Company’s assessment for impairment utilized a discounted cash flow analysis and comparative market multiples to determine the fair value of its business for comparison to its corresponding book value. The Company tested goodwill for the Natural Habitat segment as of September 30, 2016 and determined there was no impairment.

 

The Company has recorded book goodwill for which there is no tax basis and is therefore not tax deductible.

 

Other intangible assets include tradenames and customer lists. Tradenames are words, symbols, or other devices used in trade or business to indicate the source of products and to distinguish it from other products and are registered with government agencies and are protected legally by continuous use in commerce. Customer lists are established relationships with existing customers that resulted in repeat purchases and customer loyalty. Based on the Company’s analysis, amortization of the tradenames and customer lists was computed using the estimated useful lives of 15 and 5 years, respectively. Upon the occurrence of a triggering event, the assessment of possible impairment of the Company’s other intangible assets is based on the Company’s ability to recover the carrying value of its asset, which is determined by using the asset’s estimated undiscounted future cash flows. If these estimated undiscounted future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the excess, if any, of the asset’s carrying value over its estimated fair value. A significant amount of judgment is required in estimating the future cash flows and fair values of its tradenames and customer lists.

 

As of September 30, 2016, goodwill and other intangible assets, net of amortization, consisted of $22.1 million in goodwill, $3.0 million in customer lists and $2.8 million in tradenames.

 

 

Long-Lived Assets

 

The Company reviews its long-lived assets, principally its vessels and operating rights, for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be fully recoverable. Upon the occurrence of a triggering event, the assessment of possible impairment is based on the Company’s ability to recover the carrying value of its asset, which is determined by using the asset’s estimated undiscounted future cash flows. If these estimated undiscounted future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the excess, if any, of the asset’s carrying value over its estimated fair value. A significant amount of judgment is required in estimating the future cash flows and fair values of its vessels and operating rights.

 

As of September 30, 2016 and December 31, 2015, there was no triggering event and the Company did not record an impairment of its long-lived assets. In the first quarter of 2016, the Company reviewed the remaining useful life of the National Geographic Endeavour, which is expected to be replaced by the National Geographic Endeavour II in the fourth quarter of 2016. The evaluation of the National Geographic Endeavour’s useful life as of December 31, 2015 indicated a shorter remaining useful life of less than one year versus the previous estimated remaining useful life of seven years. As a result, in the first quarter of 2016, the Company began accelerating the depreciation in order to fully depreciate the asset by the end of the fourth quarter of 2016. The Company does not expect any residual value for the National Geographic Endeavour after the end of the fourth quarter of 2016.

 

Fair Value Measurements and Disclosure

 

The Company applies ASC 820, “Fair Value Measurements and Disclosures,” which expands disclosures for assets and liabilities that are measured and reported at fair value on a recurring basis. Fair value is defined as an exit price, representing the amount that would be received upon the sale of an asset or payment to transfer a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. A three-tier fair value hierarchy is used to prioritize the inputs in measuring fair value as follows:

 

Level 1	Quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at measurement date.
Level 2	Quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable, either directly or indirectly. Fair value is determined through the use of models or other valuation methodologies.
Level 3	Significant unobservable inputs for assets or liabilities that cannot be corroborated by market data. Fair value is determined by the reporting entity’s own assumptions utilizing the best information available, and includes situations where there is little market activity for the investment.

 

The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to the short-term nature of these instruments.

 

The carrying value of long-term debt approximates fair value given that the terms of the agreement were comparable to the market as of September 30, 2016. As of September 30, 2016 and December 31, 2015, the Company had no other liabilities that were measured at fair value on a recurring basis.

 

The asset’s or liability’s fair value measurement within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement.

 

Level 3 financial liabilities consist of obligations for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. Changes in fair value measurements categorized within Level 3 of the fair value hierarchy are analyzed each period based on changes in estimates or assumptions and recorded as appropriate.

 

 

Income Taxes

 

The Company is subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which it operates. Significant management judgement is required in projecting ordinary income to determine the Company’s estimated effective tax rate.

 

The Company accounts for income taxes using the asset and liability method, under which it recognizes deferred income taxes for the tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities, as well as for tax loss carryforwards and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recoverable or settled. The Company provides a valuation allowance against deferred tax assets if, based upon the weight of available evidence, the Company does not believe it is “more-likely-than-not” that some or all of the deferred tax assets will be realized. The Company will continue to evaluate the deferred tax asset valuation allowance balances in all of our foreign and U.S. companies to determine the appropriate level of valuation allowances.

 

The Company is subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which it operates. The Company regularly assesses the potential outcome of current and future examinations in each of the taxing jurisdictions when determining the adequacy of the provision for income taxes. The Company has only recorded financial statement benefits for tax positions which it believes reflect the “more-likely-than-not” criteria of FASB’s authoritative guidance on accounting for uncertainty in income taxes, and it has established income tax reserves in accordance with this guidance where necessary. As of September 30, 2016 and December 31, 2015, the Company had a liability for unrecognized tax benefits of $0.7 million and $0.7 million, respectively, which was included in other long-term liabilities on the Company’s condensed consolidated balance sheets. The guidance also discusses the classification of related interest and penalties on income taxes. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense.

 

The Company is subject to tax audits in all jurisdictions for which it files tax returns. Tax audits by their very nature are often complex and can require several years to complete. Currently, there are no U.S. federal, state or foreign jurisdiction tax audits pending. The Company’s corporate U.S. federal and state tax returns from 2013 to 2015 remain subject to examination by tax authorities and the Company’s foreign tax returns from 2011 to 2014 remain subject to examination by tax authorities.

 

Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees, non-employee directors or other service providers in accordance with accounting guidance that requires that awards are recorded at their fair value on the date of grant and are amortized over the service period of the award. The Company recognizes compensation costs on a straight line basis over the requisite service period of the award, which is generally the vesting term of the equity instrument issued. To the extent that an equity award later becomes eligible to be put back to the Company, then the fair value of that award or those exercised shares are transferred out of additional paid-in-capital to a liability account and is thereafter marked-to-market annually to fair value.

 

Redeemable Noncontrolling Interest

 

The Company, in connection with the acquistion of Natural Habitat, recognized a noncontrolling interest and measured it at fair value on the acquisition date according to ASC 805-20-30-1. The Company recognized the noncontrolling interest as a redeemable noncontrolling interest to the extent that the risks and rewards of ownership substantially remain with the noncontrolling interest.

 

Mr. Bressler’s “noncontrolling interest” in the remaining 19.9% interest in Natural Habitat not owned by the Company is subject to a put/call arrangement. The arrangement between the Company and Mr. Bressler was established in order to provide a formal exit opportunity for Mr. Bressler and a path to 100% ownership for the Company. Mr. Bressler has a put option under certain conditions, subject to providing notice by October 31, 2020, that enables him, but does not obligate him, to sell his remaining interest in Natural Habitat on December 31, 2020. The Company has a call option, but not an obligation, with an expiration of December 31, 2025, for which it can buy Mr. Bressler’s remaining interest at a similar fair value measure as Mr. Bressler’s put option.

 

 

These rights to purchase or sell the noncontrolling interest may be at a fixed or variable price, or at fair value, and may be exercisable on a fixed date or any time at some point in the future. The existence of these rights impacts (1) whether separate assets or liabilities should be recognized for these rights, (2) the classification of any minority ownership as a liability, equity or redeemable noncontrolling interest, and (3) the amount of earnings recognized in the financial statements.

 

As the purchase prices indicated similar fair value measures, the put/call arrangement had been struck at fair value and each party is in agreement that the valuation is indicative of fair value, the asset and liability position would be netted and it is expected that the resulting value would be immaterial given the structure of the arrangement. As Mr. Bressler is responsible for the management of Natural Habitat, the risks and rewards of ownership substantially remain with the noncontrolling interest. The existence of the put/call arrangement does not indicate a separate obligation or liability for either party. Based on the existence of redemptive rights by Mr. Bressler, and the existence of risks and rewards of ownership, the noncontrolling interest was recorded separately as a redeemable noncontrolling interest. The put right is not redeemable unless notice is provided as per the requirements of the agreement.

 

Recent Accounting Pronouncements

 

In October 2016, FASB issued Accounting Standards Update (“ASU”) No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory”. The amendment was issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. FASB decided that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. Public business entities should apply the guidance to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

In August 2016, FASB issued ASU No. 2016-15, “Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments” (Topic 230). ASU No. 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. For public business entities, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company adopted this ASU in the third quarter of 2016 and its adoption did not have a material impact to the Company’s condensed consolidated financial statements.

 

In May 2016, FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers – Narrow-Scope Improvements and Practical Expedients” (Topic 606). ASU No. 2016-12 addresses matters raised by the FASB-International Accounting Standards Board Joint Transition Resource Group for Revenue Recognition regarding an entity’s implementation of and transition to Topic 606. The amendments do not change the core principle of the guidance in Topic 606. Instead, the FASB provides clarification regarding specific issues, as follows: (1) satisfying the collectability and other criteria for identifying a contract, (2) presentation of sales taxes and other similar taxes collected from customers, (3) noncash consideration, and (4) transitional guidance regarding modified contracts, completed contracts and accounting change disclosures. Public business entities should apply the guidance similar to Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

In April 2016, FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers – Identifying Performance Obligations and Licensing” (Topic 606). The amendments clarify two aspects of ASU No. 2014-09, “Revenue from Contracts with Customers,” by providing (1) guidance for identifying performance obligations and (2) licensing implementation guidance. Public business entities should apply the guidance similar to Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

In March 2016, FASB issued ASU No. 2016-09, “Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting” (Topic 718). The amendments in this ASU are to significantly reduce the complexity and cost of accounting for excess tax benefits and tax deficiencies related to employee share-based payment transactions, which include restricted stock and stock options. Also, ASU No. 2016-09 requires an entity to run excess tax benefits and deficiencies through its income statement, which in effect eliminates the concept of additional paid-in capital. For public business entities, the amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, including interim periods within those annual periods. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

 

In March 2016, FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers – Principal versus Agent Considerations (Reporting Gross versus Net)” (Topic 606). The amendments clarify implementation guidance of ASU No. 2014-09, “Revenue from Contracts with Customers,” by improving the operability and understandability of principal versus agent considerations. Public business entities should apply the guidance similar to Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

In August 2015, FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date” (Topic 606). The amendments in this ASU defer the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers,” for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606), which supersedes the revenue recognition requirements (Topic 605), “Revenue Recognition,” and most industry-specific guidance. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in the ASU must be applied using one of two retrospective methods and are effective for annual and interim periods beginning after December 15, 2016. Early adoption is not permitted. The Company will evaluate the effects, if any, that adoption of this ASU will have on its condensed consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting standards upon adoption would have a material effect on the accompanying condensed consolidated financial statements.

 

NOTE 3 – LONG-TERM DEBT

 

Note Payable

 

On May 4, 2016, in connection with the Natural Habitat acquisition, Natural Habitat issued an unsecured promissory note to Mr. Bressler with an outstanding principal amount of $2.5 million. The promissory note accrues interest at a rate of 1.44% and matures on December 31, 2020.

 

Credit Facility

 

On May 8, 2015, the Company entered into a credit agreement with Credit Suisse A. G. (“Credit Suisse”) as Administrative Agent and Collateral Agent (“Credit Agreement”) for a $150.0 million facility in the form of a $130.0 million U.S. term loan (the “U.S. Term Loan”) and a $20.0 million Cayman term loan for the benefit of the Company’s foreign subsidiaries (the “Cayman Loan,” and together with the U.S. Term Loan, the “Loans”). The Loans incurred interest at a rate based on an adjusted ICE Benchmark administration LIBO Rate (subject to a floor of 1.00%) plus a spread of 5.50%.

 

 

On July 8, 2015, the Company entered into an amended and restated credit agreement with Credit Suisse as Administrative Agent and Collateral Agent increasing by $25.0 million the U.S. Term Loan to a $155.0 million facility (total facility of $175.0 million excluded $11.0 million in deferred financing costs) (“Amended Credit Agreement”). The Loans bear interest at a rate based on an adjusted ICE Benchmark administration LIBO Rate (subject to a floor of 1.00%) plus a spread of 4.50%. As of September 30, 2016, the interest rate was 5.50%. The Credit Agreement (i) requires the Company to satisfy certain financial covenants as set forth in the Amended Credit Agreement; (ii) limits the amount of indebtedness the Company may incur; (iii) limits the amount the Company may spend in connection with certain types of investments; (iv) requires the delivery of certain periodic financial statements and an operating budget and (v) requires the mortgaged vessels and related inventory to be maintained in good working condition. The U.S. Term Loan and the Cayman Loan both mature on May 8, 2021.

 

On March 7, 2016, the Company entered into a second amended and restated credit agreement with Credit Suisse as Administrative Agent and Collateral Agent (“Restated Credit Agreement”), amending its existing senior secured credit facility with Credit Suisse (“Restated Credit Facility”). The Restated Credit Facility provides for the Company’s existing $175.0 million senior secured first lien term loan facility and a new $45.0 million senior secured incremental revolving credit facility, which includes a $5.0 million letter of credit subfacility (“Revolving Credit Facility”). The Company’s obligations under the Restated Credit Facility are secured by substantially all the assets of the Company. The Revolving Credit Facility matures on May 8, 2020.

 

Borrowings under the Loans will continue to bear interest at an adjusted ICE Benchmark administration LIBO Rate (subject to a floor of 1.00%) plus a spread of 4.50%. Borrowings under the Revolving Credit Facility will bear interest at an adjusted ICE Benchmark administration LIBO Rate plus a spread of 4.00%, or, at the option of the Company, an alternative base rate plus a spread of 3.00%. The Company is also required to pay a 0.50% annual commitment fee on undrawn amounts under the Revolving Credit Facility.

 

The Restated Credit Agreement contains the same financial and operational covenants as the Amended Credit Agreement. As of September 30, 2016, the Company was in compliance with the financial covenants.

 

Borrowings under the Revolving Credit Facility will be used for general corporate and working capital purposes and related fees and expenses. As of September 30, 2016, the Company had no borrowings under the Revolving Credit Facility.

 

For the three months ended September 30, 2016 and 2015, total debt discount and deferred financing costs charged to interest expense was $0.5 million and $0.5 million, respectively. For the nine months ended September 30, 2016 and 2015, total debt discount and deferred financing costs charged to amortization and interest expense was $1.7 million and $2.7 million, respectively.

 

Long-Term Debt Outstanding

 

As of September 30, 2016 and December 31, 2015, the following long-term debt was outstanding:

 

		As of
		September 30, 2016												December 31, 2015
						Discount												Discount
						and												and
						Deferred				Balance,								Deferred				Balance,
						Financing				net of								Financing				net of
(In thousands)		Principal				Costs, net				discount				Principal				Costs, net				discount
Note payable		$	2,525			$	-			$	2,525			$	-			$	-			$	-
Credit Facility			172,813				(9,568	)			163,245				174,125				(9,682	)			164,443
Total long-term debt			175,338				(9,568	)			165,770				174,125				(9,682	)			164,443
Less current portion			(1,750	)			-				(1,750	)			(1,750	)			-				(1,750	)
Total long-term debt, non-current		$	173,588			$	(9,568	)		$	164,020			$	172,375			$	(9,682	)		$	162,693

 

 

NOTE 4 – COMMITMENTS AND CONTINGENCIES

 

Lease Commitments

 

The Company leases office space and equipment under long-term leases, which are classified as operating leases.

 

Rent expense was $0.3 million and $0.8 million for the three and nine months ended September 30, 2016, respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2015, respectively. These amounts are recorded within general and administrative expenses on the accompanying condensed consolidated statements of income.

 

Fleet Expansion

 

On December 2, 2015, the Company entered into two separate Vessel Construction Agreements, (collectively, the “Agreements”) with Ice Floe, LLC, a Washington limited liability company doing business as Nichols Brothers Boat Builders (the “Builder”). The Agreements provide for the Builder to construct two new 236-foot 100-passenger cruise vessels at a purchase price of $48.0 million and $46.8 million, respectively, payable monthly based on the value of the work performed through the end of the preceding month. As of September 30, 2016, the Company has spent a total of $30.2 million for the construction of these two coastal vessels.

 

The Builder is required to deliver the vessels in the second quarter of 2017 and the second quarter of 2018, respectively, subject to extension for certain events, such as change orders. The Company may terminate the applicable Agreements in the event the Builder fails to deliver the vessel within 180 days of the applicable due date or the Builder becomes insolvent or otherwise bankrupt. The Agreements also contain customary representations, warranties, covenants, and indemnities.

 

On December 29, 2015, a subsidiary of the Company entered into a Memorandum of Agreement to purchase a ship known as the Via Australis, which was renamed National Geographic Endeavour II. The Company has paid $26.9 million, as of September 30, 2016, for the purchase and renovations of the vessel and reported the vessel in property and equipment, net on the accompanying condensed consolidated balance sheet. The Company expects to complete the renovations and deploy the ship during the fourth quarter of 2016. The Memorandum of Agreement contained customary representations, warranties, covenants and conditions.

 

Royalty Agreement – National Geographic

 

The Company is engaged in an alliance and license agreement with National Geographic, which allows the Company to use the National Geographic name and logo. In return for these rights, the Company is charged a royalty fee. The royalty fee is included within selling and marketing expense on the accompanying condensed consolidated statements of income. The amount is calculated based upon a percentage of certain ticket revenues less travel agent commission, including the revenues received from cancellation fees and any revenues received from the sale of voyage extensions. A voyage extension occurs when a guest extends their trip with pre- or post-voyage hotel nights and is included within tour revenues on the accompanying condensed consolidated statements of income. The royalty expense is recognized at the time of revenue recognition. See Note 2 for a description of the Company’s revenue recognition policy. Royalty expense for the three and nine months ended September 30, 2016 totaled $1.2 million and $3.6 million, respectively, and for the three and nine months ended September 30, 2015 totaled $1.3 million and $3.7 million, respectively.

 

The balances outstanding to National Geographic as of September 30, 2016 and December 31, 2015 are $1.4 million and $1.3 million, respectively, and are included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets.

 

 

Royalty Agreement – World Wildlife Fund

 

Natural Habitat has a license agreement with World Wildlife Fund, which allows it to use the WWF name and logo. In return for these rights, Natural Habitat is charged a royalty fee and a fee based on annual gross sales. The fees are included within selling and marketing expense on the accompanying condensed consolidated statements of income. The annual royalty payment and gross sales fees are paid on a quarterly basis. For each of the three and nine months ended September 30, 2016, these fees were $0.2 million and $0.3 million, respectively.

 

Charter Commitments

 

From time to time, the Company enters into agreements to charter vessels onto which it holds its tours and expeditions. Future minimum payments on its charter agreements are as follows:

 

For the Years Ended December 31,		Amount
		(In thousands)
2016 (three months)		$	2,724
2017			8,793
2018			6,154
2019			1,482
Total		$	19,153

 

Legal Proceedings

 

The Company is involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. The Company has protection and indemnity insurance that would be expected to cover any damages.

 

NOTE 5 – EMPLOYEE BENEFIT PLAN

 

The Company has a 401(k) profit sharing plan and trust for its employees. The Company matches 25% of employee contributions up to an annual maximum of $1,800 for 2016 and 2015. For the three months ended September 30, 2016 and 2015, the Company’s benefit plan contribution amounted to $47.6 thousand and $35.7 thousand, respectively. For the nine months ended September 30, 2016 and 2015, the Company’s benefit plan contribution amounted to $0.2 million and $0.1 million, respectively. The benefit plan contribution is recorded within general and administrative expenses on the accompanying condensed consolidated statements of income.

 

NOTE 6 – STOCKHOLDERS’ EQUITY

 

Capital Stock

 

The Company has a total of 201,000,000 authorized shares of capital stock, consisting of 1,000,000 shares of preferred stock, $0.0001 par value and 200,000,000 shares of common stock, $0.0001 par value.

 

Stock and Warrant Repurchase Plan

 

In November 2015, the Company’s Board of Directors approved a $20.0 million stock and warrant repurchase plan (“Repurchase Plan”) and in November 2016, the Board of Directors approved an increase of $15.0 million for a total of $35.0 million. This Repurchase Plan authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants through open market repurchases in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, and/or in privately negotiated transactions based on market and business conditions, applicable legal requirements and other factors. Any shares and warrants purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of the Company’s Board of Directors at any time. In January 2016, the Company repurchased 1,967,445 warrants for $5.4 million and thus far has repurchased a total of 4,059,063 warrants for $10.9 million pursuant to the Repurchase Plan.

 

 

2016 CEO Share Allocation Plan

 

On April 8, 2016, the Company’s Board of Directors adopted the “2016 CEO Share Allocation Plan,” and at the 2016 Annual Meeting of Stockholders on June 2, 2016, the Company’s stockholders approved the 2016 CEO Share Allocation Plan, pursuant to which the Company will grant awards covering up to 1,000,000 shares of the Company’s common stock in the form of restricted stock, restricted stock units, and/or other stock- or cash-based awards to eligible employees and other service providers of the Company. The 2016 CEO Share Allocation Plan was adopted in connection with a contribution agreement (the “Contribution Agreement”) that the Company entered into with Sven-Olof Lindblad (“Mr. Lindblad”), Chief Executive Officer and President of the Company, pursuant to which Mr. Lindblad will transfer up to 1,000,000 shares from his holdings of the Company’s common stock (i.e., an equivalent number of shares as is reserved for issuance under the 2016 CEO Share Allocation Plan) (the “Contribution Shares”) to the Company as a contribution to the capital of the Company. Mr. Lindblad will not receive any consideration in exchange for the Contribution Shares. However, as a condition to the contribution of any Contribution Shares, the Company must grant awards under the 2016 CEO Share Allocation Plan, such that the number of Contribution Shares that Mr. Lindblad actually contributes to the Company will equal the number of shares corresponding to awards granted under the plan. The contribution of the Contribution Shares by Mr. Lindblad to the Company will effectively reduce the number of shares of the Company’s common stock that are outstanding by the same number of shares that would be issued under the 2016 CEO Share Allocation Plan (or a lesser number in the event awards are settled in cash). Such contributions will be effective as of the date the Company grants corresponding awards under the 2016 CEO Share Allocation Plan. The administrator may amend, suspend or terminate the 2016 CEO Share Allocation Plan at any time.

 

Restricted Shares and Restricted Share Units

 

Restricted shares are shares of stock granted to an employee, non-employee director or other service providers for which sale is prohibited for a specified period of time. Restricted share units (“RSUs”) represent a promise to deliver shares to the employee, non-employee director or other service providers at a future date if certain vesting conditions are met. The difference between RSUs and restricted shares is primarily the timing of the delivery of the underlying shares. A company that grants RSUs does not deliver the shares to the employee, non-employee director or other service providers until the vesting conditions are met.

 

Under the 2015 Plan, four non-employee directors were granted 26,640 restricted shares and one non-employee director was granted 6,660 RSUs on January 4, 2016. There were 6,660 restricted shares or RSUs granted to each non-employee director, which vest in three installments on August 8, 2016, 2017 and 2018 and are not subject to any performance-based conditions.

 

Under the 2015 Plan, one non-employee director was granted 1,864 restricted shares on May 11, 2016. These restricted shares vest in three installments on August 8, 2016, 2017 and 2018 and are not subject to any performance-based conditions.

 

Under the 2015 Plan, an employee was granted 90,000 restricted shares on May 26, 2016. These restricted shares vest in four installments on May 26, 2017, 2018, 2019 and 2020 and are not subject to any performance-based conditions.

 

Under the 2015 Plan, five non-employee directors were granted 40,540 restricted shares and one non-employee director was granted 8,108 RSUs on August 8, 2016. There were 8,108 restricted shares or RSUs granted to each non-employee director, which vest in three installments on August 8, 2017, 2018 and 2019 and are not subject to any performance-based conditions.

 

Under the 2015 Plan, an employee was granted 40,000 restricted shares on September 6, 2016. These restricted shares vest in four installments on September 6, 2017, 2018, 2019 and 2020 and are not subject to any performance-based conditions.

 

The amortization of the restricted shares and RSUs was $0.1 million and $0.2 million for the three and nine months ended September 30, 2016, respectively. As of September 30, 2016, the unamortized value of restricted shares and RSUs was $1.9 million and is expected to be expensed over a period of 4.0 years.

 

 

The following table is a summary of restricted stock and RSU activity under the Company’s 2015 Plan:

 

						Weighted
		Restricted				Average
		Shares and				Grant Date
			RSU’s				Fair Value
Restricted shares and RSUs awarded as of December 31, 2015			-			$	-
Granted			213,812				9.97
Vested			(11,721	)			11.20
Forfeited			-				-
Restricted shares and RSUs awarded as of September 30, 2016			202,091			$	9.90

 

Stock Options

 

The fair value of stock options is amortized on a straight line basis over the requisite service periods of the respective awards. Stock-based compensation expense related to stock options was $1.2 million for the three months ended September 30, 2016 and 2015, respectively. Stock-based compensation expense related to stock options was $3.8 million and $3.6 million for the nine months ended September 30, 2016 and 2015, respectively. Stock compensation expense is included in general and administrative expenses on the accompanying condensed consolidated statements of income. As of September 30, 2016, the unamortized value of options was $6.9 million and is expected to be expensed over a weighted average period of 1.3 years.

 

During January 2016, 638,223 option shares vested and were exercised. The option shares were issued using cashless transactions, approved by management, and were issued in exchange for the required exercise proceeds and payment of any related payroll withholding taxes. Using a weighted average fair value of $10.68 per share and an exercise price of $1.76 per share, 105,206 shares were withheld by the Company to provide the $1.1 million in exercise proceeds required for the transactions. In addition, 252,670 shares were withheld by the Company to provide the $2.7 million in proceeds required to pay the payroll withholding taxes for the transactions. The net balance of the option shares of 280,347 shares were issued as a result of the transactions.

 

The following table is a summary of stock options activity under the Company’s legacy 2012 Incentive Stock Plan assumed in connection with the mergers and its 2015 Plan:

 

		Shares				Weighted Average Exercise Price				Weighted Average Contractual Life (Years)				Aggregate Intrinsic Value
Options outstanding as of December 31, 2015			2,849,071			$	2.69				3.7			$	23,992,814
Granted			220,000				9.63
Exercised			(638,223	)			1.76
Forfeited			(300,000	)			10.58
Options outstanding as of September 30, 2016			2,130,848			$	2.57				3.1			$	13,695,340
Vested and expected to vest after September 30, 2016			2,130,848			$	2.57				3.1			$	13,695,340
Exercisable as of December 31, 2015			-			$	-
Vested			638,223				1.76
Exercised			(638,223	)			1.76
Forfeited			-				-
Exercisable as of September 30, 2016			-			$	-

 

 

NOTE 7 – SEGMENT INFORMATION

 

During the second quarter of 2016, the Company completed its acquisition of Natural Habitat. As a result of the acquisition, the Company updated its reporting information and its operating segments to add Natural Habitat as a separate operating and reporting segment.

 

As of September 30, 2016, total assets for the Lindblad segment and Natural Habitat segment were $356.4 million and $45.5 million, respectively. As of September 30, 2016, the $28.0 million in goodwill and other intangibles on the accompanying condensed consolidated balance sheet were all related to the Natural Habitat segment. For the three and nine months ended September 30, 2016, tradename and customer list amortization of $0.2 million and $0.4 million, respectively, was related to the Natural Habitat segment.

 

The Company evaluates the performance of its business segments based largely on tour revenues, operating income (loss), and Adjusted EBITDA results of the segments without allocating other income and expenses, net, income taxes, and interest expense, net. For the three and nine months ended September 30, 2016 and 2015, the following operating results were:

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(In thousands)		2016				2015				2016				2015
Tour revenues:
Lindblad		$	56,175			$	58,561			$	165,936			$	163,513
Natural Habitat			14,599				-				20,282				-
Total tour revenues		$	70,774			$	58,561			$	186,218			$	163,513
Operating income (loss):
Lindblad		$	9,863			$	5,759			$	19,038			$	16,143
Natural Habitat			306				-				(488	)			-
Total operating income		$	10,169			$	5,759			$	18,550			$	16,143

 

 

Item 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis addresses material changes in the financial condition and results of operations of the Company for the periods presented. This discussion and analysis should be read in conjunction with its unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”), as well as its audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2016.

 

Cautionary Note Regarding Forward-Looking Statements

 

Any statements in this Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are “forward-looking statements” as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expects,” “estimates,” “projects,” “positioned,” “strategy,” “outlook” and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to:

 

	●	changes adversely affecting the business in which we are engaged;
	●	management of our growth and our ability to execute on our planned growth;
	●	general economic conditions;
	●	our business strategy and plans;
	●	compliance with laws and regulations;
	●	compliance with the financial and/or operating covenants in our Restated Credit Agreement;
	●	adverse publicity regarding the cruise industry in general;
	●	loss of business due to competition;
	●	the result of future financing efforts;
	●	the inability to meet revenue and projections; and
	●	those risks discussed in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.

 

Unless the context otherwise requires, in this Form 10-Q, “Company,” “we,” “us,” “our,” and “ours” refer to Lindblad Expeditions Holdings, Inc. and its consolidated subsidiaries.

 

Business Overview

 

We provide expedition cruising and adventure travel experiences that include itineraries that feature up-close encounters with wildlife and nature, history and culture and promote guest empowerment and interactivity. Our mission is offering life-changing adventures on all seven continents and pioneering innovative ways to allow our guests to connect with exotic and remote places.

 

We currently operate a fleet of six owned expedition ships and four seasonal charter vessels under the Lindblad brand. In addition, we have an 80.1% ownership interest in Natural Habitat, Inc. (“Natural Habitat”), an adventure travel and ecotourism company based in Colorado.

 

 

Under the Lindblad brand, we have two new 236-foot, 100-passenger cruise vessels being constructed with delivery expected in the second quarter of 2017 and the second quarter of 2018, respectively, as well as a newly acquired vessel which will replace one of our six owned expedition ships in the fourth quarter of 2016. Our expedition ships are customized, nimble and intimately-scaled vessels that are able to venture where larger cruise ships cannot, thus allowing us to offer truly authentic, up-close experiences in the planet’s wild and remote places and capitals of culture. Many of these expeditions involve travel to remote places with limited infrastructure and ports (such as Antarctica and the Arctic) or places that are best accessed by a ship (such as the Galápagos, Alaska, Baja’s Sea of Cortez, Costa Rica and Panama), and foster active engagement by guests. Each expedition ship is designed to be comfortable and inviting, while being fully equipped with state-of-the-art tools for in-depth exploration.

 

With the acquisition of Natural Habitat, we have expanded our land-based offerings. Natural Habitat offers eco-conscious expeditions from Antarctica to Zambia with a multitude of adventures in between. Natural Habitat’s itineraries include world-class polar bear tours in Churchill, Canada, Alaskan grizzly bear adventures, small-group Galápagos tours and African safaris. In addition to its land offerings, Natural Habitat offers select itineraries on seven small chartered vessels for parts of the year. Since 2003, Natural Habitat has partnered with the World Wildlife Fund (“WWF”) to offer conservation travel, sustainable travel that directly protects nature. This agreement with WWF extends into 2023.

 

We have a strategic business alliance with the National Geographic Society (“National Geographic”) founded on a shared interest in exploration, research, technology, and conservation. This relationship includes a co-selling, co-marketing and branding arrangement whereby our owned vessels carry the National Geographic name and National Geographic sells our expeditions through its internal travel division. We collaborate with National Geographic on voyage planning to enhance the guest experience by having National Geographic experts, including photographers, writers, marine biologists, naturalists, field researchers, and film crews, join our expeditions. Guests have the ability to interface with these experts through lectures, excursions, dining, and other experiences throughout their voyage.

 

Our offerings appeal to a wide range of travelers, both individuals and families, but affluent individuals in the U.S. aged 50 years or older represent our largest segment. By providing such offerings, which we work continuously to innovate and further elevate, we have been able to achieve and maintain premium pricing in the market instead of pursuing the type of discounting in which most large cruise lines that are focused on the broader market engage. Our product offering, value proposition and differentiated pricing approach support our high net yields and occupancy rates.

 

The key components of our business strategy are to deliver exceptional guest experiences, maximize occupancy levels, continually optimize pricing methodologies, effectively manage itinerary offerings to meet guest demand, maximize and grow net yields, elevate brand awareness and loyalty, and expand and operate the business in a safe, prudent and disciplined manner.

 

We deploy chartered vessels for various seasonal offerings and continually seek to optimize our charter fleet to balance our inventory with demand and maximized yields. We use our charter inventory as a mechanism to both increase travel options of our existing and prospective guests and also to test demand for certain areas and seasons to understand the potential for longer term deployments and additional vessel needs. In December 2016, we are expanding our travel offerings with new expeditions in Cuba aboard the Panorama II, which will be the fifth chartered vessel in our Lindblad fleet.

 

We continually evaluate a range of strategies for expansion of guest capacity. We consider closely the expected return on invested capital and the range of possibilities, such as a newbuild program, adding selected charters and the acquisition of existing ships or small operators. In December 2015, we signed a definitive agreement for the purchase of the Via Australis, which was renamed National Geographic Endeavour II, to be used in our operations in the Galápagos Islands. We paid a deposit of $1.8 million on January 4, 2016 and paid the balance of $16.2 million on April 25, 2016 when we took possession of the ship. We have paid $8.9 million in renovation costs since taking possession of the ship. Following this renovation, we expect to deploy the ship during the fourth quarter of 2016. The National Geographic Endeavour II will replace the National Geographic Endeavour.

 

 

In December 2015, we executed definitive agreements for the construction of two new coastal vessels at a purchase price of $48.0 million and $46.8 million, respectively. The first vessel, which has been named the National Geographic Quest, is expected to be delivered in the second quarter of 2017 and will sail in Alaska and British Columbia during the summer of 2017. The second newbuild vessel is expected to be delivered in the second quarter of 2018. These 236-foot vessels are expected to have capacity of approximately 100 guests each and management considers this investment to be an important step to meet increasing demand for our offerings. The newbuild process will expose us to certain risks typically associated with new ship construction, which we are prepared to manage through detailed planning and close monitoring by our internal marine team.

 

We maintain our fleet in accordance with applicable regulations, international conventions and insurance requirements. This includes regularly scheduled maintenance, periodic inspections, drydocking, and overhaul. In addition, renovations and replacements of various vessel elements are part of the ongoing process of maintaining the vessels to a high standard. On a year-to-year basis, increases in maintenance expense for the current owned fleet are anticipated to grow in line with inflation.

 

Due to the specific geographies in which we operate and the cost of providing access to fuel in our remote destinations, we have historically not experienced significant fluctuations in fuel costs with changes in world fuel commodity prices. However, the continued downward pressure on fuel prices has become evident in all areas of the world in which we operate. Fuel costs represented 2.9% and 3.1% of our Lindblad segment tour revenues for the three and nine months ended September 30, 2016, respectively, and 3.6% and 4.2% of tour revenues for the three and nine months ended September 30, 2015, respectively. We have not hedged our fuel purchases historically, but we continue to evaluate a hedging strategy to manage cash flows related to fuel prices.

 

Similar to others in the industry, we have historically operated with a meaningful working capital deficit. This historical deficit is mainly attributable to the fact that, under our business model, a vast majority of guest ticket receipts are collected in advance of the applicable sailing or departure date. These advance passenger receipts remain a current liability until the sailing date and the cash generated from them is used interchangeably with cash on hand from other cash from operations. As a result of the proceeds from the Restated Credit Facility (see Note 3 – Long-Term Debt) and the merger in July 2015, we had net working capital surpluses of $79.6 million and $130.0 million as of September 30, 2016 and December 31, 2015, respectively.

 

The discussion and analysis of our financial condition and results of operations is organized as follows:

 

	●	a review of our critical accounting policies and of our financial presentation, including the descriptions of certain line items and key operational and financial metrics;
	●	a results and comparable discussion of our results of operations for the three and nine months ended September 30, 2016 and 2015; and
	●	a discussion of liquidity and capital resources.

 

Financial Presentation

 

Description of Certain Line Items

 

Tour revenues

 

Tour revenues consist of the following:

 

	●	Guest ticket revenues recognized from the sale of guest tickets; and
	●	Other tour revenues from the sale of pre- or post-expedition excursions, hotel accommodations, and land-based expeditions; air transportation to and from the ships, goods and services rendered onboard that are not included in guest ticket prices, trip insurance, and cancellation fees.

 

Cost of tours

 

Cost of tours includes the following:

 

	●	Direct costs associated with revenues, including cost of pre- or post-expedition excursions, hotel accommodations, and land-based expeditions, air and other transportation expenses, and cost of goods and services rendered onboard;
	●	Payroll costs and related expenses for shipboard and expedition personnel;
	●	Food costs for guests and crew, including complimentary food and beverage amenities for guests;
	●	Fuel costs and related costs of delivery, storage and safe disposal of waste; and
	●	Other tour expenses, such as land costs, port costs, repairs and maintenance, equipment expense, drydock, ship insurance, and charter hire costs.

 

 

Selling and marketing

 

Selling and marketing expenses include commissions and a broad range of advertising and promotional expenses.

 

General and administrative

 

General and administrative expenses include the cost of shoreside vessel support, reservations and other administrative functions, including salaries and related benefits, credit card commissions, professional fees and rent.

 

Operational and Financial Metrics

 

We use a variety of operational and financial metrics, including non-GAAP financial measures, such as Adjusted EBITDA, Net Yields, and Net Cruise Costs, to enable us to analyze our performance and financial condition. We utilize these financial measures to manage our business on a day-to-day basis and believe that they are the most relevant measures of performance. Some of these measures are commonly used in the cruise and tourism industry to evaluate performance. We believe these non-GAAP measures provide expanded insight to assess revenue and cost performance, in addition to the standard GAAP-based financial measures. There are no specific rules or regulations for determining non-GAAP measures, and as such, they may not be comparable to measures used by other companies within the industry.

 

The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. You should read this discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and the related notes thereto also included within.

 

Adjusted EBITDA is net income (loss) excluding depreciation and amortization, net interest expense, other income (expense), income tax benefit (expense), and other supplemental adjustments. Other supplemental adjustments include certain non-operating items such as stock-based compensation, the National Geographic fee amortization, merger-related expenses, and acquisition-related expenses. We believe Adjusted EBITDA, when considered along with other performance measures, is a useful measure as it reflects certain operating drivers of the business, such as sales growth, operating costs, selling and administrative expense, and other operating income and expense. We believe Adjusted EBITDA can provide a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of our financial performance and prospects for the future. While Adjusted EBITDA is not a recognized measure under GAAP, management uses this financial measure to evaluate and forecast business performance. Adjusted EBITDA is not intended to be a measure of liquidity or cash flows from operations or a measure comparable to net income as it does not take into account certain requirements, such as unearned passenger revenues, capital expenditures and related depreciation, principal and interest payments, and tax payments. Our use of Adjusted EBITDA may not be comparable to other companies within the industry. Management compensates for these limitations by using Adjusted EBITDA as only one of several measures for evaluating our business performance. In addition, capital expenditures, which impact depreciation and amortization, interest expense and income tax benefit (expense), are reviewed separately by management.

 

 

The following metrics apply to our Lindblad segment:

 

Adjusted Net Cruise Cost represents Net Cruise Cost adjusted for Non-GAAP other supplemental adjustments which include certain non-operating items such as stock-based compensation, the National Geographic fee amortization, merger-related expenses, and acquisition-related expenses.

 

Available Guest Nights is a measurement of capacity and represents double occupancy per cabin (except single occupancy for a single capacity cabin) multiplied by the number of cruise days for the period. We also record the number of guest nights available on our limited land programs in this definition.

 

Gross Cruise Cost represents the sum of cost of tours plus merger-related expenses, selling and marketing expense, and general and administrative expense.

 

Gross Yield represents tour revenues divided by Available Guest Nights.

 

Guest Nights Sold represents the number of guests carried for the period multiplied by the number of nights sailed within the period.

 

Maximum Guests is a measure of capacity and represents the maximum number of guests in a period and is based on double occupancy per cabin (except single occupancy for a single capacity cabin).

 

Net Cruise Cost represents Gross Cruise Cost excluding commissions and certain other direct costs of guest ticket revenues and other tour revenues.

 

Net Cruise Cost Excluding Fuel represents Net Cruise Cost excluding fuel costs.

 

Net Revenue represents tour revenues less commissions and direct costs of other tour revenues.

 

Net Yield represents Net Revenue divided by Available Guest Nights.

 

Number of Guests represents the number of guests that travel with us in a period.

 

Occupancy is calculated by dividing Guest Nights Sold by Available Guest Nights.

 

Voyages represent the number of ship expeditions completed during the period.

 

Foreign Currency Translation

 

The U.S. dollar is the functional currency in our foreign operations and remeasurement adjustments and gains or losses resulting from foreign currency transactions are recorded as foreign exchange gains or losses in the condensed consolidated statements of income.

 

Seasonality

 

Our tour revenues from the sale of guest tickets are mildly seasonal with demand historically larger in the first and third quarters. The seasonality of our operating results increases due to our vessels being taken out of service for scheduled maintenance or drydocking, which is typically during non-peak demand periods, in the second and fourth quarters. Our drydock schedules are subject to cost and timing differences from year to year due to the availability of shipyards for certain work, drydock locations based on ship itineraries, operating conditions experienced especially in the polar regions, and the applicable regulations of class societies in the maritime industry, which require more extensive reviews periodically. Drydocking impacts operating results by reducing tour revenues and increasing cost of tours.

 

 

Results of Operations – Consolidated

 

In the three months ended September 30, 2016, we generated tour revenues of $70.8 million compared to tour revenues of $58.6 million for the three months ended September 30, 2015, an increase of $12.2 million, or 21%, primarily due to the acquisition of Natural Habitat. Net income was $7.4 million and $4.4 million for the three months ended September 30, 2016 and 2015, respectively, primarily reflecting merger-related expenses in 2015. For the three months ended September 30, 2016, Adjusted EBITDA was $17.4 million compared to $15.8 million for the three months ended September 30, 2015, an increase of $1.6 million driven by a $0.9 million increase at our Lindblad segment and $0.6 million from the acquisition of Natural Habitat.

 

In the nine months ended September 30, 2016, we generated tour revenues of $186.2 million compared to tour revenues of $163.5 million for the nine months ended September 30, 2015, which represents an increase of $22.7 million, or 14%, primarily due to our acquisition of Natural Habitat. Net income was $13.4 million and $20.2 million for the nine months ended September 30, 2016 and 2015, respectively, primarily from higher accelerated depreciation expense for the National Geographic Endeavour, and a decrease related to the 2015 gain on transfer of assets and success fee income, offset by merger costs in 2015. For the nine months ended September 30, 2016, Adjusted EBITDA was $40.2 million compared to $42.1 million for the nine months ended September 30, 2015, primarily reflecting lower contribution of $1.9 million from the Lindblad segment.

 

We reported consolidated tour revenues, cost of tours, operating expenses, operating income, and net income for the three and nine months ended September 30, 2016 and 2015 as shown in the following table:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
(In thousands, except per share data)		2016				2015				2016				2015
Tour revenues		$	70,774			$	58,561			$	186,218			$	163,513
Cost of tours			32,446				25,444				87,111				71,331
Operating expenses			28,159				27,358				80,557				76,039
Operating income			10,169				5,759				18,550				16,143
Net income			7,447				4,416				13,420				20,184
Earnings per share attributable to Lindblad
Basic		$	0.16			$	0.10			$	0.30			$	0.45
Diluted			0.16				0.10				0.29				0.44

 

 

The following table sets forth our consolidated operating data as a percentage of total revenues:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Tour revenues			100.0	%			100.0	%			100.0	%			100.0	%
Cost of tours			45.8	%			43.4	%			46.8	%			43.6	%
Gross profit			54.2	%			56.6	%			53.2	%			56.4	%
Operating expenses:
General and administrative			18.2	%			16.6	%			19.7	%			16.9	%
Selling and marketing			14.4	%			16.2	%			15.7	%			16.4	%
Merger-related expenses			0.0	%			9.4	%			0.0	%			8.1	%
Depreciation and amortization			7.2	%			4.6	%			7.8	%			5.1	%
Total operating expenses			39.8	%			46.8	%			43.2	%			46.5	%
Operating income			14.4	%			9.8	%			10.0	%			9.9	%
Other (expense) income:
(Loss) gain on foreign currency			0.0	%			0.2	%			(0.2	%)			0.0	%
Gain on transfer of assets			0.0	%			0.0	%			0.0	%			4.6	%
Other income, net			(0.1	%)			0.0	%			0.0	%			3.0	%
Interest expense, net			(3.5	%)			(5.0	%)			(4.2	%)			(4.9	%)
Total other (expense) income			(3.6	%)			(4.8	%)			(4.4	%)			2.7	%
Income before income taxes			10.8	%			5.0	%			5.6	%			12.6	%
Income tax expense (benefit)			0.3	%			(2.5	%)			(1.6	%)			0.3	%
Net income			10.5	%			7.5	%			7.2	%			12.3	%

 

The following table outlines the reconciliation to Net income and calculation of consolidated and Adjusted EBITDA for the three and nine months ended September 30, 2016 and 2015. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

 

(In thousands)		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
		2016				2015				2016				2015
Net income		$	7,447			$	4,416			$	13,420			$	20,184
Income tax expense (benefit)			203				(1,481	)			(3,113	)			389
Interest expense, net			2,476				2,948				7,914				8,026
Depreciation and amortization			5,080				2,689				14,523				8,336
Loss (gain) on foreign currency translation			5				(148	)			291				46
Gain on transfer of assets			-				-				-				(7,502	)
Other income, net			38				24				38				(5,000	)
Stock-based compensation			1,359				1,213				3,982				3,641
National Geographic fee amortization			727				670				2,180				670
Acquisition-related expenses			31				-				924				-
Merger-related expenses			-				5,503				-				13,266
Adjusted EBITDA - Consolidated		$	17,366			$	15,834			$	40,159			$	42,056

 

 

Comparison of Three and Nine Months Ended September 30, 2016 to Three and Nine Months Ended September 30, 2015 – Consolidated

 

Tour Revenues

 

Tour revenues for the three months ended September 30, 2016 increased $12.2 million, or 21%, to $70.8 million compared to $58.6 million for the three months ended September 30, 2015. The increase was primarily a result of $14.6 million in added tour revenues from the acquisition of Natural Habitat, partially offset by $2.4 million of lower revenues for the Lindblad segment mainly due to the planned reduction in available guest nights for the owned fleet related to the timing of vessel redeployment, partially offset by price increases due to higher rates and changes in itineraries.

 

Tour revenues for the nine months ended September 30, 2016 increased $22.7 million, or 14%, to $186.2 million compared to $163.5 million for the nine months ended September 30, 2015. The increase was primarily a result of $20.3 million in added tour revenues from the acquisition of Natural Habitat and an increase of $2.4 million at the Lindblad segment mainly from price increases due to higher rates and changes in itineraries, partially offset by lower available guest nights.

 

Cost of Tours

 

Total cost of tours for the three months ended September 30, 2016 increased $7.1 million, or 28%, to $32.5 million compared to $25.4 million for the three months ended September 30, 2015. The increase was primarily a result of $10.2 million in added cost of tours from the acquisition of Natural Habitat, partially offset by a $3.2 million decrease in cost of tours for the Lindblad segment due to lower air and fuel expenses and the reduction in costs related to the lower available guest nights.

 

Total cost of tours for the nine months ended September 30, 2016 increased $15.8 million, or 22%, to $87.1 million compared to $71.3 million for the nine months ended September 30, 2015. The increase was primarily a result of $14.5 million in added cost of tours from the acquisition of Natural Habitat and $1.3 million in added cost of tours at the Lindblad segment due to increased drydock expenses, which were partially offset by a decrease in fuel expenses. The increased drydock expenses were associated with timing differences, as well as changes in vessel deployment.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended September 30, 2016 increased by $3.2 million, or 33%, to $12.9 million compared to $9.7 million for the three months ended September 30, 2015. The increase was primarily a result of $2.5 million in added general and administrative expenses from the acquisition of Natural Habitat and $0.8 million in added personnel and public company costs at the Lindblad segment.

 

General and administrative expenses for the nine months ended September 30, 2016 increased by $9.2 million, or 34%, to $36.7 million compared to $27.5 million for the nine months ended September 30, 2015. The increase was primarily a result of $4.0 million in added general and administrative expenses from the acquisition of Natural Habitat and a $5.2 million increase at the Lindblad segment resulting from $4.3 million in additional personnel and public company costs and $0.9 million in nonrecurring professional fees related to the acquisition of Natural Habitat.

 

Selling and Marketing Expenses

 

Selling and marketing expenses for the three months ended September 30, 2016 increased $0.7 million, or 7%, to $10.2 million compared to $9.5 million for the three months ended September 30, 2015. The increase was primarily a result of $1.3 million in added selling and marketing expenses from the acquisition of Natural Habitat, partially offset by a $0.6 million decline at the Lindblad segment due to $0.3 million decrease in advertising, printing and postage expenses, as well as a $0.3 million decrease in commission expense driven by lower segment tour revenues.

 

 

Selling and marketing expenses for the nine months ended September 30, 2016 increased $2.4 million, or 9%, to $29.3 million compared to $26.9 million for the nine months ended September 30, 2015. The increase was primarily a result of $1.8 million in added selling and marketing expenses from the acquisition of Natural Habitat and a $0.6 million increase at the Lindblad segment resulting from a $1.5 million increase in National Geographic fee amortization and a $0.4 million increase in commission expense driven by higher segment revenues, partially offset by a $1.3 million decrease in advertising, printing and postage expenses.

 

Merger-Related Expenses

 

Merger-related expenses consisted of one-time professional fees associated with the merger transaction that was completed in July 2015 and for the three and nine months ended September 30, 2015 were $5.5 million and $13.3 million, respectively.

 

Depreciation and Amortization Expenses

 

Depreciation and amortization expenses for the three months ended September 30, 2016 and 2015 were $5.1 million and $2.7 million, respectively. Depreciation and amortization expenses for the nine months ended September 30, 2016 and 2015 were $14.5 million and $8.3 million, respectively. The $2.4 million and $6.2 million respective increases were primarily related to the accelerated depreciation for the National Geographic Endeavour described in Note 2 –Summary of Significant Accounting Policies.

 

Other (Expense) Income

 

Other expenses were $2.5 million for the three months ended September 30, 2016 compared to $2.8 million for the three months ended September 30, 2015. This $0.3 million decrease was primarily due to the following factors:

 

	●	In 2016, we recorded a nominal loss in foreign currency translation compared to a gain of $0.1 million in foreign currency translation in 2015; and
	●	Interest expense, net, decreased $0.4 million to $2.5 million in 2016 from $2.9 million in 2015. The decrease was primarily related to $0.5 million in capitalized interest in 2016 with no capitalized interest for 2015.

 

Other expenses were $8.3 million for the nine months ended September 30, 2016 compared to other income of $4.4 million for the nine months ended September 30, 2015. This $12.7 million change was primarily due to the following factors:

 

	●	There was no other income in 2016 compared to income of $12.5 million in 2015 related to the $5.0 million success fee income for the new debt financing in May 2015 and the gain on the disposal of assets of $7.5 million related to the junior debt in the CFMF transaction;
	●	Interest expense, net, decreased $0.1 million to $7.9 million in 2016 from $8.0 million in 2015. The decrease was primarily related to $0.9 million in capitalized interest in 2016 with no capitalized interest for 2015 and a $1.1 million decrease primarily from the accelerated amortization of deferred finance costs related to the repayment of our senior debt in May 2015, partially offset by $1.9 million in higher interest expense primarily due to the higher debt levels from our Restated Credit Facility (See Note 3 – Long-Term Debt); and
	●	In 2016, we recorded a $0.3 million loss in foreign currency translation compared to a nominal loss in foreign currency translation in 2015.

 

 

Results of Operations – Segments

 

Selected information for our segments is below. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

 

		For the Three Months Ended September 30,								For the Nine Months Ended September 30,
(In thousands)		2016				2015				2016				2015
Tour revenues:
Lindblad		$	56,175			$	58,561			$	165,936			$	163,513
Natural Habitat			14,599				-				20,282				-
Total tour revenues		$	70,774			$	58,561			$	186,218			$	163,513
Operating income (loss):
Lindblad		$	9,863			$	5,759			$	19,038			$	16,143
Natural Habitat			306				-				(488	)			-
Total operating income		$	10,169			$	5,759			$	18,550			$	16,143
Adjusted EBITDA:
Lindblad		$	16,741			$	15,834			$	40,117			$	42,056
Natural Habitat			625				-				42				-
Total adjusted EBITDA		$	17,366			$	15,834			$	40,159			$	42,056

 

The following tables outline the reconciliation for each segment from Operating income (loss) to Adjusted EBITDA for the three and nine months ended September 30, 2016 and 2015.

 

Lindblad segment

 

(In thousands)		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Operating income		$	9,863			$	5,759			$	19,038			$	16,143
Depreciation and amortization			4,761				2,689				13,993				8,336
Stock-based compensation			1,359				1,213				3,982				3,641
National Geographic fee amortization			727				670				2,180				670
Acquisition-related expenses			31				-				924				-
Merger-related expenses			-				5,503				-				13,266
Adjusted EBITDA - Lindblad segment		$	16,741			$	15,834			$	40,117			$	42,056

 

Natural Habitat Segment

 

		For the Three Months Ended								For the Period May 5, 2016 to
(In thousands)		September 30,								September 30,
		2016				2015				2016				2015
Operating income (loss)		$	306			$	-			$	(488	)		$	-
Depreciation and amortization			319				-				530				-
Adjusted EBITDA - Natural Habitat segment		$	625			$	-			$	42			$	-

 

 

Results of Operations – Lindblad Segment

 

The following tables set forth our Guest Metrics for the Lindblad segment. Please refer to our Description of Certain Line Items above for the specific definition by line item and segment. The presentation of non-GAAP financial information should not be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP.

 

The following table sets forth our Available Guest Nights, Guest Nights Sold, Occupancy, Maximum Guests, Number of Guests and Voyages for the Lindblad segment in the three and nine months ended September 30, 2016 and 2015:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2016				2015				2016				2015
Available Guest Nights			48,595				53,235				141,665				144,399
Guest Nights Sold			44,139				48,200				129,633				132,007
Occupancy			90.8	%			90.5	%			91.5	%			91.4	%
Maximum Guests			6,177				6,391				17,118				17,001
Number of Guests			5,632				5,817				15,742				15,623
Voyages			84				86				231				226

 

The following table shows the calculations of Gross Yield and Net Yield for the Lindblad segment in the three and nine months ended September 30, 2016 and 2015:

 

		For the Three Months Ended								For the Nine Months Ended
(In thousands, except for Available Guest Nights, Gross and Net Yield)		September 30,								September 30,
		2016				2015				2016				2015
Guest ticket revenues		$	50,089			$	51,427			$	146,613			$	142,381
Other tour revenues			6,086				7,134				19,323				21,132
Tour Revenues			56,175				58,561				165,936				163,513
Less: Commissions			(3,957	)			(4,205	)			(11,725	)			(11,329	)
Less: Other tour expenses			(3,211	)			(4,570	)			(11,757	)			(12,682	)
Net Revenue		$	49,007			$	49,786			$	142,454			$	139,502
Available Guest Nights			48,595				53,235				141,665				144,399
Gross Yield		$	1,156			$	1,100			$	1,171			$	1,132
Net Yield			1,008				935				1,006				966

 

 

The following table shows the calculations of Gross Cruise Cost per Available Guest Night and Adjusted Net Cruise Costs per Available Guest Night for the Lindblad segment in the three and nine months ended September 30, 2016 and 2015:

 

		For the Three Months Ended								For the Nine Months Ended
(In thousands, except for Available Guest Nights, Gross and Net Cruise Cost)		September 30,								September 30,
		2016				2015				2016				2015
Cost of tours		$	22,239			$	25,444			$	72,632			$	71,331
Plus: Merger-related expenses			-				5,503				-				13,266
Plus: Selling and marketing			8,848				9,482				27,511				26,919
Plus: General and administrative			10,464				9,684				32,762				27,518
Gross Cruise Cost			41,551				50,113				132,905				139,034
Less: Commission expense			(3,957	)			(4,205	)			(11,725	)			(11,329	)
Less: Other tour expenses			(3,211	)			(4,570	)			(11,757	)			(12,682	)
Net Cruise Cost			34,383				41,338				109,423				115,023
Less: Fuel expense			(1,645	)			(2,107	)			(5,307	)			(6,831	)
Net Cruise Cost Excluding Fuel			32,738				39,231				104,116				108,192
Non-GAAP Adjustments:
Stock-based compensation			(1,359	)			(1,213	)			(3,982	)			(3,641	)
National Geographic fee amortization			(727	)			(670	)			(2,180	)			(670	)
Acquisition-related expenses			(31	)			-				(924	)			-
Merger-related expenses			-				(5,503	)			-				(13,266	)
Adjusted Net Cruise Cost Excluding Fuel		$	30,621			$	31,845			$	97,030			$	90,615
Available Guest Nights			48,595				53,235				141,665				144,399
Gross Cruise Cost per Available Guest Night		$	855			$	941			$	938			$	963
Net Cruise Cost per Available Guest Night			708				777				772				797
Net Cruise Cost Excluding Fuel per Available Guest Night			674				737				735				749
Adjusted Net Cruise Cost per Available Guest Night			664				638				722				675
Adjusted Net Cruise Cost Excl. Fuel per Available Guest Night			630				598				685				628

 

Comparison of Three and Nine Months Ended September 30, 2016 to Three and Nine Months Ended September 30, 2015 – Lindblad Segment

 

Tour Revenues

 

Tour revenues for the three months ended September 30, 2016 decreased $2.4 million, or 4%, to $56.2 million compared to $58.6 million for the three months ended September 30, 2015. The change was primarily related to a $1.3 million decrease in guest ticket revenues to $50.1 million in the third quarter of 2016 from $51.4 million in the third quarter of 2015 mainly as a result of planned lower available guest nights due to fleet repositioning. Net Yield for the three months ended September 30, 2016 amounted to $1,008 compared to $935 for the three months ended September 30, 2015. The increase in Net Yield was primarily related to price increases due to higher rates and changes in itineraries.

 

Tour revenues for the nine months ended September 30, 2016 increased $2.4 million, or 1%, to $165.9 million compared to $163.5 million for the nine months ended September 30, 2015. The change was primarily the result of a $4.2 million increase in guest ticket revenues to $146.6 million in 2016 from $142.4 million in 2015 mainly as a result of price increases due to higher rates and changes in itineraries offset by lower available guest nights. Net Yield for the nine months ended September 30, 2016 amounted to $1,006 compared to $966 for the nine months ended September 30, 2015. The increase in Net Yield was primarily due to price increases due to higher rates and changes in itineraries.

 

 

Operating Income

 

Operating income for the three months ended September 30, 2016 increased $4.1 million to $9.9 million compared to $5.8 million for the three months ended September 30, 2015. This increase was primarily related to $5.5 million in merger-related costs in 2015 and lower air and fuel expenses in 2016. These increases were partially offset by $2.1 million in higher depreciation and amortization expense related to the accelerated depreciation and amortization for the National Geographic Endeavour, lower revenues due to planned lower available guest nights for redeployed vessels and $0.8 million of increased general and administrative expenses primarily related to added personnel and public company costs.

 

Operating income for the nine months ended September 30, 2016 increased $2.9 million to $19.0 million compared to $16.1 million for the nine months ended September 30, 2015. This increase was primarily related to $13.3 million in merger-related costs in 2015. These increases were partially offset by $5.7 million in higher depreciation and amortization expense related to the accelerated depreciation and amortization for the National Geographic Endeavour and $5.2 million of increased general and administrative expenses, related primarily to additional personnel and public company costs.

 

Results of Operations – Natural Habitat Segment

 

As a result of the acquisition of Natural Habitat, we began to include the results of operations for Natural Habitat as a separate segment on May 5, 2016. Natural Habitat reported $14.6 million in tour revenues and $0.3 million in operating income for the three months ended September 30, 2016. For the period beginning May 5, 2016 and ending on September 30, 2016, Natural Habitat reported $20.3 million in tour revenues and an operating loss of $0.5 million.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash for the Nine Months Ended September 30, 2016 and 2015

 

Net cash provided by operating activities was $15.7 million in the nine months ended September 30, 2016 compared to $30.4 million in the comparable period in 2015. The $14.7 million decrease was primarily due to a reduction in collections of customer deposits recognized in unearned passenger revenues and decreases related to changes in accounts payable and accrued expenses related to payments for the two newbuild vessels.

 

Net cash used in investing activities was $62.5 million in the nine months ended September 30, 2016 compared to $75.7 million in the comparable period in 2015. The $13.2 million decrease was primarily related to the $68.1 million purchase of the investment in CFMF in 2015 and offset by a $42.5 million increase in purchases of property and equipment primarily related to growth capital expenditures for our two newbuild vessels and our purchase of and renovations for the National Geographic Endeavour II, and our $9.9 million net cash use for the acquisition of Natural Habitat in 2016.

 

Net cash used in financing activities was $11.0 million in the nine months ended September 30, 2016 compared to net cash provided by financing activities of $214.6 million in the comparable period in 2015. The $225.6 million difference was primarily related to the $125.5 million net proceeds from the issuance of long-term debt in 2015, net of debt repayments and the $96.8 million in net proceeds from the merger.

 

Funding Needs and Sources

 

We have historically relied on a combination of cash flows provided by operations and the incurrence of additional debt and/or the refinancing of existing debt to fund obligations. Similar to others in the industry, we have historically operated with a meaningful working capital deficit. This historical deficit is mainly attributable to the fact that, under our business model, a vast majority of guest ticket receipts are collected in advance of the applicable sailing date. These advance passenger receipts remain a current liability until the sailing date and the cash generated from these advance receipts is used interchangeably with cash on hand from other cash from operations. The cash received as advanced receipts can be used to fund operating expenses for the applicable future expeditions or otherwise, pay down credit facilities, invest in long-term investments or any other use of cash. As a result of the proceeds from the Restated Credit Facility and the merger, we had net working capital surpluses of $79.6 million and $130.0 million as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, we had $149.0 million in cash and cash equivalents, excluding restricted cash.

 

 

In November 2015, we announced that our Board of Directors authorized a $20.0 million stock and warrant repurchase plan (“Repurchase Plan”). In November 2016, our Board of Directors authorized a $15.0 million increase to the Repurchase Plan, totaling $35.0 million. This Repurchase Plan authorizes us to purchase from time to time our outstanding common stock and warrants through open market repurchases in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, and/or in privately negotiated transactions based on market and business conditions, applicable legal requirements and other factors. Any shares and warrants purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of our Board of Directors at any time. We did not repurchase any shares of our common stock during the quarter ended September 30, 2016. As of September 30, 2016 under this Repurchase Plan, we have cumulatively purchased 4,059,063 warrants for $10.9 million, leaving $9.1 million, prior to the $15.0 million increase, authorized to be used to purchase our outstanding common stock and warrants pursuant to the Repurchase Plan.

 

In December 2015, we executed definitive agreements for the construction of two new coastal vessels for delivery targeted in 2017 and 2018 at a purchase price of $48.0 million and $46.8 million, respectively. As of September 30, 2016, we have spent $30.2 million for the construction of these two coastal vessels, funded through cash on hand. The newbuild process exposes us to certain risks typically associated with new ship construction, which we manage through detailed planning and close monitoring by our internal marine team. The remaining purchase price of the ships will be funded through a combination of cash available on our balance sheet, our new revolving credit facility (described below) and excess cash flows generated by our existing operations.

 

In December 2015, we also signed a definitive agreement for the purchase of the National Geographic Endeavour II, formerly the Via Australis, to be used in our operations in the Galápagos Islands. The purchase price for the ship was $18.0 million. We paid a deposit of $1.8 million on January 4, 2016 and paid the balance of $16.2 million on April 25, 2016 when we took possession of the ship. We have spent $8.9 million in the nine months ended September 30, 2016, funded through cash on hand, and expect to deploy the ship during the fourth quarter of 2016. The National Geographic Endeavour II will replace the National Geographic Endeavour. The remaining costs of the refurbishment will be funded through a combination of cash available on our balance sheet, our revolving credit facility (described below) and excess cash flows generated by our existing operations.

 

As of September 30, 2016, we had approximately $175.3 million in long-term debt obligations, including the current portion of long-term debt and excluding debt discounts and deferred financing costs. We believe that our cash on hand, our revolving credit facility (described below) and expected future operating cash inflows will be sufficient to fund operations, debt service requirements, capital expenditures for our newbuilds and other assets, acquisitions, and our Repurchase Plan. However, there can be no assurance that cash flows from operations will be available in the future to fund future obligations.

 

Debt Covenants

 

On May 8, 2015, we entered into a credit agreement with Credit Suisse A.G. as Administrative Agent and Collateral Agent (“Credit Agreement”) for a $150.0 million facility, which was subsequently increased to $175.0 million upon syndication on July 8, 2015 (“Amended Credit Agreement”), in the form of a $155.0 million U.S. term loan (the “U.S. Term Loan”) and a $20.0 million Cayman term loan for the benefit of our foreign subsidiaries (the “Cayman Loan,” and together with the U.S. Term Loan, the “Loans”). The net proceeds from the Loans, net of discounts, fees and expenses, were approximately $164.1 million. The Loans bear interest at a rate based on an adjusted ICE Benchmark Administration LIBO Rate (subject to a floor of 1.00%) plus a spread of 4.50%. The U.S. Term Loan and the Cayman Loan both mature on May 8, 2021.

 

The Amended Credit Agreement contains financial covenants that, among other things, (i) require us to maintain a total net leverage ratio (defined as on any date of determination, the ratio of total debt on such date, less up to $25.0 million of the unrestricted cash and cash equivalents to Adjusted EBITDA (as defined in the Amended Credit Agreement) for the trailing 12-month period) of 4.75 to 1.00 initially, with 0.25 equal reductions annually thereafter until March 31, 2020, when the total net leverage ratio shall be 3.50 to 1.00 thereafter; (ii) limit the amount of indebtedness we may incur generally and specifically for intercompany debt, debt incurred to finance acquisitions and improvements, for capital and synthetic lease obligations, for standby letters of credit, and in connection with refinancings; (iii) limit the amount we may spend in connection with certain types of investments; and (iv) require the delivery of certain periodic financial statements and an operating budget. As of September 30, 2016, the required net leverage ratio was 4.5 to 1 and we were in compliance with the financial covenants.

 

 

On March 7, 2016, we entered into a second amended and restated credit agreement with Credit Suisse as Administrative Agent and Collateral Agent (“Restated Credit Agreement”), amending our existing senior secured credit facility with Credit Suisse (“Restated Credit Facility”). The Restated Credit Facility provides for our existing $175.0 million senior secured first lien term loan facility and a new $45.0 million senior secured incremental revolving credit facility (“Revolving Credit Facility”), which includes a $5.0 million letter of credit subfacility. Borrowings under the Revolving Credit Facility will bear interest at an adjusted ICE Benchmark Administration LIBO Rate plus a spread of 4.00%, or, at our option, an alternative base rate plus a spread of 3.00%. We are also required to pay a 0.50% annual commitment fee on undrawn amounts under the Revolving Credit Facility, which matures on May 8, 2020. Our obligations under the Restated Credit Facility are secured by substantially all of our assets. The Restated Credit Agreement contains the same financial and operational covenants as the Amended Credit Agreement.

 

Critical Accounting Policies

 

For a detailed discussion of the Critical Accounting Policies, please see the Company’s Annual Report on Form 10-K filed on March 14, 2016 with the Securities and Exchange Commission.

 

Off-Balance Sheet Arrangements

 

The Company did not have any off-balance sheet arrangements as of September 30, 2016 and December 31, 2015.

 

Item  3:

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There have been no material changes in our exposure to market risk from the information set forth in the “Quantitative and Qualitative Disclosures About Market Risk” section contained in the Company’s Annual Report on Form 10-K.

 

Item 4:

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September 30, 2016, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our principal executive officer and principal financial and accounting officer have concluded that during the period covered by this report, our disclosure controls and procedures were effective.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

Part 2:

OTHER INFORMATION

 

Item 1:

LEGAL PROCEEDINGS

 

The Company is involved in various claims, legal actions and regulatory proceedings arising from time to time in the ordinary course of business. We have protection and indemnity insurance that would be expected to cover any damages.

 

ITEM 1A:

RISK FACTORS

 

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. The risks and uncertainties that we believe are most important for you to consider are discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

 

Item 2:

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Recent Sales by the Company of Unregistered Securities

 

There were no unregistered sales of equity securities during the quarter ended September 30, 2016.

 

Repurchases of Securities

 

On November 9, 2015, we announced that our Board of Directors had approved the $20.0 million Repurchase Plan. On November 2, 2016, our Board of Directors approved a $15.0 million increase to the Repurchase Plan, totaling $35.0 million. This Repurchase Plan authorizes us to purchase from time to time our outstanding common stock and warrants through open market repurchases in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, and/or in privately negotiated transactions based on market and business conditions, applicable legal requirements and other factors. Any shares and warrants purchased will be retired. The Repurchase Plan has no time deadline and will continue until otherwise modified or terminated at the sole discretion of our Board of Directors at any time.

 

We did not repurchase any shares of our common stock during the quarter ended September 30, 2016.

 

Item 3:

DEfaults upon senior securities

 

Not applicable.

 

Item 4:

MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5:

Other information

 

Not applicable.

 

Item 6:

exhibits

 

Number		Description		Included		Form		Filing Date
31.1		Certification of Chief Executive Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.		Herewith
31.2		Certification of Chief Financial Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.		Herewith
32.1		Certification of Chief Executive Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Herewith
32.2		Certification of Chief Financial Officer of Lindblad Expeditions Holdings, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.		Herewith
101.INS		XBRL Instance Document		Herewith
101.SCH		Taxonomy extension schema document		Herewith
101.CAL		Taxonomy extension calculation linkbase document		Herewith
101.LAB		Taxonomy extension label linkbase document		Herewith
101.PRE		Taxonomy extension presentation linkbase document		Herewith

 

 

SIGNATURE

 

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, on November 4, 2016.

 

	LINDBLAD EXPEDITIONS HOLDINGS, INC.
	(Registrant)
	By	/s/ Sven-Olof Lindblad
		Sven-Olof Lindblad
		Chief Executive Officer and President

 

 

37