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 quarterly period ended September 30, 2018

 

☐ 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, 9^th Floor, New York, New York, 10014

(Address of principal executive offices) (Zip Code)

 

(212) 261-9000

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

 

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

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

As of October 31, 2018, 45,815,425 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, 2018

 

Table of Contents

 

		Page(s)
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements (Unaudited)	1
	Condensed Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	1
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	3
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018 (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	32
ITEM 4.	Controls and Procedures	32
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	33
ITEM 1A.	Risk Factors	33
ITEM 2.	Unregistered Sale of Equity Securities and Use of Proceeds	33
ITEM 3.	Defaults Upon Senior Securities	33
ITEM 4.	Mine Safety Disclosures	33
ITEM 5.	Other Information	33
ITEM 6.	Exhibits	33
SIGNATURES		35

 

 

PART 1.	FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

		As of September 30,				As of December 31,
		2018				2017
ASSETS		(unaudited)
Current Assets:
Cash and cash equivalents		$	105,688			$	96,443
Restricted cash and marketable securities			8,593				7,057
Marine operating supplies			5,024				5,045
Inventories			1,646				1,794
Prepaid expenses and other current assets			21,917				21,351
Total current assets			142,868				131,690
Property and equipment, net			282,455				250,952
Goodwill			22,105				22,105
Intangibles, net			8,370				9,554
Other long-term assets			9,017				10,047
Total assets		$	464,815			$	424,348
LIABILITIES
Current Liabilities:
Unearned passenger revenues		$	112,694			$	112,238
Accounts payable and accrued expenses			29,305				30,422
Long-term debt - current			2,000				1,750
Total current liabilities			143,999				144,410
Long-term debt, less current portion			188,161				164,186
Deferred tax liabilities			5,097				2,444
Other long-term liabilities			706				684
Total liabilities			337,963				311,724
COMMITMENTS AND CONTINGENCIES
REDEEMABLE NONCONTROLLING INTEREST			6,409				6,302
STOCKHOLDERS’ EQUITY
Preferred stock, $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding			-				-
Common stock, $0.0001 par value, 200,000,000 shares authorized; 45,815,425 and 45,427,030 issued, 45,442,728 and 44,787,608 outstanding as of September 30, 2018 and December 31, 2017, respectively			5				5
Additional paid-in capital			40,391				42,498
Retained earnings			79,817				63,819
Accumulated other comprehensive income			230
Total stockholders’ equity			120,443				106,322
Total liabilities, stockholders’ equity and redeemable noncontrolling interest		$	464,815			$	424,348

 

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

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(unaudited)

 

		For the three months ended September 30,								For the nine months ended September 30,
		2018				2017				2018				2017
Tour revenues		$	87,242			$	84,584			$	239,125			$	203,283
Cost of tours			44,964				38,480				114,645				99,780
Gross profit			42,278				46,104				124,480				103,503
Operating expenses:
General and administrative			14,718				16,526				45,647				46,710
Selling and marketing			12,255				11,676				34,911				31,521
Depreciation and amortization			5,024				4,354				15,062				12,012
Total operating expenses			31,997				32,556				95,620				90,243
Operating income			10,281				13,548				28,860				13,260
Other (expense) income:
Interest expense, net			(2,409	)			(2,802	)			(8,013	)			(7,192	)
Gain (loss) on foreign currency			163				224				(1,430	)			1,047
Other income (expense)			1				59				(118	)			(97	)
Total other expense			(2,245	)			(2,519	)			(9,561	)			(6,242	)
Income before income taxes			8,036				11,029				19,299				7,018
Income tax expense (benefit)			2,690				1,586				3,194				(473	)
Net income			5,346				9,443				16,105				7,491
Net income attributable to noncontrolling    interest			279				165				107				149
Net income available to common stockholders		$	5,067			$	9,278			$	15,998			$	7,342
Weighted average shares outstanding
Basic			45,423,127				44,457,656				45,356,438				44,528,878
Diluted			47,690,395				45,718,513				45,963,669				45,609,560
Net income per share available to common stockholders
Basic		$	0.11			$	0.21			$	0.35			$	0.16
Diluted		$	0.11			$	0.20			$	0.35			$	0.16

 

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

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands, except share and per share data)

(unaudited)

 

		For the three months ended September 30,								For the nine months ended September 30,
		2018				2017				2018				2017
Net income		$	5,346			$	9,443			$	16,105			$	7,491
Other comprehensive income:
Cash flow hedges:
Net unrealized gain			157				-				230				-
Total other comprehensive income			157				-				230				-
Total comprehensive income		$	5,503			$	9,443			$	16,335			$	7,491

 

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

 

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders’ Equity

(In thousands, except share data)

(unaudited)

 

		Common Stock								Additional Paid-In				Retained				Accumulated Other Comprehensive				Total Stockholders’
		Shares				Amount				Capital				Earnings				Income				Equity
Balance as of January 1, 2018			45,427,030			$	5			$	42,498			$	63,819			$	-			$	106,322
Stock-based compensation			-				-				3,256				-				-				3,256
Issuance of stock for equity compensation plans, net			397,425				-				(4,509	)			-				-				(4,509	)
Repurchase of shares and warrants			(9,030	)			-				(854	)			-				-				(854	)
Other comprehensive income, net			-				-				-				-				230				230
Net income			-				-				-				15,998				-				15,998
Balance as of September 30, 2018			45,815,425			$	5			$	40,391			$	79,817			$	230			$	120,443

 

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

  

 

LINDBLAD EXPEDITIONS HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

		For the nine months ended September 30,
		2018				2017
Cash Flows From Operating Activities
Net income		$	16,105			$	7,491
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			15,062				12,012
Amortization of National Geographic fee			2,181				2,180
Amortization of deferred financing costs and other, net			1,477				1,662
Stock-based compensation			3,256				9,464
Deferred income taxes			2,653				(2,017	)
Loss (gain) on foreign currency			1,430				(1,047	)
Loss on write-off of assets			129				-
Changes in operating assets and liabilities
Marine operating supplies and inventories			169				(516	)
Prepaid expenses and other current assets			(1,806	)			(1,087	)
Unearned passenger revenues			449				8,062
Write-off of unamortized issuance costs related to debt refinancing			359				-
Other long-term assets			(1,981	)			192
Other long-term liabilities			22				14
Accounts payable and accrued expenses			(247	)			(6,964	)
Net cash provided by operating activities			39,258				29,446
Cash Flows From Investing Activities
Purchases of property and equipment			(45,510	)			(44,089	)
Transfer to restricted cash and marketable securities			(1,536	)			311
Net cash used in investing activities			(47,046	)			(43,778	)
Cash Flows From Financing Activities
Proceeds from long-term debt			200,000				-
Repayments of long-term debt			(171,125	)			(1,312	)
Payment of deferred financing costs			(6,486	)			(312	)
Repurchase under stock-based compensation plans and related tax impacts			(4,509	)			(1,182	)
Repurchase of warrants and common stock			(854	)			(6,166	)
Net cash provided by (used in) financing activities			17,026				(8,972	)
Effect of exchange rate changes on cash			7				204
Net increase (decrease) in cash and cash equivalents			9,245				(23,100	)
Cash and cash equivalents at beginning of period			96,443				135,416
Cash and cash equivalents at end of period		$	105,688			$	112,316
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest		$	9,952			$	7,841
Income taxes, net		$	468			$	965
Non-cash investing and financing activities:
Additional paid-in capital exercise proceeds of option shares		$	1,682			$	168
Additional paid-in capital exchange proceeds used for option shares		$	(1,682	)		$	(168	)

 

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. and its consolidated subsidiaries (the “Company” or “Lindblad”) currently operate a fleet of seven owned expedition ships and five seasonal charter vessels under the Lindblad brand and operate eco-conscious expeditions and nature-focused, small-group tours under the Natural Habitat brand.

 

Lindblad’s mission is offering life-changing adventures on all seven continents and pioneering innovative ways to allow its guests to connect with exotic and remote places. The Company’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 has an alliance with National Geographic Partners (“National Geographic”), which provides for lecturers and National Geographic experts, including photographers, writers, marine biologists, naturalists, field researchers and film crews, to join many of the Company’s expeditions.

 

Through its subsidiary, Natural Habitat, Inc. (“Natural Habitat”), the Company offers primarily land-based adventure travel expeditions around the globe. In addition to its land offerings, Natural Habitat offers select itineraries on small chartered vessels for parts of the year. Natural Habitat’s expeditions include polar bear tours in Churchill, Canada, Alaskan grizzly bear adventures, small-group Galápagos tours and African safaris. Natural Habitat has partnered with World Wildlife Fund (“WWF”) to offer conservation travel, which is sustainable travel that contributes to the protection of nature and wildlife.

 

The Company’s common stock and warrants are listed on the NASDAQ Capital Market under the symbols “LIND” and “LINDW,” respectively.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited 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 condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial statements for the periods presented. Operating results for the 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 consolidated financial statements in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the SEC for interim reporting. All intercompany balances and transactions have been eliminated in these unaudited condensed consolidated financial statements. These unaudited 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, 2017 contained in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2018.

 

Principles of Consolidation

 

The condensed consolidated financial statements include Lindblad Expeditions Holdings, Inc. and its consolidated subsidiaries.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to the current period presentation, with no impact on consolidated net income or cash flows.

 

 

Use of Estimates

 

The preparation of condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from such estimates. Management estimates include 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 and liabilities, the fair value of derivative instruments, the value of contingent consideration and assessing its litigation, other legal claims and contingencies. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the condensed consolidated financial statements in the period that they are determined to be necessary.

 

Revenue Recognition

 

Revenues are measured based on consideration specified in the Company’s contracts with guests and are recognized as the related performance obligations are satisfied.

 

The majority of the Company’s revenues are derived from guest ticket contracts which are reported as tour revenues in the condensed consolidated statements of operations. The Company’s primary performance obligation under these contracts is to provide an expedition and may include pre- and post-expedition excursions, hotel accommodations, land-based expeditions and air transportation to and from the ships. Upon satisfaction of the Company’s primary performance obligation, revenue is recognized over the duration of each expedition.

 

Tour revenues also include revenues from the sale of goods and services onboard our ships, cancellation fees and trip insurance. Revenues from the sale of goods and services rendered onboard are recognized upon purchase. Guest cancellation fees are recognized as tour revenues at the time of the cancellation. The Company records a liability for estimated trip insurance claims based on the Company’s claims history. Proceeds received from trip insurance premiums in excess of this liability are recorded as revenue in the period in which they are received.

 

Customer Deposits and Contract Liabilities

 

The Company’s guests remit deposits in advance of tour embarkation. Guest deposits consist of guest ticket revenues as well as revenues from the sale of pre- and post-expedition excursions, hotel accommodations, land-based expeditions and air transportation to and from the ships. Guest deposits represent unearned revenues and are reported as unearned passenger revenues in the condensed consolidated balance sheet when received and are subsequently recognized as tour revenue over the duration of the expedition. Accounting Standards Codification, Revenue from Contracts with Customers (Topic 606) defines a “contract liability” as an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer. The Company does not consider guest deposits to be a contract liability until the guest no longer has the right, resulting from the passage of time, to cancel their reservation and receive a full refund. Unearned passenger revenues presented in our condensed consolidated balance sheets include contract liabilities of $63.5 million and $62.1 million as of September 30, 2018 and December 31, 2017, respectively. All of our contract liabilities as of December 31, 2017 were recognized and reported within tour revenues in our condensed consolidated statements of operations for the nine months ended September 30, 2018.

 

Earnings per Common Share

 

Earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is 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 associated with restricted stock awards, shares issuable upon the exercise of stock options and warrants, using the treasury stock method.

 

 

For the three and nine months ended September 30, 2018 and 2017, the Company calculated earnings per share as follows:

 

		For the three months ended September 30,								For the nine months ended September 30,
(In thousands, except share and per share data)		2018				2017				2018				2017
Net income available to common stockholders		$	5,067			$	9,278			$	15,998			$	7,342
Weighted average shares outstanding:
Total weighted average shares outstanding, basic			45,423,127				44,457,656				45,356,438				44,528,878
Dilutive potential common shares			2,267,268				1,260,857				607,231				1,080,682
Total weighted average shares outstanding, diluted			47,690,395				45,718,513				45,963,669				45,609,560
Net income per share available to common stockholders
Basic		$	0.11			$	0.21			$	0.35			$	0.16
Diluted		$	0.11			$	0.20			$	0.35			$	0.16

  

The Company’s Board of Directors and stockholders approved the 2015 Long-Term Incentive Plan, which includes the authority to issue up to 2.5 million shares of Lindblad common stock. As of September 30, 2018, approximately 2.0 million shares were available for future grants under the plan.

 

As of September 30, 2018 and 2017, options to purchase an aggregate of 220,000 and 1,939,764 shares of the Company’s common stock, respectively, with a weighted average exercise price of $9.63 and $2.65 per share, respectively, were outstanding. As of September 30, 2018, 113,333 options were exercisable.

 

As of September 30, 2018 and 2017, 10,088,074 and 10,673,015 warrants, respectively, expiring July 8, 2020 were outstanding to purchase common stock at a price of $11.50 per share. These warrants were anti-dilutive for the three and nine months ended September 30, 2017 and were not included in the calculation of diluted weighted average shares outstanding for those periods.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with an original maturity of six 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. As of September 30, 2018 and December 31, 2017, the Company’s cash held in financial institutions outside of the U.S. amounted to $6.5 million and $4.1 million, respectively.

 

Restricted Cash and Marketable Securities

 

Restricted cash and marketable securities consist of the following:

 

		As of September 30,				As of   December 31,
		2018				2017
(In thousands)		(unaudited)
Federal Maritime Commission escrow		$	5,622			$	4,186
Credit card processor reserves			1,530				1,530
Certificates of deposit and other restricted securities			1,441				1,341
Total restricted cash and marketable securities		$	8,593			$	7,057

  

 

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 either 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 the required amounts.

 

At September 30, 2018 and December 31, 2017, a cash reserve of approximately $1.5 million is required for credit card deposits by third-party credit card processors.

 

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

 

Marine Operating Supplies and Inventories

 

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.

 

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.

 

Prepaid Expenses and Other Current Assets

 

The Company records prepaid expenses and other current assets at cost and expenses them in the period the services are provided, or the goods are delivered. The Company’s prepaid expenses and other current assets consist of the following:

 

		As of September 30,				As of   December 31,
		2018				2017
(In thousands)		(unaudited)
Prepaid tour expenses		$	11,746			$	9,846
Prepaid air expense			3,222				3,621
Prepaid client insurance			2,097				2,525
Prepaid corporate insurance			1,808				1,033
Prepaid marketing, commissions and other expenses			1,731				2,495
Prepaid port agent fees			1,279				1,022
Prepaid income taxes			34				809
Total prepaid expenses		$	21,917			$	21,351

  

Property and Equipment

 

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 and equipment		5
Computer hardware and software		5
Leasehold improvements, including port facilities		Shorter of lease term or related asset life

 

 

Vessel improvement costs that add value to the Company’s vessels are capitalized 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 cost of tours. Drydock costs primarily represent planned maintenance activities that are incurred when a vessel is taken out of service. 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.

 

Goodwill

 

In accordance with Accounting Standards Codification (“ASC”) 360, the Company tests for impairment annually as of September 30, or more frequently if warranted. The Company assessed qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of goodwill is less than its carrying amount. The Company completed the annual impairment test as of September 30, 2018 with no indication of goodwill impairment.

 

Intangibles, net

 

Intangibles, net include tradenames, customer lists and operating rights. 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 were computed using the estimated useful lives of 15 and 5 years, respectively.

 

The Company operates two vessels year-round in the Galápagos National Park in Ecuador: the National Geographic Endeavour II with 95 berths and the National Geographic Islander with 47 berths. In order to operate these vessels within the park, the Company is required to have in its possession cupos (licenses) sufficient to cover the total available berths on each vessel.

 

In June 2015, a new Ecuadorian Special Law for Protected Areas was approved and then updated in November 2015. A Presidential Decree issued by President Correa of Ecuador in November 2015 established that cupos, which were in effect since July 2015, will have a validity of nine years. The Company’s operating rights are up for renewal in July 2024. The current “owners” of the cupos will have the opportunity to re-apply for them, but any other enterprise or individual will have the opportunity to bid for the cupos. All bidders must present proof that they fulfill the conditions to properly utilize the license (access to a vessel, experience in tourism, proven environmental behavior, marketing, etc.). While the Company believes that, based on the expected criteria to retain cupos and its past operating history in the Galápagos, there is a strong possibility that the Company will retain its cupos, from an accounting perspective, it will assume they retain no value after July 2024. Once the renewal process has begun and if it can be determined that the Company will be successful in its bid, then the Company will adjust its amortization prospectively. Operating rights are amortized over their remaining government mandated lives.

 

Upon the occurrence of a triggering event, the assessment of possible impairment of the Company’s intangibles will be 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 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, customer lists and operating rights. As of September 30, 2018, there was no triggering event and the Company did not record an impairment for intangible assets.

 

Long-Lived Assets

 

The Company reviews its long-lived assets, principally its vessels, 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 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. As of September 30, 2018, there was no triggering event and the Company did not record an impairment of its long-lived assets.

 

 

Accounts Payable and Accrued Expenses

 

The Company records accounts payable and accrued expenses for the cost of such items when the service is provided or when the related product is delivered. The Company’s accounts payable and accrued expenses consist of the following:

 

		As of September 30,				As of   December 31,
		2018				2017
(In thousands)		(unaudited)
Accrued other expense		$	8,333			$	7,001
Accounts payable			6,769				7,791
Bonus compensation liability			3,727				3,736
New build liability			2,836				2,730
Employee liability			2,776				2,644
Royalty payable			1,866				1,673
Travel certificate liability			1,056				1,120
Income tax liabilities			766				1,490
Refunds and commissions payable			749				1,805
Accrued travel insurance expense			427				432
Total accounts payable and accrued expenses		$	29,305			$	30,422

  

Fair Value Measurements

 

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.

 

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.

 

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.

 

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, 2018. As of September 30, 2018 and December 31, 2017, the Company had no other significant liabilities that were measured at fair value on a recurring basis.

 

The Company’s derivative assets consist principally of interest rate caps and are carried at fair value based on significant observable inputs (Level 2 inputs). Derivatives entered into by the Company are typically executed over-the-counter and are valued using internal valuation techniques, as quoted market prices are not readily available. The valuation technique and inputs depend on the type of derivative and the nature of the underlying exposure. The Company principally uses discounted cash flows along with fair value models that primarily use market observable inputs. These models take into account a variety of factors including, where applicable, maturity, currency exchange rates, interest rate yield curves and counterparty credit risks.

 

 

Derivative Instruments and Hedging Activities

 

By entering into derivative instrument contracts, the Company exposes itself, from time to time, to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to the Company, which creates credit risk for the Company. The Company continues to monitor counterparty credit risk as part of its ongoing hedge assessments.

 

The Company records derivatives on a gross basis in other long-term assets and other liabilities in the condensed consolidated balance sheets at fair value. The accounting for changes in value of the derivative depends on whether or not the transaction has been designated and qualifies for hedge accounting. Derivatives that are not designated as hedges are reported and measured at fair value through earnings.

 

The Company applies hedge accounting to its interest rate derivatives entered into for risk management purposes. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. In addition, key aspects of achieving hedge accounting are documentation of hedging strategy and hedge effectiveness at the hedge inception and substantiating hedge effectiveness on an ongoing basis. A derivative must be highly effective in accomplishing the hedge objective of offsetting changes in the cash flows of the hedged item for the risk being hedged. The effective portion of changes in the fair value of derivatives designated in a hedge relationship and that qualify as cash flow hedges is recorded in accumulated other comprehensive income, net of tax, and is subsequently reclassified into earnings in the period that the hedged transaction affects earnings.

 

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking cash flow hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items.

 

The Company is exposed to market risks attributable to changes in interest rates on its term loan facility and seeks to hedge the risk of variability in cash flows associated with the changes in US$-LIBOR-Intercontinental Exchange associated with interest payments on its Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”).

 

During the second quarter 2018, the Company entered into interest rate cap agreements to hedge its exposure to interest rate movements and to manage its interest expense related to the first lien loan facility (the “Term Facility”) under its Amended Credit Agreement and designated these interest rate caps as a cash flow hedge. The Company receives payments on the cap for any period that the one-month USD LIBOR rate increase beyond the strike rate. The termination date of the cap agreement is May 31, 2023. The detailed terms of the interest rate caps and the portion of the corporate Term Facility that they hedge are as follows:

 

		Interest Rate Caps		Corporate Debt
Trade date and borrowing date		May 29, 2018		March 27, 2018
Effective date		September 27, 2018		Not applicable
Termination date		May 31, 2023		March 27, 2025
Notional amount		$100,000,000		$100,000,000
Fixed interest rate (plus spread)		2.50% until November 30, 2018		Not applicable
		2.75% December 1, 2018 until April 30, 2019
		3.00% May 1, 2019 until maturity
Variable interest rate		1 month LIBOR		1 month LIBOR + 3.50%
Settlement		Monthly on last day of each month		Monthly on last day of each month
Interest payment dates		Monthly on last day of each month		Monthly on last day of each month
Reset dates		Last day of each month		Last day of each month

 

 

The notional amount of outstanding debt associated with the interest rate cap agreements was $100.0 million as of September 30, 2018, with a fair value of $1.6 million recorded within other long-term assets. Changes in the fair value of this interest rate cap are recorded in accumulated other comprehensive income, pursuant to the guidelines of cash flow hedge accounting as outlined in ASC 815 and ASU 2017-12. During the three and nine months ended September 30, 2018, the Company recorded approximately $0.2 million and $0.2 million, respectively, of gains in accumulated other comprehensive income related to the change in fair value. The Company does not expect any gains currently recorded in accumulated other comprehensive income to be recognized in earnings over the next 12 months. The cost of the interest rate cap will be amortized to interest expense over its life, from the effective date through termination date.

 

The effects of cash flow hedge accounting on accumulated other comprehensive income were as follows:

 

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, unaudited)		2018				2017				2018				2017
Beginning balance:		$	73			$	-			$	-			$	-
Net change in period			157				-				230				-
Accumulated Other Comprehensive Income		$	230			$	-			$	230			$	-

  

The amounts included in accumulated other comprehensive income will be reclassified to interest expense should the hedge no longer be considered effective. No amount of the hedge was considered to be ineffective and included in net income for the period ended September 30, 2018. The Company will continue to assess the effectiveness of the hedge on an ongoing basis.

 

Income Taxes

 

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The measurement of net deferred tax assets is reduced by the amount of any tax benefit that, based on available evidence, is not expected to be realized, and a corresponding valuation allowance is established. The determination of the required valuation allowance against net deferred tax assets was made without taking into account the deferred tax liabilities created from the book and tax differences on indefinite-lived assets.

 

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 recognizes the effect on deferred taxes of a change in tax rates in income in the period that includes the enactment date. 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. Once a financial statement benefit for a tax position is recorded or a tax reserve is established, the Company adjusts it only when there is more information available or when an event occurs necessitating a change. While the Company believes that the amount of the recorded financial statement benefits and tax reserves reflect the more-likely-than-not criteria, it is possible that the ultimate outcome of current or future examinations may result in a reduction to the tax benefits previously recorded on its condensed consolidated financial statements or may exceed the current income tax reserves in amounts that could be material. As of September 30, 2018, and December 31, 2017, the Company had a liability for unrecognized tax benefits of $0.4 million, which was included in other long-term liabilities. The Company’s policy is to record interest and penalties on uncertain tax positions as a component of income tax expense. During the three and nine months ended September 30, 2018 and 2017, interest and penalties related to uncertain tax positions included in income tax expense are not significant.

 

 

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 for the current year and three prior years remain subject to examination by tax authorities and the Company’s foreign tax returns for the current year and four prior years remain subject to examination by tax authorities.

 

The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), codified as Accounting Standards Update (“ASU”) 2018-05, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. SAB 118 is effective for reporting periods that include December 22, 2017. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its financial statements as of December 31, 2017, resulting in additional tax expense of $12.7 million in that period. As the Company collects and prepares the necessary data, and interprets the Tax Act and any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, it may make adjustments to the provisional amounts. Those adjustments may materially impact the Company’s provision for income taxes and effective tax rate in the period in which the adjustments are made. To date, management has not made any adjustments to the provisional amounts for the remeasurement of deferred tax assets/liabilities and the deemed repatriation of certain foreign subsidiary earnings. The accounting for the tax effects of the Tax Act will be completed in 2018.

 

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.

 

Segment Reporting

 

The Company is primarily a specialty cruise operator with operations in two segments, Lindblad and Natural Habitat. The Company evaluates the performance of the business based largely on the results of its operating segments. The chief operating decision maker, or CODM, and management review operating results monthly, and base operating decisions on the total results at a consolidated level, as well as at a segment level. The reports provided to the Board of Directors are at a consolidated level and also contain information regarding the separate results of both segments. While both segments have similar characteristics, the two operating and reporting segments cannot be aggregated because they fail to meet the requirements for aggregation.

 

Recent Accounting Pronouncements

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-15 Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in this Update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2018. Management is currently assessing the effect of this guidance on its consolidated financial statements and related disclosures.

 

In August 2018, the FASB issued ASU 2018-13 Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This amendment is intended to improve the effectiveness of fair value measurement disclosures by adding and modifying a few disclosure requirements, as well as eliminating several disclosures. ASU 2018-13 is effective for fiscal years beginning after December 15, 2018. Management is currently assessing the effect of this guidance on its consolidated financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and in July 2018 ASU 2018-11, Leases (Topic 842): Targeted Improvements. The guidance requires the recognition of lease right-of-use assets and lease liabilities by lessees for those leases previously classified as operating. This guidance was issued to increase transparency and comparability among organizations by disclosing key information about leasing arrangements and requiring the recognition of right-of-use assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company will adopt this guidance on January 1, 2019, as required. The adoption of this guidance will have a material impact on the Company’s balance sheet for the present value of its lease liabilities and related right-of-use assets. The Company does not believe that the adoption of this guidance will have a material effect on its future results of operations or cash flows.

 

 

Accounting Pronouncements Recently Adopted

 

In 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is based on the principle that revenue is recognized upon 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. There have been multiple clarifying ASU’s issued subsequent to ASU 2014-09. The Company adopted the revenue recognition guidance beginning January 1, 2018, using the modified retrospective transition method applied to those contracts which were not completed as of the adoption date. Prior periods have not been restated. The adoption of this guidance was not material to the Company’s financial position and results of operations.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendment was issued in response from stakeholders’ regarding the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities). Now the entity compares the fair value of the reporting unit with its carrying amount. The Company adopted this guidance beginning January 1, 2018, which did not have a material impact on its financial position or results of operations.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The guidance was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this guidance provide a screen to determine when a set (inputs and processes that produce an output) is a business. The screen requires that when substantially all of the fair value of the gross assets acquired or disposed of is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company adopted this guidance beginning January 1, 2018, which did not have a material impact on its financial position or results of operations.

 

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12), which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The amendments also ease the application of hedge accounting in certain situations, including eliminating the requirement to separately measure and report hedge ineffectiveness for cash flow hedges. ASU 2017-12 is effective for fiscal years beginning after December 31, 2018, and earlier adoption is permitted. The Company has elected early adoption of ASU 2017-12 and has accounted for its cash flow hedges in accordance with the amended rules.

 

NOTE 3 – LONG-TERM DEBT

 

		As of September 30, 2018												As of December 31, 2017
		(unaudited)
(In thousands)		Principal				Deferred Financing Costs, net				Balance				Principal				Deferred Financing Costs, net				Balance
Note payable		$	2,525			$	-			$	2,525			$	2,525			$	-			$	2,525
Credit Facility			199,500				(11,864	)			187,636				170,625				(7,214	)			163,411
Total long-term debt			202,025				(11,864	)			190,161				173,150				(7,214	)			165,936
Less current portion			(2,000	)			-				(2,000	)			(1,750	)			-				(1,750	)
Total long-term debt, non-current		$	200,025			$	(11,864	)		$	188,161			$	171,400			$	(7,214	)		$	164,186

 

Credit Facility

 

On March 27, 2018, the Company entered into the Amended Credit Agreement providing for a refinancing and amendment of the terms of the Company’s prior secured credit facility, dated as of March 7, 2016 (the “Superseded Agreement”).

 

 

The Amended Credit Agreement provided for a $200.0 million senior secured Term Facility, which represented an increase of $25.0 million from the senior secured first lien term loan facility under the Superseded Agreement. The Term Facility matures March 27, 2025. Consistent with the Superseded Agreement, the Amended Credit Agreement also provides for a $45.0 million senior secured incremental revolving credit facility (the “Revolving Facility”), which includes a $5.0 million letter of credit sub-facility. The Company’s obligations under the Amended Credit Agreement remain secured by substantially all of the assets of the Company.

 

In connection with the Amended Credit Agreement, the Company capitalized $4.2 million related to lender and third-party fees. In addition, the entry into the Amended Credit Agreement was considered a debt modification with a partial extinguishment, as a result the Company expensed $1.0 million of related costs during the nine months ended September 30, 2018, which is included in general and administrative expenses on the accompanying condensed consolidated statements of operations.

 

Borrowings under the Term Facility bear interest at an adjusted Intercontinental Exchange (“ICE”) Benchmark administration LIBOR plus a spread of 3.50%, which steps down to 3.25% if the Company’s debt rating from Moody’s and S&P are both B1 (stable) or better and BB (negative) or better, respectively. The interest rate at September 30, 2018 is 5.74% under the Term Facility. Borrowings under the Revolving Facility will bear interest at an adjusted ICE Benchmark administration LIBOR plus a spread of 3.00%, or, at the option of the Company, an alternative base rate plus a spread of 2.00%. The Company is also required to pay a 0.5% annual commitment fee on undrawn amounts under the Revolving Facility, which matures on March 27, 2023.

 

The Amended 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. As of September 30, 2018, the Company was in compliance with the covenants.

 

Borrowings under the Revolving Facility may be used for general corporate and working capital purposes and related fees and expenses. As of September 30, 2018, the Company had no borrowings under the Revolving Facility.

 

For the three months ended September 30, 2018 and 2017, deferred financing costs charged to interest expense was $0.4 million and $0.6 million, respectively. For the nine months ended September 30, 2018 and 2017, deferred financing costs charged to interest expense was $1.5 million and $1.7 million, respectively.

 

Senior Secured Credit Agreement

 

On January 8, 2018, the Company and its indirect, wholly-owned subsidiary (the “Borrower”) entered into a senior secured credit agreement (the “Export Credit Agreement”) with Citibank, N.A., London Branch (“Citi”) and Eksportkreditt Norge AS (together with Citi, the “Lenders”). Pursuant to the Export Credit Agreement, the Lenders have agreed to make available to the Borrower, at the Borrower’s option and subject to certain conditions, a loan in an aggregate principal amount not to exceed $107.7 million for the purpose of providing financing for up to 80% of the purchase price of the Company’s new ice class vessel, the National Geographic Endurance, targeted to be completed in January 2020. Seventy percent of the loan will be guaranteed by Garantiinstituttet for Eksportkreditt, the official export credit agency of Norway. If drawn upon, the loan will be made at the time of delivery of the vessel.

 

At the Borrower’s election, the loan will bear interest either at a fixed interest rate effectively equal to 5.78% or a floating interest rate equal to three-month LIBOR plus a margin of 3.00% per annum. The loan will amortize quarterly based on a twelve-year profile, with 70% maturing over twelve years from drawdown, and 30% maturing over five years from drawdown. The Company is also required to pay an annual commitment fee of 1.3% until drawdown of the Export Credit Agreement. The loan will be secured by a first priority mortgage over the new vessel and the assignment of related insurances. The Export Credit Agreement also contains customary events of default and mandatory prepayment events for, among other things, non-payment, breach of covenants, default on certain other indebtedness, certain large judgments and a change of control of the Company or the Borrower. In addition to paying interest on any outstanding loans under the facility, the Borrower is required to pay customary coordination, arrangement, agency, collateral and commitment fees. Amounts drawn under the Export Credit Agreement may be voluntarily prepaid at any time subject to customary breakage costs. All obligations of the Borrower under the Export Credit Agreement are guaranteed by the Company. As of September 30, 2018, the Company was in compliance with the covenants.

 

Note Payable

 

On May 4, 2016, in connection with the Natural Habitat acquisition, Natural Habitat issued an unsecured promissory note to Benjamin L. Bressler, the founder of Natural Habitat, with an outstanding principal amount of $2.5 million due at maturity on December 31, 2020. The promissory note accrues interest at a rate of 1.44% annually, with interest payable every six months.

 

 

NOTE 4 – EMPLOYEE BENEFIT PLAN

 

The Company has a 401(k) profit sharing plan and trust for its employees. The Company matches 30% of employee contributions up to an annual maximum of $2,100 as of September 30, 2018 and 2017. For the three months ended September 30, 2018 and 2017, the Company’s benefit plan contribution was $0.1 million and $0.1 million, respectively. For the nine months ended September 30, 2018 and 2017, the Company’s benefit plan contribution was $0.3 million and $0.2 million, respectively. The benefit plan contribution is included in general and administrative expenses on the accompanying condensed consolidated statements of operations.

 

NOTE 5 – STOCKHOLDERS’ EQUITY

 

Capital Stock

 

The Company has 1,000,000 shares of preferred stock authorized, $0.0001 par value and 200,000,000 shares of common stock authorized, $0.0001 par value.

 

Stock and Warrant Repurchase Plan

 

The Company’s Board of Directors approved a stock and warrant repurchase plan (“Repurchase Plan”) in November 2015 and increased the repurchase plan to $35.0 million in November 2016. The Repurchase Plan authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants. 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. These repurchases exclude shares repurchased to settle statutory employee tax withholding related to the exercise of stock options and vesting of stock awards. All repurchases were made using cash resources. During the nine months ended September 30, 2018 the Company repurchased 9,030 shares of common stock for $0.1 million and 568,446 warrants for $0.8 million. The Company has cumulatively repurchased 864,806 shares of common stock for $8.1 million and 6,011,926 warrants for $14.7 million, since plan inception. The balance for the Repurchase Plan was $12.1 million as of September 30, 2018.

 

2018 Long-Term Incentive Compensation

 

In 2017, the Company’s compensation committee approved an employee incentive plan which authorizes awarding restricted stock units (“RSUs”) and performance share units (“PSUs”) to key employees under the Company’s 2015 Long-Term Incentive Plan.

 

During the nine months ended September 30, 2018, the Company granted 171,947 RSUs with a weighted average grant price of $10.63. The RSUs will vest in equal installments on each of the first three anniversaries of the grant date, subject to the recipient’s continued employment or service with the Company or its subsidiaries on the applicable vesting date.

 

The PSUs are performance-vesting equity incentive awards that will be earned based on our performance against metrics relating to annual Adjusted EBITDA and annual revenue. Awards will vest after a three-year performance period and may be earned at a level ranging from 0%-200% of the number of PSUs granted, depending on performance. During the nine months ended September 30, 2018, the Company awarded 88,851 of targeted PSUs with a weighted average grant price of $10.27. The number of shares were determined based upon the closing price of our common stock on the date of the award.

 

Stock Options

 

During the nine months ended September 30, 2018, 955,424 stock options were exercised at a weighted average exercise price of $1.76 per share in cashless transactions, resulting in the net issuance of 442,820 shares of common stock.

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

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 provided for the Builder to construct two 236-foot, 100-passenger cruise vessels.

 

The first vessel, the National Geographic Quest, was delivered in July 2017. The second vessel, the National Geographic Venture, has a contract price of $57.7 million and is scheduled for delivery in the fourth quarter of 2018. As of September 30, 2018, the Company had paid Ice Floe, LLC $53.0 million related to the vessel. The Agreement also contains customary representations, warranties, covenants and indemnities.

 

 

In November 2017, the Company entered into an agreement with Ulstein Verft to construct a polar ice class vessel, the National Geographic Endurance, with a total purchase price of 1,066.0 million Norwegian Kroner. Subsequently, the Company exercised its right to make payments in United States Dollars, which resulted in a purchase price of $134.6 million, including hedging costs. The purchase price is subject to potential adjustments from contract specifications for variations in speed, deadweight, fuel consumption and delivery date, and is due in installments. The first twenty percent of the purchase price was paid shortly after execution of the Agreement with the remaining eighty percent due upon delivery and acceptance of the vessel. The vessel is targeted to be delivered in January 2020, with potential accelerated delivery to November 2019.

 

Royalty Agreement – National Geographic

 

The Company is party to 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 operations. 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 pre- and post-expedition extensions. A pre- and post-expedition extension occurs when a guest extends his or her trip with pre- or post-voyage hotel nights and is included within tour revenues on the accompanying condensed consolidated statements of operations. The royalty expense is recognized at the time of revenue recognition. See Note 2 – Summary of Significant Accounting Policies for a description of the Company’s revenue recognition policy. Royalty expense for the three and nine months ended September 30, 2018 totaled $1.5 million and $4.6 million, respectively, and for the three and nine months ended September 30, 2017 totaled $1.6 million and $3.9 million, respectively.

 

The balances outstanding to National Geographic as of September 30, 2018 and December 31, 2017 was $1.9 million and $1.7 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 operations. The annual royalty payment and gross sales fees are paid on a quarterly basis. For the three months ended September 30, 2018 and 2017, these fees totaled $0.3 million and $0.2 million, respectively. For the nine months ended September 30, 2018 and 2017, these fees totaled $0.6 million and $0.4 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 as of September 30, 2018 are as follows:

 

For the years ended December 31,		Amount
(In thousands)		(unaudited)
2018 (three months)		$	2,549
2019			8,276
2020			7,010
2021			2,031
2022			1,850
Total		$	21,716

 

 

NOTE 7 – SEGMENT INFORMATION

 

The Company evaluates the performance of its business segments based largely on tour revenues and operating income, without allocating other income and expenses, net, income taxes and interest expense, net. For the three and nine months ended September 30, 2018 and 2017, operating results were as follows:

 

		For the three months ended September 30,																For the nine months ended September 30,
(In thousands)		2018				2017				Change				%				2018				2017				Change				%
Tour revenues:
Lindblad		$	64,507			$	67,451			$	(2,944	)			(4	%)		$	194,516			$	167,891			$	26,625				16	%
Natural Habitat			22,735				17,133				5,602				33	%			44,609				35,392				9,217				26	%
Total tour revenues		$	87,242			$	84,584			$	2,658				3	%		$	239,125			$	203,283			$	35,842				18	%
Operating income:
Lindblad		$	8,209			$	12,070			$	(3,861	)			(32	%)		$	26,755			$	12,386			$	14,369				116	%
Natural Habitat			2,072				1,479				593				40	%			2,105				873				1,232				141	%
Total operating income		$	10,281			$	13,549			$	(3,268	)			(24	%)		$	28,860			$	13,259			$	15,601				118	%

 

Depreciation and amortization are included in segment operating income as shown below:

 

		For the three months ended September 30,																For the nine months ended September 30,
(In thousands)		2018				2017				Change				%				2018				2017				Change				%
Depreciation and amortization:
Lindblad		$	4,645			$	3,994			$	651				16	%		$	13,954			$	10,989			$	2,965				27	%
Natural Habitat			379				360				19				5	%			1,108				1,023				85				8	%
Total depreciation and amortization		$	5,024			$	4,354			$	670				15	%		$	15,062			$	12,012			$	3,050				25	%

 

The following table presents our total assets, intangibles, net and goodwill by segment:

 

		As of September 30,				As of December 31,
(In thousands)		2018				2017
Total Assets:		(unaudited)
Lindblad		$	399,998			$	371,081
Natural Habitat			64,817				53,267
Total assets		$	464,815			$	424,348
Intangibles, net:
Lindblad		$	4,232			$	4,776
Natural Habitat			4,138				4,778
Total intangibles, net		$	8,370			$	9,554
Goodwill
Lindblad		$	-			$	-
Natural Habitat			22,105				22,105
Total goodwill		$	22,105			$	22,105

 

For the three months ended September 30, 2018 and 2017 there were $1.2 million and $0.7 million in intercompany tour revenues between the Lindblad and Natural Habitat segments eliminated in consolidation, respectively. For the nine months ended September 30, 2018 and 2017, there were $2.6 million and $1.1 million, respectively, in intercompany tour revenues between the Lindblad and Natural Habitat segments eliminated in consolidation.

 

 

Item 2.

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

  

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 the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q (“Form 10-Q”), as well as the 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 (“SEC”) on March 2, 2018.

 

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:

 

	●	general economic conditions;
	●	unscheduled disruptions in our business due to weather events, mechanical failures, or other events;
	●	delays and costs overruns with respect to the construction and delivery of newly constructed vessels;
	●	management of our growth and our ability to execute on our planned growth;
	●	our business strategy and plans;
	●	compliance with laws and regulations,
	●	compliance with the financial and/or operating covenants in our debt agreements;
	●	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 Adjusted EBITDA projections; and
	●	those risks discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC on March 2, 2018.

 

We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-Q. 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,” “Lindblad,” “we,” “us,” “our,” and “ours” refer to Lindblad Expeditions Holdings, Inc., and its subsidiaries.

 

Business Overview

 

Lindblad provides 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 operate a fleet of seven owned expedition ships. The Company has contracted for two additional vessels, the National Geographic Venture, a coastal vessel expected to be completed in the fourth quarter of 2018, and the National Geographic Endurance, a polar ice class vessel targeted to be completed in January 2020, with potential accelerated delivery to November 2019.

 

In addition, the Company operates five seasonal charter vessels under the Lindblad brand. We deploy chartered vessels for various seasonal offerings and continually seek to optimize our charter fleet to balance our inventory with demand and maximize yields. We use our charter inventory as a mechanism to both increase travel options for 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.

 

 

We have a longstanding relationship with the National Geographic Society dating back to 2004, which is based on a shared interest in exploration, research, technology and conservation. This relationship includes co-selling, co-marketing and branding arrangements with National Geographic Partners, LLC (“National Geographic”) whereby our owned vessels carry the National Geographic name and National Geographic sells our expeditions through their internal travel divisions. We collaborate with National Geographic on expedition 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 expedition.

 

Highlights

 

In July 2018, the Company’s Board of Directors authorized the building of an additional polar ice class ship anticipated for delivery in 2021.

 

On March 27, 2018, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with Credit Suisse, as Administrative Agent and Collateral Agent, providing for a refinancing and amendment of the terms of the Company’s existing secured credit facility, dated as of March 7, 2016 (the “Superseded Agreement”). The Amended Credit Agreement provided for a $200.0 million senior secured first lien term loan facility (the “Term Facility”), which represented an increase of $25.0 million from the senior secured first lien term loan facility under the Superseded Agreement. Consistent with the Superseded Agreement, the Amended Credit Agreement also provides for a $45.0 million senior secured incremental revolving credit facility (the “Revolving Facility”), which includes a $5.0 million letter of credit sub-facility. See Note 3 – Long-Term Debt to the condensed consolidated financial statements for additional information regarding the Restated Credit Agreement.

 

On January 8, 2018, the Company and its indirect, wholly-owned subsidiary (the “Borrower”) entered into a senior secured credit agreement (the “Export Credit Agreement”) with Citibank, N.A., London Branch (“Citi”) and Eksportkreditt Norge AS (together with Citi, the “Lenders”). Pursuant to the Export Credit Agreement, the Lenders have agreed to make available to the Borrower, at the Borrower’s option and subject to certain conditions, a loan in an aggregate principal amount not to exceed $107.7 million for the purpose of providing financing for up to 80% of the purchase price of the Company’s new polar ice class vessel, the National Geographic Endurance, targeted to be completed in January 2020. Seventy percent of the loan will be guaranteed by Garantiinstituttet for Eksportkreditt, the official export credit agency of Norway. If drawn upon, the loan will be made at the time of delivery of the vessel.

 

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

 

	●	a description of certain line items and operational and financial metrics we utilize to assist us in managing our business;
	●	results and a comparable discussion of our consolidated and segment results of operations for the three and nine months ended September 30, 2018 and 2017;
	●	a discussion of our liquidity and capital resources, including future capital and contractual commitments and potential funding sources; and
	●	a review of our critical accounting policies.

 

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, royalties 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, Occupancy 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 (expense) benefit, (gain) loss on foreign currency, (gain) loss on transfer of assets, reorganization costs, and other supplemental adjustments. Other supplemental adjustments include certain non-operating items such as stock-based compensation, executive severance costs, the National Geographic fee amortization, debt refinancing costs and acquisition-related expenses. The Company believes 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. The Company believes Adjusted EBITDA helps provide a more complete understanding of the underlying operating results and trends and an enhanced overall understanding of the Company’s financial performance and prospects for the future. 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. The Company’s use of Adjusted EBITDA may not be comparable to other companies within the industry.

 

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, 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, selling and marketing expenses, and general and administrative expenses.

 

 

Gross Yield represents tour revenues less insurance proceeds 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 insurance proceeds, 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 re-measurement adjustments and gains or losses resulting from foreign currency transactions are recorded as foreign exchange gains or losses in the condensed consolidated statements of operations.

 

Seasonality

 

Lindblad tour revenues from the sale of guest tickets are mildly seasonal, 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. Natural Habitat is a seasonal business, with higher tour revenue recorded in the fourth quarter than other quarters related to polar bear tour revenues.

 

 

Results of Operations - Consolidated

 

		For the three months ended   September 30,																For the nine months ended   September 30,
(In thousands, except per share data)		2018				2017				Change				%				2018				2017				Change				%
Tour revenues		$	87,242			$	84,584			$	2,658				3	%		$	239,125			$	203,283			$	35,842				18	%
Cost of tours			44,964				38,480				6,484				17	%			114,645				99,780				14,865				15	%
Gross profit			42,278				46,104				(3,826	)			(8	%)			124,480				103,503				20,977				20	%
General and administrative			14,718				16,526				(1,808	)			(11	%)			45,647				46,710				(1,063	)			(2	%)
Selling and marketing			12,255				11,676				579				5	%			34,911				31,521				3,390				11	%
Depreciation and amortization			5,024				4,354				670				15	%			15,062				12,012				3,050				25	%
Operating income		$	10,281			$	13,548			$	(3,267	)			(24	%)		$	28,860			$	13,260			$	15,600				118	%
Net income		$	5,346			$	9,443			$	(4,097	)			(43	%)		$	16,105			$	7,491			$	8,614				115	%
Earnings per share avail. to common stockholders
Basic		$	0.11			$	0.21			$	(0.10	)						$	0.35			$	0.16			$	0.19
Diluted		$	0.11			$	0.20				(0.09	)						$	0.35			$	0.16				0.19

 

Comparison of the Three and Nine months Ended September 30, 2018 to Three and Nine months Ended September 30, 2017 - Consolidated

 

Tour Revenues

 

Tour revenues for the three months ended September 30, 2018 increased $2.7 million, or 3%, to $87.2 million compared to $84.6 million for the three months ended September 30, 2017. The Lindblad segment tour revenues decreased by $2.9 million primarily driven by a decrease in Available Guest Nights during 2018 due to timing of vessel drydocks in 2018 compared to 2017, as well as a decrease in Net Yields. 2017 results also included the impact of the cancellation of four highly booked voyages on the National Geographic Quest due to the delayed delivery of the vessel. At the Natural Habitat segment, tour revenues increased $5.6 million over the prior year period primarily due to additional departures and an increase in pricing.

 

Tour revenues for the nine months ended September 30, 2018 increased $35.8 million, or 18%, to $239.1 million compared to $203.3 million for the nine months ended September 30, 2017. The Lindblad segment tour revenues increased by $26.6 million driven by higher guest ticket revenue, primarily from an increase in Available Guest Nights during 2018 due to the addition of the National Geographic Quest to the fleet in the third quarter of 2017. 2017 results also included the impact of voyage cancellations on the National Geographic Orion and the National Geographic Sea Lion, as well as the impact of the delayed delivery of the National Geographic Quest. At the Natural Habitat segment, tour revenues increased $9.2 million over the prior year period primarily due to additional departures and an increase in pricing.

 

Cost of Tours

 

Total cost of tours for the three months ended September 30, 2018 increased $6.5 million, or 17%, to $45.0 million compared to $38.5 million for the three months ended September 30, 2017. At the Lindblad segment, cost of tours increased $2.3 million primarily due to an increase in drydock expenses related to timing of planned vessel drydock maintenance. At the Natural Habitat segment, cost of tours increased $4.2 million due to additional departures.

 

Total cost of tours for the nine months ended September 30, 2018 increased $14.9 million, or 15%, to $114.6 million compared to $99.8 million for the nine months ended September 30, 2017. At the Lindblad segment, cost of tours increased $8.9 million primarily due to costs related to the National Geographic Quest, the impact of cancelled voyages in the first quarter of 2017, an increase in Available Guest Nights across the fleet, and higher fuel costs. At the Natural Habitat segment, cost of tours increased $5.9 million due to additional departures.

 

General and Administrative

 

General and administrative expenses for the three months ended September 30, 2018 decreased $1.8 million, or 11%, to $14.7 million compared to $16.5 million for the three months ended September 30, 2017. At the Lindblad segment, general and administrative expenses decreased $2.4 million over the prior year period as a result of $1.8 million in lower stock compensation expense, mainly due to higher costs in prior year related to option grants that were fully expensed as of December 31, 2017, as well as a decrease in executive severance cost of $1.6 million, partially offset by higher personnel and other costs. At the Natural Habitat segment, general and administrative expenses increased $0.6 million primarily due to an increase in personnel and other costs.

 

 

General and administrative expenses for the nine months ended September 30, 2018 decreased $1.1 million, or 2%, to $45.6 million compared to $46.7 million for the nine months ended September 30, 2017. At the Lindblad segment, general and administrative expenses decreased $2.7 million over the prior year as a result of $6.2 million in lower stock compensation expense, mainly due to higher costs in prior year related to the 2016 CEO Allocation Grant and option grants that were fully expensed as of December 31, 2017 and the 2017 executive severance costs, partially offset by debt refinancing costs incurred in the first quarter of 2018 and an increase in personnel costs and credit card fees. At the Natural Habitat segment, general and administrative expenses increased $1.6 million primarily due to an increase in personnel and other costs.

 

Selling and Marketing

 

Selling and marketing expenses for the three months ended September 30, 2018 increased $0.6 million, or 5%, to $12.3 million compared to $11.7 million for the three months ended September 30, 2017. At the Lindblad segment, selling and marketing expenses increased $0.4 million primarily due to increased commission expenses. At the Natural Habitat segment, selling and marketing expenses increased $0.2 million primarily driven by an increase in advertising expenditures.

 

Selling and marketing expenses for the nine months ended September 30, 2018 increased $3.4 million, or 11%, to $34.9 million compared to $31.5 million for the nine months ended September 30, 2017. At the Lindblad segment, selling and marketing expenses increased $3.1 million primarily due to increased commission and royalty expense associated with the higher tour revenues. At the Natural Habitat segment, selling and marketing expenses increased $0.3 million primarily driven by an increase in advertising expenditures.

 

Depreciation and Amortization

 

Depreciation and amortization expenses for the three months ended September 30, 2018 increased $0.7 million, or 15%, to $5.0 million, compared to $4.4 million for the three months ended September 30, 2017 primarily due to the addition of the National Geographic Quest to the Lindblad segment in July 2017.

 

Depreciation and amortization expenses for the nine months ended September 30, 2018 increased $3.1 million, or 25%, to $15.1 million, compared to $12.0 million for the nine months ended September 30, 2017 primarily due to the addition of the National Geographic Quest to the Lindblad segment in July 2017.

 

Other Expense

 

Other expenses for the three months ended September 30, 2018 decreased $0.3 million to $2.2 million from $2.5 million for the three months ended September 30, 2017, primarily due to the following:

 

●

Interest expense, net, decreased $0.4 million to $2.4 million in 2018 from $2.8 million in 2017 due to higher capitalized interest for the National Geographic Endurance and the National Geographic Venture, partially offset by additional borrowings under our amended credit facility and commitment fees related to our new senior secured credit agreement.

 

Other expenses for the nine months ended September 30, 2018 increased $3.4 million to $9.6 million from $6.2 million for the nine months ended September 30, 2017, primarily due to the following:

 

	●	In 2018, we incurred a $1.4 million loss in foreign currency translation compared to a gain of $1.0 million in 2017, due to the weakening of the U.S. dollar primarily in relation to the Canadian dollar.
	●	Interest expense, net, increased $0.8 million to $8.0 million in 2018 from $7.2 million in 2017 due to additional borrowings and the commitment fees related to our new senior secured credit agreement, and our first lien term loan facility, partially offset by higher capitalized interest for the National Geographic Endurance and the National Geographic Venture.

 

 

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)		2018				2017				Change				%		2018				2017				Change				%
Tour revenues:
Lindblad		$	64,507			$	67,451			$	(2,944	)		(4%	)	$	194,516			$	167,891			$	26,625			16%
Natural Habitat			22,735				17,133				5,602			33%			44,609				35,392				9,217			26%
Total tour revenues		$	87,242			$	84,584			$	2,658			3%		$	239,125			$	203,283			$	35,842			18%
Operating income:
Lindblad		$	8,209			$	12,070			$	(3,861	)		(32%)		$	26,755			$	12,386			$	14,369			116%
Natural Habitat			2,072				1,479				593			40%			2,105				873				1,232			141%
Total operating income		$	10,281			$	13,549			$	(3,268	)		(24%)		$	28,860			$	13,259			$	15,601			118%

 

Results of Operations – Lindblad Segment

 

The following table sets forth our Available Guest Nights, Guest Nights Sold, Occupancy, Maximum Guests, Number of Guests and Voyages for the three and nine months ended September 30, 2018 and 2017 at the Lindblad segment:

 

		For the three months ended September 30,								For the nine months ended September 30,
		2018				2017				2018				2017
Available Guest Nights			55,741				56,398				160,575				142,291
Guest Nights Sold			50,993				51,122				145,714				124,951
Occupancy			91.5	%			90.6	%			90.7	%			87.8	%
Maximum Guests			7,137				7,518				20,388				17,727
Number of Guests			6,582				6,846				18,553				15,758
Voyages			93				97				269				244

 

The following table shows the calculations of Gross Yield and Net Yield for the three and nine months ended September 30, 2018 and 2017. Gross Yield is calculated by dividing Tour Revenues by Available Guest Nights and Net Yield is calculated by dividing Net Revenue by Available Guest Nights at the Lindblad segment:

 

Calculation of Gross Yield and Net Yield

Lindblad Segment 

 

		For the three months ended September 30,								For the nine months ended September 30,
(In thousands, except for Available Guest Nights, Gross and Net Yield)		2018				2017				2018				2017
Guest ticket revenues		$	58,187			$	61,715			$	174,699			$	147,504
Other tour revenues			6,320				5,736				19,817				20,387
Tour Revenues			64,507				67,451				194,516				167,891
Less: Orion Insurance Proceeds (a)			-				(248	)			-				(2,148	)
Adjusted Tour Revenues			64,507				67,203				194,516				165,743
Less: Commissions			(5,055	)			(4,559	)			(14,977	)			(12,321	)
Less: Other tour expenses			(4,673	)			(3,532	)			(12,952	)			(10,622	)
Net Revenue		$	54,779			$	59,112			$	166,587			$	142,800
Available Guest Nights			55,741				56,398				160,575				142,291
Gross Yield		$	1,157			$	1,192			$	1,211			$	1,165
Net Yield			983				1,048				1,037				1,004

  

(a)

Insurance proceeds received from the Orion voyage cancellations from Q1 2017.

 

 

The following table shows the calculations of Gross Cruise Cost per Available Guest Night and Net Cruise Costs per Available Guest Night for the three and nine months ended September 30, 2018 and 2017 at the Lindblad segment:

 

(In thousands, except for Available Guest Nights, Gross and Net		For the three months ended September 30,								For the nine months ended September 30,
Cruise Cost per Avail. Guest Night)		2018				2017				2018				2017
Cost of tours		$	29,647			$	27,374			$	85,837			$	76,915
Plus: Selling and marketing			10,754				10,358				31,699				28,629
Plus: General and administrative			11,252				13,656				36,271				38,972
Gross Cruise Cost			51,653				51,388				153,807				144,516
Less: Commission expense			(5,055	)			(4,559	)			(14,977	)			(12,321	)
Less: Other tour expenses			(4,673	)			(3,532	)			(12,952	)			(10,622	)
Net Cruise Cost			41,925				43,297				125,878				121,573
Less: Fuel expense			(2,168	)			(1,894	)			(6,876	)			(4,858	)
Net Cruise Cost Excluding Fuel			39,757				41,403				119,002				116,715
Non-GAAP Adjustments:
Stock-based compensation			(1,271	)			(3,057	)			(3,256	)			(9,464	)
National Geographic fee amortization			(727	)			(727	)			(2,181	)			(2,180	)
Reorganization costs			(31	)			(29	)			(324	)			(346	)
Debt refinancing costs			-				-				(997	)			-
Executive severance costs			215				(1,400	)			(71	)			(1,400	)
Adjusted Net Cruise Cost Excluding Fuel		$	37,943			$	36,190			$	112,173			$	103,325
Adjusted Net Cruise Cost		$	40,111			$	38,084			$	119,049			$	108,183
Available Guest Nights			55,741				56,398				160,575				142,291
Gross Cruise Cost per Available Guest Night		$	927			$	911			$	958			$	1,016
Net Cruise Cost per Available Guest Night			752				768				784				854
Net Cruise Cost Excl. Fuel per Available Guest Night			713				734				741				820
Adj. Net Cruise Cost Excl. Fuel per Avail. Guest Night			681				642				699				726
Adjusted Net Cruise Cost per Available Guest Night			720				675				741				760

 

Comparison of Three and Nine months Ended September 30, 2018 to Three and Nine months Ended September 30, 2017 at the Lindblad Segment

 

Tour Revenues

 

Tour revenues for the three months ended September 30, 2018 decreased $2.9 million, or 4%, to $64.5 million compared to $67.5 million for the three months ended September 30, 2017. The decrease was driven by lower guest ticket revenue primarily from a decrease in Available Guest Nights due to the timing of planned vessel drydocks in 2018 compared to 2017. Net Yields decreased for the three months ended September 30, 2018 to $983 compared to $1,048 for the three months ended September 30, 2017. Occupancy rates increased for the three months ended September 30, 2018 to 92% compared to 91% for the three months ended September 30, 2017, reflecting higher demand across the fleet. 2017 results also included the impact of the cancellation of four highly booked voyages on the National Geographic Quest due to the delayed delivery of the vessel.

 

Tour revenues for the nine months ended September 30, 2018 increased $26.6 million, or 16%, to $194.5 million compared to $167.9 million for the nine months ended September 30, 2017. The increase was driven by higher guest ticket revenue primarily from an increase in Available Guest Nights due to the addition of the National Geographic Quest to our fleet in the third quarter of 2017. In addition, Net Yield for the nine months ended September 30, 2018 increased to $1,037 compared to $1,004 for the nine months ended September 30, 2017, primarily driven by price increases and changes in itineraries. Occupancy rates increased for the nine months ended September 30, 2018 to 91% compared to 88% for the nine months ended September 30, 2017, reflecting higher demand across the fleet. 2017 results also included the impact of voyage cancellations on the National Geographic Orion and the National Geographic Sea Lion, as well as the impact of the delayed delivery of the National Geographic Quest.

 

 

Operating Income

 

Operating income decreased $3.9 million to $8.2 million for the three months ended September 30, 2018 compared to $12.1 million for the three months ended September 30, 2017. The decrease was driven primarily by lower tour revenues and higher dry dock expenses due to timing of planned vessel drydocks, as well as higher fuel costs and personnel costs. This was partially offset by a decrease in stock compensation expense related to option grants that were fully expensed as of December 31, 2017. 2017 results also included the impact of the cancellation of four highly booked voyages on the National Geographic Quest due to the delayed delivery of the vessel.

 

Operating income increased $14.4 million to $26.8 million for the nine months ended September 30, 2018 compared to $12.4 million for the nine months ended September 30, 2017. The increase was driven by increased tour revenue and a decrease in stock compensation expense due to higher costs in the prior year related to the 2016 CEO Allocation Grant and option grants that were fully expensed as of December 31, 2017. This was partially offset by higher operating costs due to the addition of the National Geographic Quest to our fleet in the third quarter of 2017, increased Available Guest Nights across the fleet, as well as the impact of cancelled voyages in the first quarter of 2017 and higher fuel costs and commissions. 2017 results were impacted by voyage cancellations of the National Geographic Orion and the National Geographic Sea Lion, as well as the impact of the delayed delivery of the National Geographic Quest.

 

Results of Operations – Natural Habitat Segment

 

Comparison of Three and Nine months Ended September 30, 2018 to Three and Nine months Ended September 30, 2017

 

Tour Revenues

 

Tour revenues for the three months ended September 30, 2018 increased $5.6 million, or 33%, to $22.7 million compared to $17.1 million for the three months ended September 30, 2017 due to additional departures, as well as price increases.

 

Tour revenues for the nine months ended September 30, 2018 increased $9.2 million, or 26%, to $44.6 million compared to $35.4 million for the nine months ended September 30, 2017 due to additional departures, as well as price increases.

 

Operating income

 

Operating income for the three months ended September 30, 2018 increased $0.6 million to $2.1 million compared to $1.5 million for the three months ended September 30, 2017, due to growth in tour revenue, partially offset by higher operating costs related to additional departures, as well as higher personnel and marketing costs to support future growth initiatives.

 

Operating income for the nine months ended September 30, 2018 increased $1.2 million to $2.1 million compared to $0.9 million for the nine months ended September 30, 2017, due to growth in tour revenue, partially offset by higher operating costs related to the additional departures, as well as higher personnel and marketing costs to support future growth initiatives.

 

Results of Operations – Adjusted EBITDA – Consolidated

 

The following table outlines the reconciliation to net income and calculation of consolidated Adjusted EBITDA for the three and nine months ended September 30, 2018 and 2017. 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.

 

 

Reconciliation of Net Income to Adjusted EBITDA

Consolidated

  

		For the three months ended September 30,								For the nine months ended September 30,
(In thousands)		2018				2017				2018				2017
Net income		$	5,346			$	9,443			$	16,105			$	7,491
Interest expense, net			2,409				2,802				8,013				7,192
Income tax expense (benefit)			2,690				1,586				3,194				(473	)
Depreciation and amortization			5,024				4,354				15,062				12,012
(Gain) loss on foreign currency			(163	)			(224	)			1,430				(1,047	)
Other (income) expense, net			(1	)			(59	)			118				97
Stock-based compensation			1,271				3,057				3,256				9,464
National Geographic fee amortization			727				727				2,181				2,180
Reorganization costs			31				29				324				346
Debt refinancing costs			-				-				997				-
Executive severance costs			(215	)			1,400				71				1,400
Adjusted EBITDA		$	17,119			$	23,115			$	50,751			$	38,662

  

The following tables outline the reconciliation for each segment from operating income to Adjusted EBITDA for the three and nine months ended September 30, 2018 and 2017.

 

Reconciliation of Operating Income to Adjusted EBITDA
Lindblad Segment
		For the three months ended September 30,								For the nine months ended September 30,
(In thousands)		2018				2017				2018				2017
Operating income		$	8,209			$	12,070			$	26,755			$	12,387
Depreciation and amortization			4,645				3,994				13,954				10,989
Stock-based compensation			1,271				3,057				3,256				9,464
National Geographic fee amortization			727				727				2,181				2,180
Reorganization costs			31				29				324				346
Debt refinancing costs			-				-				997				-
Executive severance costs			(215	)			1,400				71				1,400
Adjusted EBITDA		$	14,668			$	21,277			$	47,538			$	36,766

 

Reconciliation of Operating Income to Adjusted EBITDA
Natural Habitat Segment
		For the three months ended September 30,								For the nine months ended September 30,
(In thousands)		2018				2017				2018				2017
Operating income		$	2,072			$	1,478			$	2,105			$	873
Depreciation and amortization			379				360				1,108				1,023
Adjusted EBITDA		$	2,451			$	1,838			$	3,213			$	1,896

 

 

Liquidity and Capital Resources

 

Sources and Uses of Cash for the Nine months Ended September 30, 2018 and 2017

 

Net cash provided by operating activities was $39.3 million in 2018 compared to $29.4 million in 2017. The $9.8 million increase was primarily due to the improved operating results.

 

Net cash used in investing activities was $47.0 million in 2018 compared to $43.8 million in 2017. The $3.3 million decrease was primarily due to an increase in purchases of property and equipment related to the construction of the National Geographic Endurance and the National Geographic Venture, as well as higher deposits from our Federal Maritime Commission escrow for travel on the Company’s U.S. flagged vessels.

 

Net cash provided by financing activities was $17.0 million in 2018 compared to net cash used in financing activities of $9.0 million in 2017. The $26.0 million increase was primarily due to the $200.0 million in proceeds from refinancing the credit facility, partially offset by the $171.1 million repayment of the previous senior debt and payment of $6.5 million in deferred financing costs.

 

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 expedition date. These advance passenger receipts remain a current liability until the expedition 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, make long-term investments or any other use of cash. As of September 30, 2018 and December 31, 2017, we had a working capital deficit of $1.1 million and $12.7 million, respectively. As of September 30, 2018 and December 31, 2017, we had $105.7 million and $96.4 million, respectively, in cash and cash equivalents, excluding restricted cash.

 

The Company’s Board of Directors approved a stock and warrant repurchase plan (“Repurchase Plan”) in November 2015 and increased the repurchase plan to $35.0 million in November 2016. The Repurchase Plan authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants. 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. These repurchases exclude shares repurchased to settle statutory employee tax withholding related to the exercise of stock options and vesting of stock awards. All repurchases were made using cash resources. During the nine months ended September 30, 2018 the Company repurchased 9,030 shares of common stock for $0.1 million and 568,446 warrants for $0.8 million. The Company has cumulatively repurchased 864,806 shares of common stock for $8.1 million and 6,011,926 warrants for $14.7 million, since plan inception. The balance for the Repurchase Plan was $12.1 million as of September 30, 2018.

 

In December 2015, we executed definitive agreements for the construction of two new coastal vessels. The first vessel, the National Geographic Quest, was delivered in the third quarter of 2017. The second vessel, the National Geographic Venture, has a contract price of $57.7 million and is scheduled for delivery in the fourth quarter of 2018. As of September 30, 2018, the Company had paid the builder $53.0 million related to vessel.

 

In November 2017, the Company executed a contract to build a polar ice class vessel, the National Geographic Endurance, targeted to be competed in January 2020, with potential accelerated delivery to November 2019, with a total purchase price of 1,066.0 million Norwegian Kroner. Subsequently, the Company exercised its right to make payments in United States Dollars, which resulted in a purchase price of $134.6 million, including hedging costs. The first twenty percent of the purchase price was paid shortly after execution of the Agreement with the remaining eighty percent due upon delivery and acceptance of the vessel. The remaining purchase price of the ship will be funded through a combination of cash available on our balance sheet, our Export Credit Agreement, our revolving credit facility and excess cash flows generated by our existing operations.

 

As of September 30, 2018, we had approximately $202.0 million in long-term debt obligations, including the current portion of long-term debt. We believe that our cash on hand, our new revolving credit facility, our Export Credit Agreement 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 Facilities

 

Revolving Credit Facility

 

On March 27, 2018, the Company entered into a Third Amended and Restated Credit Agreement (the “Amended Credit Agreement”), providing for a refinancing and amendment of the terms of the Company’s existing secured credit facility, dated as of March 7, 2016 (the “Superseded Agreement”).

 

The Amended Credit Agreement provided for a $200.0 million senior secured first lien term loan facility (the “Term Facility”), which represented an increase of $25.0 million from the senior secured first lien term loan facility under the Superseded Agreement. The Term Facility matures March 27, 2025. Consistent with the Superseded Agreement, the Amended Credit Agreement also provides for a $45.0 million senior secured incremental revolving credit facility (the “Revolving Facility”), which includes a $5.0 million letter of credit sub-facility. The Company’s obligations under the Amended Credit Agreement remain secured by substantially all of the assets of the Company.

 

Borrowings under the Term Facility will bear interest at an adjusted Intercontinental Exchange (“ICE”) Benchmark administration LIBOR plus a spread of 3.50%, which steps down to 3.25% if the Company’s debt rating from Moody’s and S&P are both B1 (stable) or better and BB (negative) or better, respectively. Borrowings under the Revolving Facility will bear interest at an adjusted ICE Benchmark administration LIBOR plus a spread of 3.00%, or, at the option of the Company, an alternative base rate plus a spread of 2.00%. The Company is also required to pay a 0.5% annual commitment fee on undrawn amounts under the Revolving Credit Facility, which matures on March 27, 2023.

 

During the second quarter of 2018, we entered into interest rate cap agreements to hedge our exposure to interest rate movements and manage our interest rate expense related to the Term Facility.

 

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 $50.0 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 5.25 to 1.00 initially, with 0.25 equal reductions every two years thereafter until June 30, 2022 when the total net leverage ratio shall be 4.75 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 refinancing; (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, 2018, we were in compliance with the covenants.

 

The following table shows the contractual obligation of the Amended Credit agreement for the next five years and thereafter as of September 30, 2018:

 

		Payments due by period
(In thousands)		Total				Current				1-2 years				3-5 years				Thereafter
Long-term debt obligations		$	199,500			$	2,000			$	4,000			$	6,000			$	187,500
Interest on long-term debt			75,698				11,989				23,649				34,551				5,509
		$	275,198			$	13,989			$	27,649			$	40,551			$	193,009

 

Senior Secured Credit Agreement

 

On January 8, 2018, the Company and its indirect, wholly-owned subsidiary (the “Borrower”) entered into a senior secured credit agreement (the “Export Credit Agreement”) with Citibank, N.A., London Branch (“Citi”) and Eksportkreditt Norge AS (together with Citi, the “Lenders”). Pursuant to the Export Credit Agreement, the Lenders have agreed to make available to the Borrower, at the Borrower’s option and subject to certain conditions, a loan in an aggregate principal amount not to exceed $107.7 million for the purpose of providing financing for up to 80% of the purchase price of the Company’s new polar ice class vessel, the National Geographic Endurance, targeted to be completed in January 2020. Seventy percent of the loan will be guaranteed by Garantiinstituttet for Eksportkreditt, the official export credit agency of Norway. If drawn upon, the loan will be made at the time of delivery of the vessel.

 

The Export Credit Agreement contains financial covenants that, among other things, 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 Export Credit Agreement) for the trailing 12-month period) of 4.50 to 1.00.

 

 

Off-Balance Sheet Arrangements

 

On January 8, 2018, the Company entered into an Export Credit Agreement as described above.

 

Critical Accounting Policies

 

For a detailed discussion of the Critical Accounting Policies, please see the Company’s Annual Report for the year ended December 31, 2017 on Form 10-K filed on March 2, 2018 with the Securities and Exchange Commission.

 

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” sections contained in the Company’s Annual Report for the year ended December 31, 2017 on Form 10-K.

 

We are exposed to a market risk for interest rates related to our variable rate debt. We assess our market risks based on changes in interest rates utilizing a sensitivity analysis that measures the potential impact on earnings and cash flows based on a hypothetical 1.0% change (increase and decrease) in interest rates. For additional information regarding our long-term borrowings see Notes 2 and 3 to our Consolidated Condensed Financial Statements.

 

As of September 30, 2018, we had interest rate cap agreements to hedge a portion of our exposure to interest rate movements of our variable rate debt and to manage our interest expense. The notional amount of outstanding debt associated with interest rate cap agreements as of September 30, 2018 was $100.0 million. Based on our September 30, 2018 outstanding variable rate debt balance, a hypothetical 1.0% change in the six-month LIBOR interest rates would impact our annual interest expense by approximately $1.0 million.

 

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 quarter ended September 30, 2018, 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 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 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 year ended December 31, 2017 filed on March 2, 2018.

 

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, 2018.

 

Repurchases of Securities

 

The Company’s Board of Directors approved a stock and warrant repurchase plan (“Repurchase Plan”) in November 2015 and increased the repurchase plan to $35.0 million in November 2016. The Repurchase Plan authorizes the Company to purchase from time to time the Company’s outstanding common stock and warrants. 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. No shares or warrants were repurchased under the Repurchase Plan during the three months ended September 30, 2018.

 

The following table represents information with respect to shares withheld from vesting of stock-based compensation awards for employee income taxes, for the periods indicated:

 

Period		Total number of shares purchased(a)				Average price paid per share				Dollar value of shares purchased as part of publicly announced plans or programs				Maximum dollar value of warrants and shares that may be purchased under approved plans or programs
July 1 through July 31, 2018			-			$	-			$	-			$	12,124,786
August 1 through August 31, 2018			-				-				-				12,124,786
September 1 through September 30, 2018			3,500				15.35				-				12,124,786
Total			3,500								-

 

(a)	Amounts in the table above relate solely to shares withheld from vesting’s of stock-based compensation awards for employee income tax withholding.

 

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
10.1		Amendment No. 1 dated as of September 4, 2018 to Employment Agreement between the Company and Dean (Trey) Byus.		By Reference		8-K		September 6, 2018
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		XBRL Taxonomy extension schema document		Herewith
101.CAL		XBRL Taxonomy extension calculation link base document		Herewith
101.LAB		XBRL Taxonomy extension label link base document		Herewith
101.PRE		XBRL Taxonomy extension presentation link base document		Herewith
101.DEF		XBRL Taxonomy Extension Definition Link base		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 2, 2018.

 

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