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ITEM 1. BUSINESS

General Information

Our fiscal year ends on August 31 of each year.  Unless otherwise noted, references to fiscal years apply to the 12 months ended August 31 of the specified year.

The Company’s principal executive offices are located at 2200 West Parkway Boulevard, Salt Lake City, Utah 84119-2331, and our telephone number is (801) 817‑1776.  Our website is www.franklincovey.com.

1.

World Class Content – Rather than rely on “flavor of the month” training fads, our content is principle-centered and based on natural laws of human behavior and effectiveness.  Our content is designed to build new skillsets, establish new mindsets, and provide enabling toolsets.  When our content is applied consistently in an organization, we believe the culture of that organization will change to enable the organization to achieve its own great purposes.  Our content is well researched, subjected to numerous field beta tests, and improved through a proven development process.

2.

Breadth and Scalability of Delivery Options – We have a wide range of content delivery options, including:  The All Access Pass and Leader in Me membership, other intellectual property licensing arrangements, on-site training, training led through certified facilitators, on-line learning, blended learning, and organization-wide transformational processes, including consulting and coaching services.

3.

Global Capability – We not only operate domestically with sales personnel in the United States and Canada, but we also deliver content through our directly owned international offices and independently owned international licensees who deliver our content in over 140 other countries and territories around the world.  This capability allows us to deliver content to a wide range of customers, from large multinational corporations to smaller local entities.

We hold ourselves responsible for and measure ourselves by our clients’ achievement of transformational results.

Our content and offerings are designed to help our clients achieve their own great purposes through a variety of resources, including best-selling books and audio, innovative and widely recognized thought leadership, and multiple delivery and teaching methods.  These elements allow us to offer our clients training and consulting solutions that are designed to improve individual and organizational behaviors, deliver content that adapts to an organization’s unique needs, and provide meaningful improvements in our clients’ business performance.  Further information about our content and services can be found on our website at www.franklincovey.com.  However, the information contained in, or that can be accessed through, our website does not constitute any part of this Annual Report.

Industry Information

According to the Training magazine 2019 Training Industry Survey, the total size of the U.S. training industry is estimated to be $83 billion.  The training industry is highly fragmented and includes a wide variety of training and service providers of varying sizes.  We believe our competitive advantages in this industry stem from our fully integrated principle-centered training offerings, our wide variety of delivery options, and various implementation tools to help organizations and individuals measurably improve their effectiveness.  These advantages allow us to deliver not only training to corporations, educational institutions, and individuals, but also to implement the training through powerful behavior-changing tools and coaching with the capability to then measure the impact of the delivered content and solutions.

Clients

We have a relatively broad base of clients, which includes thousands of organizational, governmental, educational, and individual clients in both the United States and in other countries that are served through our directly owned operations.  We have thousands of additional organizational clients throughout the world which are served through our global licensee partner network, and we believe that our content, in all its forms, delivers results that encourage strong client loyalty.  Our clients are in a broad array of industries and we are not dependent on a single client or industry group.  During the periods presented in this report, none of our clients were responsible for more than ten percent of our consolidated revenues.

Due to the nature of our business, we do not have a significant backlog of orders.  Nearly all of our deferred revenue is attributable to subscription services for which we recognize revenue over the lives of the corresponding agreements.

Competition

We operate in a highly competitive and rapidly changing global marketplace and compete with a variety of organizations of various sizes that offer services comparable with ours.  The nature of competition in the performance improvement industry, however, is highly fragmented with few large competitors.  Based upon our fiscal 2019 consolidated sales of $225.4 million, we believe that we are a significant competitor in the performance skills and education market.  Other significant comparative companies that compete with our Enterprise Division include: Design Dimension International, GP Strategies Corp., LinkedIn Learning, Center for Creative Leadership, SkillSoft, and Vital Smarts.  Our Education Division competes with entities such as: Character Counts, Responsive Classroom, 7 Mindsets, Second Step, and K12.

We believe that the principal competitive factors in the industry in which we compete include the following:

•	Quality of offerings, services, and solutions

•	Skills and capabilities of people

•	Innovative training and consulting services combined with effective products

•	Ability to add value to client operations

•	Reputation and client references

•

Price

•	Availability of appropriate resources

•	Global reach and scale

•	Branding and name recognition in our marketplace

Given the relative ease of entry into the training market, the number of our competitors could increase, many of whom may imitate existing methods of distribution, or could offer similar content and programs at lower prices.  However, we believe that we have several areas of competitive differentiation in our industry.  We believe that our competitive advantages include: (1) the quality of our content, as indicated by our strong gross margins, branded content, and best-selling books; (2) the breadth of delivery options we are able to offer to customers for utilizing our content, including the All Access Pass and Leader in Me membership, live presentations by our own training consultants, live presentations though Company certified client-employed facilitators, intellectual property licensing, web-based presentations, and film-based presentations; (3) our global reach, which allows truly multinational clients to scale our content uniformly across the globe, through our mix of direct offices and our global licensee network; and (4) the significant impact which our offerings can have on our clients’ results.  Moreover, we believe that we are a market leader in the U.S. in leadership, execution, productivity, individual effectiveness, and educational improvement.

Seasonality

Our fourth quarter of each fiscal year typically has higher sales and operating income than other fiscal quarters primarily due to increased revenues in our Education Division (when school administrators and faculty have professional development days) and to increased sales that typically occur during that quarter from year-end incentive programs.  Overall, training sales are moderately seasonal because of the timing of corporate training, which is not typically scheduled as heavily during holiday and certain vacation periods.

Manufacturing and Distribution

We do not manufacture any of our products.  We purchase our training materials and related products from various vendors and suppliers located both domestically and internationally, and we are not dependent upon any one vendor for the production of our training and related materials as the raw materials for these products are readily available.  We currently believe that we have good relationships with our suppliers and contractors.  Our materials are primarily warehoused and distributed from an independent warehouse facility located in Des Moines, Iowa.

Trademarks, Copyrights, and Intellectual Property

Our success has resulted in part from our proprietary content, methodologies, and other intellectual property rights.  We seek to protect our intellectual property through a combination of trademarks, copyrights, and confidentiality agreements.  We claim rights for over 630 trademarks in the United States and foreign countries, and we have obtained registration in the United States and numerous foreign countries for many of our trademarks including FranklinCovey, The 7 Habits of Highly Effective People, The 4 Disciplines of Execution, and The 7 Habits.  We consider our trademarks and other proprietary rights to be important and material to our business.

We claim over 230 registered copyrights, and own sole or joint copyrights on our books, manuals, text and other printed information provided in our training programs, and other electronic media products, including audio and video media.  We may license, rather than sell, facilitator workbooks and other seminar and training materials in order to protect our intellectual property rights therein.  We place trademark and copyright notices on our instructional, marketing, and advertising materials.  In order to maintain the proprietary nature of our product information, we enter into written confidentiality agreements with certain executives, product developers, sales professionals, training consultants, other employees, and licensees.

Employees

One of our most important assets is our people.  The diverse and global makeup of our workforce allows us to serve a variety of clients on a worldwide basis.  We are committed to attracting, developing, and retaining quality personnel and actively strive to reinforce our employees’ commitment to our clients, and to our mission, vision, culture, and values through the creation of a motivational and rewarding work environment.  We currently have approximately 940 associates around the world and management believes that its relations with its associates is good.  None of our associates are represented by a union or other collective bargaining group.  While competition is intense for skilled personnel in various functions, we currently do not foresee a shortage in qualified personnel needed to operate and grow our business.

Our benefit programs are designed to be both comprehensive and tailored to the needs of our employee population, such as a paid time off policy that allows for flexibility to meet our associates’ needs.  Our wellness benefits are aimed at encouraging employees to be aware of their current state of health and provides various tools and resources to assist them in maintaining their health given the demanding nature of the work.  Through our offered benefits, including health plans, retirement benefits, stock purchase plan, and other benefit programs, we seek to provide a core sense of security to our employees.

Information About Our Executive Officers

On November 7, 2019, we apointed Paul S. Walker as President and Chief Operating Officer of Franklin Covey Co.  Each of the executive officers of Franklin Covey Co. listed below served with the described responsibilities throughout the fiscal year ended August 31, 2019:

Scott J. Miller, 51, is the Executive Vice-President of Thought Leadership at Franklin Covey.  Mr. Miller, who has been with the Company for 23 years, was previously the Executive Vice-President of Business Development and Marketing and has served as an executive of the Company since March 2012.  Scott’s role as Executive Vice-President caps 12 years on our front line, working with thousands of client facilitators across many markets and countries.  Prior to his appointment as Vice-President of Business Development and Marketing, Mr. Miller served as the general manager of our central regional sales office for six years.  Scott originally joined the Covey Leadership Center in 1996 as a client partner with the Education Division.  Mr. Miller started his professional career with the Disney Development Company, the real estate development division of the Walt Disney Company, in 1992.  During his time with the Disney Development Company, Scott identified trends and industry best practices in community development, education, healthcare, architectural design, and technology.  Mr. Miller received a Bachelor of Arts in Organizational Communication from Rollins College in 1996.

Paul S. Walker, 44, is a 19-year veteran of Franklin Covey Co.  Mr. Walker currently serves as the President of the Enterprise Division, which includes the operations of the Direct Office and International Licensee segments.  Mr. Walker was previously the Executive Vice-President of Global Sales and Delivery and began his service as an executive officer on September 1, 2015.  Paul began his career with Franklin Covey in 2000 in the role of business developer, was promoted to a Client Partner, and then to an Area Director.  In 2007, Mr. Walker became General Manager of the Company’s central sales region, an 11-state area that also included Ontario, Canada.  Prior to working for Franklin Covey, Mr. Walker was a senior sales partner for Alexander’s Digital Printing and a middle-market pilot coordinator with New York Life.  Mr. Walker graduated from Brigham Young University with a Bachelor of Arts in Communications.

Robert A. Whitman, 66, has served as Chairman of the Board of Directors since June 1999 and as President and Chief Executive Officer of the Company since January 2000.  Mr. Whitman previously served as a director of the Covey Leadership Center from 1994 to 1997.  Prior to joining us, Mr. Whitman served as President and Co‑Chief Executive Officer of The Hampstead Group from 1992 to 2000 and is a founding partner at Whitman Peterson.  Mr. Whitman received his Bachelor of Arts degree in Finance from the University of Utah and his MBA from the Harvard Business School.

Stephen D. Young, 66, joined FranklinCovey as Executive Vice President of Finance, was appointed Chief Accounting Officer and Controller in January 2001, Chief Financial Officer in November 2002, and Corporate Secretary in March 2005.  Prior to joining us, he served as Senior Vice-President of Finance, Chief Financial Officer, and director of international operations for Weider Nutrition for seven years; as Vice-President of Finance at First Health for ten years; and as an auditor at Fox and Company, a public accounting firm, for four years.  Mr. Young has more than 35 years of accounting and management experience and is a Certified Public Accountant.  Mr. Young was awarded a Bachelor of Science in Accounting from Brigham Young University.

Available Information

We regularly file reports with the SEC.  These reports include, but are not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and security transaction reports on Forms 3, 4, or 5.  The SEC also maintains electronic versions of the Company’s reports, proxy and information statements, and other information that the Company files with the SEC on its website at www.sec.gov.

The Company makes our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and other reports filed or furnished with the SEC available to the public, free of charge, through our website at www.franklincovey.com.  These reports are provided through our website as soon as is reasonably practicable after we file or furnish these reports with the SEC.

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ITEM 1A.  RISK FACTORS

Our business environment, current domestic and international economic conditions, geopolitical circumstances, and other specific risks may affect our future business decisions and financial performance.  The matters discussed below may cause our future results to differ from past results or those described in forward-looking statements and could have a material adverse effect on our business, financial condition, liquidity, results of operations, and stock price, and should be considered in evaluating our Company.

The risks included here are not exhaustive.  Other sections of this report may include additional risk factors which could adversely affect our business and financial performance.  Moreover, we operate in a very competitive and rapidly changing global environment.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

We operate in an intensely competitive industry and our competitors may develop programs, services, or courses that adversely affect our ability to sell our offerings.

The training and consulting services industry is intensely competitive with relatively easy entry.  Competitors continually introduce new programs, services, and delivery methods that may compete directly with our offerings, or that may make our offerings uncompetitive or obsolete.  Larger competitors may have superior abilities to compete for clients and skilled professionals, reducing our ability to deliver quality work to our clients.  Some of our competitors may have greater financial and other resources than we do.  In addition, one or more of our competitors may develop and implement training courses or methodologies that may adversely affect our ability to sell our offerings and products to new clients.  Any one of these circumstances could have an adverse effect on our ability to obtain new business and successfully deliver our services.

The introduction of the All Access Pass has been disruptive to our business and may continue to create both operational and financial challenges during the transition to a subscription services-focused business model.

In fiscal 2016, we introduced the All Access Pass, which is an internet-based platform that allows our clients to purchase unlimited access to our intellectual property for a specified period.  We have also introduced The Leader in Me online subscription that provides our Education Division clients with the tools and additional services they need to successfully implement the Leader in Me program in their schools.  As expected, the change to a subscription services-focused business model has been disruptive as we transition our legacy business to this new delivery model, but we believe the benefits of the AAP and the Leader in Me online service to our clients and to our business will ultimately prove beneficial as we continue to emphasize and grow sales of subscription services.

The change to a subscription-focused business model has required a transition both operationally and from an accounting and reporting point of view.  Operationally, we have reorganized our sales forces to focus on and support subscription sales and renewals.  However, we still sell a significant amount of services and related products through our legacy business, which we continue to operate and support.  As such, our selling, general, and administrative expenses have increased to support both the growth of our subscription business and our legacy business.  The applicable accounting guidance for subscription sales requires that we defer subscription contract revenue at the inception of the agreement and then recognize the revenue over the life of the corresponding arrangement.  These changes to a subscription-based business model have produced significant changes in our recent financial statements, including reduced operating income compared with previous years and increased liabilities resulting from deferred revenues.

If we are unable to effectively adapt our sales force and sales strategy to sell subscription services, or if technological development of these services becomes too costly or is not accepted by the market, or we are unable to optimize our costs to support a subscription-based and legacy business model, the transition period to a subscription-focused business model may be lengthened and our ability to achieve previous levels of profitability may be adversely affected.

The All Access Pass and Leader in Me online service are internet-based platforms, and as such we are subject to increased risks of cyber-attacks and other security breaches that could have a material adverse effect on our business.

As part of selling subscription-based services, we collect, process, and retain a limited amount of sensitive and confidential information regarding our customers.  Because our subscription services are internet-based platforms, our facilities and systems may be vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, stolen intellectual property, programming or human errors, or other similar events.

The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies, and business secrets could result in significant legal and financial exposure, damage to our reputation, or a loss of confidence in the security of our systems, products, and services, which could have a material adverse effect on our business, financial condition, or results of operations.  To the extent we are involved in any future cyber-attacks or other breaches, our brand and reputation could be affected, and these conditions could also have a material adverse effect on our business, financial condition, or results of operations.

Our business is becoming increasingly dependent on information technology and will require additional cash investments in order to grow and meet the demands of our clients.

Since the introduction of our subscription services, our dependence on the use of sophisticated technologies and information systems has increased.  Moreover, our technology platforms will require continuing cash investments by us to expand existing offerings, improve the client experience, and develop complementary offerings.  Our future success depends in part on our ability to adapt our services and infrastructure while continuing to improve the performance, features, and reliability of our services in response to the evolving demands of the marketplace.  Failure to adapt and improve these areas could have an adverse effect on our business, including our results of operations, financial position, and cash flows.

We could incur additional liabilities or our reputation could be damaged if we do not protect client data or if our information systems are breached.

We are dependent on information technology networks and systems to process, transmit, and store electronic information and to communicate between our locations around the world and with our clients.  Security breaches of this infrastructure could lead to shutdowns or disruptions of our systems and potential unauthorized disclosure of confidential information.  We are also required at times to manage, utilize, and store sensitive or confidential client or employee data.  As a result, we are subject to numerous U.S. and foreign jurisdiction laws and regulations designed to protect this information, such as the various U.S. federal and state laws governing the protection of individually identifiable information.  If any person, including any of our associates, negligently disregards or intentionally breaches our established controls with respect to such data or otherwise mismanages or misappropriates that data, we could be subject to monetary damages, fines, and/or criminal prosecution.  Unauthorized disclosure of sensitive or confidential client or employee data, whether through systems failure, employee negligence, fraud, or misappropriation could damage our reputation and cause us to lose clients.

Legal requirements relating to the collection, storage, handling, and transfer of personal data continue to evolve.  For example, the European Union and the U.S. formally entered into a new framework in July 2016 that provides a mechanism for companies to transfer data from European Union member states to the U.S.  This new framework, called the E.U.-U.S. Privacy Shield Framework, is intended to address shortcomings identified by the European Court of Justice in a predecessor mechanism.  The Privacy Shield and other data protection mechanisms face a number of legal challenges by both private parties and regulators, which may lead to uncertainty about the legal basis for data transfers across the Atlantic.  Ongoing legal reviews may result in burdensome or inconsistent requirements affecting the location and movement of our customer and internal employee data as well as the management of that data.  Compliance may require changes in services, business practices, or internal systems that may result in increased costs, lower revenue, reduced efficiency, or greater difficulty in competing with foreign-based firms.  Failure to comply with existing or new rules may result in significant penalties or orders to stop the alleged noncompliant activity.

In addition, during May 2018 the new General Data Protection Regulation (GDPR) became effective in the European Union.  The GDPR imposes strict requirements on the collection, use, security, and transfer of personal information in and from European Union member states.  The GDPR is designed to unify data protection within the European Union under a single law, which may result in significantly greater compliance burdens and costs related to our European Union operations and customers.  Under GDPR, fines of up to 20 million Euros or up to four percent of the annual global revenues of the infringer, whichever is greater, could be imposed.  Although GDPR applies across the European Union, local data protection authorities still have the ability to interpret GDPR, which may create inconsistencies in application on a country-by-country basis.  Furthermore, as the United Kingdom transitions out of the European Union, we may encounter additional complexity with respect to data privacy and data transfers from the United Kingdom.  We implemented new controls and procedures, including a team dedicated to data protection, to comply with the Privacy Shield and the requirements of GDPR, which were effective for us in May 2018.  However, these new procedures and controls may not be completely effective in preventing unauthorized breaches of personal data.

Other governmental authorities throughout the U.S. and around the world are considering similar types of legislative and regulatory proposals concerning data protection.  For example, in June 2018, the State of California enacted the California Consumer Privacy Act of 2018 (the CCPA), which will come into effect on January 1, 2020.  The CCPA requires companies that process information on California residents to make new disclosures to consumers about their data collection, use and sharing practices, and allows consumers to opt out of certain data sharing with third parties and provides a new cause of action for data breaches.  However, legislators have stated that they intend to propose amendments to the CCPA, and it remains unclear what, if any, modifications will be made to the CCPA or how it will be interpreted.  Additionally, the Federal Trade Commission and many state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use, dissemination and security of data.  Each of these privacy, security, and data protection laws and regulations could impose significant limitations, require changes to our business, or restrict our use or storage of personal information, which may increase our compliance expenses and make our business more costly or less efficient to conduct.

We employ global best practices in securing and monitoring code, applications, systems, processes and data, and our security practices are regularly reviewed and validated by an external auditing firm.  However, these efforts may be insufficient to protect sensitive information against illegal activities and we may be exposed to additional liabilities from the various data protection laws enacted within the jurisdictions where we operate.

The sale of a large number of common shares by Knowledge Capital could depress the market price of our common stock.

Knowledge Capital Investment Group (Knowledge Capital), a related party primarily controlled by a member of our Board of Directors, holds 2.8 million shares, or approximately 20 percent, of our outstanding common shares.  On January 26, 2015, the SEC declared effective a registration statement on Form S-3 to register the resale of shares held by Knowledge Capital.  The sale or prospect of the sale of a substantial number of the shares held by Knowledge Capital may have an adverse effect on the market price of our common stock.

Our results of operations could be adversely affected by economic and political conditions and the effects of these conditions on our clients’ businesses and their levels of business activity.

Global economic and political conditions affect our clients’ businesses and the markets in which they operate.  Our financial results are somewhat dependent on the amount that current and prospective clients budget for training.  A serious and/or prolonged economic downturn combined with a negative or uncertain political climate could adversely affect our clients’ financial condition and the amount budgeted for training by our clients.  These conditions may reduce the demand for our services or depress the pricing of those services and have an adverse impact on our results of operations.  Changes in global economic conditions may also shift demand to services for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain.  Such economic, political, and client spending conditions are influenced by a wide range of factors that are beyond our control and that we have no comparative advantage in forecasting.  If we are unable to successfully anticipate these changing conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected.

Our business success also depends in part upon continued growth in the use of training and consulting services and the renewal of existing contracts by our clients.  In challenging economic environments, our clients may reduce or defer their spending on new services and consulting solutions in order to focus on other priorities.  At the same time, many companies have already invested substantial resources in their current means of conducting their business and they may be reluctant or slow to adopt new approaches that could disrupt existing personnel and/or processes.  If growth in the general use of training and consulting services in business or our clients’ spending on these items declines, or if we cannot convince our clients or potential clients to embrace new services and solutions, our results of operations could be adversely affected.

In addition, our business tends to lag behind economic cycles and, consequently, the benefits of an economic recovery following a period of economic downturn may take longer for us to realize than other segments of the economy.

Recent developments in international trade may have a negative effect on global economic conditions and our business, financial results, and financial condition.

The United States recently proposed and enacted certain tariffs.  In addition, there have been ongoing discussions and activities regarding changes to other U.S. trade policies and treaties.  In response, some countries in which we operate, including China, are threatening to implement or have already implemented tariffs on U.S. imports or otherwise imposed non-tariff barriers.  These developments may have a material adverse effect on global economic conditions and the stability of global financial markets, and they may significantly reduce global trade and, in particular, trade between China and the United States.  Any of these factors could depress economic activity, create anti-American consumer sentiment, restrict our access to suppliers or customers, and have a material adverse effect on our business, financial condition, and results of operations.  In addition, any actions by non-U.S. markets to implement further trade policy changes, including limiting foreign investment or trade, increasing regulatory scrutiny or taking other actions which impact U.S. companies’ ability to obtain necessary licenses or approvals could negatively impact our business.

We have only a limited ability to protect our intellectual property rights, which are important to our success.

We depend on key personnel, the loss of whom could harm our business.

Our future success will depend, in part, on the continued service of key executive officers and personnel.  The loss of the services of any key individuals could harm our business.  Our future success also depends on our ability to identify, attract, and retain additional qualified senior personnel.  Competition for such individuals in our industry is intense, and we may not be successful in attracting and retaining such personnel.

If we are unable to attract, retain, and motivate high-quality employees, including sales personnel and training consultants, we may not be able to grow our business as projected or may not be able to compete effectively.

Our success and ability to grow are partially dependent on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve our clients and grow our business.  Competition for skilled personnel is intense at all levels of experience and seniority.  There is a risk that we will find it difficult to hire and retain a sufficient number of employees with the skills or backgrounds we require, or that it will prove difficult to retain them in a competitive labor market.  If we are unable to hire and retain talented sales and delivery employees with the skills, and in the locations, we require, we might not be able to grow our business at projected levels or may not be able to effectively deliver our content and services.  If we need to hire additional personnel to maintain a specified number of sales personnel or are required to re-assign personnel from other geographic areas, it could increase our costs and adversely affect our profit margins.  In addition, the inability of newly hired sales personnel to achieve projected sales levels may inhibit our ability to attain anticipated growth.

Our global operations pose complex management, foreign currency, legal, tax, and economic risks, which we may not adequately address.

We have sales offices in Australia, China, Japan, Germany, Switzerland, Austria, and the United Kingdom.  We also have licensed operations in numerous other foreign countries.  As a result of these foreign operations and their impact upon our financial statements, we are subject to a number of risks, including:

•	Restrictions on the movement of cash

•	Burdens of complying with a wide variety of national and local laws, including tax laws

•	The absence in some jurisdictions of effective laws to protect our intellectual property rights

•	Political instability

•	Currency exchange rate fluctuations

•	Longer payment cycles

•	Price controls or restrictions on exchange of foreign currencies

For instance, on June 23, 2016, the United Kingdom held a referendum in which a majority of voters chose to exit the European Union, commonly referred to as “Brexit.”  The outcome of this referendum produced significant currency exchange rate fluctuations and volatility in global stock markets.  The British government has commenced negotiations to determine the terms of Brexit, but the terms have not yet been determined and the process and effects of such separation remain uncertain.  Given the lack of comparable precedent, the implications of Brexit or how such implications might affect us are unclear.  Brexit could, among other things, disrupt trade and the free movement of data, goods, services, and people between the United Kingdom and the European Union or other countries as well as create legal and global economic uncertainty.  These and other potential implications of Brexit could adversely affect our business and financial results.

We may fail to meet analyst expectations, which could cause the price of our stock to decline.

Our common stock is publicly traded on the NYSE, and at any given time various securities analysts follow our financial results and issue reports on us.  These periodic reports include information about our historical financial results as well as the analysts’ estimates of our future performance.  The analysts’ estimates are based on their own opinions and are often different from our estimates or expectations.  If our operating results are below the estimates or expectations of public market analysts and investors, our stock price could decline.  If our stock price is volatile, we may become involved in securities litigation following a decline in price.  Any litigation could result in substantial costs and a diversion of management’s attention and resources that are needed to successfully run our business.

Our business performance may not be sufficient for us to meet the financial guidance that we provide publicly.

We may provide financial guidance to the public based upon our expectations regarding our financial performance.  While we believe that our annual financial guidance provides investors and analysts with insight into our view of the Company’s future performance, such financial guidance is based on assumptions that may not always prove to be accurate and may vary from actual results.  If we fail to meet the full-year financial guidance that we provide, or if we find it necessary to revise such guidance during the year, the market value of our common stock could be adversely affected.

Our future quarterly operating results are subject to factors that can cause fluctuations in our stock price.

Historically, our stock price has experienced significant volatility.  We expect that our stock price may continue to experience volatility in the future due to a variety of potential factors that may include the following:

•	Fluctuations in our quarterly results of operations and cash flows

•	Increased overall market volatility

•	Variations between our actual financial results and market expectations

•	Changes in our key balances, such as cash and cash equivalents

•	Currency exchange rate fluctuations

•	Unexpected asset impairment charges

•	Increased or decreased analyst coverage

These factors may have an adverse effect upon our stock price in the future.

Our profitability will suffer if we are not able to maintain our pricing and utilization rates.

The profit margin on our services is largely a function of the rates we are able to recover for our services and the utilization, or chargeability, of our trainers, client partners, and consultants.  Accordingly, if we are unable to maintain sufficient pricing for our services or an appropriate utilization rate for our training professionals without corresponding cost reductions, our profit margin and overall profitability will suffer.  The rates that we are able to recover for our services are affected by a number of factors that we may be unable to control, including:

•	Our clients’ perceptions of our ability to add value through our programs and content

•	Competition

•	General economic conditions

•	Introduction of new programs or services by us or our competitors

There can be no assurance that we will be able to maintain favorable pricing or utilization rates in future periods.  Additionally, we may not achieve pricing or utilization rates that are optimal for us.  If our utilization rates are too high, it could have an adverse effect on employee engagement and attrition.  If our pricing or utilization rates are too low, our profit margin and profitability may suffer.

Our work with governmental clients exposes us to additional risks that are inherent in the government contracting process.

Our clients include national, state, provincial, and local governmental entities, and our work with these governmental entities has various risks inherent in the governmental contracting process.  These risks include, but are not limited to, the following:

•

Governmental entities typically fund projects through appropriated monies.  While these projects are often planned and executed as multi-year projects, the governmental entities usually reserve the right to change the scope of, or terminate, these projects for lack of approved funding and other discretionary reasons.  Changes in governmental priorities or other political developments, including disruptions in governmental operations, could result in changes in the scope of, or in termination of, our existing contracts.

•

Governmental entities often reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to our government contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for those costs or the cost must be refunded to the client if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed upon rates for our work, which may affect our future margins.

•

If a governmental client discovers improper activities in the course of audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government.  The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of their adequacy.

•	Political and economic factors such as pending elections, the outcome of elections, revisions to governmental tax policies, sequestration, debt ceiling negotiations, and reduced tax revenues can affect the number and terms of new governmental contracts signed.

The occurrences or conditions described above could affect not only our business with the particular governmental agency involved, but also our business with other agencies of the same or other governmental entities.  Additionally, because of their visibility and political nature, governmental contracts may present a heightened risk to our reputation.  Any of these factors could have an adverse effect on our business or our results of operations.

Changes in U.S. tax laws could have an adverse effect on our business, cash flows, results of operations, and financial condition.

We are subject to income and other taxes in the U.S. at the state and federal level, and in foreign jurisdictions.  Changes in applicable U.S. state, federal, or foreign tax laws and regulations, or their interpretation and application, could materially affect our tax expense and profitability.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (2017 Tax Reform), a tax reform bill which contains significant changes to corporate taxation, including a reduction in the current corporate federal income tax rate from 35 percent to 21 percent, additional limitations on the deductibility of interest expense, substantial changes to the taxation of foreign earnings, and modification or repeal of many business deductions and credits.  The changes included in the 2017 Tax Reform are broad and complex and any amended legislation or other changes in the U.S. federal income tax laws could adversely affect the U.S. federal taxation of our ongoing operations.  Any such changes and related consequences could have a material adverse impact on our financial results.

The Company’s use of accounting estimates involves judgment and could impact our financial results.

Our most critical accounting estimates are described in Management’s Discussion and Analysis found in Item 7 of this report under the section entitled “Use of Estimates and Critical Accounting Policies.”  In addition, as discussed in various footnotes to our financial statements as found in Item 8, we make certain estimates for loss contingencies, including decisions related to legal proceedings and reserves.  Because, by definition, these estimates and assumptions involve the use of judgment, our actual financial results may differ from these estimates.  If our estimates or assumptions underlying such contingencies and reserves prove incorrect, we may be required to record additional adjustments or losses relating to such matters, which would negatively affect our financial results.

We may not be able to generate sufficient cash to service our indebtedness, and we may be forced to take other actions to satisfy our payment obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our indebtedness depends on our future performance, including the performance of our subsidiaries, which will be affected by financial, business and economic conditions, competition, and other factors.  We are unable to control many of these factors, such as the general economy, economic conditions in the industries in which we operate and competitive pressures.  Our cash flow may not be sufficient to allow us to pay principal and interest on our indebtedness and to meet our other obligations.  If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures or to sell assets, seek additional capital, or restructure or refinance our indebtedness.  These alternative measures may be unsuccessful and we may not meet our scheduled debt service obligations.  In addition, the terms of existing or future debt agreements, including our new 2019 Credit Facility, may restrict us from pursuing any of these alternatives.

In the event that we need to refinance all or a portion of our outstanding indebtedness before maturity or as it matures, we may not be able to obtain terms as favorable as the terms of our existing indebtedness or refinance our existing indebtedness at all.  If interest rates or other factors existing at the time of refinancing result in higher interest rates upon refinancing, we will incur higher interest expense.  Furthermore, if any rating agency changes our credit rating or outlook, our debt and equity securities could be negatively affected, which could adversely affect our financial condition and financial results.

Failure to comply with the terms and conditions of our credit facility may have an adverse effect upon our business and operations.

Our secured credit agreement and subsequent modifications require us to be in compliance with customary non-financial terms and conditions as well as specified financial ratios.  Failure to comply with these terms and conditions or maintain adequate financial performance to comply with specific financial ratios entitles the lender to certain remedies, including the right to immediately call due any amounts outstanding on the line of credit.  Such events would have an adverse effect upon our business and operations as there can be no assurance that we may be able to obtain other forms of financing or raise additional capital on terms that would be acceptable to us.

We may need additional capital in the future, and this capital may not be available to us on favorable terms or at all.

We may need to raise additional funds through public or private debt offerings or equity financings in order to:

•	Develop new services, programs, or offerings

•	Take advantage of opportunities, including business acquisitions

•	Respond to competitive pressures

Going forward, we will continue to incur costs necessary for the day-to-day operation and potential growth of the business and may use our available revolving line of credit facility and other financing alternatives, if necessary, for these expenditures.  We obtained a new credit agreement in August 2019 with our existing lender that expires in August 2024.  We expect to regularly renew or amend our lending agreement in the future to maintain the availability of this credit facility.  Additional potential sources of liquidity available to us include factoring receivables, issuance of additional equity, or issuance of debt from public or private sources.  If necessary, we will evaluate all of these options and select one or more of them depending on overall capital needs and the associated cost of capital.

Any additional capital raised through the sale of equity could dilute current shareholders’ ownership percentage in us.  Furthermore, we may be unable to obtain the necessary capital on terms or conditions that are favorable to us, or at all.

We have significant intangible assets, goodwill, and long-term asset balances that may be impaired if cash flows from related activities decline.

Due to the nature of our business, we have significant amounts of intangible assets, including goodwill, resulting from events such as the acquisition of businesses and the licensing of content.  Our intangible assets are evaluated for impairment based on qualitative factors or upon cash flows and estimated royalties from revenue streams (indefinite-lived intangible assets) if necessary.  Our goodwill is evaluated through qualitative factors and by comparing the fair value of the reporting units to the carrying value of our net assets if necessary.  Although our current sales, cash flows, and market capitalization are sufficient to support the carrying basis of these long-lived assets, if our sales, cash flows, or common stock price decline, we may be faced with significant asset impairment charges that would have an adverse impact upon our results of operations.

Ineffective internal controls could impact our business and operating results.

Our internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud.  Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.  If we fail to maintain the adequacy of our internal controls, including any failure to implement required new or improved controls, or if we experience difficulties in their implementation, our business and operating results may be harmed and we could fail to meet our financial reporting obligations.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

As of August 31, 2019, our principal executive offices in Salt Lake City, Utah occupy approximately 84,000 square feet of leased office space that is accounted for as a financing arrangement, which expires in 2025.  This facility accommodates our executive team and corporate departments, as well as other professionals.  The master lease agreement on our principal executive offices contains six five-year renewal options that may be exercised at our discretion.  Additionally, we occupy leased sales and administrative offices both in the United States and various countries around the world as shown below.  These leased facilities are accounted for as operating leases.

We consider our existing facilities to be in good condition and suitable for our current and expected level of operations in the upcoming fiscal year and in future periods.

Columbus, Ohio

Banbury, England

Tokyo, Japan

China:  Beijing, Shanghai, Guangzhou, and Shenzhen

During fiscal 2019, we acquired the licensee operation that serves Germany, Switzerland, and Austria (GSA), which was headquartered in Munich, Germany.  In July 2019, we closed the headquarters office in Munich and our sales personnel in the GSA countries now operate from their homes similar to our sales personnel in the United States, Canada, and in certain other countries.  In fiscal 2017, we restructured the operations of our domestic sales regions to focus on sales and support of the All Access Pass.  As part of this restructuring, we closed our three remaining sales offices in Atlanta, Georgia; Chicago, Illinois; and Irvine, California.  Our remaining sales office in the United States is used by Robert Gregory Partners, which is one of the businesses that we acquired during fiscal 2017.  There were no other significant changes to the properties used for our operations during the periods presented in this report.

ITEM 3.  LEGAL PROCEEDINGS

From time to time, we are the subject of certain legal actions, which we consider routine to our business activities.  At August 31, 2019, we were not party to any litigation or legal proceeding that, in the current opinion of management, could have a material adverse effect on our financial position, liquidity, or results of operations.  However, due to the risks and uncertainties inherent in legal proceedings, actual results could differ from current expectations.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol “FC.”

We did not pay or declare dividends on our common stock during the fiscal years ended August 31, 2019 or 2018.  Any determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our results of operations, financial condition, terms of our financing arrangements, and such other factors as the board deems relevant.  We currently anticipate that we will retain all available funds to repay our liabilities, finance future growth and business opportunities, and to repurchase outstanding shares of our common stock.

As of October 31, 2019, we had 13,982,356 shares of common stock outstanding, which were held by 528 shareholders of record.  A number of our shareholders hold their shares in street name; therefore, we believe that there are substantially more beneficial owners of our common stock.

Purchases of Common Stock by the Issuer

We did not have any purchases of our common stock during the fourth quarter of fiscal 2019.

On January 23, 2015, our Board of Directors approved a new plan to repurchase up to $10.0 million of the Company’s outstanding common stock.  All previously existing common stock repurchase plans were canceled and the new common share repurchase plan does not have an expiration date.  On March 27, 2015, our Board of Directors increased the aggregate value of shares of Company common stock that may be purchased under the January 2015 plan to $40.0 million so long as we have either $10.0 million in cash and cash equivalents or have access to debt financing of at least $10.0 million.  Under the terms of this expanded common stock repurchase plan, we have purchased 1,539,828 shares of our common stock for $26.8 million through August 31, 2019.

The actual timing, number, and value of common shares repurchased under this plan will be determined at our discretion and will depend on a number of factors, including, among others, general market and business conditions, the trading price of common shares, and applicable legal requirements.  The Company has no obligation to repurchase any common shares under the authorization, and the repurchase plan may be suspended, discontinued, or modified at any time for any reason.

Performance Graph

The following graph demonstrates a five-year comparison of cumulative total returns for Franklin Covey Co. common stock, the S&P SmallCap 600 Index, and the S&P 600 Commercial & Professional Services Index.  The graph assumes an investment of $100 on August 31, 2014 in each of our common stock, the stocks comprising the S&P SmallCap 600 Index, and the stocks comprising the S&P 600 Commercial & Professional Services Index.  Each of the indices assumes that all dividends were reinvested.

The stock performance shown on the performance graph above is not necessarily indicative of future performance. The Company will not make nor endorse any predictions as to our future stock performance.

The performance graph above is being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K, and is not being filed for purposes of Section 18 of the Exchange Act, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related footnotes as found in Item 8 of this Annual Report on Form 10-K.

_______________________

(1)

During fiscal 2017 we decided to allow new All Access Pass agreements to receive updated content throughout the contracted period.  Accordingly, we defer substantially all AAP revenues at the inception of the agreements and recognize the revenue over the lives of the arrangements.  The transition to the AAP model resulted in significantly reduced revenues and operating income during fiscal 2017.

(2)	We elected to amend previously filed U.S. federal income tax returns to claim foreign tax credits instead of foreign tax deductions and recognized significant income tax benefits which reduced our effective income tax rate during these years.

YEAR ENDED AUGUST 31,		2019				% change				2018				% change				2017
Enterprise Division:
Direct offices		$	157,754				8			$	145,890				19			$	122,309
International licensees			12,896				(3)				13,226				(3)				13,571
			170,650				7				159,116				17				135,880
Education Division			48,880				8				45,272				3				44,122
Corporate and other			5,826				8				5,370				2				5,254
Consolidated sales		$	225,356				7			$	209,758				13			$	185,256

YEAR ENDED AUGUST 31,		2019				2018				2017
Sales			100.0				100.0				100.0
Cost of sales			29.3				29.3				33.8
Gross profit			70.7				70.7				66.2
Selling, general, and administrative			64.5				67.3				65.4
Contract termination costs			-				-				0.8
Restructuring costs			-				-				0.8
Depreciation			2.8				2.4				2.1
Amortization			2.2				2.6				1.9
Total operating expenses			69.5				72.3				71.0
Income (loss) from operations			1.2				(1.6	)			(4.8	)
Interest income			0.0				0.0				0.1
Interest expense			(1.0	)			(1.2	)			(1.3	)
Discount accretion on related party receivables			0.1				0.2				0.1
Income (loss) before income taxes			0.3				(2.6	)			(5.9	)

		Year Ended August 31, 2019				% of Sales				Year Ended August 31, 2018				% of Sales				Change
Sales		$	157,754				100.0			$	145,890				100.0			$	11,864
Cost of sales			40,999				26.0				37,750				25.9				3,249
Gross profit			116,755				74.0				108,140				74.1				8,615
SG&A expenses			97,300				61.7				94,886				65.0				2,414
Adjusted EBITDA		$	19,455				12.3			$	13,254				9.1			$	6,201

		Year Ended August 31, 2019				% of Sales				Year Ended August 31, 2018				% of Sales				Change
Sales		$	12,896				100.0			$	13,226				100.0			$	(330	)
Cost of sales			2,665				20.7				3,195				24.2				(530	)
Gross profit			10,231				79.3				10,031				75.8				200
SG&A expenses			4,159				32.3				4,950				37.4				(791	)
Adjusted EBITDA		$	6,072				47.0			$	5,081				38.4			$	991

		Year Ended August 31, 2019				% of Sales				Year Ended August 31, 2018				% of Sales				Change
Sales		$	48,880				100.0			$	45,272				100.0			$	3,608
Cost of sales			18,507				37.9				16,618				36.7				1,889
Gross profit			30,373				62.1				28,654				63.3				1,719
SG&A expenses			26,820				54.8				25,944				57.3				876
Adjusted EBITDA		$	3,553				7.3			$	2,710				6.0			$	843

		Year Ended August 31, 2018				% of Sales				Year Ended August 31, 2017				% of Sales				Change
Sales		$	145,890				100.0			$	122,309				100.0			$	23,581
Cost of sales			37,750				25.9				40,609				33.2				(2,859	)
Gross profit			108,140				74.1				81,700				66.8				26,440
SG&A expenses			94,886				65.0				77,458				63.3				17,428
Adjusted EBITDA		$	13,254				9.1			$	4,242				3.5			$	9,012

		Year Ended August 31, 2018				% of Sales				Year Ended August 31, 2017				% of Sales				Change
Sales		$	13,226				100.0			$	13,571				100.0			$	(345	)
Cost of sales			3,195				24.2				3,088				22.8				107
Gross profit			10,031				75.8				10,483				77.2				(452	)
SG&A expenses			4,950				37.4				4,068				30.0				882
Adjusted EBITDA		$	5,081				38.4			$	6,415				47.3			$	(1,334	)

		Year Ended August 31, 2018				% of Sales				Year Ended August 31, 2017				% of Sales				Change
Sales		$	45,272				100.0			$	44,122				100.0			$	1,150
Cost of sales			16,618				36.7				16,206				36.7				412
Gross profit			28,654				63.3				27,916				63.3				738
SG&A expenses			25,944				57.3				20,721				47.0				5,223
Adjusted EBITDA		$	2,710				6.0			$	7,195				16.3			$	(4,485	)

YEAR ENDED AUGUST 31, 2019 (unaudited)
		November 30				February 28				May 31				August 31
Net sales		$	53,829			$	50,356			$	56,006			$	65,165
Gross profit			36,783				35,366				39,664				47,502
Selling, general, and administrative			34,644				35,925				38,713				36,037
Depreciation			1,554				1,697				1,556				1,558
Amortization			1,238				1,300				1,259				1,179
Income (loss) from operations			(653	)			(3,556	)			(1,864	)			8,728
Income (loss) before income taxes			(1,257	)			(3,927	)			(2,418	)			8,194
Net income (loss)			(1,357	)			(3,517	)			(2,024	)			5,875
Net income (loss) per share:
Basic		$	(.10	)		$	(.25	)		$	(.14	)		$	.42
Diluted			(.10	)			(.25	)			(.14	)			.41
YEAR ENDED AUGUST 31, 2018 (unaudited)
		November 30				February 28				May 31				August 31
Net sales		$	47,932			$	46,547			$	50,461			$	64,818
Gross profit			32,868				32,744				34,916				47,761
Selling, general, and administrative			33,824				35,097				34,910				37,294
Depreciation			901				1,379				1,267				1,615
Amortization			1,395				1,395				1,326				1,251
Income (loss) from operations			(3,252	)			(5,127	)			(2,587	)			7,601
Income (loss) before income taxes			(3,740	)			(5,765	)			(3,088	)			7,074
Net income (loss)			(2,392	)			(2,740	)			(2,534	)			1,779
Net income (loss) per share:
Basic and diluted		$	(.17	)		$	(.20	)		$	(.18	)		$	.13

YEAR ENDED AUGUST 31,		2019				2018				2017
Total cash provided by (used for):
Operating activities		$	30,452			$	16,861			$	17,357
Investing activities			(6,873	)			(10,634	)			(21,675	)
Financing activities			(5,932	)			(4,679	)			3,134
Effect of exchange rates on cash			(101	)			(319	)			(348	)
Increase (decrease) in cash and cash equivalents		$	17,546			$	1,229			$	(1,532	)

		Fiscal				Fiscal				Fiscal				Fiscal				Fiscal
Contractual Obligations		2020				2021				2022				2023				2024				Thereafter				Total
Required lease payments on corporate campus		$	3,724			$	3,798			$	3,874			$	3,952			$	4,031			$	3,301			$	22,680
Term loan payable to bank(1)			5,653				5,504				5,299				5,094				-				-				21,550
Purchase obligations			4,510				-				-				-				-				-				4,510
Jhana contingent consideration payments(2)			888				1,076				1,282				588				-				-				3,834
Minimum operating lease payments			752				472				112				97				79				92				1,604
RGP contingent consideration payments(2)			1,000				500				-				-				-				-				1,500
Minimum required payments for warehousing services(3)			195				-				-				-				-				-				195
Total expected contractual obligation payments		$	16,722			$	11,350			$	10,567			$	9,731			$	4,110			$	3,393			$	55,873