Learning Tree (LTRE) Risk Analysis

A majority of our outstanding shares are beneficially owned by one stockholder, and the stockholder could have significant influence over our policies and affairs and will be in a position to determine the outcome of corporate actions. As of December 14, 2018, the Trust beneficially owned 10,495,332 shares of common stock, representing beneficial ownership of approximately 64.7% of the Company's outstanding shares, which includes 7,495,332 shares of common stock acquired from the Collins Parties in the Sale Transaction and 3,000,000 conversion shares in connection to the Credit Agreement. The Company's Chairman of the Board, Kevin Gruneich, is affiliated with the Trust. Consequently, the Trust will have the power to exert significant influence over our policies and affairs and may be in a position to determine the outcome of certain corporate actions and transactions requiring stockholder approval. Our majority stockholder has significant influence over the composition of our Board. Our majority stockholder, the Trust, has significant influence over the composition of the directors serving on the Board. In connection with the Trust becoming the majority stockholder of the Company, our Chairman of the Board, Mr. Gruneich, was nominated by the Trust and pursuant to the terms of the Purchase Agreement the Trust also has the right to nominate up to three additional qualified members to the Board before January 31, 2019, subject to such nominees being qualified candidates and if two directors were to resign. To date, the Trust has utilized two of these director nomination rights with the nomination and subsequent appointments of Ms. Candee and Ms. Gardial to the Board.  In addition, even without these rights in the Purchase Agreement, the Trust holds a majority of the outstanding shares of the Company and therefore has the ability to determine the outcome of elections of directors who will serve on the Board. A large number of shares are issuable upon conversion of the amounts borrowed pursuant to the Credit Agreement with our majority stockholder. The conversion of the amounts payable under the Credit Agreement could result in substantial dilution of your stockholdings. The Credit Agreement provides the Trust, as the lender, with the right to convert, at any time, up to the full amount of the then outstanding principal that is borrowed by the Company, up to the commitment amount of $5.0 million, into shares of common stock, which conversion price is initially $1.00 per share. On June 29, 2018 and October 1, 2018, the Company received $2.0 million and $1.0 million, respectively, of advances under the terms of the Credit Agreement, which if converted in full as of the date hereof would result in 3,000,000 shares of common stock being issued to the Trust. If the Company were to borrow an additional $2.0 million under the Credit Agreement and the Trust converted the entire $5.0 million principal amount into conversion shares, then based on the initial conversion price, the Trust would be entitled to convert such advances into an additional 5,000,000 shares of common stock. The conversion price is subject to downward adjustment in the event of future issuances by the Company of common stock below $1.00 per share, subject to certain exceptions for stock options, restricted stock or other securities granted under Company incentive plans, non-qualified stock options granted by the Board and securities sold in public offerings by the Company. Accordingly, any conversion by the Trust of amounts loaned to us under the Credit Agreement may result in substantial dilution to other existing stockholders of the Company. The potential issuance of additional shares of common stock upon the conversion by the Trust of amounts borrowed by the Company under the Credit Agreement could also have an adverse effect on the market price, if any, for our common stock at the time of conversion. Our majority stockholder is also one of the Company's largest unsecured creditors. The lender to the Company under the Credit Agreement is the Trust, who is also the Company's majority stockholder. As a result of entering into the Credit Agreement, the Trust has become the Company's largest unsecured creditor. As an unsecured creditor, the Trust has rights and interests as a lender to the Company, which are different than those rights and interests that the Trust and other Company stockholders have as equity holders in the Company.

We may be unable to realize our business strategy of improving operating performance, growing our business and generating savings and improvements. Over the past five years the Company has been experiencing a decline in course attendance and revenue generated from our operations. As a result, we have been implementing new strategic initiatives, including those described in this Form 10-K, which include offering and expanding the services provided through Workforce Optimization Solutions, adjusting the duration of some of our courses to be more competitive, the comprehensive cost reduction program, Guaranteed to Run ("GTR") courses, and pricing promotions that are designed to improve our operating performance, stabilize and increase revenue and grow our business. The failure to achieve the goals of some or all of these initiatives could have a material adverse effect on our financial condition, results of operations and our business. There is no assurance that we will be able to pursue, successfully implement or realize the expected benefits of any initiative or that we will be able to sustain improvements made to date. Our operating results have historically fluctuated, and we expect fluctuations to continue in the future. Fluctuations in our historical operating results have resulted from many factors, some of which are beyond our control. In the future, these or other factors could have a material adverse impact on our operating results and cause our stock price to decrease. For example: Timing of Course Development, and Sales and Marketing Expenditures. We try to adjust our expenditures for course development and sales and marketing to maintain our long-term profitability, including our assessment of the potential to influence future customer demand, market conditions, and other factors. This may mean accepting reduced margins in poor economic periods, as we must commit too much of our spending before our attendees enroll in our courses. If revenues fall short of our expectations, we may not be able to adjust our expenditures quickly enough to compensate for lower than anticipated revenues. This could compound the impact of any revenue shortfall and further affect our operating results and the price of our common stock. Many of the new titles now being offered are not developed or taught by Learning Tree, but rather were obtained from other providers. Reselling other providers courses limits our ability to ensure a quality customer experience. While we do review and approve partner courses before offering them to our customers, our revenues could be negatively impacted if customers are not satisfied with these courses. In addition, the margins earned on these partner courses may be lower than those of our proprietary courses. Course Scheduling and Marketing Activities. The timing and content of our courses and our marketing activities can affect the number of participants who attend our courses. Some of the activities that can contribute to fluctuations in our operating results include: - the frequency of our course events;- the number of weeks during which our courses can be conducted in a quarter;- the timing, timely delivery, frequency and size of, and the response to, our marketing and advertising campaigns;- the timing of introduction of new course titles;- the average length of courses, based on the current mix of course titles, which affects the average revenue per attendee; and - the mix between course events held at customer locations and course events held in our education centers and hotels due to differing gross profit margins. Seasonal Factors. Our quarterly revenues and income fluctuate due to the seasonal spending patterns of our customers, which are affected by factors such as: - cyclic or one-time budgetary considerations;- government spending and budget cycles;- factors specific to their business or industry; and - weather, holiday and vacation considerations. Use of Accounting Estimates. The preparation of our financial statements in conformity with Generally Accepted Accounting Principles in the United States ("GAAP") requires us to make estimates and assumptions in calculating our financial results. As one example, we currently offer our customers a multiple-course sales discount referred to as a Training Passport, which allows an individual Passport holder to attend up to a specified number of Learning Tree courses over a specified period for a fixed price. For a Training Passport, the amount of revenue we recognize for each attendance in one of our courses is based upon the selling price of the Training Passport, the list price of the course taken, the average list price of all courses taken, and our estimate of the average number of courses a Passport holder will attend. After expiration of a Training Passport, we record the difference, if any, between the revenue previously recognized and the Training Passport selling price. We base our estimate of the average number of course events that a Training Passport holder will attend based on historical trends. However, these historical trends may not accurately predict the actual number of course events that a Training Passport holder will attend in the future. If average Training Passport attendance rates were to increase, for example, we would have to make negative adjustments to our revenue, which could be significant. For a summary of some of our key accounting estimates, please see our "Critical Accounting Estimates and Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations. We may not be able to fully utilize our deferred tax assets and changes in our tax rates or exposure to additional tax liabilities could adversely affect our financial position. In fiscal year 2012, we established a valuation allowance against our deferred tax assets in the United States due to current year and projected future pre-tax book losses. We continue to maintain this valuation allowance throughout the subsequent financial years. Management judgment is required in determining the provision for income taxes and in determining whether deferred tax assets will be realized in full or in part, primarily with respect to projecting taxable income. Future taxable income can never be projected with certainty as it is dependent on numerous factors, some of which are beyond our control. Substantial variances between our estimates of future taxable income and actual results, or changes in our estimate of future taxable income, could lead to changes in the amount of deferred tax assets that can be realized and could therefore require corresponding adjustments to the valuation allowance. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions, decisions on repatriation of foreign earnings, and changes to our valuation allowance in future periods. Furthermore, the new tax laws enacted in December 2017 under the Tax Cuts and Jobs Act, which brought about corporate income tax rate changes, the modification or elimination of certain tax incentives, changes to the U.S. tax regime for taxing overseas earnings (including modification to the regime for repatriating such earnings), and measures to prevent base erosion of profits in the U.S., may also impact our future effective tax rate and have a significant effect on our future operating results. As a result, we may never be able to use the full amount of our deferred tax assets which could adversely affect our financial position. Changing Regulation of Corporate Governance and Public Disclosure. Changing laws, regulations and standards relating to corporate governance and public disclosure can result in uncertainty regarding compliance matters and higher costs incurred with ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed. If the Company deregisters its common stock under the Exchange Act, the Company will be able to materially reduce its costs of public reporting compliance under U.S. securities laws. Introductions and Adoption of New Technology. Our customers tend to increase their training at times when new technology is being introduced. During periods when fewer new technologies are being introduced, demand for our training courses may decrease, which could have a material adverse effect on our operating results and stock price. Other Factors. Other factors that may affect our operating results include: - competitive forces within our current and anticipated future markets;- our ability to attract customers and meet their expectations;- currency fluctuations and other risks inherent in international operations;- general economic conditions;- differences in the timing of our spending on the marketing of our courses, as well as the timing of our spending on the development of our courses and other areas; and - excess capacity and/or unused space in our education centers and/or administrative office facilities, and our ability to sublease or find other uses for it. All or any of these and similar factors could cause our operating results to differ substantially from the expectations of public market analysts and investors, which would likely have a material adverse impact on our stock price.

We have had negative cash flows from operations, have not achieved a net profit on an annual basis for the past three years and there is substantial doubt about our ability to continue as a going concern. If we are not able to generate positive cash flow, our business operations may not be able to continue. Over the past three years we have experienced net losses and declining revenues. In fiscal year 2018, our worldwide revenues from operations decreased 9.0% to $64.3 million from $70.7 million in fiscal year 2017. In fiscal year 2017, our worldwide revenues from operations decreased 13.4% to $70.7 million from $81.6 million in fiscal year 2016. For fiscal years 2017 and 2016, our registered independent public accounting firm issued a report on our audited financial statements that included an explanatory paragraph expressing substantial doubt about the Company's ability to continue as a going concern. We have initiated several business strategies and initiatives to stabilize and increase revenue and implemented a comprehensive cost reduction program that reduced both cost of revenues and operating expenses and secured a $5.0 million Credit Agreement ("Credit Agreement") with the Kevin Ross Gruneich Legacy Trust as lender (the "Trust"), which also is our largest stockholder. Despite these actions however, we may be unsuccessful in generating sufficient cash flow, and improving our profitability for fiscal year 2019 and beyond. For fiscal year 2018, the report the Company received from its independent registered public accounting firm on its consolidated financial statements as of September 28, 2018 again contains an explanatory paragraph stating that there is substantial doubt regarding the Company's ability to continue as a going concern. If we become unable to continue as a going concern, we may have to liquidate our assets, and may realize significantly less than the values at which they are carried on our financial statements, and stockholders may lose all or part of their investment in our common stock. Our consolidated financial statements were prepared based on the assumption that we will continue to operate as a going concern and do not reflect any adjustment that might result if we were not able to continue operations. The consolidated financial statements for the fiscal year ended September 28, 2018 that accompany this Form 10-K were prepared under the assumption that we will continue to operate as a going concern. Although our consolidated financial statements raise substantial doubt about our ability to continue as a going concern, they do not reflect any adjustment or impact that might result if we were not unable to continue ongoing operations. Our Credit Agreement contains covenants, representations and warranties that the Company is required to comply with in order to receive future advances or avoid triggering an event of default. Our Credit Agreement includes covenants, representations and warranties that the Company must comply with during the term of the Credit Agreement, as well as at the time of an advance under the Credit Agreement. The terms of the Credit Agreement also contains an acceleration clause that can be triggered if the Trust, as the lender, determines an Event of Default has occurred that would reasonably be expected to have a Material Adverse Effect, as defined in the Credit Agreement, and continuance thereof for ten (10) calendar days, which in turn would permit the Trust to accelerate repayment of outstanding obligations. In addition, there are circumstances where an event of default under the Credit Agreement would occur if the Company is required to pay a final judgment or order against the Company above certain levels not covered by insurance, which final judgment or order would not be in the control of the Company. The Credit Agreement allows the Company to make quarterly borrowings until the aggregate amount of the credit has been drawn, but if we are not able to make the representations and warranties under the Credit Agreement on such quarterly borrowing date, then the Company would not be able to borrow additional funds at that time. If the Company does not remain in compliance with certain covenants or obligations under the Credit Agreement, then it may result in an inability to borrow additional funds and/or constitute an event of default, in which case, could result in amounts borrowed under the Credit Agreement becoming immediately due and payable. If the Company is not able to receive advances or if an event of default were to occur resulting in payment acceleration, then such events could have a material adverse effect on the financial condition, results of operations, liquidity, capital resources and the business of the Company. Further, there is no assurance that the Company will have the ability to fully repay borrowings under the Credit Agreement, either upon maturity or if accelerated upon an event of default, or that the Company would be able to refinance or restructure payments on those borrowings. The Company relies on the Credit Agreement as a significant source of capital and liquidity currently available to the Company. As of October 1, 2018, the outstanding principal balance under the Credit Agreement is $3.0 million, and the Company has the ability to borrow an additional $2.0 million. The Credit Agreement requires that the Company be in compliance with certain covenants as a condition to receiving additional advances under the Credit Agreement, including satisfying a financial covenant that requires the Company to maintain a required level of EBITDA, as well as representations, warranties and covenants. Current projections for fiscal year 2019 indicate that the Company will not meet the EBITDA requirement at the end of the first quarter of fiscal year 2019. If the Company is not able to satisfy the conditions to borrowing under the Credit Agreement, we will not be able to draw on the Credit Agreement at such time, and the Company's options for capital and/or liquidity at such time may be limited to its cash and cash equivalents or its existing secured line of credit with Action Capital, which has higher borrowing costs and is subject to the prior approval of Action Capital and the availability of accounts receivable acceptable to Action Capital. Our Financing Agreement requires there to be acceptable Company accounts receivable in order to receive advances from our lender, which amounts may not be available in the amounts or at the times that we may need them. We entered into a Financing and Security Agreement dated January 12, 2017 ("Financing Agreement") with Action Capital Corporation ("Action Capital"), which provides us with potential access to borrow up to $3.0 million. Amounts advanced to us under this Financing Agreement are subject to the prior approval of Action Capital and the availability of accounts receivable acceptable to Action Capital. Accordingly, there is no assurance that advances will be made to us in the amounts and at the times when they are requested by us, which could have an adverse impact on our liquidity and ability to operate the business. In addition, we may not have the requisite amount of acceptable accounts receivable in order to borrow up to the maximum principal amount under the Financing Agreement. The loss of available credit under the Credit Agreement and the Financing Agreement or termination of either or both could adversely affect our liquidity and our ability to operate our business. Although we were in compliance with all of the terms and conditions of the Credit Agreement and the Financing Agreement as of the end of fiscal year 2018, current projections for fiscal year 2019 indicate that the Company will not meet the minimum EBITDA requirement under the Credit Agreement at the end of the first quarter of fiscal year 2019. If this or other events were to occur which result in either a termination of the Credit Agreement and/or the Financing Agreement, or the loss of all or a substantial portion of our available credit under the Credit Agreement and/or the Financing Agreement, or if we are otherwise prevented from accessing such funds, and we did not have an alternative line of credit or other additional sources of capital available, then we would need to rely upon our cash and cash equivalents for our working capital needs, which may not be sufficient. In addition, because the Financing Agreement has no set term and may be terminated by either party at any time, we cannot be certain that access to capital sourced through this lending arrangement will be available when needed. If we were unable to replace these sources of liquidity, then our ability to fund our operations could be materially and adversely affected. We cannot be certain that any additional financing will be available to us or that it will be available on commercially reasonable terms. We currently have limited sources of liquidity and may need to obtain another credit facility and/or raise new capital to provide additional liquidity. If we fail to obtain additional liquidity as needed, then we will continue to rely on our balance of cash and cash equivalents on hand, cash flows from operations to finance our operating cash needs to the extent that our operating cash flows will allow and amounts available under any existing lending arrangements. Prior to entering into the Credit Agreement, we primarily relied upon our balance of cash and cash equivalents plus cash flows from operations to finance our operating cash needs. Our working capital needs have exceeded, and could continue to exceed for the near future, cash flows available from operations. If we do not generate positive cash flow from operations or have access to advances under the Credit and Financing Agreements in the amounts we need or obtain access to capital from additional sources that may or may not be available to us, or even if available, may not be on satisfactory terms or in adequate amounts, then our cash and cash equivalents will continue to decline. Consequently, any adverse impact on our operating results would impact our cash flows from operations and our ability to continue to meet our operating cash needs which would likely have a material adverse impact on our business, financial condition, results of operations and our stock price.